| (2) | Based on historical experience and classificationthe underlying expected cash flows from the underlying investment, the maximum exposure of loss is not representative of the Company’s interests in nonconsolidated VIEs included inactual loss, if any, that the Condensed Consolidated Balance Sheets:Company may incur. | | | | | | | Nonconsolidated VIEs (in thousands) | | September 30, 2022 | | December 31, 2021 | Assets | | | | | | | Committed investments in tax credit equity | | $ | 214,430 | | $ | 177,322 | Other assets: Equity-method investments | | | 58,126 | | | 74,997 | Total interests in nonconsolidated VIEs | | $ | 272,556 | | $ | 252,319 | | | | | | | | Liabilities | | | | | | | Commitments to fund investments in tax credit equity | | $ | 198,073 | | $ | 162,747 | Total commitments to fund nonconsolidated VIEs | | $ | 198,073 | | $ | 162,747 | | | | | | | | Maximum exposure to losses(1)(2) | | $ | 272,556 | | $ | 252,319 | | | | | | | |
(1) | Maximum exposure determined as Total interests in nonconsolidated VIEs. The maximum exposure for the Company’s investments in tax credit equity is limited to the carrying value of its investment, as there are no funding obligations or other commitments related to the nonconsolidated VIEs other than the amounts presented in the table above. |
(2) | Based on historical experience and the underlying expected cash flows from the underlying investment, the maximum exposure of loss is not representative of the actual loss, if any, that the Company may incur. |
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 (“2021
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” below and in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). Forward-Looking Statements Some of the statements in this Quarterly Report on Form 10-Q of Walker & Dunlop, Inc. and subsidiaries (the “Company,” “Walker & Dunlop,” “we,”, “us”, or “our”), 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: | ● | the future of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “GSEs”), including their existence, relationship to the U.S. federal government, origination capacities, and their impact on our business; |
| ● | changes to and trends in the interest rate environment and its impact on our business; |
| ● | our projected financial condition, liquidity, and results of operations; |
| ● | the failure of any bank in which we deposit funds or with which we have a warehouse or other loan funding arrangement or any other adverse developments affecting financial institutions or resulting in sustained financial market illiquidity; |
| ● | our ability to obtain and maintain warehouse and other loan funding arrangements; |
| ● | our ability to make future dividend payments or repurchase shares of our common stock; |
| ● | availability of and our ability to attract and retain qualified personnel and our ability to develop and retain relationships with borrowers, key principals, and lenders; |
| ● | degree and nature of our competition; |
| ● | changes in governmental regulations, policies, and programs, tax laws and rates, and similar matters and the impact of such regulations, policies, and actions; |
| ● | our ability to comply with the laws, rules, and regulations applicable to us, including additional regulatory requirements for broker-dealer and other financial services firms; |
| ● | our ability to successfully integrate Alliant’s and GeoPhy’s (each as defined below) employees and operations; |
| ● | trends in the commercial real estate finance market, commercial real estate values, the credit and capital markets, or the general economy, including demand for multifamily housing and rent growth; |
| ● | general volatility of the capital markets and the market price of our common stock; and |
| ● | other risks and uncertainties associated with our business described in our 20212022 Form 10-K and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission. |
While forward-looking statements reflect our good-faith projections, assumptions, and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see “Risk Factors.” Business Overview We are a leading commercial real estate (i) services, (ii) finance, and (iii) technology company in the United States. Through investments in people, brand, and technology, we have built a diversified suite of commercial real estate services to meet the needs of our customers. Our services include (i) multifamily lending, property sales, appraisal, valuation, and research, (ii) commercial real estate debt brokerage and advisory services, (iii) investment management, and (iv) affordable housing lending, tax credit syndication, development, and investment. We leverage our technological resources and investments to (i) provide an enhanced experience for our customers, (ii) identify refinancing and other financial and investment opportunities for new and existing customers, and (iii) drive efficiencies in our internal processes. We believe our people, brand, and technology provide us with a competitive advantage, as evidenced by new loans to us representing 67%60% of refinancing volumes and 25%19% of total transaction volumes coming from new customers for the ninethree months ended September 30, 2022.March 31, 2023. We are one of the largest lendersservice providers to multifamily operators in the country. We originate, sell, and service a range of multifamily and other commercial real estate financing products, including loans through the programs of the GSEs, and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”) (collectively, the “Agencies”). We retain servicing rights and asset management responsibilities on substantially all loans that we originate for the Agencies’ programs. We broker, and occasionally service, loans to commercial real estate operators for many life insurance companies, commercial banks, and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker. We provide multifamily property sales brokerage and appraisal and valuation services and engage in commercial real estate investment management activities, including a focus on the affordable housing sector through low-income housing tax credit (“LIHTC”) syndication. We engage in the development and preservation of affordable housing projects through joint ventures with real estate developers and the management of funds focused on affordable housing. We provide housing market research and real estate-related investment banking and advisory services, which providesprovide our clients and us with market insight into many areas of the housing market. Our clients are owners and developers of multifamily properties and other commercial real estate assets across the country, some of whom are the largest owners and developers in the industry. We also underwrite, service, and asset-manage shorter term loans on commercial real estate. Most of these shorter-term interim loans are closed through a joint venture or through separate accounts managed by our investment management subsidiary, Walker & Dunlop Investment Partners, Inc. (“WDIP”). Some of these interim loans are closed and retained by us through our Interim Program JV or Interim Loan Program (as defined below in Principal Lending and Investing). We are a leader in commercial real estate technology, developing and acquiring technology resources that (i) provide innovative solutions and a better experience for our customers and (ii) allow us to drive efficiencies across our internal processes. On February 28, 2022, weWe acquired GeoPhy B.V. (“GeoPhy”), a leading commercial real estate technology company based in the Netherlands.Netherlands, in the first quarter of 2022,. We plan to useare using 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, ourOur executive leadership team, which functions as our chief operating decision making body, began makingmakes decisions and assessingassesses performance based on the following three operatingreportable segments: (i) Capital Markets (“CM”), (ii) Servicing & Asset Management (“SAM”), and (iii) Corporate. The operatingreportable 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.
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 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.services, and real estate related investment banking and advisory services, including housing market research. 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. Additionally, we earn subscription fees for our housing related research. The primary services within CM are described below. Agency Lending We are one of the leading lenders with the Agencies, where we originate and sell multifamily, manufactured housing communities, student housing, affordable housing, seniors housing, and small-balance multifamily loans. For additional information on our Agency Lending services, refer to Item 1. Business in our 20212022 Form 10-K. 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. On occasion, our cost of borrowing can exceed the note rate on the loan, resulting in a net interest expense. 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 during the second quarter of 2021, that had a technology platform that streamlines and accelerates the quoting, processing, and underwriting of small-balance, multifamily loans. Additionally, the technology platform provides the borrower with a web-based, user-friendly interface, enhancing the borrower’s experience during the origination process. To further this strategy, we acquired GeoPhy during the first quarter of 2022, a leading commercial real estate technology company based in the Netherlands, to support our small-balance lending platform with data analytics and to further advance our technology development capabilities in this area. 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 instrumentdebt and/or equity solution for the borrowers’ needs. These loansfinancing solutions are then funded directly by the lender, and we receive an origination fee for placing the loan.our services. 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. To further support our growth strategy, we acquired an investment sales brokerage company during the third quarter of 2022, which expands our investment sales service offerings to include land sales. Housing Market Research and Real Estate Investment Banking Services We own a 75% interest in a subsidiary doing business as Zelman & Associates (“Zelman”). Zelman is a nationally recognized housing market research and investment banking firm that will enhance the information we provide to our clients and increase our access to high-quality market insight in many areas of the housing market, including construction trends, demographics, housing demand and mortgage finance. 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. 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 theprovides appraisal services to a client list that includes many national commercial real estate industry.lenders. Apprise also provides quarterly and annual valuation services to some of the largest institutional commercial real estate investors in the country. 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 provides appraisal services to a client list that includes several national commercial real estate lenders. Apprise also provides quarterly and annual valuation services to some of the largest institutional commercial real estate investors in the country. 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 forbrokered to certain life insurance companies, and we originateoriginated through our principal lending and investing activities, (ii)and 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.estate. 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 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 on Agency loans. Principal Lending and Investing Our principal lending and investing operation is composed of the loans held by the Interim Program JV and the Interim Loan Program as described below (collectively the “Interim Program”). Through a joint venture with an affiliate of Blackstone Mortgage Trust, Inc., we offer short-term senior secured debt financing products that provide floating-rate, interest-only loans for terms of generally up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing (the “Interim Program JV” or the “joint venture”). The joint venture funds its operations using a combination of equity contributions from its owners and third-party credit facilities. We hold a 15% ownership interest in the Interim Program JV and are responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. The Interim Program JV assumes full risk of loss while the loans it originates are outstanding, while we assume risk commensurate with our 15% ownership interest. Using a combination of 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. Affordable Housing and Other Commercial Real Estate-related Investment Management Services Affordable Housing—We provide affordable housing investment management services through our subsidiary, Alliant Capital, Ltd. and its affiliates (“Alliant”). Alliant is one of the largest tax credit syndicators and affordable housing developers in the U.S. and provides alternative investment management services focused on the affordable housing sector through LIHTC syndication, development of affordable housing projects through joint ventures, and affordable housing preservation fund management. Our affordable housing investment management team works with our developer clients to identify properties that will generate LIHTCs and meet our affordable investors’ needs, and forms limited partnership funds (“LIHTC funds”) with third-party investors that invest in the limited partnership interests in these properties. Alliant serves as the general partner of these LIHTC funds, and it receives fees, such as asset management fees, and a portion of refinance and disposition proceeds as compensation for its work as the general partner of the fund. Additionally, Alliant earns a syndication fee from the LIHTC funds for the identification, organization, and acquisition of affordable housing projects that generate LIHTCs. We invest, as the managing or non-managing member of joint ventures, with developers of affordable housing projects that generate LIHTCs. These joint ventures earn developer fees operating cash and sale / 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, 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. Other Commercial Real Estate —Through our subsidiary, Walker & Dunlop Investment Partners (“WDIP”), 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. WDIP’s current assets under management (“AUM”) of $1.4$1.3 billion primarily consist of five sources: Fund III, Fund IV, Fund V, and Fund VI (collectively, the “Funds”), and separate accounts managed primarily for life insurance companies. AUM for the Funds and for the separate accounts consists of both unfunded commitments and funded investments. Unfunded commitments are highest during the fundraising and investment phases. WDIP receives management fees based on both unfunded commitments and funded investments. Additionally, with respect to the Funds, WDIP receives a percentage of the return above the fund return hurdle rate specified in the fund agreements. Housing Market Research and Real Estate Investment Banking Services32
Corporate We own a 75% interest in a subsidiary doing business as Zelman & Associates (“Zelman”). Zelman is a nationally recognized housing market research and investment banking firm that will enhance the information we provide toThe Corporate segment consists primarily of our clients and increase our access to high-quality market insight in many areas of the housing market, including construction trends, demographics, mortgage finance, and real estate technology and services. Zelman generates revenues through the sale of its housing market research data and related publications to banks, investment bankstreasury operations and other financial institutions,corporate-level activities. Our treasury operations include monitoring and through its offering of real estate-related investment bankingmanaging our liquidity and advisory services.funding requirements, including our corporate debt. The major other corporate-level functions include our equity-method investments, accounting, information technology, legal, human resources, marketing, internal audit, and various other corporate groups.
Basis of Presentation The accompanying condensed consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiaries, and all intercompany transactions have been eliminated. Critical Accounting Estimates 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. The following critical accounting estimates involve significant estimation uncertainty that may have or are reasonably likely to have a material impact on our financial condition or results of operations. Additional information about our critical accounting estimates and other significant accounting policies are discussed in NOTE 2 of the consolidated financial statements in our 20212022 Form 10-K. Mortgage Servicing Rights (“MSRs”).MSRs are recorded at fair value at loan sale or upon purchase.sale. The fair value at loan sale (“OMSR”MSR”) 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 OMSRMSR over the estimated life of the underlying loan. The discount rates used throughout the periods presented for all OMSRsMSRs were between 8-14% and varied based on the loan type. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan and assumptions about loan behaviors around those provisions. Our model for OMSRsMSRs assumes no prepayment prior to the expiration of the prepayment provisions and full prepayment of the loan at or near the point when the prepayment provisions have expired. The estimated net cash flows also include cash flows related to the future earnings on the escrow accounts associated with servicing the loans that are based on an escrow earnings rate assumption. We include a servicing cost assumption to account for our expected costs to service a loan. The servicing cost assumption has not had a materialde minimus impact on the estimate.estimate historically. We record an individual OMSRMSR asset (or liability) for each loan at loan sale. The fair value of MSRs acquired through a stand-alone servicing portfolio purchase (“PMSR”) is equal to the purchase price paid. For PMSRs, we record and amortize a portfolio-level MSR asset based on the estimated remaining life of the portfolio using the prepayment characteristics of the portfolio. The assumptions used to estimate the fair value of capitalized OMSRsMSRs 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 material assumptions historically, including the significant assumption that most significantly impacts the estimate –estimate: the discount rate. We do not expect to see significant volatility in the material assumptions for 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. DuringOver the first quarter of 2021,past two years, we reduced the discount rate and escrow earnings rate assumptions for our OMSRs. During the third quarter of 2022, we increasedhave adjusted the escrow earnings rate assumptionsassumption several times to reflect the current and expected future earnings rate projected for the life of the MSR. Additionally, we adjusted the discount rate at the beginning of 2021 to mirror changes observed from market participant assumptions.participants. 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 based on loss rateseconomic and unemployment forecasts from a market survey and a blended loss rate from historical periodperiods that we believe is similar.reflect the forecast from the survey. We revert to the historical loss rate over a one-year period on a straight-line basis. Over the past couple of years, the loss rate used in the forecast period has been updated to reflect our expectations of the economic conditions over the coming year in relation to the historical period. For example, in the secondfirst quarter of 2022,2023, we updated the loss rate used in the forecast period from three2.1 basis points to 2.22.3 basis points. This change resulted in our forecast-period loss rate increasing from 1.8 times to 3.8 times the historical loss rate factor to reflect our current expectations of the evolving and uncertain macro-economic conditions facing the commercial real estate lending sector. We have made multiple revisions to the loss rate used in the forecast period following the onset of the pandemic in 2020. Changes in the loss rate used in the forecast period have significantly impacted the estimate in the past. One of the key components of a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will amortize and prepay in the future based on our historical prepayment and amortization experience. We group loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. We originate loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate. The runoff rates applied to each vintage and contractual maturity term are determined using historical data; however, changes in prepayment and amortization behavior may significantly impact the estimate. We have not experienced significant changes in the runoff rate since we implemented CECL in 2020. 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 2022,2023, loss data from earlier periods in the look-back period with significantly higher losses fell off and were replaced with more recent loss data with significantly lower losses, resulting in the weighted-average annual loss rate changing from 1.81.2 basis points to 1.20.6 basis points. Changes in our expectations and forecasts have materially impacted, and in the future may materially impact, the estimate. We have notIn 2022, we had aour first loss settlement in nearly six years. We expect another immaterial loss settlement in 2023. NOTE 4 of the consolidated financial statements outlines adjustments made in the loss rates used to account for the expected economic conditions as of a given period and the related impact on the estimate. 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, thatwhich 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 ObligationsObligation estimate and make adjustments to those assumptions when market conditions change, or when other factors indicate such adjustments are warranted. We believe the level of Allowance for Risk-Sharing ObligationsObligation is appropriate based on our expectations of future market conditions; however, changes in one or more of the judgments or assumptions used above could have a significant impact on the estimate. 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 requiredSheet and adjusted to continue to record the contingent consideration atestimated fair value at the end of 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-outearnout 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. Changes to the aforementioned inputs impact the estimate; for example, in the fourth quarter of 2022, we recorded a net $13.5 million reduction to the fair value of our contingent consideration liabilities based primarily on revised management forecasts of the financial performance of the entities over the remaining earnout period. 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 September 30, 2022March 31, 2023 was $221.0$174.8 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 September 30, 2022March 31, 2023 was $325.0$293.3 million. Historically, allOver the past two years, we have made two large acquisitions that included significant amounts of contingent consideration to maximize alignment 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, thekey principals and management teams. 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 aforementioned acquisitions.
GoodwillGoodwill. . As of September 30, 2022both March 31, 2023 and December 31, 2021,2022, we reported goodwill of $948.2 million and $698.6 million, respectively.$959.7 million. Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is assigned to the segmentreporting unit to which the acquisition relates. Goodwill is recognized as an asset and is reviewed for impairment annually in the fourth quarter.on October 1. 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,judgments, assumptions, and estimates about projected cash flows, discount rates and other factors. As of September 30, 2022,March 31, 2023, we continue to believe the goodwill at each of our goodwillreporting units is not impaired.
Overview of Current Business Environment The fundamentalscurrent high interest rate environment continues to disrupt many sectors of the capital markets, causing significant volatility and uncertainty, including disruption in the commercial real estate market began the year strong, particularly multifamily,lending environment, which is significantly constraining the vast majoritysupply of capital. Due to this uncertainty, our total transaction volumes. Despite significant market volatility caused byvolumes decreased 47% from the high inflation rate and resulting rising interest rates, multifamily property fundamentals remain healthy. According to RealPage, a provider of commercial real estate data and analytics, vacancies have risen from their March 2022 lows to 4.4% as of September 30, 2022; however, national vacancy rates still remain below their historical averages. Additionally, rent collections remain strong at pre-pandemic levels, despite inflationary pressures and high rent growth over the past two years. Macroeconomic conditions impacting multifamily markets remained stable in the thirdfirst quarter of 2022, with the national unemployment rate falling to pre-pandemic lows of 3.5% as of September 2022. largest decreases in our debt brokerage (58%) and HUD originations (67%). The decrease in total transaction volumes also included a decrease in our multifamily property sales (46%) and GSE lending (22%).
The high rate of inflation duringover the yearpast two years resulted in the Federal Reserve increasing its target Federal Funds Rate by 3.00%4.75% from December 2021, with a target range of 3.00%4.75% to 3.25%5.00% as of September 30, 2022.March 31, 2023. The Federal Reserve continues to signal that it anticipates additional increases inmay continue increasing 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. Bothtarget of these actions2%. The action by the Federal Reserve havehas resulted in an increase in medium to 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 initially in the consumer lending sector (e.g., residential mortgages, auto lending, and consumer credit). Although volatility in long-term interest rates also disrupted certain segments of the commercial real estate lending environment at times during 2022, the commercial real estate debt and property sales markets remained active. As a result, our total transaction volumes increased 27% over the first three quarters of 2021, with the largest increases in multifamily property sales (65%), debt brokerage (27%), and Fannie Mae (33%) volumes. The product we offer that was most significantly impacted by rising interest rates was our HUD product, which declined 49% when compared to the first three quarters of 2021. Over the last ninety days, the Federal Reserve’s stance on inflation has become more aggressive with fourth consecutive 0.75% increasesincrease in the Federal Funds Rate. Rate has increased our earnings on escrow balances and cash and cash equivalents, but also increased our borrowing costs for both our warehouse lines and corporate debt.
Additionally, late in the first quarter of 2023 and into the beginning of the second quarter, several regional banks failed and were put in receivership partially due to the high interest rate environment and volatile economic conditions. The resulting instability in the banking sector compounded the already significant turmoil in the capital markets, resulting in additional pull back by traditional banking capital sources and further constraining commercial real estate transaction activity. As the Federal Reserve continues to combat inflation by increasingthrough higher interest rates and with the turmoil in the banking sector, we expect commercial real estate debt and property sales transaction activity to slow downbe depressed in 2023 from peaks earlierthe levels we achieved in the year. As with the first three quarters of 2022, we expect certainearly 2022. Certain products to bewere impacted more than others, with property sales volumes and debt brokerage executions in non-multifamily assetsasset classes being impacted the most, as banks and life insurance companies continue to pull backreduce their lending activities significantly and potentially increase capital reserves in the last quarter of 2022.reserves. However, we do not anticipate Agencysignificant declines, if any, in GSE lending volumes to remain steady infor the fourth quarterrest of 2023 as the AgenciesGSEs provide liquidity in countercyclical markets. When the broader capital markets tighten, the AgenciesGSEs historically step inincrease their lending activity to provide liquidity to the multifamily borrowing community as they did throughout 2020 and the second half of last year, and as one of2021. As the largest providers of capital to theGSE multifamily sector,lender by volume in 2022, we are well positioned.positioned to originate loans for the GSEs in 2023. As interest rates increased rapidly over the last several months,year, and liquidity in the capital markets tightened, we have experienced declines in credit spreads to offset a portion of the interest rate increases.increases on the total cost of borrowing. This has resulted in lower average servicing fees on our new GSE lending over the past year. Although our lending activity with the AgenciesGSEs is expected to remain strong inrelatively stable for the fourth quarterremainder of 2022,2023, we expect the servicing fees on new loans and associated profitability of those executions is expected to remain consistent with third quarterlevels experienced in the second half of 2022 and lower than long-term historical levels. 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 Federal Housing Finance Agency (“FHFA”) establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In October 2021,November 2022, the FHFA established Fannie Mae’s and Freddie Mac’s 20222023 loan origination caps at $78$75 billion each for all multifamily business.business, a 4% decrease from the 2022 caps, but an increase over actual 2022 lending volumes for both Agencies. During the three months ended September 30, 2022,March 31, 2023, Fannie Mae and Freddie Mac had multifamily origination volumes of $15.9$10.2 billion and $14.7$6.3 billion, respectively, down 2.5%36% and 16.9%58%, respectively, from the same period in 2021. During the nine months ended September 30, 2022, Fannie Mae and Freddie Mac had multifamily origination volumes of $50.6 billion and $44.3 billion, respectively, up 3.9% and down 1.1% from the first nine months of 2021, respectively, leaving a combined $61.1$133.5 billion of available lending capacity for the remainder of the year.2023. A decline in our GSE originations negatively impacts our financial results, as our non-cash MSR revenues decrease disproportionately with debt financing volume and future servicing revenue would be constrained or decline. As partDespite volatility in the interest rate environment and declines in commercial real estate lending and property sales, macroeconomic conditions impacting multifamily property fundamentals remained healthy in the first quarter of FHFA’s2023, with the national unemployment rate remaining low at 3.5% as of March 2023. According to RealPage, a provider of commercial real estate data and analytics, vacancies have risen from their historical low of 2.4% in February 2022 loan origination caps, at least 50%to 5.3% as of March 2023. The historically low vacancy rates form February 2022 were largely considered to be unsustainable form a long-term perspective, and the current vacancy rate represents a return to normal that matches the pre-pandemic decade-long average.
Multifamily property sales volumes declined 74% from the first quarter of 2022 to the first quarter of 2023, according to CoStar. Our multifamily property sales volumes decreased 46% in the first quarter of 2023. We continue to gain market share in the multifamily property sales sector as customers increasingly look to experienced brokers to maximize value in this uncertain environment. Long term, we believe the market fundamentals will continue to be positive for multifamily properties. Over the last several years, household formation and a dearth of supply of entry-level single-family homes led to strong demand for rental housing in many geographical areas. Consequently, the fundamentals of the GSEs’ multifamily business is requiredassets were strong prior to be targeted towards affordable housing. Additionally,the pandemic, and, when combined with high occupancy and elevated real-estate prices, we expect that market demand for multifamily assets in 2021 the FHFA raisedlong-term will return as this asset class remains an attractive investment option. Our debt brokerage platform had lower volumes this quarter compared to the GSEs’ combined LIHTC investment capfirst quarter of 2022 due to $1.7 billion, up 70%the volatile interest rate environment and constrained supply of capital from banks, life insurance companies, and securitization markets. As the previous cap of $1.0 billion. We intendinterest rate environment and banking sector begin to leverage our affordable debt financing and our newly acquired LIHTC syndication platformsstabilize, we expect capital to create additional growth opportunities for our debt financing, property sales, and LIHTC syndication platforms.slowly return to the market. As noted above, our debt financing operations with HUD declined duringcompared to the first three quartersquarter of 2022. HUD loan volumes accounted for 2.8% and 2.6%3% of our total debt financing volumes for the three and nine months ended September 30, 2022, respectively,March 31, 2023, compared to 4.1% and 6.0%4% for the three and nine months ended September 30, 2021, respectively.March 31, 2022. The decline in HUD debt financing volumes as a percentage of our total debt financing volumes was driven by lower aggregate HUD lending volumes industry-wide, as the increasingongoing high interest-rate environment discussed above more acutely impacted the HUD product given the longer lead times associated with HUD executions. 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 nine months ended September 30, 2022, servicing fee revenues were up 7.6% and 8.4%, 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 grew significantly in the first half of 2022, as (i) the multifamily acquisitions market was very active during the first half of the year and (ii) we expanded the number of property sales brokers and geographical reach of our property sales platform. Beginning in the third quarter of 2022, the multifamily acquisitions market began to slow down due to the aforementioned market volatility driven by significant increases in interest rates. Long term, we believe the market fundamentals will continue to be positive for multifamily property sales. Over the last several years, and throughout the pandemic, household formation and a dearth of supply of entry-level single-family homes led to strong demand for rental housing in most geographic areas. Consequently, the fundamentals of the multifamily property sales market were strong prior to the pandemic, and, when combined with historically low vacancies, steadying rental rates, and healthy rent collections, it is our expectation that market demand for multifamily property sales will remain steady as this asset class remains an attractive investment option.
Our debt brokerage platform continued its growth from 2021, with brokered volume increasing during the year. The increase in volume in 2022 reflects the continued demand from private capital providers, with activity focused not only on multifamily but also on other commercial real estate assets such as office, retail, and hospitality. Although lending activity in the non-multifamily asset classes is expected to slow in the short-term, we expect non-multifamily debt financing volumes to continue to remain attractive in the long-term.
We entered into the Interim Program JV to expand our capacity to originate Interim Program loans beyond the use of our own balance sheet. The demandDemand for transitional lending has broughtwas strong over the last several years and drove increased competition from lenders, specifically banks, private debt funds, mortgage real estate investment trusts, and life insurance companies. Since the Fed began increasing interest rates a year ago, the supply of capital to transitional lending decreased substantially due to constraints in lending from banks, as well as tightening credit standards for transitional assets. For the ninethree months ended September 30, 2022,March 31, 2023, we originated $86.3 million ofdid not originate any Interim Program JV loans, compared to $665.9$86.3 million of originations for the same period last year, dueyear. Given the volatile macroeconomic conditions discussed above we continue to the aforementioned competitive pressures and the impact of rising interest ratesapproach our lending activity on interimtransitional assets cautiously. We expect our lending opportunities.volumes for transitional assets to remain low until economic conditions normalize. Except for one loan that defaulted in early 2019, the loans in our portfolio and in the Interim Program JV continue to perform according to their terms. Our subsidiary, Alliant, which provides alternative investment management services focused on the affordable housing sector through LIHTC syndication, joint venture development, and community preservation fund management remains the 6th largest LIHTC syndicator despite the economic challenges mentioned above. We continue to approach the affordable housing space with a combined LIHTC syndication and affordable housing service offering that we believe will generate significant long-term financing, property sales, and syndication opportunities. Additionally, as agreed. part of FHFA’s 2023 loan origination caps of $150 billion announced in November 2022, at least 50% of the GSEs’ multifamily business is required to be targeted towards affordable housing. We expect these initiatives will create additional growth opportunities for both Alliant and our debt financing and property sales teams focused on affordable housing. Consolidated Results of Operations The following is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. The financial results are not necessarily indicative of future results. Our quarterly results have fluctuated in the past and are expected to fluctuate in the future, reflecting the interest rate environment, the volume of transactions, business acquisitions, regulatory actions, industry trends, and general economic conditions. The table below provides supplemental data regarding our financial performance. SUPPLEMENTAL OPERATING DATA CONSOLIDATED | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | For the three months ended | | | | September 30, | | September 30, | | March 31, | | (dollars in thousands; except per share data) | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | Transaction Volume: | | | | | | | | | | | | | | | | | | | | Components of Debt Financing Volume | | | | | | | | Total Debt Financing Volume | | $ | 11,925,593 | | $ | 13,260,768 | | $ | 35,711,568 | | $ | 31,096,071 | | $ | 4,825,798 | | $ | 9,135,017 | | Property Sales Volume | | | 4,993,615 | | | 5,230,093 | | | 16,417,367 | | | 9,967,385 | | | 1,894,682 | | | 3,531,690 | | Total Transaction Volume | | $ | 16,919,208 | | $ | 18,490,861 | | $ | 52,128,935 | | $ | 41,063,456 | | $ | 6,720,480 | | $ | 12,666,707 | | | | | | | | | | | | | | | | | | | | | | Key Performance Metrics: | | | | | | | | | | | | | | | | | | | | Operating margin | | | 17 | % | | 27 | % | | 22 | % | | 28 | % | | 14 | % | | 28 | % | Return on equity | | | 11 | | | 22 | | | 14 | | | 20 | | | 6 | | | 19 | | Walker & Dunlop net income | | $ | 46,833 | | $ | 71,721 | | $ | 172,328 | | $ | 185,831 | | $ | 26,665 | | $ | 71,209 | | Adjusted EBITDA(1) | | | 74,990 | | | 72,430 | | | 232,470 | | | 199,611 | | | 67,975 | | | 62,636 | | Diluted EPS | | | 1.40 | | | 2.21 | | | 5.13 | | | 5.73 | | | 0.79 | | | 2.12 | | | | | | | | | | | | | | | | | | | | | | Key Expense Metrics (as a percentage of total revenues): | | | | | | | | | | | | | | | | | | | | Personnel expenses | | | 50 | % | | 49 | % | | 48 | % | | 48 | % | | 50 | % | | 45 | % | Other operating expenses | | | 11 | | | 7 | | | 10 | | | 7 | | | 10 | | | 10 | |
| | | | | | | | | | | | | | As of September 30, | As of March 31, | Managed Portfolio: | | 2022 | | 2021 | 2023 | | 2022 | Total Servicing Portfolio | | $ | 120,778,424 | | $ | 113,920,374 | $ | 124,575,919 | | $ | 116,257,265 | Assets under management | | | 17,017,355 | | | 2,309,332 | | 16,654,566 | | | 16,687,112 | Total Managed Portfolio | | $ | 137,795,779 | | $ | 116,229,706 | $ | 141,230,485 | | $ | 132,944,377 |
| (1) | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measure.” |
The following tables present period-to-period comparisons of our financial results for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. FINANCIAL RESULTS – THREE MONTHS CONSOLIDATED | | | | | | | | | | | | | | | | For the three months ended | | | | | | | | | September 30, | | Dollar | | Percentage | | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | | Revenues | | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 90,858 | | $ | 123,242 | | $ | (32,384) | | (26) | % | | Fair value of expected net cash flows from servicing, net | | | 55,291 | | | 89,482 | | | (34,191) | | (38) | | | Servicing fees | | | 75,975 | | | 70,628 | | | 5,347 | | 8 | | | Property sales broker fees | | | 30,308 | | | 33,677 | | | (3,369) | | (10) | | | Investment management fees | | | 16,301 | | | 2,564 | | | 13,737 | | 536 | | | Net warehouse interest income | | | 3,980 | | | 5,583 | | | (1,603) | | (29) | | | Escrow earnings and other interest income | | | 18,129 | | | 2,032 | | | 16,097 | | 792 | | | Other revenues | | | 24,769 | | | 19,082 | | | 5,687 | | 30 | | | Total revenues | | $ | 315,611 | | $ | 346,290 | | $ | (30,679) | | (9) | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | Personnel | | $ | 157,059 | | $ | 170,181 | | $ | (13,122) | | (8) | % | | Amortization and depreciation | | | 59,846 | | | 53,498 | | | 6,348 | | 12 | | | Provision (benefit) for credit losses | | | 1,218 | | | 1,266 | | | (48) | | (4) | | | Interest expense on corporate debt | | | 9,306 | | | 1,766 | | | 7,540 | | 427 | | | Other operating expenses | | | 33,991 | | | 24,836 | | | 9,155 | | 37 | | | Total expenses | | $ | 261,420 | | $ | 251,547 | | $ | 9,873 | | 4 | | | Income from operations | | $ | 54,191 | | $ | 94,743 | | $ | (40,552) | | (43) | | | Income tax expense | | | 7,532 | | | 22,953 | | | (15,421) | | (67) | | | Net income before noncontrolling interests | | $ | 46,659 | | $ | 71,790 | | $ | (25,131) | | (35) | | | Less: net income (loss) from noncontrolling interests | | | (174) | | | 69 | | | (243) | | (352) | | | Walker & Dunlop net income | | $ | 46,833 | | $ | 71,721 | | $ | (24,888) | | (35) | | |
FINANCIAL RESULTS – NINE MONTHS
CONSOLIDATED
| | | | | | | | | | | | | | | | For the nine months ended | | | | | | | | | September 30, | | Dollar | | Percentage | | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | | Revenues | | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 275,773 | | $ | 306,593 | | $ | (30,820) | | (10) | % | | Fair value of expected net cash flows from servicing, net | | | 159,970 | | | 209,266 | | | (49,296) | | (24) | | | Servicing fees | | | 222,916 | | | 205,658 | | | 17,258 | | 8 | | | Property sales broker fees | | | 100,092 | | | 65,173 | | | 34,919 | | 54 | | | Investment management fees | | | 47,345 | | | 9,115 | | | 38,230 | | 419 | | | Net warehouse interest income | | | 14,021 | | | 14,768 | | | (747) | | (5) | | | Escrow earnings and other interest income | | | 26,683 | | | 5,972 | | | 20,711 | | 347 | | | Other revenues | | | 129,103 | | | 35,444 | | | 93,659 | | 264 | | | Total revenues | | $ | 975,903 | | $ | 851,989 | | $ | 123,914 | | 15 | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | Personnel | | $ | 469,608 | | $ | 407,817 | | $ | 61,791 | | 15 | % | | Amortization and depreciation | | | 177,101 | | | 148,879 | | | 28,222 | | 19 | | | Provision (benefit) for credit losses | | | (13,120) | | | (14,380) | | | 1,260 | | (9) | | | Interest expense on corporate debt | | | 22,123 | | | 5,291 | | | 16,832 | | 318 | | | Other operating expenses | | | 102,400 | | | 62,171 | | | 40,229 | | 65 | | | Total expenses | | $ | 758,112 | | $ | 609,778 | | $ | 148,334 | | 24 | | | Income from operations | | $ | 217,791 | | $ | 242,211 | | $ | (24,420) | | (10) | | | Income tax expense | | | 46,495 | | | 56,311 | | | (9,816) | | (17) | | | Net income before noncontrolling interests | | $ | 171,296 | | $ | 185,900 | | $ | (14,604) | | (8) | | | Less: net income (loss) from noncontrolling interests | | | (1,032) | | | 69 | | | (1,101) | | (1,596) | | | Walker & Dunlop net income | | $ | 172,328 | | $ | 185,831 | | $ | (13,503) | | (7) | | |
| | | | | | | | | | | | | | | | For the three months ended | | | | | | | | | March 31, | | Dollar | | Percentage | | | (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | | Revenues | | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 47,084 | | $ | 82,310 | | $ | (35,226) | | (43) | % | | Fair value of expected net cash flows from servicing, net | | | 30,013 | | | 52,730 | | | (22,717) | | (43) | | | Servicing fees | | | 75,766 | | | 72,681 | | | 3,085 | | 4 | | | Property sales broker fees | | | 11,624 | | | 23,398 | | | (11,774) | | (50) | | | Investment management fees | | | 15,173 | | | 14,858 | | | 315 | | 2 | | | Net warehouse interest income | | | 1 | | | 4,773 | | | (4,772) | | (100) | | | Escrow earnings and other interest income | | | 30,924 | | | 1,803 | | | 29,121 | | 1,615 | | | Other revenues | | | 28,161 | | | 66,891 | | | (38,730) | | (58) | | | Total revenues | | $ | 238,746 | | $ | 319,444 | | $ | (80,698) | | (25) | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | Personnel | | $ | 118,613 | | $ | 144,181 | | $ | (25,568) | | (18) | % | | Amortization and depreciation | | | 56,966 | | | 56,152 | | | 814 | | 1 | | | Provision (benefit) for credit losses | | | (10,775) | | | (9,498) | | | (1,277) | | 13 | | | Interest expense on corporate debt | | | 15,274 | | | 6,405 | | | 8,869 | | 138 | | | Other operating expenses | | | 24,063 | | | 32,214 | | | (8,151) | | (25) | | | Total expenses | | $ | 204,141 | | $ | 229,454 | | $ | (25,313) | | (11) | | | Income from operations | | $ | 34,605 | | $ | 89,990 | | $ | (55,385) | | (62) | | | Income tax expense | | | 7,135 | | | 19,460 | | | (12,325) | | (63) | | | Net income before noncontrolling interests | | $ | 27,470 | | $ | 70,530 | | $ | (43,060) | | (61) | | | Less: net income (loss) from noncontrolling interests | | | 805 | | | (679) | | | 1,484 | | (219) | | | Walker & Dunlop net income | | $ | 26,665 | | $ | 71,209 | | $ | (44,544) | | (63) | | |
Overview Three months ended September 30, 2022 compared to three months ended September 30, 2021
The decrease in revenues was primarily driven by decreases in loan origination and debt brokerage fees, net (“origination fees”), the fair value of expected net cash flows from servicing, net (“MSR income”), property sales broker fees, net warehouse interest income, and property broker sales fees,other revenues, partially offset by increases in servicing fees investment management fees,and escrow earnings and other interest income, and other revenues.income. Origination fees and MSR income decreased largely as a result of a 10%47% decline in overall debt financing volume and a decline in the origination related fee rate and MSR income rate, respectively, as market volatility and rising interest rates resulted in tighter spreads on loans.volume. Property sales broker sales fees decreased primarily due to a 46% decline in property sales volume. Net warehouse interest income decreased principally as short-term rates were higher than long-term rates (“inverted yield curve”) during the first quarter of 2023. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. Investment management fees increased due to the addition of investment management fees from our LIHTC operations acquired in the fourth quarter of 2021. Escrow earnings and other interest income increased largelyprimarily as a result of a higher escrow earnings rate due to rising short-term interest rates. Other revenues increaseddecreased primarily due to the addition of other revenues related to our LIHTC operations, partially offset by a decrease in prepayment fees. The increase in expenses was due to increases in amortization and depreciation, interest expense on corporate debt, and other operating expenses, partially offset by a decrease in personnel costs. Amortization and depreciation expense increased primarily due to an increase in the average MSR balance and an increase in intangible asset amortization resulting from acquisitions over the past year. Interest expense on corporate debt increased primarily due to the increase in the size of the debt outstanding, an increase in SOFR to which our Term Debt is indexed, and the assumption of Alliant’s note payable in the fourth quarter of 2021. Other operating expenses increased largely as a result of (i) the overall growth of the Company over the past year, including expenses from acquired subsidiaries, and (ii) an increase in travel and entertainment costs compared to 2021 when our travel and entertainment expenses were depressed due to the on-going effects of the pandemic. The decrease in personnel expenses was primarily a result of decreases in commission costs due to the decrease in debt financing and property
sales volumes and other variable costs due to the Company’s performance, partially offset by an increase in salaries and benefits costs primarily driven by an increase in the average headcount.
Income Tax Expense. The decrease in income tax expense relates to a decrease in income from operations and a one-time $10.2$39.6 million tax benefit resulting from the dissolution during the third quarter of 2022 of the Apprise joint venture that we acquired full ownership of earlier in the year (“Apprise dissolution”). Partially offsetting this benefit was (i) an increase in the estimated annual effective tax rate due to an increase in nondeductible executive compensation, (ii) a $1.8 million decrease in realizable excess tax benefits, and (iii) a one-time international property (“IP”) transfer tax of $3.9 million related to the IP intangible assets we acquired as part of the GeoPhy acquisition.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
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 origination fees and MSR income. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. The increase in property sales broker fees was primarily a result of a substantial increase in property sales volume. Investment management fees increased due to the addition of investment management fees from our LIHTC operations acquired in the fourth quarter of 2021. Escrow earnings and other interest income increased largely as a result of higher escrow earnings rates due to rising interest rates. Other revenues increased primarily as a result of increases in: (i) a one-time gain from the revaluation of our previously held equity-method investment in Apprise (“Apprise revaluation gain”), (ii) prepayment fees, (iii) in the first quarter of 2022, with no comparable activity in 2023.
The decrease in expenses was due to decreases in personnel costs, other revenuesoperating expenses, and an increase in the benefit for credit losses, partially offset by an increase in interest expense on corporate debt. Personnel costs decreased largely due to decreases in commission costs as a result of our lower transaction volumes and bonus accruals and share-based compensation due to our financial performance, partially offset by an increase in salaries expense as we had personnel expenses from our LIHTC operations, (iv) research subscription fees,GeoPhy and (v) gains from equity-method investments. Origination fees and MSR incomeApprise for only a portion of the first quarter of 2022. Other operating expenses decreased primarily as a result of the write off of unamortized debt premium as we paid off a declinenote payable at one of our subsidiaries and decreases in the earnings rate fromtravel and entertainment costs and professional fees as a result of our debt financing volumes due to market volatility and rising interest rates over the past several months, partially offset by an increase in Agency debt financing volume. cost reduction initiatives. The increase in expensesthe benefit for credit losses was due to increases in all expense categories. The increase in personnel expenses was primarily a result of increases in commission costs due to the increase in property sales brokers fees and salaries and benefits costs driven by an increasereduction in the average headcount. Amortization and depreciation expense increased primarily due to an increase in the average MSR balance and an increase in intangible asset amortization resulting from acquisitions in 2021 and 2022.historical loss rate factor. Interest expense on corporate debt largely increased due to the(i) an increase in the size of theinterest rates as our corporate debt outstanding, including the assumption of Alliant’s note payable in the fourth quarter of 2021. Other operating expenses increased largely ashas a result of (i) the overall growth of the Company over the past year including expenses from acquired subsidiaries andfloating rate, (ii) an increase in travelthe outstanding balance of corporate debt, and entertainment costs compared(iii) an increase the balance of our corporate debt subject to 2021 whenfloating interest rates as we replaced the fixed-rate debt of one of our travel and entertainment expenses were depressed due to the on-going effects of the pandemic. subsidiaries with floating-rate debt. Income Tax Expense. The decrease in income tax expense primarily relates to a 62% decrease in income from operations, and a one-time $10.2 million tax benefit resulting from the Apprise dissolution. Partially offsetting this benefit was (i) an increase70-basis point decrease in the estimated annual effective tax rate due primarily to an increasea substantial decrease in nondeductibleexpected annual executive variable compensation, (ii)partially offset by a $1.8$3.4 million decrease in realizable excess tax benefits, and (iii) a one-time expense of $3.9 million related to the IP transfer. We do not expect our annual estimated effective tax rate to differ significantly from the 27.0% rate estimated for the three and nine months ended September 30, 2022. Accordingly, we expect an estimated annual effective tax rate of between approximately 26.5% and 27.5% for the remainder of the year. The effective tax rate decreased year over year from 23.2% in 2021 to 21.3% in 2022 due to the factors noted above.benefits.
A discussion of the financial results for our segments is included further below. Non-GAAP Financial Measure To supplement our financial statements presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use adjusted EBITDA in addition to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our term loan and Alliant’s note payable,corporate debt, and amortization and depreciation, adjusted for provision (benefit) for credit losses net of write-offs, stock-based incentive compensation charges, the fair value of expected net cash flows from servicing, net, the write off of the unamortized balance of premium associated with the repayment of a portion of our corporate debt, and the gain from revaluation of a previously held equity-method investment. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, adjusted EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not reflect certain cash requirements such as tax and debt service payments. The amounts shown for adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants. We use adjusted EBITDA to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with our GAAP financials, provides useful information to investors by offering: | ● | the ability to make more meaningful period-to-period comparisons of our ongoing operating results; |
| ● | the ability to better identify trends in our underlying business and perform related trend analyses; and |
| ● | a better understanding of how management plans and measures our underlying business. |
We believe that adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that adjusted EBITDA should only be used to evaluate our results of operations in conjunction with net income on both a consolidated and segment basis. Adjusted EBITDA is reconciled to net income as follows: ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CONSOLIDATED | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | | For the three months ended | | | | September 30, | | September 30, | | | March 31, | | (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA | Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA | | | | | | | | | | | | | | | | | | Walker & Dunlop Net Income | | $ | 46,833 | | $ | 71,721 | | $ | 172,328 | | $ | 185,831 | | | $ | 26,665 | | $ | 71,209 | | Income tax expense | | | 7,532 | | | 22,953 | | | 46,495 | | | 56,311 | | | | 7,135 | | | 19,460 | | Interest expense on corporate debt | | | 9,306 | | | 1,766 | | | 22,123 | | | 5,291 | | | | 15,274 | | | 6,405 | | Amortization and depreciation | | | 59,846 | | | 53,498 | | | 177,101 | | | 148,879 | | | | 56,966 | | | 56,152 | | Provision (benefit) for credit losses | | | 1,218 | | | 1,266 | | | (13,120) | | | (14,380) | | | | (10,775) | | | (9,498) | | Net write-offs | | | — | | | — | | | — | | | — | | | | — | | | — | | Share-based compensation expense | | | 5,546 | | | 10,708 | | | 27,154 | | | 26,945 | | | | 7,143 | | | 11,279 | | Gain from revaluation of previously held equity-method investment | | | — | | | — | | | (39,641) | | | — | | | | — | | | (39,641) | | Write off of unamortized premium from corporate debt repayment | | | | (4,420) | | | — | | Fair value of expected net cash flows from servicing, net | | | (55,291) | | | (89,482) | | | (159,970) | | | (209,266) | | | | (30,013) | | | (52,730) | | Adjusted EBITDA | | $ | 74,990 | | $ | 72,430 | | $ | 232,470 | | $ | 199,611 | | | $ | 67,975 | | $ | 62,636 | | | | | | | | | | | | | | | | | | | | | | |
The following tables presenttable presents period-to-period comparisons of the components of adjusted EBITDA for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. ADJUSTED EBITDA – THREE MONTHS CONSOLIDATED | | | | | | | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 90,858 | | $ | 123,242 | | $ | (32,384) | | (26) | % | Servicing fees | | 75,975 | | | 70,628 | | | 5,347 | | 8 | | Property sales broker fees | | 30,308 | | | 33,677 | | | (3,369) | | (10) | | Investment management fees | | 16,301 | | | 2,564 | | | 13,737 | | 536 | | Net warehouse interest income | | 3,980 | | | 5,583 | | | (1,603) | | (29) | | Escrow earnings and other interest income | | 18,129 | | | 2,032 | | | 16,097 | | 792 | | Other revenues | | 24,943 | | | 19,013 | | | 5,930 | | 31 | | Personnel | | (151,513) | | | (159,473) | | | 7,960 | | (5) | | Net write-offs | | — | | | — | | | — | | N/A | | Other operating expenses | | (33,991) | | | (24,836) | | | (9,155) | | 37 | | Adjusted EBITDA | $ | 74,990 | | $ | 72,430 | | $ | 2,560 | | 4 | |
ADJUSTED EBITDA – NINE MONTHS
CONSOLIDATED
| | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 275,773 | | $ | 306,593 | | $ | (30,820) | | (10) | % | Servicing fees | | 222,916 | | | 205,658 | | | 17,258 | | 8 | | Property sales broker fees | | 100,092 | | | 65,173 | | | 34,919 | | 54 | | Investment management fees | | 47,345 | | | 9,115 | | | 38,230 | | 419 | | Net warehouse interest income | | 14,021 | | | 14,768 | | | (747) | | (5) | | Escrow earnings and other interest income | | 26,683 | | | 5,972 | | | 20,711 | | 347 | | Other revenues | | 90,494 | | | 35,375 | | | 55,119 | | 156 | | Personnel | | (442,454) | | | (380,872) | | | (61,582) | | 16 | | Net write-offs | | — | | | — | | | — | | N/A | | Other operating expenses | | (102,400) | | | (62,171) | | | (40,229) | | 65 | | Adjusted EBITDA | $ | 232,470 | | $ | 199,611 | | $ | 32,859 | | 16 | | | | | | | | | | | | | |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
| | | | | | | | | | | | | For the three months ended | | | | | | | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | 2023 | | 2022 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 47,084 | | $ | 82,310 | | $ | (35,226) | | (43) | % | Servicing fees | | 75,766 | | | 72,681 | | | 3,085 | | 4 | | Property sales broker fees | | 11,624 | | | 23,398 | | | (11,774) | | (50) | | Investment management fees | | 15,173 | | | 14,858 | | | 315 | | 2 | | Net warehouse interest income | | 1 | | | 4,773 | | | (4,772) | | (100) | | Escrow earnings and other interest income | | 30,924 | | | 1,803 | | | 29,121 | | 1,615 | | Other revenues | | 27,356 | | | 27,929 | | | (573) | | (2) | | Personnel | | (111,470) | | | (132,902) | | | 21,432 | | (16) | | Net write-offs | | — | | | — | | | — | | N/A | | Other operating expenses | | (28,483) | | | (32,214) | | | 3,731 | | (12) | | Adjusted EBITDA | $ | 67,975 | | $ | 62,636 | | $ | 5,339 | | 9 | |
Origination fees decreased primarily due to a decline in the earnings rate from our debt financing volumes coupled with a slight decrease inoverall debt financing volumes. Servicing fees increased largely due to growth in the average servicing portfolio period over period. Property sales broker fees decreased principally due to a decline in the property sales volume. Investment management fees increasedNet warehouse interest income decreased primarily due to the addition of investment management fees from our LIHTC operations acquired ininverted yield curve during the fourthfirst quarter of 2021.2023. Escrow earnings and other interest income increased largely as a result of a higher escrow earnings rate due to rising interest rates. Other revenues increased primarily due to the addition of other revenues from our LIHTC operations, partially offset by a decrease in prepayment fees. The decrease in personnel expenses was primarily a result of decreases in commission costs due to theour lower transaction volumes and a decrease in debt financing and property sales volumes,bonus accruals, partially offset by increases in salaries and benefits costs driven by an increase in the average headcount. Other operating expenses increaseddecreased largely as a result of (i) the overall growth of the Company over the past year including expenses from acquired subsidiaries and (ii) an increasedecreases in travel and entertainment costs compared to 2021 when our travel and entertainment expenses were depressed due to the on-going effects of the pandemic. Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Originationprofessional fees decreased as a result of a decline in the earnings rate from our debt financing volumes due to market volatility and rising interest rates and a decrease in overall debt financing volume. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. The increase in property sales broker fees was a resultcost reduction initiatives.
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 and property sales, 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 available-for-sale (“AFS”) securities pledged to Fannie Mae. We opportunistically invest cash for acquisitions and MSR portfolio purchases.acquisitions. 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 forin connection with the exercise of stock options (cash inflow) and for acquisitions (non-cash transactions). NineThree Months Ended September 30, 2022March 31, 2023 Compared to NineThree Months Ended September 30, 2021March 31, 2022
The following table presents a period-to-period comparison of the significant components of cash flows for the ninethree months ended September 30, 2022March 31, 2023 and 2021.2022. SIGNIFICANT COMPONENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | | | | | | | | | | | For the nine months ended September 30, | | Dollar | | Percentage | | | For the three months ended March 31, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | | 2023 | | 2022 | | Change | | Change | | Net cash provided by (used in) operating activities | | $ | (466,766) | | $ | (196,979) | | $ | (269,787) | | 137 | % | | $ | (546,672) | | $ | 971,928 | | $ | (1,518,600) | | (156) | % | Net cash provided by (used in) investing activities | | | (170,990) | | | 49,325 | | | (220,315) | | (447) | | | | 9,284 | | | (44,440) | | | 53,724 | | (121) | | Net cash provided by (used in) financing activities | | | 449,634 | | | 194,265 | | | 255,369 | | 131 | | | | 513,804 | | | (1,096,656) | | | 1,610,460 | | (147) | | Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period ("Total cash") | | | 205,058 | | | 404,613 | | | (199,555) | | (49) | | | | 234,699 | | | 224,012 | | | 10,687 | | 5 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used in) operating activities | | | | | | | | | | | | | | | | | | | | | | | | | Net receipt (use) of cash for loan origination activity | | $ | (594,506) | | $ | (301,921) | | $ | (292,585) | | 97 | % | | $ | (511,128) | | $ | 1,013,187 | | $ | (1,524,315) | | (150) | % | Net cash provided by (used in) operating activities, excluding loan origination activity | | | 127,740 | | | 104,942 | | | 22,798 | | 22 | | | | (35,544) | | | (41,259) | | | 5,715 | | (14) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used in) investing activities | | | | | | | | | | | | | | | | | | | | | | | | | Purchases of pledged AFS securities | | $ | (51,302) | | $ | (7,250) | | $ | (44,052) | | 608 | % | | $ | — | | $ | (7,010) | | $ | 7,010 | | (100) | % | Proceeds from the prepayment/sale of pledged AFS securities | | | 9,261 | | | 28,781 | | | (19,520) | | (68) | | | Purchase of equity-method investments | | | (25,098) | | | (8,029) | | | (17,069) | | 213 | | | Purchases of equity-method investments | | | | (11,049) | | | (5,941) | | | (5,108) | | 86 | | Acquisitions, net of cash received | | | (114,163) | | | (62,208) | | | (51,955) | | 84 | | | | — | | | (78,465) | | | 78,465 | | (100) | | Capital expenditures | | | (19,302) | | | (5,507) | | | (13,795) | | 250 | | | | (2,526) | | | (11,790) | | | 9,264 | | (79) | | Net payoff of (investment in) loans held for investment | | | 22,728 | | | 127,591 | | | (104,863) | | (82) | | | Principal collected on loans held for investment | | | | 19,468 | | | 53,000 | | | (33,532) | | (63) | | Net distributions from (investments in) joint ventures | | | 6,886 | | | (24,053) | | | 30,939 | | 129 | | | | 733 | | | 4,201 | | | (3,468) | | (83) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used in) financing activities | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings (repayments) of warehouse notes payable, net | | $ | 593,685 | | $ | 333,887 | | $ | 259,798 | | 78 | % | | $ | 516,288 | | $ | (1,006,545) | | $ | 1,522,833 | | (151) | % | Borrowings of interim warehouse notes payable | | | 36,459 | | | 154,661 | | | (118,202) | | (76) | | | Repayments of interim warehouse notes payable | | | (26,000) | | | (157,277) | | | 131,277 | | (83) | | | | (14,521) | | | (11,200) | | | (3,321) | | 30 | | Repayments of notes payable | | | (29,487) | | | (2,234) | | | (27,253) | | 1,220 | | | | (116,046) | | | (13,759) | | | (102,287) | | 743 | | Borrowings of notes payable | | | | 196,000 | | | — | | | 196,000 | | N/A | | Payment of contingent consideration | | | (19,720) | | | — | | | (19,720) | | N/A | | | | (25,690) | | | (17,612) | | | (8,078) | | 46 | | Repurchase of common stock | | | (40,675) | | | (15,686) | | | (24,989) | | 159 | | | | (17,395) | | | (27,049) | | | 9,654 | | (36) | | Borrowings (repayments) of secured borrowings | | | — | | | (73,312) | | | 73,312 | | (100) | | | Cash dividends paid | | | (60,025) | | | (48,268) | | | (11,757) | | 24 | | |
The increase inchange to net cash used from net cash provided by operating activities from cash used in operating activities was driven primarily by loans originated and sold. Such loans are held for short periods of time, generally less than 60 days, and impact cash flows presented as of a point in time.time due to the timing difference between the date of origination and date of delivery. The increasedecrease in cash flows usedreceived in loan origination activities is primarily attributable to a net increase in originations (net cash used) outpacing sales by $594.5$511.1 million in 20222023 compared to $301.9 millionsales outpacing originations by $1.0 billion in 2021.2022, largely related to our lower debt financing volume in 2023. Excluding cash used for the origination and sale of loans, cash flows provided byused in operating activities were $127.7$35.5 million in 2022, up2023, down from $104.9$41.3 million in 2021.2022. The increasedecrease is primarily the result of a $77.5$23.5 million changenet reduction in non-cash adjustments for MSRs and amortization and depreciation partially offset by (i)coupled with a $39.6 million increase in a non-cash adjustment for the Apprise revaluation gain in 2022 with no comparable activity in 2021 and (ii)2023, partially offset by a $14.6$43.1 million decrease in net income before noncontrolling interests. The significant decrease in Total cash over the past year is largely attributable to acquisition activity, partially offset by an increase in our long-term debt.interests and a $12.8 million higher use for other operating activities, net. The change from net cash provided by investing activities in 2021 to net cash used in investing activities in 2022 to net cash provided by investing activities in 2023 was due to decreases in (i) an increase in cash used in acquisitions in 20222023 compared to 2021,2022 as we had no acquisitions in 2023, (ii) a decrease in the net payoff of loans held for investment, (iii) a decrease in the payoff of pledged AFS securities, which is unpredictable, (iv) an increase in capital expenditures due to elevated capital expenditures related the build out of our new corporate headquarters (v) an increase in the purchase of equity-method investments as capital calls for capital commitments increased year over year,2022, and (vi) an increase(iii) a decrease in the purchase of AFS securities, which iswas impacted by the elevated payoffs of pledged AFS securities leading up to 2022. These changes were partially offset by the changedecreases in principal collections on loans held for investment and distributions from net investments in joint ventures tocoupled with an increase in the purchases of equity-method investments. The decreases in principal collected on loans held for investment and net distributions from joint ventures. Forventures were due to our lower originations in our Principal Lending and Investing activity in the nine months ended September 30, 2021, we had three acquisitions, twopast few years, resulting in fewer loans that could pay off, and due to a loan that was fully funded with corporate cash paying off in 2022. The increase in purchase of which were small, compared to the GeoPhy acquisition, whichequity-method investments was substantially larger than the acquisitions in 2021, resulting indriven by an increase in capital calls for capital commitments and capital needs in support of our LIHTC equity method investments. The change from cash used for acquisitions. We also made a large payment for working capital adjustments for the Alliant acquisitionin financing activities in 2022 with no comparable activity in 2021. Net payoff of loans held for investment decreased, as there were fewer payoffs and originations in 2022 than in 2021. Our purchases of AFS securities increased in 2022, as we reinvested the funds from the payoff of AFS securities that occurred late in 2021. The increase into cash provided by financing activities was attributable to (i) an increase in net warehouse borrowings due to the aforementioned loan origination activity, (ii) an increase in borrowings of notes payable, and (ii)(iii) a decrease in repaymentsrepurchase of secured borrowings,common stock, partially offset by (i) a change to net borrowings from net repayments of interim warehouse notes payable, (ii)(a) an increase in repayments of notes payable, (iii)(b) an increase in the paymentpayments of contingent consideration as the Company made paymentsthe first payment related to the Alliant acquisition in 2022 for outsized performances of certain acquired entities in 2021, (iv)2023, and (c) an increase in repurchasesrepayments of common stock, and (v) an increase in dividends paid.interim warehouse notes payable. The increase in the net borrowings of warehouse notes payable was due to borrowings under our Incremental Term Loan (defined in Liquidity and Capital Resources below). Additionally, a portion of the aforementionedproceeds from the Incremental Term Loan was used to repay notes payable at one of our subsidiaries, resulting in an increase in cash used for loan origination activity.the repayments of notes payable. The changedecrease in repurchase of common stock was related to net cash borrowings from neta decrease in vesting events in our various share-based compensation plans. The increase in repayments of interim warehouse notes payable was primarily due to a reduction in repayments as we had fewer originations in 2022. Thean increase in repaymentspayoffs of notes payable was due to the quarterly paydowns of a note payable at our subsidiary, Alliant,loans funded with no comparable activity in 2021. The increase in cash paid for repurchases of common stock was related to significant vesting events in our various share-based compensation plans and the $11.1 million repurchase of common stock through our 2022 stock repurchase program compared to no repurchases under the 2021 stock repurchase program. Cash dividends paid increased largely as a result of the increase in our dividend to $0.60 per share in 2022 compared to $0.50 per share in 2021.warehouse borrowings year over year.
Segment Results The Company is managed based on our three operatingreportable segments: (i) Capital Markets, (ii) Servicing & Asset Management, and (iii) Corporate. The segment results below are intended to present each of the operatingreportable segments on a stand-alone basis. Capital Markets SUPPLEMENTAL OPERATING DATA CAPITAL MARKETS | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | For the three months ended | | | | | | | September 30, | | September 30, | | March 31, | | Dollar | | Percentage | (in thousands; except per share data) | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | Change | | Change | Transaction Volume: | | | | | | | | | | | | | | | | | | | | | | | | | Components of Debt Financing Volume | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 3,038,788 | | $ | 3,271,765 | | $ | 8,955,562 | | $ | 6,716,765 | | $ | 1,358,708 | | $ | 1,998,374 | | $ | (639,666) | | (32) | % | Freddie Mac | | | 1,885,492 | | | 2,591,906 | | | 4,014,375 | | | 4,607,945 | | | 975,737 | | | 987,849 | | | (12,112) | | (1) | | Ginnie Mae ̶ HUD | | | 338,054 | | | 522,093 | | | 931,230 | | | 1,816,800 | | | 127,599 | | | 391,693 | | | (264,094) | | (67) | | Brokered(1) | | | 6,601,244 | | | 6,402,862 | | | 21,502,815 | | | 16,985,932 | | | 2,363,754 | | | 5,643,081 | | | (3,279,327) | | (58) | | Total Debt Financing Volume | | $ | 11,863,578 | | $ | 12,788,626 | | $ | 35,403,982 | | $ | 30,127,442 | | $ | 4,825,798 | | $ | 9,020,997 | | $ | (4,195,199) | | (47) | % | Property Sales Volume | | | 4,993,615 | | | 5,230,093 | | | 16,417,367 | | | 9,967,385 | | | Property sales volume | | | 1,894,682 | | | 3,531,690 | | | (1,637,008) | | (46) | | Total Transaction Volume | | $ | 16,857,193 | | $ | 18,018,719 | | $ | 51,821,349 | | $ | 40,094,827 | | $ | 6,720,480 | | $ | 12,552,687 | | $ | (5,832,207) | | (46) | % | | | | | | | | | | | | | | | | | | | | | | | | | | Key Performance Metrics: | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 504 | | $ | 43,102 | | | (42,598) | | (99) | % | Adjusted EBITDA(2) | | $ | 119 | | $ | 21,288 | | $ | 28,255 | | $ | 52,633 | | | (18,687) | | | 8,534 | | | (27,221) | | (319) | | Operating Margin | | | 27 | % | | 42 | % | | 31 | % | | 42 | % | | Operating margin | | | 2 | % | | 33 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Key Revenue Metrics (as a percentage of debt financing volume): | Key Revenue Metrics (as a percentage of debt financing volume): | | | | | | | | | | | | | | | | | | | | | | Origination related fees(3) | | | 0.76 | % | | 0.95 | % | | 0.77 | % | | 1.00 | % | | MSR income(4) | | | 0.47 | | | 0.70 | | | 0.45 | | | 0.69 | | | MSR income, as a percentage of Agency debt financing volume(4) | | | 1.05 | | | 1.40 | | | 1.15 | | | 1.59 | | | Origination fees | | | 0.97 | % | | 0.90 | % | | | | | | MSR income | | | 0.62 | | | 0.58 | | | | | | | MSR income, as a percentage of Agency debt financing volume | | | 1.22 | | | 1.56 | | | | | | |
| (1) | Brokered transactions for life insurance companies, commercial banks, and other capital sources. |
| (2) | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measure”. |
| (3) | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained. Excludes the income and debt financing volume from Principal Lending and Investing. |
| (4) | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained, as a percentage of Agency volume. |
FINANCIAL RESULTS – THREE MONTHS CAPITAL MARKETS | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | | 2023 | | 2022 | | Change | | Change | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 89,752 | | $ | 121,133 | | $ | (31,381) | | (26) | % | | $ | 46,956 | | $ | 81,823 | | $ | (34,867) | | (43) | % | Fair value of expected net cash flows from servicing, net | | | 55,291 | | | 89,482 | | | (34,191) | | (38) | | | | 30,013 | | | 52,730 | | | (22,717) | | (43) | | Property sales broker fees | | | 30,308 | | | 33,677 | | | (3,369) | | (10) | | | | 11,624 | | | 23,398 | | | (11,774) | | (50) | | Net warehouse interest income, loans held for sale | | | 2,178 | | | 3,723 | | | (1,545) | | (41) | | | | (1,689) | | | 3,530 | | | (5,219) | | (148) | | Other revenues | | | 5,845 | | | 3,026 | | | 2,819 | | 93 | | | | 17,100 | | | 7,336 | | | 9,764 | | 133 | | Total revenues | | $ | 183,374 | | $ | 251,041 | | $ | (67,667) | | (27) | | | $ | 104,004 | | $ | 168,817 | | $ | (64,813) | | (38) | | | | | | | | | | | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | | | | | | | | | | | | Personnel | | $ | 125,980 | | $ | 139,890 | | $ | (13,910) | | (10) | % | | $ | 90,462 | | $ | 104,959 | | $ | (14,497) | | (14) | % | Amortization and depreciation | | | 952 | | | 17 | | | 935 | | 5,500 | | | | 1,186 | | | 56 | | | 1,130 | | 2,018 | | Interest expense on corporate debt | | | | 4,269 | | | 1,523 | | | 2,746 | | 180 | | Other operating expenses | | | 6,063 | | | 4,628 | | | 1,435 | | 31 | | | | 5,644 | | | 7,201 | | | (1,557) | | (22) | | Total expenses | | $ | 132,995 | | $ | 144,535 | | $ | (11,540) | | (8) | | | $ | 101,561 | | $ | 113,739 | | $ | (12,178) | | (11) | | Income from operations | | $ | 50,379 | | $ | 106,506 | | $ | (56,127) | | (53) | | | $ | 2,443 | | $ | 55,078 | | $ | (52,635) | | (96) | | Income tax expense | | | 12,751 | | | 25,660 | | | (12,909) | | (50) | | | | 504 | | | 11,911 | | | (11,407) | | (96) | | Net income before noncontrolling interests | | | $ | 1,939 | | $ | 43,167 | | $ | (41,228) | | (96) | | Less: net income (loss) from noncontrolling interests | | | | 1,435 | | | 65 | | | 1,370 | | 2,108 | | Net income | | $ | 37,628 | | $ | 80,846 | | $ | (43,218) | | (53) | | | $ | 504 | | $ | 43,102 | | $ | (42,598) | | (99) | |
FINANCIAL RESULTS – NINE MONTHS
CAPITAL MARKETS
| | | | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | Revenues | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 273,660 | | $ | 302,011 | | $ | (28,351) | | (9) | % | Fair value of expected net cash flows from servicing, net | | | 159,970 | | | 209,266 | | | (49,296) | | (24) | | Property sales broker fees | | | 100,092 | | | 65,173 | | | 34,919 | | 54 | | Net warehouse interest income, loans held for sale | | | 9,415 | | | 9,066 | | | 349 | | 4 | | Other revenues | | | 12,503 | | | 8,721 | | | 3,782 | | 43 | | Total revenues | | $ | 555,640 | | $ | 594,237 | | $ | (38,597) | | (6) | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | Personnel | | $ | 363,619 | | $ | 332,519 | | $ | 31,100 | | 9 | % | Amortization and depreciation | | | 1,762 | | | 556 | | | 1,206 | | 217 | | Other operating expenses | | | 16,757 | | | 11,628 | | | 5,129 | | 44 | | Total expenses | | $ | 382,138 | | $ | 344,703 | | $ | 37,435 | | 11 | | Income from operations | | $ | 173,502 | | $ | 249,534 | | $ | (76,032) | | (30) | | Income tax expense | | | 42,074 | | | 58,014 | | | (15,940) | | (27) | | Net income | | $ | 131,428 | | $ | 191,520 | | $ | (60,092) | | (31) | |
Revenues Loan origination and debt brokerage fees, net (“origination fees”) and Fair value of expected net cash flows from servicing, net (“MSR income”). The following tables provide additional information that helps explain changes in origination fees and MSR income period over period: | | | | | | | | | For the three months ended | | | | March 31, | | Debt Financing Volume by Product Type | | 2023 | | | 2022 | | Fannie Mae | | 28 | % | | 22 | % | Freddie Mac | | 20 | | | 11 | | Ginnie Mae ̶ HUD | | 3 | | | 4 | | Brokered | | 49 | | | 63 | |
| | | | | | | | | | | | | | | For the three months ended | | | For the nine months ended | | | | September 30, | | | September 30, | | Debt Financing Volume by Product Type | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Fannie Mae | | 25 | % | | 26 | % | | 25 | % | | 22 | % | Freddie Mac | | 16 | | | 20 | | | 11 | | | 15 | | Ginnie Mae ̶ HUD | | 3 | | | 4 | | | 3 | | | 6 | | Brokered | | 56 | | | 50 | | | 61 | | | 57 | |
Table of Contents
| | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | | September 30, | | September 30, | | Mortgage Banking Details (basis points) | 2022 | | 2021 | | 2022 | | 2021 | | Origination Fee Rate (1) | | 76 | | | 95 | | | 77 | | | 100 | | Basis Point Change | | (19) | | | | | | (23) | | | | | Percentage Change | | (20) | % | | | | | (23) | % | | | | MSR Rate (2) | | 47 | | | 70 | | | 45 | | | 69 | | Basis Point Change | | (23) | | | | | | (24) | | | | | Percentage Change | | (33) | % | | | | | (35) | % | | | | Agency MSR Rate (3) | | 105 | | | 140 | | | 115 | | | 159 | | Basis Point Change | | (35) | | | | | | (44) | | | | | Percentage Change | | (25) | % | | | | | (28) | % | | | |
| | | | | | | | For the three months ended | | | March 31, | | Mortgage Banking Details (basis points) | 2023 | | 2022 | | Origination Fee Rate (1) | | 97 | | | 90 | | Basis Point Change | | 7 | | | | | Percentage Change | | 8 | % | | | | MSR Rate (2) | | 62 | | | 58 | | Basis Point Change | | 4 | | | | | Percentage Change | | 7 | % | | | | Agency MSR Rate (3) | | 122 | | | 156 | | Basis Point Change | | (34) | | | | | Percentage Change | | (22) | % | | | |
| (1) | Loan origination and debt brokerage fees, net as a percentage of total mortgage banking volume. |
| (2) | MSR Income as a percentage of total debt financing volume, excluding the income and debt financing volume from principal lending and investing. |
| (3) | MSR Income as a percentage of Agency debt financing volume. |
For the three months ended September 30, 2022, theThe decrease in origination fees was primarily the result of a 19-basis-point decrease in our origination fee rate and a 7.2%47% decrease in segment debt financing volume.volume, partially offset by a 7-basis-point increase in our origination fee rate. The declineincrease in the origination fee rate was driven by a combination of a declinean increase in the Agency debt financing volumes, particularly in our HUDvolume as a percentage of total debt financing volumes, and a decline in the margins we earn on our debt financing productsvolume as spreads tightened due to large interest rate increases during the third quarter of 2022.
For the nine months ended September 30, 2022, the decrease inseen above. Agency loans have higher origination fees was primarily due to a 23-basis-point decrease in our origination fee rate, partially offset by an increase in overall debt financing volumes. Our origination fee rate declined due to substantial declines in our HUD debt financing volumes and a reduction in our Fannie Mae origination fee margin. The decrease in our origination fee rate was partially offset by an increase in Fannie Mae andthan brokered origination fees as both debt financing product volumes increased substantially during the year.loans.
For the three months ended September 30, 2022, theThe decrease in MSR income was attributable to a 27% decrease in Agency debt financing volume and the 25%22% decrease in our Agency MSR Rate coupled with a decrease in Agency debt financing volumes.seen above. Our Agency MSR Rate decreased primarily due to a 27%23% decrease in the weighted-average servicing fee on our Fannie Mae loans. Our Agency debt financing volumes, particularly our Freddie MacFannie Mae and HUD volumes, declined due to the current interest rate environment.environment and volatility in the capital markets. Our Fannie Mae and HUD products are our most profitable products.
For the nine months ended September 30, 2022, the decrease in MSR income was due to a 28% decline in the Agency MSR Rate, partially offset by a 33% increase in Fannie Mae debt financing volume. The decrease in Agency MSR rate was driven by (i) a significant decline in HUD debt financing volume as a percentage of segment debt financing volume and (ii) a 38% decrease in the weighted-average servicing fee on our Fannie Mae volume.
See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changeschange in debt financing volumes.volume. Property sales broker fees. For the three months ended September 30, 2022, theThe decrease in property sales broker fees was driven principally by a 4.5%46% decrease in the property sales volumes yearperiod over year,period, combined with a slight decrease in the property sales broker fee margin. For the nine months ended September 30, 2022, the increase in property sales broker fees was driven by the 64.7% increase in the property sales volumes year over year, partially offset by a decline 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 changeschange in property sales volumes.volume. Net warehouse interest income. The decrease in net warehouse interest income was primarily attributable to an inverted yield curve during the first quarter of 2023, partially offset by a lower average balance of loans held for sale. Short-term interest rates upon which we incur interest expense were higher than the long-term mortgage rates upon which we earn interest income during the first quarter of 2023 as a result of the inverted yield curve. Partially reducing the effect of the inverted yield curve and resulting negative net spread shown below was the lower average balance of loans held for sale outstanding in 2023 compared to 2022, which was driven by a reduction in the number of days loans were held before delivery and the lower debt financing volume. | | | | | | | | | | | | | For the three months ended | | | | | | | | March 31, | | | | Percentage | | Net Warehouse Interest Income Details - LHFS (dollars in thousands) | 2023 | | 2022 | | Change | | Change | | Average LHFS Outstanding Balance | $ | 540,123 | | $ | 1,145,882 | | $ | (605,759) | | (53) | % | LHFS Net Spread (basis points) | | (125) | | | 123 | | | (248) | | (202) | |
Other Revenues. The increase was primarily due to an $8.5 million increase in investment banking revenues. The increase in investment banking revenues was due to the closing of the largest investment banking transaction in Company history. Expenses Personnel. For the three months ended September 30, 2022, theThe decrease was primarily the result of (i) a $19.8$20.1 million decrease in commission costs due to lower origination fees and property sales broker fees, and (ii) a $2.9 million decrease in the accrual for subjective bonuses, partially offset by (i) a $6.5$5.6 million increase in salaries and benefits and (ii) a $2.5 million increase other compensation costs, bothprimarily due to higher average headcount resulting from (a) acquisitions and hiring initiatives and (b) the GeoPhy acquisition and corresponding consolidation of Apprise.Apprise, which occurred late in the first quarter of 2022. For the nine months ended September 30, 2022, the increase was primarily the resultInterest expense on corporate debt. Interest expense on corporate debt is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s use of (i) a $21.4 million increase in property sales commission costs duethat corporate debt. The discussion of our consolidated results above has additional information related to higher property sales broker fees, (ii) an $18.0 million increase in salaries and benefits, and (iii) a $9.0 million increase in other compensation costs. The increases in (ii) and (iii) above were due to higher average headcount resulting from (a) acquisitions and hiring initiatives and (b) the GeoPhy acquisition and corresponding consolidation of Apprise. Partially offsetting the increase in personnelinterest expense was a $13.7 million decrease in debt financing commission costs as a result of the decrease in origination fees, coupled with a $5.4 million decrease in the accrual for subjective bonuses.
Other Operating Expenses. For the nine months ended September 30, 2022, the increase primarily stemmed from increases in travel and entertainment costs of $5.2 million 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.on corporate debt.
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, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity. Non-GAAP Financial Measure A reconciliation of adjusted EBITDA for our CM segment is presented below. Our segment levelsegment-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: ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CAPITAL MARKETS | | | | | | | | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | For the three months ended | | | September 30, | | September 30, | | March 31, | (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | Reconciliation of Net Income to Adjusted EBITDA | Reconciliation of Net Income to Adjusted EBITDA | | | | | | | | | | | | | | | | Net Income | | $ | 37,628 | | $ | 80,846 | | $ | 131,428 | | $ | 191,520 | | $ | 504 | | $ | 43,102 | Income tax expense | | | 12,751 | | | 25,660 | | | 42,074 | | | 58,014 | | | 504 | | | 11,911 | Interest expense on corporate debt | | | | 4,269 | | | 1,523 | Amortization and depreciation | | | 952 | | | 17 | | | 1,762 | | | 556 | | | 1,186 | | | 56 | Share-based compensation expense | | | 4,079 | | | 4,247 | | | 12,961 | | | 11,809 | | | 4,863 | | | 4,672 | Fair value of expected net cash flows from servicing, net | | | (55,291) | | | (89,482) | | | (159,970) | | | (209,266) | | MSR Income | | | | (30,013) | | | (52,730) | Adjusted EBITDA | | $ | 119 | | $ | 21,288 | | $ | 28,255 | | $ | 52,633 | | $ | (18,687) | | $ | 8,534 |
The following tables present period-to-period comparisons of the components of CM adjusted EBITDA for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. ADJUSTED EBITDA – THREE MONTHS CAPITAL MARKETS | | | | | | | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 89,752 | | $ | 121,133 | | $ | (31,381) | | (26) | % | Property sales broker fees | | 30,308 | | | 33,677 | | | (3,369) | | (10) | | Net warehouse interest income, loans held for sale | | 2,178 | | | 3,723 | | | (1,545) | | (41) | | Other revenues | | 5,845 | | | 3,026 | | | 2,819 | | 93 | | Personnel | | (121,901) | | | (135,643) | | | 13,742 | | (10) | | Other operating expenses | | (6,063) | | | (4,628) | | | (1,435) | | 31 | | Adjusted EBITDA | $ | 119 | | $ | 21,288 | | $ | (21,169) | | (99) | |
ADJUSTED EBITDA – NINE MONTHS
CAPITAL MARKETS
| | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 273,660 | | $ | 302,011 | | $ | (28,351) | | (9) | % | Property sales broker fees | | 100,092 | | | 65,173 | | | 34,919 | | 54 | | Net warehouse interest income, loans held for sale | | 9,415 | | | 9,066 | | | 349 | | 4 | | Other revenues | | 12,503 | | | 8,721 | | | 3,782 | | 43 | | Personnel | | (350,658) | | | (320,710) | | | (29,948) | | 9 | | Other operating expenses | | (16,757) | | | (11,628) | | | (5,129) | | 44 | | Adjusted EBITDA | $ | 28,255 | | $ | 52,633 | | $ | (24,378) | | (46) | |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
| | | | | | | | | | | | | For the three months ended | | | | | | | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | 2023 | | 2022 | | Change | | Change | | Origination fees | $ | 46,956 | | $ | 81,823 | | $ | (34,867) | | (43) | % | Property sales broker fees | | 11,624 | | | 23,398 | | | (11,774) | | (50) | | Net warehouse interest income, loans held for sale | | (1,689) | | | 3,530 | | | (5,219) | | (148) | | Other revenues | | 15,665 | | | 7,271 | | | 8,394 | | 115 | | Personnel | | (85,599) | | | (100,287) | | | 14,688 | | (15) | | Other operating expenses | | (5,644) | | | (7,201) | | | 1,557 | | (22) | | Adjusted EBITDA | $ | (18,687) | | $ | 8,534 | | $ | (27,221) | | (319) | |
Loan origination and debt brokerageOrigination fees net decreased due to a decrease in our overall debt financing volume, partially offset by a slight increase in our origination fee rate and a decrease in our Agency debt financing volume.rate. Property sales broker fees decreased as a result of the decline in property sales volumes, combined with a slight decrease in the property sales broker fee margin. Net warehouse interest income decreased primarily due to the inverted yield curve during the first quarter of 2023. The decrease in personnel expense was primarily due to decreased commission costs due to the decrease in origination fees and property sales broker fees, partially offset by growth in salaries and benefitsother compensation costs, resulting from an increase in the average headcount from acquisitions and hiring initiatives. Other operating expenses increased primarily due to increases in travel and entertainment costs as our bankers and brokers attended more in person meetings in 2022.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Loan origination and debt brokerage fees, net decreased due to a decrease in our origination fee rate, partially offset by an increase in segment debt financing volumes. Property sales broker fees increased as a result of the significant increases in property sales volumes, partially offset by a decreaselate in the property sales broker fee margin. The increase in personnel expense was primarily due to increased (i) property sales commission costs and (ii) salaries and benefits costs resulting from an increase in average headcount from acquisitions and hiring initiatives, partially offset by a decrease in debt financing commission costs as a resultfirst quarter of the decrease in origination fees. Other operating expenses increased as a result of the increased travel and entertainment costs.2022.
Servicing & Asset Management SUPPLEMENTAL OPERATING DATA SERVICING & ASSET MANAGEMENT | | | | | | | | | | | | | | | | | | | (dollars in thousands) | | As of September 30, | | As of March 31, | | Dollar | | Percentage | Managed Portfolio: | | 2022 | | 2021 | | 2023 | | 2022 | | Change | | Change | Components of Servicing Portfolio | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 58,426,446 | | $ | 52,317,953 | | $ | 59,890,444 | | $ | 54,000,550 | | $ | 5,889,894 | | 11 | % | Freddie Mac | | | 37,241,471 | | | 38,039,014 | | | 38,184,798 | | | 36,965,185 | | | 1,219,613 | | 3 | | Ginnie Mae - HUD | | | 9,634,111 | | | 9,894,893 | | | 10,027,781 | | | 9,954,262 | | | 73,519 | | 1 | | Brokered (1) | | | 15,224,581 | | | 13,429,801 | | | 16,285,391 | | | 15,115,619 | | | 1,169,772 | | 8 | | Principal Lending and Investing (2) | | | 251,815 | | | 238,713 | | | 187,505 | | | 221,649 | | | (34,144) | | (15) | | Total Servicing Portfolio | | $ | 120,778,424 | | $ | 113,920,374 | | $ | 124,575,919 | | $ | 116,257,265 | | $ | 8,318,654 | | 7 | % | Assets under management | | | 17,017,355 | | | 2,309,332 | | | 16,654,566 | | | 16,687,112 | | | (32,546) | | (0) | | Total Managed Portfolio | | $ | 137,795,779 | | $ | 116,229,706 | | $ | 141,230,485 | | $ | 132,944,377 | | $ | 8,286,108 | | 6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | | For the nine months ended | | | For the three months ended | | | | | | | | | September 30, | | | September 30, | | | March 31, | | Dollar | | Percentage | Key Volume and Performance Metrics: | | 2022 | | 2021 | | | 2022 | | 2021 | | | 2023 | | 2022 | | Change | | Change | Principal Lending and Investing Origination Volume(3) | | $ | 62,015 | | $ | 472,142 | | | $ | 307,586 | | $ | 968,629 | | | Adjusted EBITDA(4) | | | 107,517 | | | 82,810 | | | | 300,352 | | | 225,933 | | | Operating Margin | | | 36 | % | | 30 | % | | | 37 | % | | 36 | % | | Equity syndication volume(3) | | | $ | 135,913 | | $ | 64,523 | | $ | 71,390 | | 111 | % | Principal Lending and Investing debt financing volume(4) | | | | — | | | 114,020 | | | (114,020) | | (100) | | Net income | | | | 51,084 | | | 28,073 | | | 23,011 | | 82 | | Adjusted EBITDA(5) | | | | 112,975 | | | 86,236 | | | 26,739 | | 31 | | Operating margin | | | | 48 | % | | 33 | % | | | | | |
| | | | | | | | | | | | | | | As of September 30, | | As of March 31, | Key Servicing Portfolio Metrics: | | 2022 | | 2021 | | 2023 | | 2022 | Custodial escrow account balance (in billions) | | $ | 3.1 | | $ | 3.0 | | $ | 2.2 | | $ | 2.5 | Weighted-average servicing fee rate (basis points) | | | 24.7 | | | 24.6 | | | 24.3 | | | 25.0 | Weighted-average remaining servicing portfolio term (years) | | | 8.9 | | | 9.2 | | | 8.7 | | | 9.1 |
| | | | | | | | | | | | | | | | As of September 30, | | | As of March 31, | Components of assets under management (in thousands) | | 2022 | | 2021 | | 2023 | | 2022 | Alliant(5) | | $ | 14,692,962 | | $ | — | | WDIP | | | 1,424,356 | | | 1,390,814 | | LIHTC | | | $ | 14,423,714 | | $ | 14,485,564 | Investment funds | | | | 1,336,023 | | | 1,271,252 | Interim Program JV Managed Loans(6) | | | 900,037 | | | 918,518 | | | 894,829 | | | 930,296 | Total assets under management | | $ | 17,017,355 | | $ | 2,309,332 | | $ | 16,654,566 | | $ | 16,687,112 | | | | | | | | | | | | | |
| (1) | Brokered loans serviced primarily for life insurance companies. |
| (2) | Consists of interim loans not managed for the Interim Program JV. |
| (3) | Amount of equity called and syndicated into LIHTC funds. |
| (4) | For the three months ended September 30, 2022, comprised solely of WDIP separate account originations. For the nine months ended September 30,March 31, 2022, includes $86.3 million from the Interim Program JV, $113.6 million from the Interim Loan Program and $107.7 million from WDIP separate accounts. For the three months ended September 30, 2021, includes $314.986.3 million from the Interim Program JV and $157.2 million from the Interim Loan Program. For the nine months ended September 30, 2021, includes $665.9 million from the Interim Program JV, $286.7 million from the Interim Loan Program and $16.0$27.7 million from WDIP separate accounts. |
(4) | (5) | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measure”. |
(5) | Alliant assets under management were acquired in December 2021. |
(6) | As of September 30, 2022 and 2021, only comprised of Interim Program JV managed loans. |
FINANCIAL RESULTS – THREE MONTHS SERVICING & ASSET MANAGEMENT | | | | | | | | | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | Revenues | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 1,106 | | $ | 2,109 | | $ | (1,003) | | (48) | % | Servicing fees | | | 75,975 | | | 70,628 | | | 5,347 | | 8 | | Investment management fees | | | 16,301 | | | 2,564 | | | 13,737 | | 536 | | Net warehouse interest income, loans held for investment | | | 1,802 | | | 1,860 | | | (58) | | (3) | | Escrow earnings and other interest income | | | 17,760 | | | 1,945 | | | 15,815 | | 813 | | Other revenues | | | 21,544 | | | 16,724 | | | 4,820 | | 29 | | Total revenues | | $ | 134,488 | | $ | 95,830 | | $ | 38,658 | | 40 | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | Personnel | | $ | 21,676 | | $ | 10,446 | | $ | 11,230 | | 108 | % | Amortization and depreciation | | | 57,239 | | | 52,388 | | | 4,851 | | 9 | | Provision (benefit) for credit losses | | | 1,218 | | | 1,266 | | | (48) | | (4) | | Other operating expenses | | | 6,043 | | | 3,199 | | | 2,844 | | 89 | | Total expenses | | $ | 86,176 | | $ | 67,299 | | $ | 18,877 | | 28 | | Income from operations | | $ | 48,312 | | $ | 28,531 | | $ | 19,781 | | 69 | | Income tax expense | | | 12,110 | | | 7,040 | | | 5,070 | | 72 | | Income before noncontrolling interests | | $ | 36,202 | | $ | 21,491 | | $ | 14,711 | | 68 | | Less: net income (loss) from noncontrolling interests | | | (174) | | | 69 | | | (243) | | (352) | | Net income | | $ | 36,376 | | $ | 21,422 | | $ | 14,954 | | 70 | | | | | | | | | | | | | | |
FINANCIAL RESULTS – NINE MONTHS
SERVICING & ASSET MANAGEMENT
| | | | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | Revenues | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 2,113 | | $ | 4,582 | | $ | (2,469) | | (54) | % | Servicing fees | | | 222,916 | | | 205,658 | | | 17,258 | | 8 | | Investment management fees | | | 47,345 | | | 9,115 | | | 38,230 | | 419 | | Net warehouse interest income, loans held for investment | | | 4,606 | | | 5,702 | | | (1,096) | | (19) | | Escrow earnings and other interest income | | | 26,166 | | | 5,712 | | | 20,454 | | 358 | | Other revenues | | | 74,959 | | | 28,381 | | | 46,578 | | 164 | | Total revenues | | $ | 378,105 | | $ | 259,150 | | $ | 118,955 | | 46 | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | Personnel | | $ | 62,195 | | $ | 27,004 | | $ | 35,191 | | 130 | % | Amortization and depreciation | | | 170,930 | | | 145,161 | | | 25,769 | | 18 | | Provision (benefit) for credit losses | | | (13,120) | | | (14,380) | | | 1,260 | | (9) | | Other operating expenses | | | 18,721 | | | 8,056 | | | 10,665 | | 132 | | Total expenses | | $ | 238,726 | | $ | 165,841 | | $ | 72,885 | | 44 | | Income from operations | | $ | 139,379 | | $ | 93,309 | | $ | 46,070 | | 49 | | Income tax expense | | | 33,799 | | | 21,693 | | | 12,106 | | 56 | | Income before noncontrolling interests | | $ | 105,580 | | $ | 71,616 | | $ | 33,964 | | 47 | | Less: net income (loss) from noncontrolling interests | | | (1,032) | | | 69 | | | (1,101) | | (1,596) | | Net income | | $ | 106,612 | | $ | 71,547 | | $ | 35,065 | | 49 | |
| | | | | | | | | | | | | | | For the three months ended | | | | | | | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | Revenues | | | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 128 | | $ | 487 | | $ | (359) | | (74) | % | Servicing fees | | | 75,766 | | | 72,681 | | | 3,085 | | 4 | | Investment management fees | | | 15,173 | | | 14,858 | | | 315 | | 2 | | Net warehouse interest income, loans held for investment | | | 1,690 | | | 1,243 | | | 447 | | 36 | | Escrow earnings and other interest income | | | 28,824 | | | 1,758 | | | 27,066 | | 1,540 | | Other revenues | | | 11,615 | | | 15,466 | | | (3,851) | | (25) | | Total revenues | | $ | 133,196 | | $ | 106,493 | | $ | 26,703 | | 25 | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | Personnel | | $ | 15,341 | | $ | 16,664 | | $ | (1,323) | | (8) | % | Amortization and depreciation | | | 54,010 | | | 54,893 | | | (883) | | (2) | | Provision (benefit) for credit losses | | | (10,775) | | | (9,498) | | | (1,277) | | 13 | | Interest expense on corporate debt | | | 9,582 | | | 4,536 | | | 5,046 | | 111 | | Other operating expenses | | | 1,480 | | | 5,029 | | | (3,549) | | (71) | | Total expenses | | $ | 69,638 | | $ | 71,624 | | $ | (1,986) | | (3) | | Income from operations | | $ | 63,558 | | $ | 34,869 | | $ | 28,689 | | 82 | | Income tax expense | | | 13,104 | | | 7,540 | | | 5,564 | | 74 | | Income before noncontrolling interests | | $ | 50,454 | | $ | 27,329 | | $ | 23,125 | | 85 | | Less: net income (loss) from noncontrolling interests | | | (630) | | | (744) | | | 114 | | (15) | | Net income | | $ | 51,084 | | $ | 28,073 | | $ | 23,011 | | 82 | | | | | | | | | | | | | | |
Revenues Servicing Fees. For the three and nine months ended September 30, 2022, theThe increase was primarily attributable to an increase in the average servicing portfolio period over period as shown below, primarily due to a $6.1$5.9 billion net increase in Fannie Mae serviced loans and a $1.8$1.2 billion net increaseincreases in both Freddie Mac and brokered loans serviced over the past year, coupled with increasespartially offset by a decrease in the servicing portfolio’s average servicing fee rates as shown below. The increasesdecrease in the average servicing fee rates areis the result of a decrease in the large volume of Fannie Mae debt financing volumeweighted-average servicing fees on our new originations over the past year resulting in Fannie Mae loans composing a higher percentage ofas the overall portfolio. Fannie Mae loans have the highest servicing fees of all our products. | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | | September 30, | | September 30, | | Servicing Fees Details (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | Average Servicing Portfolio | $ | 119,551,659 | | $ | 112,308,470 | | $ | 117,798,975 | | $ | 110,516,000 | | Dollar Change | $ | 7,243,189 | | | | | $ | 7,282,975 | | | | | Percentage Change | | 6 | % | | | | | 7 | % | | | | Average Servicing Fee (basis points) | | 24.8 | | | 24.6 | | | 24.9 | | | 24.4 | | Basis Point Change | | 0.2 | | | | | | 0.5 | | | | | Percentage Change | | 1 | % | | | | | 2 | % | | | |
Investment Management Fees. For the three and nine months ended September 30, 2022, the increases were primarily driven by the addition of investment management fees from our LIHTC operations that were acquired latevolatility in the fourth quarter of 2021, which added $13.9 millioninterest rate environment compressed the spread on our originations and $40.8 million in additional fees, respectively.reduced the average servicing fee rate.
| | | | | | | | | | | | | | | | For the three months ended March 31, | | | | Percentage | | Servicing Fees Details (dollars in thousands) | 2023 | | 2022 | | Change | | Change | | Average Servicing Portfolio | $ | 123,837,489 | | $ | 116,137,461 | | $ | 7,700,028 | | 7 | % | Average Servicing Fee (basis points) | | 24.4 | | | 24.9 | | | (0.5) | | (2) | |
Escrow earnings and other interest income. For the three and nine months ended September 30, 2022, the increases wereThe increase was driven primarily by increasesan increase in our escrow earnings of $12.9$24.9 million and $15.9a $1.4 million respectively, coupled with increasesincrease in interest income from our pledged securities investments. The earnings rates on escrow earnings and other interest income increased significantly as a result of risingthe higher short-term interest rates over the past three months. Other Revenues. For the three months ended September 30, 2022,rate environment in 2023 compared to same period in 2022. Partially offsetting the increase was primarily due to an $8.5 million increase in other revenues from our LIHTC operations, partially offset by a $3.3 million decrease in prepayment fees. For the nine months ended September 30, 2022, the increaseearnings rates was primarily attributable to: (i) a $29.8 million increase in other revenues from our LIHTC operations, (ii) a $12.6 million increase in research subscription fees, and (iii) a $5.2 million increase in prepayment fees. The increase in other revenues from LIHTC operations was driven by our subsidiary Alliant, which was acquired in the fourth quarter of 2021. The increase in research subscription fees was primarily driven by the addition of revenues from our subsidiary, Zelman, as there was no comparable activity for the first six months of the year. 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 nine months ended September 30, 2022, the increases were primarily the result of increases in salaries and benefits of $7.1 million and $23.4 million, respectively. Additionally, bonus accruals increased by $3.1 million and $10.5 million for the same periods. Salaries and benefits and bonus accruals increased during the three and nine months ended September 30, 2022, primarily due to growth in headcount as a result of the Alliant acquisition that occurred during the fourth quarter of 2021, partially offset by a decrease in the accrual rate due to the Company’s performance in 2022.
Amortization and Depreciation. For the three and nine months ended September 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 have added $101.0 million of MSRs, net of disposals. Due to acquisitions over the past year, we have added $170.8 million in intangible assets to SAM, resulting in increases in amortization expense of $2.1 million and $8.9 million for the three and nine months ended September 30, 2022, respectively.
Other Operating Expenses. For the three months ended September 30, 2022, the increase primarily stemmed from small increases in various expense types. For the nine months ended September 30, 2022, the increase was primarily due to a $7.4 million increase in other operating costs and a $2.9 million increase in professional fees. The increases in other operating costs and professional fees were primarily due to additional operating expenses incurred at subsidiaries acquired in the second half of 2021.escrow balance.
Other Revenues. The decrease was primarily due to a $7.1 million decline in prepayment fees, partially offset by a $3.3 million increase in syndication fees from our LIHTC operations. Prepayment fees declined significantly as a result of rapidly rising interest rates over the past year, which reduces both the volume of loans prepaying and the amount of prepayment fees we receive on loans that have prepaid. We expect this trend of a decline in the amount of prepayment fees to continue for the foreseeable future. Syndication fees from our LIHTC operations increased due to a higher volume of capital syndicated into our LIHTC funds (as shown above in Key Volume and Performance Metrics). We earn a negotiated fee as capital is called and deployed (“syndicated”) in our LIHTC funds. Expenses Personnel. The decrease was primarily the result of a decrease in the accrual of subjective bonuses and stock compensation expense of $2.4 million related to our financial performance. Partially offsetting this decrease was a $1.0 million increase in salaries and benefits related to a small increase in average headcount. Provision (benefit) for credit losses. The benefits for credit losses were primarily due to the impact of updating our historical loss rate factor that is based on a 10-year rolling period in both 2023 and 2022. The updates resulted in the loss data from earlier periods within the historical lookback period falling off and replaced with a period with significantly lower loss data, resulting in the historical loss rate decreasing by 0.6 basis points for both the three months ended March 31, 2023 and 2022. During 2023, we also updated the loss rate used in the forecast period from 2.1 basis points as of December 31, 2022 to 2.3 basis points as of March 31, 2023, resulting in the forecast-period loss rate increasing from 1.8 times to 3.8 times the historical loss rate factor reflecting our current expectations of the evolving and uncertain macro-economic conditions facing the commercial real estate lending sector. Interest expense on corporate debt. Interest expense on corporate debt is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s use of that corporate debt. The discussion of our consolidated results above has additional information related to the increase in interest expense on corporate debt. Other Operating Expenses. The decrease primarily stemmed from a $4.4 million write-off of debt premium related to the payoff of fixed-rate debt held by Alliant. The decrease was partially offset by small increases in various other expense types. 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, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity. Non-GAAP Financial Measure A reconciliation of adjusted EBITDA for our SAM segment is presented below. Our segment levelsegment-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 | | | | | | | | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | For the three months ended | | | September 30, | | September 30, | | March 31, | (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | Reconciliation of Net Income to Adjusted EBITDA | Reconciliation of Net Income to Adjusted EBITDA | | | | | | | | | | | | | | | | Net Income | | $ | 36,376 | | $ | 21,422 | | $ | 106,612 | | $ | 71,547 | | $ | 51,084 | | $ | 28,073 | Income tax expense | | | 12,110 | | | 7,040 | | | 33,799 | | | 21,693 | | | 13,104 | | | 7,540 | Interest expense on corporate debt | | | | 9,582 | | | 4,536 | Amortization and depreciation | | | 57,239 | | | 52,388 | | | 170,930 | | | 145,161 | | | 54,010 | | | 54,893 | Provision (benefit) for credit losses | | | 1,218 | | | 1,266 | | | (13,120) | | | (14,380) | | | (10,775) | | | (9,498) | Net write-offs | | | — | | | — | | | — | | | — | | Write off of unamortized premium from corporate debt repayment | | | | (4,420) | | | — | Share-based compensation expense | | | 574 | | | 694 | | | 2,131 | | | 1,912 | | | 390 | | | 692 | Adjusted EBITDA | | $ | 107,517 | | $ | 82,810 | | $ | 300,352 | | $ | 225,933 | | $ | 112,975 | | $ | 86,236 |
The following tables present period-to-period comparisons of the components of SAM adjusted EBITDA for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. ADJUSTED EBITDA – THREE MONTHS SERVICING & ASSET MANAGEMENT | | | | | | | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 1,106 | | $ | 2,109 | | $ | (1,003) | | (48) | % | Servicing fees | | 75,975 | | | 70,628 | | | 5,347 | | 8 | | Investment management fees | | 16,301 | | | 2,564 | | | 13,737 | | 536 | | Net warehouse interest income, loans held for investment | | 1,802 | | | 1,860 | | | (58) | | (3) | | Escrow earnings and other interest income | | 17,760 | | | 1,945 | | | 15,815 | | 813 | | Other revenues | | 21,718 | | | 16,655 | | | 5,063 | | 30 | | Personnel | | (21,102) | | | (9,752) | | | (11,350) | | 116 | | Net write-offs | | — | | | — | | | — | | N/A | | Other operating expenses | | (6,043) | | | (3,199) | | | (2,844) | | 89 | | Adjusted EBITDA | $ | 107,517 | | $ | 82,810 | | $ | 24,707 | | 30 | |
ADJUSTED EBITDA – NINE MONTHS
SERVICING & ASSET MANAGEMENT
| | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Loan origination and debt brokerage fees, net | $ | 2,113 | | $ | 4,582 | | $ | (2,469) | | (54) | % | Servicing fees | | 222,916 | | | 205,658 | | | 17,258 | | 8 | | Investment management fees | | 47,345 | | | 9,115 | | | 38,230 | | 419 | | Net warehouse interest income, loans held for investment | | 4,606 | | | 5,702 | | | (1,096) | | (19) | | Escrow earnings and other interest income | | 26,166 | | | 5,712 | | | 20,454 | | 358 | | Other revenues | | 75,991 | | | 28,312 | | | 47,679 | | 168 | | Personnel | | (60,064) | | | (25,092) | | | (34,972) | | 139 | | Net write-offs | | — | | | — | | | — | | N/A | | Other operating expenses | | (18,721) | | | (8,056) | | | (10,665) | | 132 | | Adjusted EBITDA | $ | 300,352 | | $ | 225,933 | | $ | 74,419 | | 33 | |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
| | | | | | | | | | | | | For the three months ended | | | | | | | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | 2023 | | 2022 | | Change | | Change | | Origination fees | $ | 128 | | $ | 487 | | $ | (359) | | (74) | % | Servicing fees | | 75,766 | | | 72,681 | | | 3,085 | | 4 | | Investment management fees | | 15,173 | | | 14,858 | | | 315 | | 2 | | Net warehouse interest income, loans held for investment | | 1,690 | | | 1,243 | | | 447 | | 36 | | Escrow earnings and other interest income | | 28,824 | | | 1,758 | | | 27,066 | | 1,540 | | Other revenues | | 12,245 | | | 16,210 | | | (3,965) | | (24) | | Personnel | | (14,951) | | | (15,972) | | | 1,021 | | (6) | | Net write-offs | | — | | | — | | | — | | N/A | | Other operating expenses | | (5,900) | | | (5,029) | | | (871) | | 17 | | Adjusted EBITDA | $ | 112,975 | | $ | 86,236 | | $ | 26,739 | | 31 | |
Servicing fees increased due to growth in the average servicing portfolio period over period as a result of loan originations, and an increasepartially offset by a decrease in the average servicing fee rate. Investment management fees increased due to the addition of our LIHTC operations from our acquisition in the fourth quarter of 2021. Escrow earnings and other interest income increased primarily due to the rise in the escrow earnings rate. Other revenues increaseddecreased primarily due to the addition of other revenues from our LIHTC operations, partially offset by a decrease in prepayment fees. Personnel and other operating expenses increased due to growthfees, partially offset by an increase in headcount and operationssyndication fees from the aforementioned acquisition.our LIHTC operations. Nine months ended September 30, 2022 compared to nine months ended September 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 acquired in the fourth quarter of 2021. Escrow earnings and other interest income increased primarily due to the rise in the escrow earnings rate. Other revenues increased primarily due to an increase in prepayment fees and the additions of (i) other revenues from our LIHTC operations and (ii) research subscription fees as there was no comparable activity for the first six months of 2021. Personnel and other operating expenses increased due to growth in headcount and operations from the aforementioned acquisitions.
Corporate FINANCIAL RESULTS – THREE MONTHS CORPORATE | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | | 2023 | | 2022 | | Change | | Change | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | Other interest income | | $ | 369 | | $ | 87 | | $ | 282 | | 324 | % | | $ | 2,100 | | $ | 45 | | $ | 2,055 | | 4,567 | % | Other revenues | | | (2,620) | | | (668) | | | (1,952) | | 292 | | | | (554) | | | 44,089 | | | (44,643) | | (101) | | Total revenues | | $ | (2,251) | | $ | (581) | | $ | (1,670) | | 287 | | | $ | 1,546 | | $ | 44,134 | | $ | (42,588) | | (96) | | | | | | | | | | | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | | | | | | | | | | | | Personnel | | $ | 9,403 | | $ | 19,845 | | $ | (10,442) | | (53) | % | | $ | 12,810 | | $ | 22,558 | | $ | (9,748) | | (43) | % | Amortization and depreciation | | | 1,655 | | | 1,093 | | | 562 | | 51 | | | | 1,770 | | | 1,203 | | | 567 | | 47 | | Interest expense on corporate debt | | | 9,306 | | | 1,766 | | | 7,540 | | 427 | | | | 1,423 | | | 346 | | | 1,077 | | 311 | | Other operating expenses | | | 21,885 | | | 17,009 | | | 4,876 | | 29 | | | | 16,939 | | | 19,984 | | | (3,045) | | (15) | | Total expenses | | $ | 42,249 | | $ | 39,713 | | $ | 2,536 | | 6 | | | $ | 32,942 | | $ | 44,091 | | $ | (11,149) | | (25) | | Income from operations | | $ | (44,500) | | $ | (40,294) | | $ | (4,206) | | 10 | | | $ | (31,396) | | $ | 43 | | $ | (31,439) | | (73,114) | | Income tax expense (benefit) | | | (17,329) | | | (9,747) | | | (7,582) | | 78 | | | | (6,473) | | | 9 | | | (6,482) | | (72,022) | | Net income | | $ | (27,171) | | $ | (30,547) | | $ | 3,376 | | (11) | | | $ | (24,923) | | $ | 34 | | $ | (24,957) | | (73,403) | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA | | $ | (32,646) | | $ | (31,668) | | $ | (978) | | 3 | % | | $ | (26,313) | | $ | (32,134) | | $ | 5,821 | | (18) | % |
FINANCIAL RESULTS – NINE MONTHSRevenues
CORPORATE
Other interest income. | | | | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | | 2022 | | 2021 | | Change | | Change | | Revenues | | | | | | | | | | | | | Other interest income | | $ | 517 | | $ | 260 | | $ | 257 | | 99 | % | Other revenues | | | 41,641 | | | (1,658) | | | 43,299 | | (2,612) | | Total revenues | | $ | 42,158 | | $ | (1,398) | | $ | 43,556 | | (3,116) | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | Personnel | | $ | 43,794 | | $ | 48,294 | | $ | (4,500) | | (9) | % | Amortization and depreciation | | | 4,409 | | | 3,162 | | | 1,247 | | 39 | | Interest expense on corporate debt | | | 22,123 | | | 5,291 | | | 16,832 | | 318 | | Other operating expenses | | | 66,922 | | | 42,487 | | | 24,435 | | 58 | | Total expenses | | $ | 137,248 | | $ | 99,234 | | $ | 38,014 | | 38 | | Income from operations | | $ | (95,090) | | $ | (100,632) | | $ | 5,542 | | (6) | | Income tax expense (benefit) | | | (29,378) | | | (23,396) | | | (5,982) | | 26 | | Net income | | $ | (65,712) | | $ | (77,236) | | $ | 11,524 | | (15) | | | | | | | | | | | | | | | Adjusted EBITDA | | $ | (96,137) | | $ | (78,955) | | $ | (17,182) | | 22 | % |
Revenues The increase was due to an increase in the interest rates for which we earn on our cash deposits held by our Corporate segment.
Other Revenues. For the nine months ended September 30, 2022, tThe increasedecrease was primarily due to the $39.6 million Apprise revaluation gain, which was a one-time transaction recognized in the first quarter of 2022. As part of our acquisition of GeoPhy, we acquired its 50% interest in Apprise. The revaluation of our existing 50% ownership interest with2022 and a carrying value of $18.9$5.7 million to a fair value of $58.5 million resulted in a $39.6 million gain. The remaining increase was primarily due to a $7.0 million increasedecrease in income from our other equity-method investments, mostly related to the first quarter of 2022. Partially offsetting the increase in Other revenues was a $3.0 million decrease in investment income from the Company’s deferred compensation plan. investments. Expenses Personnel. For the three months ended September 30, 2022, theThe decrease was primarily the result of a $6.2$7.9 million decrease to the accrual for performance-based and subjective bonuses, and a $4.9$4.2 million decrease in stock compensation expense related to the Company’sour performance share plan, partially offset by a slight increase in salaries and benefitsboth due to an increase incompany performance. Partially offsetting the average headcount. For the nine months ended September 30, 2022, the decreasedecreases was primarily the result of (i) a $6.3 million decrease to the accrual for subjective bonuses, (ii) a $3.0 million decrease in compensation expense related to the Company’s deferred compensation plan, and (iii) a $1.2 million decrease in stock compensation expense related to the Company’s performance share plan, partially offset by a $5.5 millionan increase in salaries and benefits due to an increase in the average headcount.
Interest expense on corporate debt. For the threeInterest expense on corporate debt is determined at a consolidated corporate level and nine months ended September 30, 2022, the increases were primarily driven by the doubling in the sizeallocated to each segment proportionally based on each segment’s use of that corporate debt. The discussion of our corporate debt duringconsolidated results above has additional information related to the fourth quarter of 2021, an increase in the interest rate on our corporate debt as the lock on our floating interest rate expired, and an increasein-crease in interest expense related to a note payable at our subsidiary, Alliant, which we assumed in the fourth quarter of 2021.on corporate debt. Other Operating Expenses. For the three months ended September 30, 2022, the increaseThe decrease was primarily driven by:by a $3.6 million decrease in professional fees and decreases in various other operating expenses, partially offset by a $2.3 million increase in office expenses and small increasesexpenses. The decrease in other expenses including travel and entertainment and marketingprofessional fees was due to elevated professional fees in 2022 related to acquisition costs. The increasesdecrease in other expenses were attributable to the growthcost reduction efforts as a result of the Company, especially from acquired subsidiaries. For the nine months ended September 30, 2022, the increase was primarily driven by: (i) a $6.4 million increase in professional fees largely due to increases in legal and other professional fees related to our acquisitions and growthfinancial performance.
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, except for significant, one-time tax activities, which are allocated entirely to the segment impacted by the tax activity.
Non-GAAP Financial Measure A reconciliation of adjusted EBITDA for our Corporate segment is presented below. Our segment levelsegment-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 | | | | | | | | | | | | | | | | | | | | | For the three months ended | | For the nine months ended | | For the three months ended | | | September 30, | | September 30, | | March 31, | (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | Reconciliation of Net Income to Adjusted EBITDA | Reconciliation of Net Income to Adjusted EBITDA | | | | | | | | | | | | | | | | Net Income | | $ | (27,171) | | $ | (30,547) | | $ | (65,712) | | $ | (77,236) | | $ | (24,923) | | $ | 34 | Income tax expense (benefit) | | | (17,329) | | | (9,747) | | | (29,378) | | | (23,396) | | | (6,473) | | | 9 | Interest expense on corporate debt | | | 9,306 | | | 1,766 | | | 22,123 | | | 5,291 | | | 1,423 | | | 346 | Amortization and depreciation | | | 1,655 | | | 1,093 | | | 4,409 | | | 3,162 | | | 1,770 | | | 1,203 | Share-based compensation expense | | | 893 | | | 5,767 | | | 12,062 | | | 13,224 | | | 1,890 | | | 5,915 | Gain from revaluation of previously held equity-method investment | | | — | | | — | | | (39,641) | | | — | | | — | | | (39,641) | Adjusted EBITDA | | $ | (32,646) | | $ | (31,668) | | $ | (96,137) | | $ | (78,955) | | $ | (26,313) | | $ | (32,134) |
The following tables present period-to-period comparisons of the components of Corporate adjusted EBITDA for the three and nine months ended September 30, 2022March 31, 2023 and 2021.2022. ADJUSTED EBITDA – THREE MONTHS CORPORATE | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended | | | | | | | For the three months ended | | | | | | | | September 30, | | Dollar | | Percentage | | March 31, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | 2023 | | 2022 | | Change | | Change | | Other interest income | | 369 | | | 87 | | | 282 | | 324 | % | $ | 2,100 | | $ | 45 | | $ | 2,055 | | 4,567 | % | Other revenues | | (2,620) | | | (668) | | | (1,952) | | 292 | | | (554) | | | 4,448 | | | (5,002) | | (112) | | Personnel | | (8,510) | | | (14,078) | | | 5,568 | | (40) | | | (10,920) | | | (16,643) | | | 5,723 | | (34) | | Other operating expenses | | (21,885) | | | (17,009) | | | (4,876) | | 29 | | | (16,939) | | | (19,984) | | | 3,045 | | (15) | | Adjusted EBITDA | $ | (32,646) | | $ | (31,668) | | $ | (978) | | 3 | | $ | (26,313) | | $ | (32,134) | | $ | 5,821 | | (18) | |
ADJUSTED EBITDA – NINE MONTHS
CORPORATE
| | | | | | | | | | | | | For the nine months ended | | | | | | | | September 30, | | Dollar | | Percentage | | (dollars in thousands) | 2022 | | 2021 | | Change | | Change | | Other interest income | | 517 | | | 260 | | | 257 | | 99 | % | Other revenues | | 2,000 | | | (1,658) | | | 3,658 | | (221) | | Personnel | | (31,732) | | | (35,070) | | | 3,338 | | (10) | | Other operating expenses | | (66,922) | | | (42,487) | | | (24,435) | | 58 | | Adjusted EBITDA | $ | (96,137) | | $ | (78,955) | | $ | (17,182) | | 22 | | | | | | | | | | | | | |
Three months ended September 30, 2022 comparedOther interest income increased primarily due to three months ended September 30, 2021
an increase in the interest rates on our cash deposits. Other revenues decreased due to a decrease in income from equity-method investments. 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 slightly 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 office costs from our acquisitions.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Other revenues increased primarily due to our equity method investments generating income in 2022 compared to losses in 2021. The decrease in personnel expense was primarily due to decreases in deferred compensation costs and the accrual for performance-based and subjective bonuses, partially offset by increased salaries and benefits resulting from increasesan increase in average headcount. Other operating expenses increaseddecreased as a result of the overall growth of the Company over the past year and from increased office costs anda decline in professional fees resulting from our acquisitions.and other operating expenses, partially offset by an increase in office expenses.
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, and other equity-method investments; (v) fund investments in properties to be syndicated to LIHTC investment funds that we will asset-manage; (vi) make payments related to earnouts from acquisitions, (vii) meet working capital needs to support our day-to-day operations, including debt service payments, joint venture development partnerships contributions, servicing advances and payments for salaries, commissions, and income taxes,; and (viii) meet working capital to satisfy collateral requirements for our Fannie Mae DUS risk-sharing obligations and to meet the operational liquidity requirements of Fannie Mae, Freddie Mac, HUD, Ginnie Mae, and our warehouse facility lenders. Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate our servicing authority for all or some of the portfolio if, at any time, it determines that our financial condition is not adequate to support our obligations under the DUS agreement. We are required to maintain acceptable net worth as defined in the standards, and we satisfied the requirements as of September 30, 2022.March 31, 2023. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing. As of September 30, 2022,March 31, 2023, the net worth requirement was $275.0$287.3 million, and our net worth was $646.0 million,$1.0 billion, as measured at our wholly-owned operating subsidiary, Walker & Dunlop, LLC. As of September 30, 2022,March 31, 2023, we were required to maintain at least $54.7$57.2 million of liquid assets to meet our operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, Ginnie Mae and our warehouse facility lenders. As of September 30, 2022,March 31, 2023, we had operational liquidity of $131.9$164.5 million, as measured at our wholly-owned operating subsidiary, Walker & Dunlop, LLC. We paid a cash dividend of $0.60$0.63 per share forduring the thirdfirst quarter of 2022,2023, which is 20%5% higher than the quarterly dividend paid in the thirdfirst quarter of 2021.2022. On November 8, 2022,May 3, 2023, the Company’s Board of Directors declared a dividend of $0.60$0.63 per share for the thirdsecond quarter of 2022.2023. The dividend will be paid on December 9, 2022June 2, 2023 to all holders of record of our restricted and unrestricted common stock as of November 25, 2022.May 18, 2023. Over the past three years, we have returned $216.4 million to investors through the repurchase of 0.6 million shares of our common stock under share repurchase programs for a cost of $37.2 million and cash dividend payments of $179.2 million. Additionally, we have invested $655.1 million in acquisitions, $300.0 million of which was financed by an increase in our Term Loan (as defined below). On occasion, we may use cash to fully fund some loans held for investment or loans held for sale instead of using our warehouse lines. As of September 30, 2022,March 31, 2023, we did not fully fund any such loans.funded $3.5 million of loans held for investment. We continually seek opportunities to complete additional acquisitions if we believe the economics are favorable.
In February 2022,2023, our Board of Directors approved a stock repurchase program that permits the repurchase of up to $75.0 million of shares of our common stock over a 12-month period beginning February 13, 2022.23, 2023. Through September 30, 2022March 31, 2023 we have not repurchased 109 thousandany shares under the 20222023 stock repurchase program and have $63.9$75.0 million of remaining capacity under that program. Historically, our cash flows from operations and warehouse facilities have been sufficient to enable us to meet our short-term liquidity needs and other funding requirements. We believe that cash flows from operations will continue to be sufficient for us to meet our current obligations for the foreseeable future. We also maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. The vast majority of our cash deposits are concentrated in a few national banks. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, such as those bank failures that occurred in March and April of 2023, may lead to short-term liquidity constraints as we may not be able to quickly access our cash deposits. During the first quarter of 2023, we had an immaterial amount of cash deposited with a financial institution that was taken into receivership. We transferred all of the cash at the failed bank to our other bank accounts and suffered no losses on our deposits. The bank failures that occurred during the first quarter of 2023 did not have a significant direct or indirect impact on our operations or financial results. In particular, we have not experienced (i) any counterparty nonperformance, including with derivative or loan commitment counterparties, (ii) changes to our derivative contracts or any outstanding derivatives, (iii) impacts to our debt covenants with our lenders, or (iv) decrease in the amount of our borrowing capacity. Additionally, we do not hold any investments that are exposed to the banking failures, do not believe we will be required to sell any investments as a result of the banking failures, and do not have any long-lived assets or intangible assets that may be impaired. 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 loan and cash held in collection accounts to be used to fund the repayment of the Alliant note payable.loan. We are generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program, our only off- balanceoff-balance sheet arrangement. We are required to secure this obligation by assigning collateral to Fannie Mae. We meet this obligation by assigning pledged securities to Fannie Mae. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires collateral for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Collateral held in the form of money market funds holding U.S. Treasuries is discounted 5%, and Agency MBS are discounted 4% for purposes of calculating compliance with the collateral requirements. As of September 30, 2022,March 31, 2023, we held substantially all of our restricted liquidity in Agency MBS in the aggregate amount of $138.8$139.3 million. Additionally, the majority of the loans for which we have risk-sharing are Tier 2 loans. We fund any growth in our Fannie Mae required operational liquidity and collateral requirements from our working capital.
We are in compliance with the September 30, 2022March 31, 2023 collateral requirements as outlined above. As of September 30, 2022,March 31, 2023, reserve requirements for the September 30, 2022March 31, 2023 DUS loan portfolio will require us to fund $71.8$75.3 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within our at-risk portfolio. Fannie Mae has assessed the DUS Capital Standards in the past and may make changes to these standards in the future. We generate sufficient cash flows from our operations to meet these capital standards and do not expect any future changes to have a material impact on our future operations; however, any future changes to collateral requirements may adversely impact our available cash. Under the provisions of the DUS agreement, we must also maintain a certain level of liquid assets referred to as the operational and unrestricted portions of the required reserves each year. We satisfied these requirements as of September 30, 2022.March 31, 2023. Sources of Liquidity: Warehouse Facilities and Notes Payable Warehouse Facilities We utilizeuse a combination of warehouse facilities and notes payable to provide funding for our operations. We utilizeuse warehouse facilities to fund our Agency Lending and Interim Loan Program, and LIHTC operations.Program. Our ability to originate Agency mortgage loans and loans held for investments depends upon our ability to secure and maintain these types of financing agreements on acceptable terms. For a detailed description of the terms of each warehouse agreement, including the affirmative and negative covenants, refer to “Warehouse Facilities” in NOTE 6 in the consolidated financial statements in our 20212022 Form 10-K, as updated in NOTE 6 in the condensed consolidated financial statements in this Form 10-Q. Notes Payable We have a senior secured credit agreement (the “Credit Agreement”) that provides for a $600 million term loan (the “Term Loan”) that bears interest at Adjusted Term SOFR plus 225 basis points with a floor of 50 basis points and has a stated maturity date of December 16, 2028 (or, if earlier, the date of acceleration of the Term Loan pursuant to the term of the Credit Agreement). At any time, On January 12, 2023, we may also electentered into a lender joinder agreement and amendment to request one or morethe Credit Agreement that provided for an incremental term loan commitments not(“Incremental Term Loan”) with a principal amount of $200.0 million, modified the ratio thresholds related to exceedmandatory prepayments, and included a provision that allows additional types of indebtedness. The Incremental Term Loan was issued at a 2.0% discount and contains similar repayment terms as the lesserTerm Loan. The Incremental Term Loan bears interest at Adjusted Term SOFR plus 300 basis points and matures on December 16, 2028. We are obligated to make principal payments on the Incremental Term Loan in consecutive quarterly installments equal to 0.25% of $230the aggregate original principal amount of the Incremental Term Loan on the last business day of each March, June, September, and December, beginning on June 30, 2023. We used approximately $115.9 million of the proceeds to pay off the Alliant note payable and 100%related accrued interest and other fees of trailing four-quarter Consolidated Adjusted EBITDA, provided that total indebtedness would not cause the leverage ratio to exceed 3.00 to 1.00.a subsidiary. As of September 30, 2022,March 31, 2023, the aggregate outstanding principal balance of the original Term Loan and Incremental Term Loan (“Corporate Debt”) was $595.5$792.5 million. The note payable and the warehouse facilities are senior obligations of the Company. As of September 30, 2022, we were in compliance with all covenants related to the Credit Agreement. 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 20212022 Form 10-K. There have been no changes The note payable and the warehouse facilities are senior obligations of the Company. As of March 31, 2023, we were in compliance with all covenants related to the Credit Agreement in 2022.Agreement. We have a note payable through our wholly-owned subsidiary Alliant, which has an outstanding balance of $120.2 million as of September 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. | | | | | | | | | | | | | | | | | September 30, | | | March 31, | | (dollars in thousands) | | 2022 | | 2021 | | | 2023 | | 2022 | | Key Credit Metrics | | | | | | | | | | | | | | | Risk-sharing servicing portfolio: | | | | | | | | | | | | | | | Fannie Mae Full Risk | | $ | 49,241,243 | | $ | 44,069,885 | | | $ | 50,713,349 | | $ | 46,194,756 | | Fannie Mae Modified Risk | | | 9,177,094 | | | 8,235,475 | | | | 9,170,127 | | | 7,794,710 | | Freddie Mac Modified Risk | | | 23,615 | | | 36,883 | | | | 23,515 | | | 23,715 | | Total risk-sharing servicing portfolio | | $ | 58,441,952 | | $ | 52,342,243 | | | $ | 59,906,991 | | $ | 54,013,181 | | | | | | | | | | | | | | | | | Non-risk-sharing servicing portfolio: | | | | | | | | | | | | | | | Fannie Mae No Risk | | $ | 8,109 | | $ | 12,593 | | | $ | 6,968 | | $ | 11,084 | | Freddie Mac No Risk | | | 37,217,856 | | | 38,002,131 | | | | 38,161,283 | | | 36,941,470 | | GNMA - HUD No Risk | | | 9,634,111 | | | 9,894,893 | | | | 10,027,781 | | | 9,954,262 | | Brokered | | | 15,224,581 | | | 13,429,801 | | | | 16,285,391 | | | 15,115,619 | | Total non-risk-sharing servicing portfolio | | $ | 62,084,657 | | $ | 61,339,418 | | | $ | 64,481,423 | | $ | 62,022,435 | | Total loans serviced for others | | $ | 120,526,609 | | $ | 113,681,661 | | | $ | 124,388,414 | | $ | 116,035,616 | | Interim loans (full risk) servicing portfolio | | | 251,815 | | | 238,713 | | | | 187,505 | | | 221,649 | | Total servicing portfolio unpaid principal balance | | $ | 120,778,424 | | $ | 113,920,374 | | | $ | 124,575,919 | | $ | 116,257,265 | | | | | | | | | | | | | | | | | Interim Program JV Managed Loans (1) | | | 900,037 | | | 918,518 | | | | 894,829 | | | 930,296 | | | | | | | | | | | | | | | | | At risk servicing portfolio (2) | | $ | 53,430,615 | | $ | 48,209,532 | | | $ | 54,898,461 | | $ | 50,176,521 | | Maximum exposure to at risk portfolio (3) | | | 10,826,654 | | | 9,784,054 | | | | 11,132,473 | | | 10,178,454 | | Defaulted loans | | | 78,203 | | | 48,481 | | | | 36,983 | | | 78,659 | | | | | | | | | | | | | | | | | Defaulted loans as a percentage of the at-risk portfolio | | | 0.15 | % | | 0.10 | % | | | 0.07 | % | | 0.16 | % | Allowance for risk-sharing as a percentage of the at-risk portfolio | | | 0.09 | | | 0.13 | | | | 0.06 | | | 0.11 | | Allowance for risk-sharing as a percentage of maximum exposure | | | 0.46 | | | 0.63 | | | | 0.30 | | | 0.52 | |
| (1) | As of September 30,March 31, 2023 and 2022, and 2021, this balance consists entirely of Interim Program JV managed loans. We indirectly share in a portion of the risk of loss associated with Interim Program JV managed loans through our 15% equity ownership in the Interim Program JV. We have no exposure to risk of loss for the loans serviced directly for the Interim Program JV partner. The balance of this line is included as a component of assets under management in the Supplemental Operating Data table above. |
| (2) | At-risk servicing portfolio is defined as the balance of Fannie Mae DUS loans subject to the risk-sharing formula described below, as well as a small number of Freddie Mac loans on which we share in the risk of loss. Use of the at-risk portfolio provides for comparability of the full risk-sharing and modified risk-sharing loans because the provision and allowance for risk-sharing obligations are based on the at-risk balances of the associated loans. Accordingly, we have presented the key statistics as a percentage of the at-risk portfolio. |
For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at-risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans. | (3) | Represents the maximum loss we would incur under our risk-sharing obligations if all of the loans we service, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. The maximum exposure is not representative of the actual loss we would incur. |
Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described in the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan. | | | | Risk-Sharing Losses | | Percentage Absorbed by Us | | First 5% of UPB at the time of loss settlement | | 100% | | Next 20% of UPB at the time of loss settlement | | 25% | | Losses above 25% of UPB at the time of loss settlement | | 10% | | Maximum loss | | 20% of origination UPB | |
Fannie Mae can double or triple our risk-sharing obligation if the loan does not meet specific underwriting criteria or if a loan defaults within 12 months of its sale to Fannie Mae. We may request modified risk-sharing at the time of origination, which reduces our potential risk-sharing obligation from the levels described above. We use several techniques to manage our risk exposure under the Fannie Mae DUS risk-sharing program. These techniques include maintaining a strong underwriting and approval process, evaluating and modifying our underwriting criteria given the underlying multifamily housing market fundamentals, limiting our geographic market and borrower exposures, and electing the modified risk-sharing option under the Fannie Mae DUS program. The “Business”Segments - Capital Markets section of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”1. Business” in our 2022 Form 10-K 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. The calculated CECL reserve for the Company’s $52.1$54.5 billion at-risk Fannie Mae servicing portfolio as of September 30, 2022March 31, 2023 was $38.9$28.7 million compared to $52.3$39.7 million as of December 31, 2021.2022. The significant decrease in the CECL reserve was principally related to a reduction in our historical loss rate factor, used for both the three and nine months ended September 30,which decreased from 1.2 basis points as of December 31, 2022 and the forecast-period loss rate for the three months ended June 30, 2022 and September 30, 2022.to 0.6 basis points as of March 31, 2023 as a year with significant losses in our 10-year lookback period was replaced with a year with significantly fewer losses. As of September 30, 2022, threeMarch 31, 2023, two at-risk loans with an aggregate UPB of $78.2$37.0 million were in default compared to twothree at-risk loans with an aggregated UPB of $48.5$78.7 million as of September 30, 2021.March 31, 2022. The collateral-based reserve on defaulted loans was $10.8$4.4 million and $7.6$10.8 million as of September 30,March 31, 2023 and March 31, 2022, and September 30, 2021, respectively. We had a provisionbenefit for risk-sharing obligations of $1.2$11.0 million for the three months ended September 30, 2022March 31, 2023 compared to a benefit for risk-sharing obligations of $1.3$9.4 million for the three months ended September 30, 2021. We had a benefit for risk-sharing obligations of $13.0 million for the nine months ended September 30, 2022 compared to a benefit for risk-sharing obligations of $13.7 million for the nine months ended September 30, 2021.March 31, 2022. 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 September 30, 2022.March 31, 2023. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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. Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows generally track the effective Federal Funds Rate (“EFFR”). The EFFR was 308483 basis points and six33 basis points as of September 30,March 31, 2023 and 2022, and 2021, respectively. The following table shows the impact on our annual escrow earnings due to a 100-basis point increase and decrease in EFFR based on our escrow balances outstanding at each period end. A portion of these changes in earnings as a result of a 100-basis point increase in the EFFR would be delayed several months due to the negotiated nature of some of our escrow arrangements. | | | | | | | | | | | | | | | | | As of September 30, | | | As of March 31, | | Change in annual escrow earnings due to: (in thousands) | | 2022 | | 2021 | | | 2023 | | 2022 | | 100 basis point increase in EFFR | | $ | 30,790 | | $ | 29,824 | | | $ | 22,069 | | $ | 24,807 | | 100 basis point decrease in EFFR (1) | | | (30,628) | | | (2,357) | | | | (22,009) | | | (4,543) | |
The borrowing cost of our warehouse facilities used to fund loans held for sale, loans held for investment, and investments in tax credit equity is based on LIBOR or Adjusted Term Secured Overnight Financing Rate (“SOFR”). The base SOFR was 298487 basis points as of September 30, 2022.March 31, 2023. The 30-day LIBOR as of September 30, 2021March 31, 2022 was eight45 basis points. The interest income on our loans held for investment is based on LIBOR or SOFR. The LIBOR or SOFR reset date for loans held for investment is the same date as the LIBOR or SOFR reset date for the corresponding warehouse facility. The following table shows the impact on our annual net warehouse interest income due to a 100-basis point increase and decrease in LIBOR or Adjusted Term SOFR, based on our warehouse borrowings outstanding at each period end. The changes shown below do not reflect an increase or decrease in the interest rate earned on our loans held for sale. | | | | | | | | | | | | | | | | | As of September 30, | | | As of March 31, | | Change in annual net warehouse interest income due to: (in thousands) | | 2022 | | 2021 | | | 2023 | | 2022 | | 100 basis point increase in SOFR or 30-day LIBOR | | $ | (23,630) | | $ | (26,212) | | | $ | (9,110) | | $ | (8,929) | | 100 basis point decrease in SOFR or 30-day LIBOR (2) | | | 23,630 | | | 1,684 | | | | 9,110 | | | 3,295 | |
Our Term LoanCorporate Debt is based on Adjusted Term SOFR as of September 30, 2022.March 31, 2023. In December 2021, we fully paid the prior $300 million term loan agreement, which was based on interest at 30-day LIBOR and entered into a $600 million note payable with an interest based Adjusted Term SOFR and a SOFR floor of 50 basis points.January 2023, our Corporate Debt increased by $200 million. The following table shows the impact on our annual earnings due to a 100-basis point increase and decrease in SOFR and/or 30-day LIBOR as of September 30,March 31, 2023 and March 31, 2022, and September 30, 2021, respectively, based on our current and previous notesthe note payable balance outstanding at each period end. The Alliant note payable isas of March 31, 2022 was a fixed-rate debt;note; therefore, there iswas no impact to our earnings related to this debt when interest rates change.change as of March 31, 2022. | | | | | | | | | | | | | | | | | As of September 30, | | | As of March 31, | | Change in annual income from operations due to: (in thousands) | | 2022 | | 2021 | | | 2023 | | 2022 | | 100 basis point increase in SOFR or 30-day LIBOR | | $ | (5,955) | | $ | (2,925) | | | 100 basis point decrease in SOFR or 30-day LIBOR (2) | | | 5,955 | | | 235 | | | 100 basis point increase in SOFR | | | $ | (7,925) | | $ | (4,728) | | 100 basis point decrease in SOFR(2) | | | | 7,925 | | | — | |
| (1) | The decrease is limited to EFFR in cases where the2022 since a 100 basis pointbasis-point decrease resultedwould result in a negative effective interest rate. |
| (2) | The decrease as of September 30, 2021March 31, 2022 is limited to 30-day LIBOR or SOFR as of September 30, 2021,March 31, 2022, as it wasthey were less than 100 basis points, or the interest rate floor.floor, if applicable |
Market Value Risk The fair value of our MSRs is subject to market-value risk. A 100-basis point increase or decrease in the weighted average discount rate would decrease or increase, respectively, the fair value of our MSRs by approximately $40.6$43.4 million as of September 30, 2022March 31, 2023 compared to $37.2$39.1 million as of September 30, 2021.March 31, 2022. Our Fannie Mae and Freddie Mac servicing engagements provide for prepayment fees inloans include economic deterrents that reduce the eventrisk of a voluntaryloan prepayment prior to the expiration of the prepayment protection period.period, including prepayment premiums, loan defeasance, or yield maintenance fees. These prepayment protections generally extend the duration of a loan compared to a loan without similar protections. If a loan is prepaid prior to the expiration of the prepayment protection period, and the customer is obligated to incur a prepayment premium, our servicing contacts with Fannie Mae and Freddie Mac allow us to receive a portion of the prepayment premium. Our servicing contractscontract with institutional investors and HUD do not require them to provide us with prepayment fees. As of both September 30,March 31, 2023 and 2022, 90% and 2021, 89%85% of the loans for which we earn servicing fees are protected from the risk of prepayment through prepayment provisions.provisions, respectively. Given this significant level of prepayment protection, we do not hedge our servicing portfolio for prepayment risk. As interest rates have risen rapidly over the past 12 months, we have experienced a significant reduction in prepayment activity within our loan servicing portfolio, which in turn has significantly reduced the volume and amount of prepayment premium revenues we receive. London Interbank Offered Rate (“LIBOR”) Transition In the first quarter of 2021, the United Kingdom’s Financial Conduct Authority, the regulator for the administration of LIBOR, announced specific dates for its intention to stop publishing LIBOR rates, including the 30-day LIBOR (our primary reference rate) which is scheduled for June 30, 2023. It is expected thatOur legacy GSE LIBOR-based loans will transition to Secured Overnight Financing Rate (“SOFR”) on or before June 30,effective July 1, 2023. With respect toAt the loans we underwrite and service,direction of the GSEs, we have been working closelyprovided formal notice to all impacted borrowers. A portion of our non-GSE book of LIBOR-based loans converted to SOFR effective April 1, 2023, with the GSEs on this matter through our participation on subcommitteesremaining balance expected to covert between May 1, 2023 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.July 1, 2023. 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 fiveall but one 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 September 30, 2022March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have integrated and continue to enhance the accounting processes and internal control over financial reporting for Alliant and its affiliates into our internal control over financial reporting environment.
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 20212022 Form 10-K descriptions of certain risks and uncertainties that could affect our business, future performance, or financial condition (the “Risk Factors”). ThereExcept as described below, there have been no material changes from the disclosures provided in the 20212022 Form 10-K with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to the Company’s stock. The failure of banks or other major financial institutions, or sustained financial market illiquidity, could adversely affect our and our clients’ businesses and results of operations. The failure of certain financial institutions may increase the possibility of a sustained deterioration of financial market liquidity. The failure of a bank (or banks) with which we and/or our clients have a commercial relationship could adversely affect, among other things, our and/or our clients’ ability to pursue key initiatives, including by affecting our ability to borrow from financial institutions on favorable terms. In the event our client has a commercial relationship with a bank that has failed or is otherwise distressed, such client may experience delays or other issues in meeting certain debt service, other funding or credit support obligations or consummating transactions with us. Additionally, if a client has a commercial relationship with a bank that has failed or is otherwise distressed, the client or sponsor may experience issues receiving financial assistance to support their operations or consummate transactions, to the detriment of their business, financial condition and/or results of operations, which, in turn, may have a material adverse effect on our business, results of operations, liquidity, or financial condition. We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance. We maintain substantially all of our cash and cash equivalents in domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks, and certain of our cash deposits exceed FDIC insurance limits. Market conditions can impact the viability of these institutions, and bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of FDIC insurance limits will be backstopped by the U.S. government, or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis. 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 September 30, 2022,March 31, 2023, we purchased 14185 thousand shares to satisfy grantee tax withholding obligations on share-vesting events. During the first quarter of 2022,2023, the Company’s Board of Directors approved a share 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, 2022.23, 2023. During the quarter ended September 30, 2022March 31, 2023 we did not repurchase any shares under this share repurchase program. The Company had $63.9$75.0 million of authorized share repurchase capacity remaining as of September 30, 2022.March 31, 2023. The following table provides information regarding common stock repurchases for the quarter ended September 30, 2022:March 31, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Number of | | Approximate | | | | | | | Total Number of | | Approximate | | | | | | | | | Shares Purchased as | | Dollar Value | | | | | | | | Shares Purchased as | | Dollar Value | | | | Total Number | | Average | | Part of Publicly | | of Shares that May | | | Total Number | | Average | | Part of Publicly | | of Shares that May | | | | of Shares | | Price Paid | | Announced Plans | | Yet Be Purchased Under | | | of Shares | | Price Paid | | Announced Plans | | Yet Be Purchased Under | | Period | | Purchased | | per Share | | or Programs | | the Plans or Programs | | | Purchased | | per Share | | or Programs | | the Plans or Programs | | July 1-31, 2022 | | 1,204 | | $ | 98.13 | | — | | | 63,901,743 | | | August 1-31, 2022 | | 4,720 | | | 113.20 | | — | | | 63,901,743 | | | September 1-30, 2022 | | 7,975 | | | 98.24 | | — | | | 63,901,743 | | | 3rd Quarter | | 13,899 | | $ | 103.31 | | — | | | | | | | | | | | | | | | | | | | January 1-31, 2023 | | | 5,934 | | $ | 41.99 | | — | | $ | 75,000,000 | | February 1-28, 2023 | | | 152,346 | | | 96.86 | | — | | | 75,000,000 | | March 1-31, 2023 | | | 26,544 | | | 79.47 | | — | | $ | 75,000,000 | | 1st Quarter | | | 184,824 | | $ | 92.60 | | — | | | | |
Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. Item 6. Exhibits (a) Exhibits: Item 6. Exhibits
(a) Exhibits:
2.1 | | Contribution Agreement, dated as of October 29, 2010, by and among Mallory Walker, Howard W. Smith, William M. Walker, Taylor Walker, Richard C. Warner, Donna Mighty, Michael Alinksy, Edward B. Hermes, Deborah A. Wilson and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 2.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 1, 2010) | 2.2 | | Contribution Agreement, dated as of October 29, 2010, between Column Guaranteed LLC and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 2.2 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 1, 2010) | 2.3 | | Amendment No. 1 to Contribution Agreement, dated as of December 13, 2010, by and between Walker & Dunlop, Inc. and Column Guaranteed LLC (incorporated by reference to Exhibit 2.3 to Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 13, 2010) | 2.4 | | Purchase Agreement, dated June 7, 2012, by and among Walker & Dunlop, Inc., Walker & Dunlop, LLC, CW Financial Services LLC and CWCapital LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K/A filed on June 15, 2012) | 2.5 | | Purchase Agreement, dated as of August 30, 2021, by and among Walker & Dunlop, Inc., WDAAC, LLC, Alliant Company, LLC, Alliant Capital, Ltd., Alliant Fund Asset Holdings, LLC, Alliant Asset Management Company, LLC, Alliant Strategic Investments II, LLC, ADC Communities, LLC, ADC Communities II, LLC, AFAH Finance, LLC, Alliant Fund Acquisitions, LLC, Vista Ridge 1, LLC, Alliant, Inc., Alliant ADC, Inc., Palm Drive Associates, LLC, and Shawn Horwitz (incorporated by reference to Exhibit 2.5 of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021) | 2.6 | | Share Purchase Agreement dated February 4, 2022 by and among Walker & Dunlop, Inc., WD-GTE, LLC, GeoPhy B.V. (“GeoPhy”), the several persons and entities constituting the holders of all of GeoPhy’s issued and outstanding shares of capital stock, and Shareholder Representative Services LLC, as representative of the Shareholders (incorporated by reference to Exhibit 2.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021) | 3.1 | | Articles of Amendment and Restatement of Walker & Dunlop, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 1, 2010) | 3.2 | | Amended and Restated Bylaws of Walker & Dunlop, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 8, 2018)February 10, 2023) | 4.1 | | Specimen Common Stock Certificate of Walker & Dunlop, Inc. (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on September 30, 2010) | 4.2 | | Registration Rights Agreement, dated December 20, 2010, by and among Walker & Dunlop, Inc. and Mallory Walker, Taylor Walker, William M. Walker, Howard W. Smith, III, Richard C. Warner, Donna Mighty, Michael Yavinsky, Ted Hermes, Deborah A. Wilson and Column Guaranteed LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 27, 2010) | 4.3 | | Stockholders Agreement, dated December 20, 2010, by and among William M. Walker, Mallory Walker, Column Guaranteed LLC and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 27, 2010) | 4.4 | | Piggy-Back Registration Rights Agreement, dated June 7, 2012, by and among Column Guaranteed, LLC, William M. Walker, Mallory Walker, Howard W. Smith, III, Deborah A. Wilson, Richard C. Warner, CW Financial Services LLC and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 filed on August 9, 2012) | 4.5 | | Voting Agreement, dated as of June 7, 2012, by and among Walker & Dunlop, Inc., Walker & Dunlop, LLC, Mallory Walker, William M. Walker, Richard Warner, Deborah Wilson, Richard M. Lucas, and Howard W. Smith, III, and CW Financial Services LLC (incorporated by reference to Annex C of the Company’s proxy statement filed on July 26, 2012) | 4.6 | | Voting Agreement, dated as of June 7, 2012, by and among Walker & Dunlop, Inc., Walker & Dunlop, LLC, Column Guaranteed, LLC and CW Financial Services LLC (incorporated by reference to Annex D of the Company’s proxy statement filed on July 26, 2012) | 10.1 | †* | Amendment to the Walker & Dunlop, Inc. Management Deferred Stock Unit Purchase Plan | 10.2 | †* | Amendment to the Walker & Dunlop, Inc. Management Deferred Stock Unit Purchase Matching Program | 10.3 | | Lender Joinder Agreement and Amendment No. 41, dated as of January 12, 2023, to Master Repurchasethe Credit Agreement, dated as of September 15, 2022,December 16, 2021, by and among Walker & Dunlop, LLC, Walker & Dunlop, Inc., andthe Company, as borrower, JPMorgan Chase Bank, N.A., a national banking association, as administrative agent and an Incremental Term B Lender, the several banks and other financial institutions or entities from time to time party thereto, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 20, 2022) | 10.2
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| Amendment No. 1 to Amended and Restated Letter, dated as of September 15, 2022, by and among Walker & Dunlop, LLC, Walker & Dunlop, Inc., and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 20, 2022)January 18, 2023)
| 31.1 | * | Certification of Walker & Dunlop, Inc.'s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31.2 | * | Certification of Walker & Dunlop, Inc.'s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 32 | ** | Certification of Walker & Dunlop, Inc.'s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | 101.SCH | * | Inline XBRL Taxonomy Extension Schema Document | 101.CAL | * | Inline XBRL Taxonomy Extension Calculation Linkbase Document | 101.DEF | * | Inline XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB | * | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | * | Inline XBRL Taxonomy Extension Presentation Linkbase Document | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
†:Denotes a management contract or compensation plan, contract or arrangement. *: Filed herewith. **: Furnished herewith. Information in this Quarterly Report on Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act 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. | | | | | | | Walker & Dunlop, Inc. | Date: November 9, 2022May 4, 2023 | | By: | /s/ William M. Walker | | | | William M. Walker | | | | Chairman and Chief Executive Officer | | | | | | | | | Date: November 9, 2022May 4, 2023 | | By: | /s/ Gregory A. Florkowski | | | | Gregory A. Florkowski | | | | Executive Vice President and Chief Financial Officer |
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