UNITED STATES SECURITIES 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 SeptemberJune 30, 20212022
OR
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35000
Walker & Dunlop, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
| 80-0629925 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
75017272 Wisconsin Avenue, Suite 1200E1300
Bethesda, Maryland 20814
(301) 215-5500
(Address of principal executive offices and registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
Large Accelerated Filer ☒ Smaller Reporting Company ☐ |
| Accelerated Filer ☐ Emerging Growth Company ☐ |
| 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 OctoberJuly 28, 2021,2022, there were 32,038,21633,030,266 total shares of common stock outstanding.
Walker & Dunlop, Inc.
Form 10-Q
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PART I
FINANCIAL INFORMATION
Item 1.Financial Statements3
Walker & Dunlop, Inc. and SubsidiariesItem 1.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)Financial Statements
(Unaudited)3
Management's Discussion and Analysis of Financial Condition and Results of Operations
32
65
67
67
67
67
67
68
68
68
69
Signatures September 30, 2021 December 31, 2020 Assets Cash and cash equivalents $ 318,188 $ 321,097 Restricted cash 34,875 19,432 Pledged securities, at fair value 148,774 137,236 Loans held for sale, at fair value 2,711,900 2,449,198 Loans held for investment, net 233,685 360,402 Mortgage servicing rights 929,825 862,813 Goodwill and other intangible assets 341,703 250,838 Derivative assets 85,486 49,786 Receivables, net 106,228 65,735 Other assets 206,198 134,438 Total assets $ 5,116,862 $ 4,650,975 Liabilities Warehouse notes payable $ 2,848,579 $ 2,517,156 Note payable 289,763 291,593 Allowance for risk-sharing obligations 61,607 75,313 Guaranty obligation, net 49,060 52,306 Derivative liabilities 13,263 5,066 Other liabilities 470,654 513,319 Total liabilities $ 3,732,926 $ 3,454,753 Stockholders' Equity Preferred stock (authorized 50,000; NaN issued) $ — $ — Common stock ($0.01 par value; authorized 200,000 shares; issued and outstanding 31,194 shares at September 30, 2021 and 30,678 shares at December 31, 2020) 312 307 Additional paid-in capital ("APIC") 271,562 241,004 Accumulated other comprehensive income ("AOCI") 2,737 1,968 Retained earnings 1,090,506 952,943 Total stockholders’ equity $ 1,365,117 $ 1,196,222 Noncontrolling interests 18,819 — Total equity $ 1,383,936 $ 1,196,222 Commitments and contingencies (NOTES 2 and 9) — — Total liabilities and equity $ 5,116,862 $ 4,650,975
70
PART I
FINANCIAL INFORMATION
Item 1.Financial Statements
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
| | | | | | | |
| | | June 30, 2022 | | December 31, 2021 | | |
Assets | | | | | |
| |
Cash and cash equivalents | | $ | 151,252 | | $ | 305,635 | |
Restricted cash | |
| 34,361 | |
| 42,812 | |
Pledged securities, at fair value | |
| 149,560 | |
| 148,996 | |
Loans held for sale, at fair value | |
| 931,516 | |
| 1,811,586 | |
Loans held for investment, net | |
| 247,243 | |
| 269,125 | |
Mortgage servicing rights | |
| 978,745 | |
| 953,845 | |
Goodwill | | | 937,881 | | | 698,635 | |
Other intangible assets | |
| 207,024 | |
| 183,904 | |
Derivative assets | |
| 59,810 | |
| 37,364 | |
Receivables, net | |
| 236,786 | |
| 212,019 | |
Committed investments in tax credit equity | | | 187,393 | | | 177,322 | |
Other assets | |
| 413,201 | |
| 364,746 | |
Total assets | | $ | 4,534,772 | | $ | 5,205,989 | |
| | | | | | | |
Liabilities | | | | | | | |
Warehouse notes payable | | $ | 1,125,677 | | $ | 1,941,572 | |
Notes payable | |
| 719,210 | |
| 740,174 | |
Allowance for risk-sharing obligations | |
| 48,475 | |
| 62,636 | |
Derivative liabilities | |
| 17,176 | |
| 6,403 | |
Commitments to fund investments in tax credit equity | | | 173,740 | | | 162,747 | |
Other liabilities | | | 784,719 | | | 714,250 | |
Total liabilities | | $ | 2,868,997 | | $ | 3,627,782 | |
| | | | | | | |
Stockholders' Equity | | | | | | | |
Preferred stock (authorized 50,000 shares; NaN issued) | | $ | — | | $ | — | |
Common stock ($0.01 par value; authorized 200,000 shares; issued and outstanding 32,322 shares at June 30, 2022 and 32,049 shares at December 31, 2021) | |
| 323 | |
| 320 | |
Additional paid-in capital ("APIC") | |
| 403,668 | |
| 393,022 | |
Accumulated other comprehensive income ("AOCI") | | | (222) | | | 2,558 | |
Retained earnings | |
| 1,229,712 | |
| 1,154,252 | |
Total stockholders’ equity | | $ | 1,633,481 | | $ | 1,550,152 | |
Noncontrolling interests | |
| 32,294 | |
| 28,055 | |
Total equity | | $ | 1,665,775 | | $ | 1,578,207 | |
Commitments and contingencies (NOTES 2 and 9) | |
| — | |
| — | |
Total liabilities and equity | | $ | 4,534,772 | | $ | 5,205,989 | |
See accompanying notes to condensed consolidated financial statements.
3
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 six months ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Revenues | | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 102,605 | | $ | 107,472 | | $ | 184,915 | | | 183,351 | |
Fair value of expected net cash flows from servicing, net | | | 51,949 | | | 61,849 | | | 104,679 | | | 119,784 | |
Servicing fees | |
| 74,260 | |
| 69,052 | |
| 146,941 | | | 135,030 | |
Property sales broker fees | | | 46,386 | | | 22,454 | | | 69,784 | | | 31,496 | |
Investment management fees | | | 10,282 | | | 3,815 | | | 22,930 | | | 6,551 | |
Net warehouse interest income | |
| 5,268 | |
| 4,630 | |
| 10,041 | | | 9,185 | |
Escrow earnings and other interest income | |
| 6,751 | |
| 1,823 | |
| 8,554 | | | 3,940 | |
Other revenues | |
| 43,347 | |
| 10,316 | |
| 112,448 | | | 16,362 | |
Total revenues | | $ | 340,848 | | $ | 281,411 | | $ | 660,292 | | $ | 505,699 | |
| | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | |
Personnel | | $ | 168,368 | | $ | 141,421 | | $ | 312,549 | | | 237,636 | |
Amortization and depreciation | | | 61,103 | | | 48,510 | | | 117,255 | | | 95,381 | |
Provision (benefit) for credit losses | |
| (4,840) | |
| (4,326) | |
| (14,338) | | | (15,646) | |
Interest expense on corporate debt | |
| 6,412 | |
| 1,760 | |
| 12,817 | | | 3,525 | |
Other operating expenses | |
| 36,195 | |
| 19,748 | |
| 68,409 | | | 37,335 | |
Total expenses | | $ | 267,238 | | $ | 207,113 | | $ | 496,692 | | $ | 358,231 | |
Income from operations | | $ | 73,610 | | $ | 74,298 | | $ | 163,600 | | $ | 147,468 | |
Income tax expense | |
| 19,503 | |
| 18,240 | |
| 38,963 | | | 33,358 | |
Net income before noncontrolling interests | | $ | 54,107 | | $ | 56,058 | | $ | 124,637 | | $ | 114,110 | |
Less: net income (loss) from noncontrolling interests | |
| (179) | |
| — | |
| (858) | |
| — | |
Walker & Dunlop net income | | $ | 54,286 | | $ | 56,058 | | $ | 125,495 | | $ | 114,110 | |
Net change in unrealized gains (losses) on pledged available-for-sale securities, net of taxes | | | (1,810) | | | 768 | | | (2,780) | | | 610 | |
Walker & Dunlop comprehensive income | | $ | 52,476 | | $ | 56,826 | | $ | 122,715 | | $ | 114,720 | |
| | | | | | | | | | | | | |
Basic earnings per share (NOTE 10) | | $ | 1.63 | | $ | 1.75 | | $ | 3.77 | | $ | 3.57 | |
Diluted earnings per share (NOTE 10) | | $ | 1.61 | | $ | 1.73 | | $ | 3.73 | | $ | 3.52 | |
| | | | | | | | | | | | | |
Basic weighted-average shares outstanding | |
| 32,388 | |
| 31,019 | |
| 32,304 | |
| 30,922 | |
Diluted weighted-average shares outstanding | |
| 32,694 | |
| 31,370 | | | 32,657 | |
| 31,322 | |
See accompanying notes to condensed consolidated financial statements.
4
Walker & Dunlop, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | For the three and six months ended June 30, 2022 | | ||||||||||||||||||
| | | | Stockholders' Equity | | | | | | | | ||||||||||
| | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | ||||||||
|
| 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) | |
Cash dividends paid ($0.60 per common share) | | — | | | — | | | — | | | — | | | (20,077) | | | — | | | (20,077) | |
Other activity (NOTE 10) | | — | | | — | | | (5,303) | | | — | | | — | | | 15,490 | | | 10,187 | |
Balance at March 31, 2022 | | 32,398 | | $ | 324 | | $ | 387,009 | | $ | 1,588 | | $ | 1,205,384 | | $ | 42,866 | | $ | 1,637,171 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 54,286 | | | — | | | 54,286 | |
Net income (loss) from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (179) | | | (179) | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (1,810) | | | — | | | — | | | (1,810) | |
Stock-based compensation - equity classified | | — | | | — | | | 9,980 | | | — | | | — | | | — | | | 9,980 | |
Issuance of common stock in connection with equity compensation plans | | 43 | | | — | | | 110 | | | — | | | — | | | — | | | 110 | |
Repurchase and retirement of common stock | | (119) | | | (1) | | | (2,409) | | | — | | | (9,892) | | | — | | | (12,302) | |
Distributions to noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | (1,675) | | | (1,675) | |
Cash dividends paid ($0.60 per common share) | | — | | | — | | | — | | | — | | | (20,066) | | | — | | | (20,066) | |
Other activity (NOTE 10) | | — | | | — | | | 8,978 | | | — | | | — | | | (8,718) | | | 260 | |
Balance at June 30, 2022 | | 32,322 | | $ | 323 | | $ | 403,668 | | $ | (222) | | $ | 1,229,712 | | $ | 32,294 | | $ | 1,665,775 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | For the three and six months ended June 30, 2021 | | |||||||||||||||
| | | | Stockholders' Equity | | | | | ||||||||||
| | Common Stock | | | | | | Retained | | Total | | |||||||
|
| 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 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 56,058 | | | 56,058 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 768 | | | — | | | 768 | |
Stock-based compensation - equity classified | | — | | | — | | | 7,892 | | | — | | | — | | | 7,892 | |
Issuance of common stock in connection with equity compensation plans | | 64 | | | 1 | | | 530 | | | — | | | — | | | 531 | |
Repurchase and retirement of common stock | | (7) | | | (1) | | | (815) | | | — | | | — | | | (816) | |
Cash dividends paid ($0.50 per common share) | | — | | | — | | | — | | | — | | | (16,070) | | | (16,070) | |
Balance at June 30, 2021 | | 31,034 | | $ | 310 | | $ | 255,676 | | $ | 2,578 | | $ | 1,034,931 | | $ | 1,293,495 | |
See accompanying notes to condensed consolidated financial statements.
5
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, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Revenues | | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 123,242 | | $ | 83,825 | | $ | 306,593 | | $ | 238,105 | |
Fair value of expected net cash flows from servicing, net | | | 89,482 | | | 78,065 | | | 209,266 | | | 236,434 | |
Servicing fees | |
| 70,628 | |
| 60,265 | |
| 205,658 | |
| 172,561 | |
Property sales broker fees | | | 33,677 | | | 6,756 | | | 65,173 | | | 19,928 | |
Net warehouse interest income | |
| 5,583 | |
| 7,558 | |
| 14,768 | |
| 22,454 | |
Escrow earnings and other interest income | |
| 2,032 | |
| 2,275 | |
| 5,972 | |
| 15,689 | |
Other revenues | |
| 21,646 | |
| 8,272 | |
| 44,559 | |
| 28,827 | |
Total revenues | | $ | 346,290 | | $ | 247,016 | | $ | 851,989 | | $ | 733,998 | |
| | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | |
Personnel | | $ | 170,181 | | $ | 114,548 | | $ | 407,817 | | $ | 310,993 | |
Amortization and depreciation | | | 53,498 | | | 41,919 | | | 148,879 | | | 123,998 | |
Provision (benefit) for credit losses | |
| 1,266 | |
| 3,483 | |
| (14,380) | |
| 32,029 | |
Interest expense on corporate debt | |
| 1,766 | |
| 1,786 | |
| 5,291 | |
| 6,724 | |
Other operating expenses | |
| 24,836 | |
| 16,165 | |
| 62,171 | |
| 47,324 | |
Total expenses | | $ | 251,547 | | $ | 177,901 | | $ | 609,778 | | $ | 521,068 | |
Income from operations | | $ | 94,743 | | $ | 69,115 | | $ | 242,211 | | $ | 212,930 | |
Income tax expense | |
| 22,953 | |
| 15,925 | |
| 56,311 | |
| 50,076 | |
Net income before noncontrolling interests | | $ | 71,790 | | $ | 53,190 | | $ | 185,900 | | $ | 162,854 | |
Less: net income (loss) from noncontrolling interests | |
| 69 | |
| — | |
| 69 | |
| (224) | |
Walker & Dunlop net income | | $ | 71,721 | | $ | 53,190 | | $ | 185,831 | | $ | 163,078 | |
Net change in unrealized gains (losses) on pledged available-for-sale securities, net of taxes | | | 159 | | | 1,219 | | | 769 | | | 731 | |
Walker & Dunlop comprehensive income | | $ | 71,880 | | $ | 54,409 | | $ | 186,600 | | $ | 163,809 | |
| | | | | | | | | | | | | |
Basic earnings per share (NOTE 10) | | $ | 2.23 | | $ | 1.69 | | $ | 5.80 | | $ | 5.21 | |
Diluted earnings per share (NOTE 10) | | $ | 2.21 | | $ | 1.66 | | $ | 5.73 | | $ | 5.11 | |
| | | | | | | | | | | | | |
Basic weighted-average shares outstanding | |
| 31,064 | |
| 30,560 | |
| 30,969 | |
| 30,379 | |
Diluted weighted-average shares outstanding | |
| 31,459 | |
| 31,074 | | | 31,367 | |
| 30,995 | |
See accompanying notes to condensed consolidated financial statements.
4
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Walker & Dunlop, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | For the three and nine months ended September 30, 2021 | | ||||||||||||||||||
| | Common Stock | | | | | | Retained | | Noncontrolling | | Total Stockholders' | | ||||||||
|
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| 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 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 56,058 | | | — | | | 56,058 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 768 | | | — | | | — | | | 768 | |
Stock-based compensation - equity classified | | — | | | — | | | 7,892 | | | — | | | — | | | — | | | 7,892 | |
Issuance of common stock in connection with equity compensation plans | | 64 | | | 1 | | | 530 | | | — | | | — | | | — | | | 531 | |
Repurchase and retirement of common stock | | (7) | | | (1) | | | (815) | | | — | | | — | | | — | | | (816) | |
Cash dividends paid ($0.50 per common share) | | — | | | — | | | — | | | — | | | (16,070) | | | — | | | (16,070) | |
Balance at June 30, 2021 | | 31,034 | | $ | 310 | | $ | 255,676 | | $ | 2,578 | | $ | 1,034,931 | | $ | — | | $ | 1,293,495 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 71,721 | | | — | | | 71,721 | |
Net income (loss) from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 69 | | | 69 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 159 | | | — | | | — | | | 159 | |
Stock-based compensation - equity classified | | — | | | — | | | 10,426 | | | — | | | — | | | — | | | 10,426 | |
Issuance of common stock in connection with equity compensation plans | | 124 | | | 2 | | | 1,706 | | | — | | | — | | | — | | | 1,708 | |
Issuance of common stock in connection with acquisitions | | 50 | | | 1 | | | 5,249 | | | | | | | | | | | | 5,250 | |
Repurchase and retirement of common stock | | (14) | | | (1) | | | (1,495) | | | — | | | — | | | — | | | (1,496) | |
Noncontrolling interests from acquisitions | | — | | | — | | | — | | | — | | | — | | | 18,750 | | | 18,750 | |
Cash dividends paid ($0.50 per common share) | | — | | | — | | | — | | | — | | | (16,146) | | | — | | | (16,146) | |
Balance at September 30, 2021 | | 31,194 | | $ | 312 | | $ | 271,562 | | $ | 2,737 | | $ | 1,090,506 | | $ | 18,819 | | $ | 1,383,936 | |
| | | | | | | | | | | | | | | | | | | | | |
5
Walker & Dunlop, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | For the three and nine months ended September 30, 2020 | | ||||||||||||||||||
| | | | Stockholders' Equity | | | | | | | | ||||||||||
| | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | ||||||||
|
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| Equity | | ||||||
Balance at December 31, 2019 | | 30,035 | | $ | 300 | | $ | 237,877 | | $ | 737 | | $ | 796,775 | | $ | 6,596 | | $ | 1,042,285 | |
Cumulative-effect adjustment for adoption of ASU 2016-13, net of tax | | — | | | — | | | — | | | — | | | (23,678) | | | — | | | (23,678) | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 47,829 | | | — | | | 47,829 | |
Net loss from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (224) | | | (224) | |
Contributions from noncontrolling interests | | | | | | | | | | | | | | | | | 675 | | | 675 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (1,918) | | | — | | | — | | | (1,918) | |
Stock-based compensation - equity classified | | — | | | — | | | 5,061 | | | — | | | — | | | — | | | 5,061 | |
Issuance of common stock in connection with equity compensation plans | | 675 | | | 7 | | | 11,362 | | | — | | | — | | | — | | | 11,369 | |
Repurchase and retirement of common stock | | (380) | | | (4) | | | (18,293) | | | — | | | (8,440) | | | — | | | (26,737) | |
Cash dividends paid ($0.36 per common share) | | — | | | — | | | — | | | — | | | (11,347) | | | — | | | (11,347) | |
Balance at March 31, 2020 | | 30,330 | | $ | 303 | | $ | 236,007 | | $ | (1,181) | | $ | 801,139 | | $ | 7,047 | | $ | 1,043,315 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 62,059 | | | — | | | 62,059 | |
Purchase of noncontrolling interests | | — | | | — | | | (3,295) | | | — | | | — | | | (7,047) | | | (10,342) | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 1,430 | | | — | | | — | | | 1,430 | |
Stock-based compensation - equity classified | | — | | | — | | | 5,592 | | | — | | | — | | | — | | | 5,592 | |
Issuance of common stock in connection with equity compensation plans | | 50 | | | 1 | | | 195 | | | — | | | — | | | — | | | 196 | |
Repurchase and retirement of common stock | | (11) | | | — | | | (405) | | | — | | | — | | | — | | | (405) | |
Cash dividends paid ($0.36 per common share) | | — | | | — | | | — | | | — | | | (11,294) | | | — | | | (11,294) | |
Balance at June 30, 2020 | | 30,369 | | $ | 304 | | $ | 238,094 | | $ | 249 | | $ | 851,904 | | $ | — | | $ | 1,090,551 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 53,190 | | | — | | | 53,190 | |
Purchase of noncontrolling interests | | — | | | — | | | (21,635) | | | — | | | — | | | — | | | (21,635) | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 1,219 | | | — | | | — | | | 1,219 | |
Stock-based compensation - equity classified | | — | | | — | | | 6,598 | | | — | | | — | | | — | | | 6,598 | |
Issuance of common stock in connection with equity compensation plans and purchase of noncontrolling interests | | 574 | | | 5 | | | 11,923 | | | — | | | — | | | — | | | 11,928 | |
Repurchase and retirement of common stock | | (324) | | | (3) | | | (4,678) | | | — | | | (10,702) | | | — | | | (15,383) | |
Cash dividends paid ($0.36 per common share) | | — | | | — | | | — | | | — | | | (11,343) | | | — | | | (11,343) | |
Balance at September 30, 2020 | | 30,619 | | $ | 306 | | $ | 230,302 | | $ | 1,468 | | $ | 883,049 | | $ | — | | $ | 1,115,125 | |
See accompanying notes to condensed consolidated financial statements.
6
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | | | | | |
| | For the nine months ended September 30, |
| ||||
|
| 2021 |
| 2020 |
| ||
Cash flows from operating activities | | | | | | | |
Net income before noncontrolling interests | | $ | 185,900 | | $ | 162,854 | |
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 | |
| (209,266) | |
| (236,434) | |
Change in the fair value of premiums and origination fees | |
| 6,909 | |
| (24,393) | |
Amortization and depreciation | |
| 148,879 | |
| 123,998 | |
Provision (benefit) for credit losses | |
| (14,380) | |
| 32,029 | |
Originations of loans held for sale | | | (12,761,432) | | | (15,923,846) | |
Proceeds from transfers of loans held for sale | | | 12,459,511 | | | 13,517,432 | |
Other operating activities, net | | | (13,100) | | | 51,492 | |
Net cash provided by (used in) operating activities | | $ | (196,979) | | $ | (2,296,868) | |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | | $ | (5,507) | | $ | (2,050) | |
Purchases of equity-method investments | | | (8,029) | | | (974) | |
Purchases of pledged available-for-sale ("AFS") securities | | | (7,250) | | | (14,130) | |
Proceeds from prepayment and sale of pledged AFS securities | | | 28,781 | | | 15,531 | |
Investments in joint ventures | | | (58,065) | | | (16,215) | |
Distributions from joint ventures | | | 34,012 | | | 12,677 | |
Acquisitions, net of cash received | | | (62,208) | | | (46,784) | |
Originations of loans held for investment | |
| (269,737) | |
| (36,950) | |
Principal collected on loans held for investment | |
| 397,328 | |
| 236,519 | |
Net cash provided by (used in) investing activities | | $ | 49,325 | | $ | 147,624 | |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | 333,887 | | $ | 2,497,627 | |
Borrowings of interim warehouse notes payable | |
| 154,661 | |
| 34,028 | |
Repayments of interim warehouse notes payable | |
| (157,277) | |
| (109,860) | |
Repayments of note payable | |
| (2,234) | |
| (2,234) | |
Repayment of secured borrowings | | | (73,312) | | | — | |
Proceeds from issuance of common stock | |
| 5,256 | |
| 12,587 | |
Repurchase of common stock | |
| (15,686) | |
| (42,525) | |
Purchase of noncontrolling interests | | | — | | | (10,400) | |
Cash dividends paid | | | (48,268) | | | (33,984) | |
Payment of contingent consideration | | | — | | | (1,641) | |
Debt issuance costs | |
| (2,762) | |
| (2,340) | |
Net cash provided by (used in) financing activities | | $ | 194,265 | | $ | 2,341,258 | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | 46,611 | | $ | 192,014 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | |
| 358,002 | |
| 136,566 | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 404,613 | | $ | 328,580 | |
| | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | |
Cash paid to third parties for interest | | $ | 24,906 | | $ | 33,116 | |
Cash paid for income taxes | | | 38,728 | | | 21,437 | |
| | | | | | | |
| | For the six months ended June 30, |
| ||||
|
| 2022 |
| 2021 |
| ||
Cash flows from operating activities | | | | | | | |
Net income before noncontrolling interests | | $ | 124,637 | | $ | 114,110 | |
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 | |
| (104,679) | |
| (119,784) | |
Change in the fair value of premiums and origination fees | |
| 7,852 | |
| 9,047 | |
Amortization and depreciation | |
| 117,255 | |
| 95,381 | |
Provision (benefit) for credit losses | |
| (14,338) | |
| (15,646) | |
Gain from revaluation of previously held equity-method investment | | | (39,641) | | | — | |
Originations of loans held for sale | | | (8,805,659) | | | (7,293,128) | |
Proceeds from transfers of loans held for sale | | | 9,637,859 | | | 8,024,903 | |
Other operating activities, net | | | (69,417) | | | (55,541) | |
Net cash provided by (used in) operating activities | | $ | 853,869 | | $ | 759,342 | |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | | $ | (11,902) | | $ | (3,800) | |
Purchases of equity-method investments | | | (12,029) | | | (3,248) | |
Purchases of pledged available-for-sale ("AFS") securities | | | (46,395) | | | (2,000) | |
Proceeds from prepayment and sale of pledged AFS securities | | | 6,101 | | | 22,092 | |
Investments in joint ventures | | | (5,040) | | | (38,805) | |
Distributions from joint ventures | | | 11,359 | | | 22,113 | |
Acquisitions, net of cash received | | | (78,465) | | | (10,507) | |
Originations of loans held for investment | |
| (49,057) | |
| (116,087) | |
Principal collected on loans held for investment | |
| 71,500 | |
| 205,653 | |
Net cash provided by (used in) investing activities | | $ | (113,928) | | $ | 75,411 | |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | (826,454) | | $ | (744,281) | |
Borrowings of interim warehouse notes payable | |
| 36,459 | |
| 84,766 | |
Repayments of interim warehouse notes payable | |
| (26,000) | |
| (34,174) | |
Repayments of notes payable | |
| (21,244) | |
| (1,490) | |
Repayment of secured borrowings | | | — | | | (73,312) | |
Proceeds from issuance of common stock | |
| 263 | |
| 13,137 | |
Repurchase of common stock | |
| (39,380) | |
| (14,190) | |
Cash dividends paid | | | (40,143) | | | (32,122) | |
Payment of contingent consideration | | | (17,612) | | | — | |
Distributions to noncontrolling interest | | | (1,675) | | | — | |
Debt issuance costs | |
| (1,573) | |
| (1,333) | |
Net cash provided by (used in) financing activities | | $ | (937,359) | | $ | (802,999) | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | (197,418) | | $ | 31,754 | |
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 | | $ | 195,762 | | $ | 389,756 | |
| | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | |
Cash paid to third parties for interest | | $ | 28,023 | | $ | 16,708 | |
Cash paid for income taxes | | | 45,300 | | | 26,723 | |
6
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (CONTINUED)
(In thousands)
(Unaudited)
| | | | | | |
| | For the six months ended June 30, | ||||
| | 2022 |
| 2021 | ||
Supplemental Disclosure of Non-Cash Activity: | | | | | | |
Issuance of common stock to settle compensation liabilities | | $ | 6,551 | | $ | 9,589 |
Issuance of common stock to settle contingent consideration liabilities (NOTE 7) | | | 8,750 | | | — |
Net increase (decrease) in total equity due to consolidations of tax credit entities (NOTE 10) | | | 10,447 | | | — |
Net increase (decrease) in total assets due to consolidations of tax credit entities (NOTE 10) | | | 13,700 | | | — |
Net increase (decrease) in total liabilities due to consolidations of tax credit entities (NOTE 10) | | | 3,559 | | | — |
Forgiveness of a receivable the Company had with an acquired joint venture (NOTE 7) | | | 5,460 | | | — |
Additions of contingent consideration liabilities from acquisitions (NOTE 7) | | | 117,000 | | | 7,504 |
Increase in Goodwill (NOTE 7) | | | 29,695 | | | — |
See accompanying notes to condensed consolidated financial statements.
7
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
These financial statements represent the condensed consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they may not include certain financial statement disclosures and other information required for annual financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 (“20202021 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three and ninesix months ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 20212022 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 commercial real estate debt and equity financing products, provides multifamily property 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.
Through its agency lending products, the Company originates and sells loans pursuant to the programs of the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac” and, together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). Through its debt brokerage products, the Company brokers, and in some cases services, loans for various life insurance companies, commercial banks, commercial mortgage-backed securities issuers, and other institutional investors, in which cases the Company does not fund the loan.investors.
The Company also provides a variety of commercial real estate debt and equity solutions through its principal lending and investing products, including interim loans, and preferred and joint venture equity on commercial real estate properties. Interim loans on multifamily properties are offered (i) through the Company and recorded on the Company’s balance sheet (the “Interim Loan Program”) and (ii) through a joint venture with an affiliate of Blackstone Mortgage Trust, Inc., in which the Company holds a 15% ownership interest (the “Interim Program JV”). Interim loans on all commercial real estate property types are also offered through separate accounts managed by the Company’s subsidiary, Walker & Dunlop Investment Partners, Inc. (“WDIP”). Preferred and joint venture equity products on commercial real estate properties are offered through funds managed by WDIP.
The Company brokers the sale of multifamily properties through its wholly owned subsidiary, Walker & Dunlop Investment Sales, LLC. In some cases, the Company also provides the debt financing for the property sale.
The Company has a joint venture, branded as “Apprise by Walker & Dunlop,” with an international technology services company to offer automated multifamily valuation and appraisal services (the “Appraisal JV”). The Appraisal JV leverages technology and data science to dramatically improve the consistency, transparency, and speed of multifamily appraisals in the U.S. through the licensing of the partner’s technology and leveraging of the Company’s expertise in the commercial real estate industry. The Company owns a 50% interest in the Appraisal JV and accounts for the interest as an equity-method investment. The operations of the Appraisal JV for the three and nine months ended September 30, 2021 and 2020 were immaterial.
During the third quarter of 2021, the Company acquired certain assets and assumed certain liabilities of Zelman Holdings, LLC (“Zelman”) through a 75% interest in a newly formed entity, which does business as Zelman & Associates. Zelman & Associates provides housing market research and real estate-related investment banking and advisory services.
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 ownedwholly-owned subsidiaries, and its majority owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or the voting
8
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, it uses the equity method of accounting. In instances where the Company owns less than 100% of the equity interests of an entity but holds a controlling financial interest and is the primary beneficiary or owns a majority of the voting interests, or has control over an entity, the Company accounts for the portion of equity not attributable to Walker & Dunlop, Inc. as Noncontrolling interests on the Condensed Consolidated Balance Sheets and the portion of 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 SeptemberJune 30, 2021.2022. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to SeptemberJune 30, 2021.2022. There have been no other material subsequent events that would require recognition in the condensed consolidated financial statements.
Use of Estimates—The preparation of condensed consolidated financial statements in accordance with GAAPaccounting 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, expenses, including the allowance for risk-sharing obligations, initial fair value of capitalized mortgage servicing
8
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.
Derivative Assets and Liabilities—Co-broker Fees—Loan commitments that meet the definition of a derivative are recorded at fair value on the Condensed Consolidated Balance Sheets upon the executions of the commitments to originate a loan with a borrower and to sell the loan to an investor, with a corresponding amount recognized as revenue in the Condensed Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on the anticipated sale of the loan, net of co-broker fees (included in Derivative assets on the Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income), (ii) the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the guaranty obligation (included in Derivative assets on the Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income), and (iii) the effects of interest rate movements between the trade date and balance sheet date. Loan commitments are generally derivative assets but can become derivative liabilities if the effects of the interest rate movement between the trade date and the balance sheet date are greater than the combination of (i) and (ii) above. Forward sale commitments that meet the definition of a derivative are recorded as either derivative assets or derivative liabilities depending on the effects of the interest rate movements between the trade date and the balance sheet date. Adjustments to the fair value are reflected as a component of income within Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income.
Co-broker fees, which are netted against Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income, were $6.3$4.4 million and $5.1$3.6 million for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively and $15.2$10.3 million and $20.4$8.9 million for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.
Loans Held for Investment, net—Loans held for investment are multifamily interim loans originated by the Company through the Interim Loan Program for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing.financing (“Interim Loan Program”). These loans have terms of up to three years and are all adjustable-rate, interest-only, multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs, and net of any allowance for loan losses.
As of SeptemberJune 30, 2021,2022, Loans held for investment, net consisted of 9 loans with an aggregate $238.7$252.1 million of unpaid principal balance less $0.9 million of net unamortized deferred fees and costs and $4.1$4.0 million of allowance for loan losses. As of December 31, 2020,2021, Loans held for investment, net consisted of 1812 loans with an aggregate $366.3$274.5 million of unpaid principal balance less $1.1$1.2 million of net unamortized deferred fees and costs and $4.8$4.2 million of allowance for loan losses.
During the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party that was paid off in the second quarter of 2021. The Company accounted for the transfer as a secured borrowing, with the aggregate unpaid principal balance of the loans of $81.5 million presented as a component of Loans held for investment, net and the secured borrowing of $73.3 million presented within Other liabilities on the Condensed Consolidated Balance Sheets as of December 31, 2020.
9
The Company assesses the credit quality of loans held for investment in the same manner as it does for the loans in the Fannie Mae at-risk portfolio and records an allowance for these loans as necessary. The allowance for loan losses is estimated collectively for loans with similar characteristics. The collective allowance is based on the same methodology that the Company uses to estimate its allowance for risk-sharing obligations under the Current Expected Credit Losses (“CECL”) standard for at-risk Fannie Mae Delegated Underwriting and Servicing (“DUS”) loans (with the exception of a reversion period) because the nature of the underlying collateral is the same, and the loans have similar characteristics, except they are significantly shorter in maturity. The reasonable and supportable forecast period used for the CECL allowance for loans held for investment is one year.
The loss rate for the forecast period was 1511 basis points and 3615 basis points as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. The loss rate for the remaining period until maturity was 6 basis points and 9 basis points as of both SeptemberJune 30, 20212022 and December 31, 2020.2021, respectively.
NaN loan held for investment with an unpaid principal balance of $14.7 million that was originated in 2017 was delinquent and on non-accrual status as of SeptemberJune 30, 20212022 and December 31, 2020.2021. The Company had a $3.7 million reservein collateral-based reserves for this loan based on its collateral fair value as of Septemberboth June 30, 20212022 and December 31, 20202021 and has not recorded any interest related to this loan since it went on non-accrual status in 2019. All other loans were current as of SeptemberJune 30, 20212022 and December 31, 2020.2021. The amortized cost basis of loans that were current as of SeptemberJune 30, 20212022 and December 31, 20202021 was $223.1$236.3 million and $350.5$258.6 million, respectively. As of SeptemberJune 30, 2021, $195.72022, $48.6 million, $160.5 million, and $28.3 million of the loans that were current were originated in 2022, 2021, and 2019, respectively. NaN loans originated in 2020 were outstanding as of September 30, 2021. Prior to 2019,Other than the defaulted loan noted above, the Company hadhas not experienced any delinquencies related to loans held for investment.
Provision (Benefit) for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit losses in the Condensed Consolidated Statements of Income. NOTE 4 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Components of Provision (Benefit) for Credit Losses (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Provision (benefit) for loan losses | | $ | (12) | | $ | 2,179 | | $ | (674) | | $ | 3,107 | |
Provision (benefit) for risk-sharing obligations | |
| 1,278 | |
| 1,304 | |
| (13,706) | |
| 28,922 | |
Provision (benefit) for credit losses | | $ | 1,266 | | $ | 3,483 | | $ | (14,380) | | $ | 32,029 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
Components of Provision (Benefit) for Credit Losses (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Provision (benefit) for loan losses | | $ | (71) | | $ | (75) | | $ | (177) | | $ | (662) | |
Provision (benefit) for risk-sharing obligations | |
| (4,769) | |
| (4,251) | |
| (14,161) | |
| (14,984) | |
Provision (benefit) for credit losses | | $ | (4,840) | | $ | (4,326) | | $ | (14,338) | | $ | (15,646) | |
| | | | | | | | | | | | | |
9
Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Generally, a substantial portion of the Company’s loans is financed with matched borrowings under one of its warehouse facilities. The remaining portion of loans not funded with matched borrowings is financed with the Company’s own cash. The Company also occasionally fully funds a small number of loans held for sale or loans held for investment with its own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. The Company had a portfolio of participating interests in loans held for investment that was accounted for as a secured borrowing and paid off at the end of 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 six months ended June 30, 2021. Included in Net warehouse interest income for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 are the following components:
10
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | | For the three months ended | | For the six months ended | | ||||||||||||||||
| | September 30, | | September 30, | | | June 30, | | June 30, | | ||||||||||||||||
Components of Net Warehouse Interest Income (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||
Warehouse interest income - loans held for sale | | $ | 11,334 | | $ | 12,649 | | $ | 28,315 | | $ | 37,150 | | | $ | 12,175 | | $ | 7,863 | | $ | 21,038 | | $ | 16,981 | |
Warehouse interest expense - loans held for sale | |
| (7,611) | |
| (7,780) | |
| (19,249) | |
| (24,475) | | |
| (8,468) | |
| (4,979) | |
| (13,801) | |
| (11,638) | |
Net warehouse interest income - loans held for sale | | $ | 3,723 | | $ | 4,869 | | $ | 9,066 | | $ | 12,675 | | | $ | 3,707 | | $ | 2,884 | | $ | 7,237 | | $ | 5,343 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Warehouse interest income - loans held for investment | | $ | 3,108 | | $ | 4,015 | | $ | 9,298 | | $ | 15,083 | | | $ | 3,015 | | $ | 2,962 | | $ | 5,365 | | $ | 6,190 | |
Warehouse interest expense - loans held for investment | |
| (1,248) | |
| (1,326) | |
| (3,596) | |
| (5,304) | | |
| (1,454) | |
| (1,216) | |
| (2,561) | |
| (2,348) | |
Warehouse interest income - secured borrowings | | | — | | | 869 | | | 1,748 | | | 2,564 | | | | — | | | 883 | | | — | | | 1,748 | |
Warehouse interest expense - secured borrowings | | | — | | | (869) | | | (1,748) | | | (2,564) | | | | — | | | (883) | | | — | | | (1,748) | |
Net warehouse interest income - loans held for investment | | $ | 1,860 | | $ | 2,689 | | $ | 5,702 | | $ | 9,779 | | | $ | 1,561 | | $ | 1,746 | | $ | 2,804 | | $ | 3,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net warehouse interest income | | $ | 5,583 | | $ | 7,558 | | $ | 14,768 | | $ | 22,454 | | | $ | 5,268 | | $ | 4,630 | | $ | 10,041 | | $ | 9,185 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20212022 and 20202021 and December 31, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, | | December 31, | | June 30, | | December 31, | | ||||||||||||||||
(in thousands) | 2021 |
| 2020 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2021 |
| 2020 |
| ||||||||
Cash and cash equivalents | $ | 318,188 | | $ | 294,873 | | $ | 321,097 | | $ | 120,685 | | $ | 151,252 | | $ | 326,518 | | $ | 305,635 | | $ | 321,097 | |
Restricted cash | | 34,875 | | | 12,383 | | | 19,432 | | | 8,677 | | | 34,361 | | | 15,842 | | | 42,812 | | | 19,432 | |
Pledged cash and cash equivalents (NOTE 9) |
| 51,550 | |
| 21,324 | |
| 17,473 | |
| 7,204 | |
| 10,149 | |
| 47,396 | |
| 44,733 | |
| 17,473 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 404,613 | | $ | 328,580 | | $ | 358,002 | | $ | 136,566 | | $ | 195,762 | | $ | 389,756 | | $ | 393,180 | | $ | 358,002 | |
Income Taxes—The Company records the realizable excess tax benefits from stock-based compensation as a reduction to income tax expense. The realizable excess tax benefits were $2.1$0.3 million and $3.0$1.2 million for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, and $7.3$5.2 million and $6.0 million duringfor each of the ninesix months ended SeptemberJune 30, 20212022 and 2020, respectively.2021.
Contracts with Customers—A majority of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is derived from contracts with customers. The majority 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 the majority all of the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The following table presents information about the Company’s contracts with customers for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020: 2021:
1110
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | | | For the three months ended | | For the six months ended | | | ||||||||||||||||
| | September 30, | | September 30, | | | | June 30, | | June 30, | | | ||||||||||||||||
Description (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Statement of income line item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| Statement of income line item | ||||||||
Certain loan origination fees | | $ | 46,527 | | $ | 10,731 | | $ | 113,650 | | $ | 40,769 | | Loan origination and debt brokerage fees, net | | $ | 53,281 | | $ | 43,222 | | $ | 90,646 | | $ | 67,123 | | Loan origination and debt brokerage fees, net |
Property sales broker fees | | | 33,677 | | | 6,756 | | | 65,173 | | | 19,928 | | Property sales broker fees | | | 46,386 | | | 22,454 | | | 69,784 | | | 31,496 | | Property sales broker fees |
Investment management fees, application fees, subscription revenues, and other | |
| 10,936 | |
| 4,532 | |
| 25,114 | |
| 14,632 | | Other revenues | ||||||||||||||
Investment management fees | | | 10,282 | | | 3,815 | | | 22,930 | | | 6,551 | | Investment management fees | ||||||||||||||
Application fees, subscription revenues, other revenues from LIHTC operations, and other revenues | |
| 35,198 | |
| 4,113 | |
| 50,855 | |
| 7,627 | | Other revenues | ||||||||||||||
Total revenues derived from contracts with customers | | $ | 91,140 | | $ | 22,019 | | $ | 203,937 | | $ | 75,329 | | | | $ | 145,147 | | $ | 73,604 | | $ | 234,215 | | $ | 112,797 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.
Recently Adopted and Recently Announced Accounting Pronouncements—There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 20202021 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 SeptemberJune 30, 2021.2022.
Reclassifications—The Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentations. presentation.
NOTE 3—MORTGAGE SERVICING RIGHTS
The fair value of the mortgage servicing rights (“MSRs”) was $1.3 billion as of Septemberboth June 30, 20212022 and December 31, 2020 was $1.2 billion and $1.1 billion, 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 SeptemberJune 30, 20212022 would be a decrease in the fair value of $37.2$40.6 million to the MSRs outstanding as of SeptemberJune 30, 2021.2022.
The impact of a 200-basis point increase in the discount rate at SeptemberJune 30, 20212022 would be a decrease in the fair value of $72.0$78.6 million to the MSRs outstanding as Septemberof June 30, 2021.2022.
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.
Activity related to MSRs for the three and ninesix months ended SeptemberJune 30, 20212022 and 20202021 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| | For the three months ended | | For the six months ended |
| ||||||||||||||||
| | September 30, | | September 30, |
| | June 30, | | June 30, |
| ||||||||||||||||
Roll Forward of MSRs (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||
Beginning balance | | $ | 915,519 | | $ | 778,269 | | $ | 862,813 | | $ | 718,799 | | | $ | 976,554 | | $ | 909,884 | | $ | 953,845 | | $ | 862,813 | |
Additions, following the sale of loan | |
| 70,095 | |
| 71,485 | |
| 224,035 | |
| 215,288 | | |
| 60,445 | |
| 57,300 | |
| 137,299 | |
| 153,940 | |
Amortization | |
| (44,402) | |
| (38,319) | |
| (130,868) | |
| (110,243) | | |
| (47,098) | |
| (43,914) | |
| (93,455) | |
| (86,466) | |
Pre-payments and write-offs | |
| (11,156) | |
| (7,751) | |
| (18,944) | |
| (14,768) | | |||||||||||||
Ending balance | | $ | 978,745 | | $ | 915,519 | | $ | 978,745 | | $ | 915,519 | |
1211
Pre-payments and write-offs | |
| (11,387) | |
| (5,780) | |
| (26,155) | |
| (18,189) | |
Ending balance | | $ | 929,825 | | $ | 805,655 | | $ | 929,825 | | $ | 805,655 | |
The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of SeptemberJune 30, 20212022 and December 31, 2020:2021:
| | | | | | | | | | | | |
Components of MSRs (in thousands) | | September 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 | ||||
Gross value | | $ | 1,521,190 | | $ | 1,394,901 | | $ | 1,617,975 | | $ | 1,548,870 |
Accumulated amortization | |
| (591,365) | |
| (532,088) | |
| (639,230) | |
| (595,025) |
Net carrying value | | $ | 929,825 | | $ | 862,813 | | $ | 978,745 | | $ | 953,845 |
The expected amortization of MSRs heldshown in the Condensed Consolidated Balance Sheet as of SeptemberJune 30, 20212022 is shown in the table below. Actual amortization may vary from these estimates.
| | | | | ||
|
| Expected |
| Expected | ||
(in thousands) | | Amortization | | Amortization | ||
Three Months Ending December 31, | | | | |||
2021 | | $ | 43,927 | |||
Six Months Ending December 31, | | | | |||
2022 | | $ | 92,455 | |||
Year Ending December 31, | | | | | ||
2022 | | $ | 167,770 | |||
2023 | |
| 155,112 | | $ | 177,502 |
2024 | |
| 134,111 | |
| 159,556 |
2025 | |
| 113,562 | |
| 136,593 |
2026 | |
| 93,833 | |
| 115,353 |
2027 | |
| 97,384 | |||
Thereafter | | | 221,510 | | | 199,902 |
Total | | $ | 929,825 | | $ | 978,745 |
NOTE 4—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS AND GUARANTY OBLIGATION
When a loan is sold under the Fannie Mae DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. 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. Activity related to the guaranty obligation for the three and nine months ended September 30, 2021 and 2020 is presented in the following table:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| ||||||||
| | September 30, | | September 30, |
| ||||||||
Roll Forward of Guaranty Obligation (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Beginning balance | | $ | 50,369 | | $ | 54,872 | | $ | 52,306 | | $ | 54,695 | |
Additions, following the sale of loan | |
| 1,449 | |
| 876 | |
| 4,023 | |
| 4,346 | |
Amortization | |
| (2,758) | |
| (2,274) | |
| (7,269) | |
| (7,035) | |
Other | | | — | | | — | | | — | | | 1,468 | |
Ending balance | | $ | 49,060 | | $ | 53,474 | | $ | 49,060 | | $ | 53,474 | |
Substantially all loans sold under the Fannie Mae DUS program contain partial or full risk-sharingfull-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. Additionally, a guaranty obligation is presented as a component of Other liabilities on the Condensed Consolidated Balance Sheets.
Activity related to the allowance for risk-sharing obligations for the three and six months ended June 30, 2022 and 2021 follows:
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| ||||||||
| | June 30, | | June 30, |
| ||||||||
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Beginning balance | | $ | 53,244 | | $ | 64,580 | | $ | 62,636 | | $ | 75,313 | |
Provision (benefit) for risk-sharing obligations | |
| (4,769) | |
| (4,251) | |
| (14,161) | |
| (14,984) | |
Write-offs | |
| — | |
| — | |
| — | |
| — | |
Ending balance | | $ | 48,475 | | $ | 60,329 | | $ | 48,475 | | $ | 60,329 | |
During the first quarter of 2022, the Company updated its historical loss rate factor calculation to the current 10-year rolling period, with no change during the three months ended June 30, 2022. The Company utilizeshistorical loss rate used for the weighted-average remaining maturity (“WARM”) method to calculatecalculation of the CECL reserve and one yearwas 1.2 basis points as of June 30, 2022 compared to 1.8 basis points as of December 31, 2021, contributing to the benefit for risk-sharing obligations for the reasonable and supportable forecast period (the “forecast period”), assix months ended June 30, 2022 presented above. During the second quarter of 2022, the Company currently believes forecasts beyond one year are inherently less reliable. The WARM method uses an average annual charge-offupdated its estimate of the forecast-period loss rate that contains loss content over multiple vintagesto 2.2 basis points from 3 basis points as of March 31, 2022, based on (i) the projected unemployment rate, (ii) overall health of the multifamily market, and loan terms(iii) other information expected during the forecast-period and is used as a foundation for estimating the CECL reserve. The Company reverts to a historical loss ratereverted over a one-year period. For all remaining years untilperiod to the
1312
maturity,aforementioned 1.2 basis points historical loss rate. The change in the Company uses the historical weighted-average annual charge-offforecast-period loss rate to estimate losses. The average annual charge-off rate is appliedled to the unpaid principal balance over the contractual term, further adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio.
Activity related to the allowancebenefit for risk-sharing obligations for the three and nine months ended SeptemberJune 30, 20212022, presented above, and 2020 follows:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| ||||||||
| | September 30, | | September 30, |
| ||||||||
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Beginning balance | | $ | 60,329 | | $ | 69,191 | | $ | 75,313 | | $ | 11,471 | |
Adjustment related to adoption of CECL | | | — | | | — | | | — | | | 31,570 | |
Provision (benefit) for risk-sharing obligations | |
| 1,278 | |
| 1,304 | |
| (13,706) | |
| 28,922 | |
Write-offs | |
| — | |
| — | |
| — | |
| — | |
Other | | | — | | | — | | | — | | | (1,468) | |
Ending balance | | $ | 61,607 | | $ | 70,495 | | $ | 61,607 | | $ | 70,495 | |
As a result ofcontributed to the onset of the pandemic and the resulting forecasts for significant unemployment rates during 2020, the Company’s loss ratebenefit for the forecast period was 7 basis points as of September 30, 2020, resulting in the substantial provision for risk-sharing obligations for the ninesix months ended SeptemberJune 30, 2020 and an increase in the allowance for risk-sharing obligations as of September 30, 2020 as seen2022 presented above.
During the first three quartershalf of 2021, economic conditions have improved significantly compared to the same period in 2020, with reported and forecastforecasted unemployment rates significantly betterimproved compared to both December 31, 2020 and September 30, 2020. In response to improving unemployment statistics and the current and expected continued overall health of the multifamily market, the Company adjustedreduced the loss rate for the forecast period to 4 basis points as of March 31, 2021 and 3 basis points as of June 30, 2021 from 6 basis points as of December 31, 2020, to 3 basis points as of both June 30, 2021 and September 30, 2021. The decrease in the loss rate resultedresulting in the benefit for risk-sharing obligations seen above for the nine months ended September 30, 2021. The provision for risk-sharing obligations for the three and six months ended SeptemberJune 30, 2021, was a result of growth in the at-risk servicing portfolio. For the remaining expected life of the portfolio, the Company reverted over a one-year period on a straight-line basis to a historical loss rate of just under 2 basis points for all periods shown in the roll forwardas presented above.
The calculated CECL reserve for the Company’s $47.0$51.2 billion at-risk Fannie Mae servicing portfolio as of SeptemberJune 30, 20212022 was $54.0$37.7 million compared to $67.0$52.3 million as of December 31, 2020.2021. The weighted-average remaining life of the at-risk Fannie Mae servicing portfolio as of SeptemberJune 30, 20212022 was 7.3 years compared to 7.5 years. The at-risk Fannie Mae servicing portfolio does not include at-risk loans held for sale.years as of December 31, 2021.
NaN loans that defaulted in 2019 had aggregate collateral-based reserves of $7.6$10.8 million and $8.3$10.3 million as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
Activity related to the guaranty obligation for the three and six months ended June 30, 2022 and 2021 is presented in the following table:
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended |
| ||||||||
| | June 30, | | June 30, |
| ||||||||
Roll Forward of Guaranty Obligation (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Beginning balance | | $ | 46,490 | | $ | 51,836 | | $ | 47,378 | | $ | 52,306 | |
Additions, following the sale of loan | |
| 1,759 | |
| 853 | |
| 3,310 | |
| 2,574 | |
Amortization and write-offs | |
| (2,600) | |
| (2,320) | |
| (5,039) | |
| (4,511) | |
Ending balance | | $ | 45,649 | | $ | 50,369 | | $ | 45,649 | | $ | 50,369 | |
As of SeptemberJune 30, 2022 and 2021, the maximum quantifiable contingent liability associated with the Company’s guaranties for the at-risk loans serviced under the Fannie Mae DUS agreement was $9.8 billion.$10.5 billion and $9.5 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 5—SERVICING
The total unpaid principal balance of loans the Company was servicing for various institutional investors was $113.9$119.0 billion as of SeptemberJune 30, 20212022 compared to $107.2$115.7 billion as of December 31, 2020.2021.
As of SeptemberJune 30, 20212022 and December 31, 2020,2021, custodial escrow accounts relating to loans serviced by the Company totaled $3.0$2.3 billion and $3.1$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 incomefees 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
14
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.
13
NOTE 6—WAREHOUSE NOTES PAYABLE
As of SeptemberJune 30, 2021,2022, to provide financing to borrowers under the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $4.1$3.9 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of these Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale under the Company’s approved programs. The Company’s ability to originate mortgage loans for sale depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.
Additionally, as of SeptemberJune 30, 2021,2022, the Company has arranged for warehouse lines of credit in the amount of $0.5 billion with certain national banks to assist in funding loans held for investment under the Interim Loan Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The Company’s ability to originate loans held for investment depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.
The Company also has a warehouse line of credit in the amount of $30.0 million with a national bank to assist in funding the Company’s Committed investments in tax credit equity before transferring them to a tax credit fund (“Tax Credit Equity Warehouse Facility”).
The maximum amount and outstanding borrowings under Warehouse notes payable at SeptemberJune 30, 2021 follows:2022 follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | |
| | June 30, 2022 | | |
| ||||||||||||||||||||
(dollars in thousands) |
| Committed |
| Uncommitted | | Total Facility | | Outstanding |
|
|
|
| Committed |
| Uncommitted | | Total Facility | | Outstanding |
|
|
| ||||||||
Facility | | Amount | | Amount | | Capacity | | Balance | | Interest rate(2) |
| | Amount | | Amount | | Capacity | | Balance | | Interest rate(1) |
| ||||||||
Agency Warehouse Facility #1 | | $ | 425,000 | | $ | — | | $ | 425,000 | | $ | 277,872 |
| 30-day LIBOR plus 1.30% | | | $ | 425,000 | | $ | — | | $ | 425,000 | | $ | 105,286 |
| Adjusted Term SOFR plus 1.30% | |
Agency Warehouse Facility #2 | |
| 700,000 | |
| 300,000 | |
| 1,000,000 | |
| 346,047 | | 30-day LIBOR plus 1.30% | | |
| 700,000 | |
| 300,000 | |
| 1,000,000 | |
| 272,369 | | Adjusted Term SOFR plus 1.30% | |
Agency Warehouse Facility #3 | |
| 600,000 | |
| 265,000 | |
| 865,000 | |
| 378,624 |
| 30-day LIBOR plus 1.30% | | |
| 600,000 | |
| 265,000 | |
| 865,000 | |
| 287,275 |
| Adjusted Term SOFR plus 1.35% | |
Agency Warehouse Facility #4 | | | 350,000 | | | — | | | 350,000 | | | 136,616 | | 30-day LIBOR plus 1.30% | | | | 200,000 | | | 225,000 | | | 425,000 | | | 128,251 | | Adjusted Term SOFR plus 1.30% | |
Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 885,308 | | 30-day LIBOR plus 1.45% | | | | — | | | 1,000,000 | | | 1,000,000 | | | 68,804 | | Adjusted Term SOFR plus 1.45% | |
Agency Warehouse Facility #6 | | | 150,000 | | | 100,000 | | | 250,000 | | | 118,124 | | 30-day LIBOR plus 1.40% | | | | 150,000 | | | 50,000 | | | 200,000 | | | — | | 30-day LIBOR plus 1.30% | |
Agency Warehouse Facility #7 | | | 150,000 | | | 50,000 | | | 200,000 | | | 92,293 | | 30-day LIBOR plus 1.30% | | |||||||||||||||
Total National Bank Agency Warehouse Facilities | | $ | 2,375,000 | | $ | 1,715,000 | | $ | 4,090,000 | | $ | 2,234,884 | | | | | $ | 2,075,000 | | $ | 1,840,000 | | $ | 3,915,000 | | $ | 861,985 | | | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | |
| — | |
| 1,500,000 | |
| 1,500,000 | |
| 482,861 |
| | | |
| — | |
| 1,500,000 | |
| 1,500,000 | |
| 71,119 |
| | |
Total Agency Warehouse Facilities | | $ | 2,375,000 | | $ | 3,215,000 | | $ | 5,590,000 | | $ | 2,717,745 | | | | | $ | 2,075,000 | | $ | 3,340,000 | | $ | 5,415,000 | | $ | 933,104 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interim Warehouse Facility #1 | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | — |
| 30-day LIBOR plus 1.90% | | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | — |
| Adjusted Term SOFR plus 1.80% | |
Interim Warehouse Facility #2 | |
| 100,000 | |
| — | |
| 100,000 | |
| — |
| 30-day LIBOR plus 1.65% to 2.00% | | |
| 100,000 | |
| — | |
| 100,000 | |
| — |
| Adjusted Term SOFR plus 1.35% to 1.85% | |
Interim Warehouse Facility #3 | |
| 200,000 | |
| — | |
| 200,000 | |
| 111,817 |
| 30-day LIBOR plus 1.75% to 3.25% | | |
| 200,000 | |
| — | |
| 200,000 | |
| 163,468 |
| 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% | | | | 19,810 | | | — | | | 19,810 | | | 19,810 | | 30-day LIBOR plus 3.00% | |
Total National Bank Interim Warehouse Facilities | | $ | 454,810 | | $ | — | | $ | 454,810 | | $ | 131,627 | | | | | $ | 454,810 | | $ | — | | $ | 454,810 | | $ | 183,278 | | | |
Tax Credit Equity Warehouse Facility | | $ | 30,000 | | $ | — | | $ | 30,000 | | $ | 9,777 | | Adjusted Daily SOFR plus 3.00% | | |||||||||||||||
Debt issuance costs | |
| — | |
| — | |
| — | |
| (793) | | | | |
| — | |
| — | |
| — | |
| (482) | | | |
Total warehouse facilities | | $ | 2,829,810 | | $ | 3,215,000 | | $ | 6,044,810 | | $ | 2,848,579 | | | | | $ | 2,559,810 | | $ | 3,340,000 | | $ | 5,899,810 | | $ | 1,125,677 | | | |
(1) |
Interest rate presented does not include the effect of any applicable interest rate floors. |
TheDuring 2022, the following amendments to the Agency Warehouse Facilities were executed in the normal course of business to support the growth of the Company’s Agency business.
During the second quarter of 2021, the Company executed an amendment to the agreement related to Agency Warehouse Facility #1 that decreased the borrowing rate to 30-day London Interbank Offered Rate (“LIBOR”) plus 130 basis points from 30-day LIBOR plus 140 basis points and decreased the 30-day LIBOR floor to 0 from 25 basis points. In October 2021, the Company executed an amendment to the agreement that extended the maturity date to December 24, 2021. No other material modifications have been made to the agreement during 2021.
1514
Agency Warehouse Facilities
During the second quarter of 2021,2022, the Company executed amendments to the agreement relatedan amendment to Agency Warehouse Facility #2 that extended the maturity date to April 14, 202213, 2023 and decreasedtransitioned the borrowinginterest rate to 30-day LIBOR plus 130 basis points from 30-day LIBOR to Adjusted Term SOFR plus 140130 basis points. No other material modifications have been made to the agreement during 2021.2022.
During the second quarter of 2021,2022, the Company executed amendments to the agreementan amendment related to Agency Warehouse Facility #3 that extended the maturity date to May 14, 2022, increased15, 2023 and transitioned the borrowinginterest rate to 30-day LIBOR plus 130 basis points from 30-day LIBOR to Adjusted Term SOFR plus 115135 basis points and decreased the 30-day LIBORwith an Adjusted Term SOFR floor to 0 basis points from 50of 15 basis points. No other material modifications have been made to the agreement during 2021.2022.
During the second quarter of 2021,2022, the Company executed an amendment to the agreement related to Agency Warehouse Facility #4 that extended the maturity date to June 22, 2022, decreased2023, increased the total borrowing ratecapacity to 30-day LIBOR plus 130 basis points$425 million from $350 million, and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 140 basis points, and decreased the 30-day LIBOR floor to 5 basis points from 25130 basis points. No other material modifications have been made to the agreement during 2021.2022.
During the third quarter of 2021, the Company executed amendments to the agreement related to AgencyInterim Warehouse Facility #5 that extended the maturity date to September 15, 2022. No other material modifications have been made to the agreement during 2021.Facilities
During the first quarter of 2021, the Company executed an agreement to establish Agency Warehouse Facility #6. The warehouse facility has a $150.0 million maximum committed borrowing capacity, provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans, and matures on March 5, 2022. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 140 basis points with a 30-day LIBOR floor of 25 basis points. In addition to the committed borrowing capacity, the agreement provides $100.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. The facility agreement requires the Company’s compliance with the same financial covenants as provided in the facility agreement for Agency Warehouse Facility #1, as described in the Company’s 2020 Form 10-K. No material modifications have been made to the agreement during 2021.
During the third quarter of 2021, the Company executed an agreement to establish Agency Warehouse Facility #7. The warehouse facility has a $150.0 million maximum committed borrowing capacity, provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans, and matures on August 24, 2022. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 130 basis points. In addition to the committed borrowing capacity, the agreement provides $50.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. The facility agreement requires the Company’s compliance with the same financial covenants as provided in the facility agreement for Agency Warehouse Facility #1, as described in the Company’s 2020 Form 10-K. No material modifications have been made to the agreement during 2021.
During the second quarter of 2021,2022, the Company executed amendments to the agreementan amendment related to Interim Warehouse Facility #1 that extended the maturity date to May 14, 202215, 2023 and decreasedtransitioned the interest rate from 30-day LIBOR floor to 0 basis points from 50Adjusted Term SOFR plus 180 basis points. No other material modifications have been made to the agreement during 2021.2022.
During the thirdfirst quarter of 2021,2022, the Company executed an amendment to the agreement related to Interim Warehouse Facility #3#2 that extended the maturity date to September 29, 2022, increasedDecember 13, 2023 and transitioned the committed borrowing capacityinterest rate from 30-day LIBOR to $200.0 million, and eliminated the uncommitted borrowing capacity.Adjusted Term SOFR plus 135 to 185 basis points. No other material modifications have been made to the agreement during 2021.2022.
In October 2021,Tax Credit Equity Warehouse Facility
During 2022, the Company executed an amendmentamendments related to Interimthe Tax Credit Equity Warehouse Facility #4 that extended the stated maturity date to October 1,August 30, 2022. Additionally, the amendments transitioned the interest rate from Daily LIBOR plus 300 basis points to Adjusted Daily SOFR plus 300 basis points, with a SOFR floor of 150 basis points. No other material modifications have been made to the agreement during 2021.2022.
The warehouse notes payable are subject to various financial covenants, all of which the Company was in compliance with as of SeptemberJune 30, 2021.
2022. Interest on the Company’s warehouse notes payable is based on 30-day LIBOR.LIBOR, Adjusted Term SOFR, or Adjusted Daily SOFR. As a result of the expected transition from LIBOR, the Company has updated its debt agreements to include fallback language to govern the transition from 30-day LIBOR to an alternative reference rate.
NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Acquisition Activities
A summary of the Company’s goodwill for the six months ended June 30, 2022 and 2021 follows:
| | | | | | | |
| | For the six months ended | | ||||
| | June 30, | | ||||
Roll Forward of Goodwill (in thousands) |
| 2022 |
| 2021 |
| ||
Beginning balance | | $ | 698,635 | | $ | 248,958 | |
Additions from acquisitions | |
| 213,874 | |
| 17,507 | |
Measurement-period adjustments | | | 25,372 | | | — | |
Impairment | |
| — | |
| — | |
Ending balance | | $ | 937,881 | | $ | 266,465 | |
| | | | | | | |
The addition to goodwill from acquisitions during 2022 shown in the table above during the six months ended June 30, 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
15
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 $210.1 million and consisted of $87.6 million of cash, $5.5 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 $117.0 million of contingent consideration.
GeoPhy’s data analytics and technology development capabilities are expected to 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. GeoPhy’s financial results since the acquisition and pro-forma information as if the acquisition occurred January 1, 2021 were immaterial.
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 $132.7 million, or 65% of the maximum earnout, is achievable based on management forecasts. The discounted balance of $117.0 million is 57% of the maximum earnout amount. The Company estimated the fair value of this contingent consideration using a Monte Carlo simulation. The weighted average cost of capital (“WACC”) used for the valuation of the contingent consideration was 17.0% for the Apprise portion of the earnout and 14.5% for the small-balance portion of the earnout. The WACC reflects the additional risk inherent in the Apprise performance estimates as it is still in the startup stage of its development. The estimated achievable earnout amount was discounted using a forward curve for a Company-specific subordinated debt rating.
The calculation of goodwill of $211.9 million included the fair value of the consideration transferred of $210.1 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’s 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 10-year period. Immaterial liabilities were assumed.
As of June 30, 2022, the amounts recorded for the GeoPhy acquisition were provisional as the Company had not completed the purchase accounting for the GeoPhy acquisition as it awaits additional tax information.
The measurement-period adjustments above primarily relate to the Company’s acquisition of Alliant Capital Ltd. (“Alliant”), an acquisition completed in December of 2021, as more fully described in the Company’s 2021 Form 10-K. The measurement-period adjustments consist of (i) $29.7 million additional purchase price consideration related to the settlement of working capital adjustments and (ii) immaterial other adjustments. The additional consideration was paid during the third quarter of 2022. The Company has substantially completed the purchase accounting for the Alliant acquisition as of June 30, 2022.
As discussed in NOTE 11 below and beginning in the first quarter of 2022, the Company now has 3 reportable segments. The following table shows goodwill by reportable segments as of June 30, 2022. As the Company did not have segment reporting as of December 31, 2021, all of the goodwill balance was allocated to the Company’s 1 reportable segment as of December 31, 2021. As noted above, the additions in the first quarter of 2022 were allocated to Capital Markets, and the measurement-period adjustments relate to both Capital Markets and Servicing & Asset Management.
16
| | | |
Goodwill by Reportable Segment (in thousands) | | As of June 30, 2022 | |
Capital Markets | | $ | 448,048 |
Servicing & Asset Management | | | 489,833 |
Corporate | | | — |
Ending balance | | $ | 937,881 |
NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
A summaryOther Intangible Assets
Activity related to other intangible assets for the six months ended June 30, 2022 and 2021 follows:
| | | | | | |
| | For the six months ended | ||||
| | June 30, | ||||
Roll Forward of Other Intangible Assets (in thousands) |
| 2022 |
| 2021 | ||
Beginning balance | | $ | 183,904 | | $ | 1,880 |
Additions from acquisitions | |
| 31,000 | |
| 504 |
Amortization | |
| (7,880) | |
| (831) |
Ending balance | | $ | 207,024 | | $ | 1,553 |
The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s goodwill for the nine months ended Septemberother intangible assets as of June 30, 20212022 and 2020 follows:December 31, 2021:
| | | | | | | |
| | For the nine months ended | | ||||
| | September 30, | | ||||
Roll Forward of Goodwill (in thousands) |
| 2021 |
| 2020 |
| ||
Beginning balance | | $ | 248,958 | | $ | 180,424 | |
Additions from acquisitions | |
| 84,291 | |
| 68,534 | |
Impairment | |
| — | |
| — | |
Ending balance | | $ | 333,249 | | $ | 248,958 | |
| | | | | | | |
| | | | | | |
Components of Other Intangible Assets (in thousands) | | June 30, 2022 | | December 31, 2021 | ||
Gross value | | $ | 220,682 | | $ | 189,682 |
Accumulated amortization | |
| (13,658) | |
| (5,778) |
Net carrying value | | $ | 207,024 | | $ | 183,904 |
The additions to goodwill from acquisitions during 2021expected amortization of other intangible assets shown in the Condensed Consolidated Balance Sheet as of June 30, 2022 is shown in the table above during the nine months ended September 30, 2021 relate to the following immaterial acquisitions:below. Actual amortization may vary from these estimates.
| | | |
|
| Expected | |
(in thousands) | | Amortization | |
Six Months Ending December 31, | | | |
2022 | | $ | 8,870 |
Year Ending December 31, | | | |
2023 | | $ | 17,303 |
2024 | |
| 16,246 |
2025 | |
| 16,206 |
2026 | |
| 16,206 |
2027 | |
| 16,206 |
Thereafter | | | 115,987 |
Total | | $ | 207,024 |
17
Contingent Consideration Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | ||||||||||||||
Detail of Acquisition Activity (in thousands) | ||||||||||||||||||||||||||
| | Acquisition | | | Purchase Consideration | | | Assets | | Liabilities | | Noncontrolling | | Goodwill | ||||||||||||
Acquisition | | Date | | Cash | | Stock | | Contingent | | Total | | | Acquired | | Assumed | | Interest | | Recognized | |||||||
Acquisition #1 | | Q1 2021 | | $ | 7,506 | | $ | — | | $ | 5,229 | | $ | 12,735 | | $ | 504 | | $ | — | | $ | — | | $ | 12,231 |
Acquisition #2 | | Q2 2021 | | | 3,000 | | | — | | | 2,275 | | | 5,275 | | | — | | | — | | | — | | | 5,275 |
Acquisition #3 | | Q3 2021 | | | 53,420 | | | 5,250 | | | — | | | 58,670 | | | 16,521 | | | 5,886 | | | 18,750 | | | 66,785 |
Total | | | | $ | 63,926 | | $ | 5,250 | | $ | 7,504 | | $ | 76,680 | | $ | 17,025 | | $ | 5,886 | | $ | 18,750 | | $ | 84,291 |
The assets acquired and liabilities assumed presented above were recorded at fair value. Acquisition #1 relates to a property sales brokerage company. Acquisition #2 relates to a company with a technology platform that streamlines and accelerates the quoting, processing, and underwriting of small-balance multifamily loans while providing the borrower with a web-based, user-friendly interface. The acquisition is part of the Company’s overall strategy to significantly increase its small-balance lending volumes using technology. Acquisition #3 relates to the purchase of a 75% controlling interest in Zelman, which specializes in housing market research and real estate-related investment banking and advisory services. The assets acquired for Acquisition #3 include $8.2 million of intangible assets. As of September 30, 2021, the Company completed the purchase accounting for Acquisitions #1 and #2. The purchase accounting for Acquisition #3 is pending the finalization of working capital adjustments in the fourth quarter of 2021, which are expected to be immaterial.
The stock consideration shown above is a non-cash transaction not impacting the amount of cash consideration paid on the Condensed Consolidated Statements of Cash Flows.
As of September 30, 2021 and December 31, 2020, the remaining balance of intangible assets from acquisitions totaled $8.5 million and $1.9 million, respectively. As of September 30, 2021, the weighted-average period over which the Company expects these intangible assets to be amortized is 5.4 years.
A summary of the Company’s contingent consideration liabilities, which are included in Other liabilities in the Condensed Consolidated Balance Sheets, as of and for the ninesix months ended SeptemberJune 30, 2022 and 2021 and 2020 follows:
| | | | | | | |
| | For the nine months ended | | ||||
| | September 30, | | ||||
Roll Forward of Contingent Consideration Liabilities (in thousands) |
| 2021 |
| 2020 | | ||
Beginning balance | | $ | 28,829 | | $ | 5,752 | |
Additions | | | 7,504 | | | 27,645 | |
Accretion | | | 1,405 | | | 826 | |
Payments | | | (6,080) | | | (5,800) | |
Ending balance | | $ | 31,658 | | $ | 28,423 | |
| | | | | | | |
| | For the six months ended | | ||||
| | June 30, | | ||||
Roll Forward of Contingent Consideration Liabilities (in thousands) |
| 2022 |
| 2021 | | ||
Beginning balance | | $ | 125,808 | | $ | 28,829 | |
Additions | | | 117,000 | | | 7,504 | |
Accretion and revaluation | | | 1,823 | | | 906 | |
Payments | | | (26,439) | | | — | |
Ending balance | | $ | 218,192 | | $ | 37,239 | |
The contingent consideration liabilities presented in the table above relate to (i) acquisitions of debt brokerage companies and an investment sales brokerage company completed over the past several years, including 2021, (ii) the purchase of noncontrolling interests in 2020 that was fully earned as of December 31, 2021 and paid in 2022, (iii) the aforementioned
17
technology company acquired in 2021.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 probability-based, discounted cash flow model.Monte Carlo simulation.
The recognition of the contingent consideration includedliability for the acquisitions and purchase of noncontrolling interestsGeoPhy acquisition is non-cash, and thus not reflected in the amount of cash consideration paid on the Condensed Consolidated Statements of Cash Flows. In addition, $8.8 millionof the payments settling contingent consideration liabilities included in the table above for the six months ended June 30, 2022 were from the issuance of the Company’s common stock, a non-cash transaction.
NOTE 8—FAIR VALUE MEASUREMENTS
The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
● | Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
● | Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, discount rates, volatilities, prepayment speeds, earnings rates, credit risk, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
● | Level 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation. |
The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement when there is evidence of impairment and for disclosure purposes (NOTE 3). The Company's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur on occasion, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated
18
fair value of the Company’s MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, estimated revenue from escrow accounts, 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 market participants consider in valuing MSR assets. During the first quarter of 2021, the Company reduced the discount rate and escrow earnings rate assumptions for its capitalized MSRs based on market participant data. MSRs are carried at the lower of amortized cost or fair value.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
● | Derivative Instruments—The derivative positions consist of interest rate lock commitments with borrowers and forward sale agreements to the Agencies. The fair value of these instruments is estimated using a discounted cash flow model developed based on changes in the applicable U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company, and are classified within Level 3 of the valuation |
● | Loans Held for Sale—All loans held for sale presented in the Condensed Consolidated Balance Sheets are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted |
18
observable inputs from market participants such as changes in the U.S. Treasury rate. Therefore, the Company classifies these loans held for sale as Level |
● |
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:
| | | | | | | | | | | | | |
| | | | | | | | Balance as of |
| ||||
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Period End |
| ||||
September 30, 2021 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 2,711,900 | | $ | — | | $ | 2,711,900 | |
Pledged securities | |
| 51,550 | |
| 97,224 | |
| — | |
| 148,774 | |
Derivative assets | |
| — | |
| — | |
| 85,486 | |
| 85,486 | |
Total | | $ | 51,550 | | $ | 2,809,124 | | $ | 85,486 | | $ | 2,946,160 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 13,263 | | $ | 13,263 | |
Total | | $ | — | | $ | — | | $ | 13,263 | | $ | 13,263 | |
| | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 2,449,198 | | $ | — | | $ | 2,449,198 | |
Pledged securities | |
| 17,473 | |
| 119,763 | |
| — | |
| 137,236 | |
Derivative assets | |
| — | |
| — | |
| 49,786 | |
| 49,786 | |
Total | | $ | 17,473 | | $ | 2,568,961 | | $ | 49,786 | | $ | 2,636,220 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 5,066 | | $ | 5,066 | |
Total | | $ | — | | $ | — | | $ | 5,066 | | $ | 5,066 | |
There were 0 transfers between any of the levels within the fair value hierarchy during the nine months ended September 30, 2021.
Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | |
| | Level 3 Fair Value Measurements: | | ||||||||||
| | Derivative Instruments | | ||||||||||
| | For the three months ended | | For the nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Derivative Assets and Liabilities, net (in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Beginning balance | | $ | 6,340 | | $ | 13,346 | | $ | 44,720 | | $ | 15,532 | |
Settlements | |
| (146,841) | |
| (141,804) | |
| (488,356) | |
| (456,639) | |
Realized gains recorded in earnings(1) | |
| 140,501 | |
| 128,458 | |
| 443,636 | |
| 441,107 | |
Unrealized gains (losses) recorded in earnings(1) | |
| 72,223 | |
| 33,432 | |
| 72,223 | |
| 33,432 | |
Ending balance | | $ | 72,223 | | $ | 33,432 | | $ | 72,223 | | $ | 33,432 | |
19
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of September 30, 2021:
| | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| |||||||
(in thousands) |
| Fair Value |
| Valuation Technique |
| Unobservable Input (1) |
| Input Value (1) |
| |
Derivative assets | | $ | 85,486 |
| Discounted cash flow |
| Counterparty credit risk |
| — | |
Derivative liabilities | | $ | 13,263 |
| Discounted cash flow |
| Counterparty credit risk |
| — | |
The carrying amounts and the fair values of the Company's financial instruments as of September 30, 2021 and December 31, 2020 are presented below:
| | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
(in thousands) | | Amount | | Value | | Amount | | Value |
| ||||
Financial Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 318,188 | | $ | 318,188 | | $ | 321,097 | | $ | 321,097 | |
Restricted cash | |
| 34,875 | |
| 34,875 | |
| 19,432 | |
| 19,432 | |
Pledged securities | |
| 148,774 | |
| 148,774 | |
| 137,236 | |
| 137,236 | |
Loans held for sale | |
| 2,711,900 | |
| 2,711,900 | |
| 2,449,198 | |
| 2,449,198 | |
Loans held for investment, net | |
| 233,685 | |
| 234,996 | |
| 360,402 | |
| 362,586 | |
Derivative assets | |
| 85,486 | |
| 85,486 | |
| 49,786 | |
| 49,786 | |
Total financial assets | | $ | 3,532,908 | | $ | 3,534,219 | | $ | 3,337,151 | | $ | 3,339,335 | |
| | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | |
Derivative liabilities | | $ | 13,263 | | $ | 13,263 | | $ | 5,066 | | $ | 5,066 | |
Secured borrowings | | | — | | | — | | | 73,314 | | | 73,314 | |
Warehouse notes payable | |
| 2,848,579 | |
| 2,849,372 | |
| 2,517,156 | |
| 2,518,101 | |
Note payable | |
| 289,763 | |
| 292,539 | |
| 291,593 | |
| 294,773 | |
Total financial liabilities | | $ | 3,151,605 | | $ | 3,155,174 | | $ | 2,887,129 | | $ | 2,891,254 | |
The following methods and assumptions were used for recurring fair value measurements as of September 30, 2021 and December 31, 2020.
Cash and Cash Equivalents and Restricted Cash—The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).
Pledged Securities—Investments in money market funds are valued using quoted market prices from recent trades. Therefore, the Company classifies this portion of pledged securities as Level 1. The Company determines the fair value of its AFS investments in Agency debt securities using discounted cash flows that incorporate observable inputs from market participants and then compares the fair value to broker estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2.
● | 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 fair value accretion. The remeasurement and fair value accretion are recognized as Other operating expenses in the Condensed Consolidated Statements of Income. The Company determines the fair value of each contingent consideration liability based on a combination of Monte Carlo simulations and probability of achievement estimates, which incorporates management estimates. As a result, the Company classifies these liabilities as Level 3. |
19
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:
| | | | | | | | | | | | | |
| | | | | | | | Balance as of |
| ||||
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Period End |
| ||||
June 30, 2022 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 931,516 | | $ | — | | $ | 931,516 | |
Pledged securities | |
| 10,149 | |
| 139,411 | |
| — | |
| 149,560 | |
Derivative assets | |
| — | |
| — | |
| 59,810 | |
| 59,810 | |
Total | | $ | 10,149 | | $ | 1,070,927 | | $ | 59,810 | | $ | 1,140,886 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 17,176 | | $ | 17,176 | |
Contingent consideration liabilities | | | — | | | — | | | 218,192 | | | 218,192 | |
Total | | $ | — | | $ | — | | $ | 235,368 | | $ | 235,368 | |
| | | | | | | | | | | | | |
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 0 transfers between any of the levels within the fair value hierarchy during the six months ended June 30, 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 six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
Derivative Assets and Liabilities, net (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Beginning balance | | $ | 99,623 | | $ | 48,880 | | $ | 30,961 | | $ | 44,720 | |
Settlements | |
| (211,543) | |
| (211,771) | |
| (277,921) | |
| (341,515) | |
Realized gains recorded in earnings(1) | |
| 111,920 | |
| 162,891 | |
| 246,960 | |
| 296,795 | |
Unrealized gains (losses) recorded in earnings(1) | |
| 42,634 | |
| 6,340 | |
| 42,634 | |
| 6,340 | |
Ending balance | | $ | 42,634 | | $ | 6,340 | | $ | 42,634 | | $ | 6,340 | |
(1) | Realized and unrealized gains (losses) from derivatives are recognized in Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income. |
20
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of June 30, 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 | | $ | 59,810 |
| Discounted cash flow |
| Counterparty credit risk |
| — | | — |
Derivative liabilities | | $ | 17,176 |
| Discounted cash flow |
| Counterparty credit risk |
| — | | — |
Contingent consideration liabilities | | $ | 218,192 | | Various(2) | | Probability of earn-out achievement | | 65% - 100% | | 76% |
(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's financial instruments as of June 30, 2022 and December 31, 2021 are presented below:
| | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
(in thousands) | | Amount | | Value | | Amount | | Value |
| ||||
Financial Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 151,252 | | $ | 151,252 | | $ | 305,635 | | $ | 305,635 | |
Restricted cash | |
| 34,361 | |
| 34,361 | |
| 42,812 | |
| 42,812 | |
Pledged securities | |
| 149,560 | |
| 149,560 | |
| 148,996 | |
| 148,996 | |
Loans held for sale | |
| 931,516 | |
| 931,516 | |
| 1,811,586 | |
| 1,811,586 | |
Loans held for investment, net | |
| 247,243 | |
| 248,383 | |
| 269,125 | |
| 270,826 | |
Derivative assets | |
| 59,810 | |
| 59,810 | |
| 37,364 | |
| 37,364 | |
Total financial assets | | $ | 1,573,742 | | $ | 1,574,882 | | $ | 2,615,518 | | $ | 2,617,219 | |
| | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | |
Derivative liabilities | | $ | 17,176 | | $ | 17,176 | | $ | 6,403 | | $ | 6,403 | |
Contingent consideration liabilities | | | 218,192 | | | 218,192 | | | 125,808 | | | 125,808 | |
Warehouse notes payable | |
| 1,125,677 | |
| 1,126,159 | |
| 1,941,572 | |
| 1,942,448 | |
Notes payable | |
| 719,210 | |
| 723,931 | |
| 740,174 | |
| 745,175 | |
Total financial liabilities | | $ | 2,080,255 | | $ | 2,085,458 | | $ | 2,813,957 | | $ | 2,819,834 | |
The following methods and assumptions were used for recurring fair value measurements as of June 30, 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 Agency debt securities. The 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 a mortgage loan is funded and are valued using discounted cash flow models that incorporate observable prices from market participants.
21
Contingent Consideration Liability—Consists of the estimated fair values of expected future earn-out payments related to acquisitions completed over the past several years, including 2022. The earn-out liabilities are valued using a 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 flows. 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.
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.
20
Fair Value of Derivative Instruments and Loans Held for Sale—In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to an investor.
To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into a sale commitment with the investor simultaneously 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 Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. The fair value of the Company's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:
● | the estimated gain of the expected loan sale to the investor (Level 2); |
● |
The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan, is calculated pursuant to the valuation techniques applicable to the fair valuenet of future servicing, net at loan sale (Levelany guaranty obligations retained (Level 2).;
To calculate
● | the
|
The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to the fair value of future servicing, net at loan sale (Level 2).
To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount (Level 2).
The fair value of the Company's forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The fair value of the Company’s interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in interest rate lock commitments and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties and the short duration of interest rate lock commitments and forward sale contracts, the risk of nonperformance by the Company’s counterparties has historically been minimal (Level 3).
22
The following table presents the components of fair value and other relevant information associated with the Company’s derivative instruments and loans held for sale as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Adjustment Components | | Balance Sheet Location |
| ||||||||||||||
|
| | |
| | |
| | |
| | |
| | |
| | |
| Fair Value |
| |
| | Notional or | | Estimated | | | | | Total | | | | | | | | Adjustment |
| ||||
| | Principal | | Gain | | Interest Rate | | Fair Value | | Derivative | | Derivative | | to Loans |
| |||||||
(in thousands) | | Amount | | on Sale | | Movement | | Adjustment | | Assets | | Liabilities | | Held for Sale |
| |||||||
June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | |
Rate lock commitments | | $ | 820,439 | | $ | 20,105 | | $ | 12,556 | | $ | 32,661 | | $ | 33,386 | | $ | (725) | | $ | — | |
Forward sale contracts | |
| 1,753,635 | |
| — | |
| 9,973 | |
| 9,973 | |
| 26,424 | | | (16,451) | |
| — | |
Loans held for sale | |
| 933,196 | |
| 20,849 | |
| (22,529) | |
| (1,680) | |
| — | |
| — | |
| (1,680) | |
Total | | | | | $ | 40,954 | | $ | — | | $ | 40,954 | | $ | 59,810 | | $ | (17,176) | | $ | (1,680) | |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | |
Rate lock commitments | | $ | 1,115,829 | | $ | 29,837 | | $ | (4,604) | | $ | 25,233 | | $ | 26,526 | | $ | (1,293) | | $ | — | |
Forward sale contracts | |
| 2,881,224 | |
| — | |
| 5,728 | |
| 5,728 | |
| 10,838 | | | (5,110) | |
| — | |
Loans held for sale | |
| 1,765,395 | |
| 47,315 | |
| (1,124) | |
| 46,191 | |
| — | |
| — | |
| 46,191 | |
Total | | | | | $ | 77,152 | | $ | — | | $ | 77,152 | | $ | 37,364 | | $ | (6,403) | | $ | 46,191 | |
NOTE 9—FANNIE MAE COMMITMENTS AND PLEDGED 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 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, 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. Pledged securities held in the form of money market funds holding U.S. Treasuries are discounted 5%, and Agency mortgage-backed securities (“Agency MBS”) are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As seen below, the Company held the majority of its pledged securities in Agency MBS as of June 30, 2022. The majority of the loans for which the Company has risk sharing are Tier 2 loans.
The Company is in compliance with the June 30, 2022 collateral requirements as outlined above. As of June 30, 2022, reserve requirements for the DUS loan portfolio will require the Company to fund $70.4 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within the at-risk portfolio. Fannie Mae has 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 increases to collateral requirements may adversely impact the Company’s available cash.
Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company's servicing authority for all or some of the portfolio if, at any time, it determines that the Company's financial condition is not adequate to support its obligations under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of June 30, 2022. The net worth requirement is derived primarily from unpaid principal balances on Fannie Mae loans and the level of risk sharing. At June 30, 2022, the net worth requirement was $266.2 million, and the Company's net worth, as defined in the requirements, was $621.6 million, as measured at our wholly-owned operating subsidiary, Walker & Dunlop, LLC. As of June 30, 2022, the Company was required to maintain at least $52.8 million of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Ginnie Mae, and the Company had operational liquidity, as defined in the requirements, of $116.0 million as of June 30, 2022, as measured at our wholly-owned operating subsidiary, Walker & Dunlop, LLC.
23
Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of June 30, 2022 and 2021 and December 31, 2021 and 2020:
| | | | | | | | | | | | |
| June 30, | | December 31, | | ||||||||
Pledged Securities (in thousands) | 2022 |
| 2021 |
| 2021 |
| 2020 |
| ||||
Restricted cash | $ | 5,979 | | $ | 7,442 | | $ | 3,779 | | $ | 4,954 | |
Money market funds | | 4,170 | | | 39,954 | | | 40,954 | | | 12,519 | |
Total pledged cash and cash equivalents | $ | 10,149 | | $ | 47,396 | | $ | 44,733 | | $ | 17,473 | |
Agency MBS |
| 139,411 | | | 99,152 | |
| 104,263 | |
| 119,763 | |
Total pledged securities, at fair value | $ | 149,560 | | $ | 146,548 | | $ | 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 2.
The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency MBS and are all accounted for as AFS securities. When the fair value of Agency MBS is lower than the carrying value, the Company assesses whether an allowance for credit losses is necessary. The Company does not record an allowance for credit losses for its AFS securities, including those whose fair value is less than amortized cost, when the AFS securities are issued by the GSEs. The contractual cash flows of these AFS securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of these securities. The Company does not intend to sell any of the Agency MBS 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 June 30, 2022 and December 31, 2021:
| | | | | | |
Fair Value and Amortized Cost of Agency MBS (in thousands) | June 30, 2022 |
| December 31, 2021 |
| ||
Fair value | $ | 139,411 | | $ | 104,263 | |
Amortized cost | | 139,737 | | | 100,847 | |
Total gains for securities with net gains in AOCI | | 1,242 | | | 3,636 | |
Total losses for securities with net losses in AOCI |
| (1,568) | |
| (220) | |
Fair value of securities with unrealized losses |
| 104,433 | |
| 4,757 | |
An immaterial amount of the pledged securities has been in a continuous unrealized loss position for more than 12 months.
The following table provides contractual maturity information related to Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date.
| | | | | | |
| June 30, 2022 | | ||||
Detail of Agency MBS Maturities (in thousands) | Fair Value |
| Amortized Cost |
| ||
Within one year | $ | — | | $ | — | |
After one year through five years | | 13,901 | | | 13,903 | |
After five years through ten years | | 100,704 | | | 100,835 | |
After ten years |
| 24,806 | | | 24,999 | |
Total | $ | 139,411 | | $ | 139,737 | |
| | | | | | |
NOTE 10—EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY
Earnings per share (“EPS”) is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to each class of common stock and participating securities based on their respective rights to receive dividends. The Company grants share-based awards to various employees and nonemployee directors under the 2020 Equity Incentive Plan that entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
24
The following table presents the calculation of basic and diluted EPS for the three and six months ended June 30, 2022 and 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.
| | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| ||||||||
EPS Calculations (in thousands, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
| ||||
Calculation of basic EPS | | | | | | | | | | | | |
Walker & Dunlop net income | $ | 54,286 | | $ | 56,058 | | $ | 125,495 | | $ | 114,110 | |
Less: dividends and undistributed earnings allocated to participating securities |
| 1,554 | |
| 1,831 | |
| 3,708 | |
| 3,798 | |
Net income applicable to common stockholders | $ | 52,732 | | $ | 54,227 | | $ | 121,787 | | $ | 110,312 | |
Weighted-average basic shares outstanding | | 32,388 | | | 31,019 | | | 32,304 | | | 30,922 | |
Basic EPS | $ | 1.63 | | $ | 1.75 | | $ | 3.77 | | $ | 3.57 | |
| | | | | | | | | | | | |
Calculation of diluted EPS | | | | | | | | | | | | |
Net income applicable to common stockholders | $ | 52,732 | | $ | 54,227 | | $ | 121,787 | | $ | 110,312 | |
Add: reallocation of dividends and undistributed earnings based on assumed conversion | | 9 | | | 14 | | | 27 | | | 34 | |
Net income allocated to common stockholders | $ | 52,741 | | $ | 54,241 | | $ | 121,814 | | $ | 110,346 | |
Weighted-average basic shares outstanding | | 32,388 | | | 31,019 | | | 32,304 | | | 30,922 | |
Add: weighted-average diluted non-participating securities | | 306 | | | 351 | | | 353 | | | 400 | |
Weighted-average diluted shares outstanding | | 32,694 | | | 31,370 | | | 32,657 | | | 31,322 | |
Diluted EPS | $ | 1.61 | | $ | 1.73 | | $ | 3.73 | | $ | 3.52 | |
The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasury-stock method includes the unrecognized compensation costs associated with the awards. For the three and six months ended June 30, 2022, 136 thousand average restricted shares and 87 thousand average restricted shares, respectively, were excluded. An immaterial number of average restricted shares were excluded from the computation of diluted EPS under the treasury-stock method for the three and six months ended June 30, 2021. These average restricted shares were excluded from the computation of diluted EPS under the treasury method because the effect would have been anti-dilutive, as the grant date market price of the restricted shares was greater than the average market price of the Company’s shares of common stock during the periods presented.
The following non-cash transactions did not impact the amount of cash paid on the Condensed Consolidated Statements of Cash Flows. During 2022, the operating agreement of 3 of the Company’s tax-credit-related joint ventures changed. The Company reconsidered its consolidation conclusion based on these changes and concluded that the joint ventures should be consolidated, resulting in a $3.7 million increase in APIC and $6.8 million of noncontrolling interests consolidated as shown on the Consolidated Statements of Changes in Equity for the six months ended June 30, 2022. 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.
In February 2022, the Company’s Board of Directors approved a stock repurchase program that permits the repurchase of 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 2022, the Company did 0t repurchase any shares of its common stock under the share repurchase program. During the second quarter of 2022, the Company repurchased 109 thousand shares of its common stock under the 2022 share repurchase program at a weighted-average price of $101.77 per share and immediately retired the shares, reducing stockholders’ equity by $11.1 million. As of June 30, 2022, the Company had $63.9 million of authorized share repurchase capacity remaining under the 2022 share repurchase program.
During each of the first and second quarters of 2022, the Company paid a dividend of $0.60 per share. On August 3, 2022, the Company’s Board of Directors declared a dividend of $0.60 per share for the third quarter of 2022. The dividend will be paid on September 2, 2022 to all holders of record of the Company’s restricted and unrestricted common stock as of August 18, 2022.
The Company’s Note Payable (“Term Loan”) contains direct restrictions to sell the loan to Fannie Mae. As discussed in NOTE 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, 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. Pledged securities held in the form of money market funds holding U.S. Treasuries are discounted 5%, and Agency mortgage-backed securities (“Agency MBS”) are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As seen below, the Company held the majority of its pledged securities in Agency MBS as of September 30, 2021. The majority of the loans for which the Company has risk sharing are Tier 2 loans.
The Company is in compliance with the September 30, 2021 collateral requirements as outlined above. As of September 30, 2021, reserve requirements for the DUS loan portfolio will require the Company to fund $64.2 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within the at-risk portfolio. Fannie Mae has 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 increases to collateral requirements may adversely impact the Company’s available cash.
Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company's servicing authority for all or some of the portfolio if, at any time, it determines that the Company's financial condition is not adequate to support its obligations under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of September 30, 2021. The net worth requirement is derived primarily from unpaid principal balances on Fannie Mae loans and the level of risk sharing. At September 30, 2021, the net worth requirement was $250.2 million, and the Company's net worth, as defined in the requirements, was $1.1 billion, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of September 30, 2021, the Company was required to maintain at least $49.5 million of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Ginnie Mae, and the Company had operational liquidity, as defined in the requirements, of $254.7 million as of September 30, 2021, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.
22
Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of September 30, 2021 and 2020 and December 31, 2020 and 2019:
| | | | | | | | | | | | |
| September 30, | | December 31, | | ||||||||
Pledged Securities (in thousands) | 2021 |
| 2020 |
| 2020 |
| 2019 |
| ||||
Restricted cash | $ | 10,596 | | $ | 13,370 | | $ | 4,954 | | $ | 2,150 | |
Money market funds | | 40,954 | | | 7,954 | | | 12,519 | | | 5,054 | |
Total pledged cash and cash equivalents | $ | 51,550 | | $ | 21,324 | | $ | 17,473 | | $ | 7,204 | |
Agency MBS |
| 97,224 | | | 112,971 | |
| 119,763 | |
| 114,563 | |
Total pledged securities, at fair value | $ | 148,774 | | $ | 134,295 | | $ | 137,236 | | $ | 121,767 | |
The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Condensed Consolidated Statements of Cash Flows as more fully discussed in NOTE 2.
The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency MBS and are all accounted for as AFS securities. When the fair value of Agency MBS is lower than the carrying value, the Company assesses whether an allowance for credit losses is necessary. The Company does not record an allowance for credit losses for its AFS securities, including those whose fair value is less than amortized cost, when the AFS securities are issued by the GSEs. The contractual cash flows of these AFS securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of these securities. The Company does not intend to sell any of the Agency MBS 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 September 30, 2021 and December 31, 2020:
| | | | | | |
Fair Value and Amortized Cost of Agency MBS (in thousands) | September 30, 2021 |
| December 31, 2020 |
| ||
Fair value | $ | 97,224 | | $ | 119,763 | |
Amortized cost | | 93,570 | | | 117,136 | |
Total gains for securities with net gains in AOCI | | 3,796 | | | 2,669 | |
Total losses for securities with net losses in AOCI |
| (142) | |
| (42) | |
Fair value of securities with unrealized losses |
| 2,139 | |
| 12,267 | |
None of the pledged securities has been in a continuous unrealized loss position for more than 12 months.
The following table provides contractual maturity information related to Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date.
| | | | | | |
| September 30, 2021 | | ||||
Detail of Agency MBS Maturities (in thousands) | Fair Value |
| Amortized Cost |
| ||
Within one year | $ | — | | $ | — | |
After one year through five years | | 5,720 | | | 5,697 | |
After five years through ten years | | 61,939 | | | 61,056 | |
After ten years |
| 29,565 | | | 26,817 | |
Total | $ | 97,224 | | $ | 93,570 | |
| | | | | | |
NOTE 10—EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY
Earnings per share (“EPS”) is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to each class of common stock and participating securities based on their respective rights to receive dividends. The Company grants share-based awards to various employees and nonemployee directors under the 2020 Equity Incentive Plan that entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
23
The following table presents the calculation of basic and diluted EPS for the three and nine months ended September 30, 2021 and 2020 under the two-class method. Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the treasury-stock method.
| | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| ||||||||
EPS Calculations (in thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
| ||||
Calculation of basic EPS | | | | | | | | | | | | |
Walker & Dunlop net income | $ | 71,721 | | $ | 53,190 | | $ | 185,831 | | $ | 163,078 | |
Less: dividends and undistributed earnings allocated to participating securities |
| 2,364 | |
| 1,528 | |
| 6,163 | |
| 4,923 | |
Net income applicable to common stockholders | $ | 69,357 | | $ | 51,662 | | $ | 179,668 | | $ | 158,155 | |
Weighted-average basic shares outstanding | | 31,064 | | | 30,560 | | | 30,969 | | | 30,379 | |
Basic EPS | $ | 2.23 | | $ | 1.69 | | $ | 5.80 | | $ | 5.21 | |
| | | | | | | | | | | | |
Calculation of diluted EPS | | | | | | | | | | | | |
Net income applicable to common stockholders | $ | 69,357 | | $ | 51,662 | | $ | 179,668 | | $ | 158,155 | |
Add: reallocation of dividends and undistributed earnings based on assumed conversion | | 23 | | | 19 | | | 57 | | | 75 | |
Net income allocated to common stockholders | $ | 69,380 | | $ | 51,681 | | $ | 179,725 | | $ | 158,230 | |
Weighted-average basic shares outstanding | | 31,064 | | | 30,560 | | | 30,969 | | | 30,379 | |
Add: weighted-average diluted non-participating securities | | 395 | | | 514 | | | 398 | | | 616 | |
Weighted-average diluted shares outstanding | | 31,459 | | | 31,074 | | | 31,367 | | | 30,995 | |
Diluted EPS | $ | 2.21 | | $ | 1.66 | | $ | 5.73 | | $ | 5.11 | |
The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasury-stock method includes the unrecognized compensation costs associated with the awards. For the three and nine months ended September 30, 2021, an immaterial number of average restricted shares were excluded from the computation of diluted earnings per share under the treasury method. For the three and nine months ended September 30, 2020, 175 thousand and 142 thousand average restricted shares, respectively, were excluded. These average restricted shares were excluded from the computation of diluted earnings per share under the treasury method because the effect would have been anti-dilutive, as the grant date market price of the restricted shares was greater than the average market price of the Company’s shares of common stock during the periods presented. For the nine months ended September 30, 2021, the Company issued shares of common stock totaling $9.6 million to settle compensation liabilities; these are non-cash transactions that do not impact the amount of cash paid on the Condensed Consolidated Statements of Cash Flows.
The Company’s Board of Directors approved a stock repurchase program that permits the repurchase of up to $75.0 million of the Company’s common stock over a 12-month period beginning on February 12, 2021. During the first three quarters of 2021, the Company did 0t repurchase any shares of its common stock under the share repurchase program. As of September 30, 2021, the Company had $75.0 million of authorized share repurchase capacity remaining under the 2021 share repurchase program.
During each of the first three quarters of 2021, the Company paid a dividend of $0.50 per share. On November 3, 2021, the Company’s Board of Directors declared a dividend of $0.50 per share for the fourth quarter of 2021. The dividend will be paid on November 29, 2021 to all holders of record of the Company’s restricted and unrestricted common stock as of November 19, 2021.
The Company’s Term Loan contains direct restrictions on the amount of dividends the Company may pay, and the warehouse debt facilities and agreements with the Agencies contain minimum equity, liquidity, and other capital requirements that indirectly restrict the amount of dividends the Company may pay. The Company does not believe that these restrictions currently limit the amount of dividends the Company can pay for the foreseeable future.
25
NOTE 11—SEGMENTS
In the first quarter of 2022, as a result of the Company’s growth and recent acquisitions, the Company’s executive leadership team, which functions as the Company’s chief operating decision making body, 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 |
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 segment.
(ii) | Servicing & Asset Management (“SAM”)—SAM’s activities include: (i) servicing and asset-managing the
|
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, accounting, information technology, legal, human resources, marketing, 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. |
26
The following tables provide a summary and reconciliation of each segment’s results for the three months ended June 30, 2022 and 2021.
| | | | | | | | | | | | |
| For the three months ended June 30, 2022 | |||||||||||
Segment Results | | | | | | Servicing & | | | | | | |
(in thousands) | | | Capital | | | Asset | | | | | | |
| | | Markets | | | Management | | | Corporate | | | Consolidated |
Revenues | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 102,085 | | $ | 520 | | $ | — | | $ | 102,605 |
Fair value of expected net cash flows from servicing, net | | | 51,949 | | | — | | | — | | | 51,949 |
Servicing fees | | | — | | | 74,260 | | | — | | | 74,260 |
Property sales broker fees | | | 46,386 | | | — | | | — | | | 46,386 |
Investment management fees | | | — | | | 10,282 | | | — | | | 10,282 |
Net warehouse interest income | | | 3,707 | | | 1,561 | | | — | | | 5,268 |
Escrow earnings and other interest income | | | — | | | 6,648 | | | 103 | | | 6,751 |
Other revenues | | | 3,895 | | | 39,280 | | | 172 | | | 43,347 |
Total revenues | | $ | 208,022 | | $ | 132,551 | | $ | 275 | | $ | 340,848 |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Personnel | | $ | 138,913 | | $ | 21,881 | | $ | 7,574 | | $ | 168,368 |
Amortization and depreciation | | | 810 | | | 58,760 | | | 1,533 | | | 61,103 |
Provision (benefit) for credit losses | |
| — | |
| (4,840) | |
| — | |
| (4,840) |
Interest expense on corporate debt | |
| — | |
| — | |
| 6,412 | |
| 6,412 |
Other operating expenses | |
| 4,583 | |
| 6,559 | |
| 25,053 | |
| 36,195 |
Total expenses | | $ | 144,306 | | $ | 82,360 | | $ | 40,572 | | $ | 267,238 |
Income from operations | | $ | 63,716 | | $ | 50,191 | | $ | (40,297) | | $ | 73,610 |
Income tax expense | |
| 16,476 | | | 12,850 | | | (9,823) | |
| 19,503 |
Net income before noncontrolling interests | | $ | 47,240 | | $ | 37,341 | | $ | (30,474) | | $ | 54,107 |
Less: net income (loss) from noncontrolling interests | |
| — | |
| (179) | |
| — | |
| (179) |
Walker & Dunlop net income | | $ | 47,240 | | $ | 37,520 | | $ | (30,474) | | $ | 54,286 |
| | | | | | | | | | | | |
27
| | | | | | | | | | | | |
| For the three months ended June 30, 2021 | |||||||||||
Segment Results | | | | | | Servicing & | | | | | | |
(in thousands) | | | Capital | | | Asset | | | | | | |
| | | Markets | | | Management | | | Corporate | | | Consolidated |
Revenues | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 105,583 | | $ | 1,889 | | $ | — | | $ | 107,472 |
Fair value of expected net cash flows from servicing, net | | | 61,849 | | | — | | | — | | | 61,849 |
Servicing fees | | | — | | | 69,052 | | | — | | | 69,052 |
Property sales broker fees | | | 22,454 | | | — | | | — | | | 22,454 |
Investment management fees | | | — | | | 3,815 | | | — | | | 3,815 |
Net warehouse interest income | | | 2,884 | | | 1,746 | | | — | | | 4,630 |
Escrow earnings and other interest income | | | — | | | 1,768 | | | 55 | | | 1,823 |
Other revenues | | | 3,135 | | | 6,885 | | | 296 | | | 10,316 |
Total revenues | | $ | 195,905 | | $ | 85,155 | | $ | 351 | | $ | 281,411 |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Personnel | | $ | 119,994 | | $ | 9,447 | | $ | 11,980 | | $ | 141,421 |
Amortization and depreciation | | | 18 | | | 47,395 | | | 1,097 | | | 48,510 |
Provision (benefit) for credit losses | |
| — | |
| (4,326) | |
| — | |
| (4,326) |
Interest expense on corporate debt | |
| — | |
| — | |
| 1,760 | |
| 1,760 |
Other operating expenses | |
| 3,598 | |
| 2,604 | |
| 13,546 | |
| 19,748 |
Total expenses | | $ | 123,610 | | $ | 55,120 | | $ | 28,383 | | $ | 207,113 |
Income from operations | | $ | 72,295 | | $ | 30,035 | | $ | (28,032) | | $ | 74,298 |
Income tax expense | |
| 17,739 | | | 7,475 | | | (6,974) | |
| 18,240 |
Net income before noncontrolling interests | | $ | 54,556 | | $ | 22,560 | | $ | (21,058) | | $ | 56,058 |
Less: net income (loss) from noncontrolling interests | |
| — | |
| — | |
| — | |
| — |
Walker & Dunlop net income | | $ | 54,556 | | $ | 22,560 | | $ | (21,058) | | $ | 56,058 |
| | | | | | | | | | | | |
28
The following tables provide a summary and reconciliation of each segment’s results for the six months ended June 30, 2022 and 2021 and total assets as of June 30, 2022 and 2021.
| | | | | | | | | | | | |
| As of and for the six months ended June 30, 2022 | |||||||||||
Segment Results and Total Assets | | | | | | Servicing & | | | | | | |
(in thousands) | | | Capital | | | Asset | | | | | | |
| | | Markets | | | Management | | | Corporate | | | Consolidated |
Revenues | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 183,908 | | $ | 1,007 | | $ | — | | $ | 184,915 |
Fair value of expected net cash flows from servicing, net | | | 104,679 | | | — | | | — | | | 104,679 |
Servicing fees | | | — | | | 146,941 | | | — | | | 146,941 |
Property sales broker fees | | | 69,784 | | | — | | | — | | | 69,784 |
Investment management fees | | | — | | | 22,930 | | | — | | | 22,930 |
Net warehouse interest income | | | 7,237 | | | 2,804 | | | — | | | 10,041 |
Escrow earnings and other interest income | | | — | | | 8,406 | | | 148 | | | 8,554 |
Other revenues | | | 6,658 | | | 61,529 | | | 44,261 | | | 112,448 |
Total revenues | | $ | 372,266 | | $ | 243,617 | | $ | 44,409 | | $ | 660,292 |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Personnel | | $ | 237,639 | | $ | 40,519 | | $ | 34,391 | | $ | 312,549 |
Amortization and depreciation | | | 810 | | | 113,691 | | | 2,754 | | | 117,255 |
Provision (benefit) for credit losses | |
| — | |
| (14,338) | |
| — | |
| (14,338) |
Interest expense on corporate debt | |
| — | |
| — | |
| 12,817 | |
| 12,817 |
Other operating expenses | |
| 10,694 | |
| 12,678 | |
| 45,037 | |
| 68,409 |
Total expenses | | $ | 249,143 | | $ | 152,550 | | $ | 94,999 | | $ | 496,692 |
Income from operations | | $ | 123,123 | | $ | 91,067 | | $ | (50,590) | | $ | 163,600 |
Income tax expense | |
| 29,323 | | | 21,689 | | | (12,049) | |
| 38,963 |
Net income before noncontrolling interests | | $ | 93,800 | | $ | 69,378 | | $ | (38,541) | | $ | 124,637 |
Less: net income (loss) from noncontrolling interests | |
| — | |
| (858) | |
| — | |
| (858) |
Walker & Dunlop net income | | $ | 93,800 | | $ | 70,236 | | $ | (38,541) | | $ | 125,495 |
| | | | | | | | | | | | |
Total assets | | $ | 1,611,951 | | $ | 2,607,990 | | $ | 314,831 | | $ | 4,534,772 |
29
| | | | | | | | | | | | |
| As of and for the six months ended June 30, 2021 | |||||||||||
Segment Results and Total Assets | | | | | | Servicing & | | | | | | |
(in thousands) | | | Capital | | | Asset | | | | | | |
| | | Markets | | | Management | | | Corporate | | | Consolidated |
Revenues | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 180,878 | | $ | 2,473 | | $ | — | | $ | 183,351 |
Fair value of expected net cash flows from servicing, net | | | 119,784 | | | — | | | — | | | 119,784 |
Servicing fees | | | — | | | 135,030 | | | — | | | 135,030 |
Property sales broker fees | | | 31,496 | | | — | | | — | | | 31,496 |
Investment management fees | | | — | | | 6,551 | | | — | | | 6,551 |
Net warehouse interest income | | | 5,343 | | | 3,842 | | | — | | | 9,185 |
Escrow earnings and other interest income | | | — | | | 3,767 | | | 173 | | | 3,940 |
Other revenues | | | 5,695 | | | 11,657 | | | (990) | | | 16,362 |
Total revenues | | $ | 343,196 | | $ | 163,320 | | $ | (817) | | $ | 505,699 |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Personnel | | $ | 192,629 | | $ | 16,558 | | $ | 28,449 | | $ | 237,636 |
Amortization and depreciation | | | 539 | | | 92,773 | | | 2,069 | | | 95,381 |
Provision (benefit) for credit losses | |
| — | |
| (15,646) | |
| — | |
| (15,646) |
Interest expense on corporate debt | |
| — | | | — | | | 3,525 | |
| 3,525 |
Other operating expenses | |
| 7,000 | | | 4,857 | | | 25,478 | |
| 37,335 |
Total expenses | | $ | 200,168 | | $ | 98,542 | | $ | 59,521 | | $ | 358,231 |
Income from operations | | $ | 143,028 | | $ | 64,778 | | $ | (60,338) | | $ | 147,468 |
Income tax expense | |
| 32,354 | | | 14,653 | | | (13,649) | |
| 33,358 |
Net income before noncontrolling interests | | $ | 110,674 | | $ | 50,125 | | $ | (46,689) | | $ | 114,110 |
Less: net income (loss) from noncontrolling interests | |
| — | |
| — | |
| — | |
| — |
Walker & Dunlop net income | | $ | 110,674 | | $ | 50,125 | | $ | (46,689) | | $ | 114,110 |
| | | | | | | | | | | | |
Total assets | | $ | 2,070,549 | | $ | 1,404,895 | | $ | 467,677 | | $ | 3,943,121 |
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.
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 2022, the operating agreement of 3 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 June 30, 2022 and December 31, 2021, the assets and liabilities of the consolidated tax credit funds were immaterial.
30
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) |
| | June 30, 2022 |
| | December 31, 2021 |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 1,101 | | $ | — |
Restricted cash | | | 1,049 | | | — |
Receivables, net | | | 34,051 | | | — |
Other Assets | | | 49,224 | | | 54,880 |
Total assets of consolidated VIEs | | $ | 85,425 | | $ | 54,880 |
| | | | | | |
Liabilities: | | | | | | |
Other liabilities | | $ | 33,662 | | $ | 36,480 |
Total liabilities of consolidated VIEs | | $ | 33,662 | | $ | 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) | | | June 30, 2022 |
| | December 31, 2021 |
Assets | | | | | | |
Committed investments in tax credit equity | | $ | 187,393 | | $ | 177,322 |
Other assets: Equity-method investments | | | 55,970 | | | 74,997 |
Total interests in nonconsolidated VIEs | | $ | 243,363 | | $ | 252,319 |
| | | | | | |
Liabilities | | | | | | |
Commitments to fund investments in tax credit equity | | | 173,740 | | | 162,747 |
Total commitments to fund nonconsolidated VIEs | | $ | 173,740 | | $ | 162,747 |
| | | | | | |
Maximum exposure to losses(1)(2) | | $ | 243,363 | | $ | 252,319 |
| | | | | | |
(1) | Maximum exposure determined as Total interests in nonconsolidated VIEs. The maximum exposure for the Company’s investments in tax credit |
(2) | Based on historical experience and
31 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“
Forward-Looking Statements Some of the statements in this Quarterly Report on Form 10-Q of Walker & Dunlop, Inc. and subsidiaries (the “Company,” “Walker & Dunlop,” “we,” or “us”), may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, or intentions. The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:
While forward-looking statements reflect our good-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 32 assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see “Risk Factors.” Business Overview We are We We provide multifamily property sales brokerage and appraisal and valuation services and engage in commercial real estate investment management On February 28, 2022, we acquired 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 executive leadership team, which functions as our chief operating decision making body, 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 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. 33 Corporate 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 requirements, including our corporate debt. The major other corporate-level functions include our strategic equity-method investments, accounting, information technology, legal, human resources, marketing, 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 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 are one of the leading lenders with the Agencies, where we originate and We recognize loan origination and debt brokerage fees, net and the fair value of expected net cash flows from servicing, 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 loan origination and debt brokerage fees, net and the fair value of expected net cash flows from servicing, 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 generally 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 the sale of the loan are used to pay off the warehouse facility borrowing. The sale of the loan is typically completed within 60 days after the loan is closed. We earn net warehouse interest income from loans held for sale while they are outstanding equal to the difference between the note rate on the loan and 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 small technology company 34 Debt Brokerage Our mortgage bankers who focus on debt brokerage are engaged by borrowers to work with a variety of institutional lenders and banks to find the most appropriate loan instrument for the Property Sales We offer property sales brokerage 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 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 across 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 our proprietary technology and leveraging our expertise in the commercial real estate industry. Prior to the GeoPhy acquisition, we and GeoPhy each owned a 50% interest in Apprise, and we accounted for the interest as an equity-method investment. Subsequent to the GeoPhy acquisition, Apprise is a wholly-owned subsidiary of Walker & Dunlop. Apprise’s revenues 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 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, 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 our 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 protection to us in the event of a voluntary prepayment. For loans serviced outside of Fannie Mae and Freddie Mac, we typically do not have 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 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 eligible to assign a loan to HUD once it is in default for 30 days. If the loan is not brought current, or the loan otherwise defaults, we are not reimbursed for our advances until such time as we assign the loan to HUD or work out a payment modification for the borrower. For loans in default, we may repurchase those loans out of the Ginnie Mae security, at which time our advance requirements cease and we may then modify and resell the loan or assign the loan back to 35 HUD and be reimbursed for our advances. We are not obligated to make advances on the loans we service under the Freddie Mac Optigo® program and our bank and life insurance company servicing 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). Our full risk-sharing is currently limited to loans up to $300 million, which equates to a maximum loss per loan of $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). 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 loans below $300 million, which reduces our potential risk-sharing losses from the levels described above if we do not believe that we are being fully compensated for the risks of 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
Principal Lending and Investing Our Using a combination of our own capital and warehouse debt financing, we offer interim loans that do not meet the criteria of the Interim Program JV (the “Interim Loan Program”). We underwrite, service, and asset-manage all loans executed 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.
We provide affordable housing investment management services through our subsidiary, Alliant Capital, Ltd and its 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 receive the portion of the economic benefits commensurate with its investment in the joint ventures. Additionally, Alliant also invests with third-party investors (either in a fund or joint-venture structure) with the goal of preserving affordability on multifamily properties coming out of the LIHTC 15-year compliance period or on which market forces are unlikely to keep the properties affordable. Through these preservation funds, 36 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. Through our subsidiary, Walker & Dunlop Investment Partners, we function as the operator of a private commercial real estate investment adviser focused on the management of debt, preferred equity, and mezzanine equity investments in middle-market commercial real estate funds.
Housing Market Research and Real Estate Investment Banking Services
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 Critical Accounting Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires 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 and the use of different judgments and assumptions may have a material impact on our results. Mortgage Servicing Rights (“MSRs”). MSRs are recorded at fair value at loan sale or upon purchase. 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 OMSR over the estimated life of the underlying loan. The discount rates used throughout the periods presented for all OMSRs were between 8-14% The assumptions used to estimate the fair value of capitalized OMSRs are developed 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 limited volatility in the assumptions historically, including the 37 the foreseeable future. We actively monitor the assumptions used and make adjustments to those assumptions when market conditions change, or other factors indicate such adjustments are warranted. During the first quarter of 2021, we reduced the discount rate and escrow earnings rate assumptions for our 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. Changes in our discount rate assumptions may materially impact the fair value of the MSRs (NOTE 3 of the condensed consolidated financial statements details the portfolio-level impact of a change in the discount rate). For PMSRs, a constant rate of prepayments and defaults is included in the determination of the portfolio’s estimated life at purchase (and thus included as a component of the portfolio’s amortization). Accordingly, prepayments and defaults of individual loans 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 made adjustments to the estimated life of our PMSRs in the past when the actual experience of prepayments differed materially from the estimated prepayments. Allowance for Risk-Sharing Obligations. This reserve liability (referred to as “allowance”) for risk-sharing obligations relates to our Fannie Mae at-risk servicing portfolio and is presented as a separate liability on our balance sheets. We record an estimate of the loss 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 One of the key components of a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will amortize and prepay in the 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 time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. 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 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 have not had a loss settlement in nearly six years. We evaluate our risk-sharing loans on a quarterly basis to determine whether there are loans that are probable of default. Specifically, we assess a loan’s qualitative and quantitative risk factors, such as payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. When a loan is determined to be probable of default based on these factors, we remove the loan 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 values and other factors that may differ significantly from actual results. Loss settlement with Fannie Mae has historically concluded within 18 to 36 months after foreclosure. Historically, the initial collateral-based reserves have not varied significantly from the final settlement. We actively monitor the judgments and assumptions used in our Allowance for Risk-Sharing 38 Allowance for Risk-Sharing 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. Over the past year, we have made two large acquisitions that included significant portions of contingent consideration. The aggregate fair value of our contingent consideration liabilities as of June 30, 2022 was $218.2 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 June 30, 2022 was $323.8 million. Historically, all of the contingent consideration arrangements have paid out at the maximum achievable amount. We are uncertain whether this trend will continue in the future. Additionally, the earnouts completed prior to 2021 have involved businesses that operated in our core debt financing business and involved substantially smaller amounts of contingent consideration as compared to the two recent acquisitions. Goodwill. As of June 30, 2022 and December 31, 2021, we reported goodwill of $937.9 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 asset and is reviewed for impairment annually in the fourth quarter. Between the annual evaluation time, we will perform an evaluation of recoverability, when events and circumstances indicate that it is more-likely-than not that the 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, but are not limited to, whether there has been a significant or adverse change in the business 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 make judgements, assumptions, and estimates about projected cash flows, discount rates and other factors. As of June 30, 2022, we continue to believe our goodwill is not impaired. Overview of Current Business Environment
Macroeconomic conditions impacting multifamily markets remained stable in the second quarter of 2022, with the national unemployment rate falling to pre-pandemic lows of 3.6% as of June 2022. The high rate of inflation during the first half of 2022 resulted in the Federal Reserve increasing its target Federal Funds Rate by 1.50% from December 2021, with a target range of 1.50% to 1.75% as of June 30, 2022, with an additional 0.75% increase to 2.25% to 2.50% following its July 2022 meeting. The Federal Reserve continues to signal that it anticipates additional increases in the target range and will continue the reduction of its holdings in Treasury securities and Agency mortgage-backed securities (“Agency MBS”) until the inflation rate returns to the Federal Reserve’s long-term target. Both of these actions by the Federal
Reserve have resulted in an increase in long-term mortgage interest rates, which form the basis of most of our lending. The market’s transition from a historically low interest rate environment to a rising interest rate environment disrupted certain sectors of the lending market, with the most acute impact felt in the consumer lending sector (e.g., residential mortgages, auto lending, consumer credit, etc). Although volatility in long-term interest rates also disrupted certain segments of the commercial real estate lending environment at times during the first half of 2022, the commercial real estate debt and property sales markets remained active. As a result, our total transaction volumes increased 56% over the first half of 2021, with the largest increases in multifamily property sales (141%), debt brokerage (41%), and Fannie Mae (72%) volumes. The product we offer that was most significantly impacted by rising interest rates was our HUD product, which declined 54% when compared to the first half of 2021. As the Federal Reserve continues to combat inflation by increasing interest rates, we expect commercial real estate debt and property sales transaction activity to slow down from second quarter peaks, but still remain quite active overall. As with the first half of 2022, we expect certain products to be impacted more than others, with debt brokerage executions in non-multifamily assets classes being impacted the most, as banks and life insurance companies pull back and potentially increase capital reserves in the second half of 2022. However, we anticipate Agency lending volumes to accelerate in the second half of 2022. As the broader capital markets tighten, the Agencies historically step in to provide liquidity to the multifamily borrowing community as they did throughout 2020 and the second half of last year, and as one of the largest providers of capital to the multifamily sector, we are well positioned. As interest rates increased over the last several months, we have experienced declines in credit spreads to offset a portion of the interest rate increases. Although our lending activity with the Agencies may remain strong in the second half of 2022, the servicing fees and associated profitability of those executions may decline. We are a market-leading originator with 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. The FHFA establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In October 2021, the FHFA established Fannie Mae’s and Freddie Mac’s 2022 loan origination caps at $78 billion each for all multifamily business. During the three months ended June 30, 2022, Fannie Mae and Freddie Mac had multifamily origination volumes of $18.7 billion and $14.7 billion, respectively, up 71.6% and 12.2%, respectively, from the same period in 2021. During the six months ended June 30, 2022, Fannie Mae and Freddie Mac had multifamily origination volumes of $34.7 billion and $29.6 billion, respectively, up 7.1% and 9.2% from the first half of 2021, respectively, leaving a combined $91.7 billion of available lending capacity for the remainder of the year, or 43% more lending volume than the GSEs delivered to the multifamily market in the first half of 2022. As part of FHFA’s 2022 loan origination caps, at least 50% of the GSEs’ multifamily business is required to be targeted towards affordable housing. Additionally, in 2021 the FHFA raised the GSEs’ combined LIHTC investment cap to $1.7 billion, up 70% from the previous cap of $1.0 billion. We intend to leverage our affordable debt financing and our newly acquired LIHTC syndication platforms to create additional growth opportunities for our debt financing, property sales, and LIHTC syndication platforms. As noted above, our debt financing operations with HUD declined during the first half of 2022. HUD loan volumes accounted for 1.4% and 2.5% of our total debt financing volumes for the three and six months ended June 30, 2022, respectively, compared to 6.8% and 7.5% for the three and six months ended June 30, 2021, respectively. 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 half of 2021 and the increasing interest-rate environment discussed above. Our originations with the Agencies are our most profitable executions as they provide significant non-cash gains from MSRs that turn into significant cash revenue streams from future servicing fees. During the three and six months ended June 30, 2022, servicing fees were up 7.5% and 8.8%, respectively, compared to the same periods in 2021, due to the growth in our Agency servicing portfolio over the last year. A decline in our Agency originations would negatively impact our financial results as our non-cash revenues would decrease disproportionately with debt financing volume and future servicing fee revenue would be constrained or decline. Our multifamily property sales volumes continued Our debt brokerage platform continued its 40 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, retail, and
We entered into the Interim Program JV to
Consolidated Results of Operations The following is a discussion of our consolidated results of operations for the three and SUPPLEMENTAL OPERATING DATA
The following tables present FINANCIAL RESULTS – THREE MONTHS
CONSOLIDATED
FINANCIAL RESULTS –
CONSOLIDATED
Overview Three months ended The increase in revenues was primarily driven by increases in servicing fees, property sales broker fees, investment management fees, escrow earnings and other interest income, and other revenues, partially offset by decreases in loan origination and debt brokerage fees, net (“origination fees”) Other revenues for the three months ended June 30, 2022 primarily consisted of the following: (i) $20.7 million in other revenues related to our LIHTC operations, (ii) $10.3 million of prepayment and application fees, (iii) $7.5 million of research subscription fees, and (iv) $4.8 million of miscellaneous revenues. Other revenues for the three months ended June 30, 2021 primarily consisted of (i) $7.2 million of prepayment and application fees and (ii) $3.4 million of assumption and other revenues. 43 The increase in expenses was
Six months ended The increase in revenues was primarily driven by increases in
Other revenues for the The increase in expenses was
Income Tax Expense.
We do not expect our annual estimated effective tax rate to differ significantly from the A discussion of the Non-GAAP Financial 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 44 to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our term loan 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 this non-GAAP measure, when read in conjunction with our GAAP financials, provides useful information to investors by offering:
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 ADJUSTED FINANCIAL CONSOLIDATED
45 The following tables present period-to-period comparisons of the components of adjusted EBITDA for the three and six months ended June 30, 2022 and 2021. ADJUSTED EBITDA – THREE MONTHS CONSOLIDATED
ADJUSTED EBITDA – SIX MONTHS CONSOLIDATED
Three and six months ended June 30, 2022 compared to three and six months ended June 30, 2021 Origination fees decreased for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to a significant decrease in HUD debt financing volume. For both the three and six months ended June 30, 2022, servicing fees increased due to growth in the average servicing portfolio period over period. For both the three and six months ended June 30, 2022, property sales broker fees increased as a result of the increases in property sales volumes. For both the three and six months ended June 30, 2022, investment management fees increased due to the addition of investment management fees from our LIHTC operations acquired in the fourth quarter of 2021. For both the three and six months ended June 30, 2022, escrow earnings and other interest income increased as a result of higher escrow earnings rate due to rising interest rates. For both the three and six months ended June 30, 2022, other revenues increased primarily due to increases in (i) prepayment and application fees and (ii) other revenues from our LIHTC operations and research subscription fees generated from our acquired subsidiaries in the second half of 2021. For both the three and six months ended June 30, 2022, the increases in personnel expense were primarily due to increased commission costs due to the increases in property sales broker fees and salaries and benefits resulting from growth in average headcount. For both the three and six months ended June 30, 2022, other operating expenses increased as a result of the overall growth of the Company over the past year, increased travel and entertainment costs, and increased costs from acquired companies.
Financial Condition Cash Flows from Operating Activities Our cash flows from operating activities are generated from loan sales, servicing fees, escrow earnings, net warehouse interest income, property sales broker fees, investment management 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. Cash Flows from Investing Activities We usually lease facilities and equipment for our operations. 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 purchase of Cash Flows from Financing Activities We use our warehouse loan facilities and, when necessary, our corporate cash to fund loan closings, both for loans held for sale and loans held for investment. We also use warehouse facilities to assist in funding investments in tax credit equity before transferring them to a tax credit fund. We believe that our current warehouse loan facilities are adequate to meet our increasing loan origination needs. Historically, we have used a combination of long-term debt and cash on hand to fund large acquisitions. Additionally, we repurchase shares, pay cash dividends, make long-term debt principal payments, and repay short-term borrowings on a regular basis. We issue stock primarily for exercise of stock options (cash inflow) and for acquisitions (non-cash transactions). 47
The following table presents a period-to-period comparison of the significant components of cash flows for the
SIGNIFICANT COMPONENTS OF CASH FLOWS
The The
The increase in cash used in financing activities was attributable to increases in: (i) net warehouse repayments, (ii) repayments of notes payable, (iii) repurchases of common stock, (iv) dividends paid, and (v) cash payments of contingent consideration liabilities, partially offset by (a) a decrease in net borrowings of interim warehouse notes payables and (b) a decrease in repayments of secured 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
49 FINANCIAL RESULTS – THREE MONTHS CAPITAL MARKETS
FINANCIAL RESULTS – SIX MONTHS CAPITAL MARKETS
50 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 June 30, 2022, the decrease in origination fees was the result of a 36-point decrease in our origination fee rate, partially offset by the increase in overall debt financing volume. The decline in the origination fee rate was largely due to the significant decline in HUD debt financing volume and the $1.9 billion Fannie Mae portfolio, which comprised just under 50% of our Fannie Mae debt financing volume for the quarter and had a very low origination fee rate. The portfolio was the primary driver of the 105% increase in our Fannie Mae debt financing volume and was 13% of our total debt financing volume for the quarter. Large portfolios such as the $1.9 billion Fannie Mae portfolio typically have small origination fee rate. HUD loans are our most profitable loan product. For the six months ended June 30, 2022, the increase in origination fees was primarily due to an increase in overall debt financing volume, particularly the substantial growth in brokered and Fannie Mae debt financing volume. Our brokered loan volumes grew 40.8% year over year. Excluding the aforementioned large Fannie Mae portfolio, our Fannie Mae debt financing volumes grew 17.7% year over year. The increase in origination fees from the overall growth in debt financing volume was partially offset by a significant reduction in our HUD debt financing volume and an overall decrease in the origination fee rate for many of the same reasons discussed for the three months ended June 30, 2022. The decrease in MSR income for the three months ended June 30, 2022 is attributable to the decrease in our MSR and Agency MSR Rates, partially offset by the increase in overall debt financing volume. The decline in the Agency MSR Rate was primarily the result of a 56% decrease in the weighted-average servicing fee (“WASF”) for Fannie Mae debt financing volume. The decline in the WASF was related to the $1.9 billion Fannie Mae portfolio, which had a very low servicing fee that is typical of such a portfolio, and a decline in the WASF for our non-portfolio Fannie Mae debt financing volume. Additionally, our HUD debt financing volume declined significantly in 2022. The decrease in the MSR Rate was the result of the decrease in the Agency MSR Rate coupled with an increase in our brokered debt financing volume. For the six months ended June 30, 2022, the decrease in MSR income was due to a 32% decline in the Agency MSR Rate, partially offset by a 27.9% increase in Agency debt financing volume. The decrease in Agency MSR rate was the result of the large Fannie Mae portfolio originated in the second quarter of 2022 combined with a significant decline in HUD debt financing volume as HUD loans have the highest MSR rate of all our products. The impacts to the Agency MSR Rate discussed above for the three months ended June 30, 2022 also impacted the six months ended June 30, 2022. 51 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. For the three months and six months ended June 30, 2022, the increase in property sales broker fees was driven by significant increases in the property sales volumes year over year, partially offset by declines in the property sales broker fee margin. See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in property sales volumes. Expenses Personnel. For the three months ended June 30, 2022, the increase was primarily the result of (i) a $14.3 million increase in property sales commission costs due to higher property sales broker fees and (ii) a $7.0 million increase in salaries and benefits due to a higher average headcount due to (i) the GeoPhy acquisition and corresponding consolidation of Apprise and (ii) hiring initatives to increase the number of bankers and brokers, partially offset by decreases in (i) debt financing commissions due to lower origination fees and (ii) accrual for subjective bonuses. For the six months ended June 30, 2022, the increase was primarily the result of (i) a $27.6 million increase in overall commission costs due to higher origination fees and property sales broker fees, (ii) an $11.5 million increase in salaries and benefits due to (i) the GeoPhy acquisition and corresponding consolidation of Apprise, (ii) hiring initatives to increase the number of bankers and brokers, and (iii) a $4.0 million net increase in bonuses due to the Company’s financial performance. Other Operating Expenses. For the six months ended June 30, 2022, the increase primarily stemmed from a $3.9 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 2021, partially offset by a slight decrease in other expenses. 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 Measure 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 Measure. CM adjusted EBITDA is reconciled to net income as follows: 52 ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CAPITAL MARKETS
The following tables present period-to-period comparisons of the components of CM adjusted EBITDA for the three and six months ended June 30, 2022 and 2021. ADJUSTED EBITDA – THREE MONTHS CAPITAL MARKETS
ADJUSTED EBITDA – SIX MONTHS CAPITAL MARKETS
Three months ended June 30, 2022 compared to three months ended June 30, 2021 Loan origination and debt brokerage fees, net decreased due to a decrease in our origination fee rate and decreases in our HUD debt financing volumes, partially offset by an increase in overall debt financing volume. Property sales broker fees increased as a result of the significant increases in property sales volumes, partially offset by a decrease in the property sales broker fee margin. The increase in personnel expense was primarily due to increased (i) commission costs due to the increase in property sales broker fees and (ii) salaries and benefits resulting from increases in average headcount from strategic acquisitions and hiring initiatives. 53 Six months ended June 30, 2022 compared to six months ended June 30, 2021 Loan origination and debt brokerage fees, net increased due to increases in overall debt financing volumes, partially offset by reductions in our HUD debt financing volume. Property sales broker fees increased as a result of the significant increases in property sales volumes, partially offset by a decrease in the property sales broker fee margin. The increase in personnel expense was primarily due to increased (i) commission costs due to higher origination fees and property sales broker fees, (ii) salaries and benefits resulting from increases in average headcount from strategic acquisitions and hiring initiatives, and (iii) accruals 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 the increased travel and marketing costs. Servicing & Asset Management SUPPLEMENTAL OPERATING DATA SERVICING & ASSET MANAGEMENT
54
FINANCIAL RESULTS – THREE MONTHS SERVICING & ASSET MANAGEMENT
55 FINANCIAL RESULTS – SIX MONTHS SERVICING & ASSET MANAGEMENT
Revenues Servicing Fees. For the three and six months ended June 30, 2022, the increase was primarily attributable to an increase in the average servicing portfolio period over period as shown below, primarily due to a $6.0 billion net increase in Fannie Mae serviced loans and a $2.1 billion net increase in brokered loans serviced over the past year, coupled with increases in the servicing portfolio’s average servicing fee rates as shown below. The increases in the average servicing fee rates are the result of the large volume of Fannie Mae debt financing volume over the past year.
Investment Management Fees. For the three and six months ended June 30, 2022, the increases were primarily driven by the addition of investment management fees from our LIHTC operations that were acquired late in the fourth quarter of 2021, which added $7.9 million and $18.7 million in additional fees, respectively. Escrow earnings and other interest income. For the three and six months ended June 30, 2022, the increase was driven primarily by increases in our escrow earnings of $2.9 million and $3.7 million, respectively. The earnings rates on escrow earnings and other interest income increased as a result of rising interest rates over the past six months. 56 Other Revenues. For the three months ended June 30, 2022, the increase was primarily attributable to: (i) a $20.7 million increase in other revenues from our LIHTC operations, (ii) a $7.5 million increase in research subscription fees, and (iii) a $3.5 million increase in prepayment penalties. For the six months ended June 30, 2022, the increase was primarily attributable to: (i) a $28.5 million increase in other revenues from our LIHTC operations, (ii) a $12.0 million increase in research subscription fees, and (iii) an $8.6 million increase in prepayment penalties. The increase in other revenues from LIHTC operations was driven by our subsidiary Alliant, 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. Expenses Personnel. For the three and six months ended June 30, 2022, the increases were primarily the result of a $12.3 million increase and a $23.6 million increase, respectively, 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. For the three and six months ended June 30, 2022, the increases were primarily attributed to loan origination activity and the resulting growth in the average MSR balance and due to an increase in intangible asset amortization. Over the past 12 months, we Other Operating Expenses. For the three and six months ended June 30, 2022, the increases primarily stemmed from an increase in professional fees of $1.2 million and $2.4 million, respectively. Additionally, there were increases in other costs across all expense categories. The increases in professional fees and other costs primarily stemmed from additional operating expenses incurred at subsidiaries acquired in the second half 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 Measure 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 Measure. SAM adjusted EBITDA is reconciled to net income as follows: ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP SERVICING & ASSET MANAGEMENT
The following tables present period-to-period comparisons of the components of SAM adjusted EBITDA for the three and six months ended June 30, 2022 and 2021. 57 ADJUSTED EBITDA – THREE MONTHS SERVICING & ASSET MANAGEMENT
ADJUSTED EBITDA – SIX MONTHS SERVICING & ASSET MANAGEMENT
Three and six months ended June 30, 2022 compared to three and six months ended June 30, 2021 Servicing fees increased due to growth in the average servicing portfolio period over period as a result of loan originations and an increase in the average servicing fee rate. Investment management fees increased due to the addition of our LIHTC operations. Other revenues increased primarily due to the addition of other revenues from our LIHTC operations 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. 58 Corporate FINANCIAL RESULTS – THREE MONTHS CORPORATE
FINANCIAL RESULTS – SIX MONTHS CORPORATE
59 Revenues Other Revenues. For the six months ended June 30, 2022, the increase was primarily due to the $39.6 million Apprise revaluation gain, which was recognized in the first quarter fo 2022. As part of our acquisition of GeoPhy, we acquired its 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 primarily due to a $4.6 million increase in income from our other equity-method investments, mostly related to the first quarter of 2022. Expenses Personnel. For the three months ended June 30, 2022, the decrease was primarily the result of a $5.1 million decrease to the accrual for subjective bonuses and a $2.1 million decrease in compensation expense related to the Company’s deferred compensation plan, partially offset by a $1.2 million increase in salaries and benefits due to an increase in the average headcount and $1.5 million increase in stock compensation. For the six months ended June 30, 2022, the increase was primarily the result of (i) a $4.8 million increase in salaries and benefits due to an increase in the average headcount and (ii) a $3.7 million increase in stock compensation expense, partially offset by a $2.5 million decrease in compensation expense related to the Company’s deferred compensation plan Interest expense on corporate debt. For the three and six months ended June 30, 2022, the increases were driven by a doubling in the size of our corporate debt during the fourth quarter of 2021 and increases in interest expense related to a note payable at our subsidiary, Alliant, which we assumed in the fourth quarter of 2021. Other Operating Expenses. For the three months ended June 30, 2022, the increase was primarily driven by: (i) a $6.5 million increase in office expenses, (ii) a $1.8 million increase in professional fees, and (iii) a $1.4 million increase in marketing costs. The increases in expenses were attributable to the growth of the Company, especially from acquired subsidiaries. For the six months ended June 30, 2022, the increase was primarily driven by: (i) a $7.2 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 $7.5 million increase in office expenses related to the growth of the Company and acquired offices, (iii) a $1.8 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, and (iv) a $1.7 million increase in marketing costs related to the growth of the Company, especially from acquisition subsidiaries. Non-GAAP Financial Measure 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 Measure. Corporate adjusted EBITDA is reconciled to net income as follows: ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CORPORATE
60 The following tables present period-to-period comparisons of the components of Corporate adjusted EBITDA for the three and six months ended June 30, 2022 and 2021. ADJUSTED EBITDA – THREE MONTHS CORPORATE
ADJUSTED EBITDA – SIX MONTHS CORPORATE
Three months ended June 30, 2022 compared to three months ended June 30, 2021 The decrease in personnel expense was primarily due to the decreases in accruals for subjective bonuses and expenses related to the Company’s deferred compensation plan, partially offset by increased salaries and benefits resulting from increases in average headcount. Other operating expenses increased as a result of the overall growth of the Company over the past year and from increased professional costs associated with acquisitions. Six months ended June 30, 2022 compared to six months ended June 30, 2021 Other revenues increased primarily due to our equity method investments generating income in 2022 compared to losses in 2021. The increase in personnel expense was primarily due to increased salaries and benefits resulting from increases in average headcount, partially offset by a decrease in deferred compensation costs. Other operating expenses increased as a result of the overall growth of the Company over the past year and 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 liquidity to (i) fund loans held for sale; (ii) fund loans held for investment under the Interim Loan Program; (iii) pay cash dividends; (iv) fund our portion of the equity necessary for the operations of the Interim Program JV, 61 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 requirements as of We paid a cash dividend of Over the past three years, we have returned In February 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 investor purchases the
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 We are in compliance with the 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 62 Sources of Liquidity: Warehouse Facilities and Notes Payable Warehouse Facilities
We have
The note payable and the warehouse facilities are senior obligations of the Company. As of For a detailed description of the terms of the Credit Agreement, refer to “Notes Payable – Term Loan Note Payable” in NOTE 6 in the consolidated financial statements in our 2021 Form 10-K. There have been no changes to the Credit Agreement in 2022. We have a note payable through our wholly-owned subsidiary Alliant, which has an outstanding balance of $126.9 million as of June 30, 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 been no changes to the terms of the note payable during 2022.
Credit Quality and Allowance for Risk-Sharing Obligations The following table sets forth certain information useful in evaluating our credit performance.
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-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.
Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described in the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan. 64
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. The “Business” section of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains a discussion of the risk-sharing caps we have with 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 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 collateral-based reserve is recorded when it is probable that a risk-sharing loan will foreclose or has foreclosed, and a reserve for estimated credit losses and a guaranty obligation are recorded for all other risk-sharing loans.
As of We have never been required to repurchase a loan.
New/Recent Accounting Pronouncements As seen in NOTE 2 in the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, there 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 as of
Item 3. Quantitative and Qualitative Interest Rate Risk For loans held for sale to 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. 65 Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows generally track 30-day LIBOR. 30-day LIBOR as of
The borrowing cost of our warehouse facilities used to fund loans held for sale,
Market Value Risk The fair value of our MSRs is subject to
$36.9 million as of 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 66 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 five of our warehouse facilities to SOFR. Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting during the quarter ended PART II OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of business, we may be party to various claims and litigation, none of which we believe is material. We cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties and other costs, and our reputation and business may be impacted. Our management believes that any liability that could be imposed on us in connection with the disposition of any pending lawsuits would not have a material adverse effect on our business, results of operations, liquidity, or financial condition. Item 1A. Risk Factors We have included in Part I, Item 1A of our
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities Under the 2020 Equity Incentive Plan, subject to the Company’s approval, grantees have the option of electing to satisfy minimum tax withholding obligations at the time of vesting or exercise by allowing the Company to withhold and purchase the shares of stock otherwise issuable to the grantee. During the quarter ended 67 quarter ended
Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None.
Item 6. Exhibits (a) Exhibits:
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*: 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 of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing. † SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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