UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
OR
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35000
Walker & Dunlop, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
| 80-0629925 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
7272 Wisconsin Avenue, Suite 1300
Bethesda, Maryland 20814
(301) 215-5500
(Address of principal executive offices and registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.01 Par Value Per Share | | WD | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
Large Accelerated Filer ☒ Smaller Reporting Company ☐ |
| Accelerated Filer ☐ Emerging Growth Company ☐ |
| Non-accelerated Filer ☐ |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022,April 27, 2023, there were 33,012,08233,340,461 total shares of common stock outstanding.
Walker & Dunlop, Inc.
Form 10-Q
INDEX
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PART I
FINANCIAL INFORMATION
Item 1.Financial Statements3
Walker & Dunlop, Inc. and SubsidiariesItem 1.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)Financial Statements
(Unaudited)3
| | | | | | | |
| | | September 30, 2022 | | December 31, 2021 | | |
Assets | | | | | |
| |
Cash and cash equivalents | | $ | 152,188 | | $ | 305,635 | |
Restricted cash | |
| 40,246 | |
| 42,812 | |
Pledged securities, at fair value | |
| 151,413 | |
| 148,996 | |
Loans held for sale, at fair value | |
| 2,180,117 | |
| 1,811,586 | |
Loans held for investment, net | |
| 247,106 | |
| 269,125 | |
Mortgage servicing rights | |
| 967,770 | |
| 953,845 | |
Goodwill | | | 948,164 | | | 698,635 | |
Other intangible assets | |
| 202,834 | |
| 183,904 | |
Derivative assets | |
| 255,295 | |
| 37,364 | |
Receivables, net | |
| 216,963 | |
| 212,019 | |
Committed investments in tax credit equity | | | 214,430 | | | 177,322 | |
Other assets | |
| 426,487 | |
| 364,746 | |
Total assets | | $ | 6,003,013 | | $ | 5,205,989 | |
| | | | | | | |
Liabilities | | | | | | | |
Warehouse notes payable | | $ | 2,545,406 | | $ | 1,941,572 | |
Notes payable | |
| 711,107 | |
| 740,174 | |
Allowance for risk-sharing obligations | |
| 49,658 | |
| 62,636 | |
Derivative liabilities | |
| 24,054 | |
| 6,403 | |
Commitments to fund investments in tax credit equity | | | 198,073 | | | 162,747 | |
Other liabilities | | | 780,012 | | | 714,250 | |
Total liabilities | | $ | 4,308,310 | | $ | 3,627,782 | |
| | | | | | | |
Stockholders' Equity | | | | | | | |
Preferred stock (authorized 50,000 shares; none issued) | | $ | — | | $ | — | |
Common stock ($0.01 par value; authorized 200,000 shares; issued and outstanding 32,344 shares at September 30, 2022 and 32,049 shares at December 31, 2021) | |
| 323 | |
| 320 | |
Additional paid-in capital ("APIC") | |
| 407,417 | |
| 393,022 | |
Accumulated other comprehensive income (loss) ("AOCI") | | | (1,460) | | | 2,558 | |
Retained earnings | |
| 1,256,663 | |
| 1,154,252 | |
Total stockholders’ equity | | $ | 1,662,943 | | $ | 1,550,152 | |
Noncontrolling interests | |
| 31,760 | |
| 28,055 | |
Total equity | | $ | 1,694,703 | | $ | 1,578,207 | |
Commitments and contingencies (NOTES 2 and 9) | |
| — | |
| — | |
Total liabilities and equity | | $ | 6,003,013 | | $ | 5,205,989 | |
See accompanying notes to condensed consolidated financial statements.
3
Management's Discussion and Analysis of ContentsFinancial Condition and Results of Operations
28
Walker & Dunlop, Inc.
Quantitative and SubsidiariesQualitative Disclosures About Market Risk
58
60
Condensed Consolidated Statements
60
60
60
Unregistered Sales of IncomeEquity Securities and Comprehensive IncomeUse of Proceeds
(In thousands, except per share data)61
(Unaudited)
61
61
61
61
Signatures For the three months ended For the nine months ended September 30, September 30, 2022 2021 2022 2021 Revenues Loan origination and debt brokerage fees, net $ 90,858 $ 123,242 $ 275,773 306,593 Fair value of expected net cash flows from servicing, net 55,291 89,482 159,970 209,266 Servicing fees 75,975 70,628 222,916 205,658 Property sales broker fees 30,308 33,677 100,092 65,173 Investment management fees 16,301 2,564 47,345 9,115 Net warehouse interest income 3,980 5,583 14,021 14,768 Escrow earnings and other interest income 18,129 2,032 26,683 5,972 Other revenues 24,769 19,082 129,103 35,444 Total revenues $ 315,611 $ 346,290 $ 975,903 $ 851,989 Expenses Personnel $ 157,059 $ 170,181 $ 469,608 407,817 Amortization and depreciation 59,846 53,498 177,101 148,879 Provision (benefit) for credit losses 1,218 1,266 (13,120) (14,380) Interest expense on corporate debt 9,306 1,766 22,123 5,291 Other operating expenses 33,991 24,836 102,400 62,171 Total expenses $ 261,420 $ 251,547 $ 758,112 $ 609,778 Income from operations $ 54,191 $ 94,743 $ 217,791 $ 242,211 Income tax expense 7,532 22,953 46,495 56,311 Net income before noncontrolling interests $ 46,659 $ 71,790 $ 171,296 $ 185,900 Less: net income (loss) from noncontrolling interests (174) 69 (1,032) 69 Walker & Dunlop net income $ 46,833 $ 71,721 $ 172,328 $ 185,831 Net change in unrealized gains (losses) on pledged available-for-sale securities, net of taxes (1,238) 159 (4,018) 769 Walker & Dunlop comprehensive income $ 45,595 $ 71,880 $ 168,310 $ 186,600 Basic earnings per share (NOTE 10) $ 1.41 $ 2.23 $ 5.18 $ 5.80 Diluted earnings per share (NOTE 10) $ 1.40 $ 2.21 $ 5.13 $ 5.73 Basic weighted-average shares outstanding 32,290 31,064 32,300 30,969 Diluted weighted-average shares outstanding 32,620 31,459 32,645 31,367
63
PART I
FINANCIAL INFORMATION
Item 1.Financial Statements
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
| | | | | | | |
| | | March 31, 2023 | | December 31, 2022 | | |
Assets | | | | | |
| |
Cash and cash equivalents | | $ | 188,389 | | $ | 225,949 | |
Restricted cash | |
| 20,504 | |
| 17,676 | |
Pledged securities, at fair value | |
| 165,081 | |
| 157,282 | |
Loans held for sale, at fair value | |
| 934,991 | |
| 396,344 | |
Loans held for investment, net | |
| 180,890 | |
| 200,247 | |
Mortgage servicing rights | |
| 946,406 | |
| 975,226 | |
Goodwill | | | 959,712 | | | 959,712 | |
Other intangible assets | |
| 194,208 | |
| 198,643 | |
Receivables, net | |
| 224,776 | |
| 202,251 | |
Committed investments in tax credit equity | | | 207,750 | | | 254,154 | |
Other assets | |
| 470,345 | |
| 457,875 | |
Total assets | | $ | 4,493,052 | | $ | 4,045,359 | |
| | | | | | | |
Liabilities | | | | | | | |
Warehouse notes payable | | $ | 1,031,277 | | $ | 537,531 | |
Notes payable | |
| 777,311 | |
| 704,103 | |
Allowance for risk-sharing obligations | |
| 33,087 | |
| 44,057 | |
Commitments to fund investments in tax credit equity | | | 196,522 | | | 239,281 | |
Other liabilities | | | 739,759 | | | 803,558 | |
Total liabilities | | $ | 2,777,956 | | $ | 2,328,530 | |
| | | | | | | |
Stockholders' Equity | | | | | | | |
Preferred stock (authorized 50,000 shares; none issued) | | $ | — | | $ | — | |
Common stock ($0.01 par value; authorized 200,000 shares; issued and outstanding 32,679 shares at March 31, 2023 and 32,396 shares at December 31, 2022) | |
| 327 | |
| 323 | |
Additional paid-in capital ("APIC") | |
| 405,303 | |
| 412,636 | |
Accumulated other comprehensive income (loss) ("AOCI") | | | (1,621) | | | (1,568) | |
Retained earnings | |
| 1,281,119 | |
| 1,278,035 | |
Total stockholders’ equity | | $ | 1,685,128 | | $ | 1,689,426 | |
Noncontrolling interests | |
| 29,968 | |
| 27,403 | |
Total equity | | $ | 1,715,096 | | $ | 1,716,829 | |
Commitments and contingencies (NOTES 2 and 9) | |
| — | |
| — | |
Total liabilities and equity | | $ | 4,493,052 | | $ | 4,045,359 | |
See accompanying notes to condensed consolidated financial statements.
3
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
| | | | | | | |
| | For the three months ended | | ||||
| | March 31, | | ||||
|
| 2023 |
| 2022 |
| ||
Revenues | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 47,084 | | | 82,310 | |
Fair value of expected net cash flows from servicing, net | | | 30,013 | | | 52,730 | |
Servicing fees | |
| 75,766 | | | 72,681 | |
Property sales broker fees | | | 11,624 | | | 23,398 | |
Investment management fees | | | 15,173 | | | 14,858 | |
Net warehouse interest income | |
| 1 | | | 4,773 | |
Escrow earnings and other interest income | |
| 30,924 | | | 1,803 | |
Other revenues | |
| 28,161 | | | 66,891 | |
Total revenues | | $ | 238,746 | | $ | 319,444 | |
| | | | | | | |
Expenses | | | | | | | |
Personnel | | $ | 118,613 | | | 144,181 | |
Amortization and depreciation | | | 56,966 | | | 56,152 | |
Provision (benefit) for credit losses | |
| (10,775) | | | (9,498) | |
Interest expense on corporate debt | |
| 15,274 | | | 6,405 | |
Other operating expenses | |
| 24,063 | | | 32,214 | |
Total expenses | | $ | 204,141 | | $ | 229,454 | |
Income from operations | | $ | 34,605 | | $ | 89,990 | |
Income tax expense | |
| 7,135 | | | 19,460 | |
Net income before noncontrolling interests | | $ | 27,470 | | $ | 70,530 | |
Less: net income (loss) from noncontrolling interests | |
| 805 | |
| (679) | |
Walker & Dunlop net income | | $ | 26,665 | | $ | 71,209 | |
Net change in unrealized gains (losses) on pledged available-for-sale securities, net of taxes | | | (53) | | | (970) | |
Walker & Dunlop comprehensive income | | $ | 26,612 | | $ | 70,239 | |
| | | | | | | |
Basic earnings per share (NOTE 10) | | $ | 0.80 | | $ | 2.14 | |
Diluted earnings per share (NOTE 10) | | $ | 0.79 | | $ | 2.12 | |
| | | | | | | |
Basic weighted-average shares outstanding | |
| 32,529 | |
| 32,219 | |
Diluted weighted-average shares outstanding | | | 32,816 | |
| 32,617 | |
See accompanying notes to condensed consolidated financial statements.
4
Walker & Dunlop, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, 2023 | | ||||||||||||||||||
| | | | Stockholders' Equity | | | | | | | | ||||||||||
| | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | ||||||||
|
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| Equity |
| ||||||
Balance at December 31, 2022 | | 32,396 | | $ | 323 | | $ | 412,636 | | $ | (1,568) | | $ | 1,278,035 | | $ | 27,403 | | $ | 1,716,829 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 26,665 | | | — | | | 26,665 | |
Net income (loss) from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 805 | | | 805 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (53) | | | — | | | — | | | (53) | |
Stock-based compensation - equity classified | | — | | | — | | | 6,664 | | | — | | | — | | | — | | | 6,664 | |
Issuance of common stock in connection with equity compensation plans | | 468 | | | 5 | | | 3,397 | | | — | | | — | | | — | | | 3,402 | |
Repurchase and retirement of common stock | | (185) | | | (1) | | | (17,394) | | | — | | | — | | | — | | | (17,395) | |
Distributions to noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | (600) | | | (600) | |
Cash dividends paid ($0.63 per common share) | | — | | | — | | | — | | | — | | | (21,221) | | | — | | | (21,221) | |
Other activity | | — | | | — | | | — | | | — | | | (2,360) | | | 2,360 | | | — | |
Balance at March 31, 2023 | | 32,679 | | $ | 327 | | $ | 405,303 | | $ | (1,621) | | $ | 1,281,119 | | $ | 29,968 | | $ | 1,715,096 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||
| | For the three and nine months ended September 30, 2022 | | | For the three months ended March 31, 2022 | | ||||||||||||||||||||||||||||||||||||
| | | | Stockholders' Equity | | | | | | | | | | Stockholders' Equity | | | | | | | ||||||||||||||||||||||
| | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | ||||||||||||||||
|
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| Equity |
|
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| Equity | | ||||||||||||
Balance at December 31, 2021 | | 32,049 | | $ | 320 | | $ | 393,022 | | $ | 2,558 | | $ | 1,154,252 | | $ | 28,055 | | $ | 1,578,207 | | | 32,049 | | $ | 320 | | $ | 393,022 | | $ | 2,558 | | $ | 1,154,252 | | $ | 28,055 | | $ | 1,578,207 | |
Walker & Dunlop net income | | — | | | — | | — | | — | | 71,209 | | | — | | 71,209 | | | — | | | — | | — | | — | | 71,209 | | | — | | 71,209 | | ||||||||
Net income (loss) from noncontrolling interests | | — | | | — | | — | | — | | — | | | (679) | | (679) | | | — | | | — | | — | | — | | — | | | (679) | | (679) | | ||||||||
Other comprehensive income (loss), net of tax | | — | | | — | | — | | (970) | | — | | | — | | (970) | | | — | | | — | | — | | (970) | | — | | | — | | (970) | | ||||||||
Stock-based compensation - equity classified | | — | | | — | | 10,812 | | — | | — | | | — | | 10,812 | | | — | | | — | | 10,812 | | — | | — | | | — | | 10,812 | | ||||||||
Issuance of common stock in connection with equity compensation plans | | 544 | | | 5 | | 15,526 | | — | | — | | | — | | 15,531 | | | 544 | | | 5 | | 15,526 | | — | | — | | | — | | 15,531 | | ||||||||
Repurchase and retirement of common stock | | (195) | | | (1) | | (27,048) | | — | | — | | | — | | (27,049) | | | (195) | | | (1) | | (27,048) | | — | | — | | | — | | (27,049) | | ||||||||
Noncontrolling interests added due to new consolidations | | — | | | — | | (5,303) | | — | | — | | | 15,490 | | 10,187 | | |||||||||||||||||||||||||
Cash dividends paid ($0.60 per common share) | | — | | | — | | — | | — | | (20,077) | | | — | | (20,077) | | | — | | | — | | | — | | | — | | | (20,077) | | | — | | | (20,077) | | ||||
Other activity (NOTE 10) | | — | | | — | | | (5,303) | | | — | | | — | | | 15,490 | | | 10,187 | | |||||||||||||||||||||
Balance at March 31, 2022 | | 32,398 | | $ | 324 | | $ | 387,009 | | $ | 1,588 | | $ | 1,205,384 | | $ | 42,866 | | $ | 1,637,171 | | | 32,398 | | $ | 324 | | $ | 387,009 | | $ | 1,588 | | $ | 1,205,384 | | $ | 42,866 | | $ | 1,637,171 | |
Walker & Dunlop net income | | — | | | — | | — | | — | | 54,286 | | | — | | 54,286 | | |||||||||||||||||||||||||
Net income (loss) from noncontrolling interests | | — | | | — | | — | | — | | — | | | (179) | | (179) | | |||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | | — | | | — | | — | | (1,810) | | — | | | — | | (1,810) | | |||||||||||||||||||||||||
Stock-based compensation - equity classified | | — | | | — | | 9,980 | | — | | — | | | — | | 9,980 | | |||||||||||||||||||||||||
Issuance of common stock in connection with equity compensation plans | | 43 | | | — | | 110 | | — | | — | | | — | | 110 | | |||||||||||||||||||||||||
Repurchase and retirement of common stock | | (119) | | | (1) | | (2,409) | | — | | (9,892) | | | — | | (12,302) | | |||||||||||||||||||||||||
Distributions to noncontrolling interest holders | | — | | | — | | — | | — | | — | | | (1,675) | | (1,675) | | |||||||||||||||||||||||||
Cash dividends paid ($0.60 per common share) | | — | | | — | | — | | — | | (20,066) | | | — | | (20,066) | | |||||||||||||||||||||||||
Other activity (NOTE 10) | | — | | | — | | | 8,978 | | | — | | | — | | | (8,718) | | | 260 | | |||||||||||||||||||||
Balance at June 30, 2022 | | 32,322 | | $ | 323 | | $ | 403,668 | | $ | (222) | | $ | 1,229,712 | | $ | 32,294 | | $ | 1,665,775 | | |||||||||||||||||||||
Walker & Dunlop net income | | — | | | — | | — | | — | | 46,833 | | | — | | 46,833 | | |||||||||||||||||||||||||
Net income (loss) from noncontrolling interests | | — | | | — | | — | | — | | — | | | (174) | | (174) | | |||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | | — | | | — | | — | | (1,238) | | — | | | — | | (1,238) | | |||||||||||||||||||||||||
Stock-based compensation - equity classified | | — | | | — | | 5,185 | | — | | — | | | — | | 5,185 | | |||||||||||||||||||||||||
Issuance of common stock in connection with equity compensation plans | | 36 | | | — | | — | | — | | — | | | — | | — | | |||||||||||||||||||||||||
Repurchase and retirement of common stock | | (14) | | | — | | (1,436) | | — | | — | | | — | | (1,436) | | |||||||||||||||||||||||||
Distributions to noncontrolling interest holders | | — | | | — | | — | | — | | — | | | (360) | | (360) | | |||||||||||||||||||||||||
Cash dividends paid ($0.60 per common share) | | — | | | — | | | — | | | — | | | (19,882) | | | — | | | (19,882) | | |||||||||||||||||||||
Balance at September 30, 2022 | | 32,344 | | $ | 323 | | $ | 407,417 | | $ | (1,460) | | $ | 1,256,663 | | $ | 31,760 | | $ | 1,694,703 | | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
5
| | | | | | | | | | | | | | | | | | | | | |
| | For the three and nine months ended September 30, 2021 | | ||||||||||||||||||
| | | | Stockholders' Equity | | | | | | | | ||||||||||
| | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | ||||||||
|
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| Equity | | ||||||
Balance at December 31, 2020 | | 30,678 | | $ | 307 | | $ | 241,004 | | $ | 1,968 | | $ | 952,943 | | $ | | | $ | 1,196,222 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 58,052 | | | — | | | 58,052 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (158) | | | — | | | — | | | (158) | |
Stock-based compensation - equity classified | | — | | | — | | | 7,836 | | | — | | | — | | | — | | | 7,836 | |
Issuance of common stock in connection with equity compensation plans | | 430 | | | 4 | | | 12,602 | | | — | | | — | | | — | | | 12,606 | |
Repurchase and retirement of common stock | | (131) | | | (1) | | | (13,373) | | | — | | | — | | | — | | | (13,374) | |
Cash dividends paid ($0.50 per common share) | | — | | | — | | | — | | | — | | | (16,052) | | | — | | | (16,052) | |
Balance at March 31, 2021 | | 30,977 | | $ | 310 | | $ | 248,069 | | $ | 1,810 | | $ | 994,943 | | $ | — | | $ | 1,245,132 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 56,058 | | | — | | | 56,058 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 768 | | | — | | | — | | | 768 | |
Stock-based compensation - equity classified | | — | | | — | | | 7,892 | | | — | | | — | | | — | | | 7,892 | |
Issuance of common stock in connection with equity compensation plans | | 64 | | | 1 | | | 530 | | | — | | | — | | | — | | | 531 | |
Repurchase and retirement of common stock | | (7) | | | (1) | | | (815) | | | — | | | — | | | — | | | (816) | |
Cash dividends paid ($0.50 per common share) | | — | | | — | | | — | | | — | | | (16,070) | | | — | | | (16,070) | |
Balance at June 30, 2021 | | 31,034 | | $ | 310 | | $ | 255,676 | | $ | 2,578 | | $ | 1,034,931 | | $ | — | | $ | 1,293,495 | |
Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 71,721 | | | — | | | 71,721 | |
Net income (loss) from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 69 | | | 69 | |
Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 159 | | | — | | | — | | | 159 | |
Stock-based compensation - equity classified | | — | | | — | | | 10,426 | | | — | | | — | | | — | | | 10,426 | |
Issuance of common stock in connection with equity compensation plans | | 124 | | | 2 | | | 1,706 | | | — | | | — | | | — | | | 1,708 | |
Issuance of common stock in connection with acquisitions | | 50 | | | 1 | | | 5,249 | | | — | | | — | | | — | | | 5,250 | |
Repurchase and retirement of common stock | | (14) | | | (1) | | | (1,495) | | | — | | | — | | | — | | | (1,496) | |
Noncontrolling interests from acquisition | | — | | | — | | | — | | | — | | | — | | | 18,750 | | | 18,750 | |
Cash dividends paid ($0.50 per common share) | | — | | | — | | | — | | | — | | | (16,146) | | | — | | | (16,146) | |
Balance at September 30, 2021 | | 31,194 | | $ | 312 | | $ | 271,562 | | $ | 2,737 | | $ | 1,090,506 | | $ | 18,819 | | $ | 1,383,936 | |
See accompanying notes to condensed consolidated financial statements.
6
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | | | | | |
| | For the nine months ended September 30, |
| ||||
|
| 2022 |
| 2021 |
| ||
Cash flows from operating activities | | | | | | | |
Net income before noncontrolling interests | | $ | 171,296 | | $ | 185,900 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Gains attributable to the fair value of future servicing rights, net of guaranty obligation | |
| (159,970) | |
| (209,266) | |
Change in the fair value of premiums and origination fees | |
| 8,586 | |
| 6,909 | |
Amortization and depreciation | |
| 177,101 | |
| 148,879 | |
Provision (benefit) for credit losses | |
| (13,120) | |
| (14,380) | |
Gain from revaluation of previously held equity-method investment | | | (39,641) | | | — | |
Originations of loans held for sale | | | (13,877,961) | | | (12,761,432) | |
Proceeds from transfers of loans held for sale | | | 13,283,455 | | | 12,459,511 | |
Other operating activities, net | | | (16,512) | | | (13,100) | |
Net cash provided by (used in) operating activities | | $ | (466,766) | | $ | (196,979) | |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | | $ | (19,302) | | $ | (5,507) | |
Purchases of equity-method investments | | | (25,098) | | | (8,029) | |
Purchases of pledged available-for-sale ("AFS") securities | | | (51,302) | | | (7,250) | |
Proceeds from prepayment and sale of pledged AFS securities | | | 9,261 | | | 28,781 | |
Investments in joint ventures | | | (5,040) | | | (58,065) | |
Distributions from joint ventures | | | 11,926 | | | 34,012 | |
Acquisitions, net of cash received | | | (114,163) | | | (62,208) | |
Originations of loans held for investment | |
| (50,772) | |
| (269,737) | |
Principal collected on loans held for investment | |
| 73,500 | |
| 397,328 | |
Net cash provided by (used in) investing activities | | $ | (170,990) | | $ | 49,325 | |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | 593,685 | | $ | 333,887 | |
Borrowings of interim warehouse notes payable | |
| 36,459 | |
| 154,661 | |
Repayments of interim warehouse notes payable | |
| (26,000) | |
| (157,277) | |
Repayments of notes payable | |
| (29,487) | |
| (2,234) | |
Repayment of secured borrowings | | | — | | | (73,312) | |
Proceeds from issuance of common stock | |
| 263 | |
| 5,256 | |
Repurchase of common stock | |
| (40,675) | |
| (15,686) | |
Cash dividends paid | | | (60,025) | | | (48,268) | |
Payment of contingent consideration | | | (19,720) | | | — | |
Distributions to noncontrolling interest | | | (2,035) | | | — | |
Debt issuance costs | |
| (2,831) | |
| (2,762) | |
Net cash provided by (used in) financing activities | | $ | 449,634 | | $ | 194,265 | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | (188,122) | | $ | 46,611 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | |
| 393,180 | |
| 358,002 | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 205,058 | | $ | 404,613 | |
| | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | |
Cash paid to third parties for interest | | $ | 48,590 | | $ | 24,906 | |
Cash paid for income taxes | | | 56,099 | | | 38,728 | |
| | | | | | | |
| | For the three months ended March 31, |
| ||||
|
| 2023 |
| 2022 |
| ||
Cash flows from operating activities | | | | | | | |
Net income before noncontrolling interests | | $ | 27,470 | | $ | 70,530 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Gains attributable to the fair value of future servicing rights, net of guaranty obligation | |
| (30,013) | |
| (52,730) | |
Change in the fair value of premiums and origination fees | |
| 2,536 | |
| 2,883 | |
Amortization and depreciation | |
| 56,966 | |
| 56,152 | |
Provision (benefit) for credit losses | |
| (10,775) | |
| (9,498) | |
Gain from revaluation of previously held equity-method investment | | | — | | | (39,641) | |
Originations of loans held for sale | | | (2,512,635) | | | (3,185,019) | |
Proceeds from transfers of loans held for sale | | | 2,001,507 | | | 4,198,206 | |
Other operating activities, net | | | (81,728) | | | (68,955) | |
Net cash provided by (used in) operating activities | | $ | (546,672) | | $ | 971,928 | |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | | $ | (2,526) | | $ | (11,790) | |
Purchases of equity-method investments | | | (11,049) | | | (5,941) | |
Purchases of pledged available-for-sale ("AFS") securities | | | — | | | (7,010) | |
Proceeds from prepayment and sale of pledged AFS securities | | | 2,797 | | | 1,672 | |
Investments in joint ventures | | | — | | | (5,040) | |
Distributions from joint ventures | | | 733 | | | 9,241 | |
Acquisitions, net of cash received | | | — | | | (78,465) | |
Originations of loans held for investment | |
| (139) | |
| (107) | |
Principal collected on loans held for investment | |
| 19,468 | |
| 53,000 | |
Net cash provided by (used in) investing activities | | $ | 9,284 | | $ | (44,440) | |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | 516,288 | | $ | (1,006,545) | |
Repayments of interim warehouse notes payable | |
| (14,521) | |
| (11,200) | |
Repayments of notes payable | |
| (116,046) | |
| (13,759) | |
Borrowings of notes payable | | | 196,000 | | | — | |
Proceeds from issuance of common stock | |
| 449 | |
| 153 | |
Repurchase of common stock | |
| (17,395) | |
| (27,049) | |
Cash dividends paid | | | (21,221) | | | (20,077) | |
Payment of contingent consideration | | | (25,690) | | | (17,612) | |
Distributions to noncontrolling interest holders | | | (600) | | | — | |
Debt issuance costs | |
| (3,460) | |
| (567) | |
Net cash provided by (used in) financing activities | | $ | 513,804 | | $ | (1,096,656) | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | (23,584) | | $ | (169,168) | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | |
| 258,283 | |
| 393,180 | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 234,699 | | $ | 224,012 | |
| | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | |
Cash paid to third parties for interest | | $ | 26,393 | | $ | 13,037 | |
Cash paid for income taxes | | | 1,236 | | | 1,290 | |
76
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (CONTINUED)
(In thousands)
(Unaudited)
| | | | | | | | | | | | |
| | For the nine months ended September 30, | | For the three months ended March 31, | ||||||||
| | 2022 |
| 2021 | | 2023 |
| 2022 | ||||
Supplemental Disclosure of Non-Cash Activity: | | | | | | | | | | | | |
Issuance of common stock in connection with acquisitions | | $ | — | | $ | 5,250 | ||||||
Issuance of common stock to settle compensation liabilities | | | 6,551 | | | 9,589 | | | 2,953 | | | 6,551 |
Issuance of common stock to settle contingent consideration liabilities (NOTE 7) | | | 8,750 | | | — | | | — | | | 8,750 |
Net increase (decrease) in total equity due to consolidations of tax credit entities (NOTE 10) | | | 10,447 | | | — | ||||||
Net increase (decrease) in total assets due to consolidations of tax credit entities (NOTE 10) | | | 13,700 | | | — | ||||||
Net increase (decrease) in total liabilities due to consolidations of tax credit entities (NOTE 10) | | | 3,559 | | | — | ||||||
Forgiveness of a receivable the Company had with an acquired joint venture (NOTE 7) | | | 5,460 | | | — | ||||||
Net increase in total equity due to consolidations of tax credit entities (NOTE 10) | | | — | | | 10,187 | ||||||
Net increase in total assets due to consolidations of tax credit entities (NOTE 10) | | | — | | | 13,746 | ||||||
Net increase in total liabilities due to consolidations of tax credit entities (NOTE 10) | | | — | | | 3,559 | ||||||
Forgiveness of receivables related to acquisitions | | | — | | | 5,404 | ||||||
Additions of contingent consideration liabilities from acquisitions (NOTE 7) | | | 119,955 | | | 7,504 | | | — | | | 119,000 |
See accompanying notes to condensed consolidated financial statements.
87
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
These financial statements represent the condensed consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they may not include certain financial statement disclosures and other information required for annual financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 (“20212022 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20222023 or thereafter.
Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of commercial real estate debt and equity financing products, provides multifamily property sales brokerage and valuation services, engages in commercial real estate investment management activities with a particular focus on the affordable housing sector through low-income housing tax credit (“LIHTC”) syndication, provides housing market research, and delivers real estate-related investment banking and advisory services.
Through its agency lending products, the Company originates and sells loans pursuant to the programs of the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac” and, together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). Through its debt brokerage products, the Company brokers, and in some cases services, loans for various life insurance companies, commercial banks, commercial mortgage-backed securities issuers, and other institutional investors.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly-owned subsidiaries, and its majority owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or the voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it holds a variable interest in a VIE and has a controlling financial interest and therefore is considered the primary beneficiary, the Company consolidates the entity. In instances where the Company holds a variable interest in a VIE but is not the primary beneficiary, the Company uses the equity-method of accounting.
If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity. If the Company does not have a majority voting interest but has significant influence, it uses the equity method of accounting. In instances where the Company owns less than 100% of the equity interests of an entity but holds a controlling financial interest and is the primary beneficiary or owns a majority of the voting interests or has control over an entity, the Company accounts for the portion of equity not attributable to Walker & Dunlop, Inc. as Noncontrolling interests on the Condensed Consolidated Balance Sheets and the portion of net income not attributable to Walker & Dunlop, Inc. as Net income (loss) from noncontrolling interests in the Condensed Consolidated Statements of Income.
Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to September 30, 2022.March 31, 2023. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to September 30, 2022.March 31, 2023. On April 17, 2023, the Company completed a workforce reduction of approximately 8% of its then full-time employees in response to continued challenges in the commercial real estate financing and services market as disclosed on its Current Report on Form 8-K filed that day. There have been no other material subsequent events that would require recognition in the condensed consolidated financial statements.
Use of Estimates—The preparation of condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, including the allowance for risk-sharing obligations, initial fair value of capitalized mortgage servicing rights, asset management fee receivable related to LIHTC funds, derivative instruments, estimation of contingent consideration for businessrisk-
98
combinations, estimation of thesharing obligations, initial fair value of the Apprise joint venture (as discussed in NOTE 7),capitalized mortgage servicing rights, and the disclosureinitial and recurring fair value assessments of contingent assets andconsideration liabilities. Actual results may vary from these estimates.
Co-broker Fees—Provision (Benefit) Third-party co-broker fees are netted against Loan originationfor Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and debt brokerage fees, netthe allowance for risk-sharing obligations within Provision (benefit) for credit losses in the Condensed Consolidated Statements of Income were $3.1 millionIncome. NOTE 4 contains additional discussion related to the allowance for risk-sharing obligations. The Company has credit risk exclusively on loans secured by multifamily real estate, with no exposure to any other sector of commercial real estate, including office, retail, industrial and $6.3 millionhospitality. Provision (benefit) for credit losses consisted of the following activity for the three months ended September 30, 2022March 31, 2023 and 2021, respectively, and $13.4 million and $15.2 million for the nine months ended September 30, 2022 and 2021, respectively.2022:
| | | | | | | |
| | For the three months ended | | ||||
| | March 31, | | ||||
Components of Provision (Benefit) for Credit Losses (in thousands) |
| 2023 |
| 2022 |
| ||
Provision (benefit) for loan losses | | $ | 195 | | $ | (106) | |
Provision (benefit) for risk-sharing obligations | |
| (10,970) | |
| (9,392) | |
Provision (benefit) for credit losses | | $ | (10,775) | | $ | (9,498) | |
| | | | | | | |
Loans Held for Investment, net—Loans held for investment are multifamily interim loans originated by the Company for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing (“Interim Loan Program”). These loans have terms of up to three years and are all adjustable-rate, interest-only, multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs, and net of any allowance for loan losses.
As of September 30,March 31, 2023, Loans held for investment, net consisted of eight loans with an aggregate $187.5 million of unpaid principal balance less $0.3 million of net unamortized deferred fees and costs and $6.3 million of allowance for loan losses. As of December 31, 2022, Loans held for investment, net consisted of nine loans with an aggregate $251.8$206.8 million of unpaid principal balance less $0.7$0.4 million of net unamortized deferred fees and costs and $4.0 million of allowance for loan losses. As of December 31, 2021, Loans held for investment, net consisted of 12 loans with an aggregate $274.5 million of unpaid principal balance less $1.2 million of net unamortized deferred fees and costs and $4.2$6.2 million of allowance for loan losses.
One loan held for investment with an unpaid principal balance of $14.7 million was delinquent and on non-accrual status as of September 30, 2022March 31, 2023 and December 31, 2021.2022. The Company had $3.7$5.9 million in collateral-based reserves for this loan as of both September 30, 2022March 31, 2023 and December 31, 20212022 and has not recorded any interest related to this loan since it went on non-accrual status in 2019.status. All other loans were current as of September 30, 2022March 31, 2023 and December 31, 2021.2022. The amortized cost basis of loans that were current as of September 30, 2022March 31, 2023 and December 31, 20212022 was $236.1$172.5 million and $258.6$191.7 million, respectively. As of September 30, 2022, $48.6March 31, 2023, $3.5 million, $162.2$143.0 million and $26.3 million of the loans that were current were originated in 2022, 2021 and 2019, respectively. Other than the defaulted loan noted above,No loans originated in 2023 or 2020 were outstanding as of March 31, 2023. Prior to 2019, the Company has neverhad not experienced any delinquencies related to loans held for investment.
Provision (Benefit) Statementfor Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit lossesCash Flows—For presentation in the Condensed Consolidated Statements of Income.Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 4 contains additional discussion related9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consistedrelated captions in the Condensed Consolidated Balance Sheets as of March 31, 2023 and 2022 and December 31, 2022 and 2021.
| | | | | | | | | | | | |
| March 31, | | December 31, | | ||||||||
(in thousands) | 2023 |
| 2022 |
| 2022 |
| 2021 |
| ||||
Cash and cash equivalents | $ | 188,389 | | $ | 141,375 | | $ | 225,949 | | $ | 305,635 | |
Restricted cash | | 20,504 | | | 41,584 | | | 17,676 | | | 42,812 | |
Pledged cash and cash equivalents (NOTE 9) |
| 25,806 | |
| 41,053 | |
| 14,658 | |
| 44,733 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 234,699 | | $ | 224,012 | | $ | 258,283 | | $ | 393,180 | |
Income Taxes—The Company records the following activityrealizable excess tax benefits from stock-based compensation as a reduction to income tax expense. The realizable excess tax benefits were $1.5 million and $4.9 million for the three and nine months ended September 30,March 31, 2023 and 2022, and 2021:respectively.
9
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Components of Provision (Benefit) for Credit Losses (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Provision (benefit) for loan losses | | $ | 35 | | $ | (12) | | $ | (142) | | $ | (674) | |
Provision (benefit) for risk-sharing obligations | |
| 1,183 | |
| 1,278 | |
| (12,978) | |
| (13,706) | |
Provision (benefit) for credit losses | | $ | 1,218 | | $ | 1,266 | | $ | (13,120) | | $ | (14,380) | |
| | | | | | | | | | | | | |
Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Generally, a substantial portion of the Company’s loans is financed with matched borrowings under one of its warehouse facilities. The remaining portion of loans not funded with matched borrowings is financed with the Company’s own cash. The Company also occasionally fully funds a small number of loans held for sale or loans held for investment with its own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. The Company had a portfolio of participating interests in loans held for investment that was accounted for as a secured borrowing and paid off at the end of the second quarter of 2021. The Company recognized Net warehouse interest income on the unpaid
10
principal balance of the loans and secured borrowing for the nine months ended September 30, 2021. Included in Net warehouse interest income for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 are the following components:
| | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | | For the three months ended | | ||||||||||||
| | September 30, | | September 30, | | | March 31, | | ||||||||||||
Components of Net Warehouse Interest Income (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Warehouse interest income - loans held for sale | | $ | 14,517 | | $ | 11,334 | | $ | 35,555 | | $ | 28,315 | | | $ | 6,312 | | $ | 8,863 | |
Warehouse interest expense - loans held for sale | |
| (12,339) | |
| (7,611) | |
| (26,140) | |
| (19,249) | | |
| (8,001) | |
| (5,333) | |
Net warehouse interest income - loans held for sale | | $ | 2,178 | | $ | 3,723 | | $ | 9,415 | | $ | 9,066 | | |||||||
Net warehouse interest income (expense) - loans held for sale | | $ | (1,689) | | $ | 3,530 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Warehouse interest income - loans held for investment | | $ | 3,896 | | $ | 3,108 | | $ | 9,261 | | $ | 9,298 | | | $ | 4,195 | | $ | 2,350 | |
Warehouse interest expense - loans held for investment | |
| (2,094) | |
| (1,248) | |
| (4,655) | |
| (3,596) | | |
| (2,505) | |
| (1,107) | |
Net warehouse interest income - loans held for investment | | $ | 1,802 | | $ | 1,860 | | $ | 4,606 | | $ | 5,702 | | | $ | 1,690 | | $ | 1,243 | |
| | | | | | | | | | | | | | | | | | | | |
Total net warehouse interest income | | $ | 3,980 | | $ | 5,583 | | $ | 14,021 | | $ | 14,768 | | | $ | 1 | | $ | 4,773 | |
| | | | | | | | | | | | | | | | | | | | |
StatementCo-broker Fees—Third-party co-broker fees are netted against of Cash FlowsLoan origination and debt brokerage fees, net—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cashIncome and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of September 30, 2022 and 2021 and December 31, 2021 and 2020.
| | | | | | | | | | | | |
| September 30, | | December 31, | | ||||||||
(in thousands) | 2022 |
| 2021 |
| 2021 |
| 2020 |
| ||||
Cash and cash equivalents | $ | 152,188 | | $ | 318,188 | | $ | 305,635 | | $ | 321,097 | |
Restricted cash | | 40,246 | | | 34,875 | | | 42,812 | | | 19,432 | |
Pledged cash and cash equivalents (NOTE 9) |
| 12,624 | |
| 51,550 | |
| 44,733 | |
| 17,473 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 205,058 | | $ | 404,613 | | $ | 393,180 | | $ | 358,002 | |
Income Taxes—The Company records the realizable excess tax benefits from stock-based compensation as a reduction to income tax expense. The realizable excess tax benefits were $0.3$3.3 million and $2.1$5.9 million for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $5.5 million and $7.3 million during the nine months ended September 30, 2022 and 2021, respectively.
Contracts with Customers—A majority of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is derived from contracts with customers.
The majority of the Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the
11
majority all of the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The following table presents information about the Company’s contracts with customers for the three and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | | | For the three months ended | | | ||||||||||||
| | September 30, | | September 30, | | | | March 31, | | | ||||||||||||
Description (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| Statement of income line item |
| 2023 |
| 2022 |
| Statement of income line item | ||||||
Certain loan origination fees | | $ | 40,076 | | $ | 46,527 | | $ | 130,722 | | $ | 113,650 | | Loan origination and debt brokerage fees, net | | $ | 14,029 | | $ | 37,365 | | Loan origination and debt brokerage fees, net |
Property sales broker fees | | | 30,308 | | | 33,677 | | | 100,092 | | | 65,173 | | Property sales broker fees | | | 11,624 | | | 23,398 | | Property sales broker fees |
Investment management fees | | | 16,301 | | | 2,564 | | | 47,345 | | | 9,115 | | Investment management fees | | | 15,173 | | | 14,858 | | Investment management fees |
Application fees, subscription revenues, other revenues from LIHTC operations, and other revenues | |
| 12,643 | |
| 8,372 | |
| 55,384 | |
| 15,999 | | Other revenues | ||||||||
Application fees, appraisal revenues, subscription revenues, other revenues from LIHTC operations, and other revenues | |
| 22,538 | |
| 13,447 | | Other revenues | ||||||||||||||
Total revenues derived from contracts with customers | | $ | 99,328 | | $ | 91,140 | | $ | 333,543 | | $ | 203,937 | | | | $ | 63,364 | | $ | 89,068 | | |
| | | | | | | | | | | | | | | | | | | | | | |
Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material.material, and the Company has accrued its best estimate of any probable impacts from pending litigation in its Condensed Consolidated Financial Statements. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.
10
Recently Adopted and Recently Announced Accounting Pronouncements—There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 20212022 Form 10-K. There are no recently announced but not yet effective accounting pronouncements that are expected to have a material impact to the Company as of September 30, 2022.March 31, 2023.
Reclassifications—The Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation.
NOTE 3—MORTGAGE SERVICING RIGHTS
The fair value of the mortgage servicing rights (“MSRs”) was $1.3$1.4 billion as of both September 30, 2022March 31, 2023 and December 31, 2021.2022. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities related to the discount rate:
The impact of a 100-basis point increase in the discount rate at September 30, 2022March 31, 2023 would be a decrease in the fair value of $40.6$43.4 million to the MSRs outstanding as of September 30, 2022.March 31, 2023.
The impact of a 200-basis point increase in the discount rate at September 30, 2022March 31, 2023 would be a decrease in the fair value of $78.6$83.9 million to the MSRs outstanding as of September 30, 2022.March 31, 2023.
These sensitivities are hypothetical and should be used with caution. These estimates do not include interplay among assumptions and are estimated as a portfolio rather than individual assets.
Activity related to MSRs for the three months ended March 31, 2023 and 2022 follows:
| | | | | | | |
| | For the three months ended |
| ||||
| | March 31, |
| ||||
Roll Forward of MSRs (in thousands) |
| 2023 |
| 2022 |
| ||
Beginning balance | | $ | 975,226 | | $ | 953,845 | |
Additions, following the sale of loan | |
| 24,030 | |
| 76,854 | |
Amortization | |
| (49,442) | |
| (46,357) | |
Pre-payments and write-offs | |
| (3,408) | |
| (7,788) | |
Ending balance | | $ | 946,406 | | $ | 976,554 | |
The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of March 31, 2023 and December 31, 2022:
| | | | | | |
Components of MSRs (in thousands) | | March 31, 2023 | | December 31, 2022 | ||
Gross value | | $ | 1,663,933 | | $ | 1,659,185 |
Accumulated amortization | |
| (717,527) | |
| (683,959) |
Net carrying value | | $ | 946,406 | | $ | 975,226 |
1211
The expected amortization of MSRs shown in the Condensed Consolidated Balance Sheet as of March 31, 2023 is shown in the table below. Actual amortization may vary from these estimates.
| | | |
|
| Expected | |
(in thousands) | | Amortization | |
Nine Months Ending December 31, | | | |
2023 | | $ | 143,146 |
Year Ending December 31, | | | |
2024 | | $ | 176,366 |
2025 | |
| 153,355 |
2026 | |
| 127,756 |
2027 | |
| 108,636 |
2028 | |
| 88,482 |
Thereafter | | | 148,665 |
Total | | $ | 946,406 |
Activity related to MSRs for the three and nine months ended September 30, 2022 and 2021 follows:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| ||||||||
| | September 30, | | September 30, |
| ||||||||
Roll Forward of MSRs (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Beginning balance | | $ | 978,745 | | $ | 915,519 | | $ | 953,845 | | $ | 862,813 | |
Additions, following the sale of loan | |
| 45,454 | |
| 70,095 | |
| 182,753 | |
| 224,035 | |
Amortization | |
| (47,391) | |
| (44,402) | |
| (140,846) | |
| (130,868) | |
Pre-payments and write-offs | |
| (9,038) | |
| (11,387) | |
| (27,982) | |
| (26,155) | |
Ending balance | | $ | 967,770 | | $ | 929,825 | | $ | 967,770 | | $ | 929,825 | |
The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of September 30, 2022 and December 31, 2021:
| | | | | | |
Components of MSRs (in thousands) | | September 30, 2022 | | December 31, 2021 | ||
Gross value | | $ | 1,622,213 | | $ | 1,548,870 |
Accumulated amortization | |
| (654,443) | |
| (595,025) |
Net carrying value | | $ | 967,770 | | $ | 953,845 |
The expected amortization of MSRs shown in the Condensed Consolidated Balance Sheet as of September 30, 2022 is shown in the table below. Actual amortization may vary from these estimates.
| | | |
|
| Expected | |
(in thousands) | | Amortization | |
Three Months Ending December 31, | | | |
2022 | | $ | 46,639 |
Year Ending December 31, | | | |
2023 | | $ | 180,469 |
2024 | |
| 163,771 |
2025 | |
| 141,014 |
2026 | |
| 119,503 |
2027 | |
| 101,362 |
Thereafter | | | 215,012 |
Total | | $ | 967,770 |
NOTE 4—ALLOWANCE FOR RISK-SHARING OBLIGATIONS AND GUARANTY OBLIGATION
When a loan is sold under the Fannie Mae DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers. Substantially all loans sold under the Fannie Mae DUS program contain modified or full-risk sharing guaranties that are based on the credit performance of the loan. The Company records an estimate of the contingent loss reserve for Current Expected Credit Losses (“CECL”) for all loans in its Fannie Mae at-risk servicing portfolio and also records collateral-based reserves as necessary and presents this combined loss reserve as Allowance for risk-sharing obligations on the Condensed Consolidated Balance Sheets. Additionally, a guaranty obligation is presented as a component of Other liabilities on the Condensed Consolidated Balance Sheets.
13
Activity related to the allowance for risk-sharing obligations for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| | For the three months ended |
| ||||||||||||
| | September 30, | | September 30, |
| | March 31, |
| ||||||||||||
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Beginning balance | | $ | 48,475 | | $ | 60,329 | | $ | 62,636 | | $ | 75,313 | | | $ | 44,057 | | $ | 62,636 | |
Provision (benefit) for risk-sharing obligations | |
| 1,183 | |
| 1,278 | |
| (12,978) | |
| (13,706) | | |
| (10,970) | |
| (9,392) | |
Write-offs | |
| — | |
| — | |
| — | |
| — | | |
| — | |
| — | |
Ending balance | | $ | 49,658 | | $ | 61,607 | | $ | 49,658 | | $ | 61,607 | | | $ | 33,087 | | $ | 53,244 | |
The Company assesses several factors impacting the current and expected unemployment rate, macroeconomic conditions and multifamily market to calculate the Company’s CECL allowance each quarter. The key inputs for the CECL allowance are the historic loss rate, the forecast-period loss rate, the reversion-period loss rate, and the UPB of the at-risk servicing portfolio. A summary of the key inputs of the CECL allowance and provision impact as of and for the quarters ended March 31, 2023 and 2022 follows.
| | | | |
| | As of and for the three months ended | ||
| | March 31, | ||
CECL Calculation Details and Provision Impact | 2023 |
| 2022 | |
Forecast-period loss rate (in basis points) | | 2.3 | | 3.0 |
Reversion-period loss rate (in basis points) | | 1.5 | | 2.0 |
Historical loss rate (in basis points) | | 0.6 | | 1.2 |
At-risk Fannie Mae servicing portfolio UPB (in billions) | $ | 54.5 | $ | 49.7 |
CECL allowance (in millions) | $ | 28.7 | $ | 42.5 |
Provision (benefit) for risk-sharing obligations (in millions) | $ | (11.0) | $ | (9.4) |
12
During the first quarterquarters of 2023 and 2022, the Company updated its historical10-year look-back period resulting in loss rate factor calculation to the current 10-year rollingdata from earlier periods being replaced with more recent loss data. The look-back period with no change to either the three months ended June 30, 2022 or three months ended September 30, 2022. The historical loss rate used for the calculation of the CECL reserve was 1.2 basis points as of both June 30, 2022 and September 30, 2022 compared to 1.8 basis points as of December 31, 2021. During the second quarter of 2022, the Company updated its estimate of the forecast-period loss rate to 2.2 basis points from three basis points as of March 31, 2022, based on (i) the projected unemployment rate, (ii) overall health of the multifamily market, and (iii) other information expected during the forecast-period and reverted over a one-year period to the aforementioned 1.2 basis points historical loss rate and maintained this forecast-period loss-rate estimate through September 30, 2022. The changesupdates resulted in the historical loss rate factor decreasing and forecast-period loss rate during the first two quarters of 2022 contributed to the benefit for the nine months ended September 30, 2022 presented above, while an increase in the at-risk portfolio led to the small provision for the three months ended September 30, 2022.
During the first three quarters of 2021, reported and forecasted unemployment rates significantly improved compared to December 31, 2020. In response to improving unemployment statistics and the expected continued overall health of the multifamily market, the Company reduced the loss rate for the forecast period to four basis points as of March 31, 2021 and three basis points as of both June 30, 2021 and September 30, 2021 from six basis points as of December 31, 2020, resulting in the benefit for risk-sharing obligations foras noted in the table above. The Company also slightly increased its forecast-period loss rate to incorporate its current economic expectations over the next year during the three and nine months ended September 30, 2021, as presented above.March 31, 2023. For the three months ended March 31, 2022, no adjustment was made to the forecast-period loss rate.
The calculated CECL reserve for the Company’s $52.1 billion at-risk Fannie Mae servicing portfolio as of September 30, 2022 was $38.9 million compared to $52.3 million as of December 31, 2021. The weighted-averageweighted average remaining life of the at-risk Fannie Mae servicing portfolio as of September 30, 2022March 31, 2023 was 7.37.0 years compared to 7.57.2 years as of December 31, 2021.2022.
ThreeTwo loans had aggregate collateral-based reserves of $10.8 million and $10.3$4.4 million as of September 30, 2022both March 31, 2023 and December 31, 2021, respectively.
Activity related to the guaranty obligation for the three and nine months ended September 30, 2022 and 2021 is presented in the following table:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| ||||||||
| | September 30, | | September 30, |
| ||||||||
Roll Forward of Guaranty Obligation (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Beginning balance | | $ | 45,649 | | $ | 50,369 | | $ | 47,378 | | $ | 52,306 | |
Additions, following the sale of loan | |
| 1,401 | |
| 1,449 | |
| 4,711 | |
| 4,023 | |
Amortization and write-offs | |
| (2,588) | |
| (2,758) | |
| (7,627) | |
| (7,269) | |
Ending balance | | $ | 44,462 | | $ | 49,060 | | $ | 44,462 | | $ | 49,060 | |
2022.
As of September 30,March 31, 2023 and 2022, and 2021, the maximum quantifiable contingent liability associated with the Company’s guaranties for the at-risk loans serviced under the Fannie Mae DUS agreement was $10.8$11.1 billion and $9.8$10.2 billion, respectively. This maximum quantifiable contingent liability relates to the at-risk loans serviced for Fannie Mae at the specific point in time indicated. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement.
14
NOTE 5—SERVICING
The total unpaid principal balance of loans the Company was servicing for various institutional investors was $120.8$124.6 billion as of September 30, 2022March 31, 2023 compared to $115.7$123.1 billion as of December 31, 2021.2022.
As of September 30, 2022March 31, 2023 and December 31, 2021,2022 custodial escrow accounts relating to loans serviced by the Company totaled $3.1$2.2 billion and $3.7$2.7 billion, respectively. These amounts are not included in the Condensed Consolidated Balance Sheets as such amounts are not Company assets; however, the Company is entitled to earnplacement fees on these escrow balances, presented as a component ofwithin Escrow earnings and other interest income in the Condensed Consolidated Statements of Income. Certain cash deposits at other financial institutions exceed the Federal Deposit Insurance Corporation insured limits. The Company places these deposits with financial institutions that meet the requirements of the Agencies, and where it believes the risk of loss to be minimal. In light of recent failures and risks within the regional banking sector, the Company has allocated its deposits to maximize protections provided by the Federal Deposit Insurance Corporation (“FDIC”). However, certain cash deposits exceed FDIC insurance limits, and to the extent that exposure exists, the Company has mitigated that risk by holding uninsured deposit balances at large money center financial institutions.
NOTE 6—WAREHOUSE NOTES PAYABLE AND NOTES PAYABLE
As of September 30, 2022,March 31, 2023, to provide financing to borrowers under the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $3.9 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of these Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale under the Company’s approved programs. The Company’s ability to originate mortgage loans for sale depends upon its ability to secure and maintain these types of financings on acceptable terms.
Additionally, as of September 30, 2022,March 31, 2023, the Company has arranged for warehouse lines of credit in the amount of $0.5 billion with certain national banks to assist in funding loans held for investment under the Interim Loan Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The Company’s ability to originate loans held for investment depends upon market conditions and its ability to secure and maintain these types of financings on acceptable terms.
The interest rate for all our warehouse facilities and debt is based on either an Adjusted Term Secured Overnight Financing Rate (“SOFR”) or London Interbank Offered Rate (“LIBOR”). The Company also has aupdated all its debt agreements with warehouse line of credit infacility providers to include fallback language governing the amount of $30.0 million with a national banktransition from LIBOR to assist in funding the Company’s Committed investments in tax credit equity before transferring themSOFR and have already transitioned all but one warehouse facility to a tax credit fund (“Tax Credit Equity Warehouse Facility”).SOFR.
The maximum amount and outstanding borrowings under Warehouse notes payable at September 30, 2022:
| | | | | | | | | | | | | | | |
| | September 30, 2022 | | |
| ||||||||||
(dollars in thousands) |
| Committed |
| Uncommitted |
| Total Facility |
| Outstanding |
|
|
| ||||
Facility | | Amount | | Amount | | Capacity | | Balance | | Interest rate(1) |
| ||||
Agency Warehouse Facility #1 | | $ | 325,000 | | $ | 250,000 | | $ | 575,000 | | $ | 147,070 |
| Adjusted Term SOFR plus 1.30% | |
Agency Warehouse Facility #2 | |
| 700,000 | |
| 300,000 | |
| 1,000,000 | |
| 536,956 | | Adjusted Term SOFR plus 1.30% | |
Agency Warehouse Facility #3 | |
| 600,000 | |
| 265,000 | |
| 865,000 | |
| 420,585 |
| Adjusted Term SOFR plus 1.35% | |
Agency Warehouse Facility #4 | | | 200,000 | | | 225,000 | | | 425,000 | | | 92,924 | | Adjusted Term SOFR plus 1.30% | |
Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 652,773 | | Adjusted Term SOFR plus 1.45% | |
Total National Bank Agency Warehouse Facilities | | $ | 1,825,000 | | $ | 2,040,000 | | $ | 3,865,000 | | $ | 1,850,308 | | | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | |
| — | |
| 1,500,000 | |
| 1,500,000 | |
| 507,412 |
| | |
Total Agency Warehouse Facilities | | $ | 1,825,000 | | $ | 3,540,000 | | $ | 5,365,000 | | $ | 2,357,720 | | | |
| | | | | | | | | | | | | | | |
Interim Warehouse Facility #1 | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | — |
| Adjusted Term SOFR plus 1.80% | |
Interim Warehouse Facility #2 | |
| 100,000 | |
| — | |
| 100,000 | |
| — |
| Adjusted Term SOFR plus 1.35% to 1.85% | |
Interim Warehouse Facility #3 | |
| 200,000 | |
| — | |
| 200,000 | |
| 163,468 |
| 30-day LIBOR plus 1.75% to 3.25% | |
Interim Warehouse Facility #4 | | | 19,810 | | | — | | | 19,810 | | | 19,810 | | 30-day LIBOR plus 3.00% | |
Total National Bank Interim Warehouse Facilities | | $ | 454,810 | | $ | — | | $ | 454,810 | | $ | 183,278 | | | |
Tax Credit Equity Warehouse Facility | | $ | 30,000 | | $ | — | | $ | 30,000 | | $ | 5,300 | | Adjusted Daily SOFR plus 3.00% | |
Debt issuance costs | |
| — | |
| — | |
| — | |
| (892) | | | |
Total warehouse facilities | | $ | 2,309,810 | | $ | 3,540,000 | | $ | 5,849,810 | | $ | 2,545,406 | | | |
15
During 2022, the following amendments to the Warehouse Facilities were executed in the normal course of business to support the growth of the Company’s business.
Agency Warehouse Facilities
During the third quarter of 2022, at the Company’s request, an amendment to Agency Warehouse Facility #1 was executed that decreased the committed borrowing capacity from $425.0 million to $325.0 million. In addition to the change in committed borrowing capacity, the amendment added $250 million of uncommitted borrowing capacity and extended the maturity date to August 30, 2023. No other material modifications have been made to the agreement during 2022.
During the second quarter of 2022, the Company executed an amendment to Agency Warehouse Facility #2 that extended the maturity date to April 13 2023 and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 130 basis points. No other material modifications have been made to the agreement during 2022.
During the second quarter of 2022, the Company executed an amendment related to Agency Warehouse Facility #3 that extended the maturity date to May 15, 2023 and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 135 basis points with an Adjusted Term SOFR floor of 15 basis points. No other material modifications have been made to the agreement during 2022.
During the second quarter of 2022, the Company executed an amendment related to Agency Warehouse Facility #4 that extended the maturity date to June 22, 2023, increased the total borrowing capacity to $425.0 million from $350.0 million, and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 130 basis points. No other material modifications have been made to the agreement during 2022.
During the third quarter of 2022, the Company executed an amendment related to Agency Warehouse Facility #5 that extended the maturity date to September 14, 2023. No other material modifications have been made to the agreement during 2022.
During the third quarter of 2022, the Company allowed an agency warehouse facility to mature on September 29, 2022, as the Company believed it had sufficient borrowing capacity from the other warehouse lenders.
Interim Warehouse Facilities
During the second quarter of 2022, the Company executed an amendment related to Interim Warehouse Facility #1 that extended the maturity date to May 15, 2023 and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 180 basis points. No other material modifications have been made to the agreement during 2022.
During the first quarter of 2022, the Company executed an amendment related to Interim Warehouse Facility #2 that extended the maturity date to December 13, 2023 and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 135 to 185 basis points. No other material modifications have been made to the agreement during 2022.
During the third quarter of 2022, the Company executed an amendment related to Interim Warehouse Facility #3 that extended the maturity date to September 29, 2023. No other material modifications have been made to the agreement during 2022.
During the fourth quarter of 2022, the Company executed an amendment related to Interim Warehouse Facility #4 that extended the maturity date to October 1, 2024 and transitioned the interest rate from 30-day LIBOR to Adjusted Term SOFR plus 311 basis points with an Adjusted Term SOFR floor of 15 basis points. No other material modifications have been made to the agreement during 2022.
Tax Credit Equity Warehouse Facility
During the third quarter of 2022, the Company executed amendments related to the Tax Credit Equity Warehouse Facility that extended the maturity date to October 14, 2022. Additionally, the amendments transitioned the interest rate from Daily LIBOR plus 300 basis points to Adjusted Daily SOFR plus 300 basis points, with a SOFR floor of 150 basis points. During October 2022, the Company allowed the Tax Credit Equity Warehouse Facility to mature according to the terms of the agreement.
16
In October 2022, the Company, through one of its wholly-owned subsidiaries, replaced the maturing Tax Credit Equity Warehouse Facility with a new warehouse facility with a national bank. The credit agreement is scheduled to mature on October 5, 2025. The facility provides the Company with up to $20.0 million in committed borrowing capacity to fund investments in affordable housing limited partnerships that also secure the borrowings. Borrowings under this facility bear interest at the Adjusted Term SOFR plus 280 basis points, with a SOFR floor of zero basis points.
The credit agreement requires the Company to abide by the following financial covenants:
The warehouse notes payable are subject to various financial covenants, all of which the Company was in compliance with as of September 30, 2022. Interest on the Company’s warehouse notes payable is based on 30-day LIBOR, Adjusted Term SOFR, or Adjusted Daily SOFR. As a result of the expected transition from LIBOR, the Company has transitioned all of its debt agreements to a SOFR based benchmark or has included fallback language to govern the transition from 30-day LIBOR to an alternative reference rate.
NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Acquisition Activities
A summary of the Company’s goodwill for the nine months ended September 30, 2022 and 2021 follows:
| | | | | | | |
| | For the nine months ended | | ||||
| | September 30, | | ||||
Roll Forward of Goodwill (in thousands) |
| 2022 |
| 2021 |
| ||
Beginning balance | | $ | 698,635 | | $ | 248,958 | |
Additions from acquisitions | |
| 222,670 | |
| 84,291 | |
Measurement-period adjustments | | | 26,859 | | | — | |
Impairment | |
| — | |
| — | |
Ending balance | | $ | 948,164 | | $ | 333,249 | |
| | | | | | | |
The additions to goodwill from acquisitions during 2022 shown in the table above during the nine months ended September 30, 2022 relate to two acquisitions. On February 28, 2022, the Company acquired 100% of the equity interests of GeoPhy B.V. (“GeoPhy”), a Netherlands-based commercial real-estate technology company. As part of the acquisition, the Company also obtained GeoPhy’s 50% interest in the Company’s appraisal joint venture, Apprise. The Company now owns 100% of Apprise and consolidates its balances and its operating results post acquisition. Prior to the acquisition, the Company accounted for its investment in Apprise under the equity method. The fair value of the consideration was $204.6 million and consisted of $82.1 million of cash, $5.5 million of forgiveness of a receivable the Company had with the joint venture (non-cash activity not reflected in the Condensed Consolidated Statements of Cash Flows), and $117.0 million of contingent consideration.
GeoPhy’s data analytics and technology development capabilities are expected to accelerate the growth of the Company’s lending, brokerage, and appraisal operations. The GeoPhy acquisition is also expected to allow the Company to meet its goal of $5 billion of annual small-balance lending volume and appraisal revenue of $75 million by 2025 as part of the Company’s overall growth targets. A significant portion of the value associated with the GeoPhy acquisition was related to the assembled workforces with their combined expertise in information technology, data science, and commercial real estate. The Company believes that the combination of GeoPhy’s personnel, appraisal technology platform, and the future development of technology to accelerate growth in the origination of small-balance commercial loans, along with Walker & Dunlop’s financial resources will (i) drive a significant increase in the identification and retention of borrowers in the small-balance segment of the multifamily market and (ii) continue to drive significant growth in appraisal revenues over the next five years. GeoPhy’s financial results since the acquisition and pro-forma information as if the acquisition occurred January 1, 2021 were immaterial.
The contingent consideration noted above is contingent on achieving certain Apprise revenue and productivity milestones and small-balance loan volume and revenue milestones over a four-year period. The maximum earnout included as part of the GeoPhy acquisition is $205.0 million. The Company estimated that $132.7 million, or 65% of the maximum earnout, was achievable based on management forecasts.
17
The discounted balance of $117.0 million is 57% of the maximum earnout amount. The Company estimated the fair value of this contingent consideration using a Monte Carlo simulation. The weighted average cost of capital (“WACC”) used for the valuation of the contingent consideration was 17.0% for the Apprise portion of the earnout and 14.5% for the small-balance portion of the earnout. The WACC reflects the additional risk inherent in the Apprise performance estimates as it is still in the startup stage of its development. The estimated achievable earnout amount was discounted using a forward curve for a Company-specific subordinated debt rating.
The calculation of goodwill of $206.4 million included the fair value of the consideration transferred of $204.6 million and the acquisition-date fair value of the Company’s previously held equity-method investment in Apprise of $58.5 million. The book value of the Company’s equity-method investment in Apprise prior to the acquisition date was $18.9 million, resulting in a $39.6 million gain from remeasuring to fair value. The gain is included as a component of Other revenues in the Condensed Consolidated Statements of Income. The Company used a discounted cash flow model to estimate the acquisition-date fair value of Apprise, with the discount rate and management’s forecast of future revenues and cash flows as the most-significant inputs for the estimate. The discount rate used was 17.0%, and a control premium was not included in the estimate.
The goodwill resulting from the GeoPhy acquisition was allocated to the Company’s Capital Markets reportable segment. The other assets primarily consisted of technology intangible assets of $31.0 million and deferred tax assets of $9.4 million. The technology intangible assets will be amortized over a 10-year period. Immaterial liabilities were assumed.
The Company expects a large portion of the goodwill to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made.
The second acquisition occurred during the third quarter of 2022 for consideration of $6.0 million of cash and $3.0 million of contingent consideration and resulted in $8.8 million of goodwill. The Company allocated the goodwill from this acquisition to the Company’s Capital Markets reportable segment. The Company expects all of the goodwill from this acquisition to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made. The financial results since the acquisition and pro-forma financial information as if the acquisition occurred on January 1, 2021 were immaterial.
The measurement-period adjustments above primarily relate to the Company’s acquisition of Alliant Capital Ltd. (“Alliant”), an acquisition completed in December of 2021, as more fully described in the Company’s 2021 Form 10-K. The measurement-period adjustments consist of (i) $29.7 million additional purchase price consideration related to the settlement of working capital adjustments and (ii) immaterial other adjustments as a result of the Company obtaining additional information. The additional consideration was paid during the third quarter of 2022. The Company has substantially completed the purchase accounting for the Alliant acquisition as of September 30, 2022. During the third quarter of 2022, the Company settled working capital adjustments related to the GeoPhy acquisition, resulting in a $5.5 million reduction in purchase price consideration. The settlement of the cash owed to the Company from GeoPhy for working capital adjustments will be a reduction of the cash paid to settle the contingent consideration achieved in the future. The Company has not completed the purchase accounting for the GeoPhy acquisition as it is waiting for the GeoPhy tax returns to be completed.
As discussed in NOTE 11 below, in the first quarter of 2022, the Company began disclosing three reportable segments. The following table shows goodwill by reportable segments as of September 30, 2022. As the Company did not have segment reporting as of December 31, 2021, all of the goodwill balance was allocated to the Company’s one reportable segment as of December 31, 2021.
| | | |
| | As of | |
Goodwill by Reportable Segment (in thousands) | | September 30, 2022 | |
Capital Markets | | $ | 451,345 |
Servicing & Asset Management | | | 496,819 |
Corporate | | | — |
Ending balance | | $ | 948,164 |
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The maximum amount and outstanding borrowings under Warehouse notes payable as of March 31, 2023 follows:
| | | | | | | | | | | | | | | |
| | March 31, 2023 | | |
| ||||||||||
(dollars in thousands) |
| Committed |
| Uncommitted | | Total Facility | | Outstanding |
|
|
| ||||
Facility | | Amount | | Amount | | Capacity | | Balance | | Interest rate(1) |
| ||||
Agency Warehouse Facility #1 | | $ | 325,000 | | $ | 250,000 | | $ | 575,000 | | $ | 168,150 |
| SOFR plus 1.30% | |
Agency Warehouse Facility #2 | |
| 700,000 | |
| 300,000 | |
| 1,000,000 | |
| 176,022 | | SOFR plus 1.30% | |
Agency Warehouse Facility #3 | |
| 600,000 | |
| 265,000 | |
| 865,000 | |
| 306,491 |
| SOFR plus 1.35% | |
Agency Warehouse Facility #4 | | | 200,000 | | | 225,000 | | | 425,000 | | | 48,818 | | SOFR plus 1.30% | |
Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 57,860 | | SOFR plus 1.45% | |
Total National Bank Agency Warehouse Facilities | | $ | 1,825,000 | | $ | 2,040,000 | | $ | 3,865,000 | | $ | 757,341 | | | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | |
| — | |
| 1,500,000 | |
| 1,500,000 | |
| 143,338 |
| | |
Total Agency Warehouse Facilities | | $ | 1,825,000 | | $ | 3,540,000 | | $ | 5,365,000 | | $ | 900,679 | | | |
| | | | | | | | | | | | | | | |
Interim Warehouse Facility #1 | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | — |
| SOFR plus 1.80% | |
Interim Warehouse Facility #2 | |
| 100,000 | |
| — | |
| 100,000 | |
| — |
| SOFR plus 1.35% to 1.85% | |
Interim Warehouse Facility #3 | |
| 200,000 | |
| — | |
| 200,000 | |
| 112,489 |
| 30-day LIBOR plus 1.75% to 3.25% | |
Interim Warehouse Facility #4 | | | 19,810 | | | — | | | 19,810 | | | 18,410 | | SOFR plus 3.11% | |
Total National Bank Interim Warehouse Facilities | | $ | 454,810 | | $ | — | | $ | 454,810 | | $ | 130,899 | | | |
Debt issuance costs | |
| — | |
| — | |
| — | |
| (301) | | | |
Total warehouse facilities | | $ | 2,279,810 | | $ | 3,540,000 | | $ | 5,819,810 | | $ | 1,031,277 | | | |
(1) | Interest rate presented does not include the effect of any applicable interest rate floors. |
During 2023, the following amendments to the Company’s Warehouse Facilities and Term Debt were executed in the normal course of business to support the growth of the Company’s business. The Company had a note payable through its wholly-owned subsidiary, Alliant, which had an outstanding balance of $114.5 million as of December 31, 2022. As noted below, on January 12, 2023, the Company repaid the Alliant note payable in full with proceeds from the Incremental Term Loan (as defined below).
Warehouse Facilities
During April 2023, the Company executed an amendment to Agency Warehouse Facility #2 that extended the maturity date to April 12, 2024. No other material modifications have been made to the agreement during 2023.
No other material modifications have been made to the Agency or Interim Warehouse Facilities during the year.
Notes payable
Incremental Term Loan
As of December 31, 2022, the Company had a senior secured credit agreement (the “Credit Agreement”) that provided for a $600 million term loan (the “Term Loan”). On January 12, 2023, the Company entered into a lender joinder agreement and amendment to the Credit Agreement that provided for an increment term loan (“Incremental Term Loan”) with a principal amount of $200.0 million, modified the ratio thresholds related to mandatory 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 Term Loan, bears interest at a rate equal to SOFR plus 300 basis points, and matures on December 16, 2028. The Company used approximately $115.9 million of the proceeds to pay off the Alliant note payable, accrued interest, and other fees. The Company is obligated to make principal payments on the Incremental Term Loan in consecutive quarterly installments equal to 0.25% of the aggregate original principal amount of the Incremental Term Loan on the last business day of each March, June, September, and December that commences on June 30, 2023.
The warehouse notes payable and notes payable are subject to various financial covenants. The Company is in compliance with all of these financial covenants. As a result of the expected transition from LIBOR, the Company has transitioned all of its debt agreements to a SOFR-based benchmark or has included fallback language to govern the transition from 30-day LIBOR to an alternative reference rate.
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NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
A summary of the Company’s goodwill for the three months ended March 31, 2023 and 2022 follows:
| | | | | | | |
| | For the three months ended | | ||||
| | March 31, | | ||||
Roll Forward of Goodwill (in thousands) |
| 2023 |
| 2022 |
| ||
Beginning balance | | $ | 959,712 | | $ | 698,635 | |
Additions from acquisitions | |
| — | |
| 213,874 | |
Measurement-period adjustments | | | — | | | (3,765) | |
Impairment | |
| — | |
| — | |
Ending balance | | $ | 959,712 | | $ | 908,744 | |
| | | | | | | |
The following table shows goodwill by reportable segments as of March 31, 2023 and December 31, 2022.
| | | | | | |
| | As of | | As of | ||
Goodwill by Reportable Segment (in thousands) | | March 31, 2023 | | December 31, 2022 | ||
Capital Markets | | $ | 520,191 | | $ | 520,191 |
Servicing & Asset Management | | | 439,521 | | | 439,521 |
Corporate | | | — | | | — |
Ending balance | | $ | 959,712 | | $ | 959,712 |
Other Intangible Assets
Activity related to other intangible assets for the ninethree months ended September 30,March 31, 2023 and 2022 and 2021 follows:
| | | | | | | | | | | | |
| | For the nine months ended | | For the three months ended | ||||||||
| | September 30, | | March 31, | ||||||||
Roll Forward of Other Intangible Assets (in thousands) |
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Beginning balance | | $ | 183,904 | | $ | 1,880 | | $ | 198,643 | | $ | 183,904 |
Additions from acquisitions | |
| 31,000 | |
| 8,719 | |
| — | |
| 31,000 |
Amortization | |
| (12,070) | |
| (2,145) | |
| (4,435) | |
| (3,499) |
Ending balance | | $ | 202,834 | | $ | 8,454 | | $ | 194,208 | | $ | 211,405 |
The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s other intangible assets as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | | | | | | | | | | |
Components of Other Intangible Assets (in thousands) | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 | ||||
Gross value | | $ | 220,682 | | $ | 189,682 | | $ | 220,682 | | $ | 220,682 |
Accumulated amortization | |
| (17,848) | |
| (5,778) | |
| (26,474) | |
| (22,039) |
Net carrying value | | $ | 202,834 | | $ | 183,904 | | $ | 194,208 | | $ | 198,643 |
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The expected amortization of other intangible assets shown in the Condensed Consolidated Balance Sheet as of September 30, 2022March 31, 2023 is shown in the table below. Actual amortization may vary from these estimates.
| | | | | ||
|
| Expected |
| Expected | ||
(in thousands) | | Amortization | | Amortization | ||
Three Months Ending December 31, | | | | |||
2022 | | $ | 4,190 | |||
Nine Months Ending December 31, | | | | |||
2023 | | $ | 12,828 | |||
Year Ending December 31, | | | | | ||
2023 | | $ | 17,263 | |||
2024 | |
| 16,206 | | $ | 16,206 |
2025 | |
| 16,206 | |
| 16,206 |
2026 | |
| 16,206 | |
| 16,206 |
2027 | |
| 16,206 | |
| 16,206 |
2028 | |
| 16,206 | |||
Thereafter | | | 116,557 | | | 100,350 |
Total | | $ | 202,834 | | $ | 194,208 |
Contingent Consideration Liabilities
A summary of the Company’s contingent consideration liabilities, which are included in Other liabilities in the Condensed Consolidated Balance Sheets, as of and for the ninethree months ended September 30,March 31, 2023 and 2022 and 2021 follows:
| | | | | | | | | | | | | | |
| | For the nine months ended | | | For the three months ended | | ||||||||
| | September 30, | | | March 31, | | ||||||||
Roll Forward of Contingent Consideration Liabilities (in thousands) |
| 2022 |
| 2021 | |
| 2023 |
| 2022 | | ||||
Beginning balance | | $ | 125,809 | | $ | 28,829 | | | $ | 200,346 | | $ | 125,808 | |
Additions | | | 119,955 | | | 7,504 | | | | — | | | 119,000 | |
Accretion and revaluation | | | 3,767 | | | 1,405 | | |||||||
Accretion | | | 177 | | | 359 | | |||||||
Payments | | | (28,547) | | | (6,080) | | | | (25,690) | | | (26,438) | |
Ending balance | | $ | 220,984 | | $ | 31,658 | | | $ | 174,833 | | $ | 218,729 | |
The contingent consideration liabilities presented in the table above relate to (i) acquisitions of debt brokerage and investment sales brokerage companies completed over the past several years, (ii) the purchase of noncontrolling interests in 2020 that was fully earned as of December 31, 2021 and paid in 2022, (iii) the Alliant acquisition, and (iv) the GeoPhy acquisition. The contingent consideration for each of the
19
acquisitions may be earned over various lengths of time after each acquisition, with a maximum earn-out period of five years, provided certain revenue targets and other metrics have been met. The last of the earn-out periods related to the contingent consideration ends in the third quarter of 2027. In each case, the Company estimated the initial fair value of the contingent consideration using a Monte Carlo simulation.
The recognition of the contingent consideration liability for the two acquisitionsGeoPhy acquisition in the first quarter of 2022 is non-cash, and thus not reflected in the amount of cash consideration paid on the Condensed Consolidated Statements of Cash Flows. In addition, $8.8 million of the payments settling contingent consideration liabilities included in the table above for the ninethree months ended September 30,March 31, 2022 were from the issuance of the Company’s common stock, a non-cash transaction.
NOTE 8—FAIR VALUE MEASUREMENTS
The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that
16
gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
● | Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
● | Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, discount rates, volatilities, prepayment speeds, earnings rates, credit risk, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
● | Level 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation. |
The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement when there is evidence of impairment and for disclosure purposes (NOTE 3). The Company's MSRs do not trade in an active, open market with readily observable prices. Accordingly, the estimated fair value of the Company’s MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, estimated revenue from escrow accounts, costs to service, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that market participants consider in valuing MSR assets. MSRs are carried at the lower of amortized cost or fair value.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
● | Derivative Instruments—The derivative positions consist of interest rate lock commitments with borrowers and forward sale agreements to the Agencies. The fair value of these instruments is estimated using a discounted cash flow model developed based on changes in the applicable U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company and are classified within Level 3 of the valuation hierarchy. |
● | Loans Held for Sale—All loans held for sale presented in the Condensed Consolidated Balance Sheets are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted observable inputs from market participants such as changes in the U.S. Treasury rate. Therefore, the Company classifies these loans held for sale as Level 2. |
20
● |
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:
| | | | | | | | | | | | | |
| | | | | | | | Balance as of |
| ||||
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Period End |
| ||||
September 30, 2022 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 2,180,117 | | $ | — | | $ | 2,180,117 | |
Pledged securities | |
| 12,624 | |
| 138,789 | |
| — | |
| 151,413 | |
Derivative assets | |
| — | |
| — | |
| 255,295 | |
| 255,295 | |
Total | | $ | 12,624 | | $ | 2,318,906 | | $ | 255,295 | | $ | 2,586,825 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 24,054 | | $ | 24,054 | |
Contingent consideration liabilities | | | — | | | — | | | 220,984 | | | 220,984 | |
Total | | $ | — | | $ | — | | $ | 245,038 | | $ | 245,038 | |
| | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 1,811,586 | | $ | — | | $ | 1,811,586 | |
Pledged securities | |
| 44,733 | |
| 104,263 | |
| — | |
| 148,996 | |
Derivative assets | |
| — | |
| — | |
| 37,364 | |
| 37,364 | |
Total | | $ | 44,733 | | $ | 1,915,849 | | $ | 37,364 | | $ | 1,997,946 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 6,403 | | $ | 6,403 | |
Contingent consideration liabilities | | | — | | | — | | | 125,808 | | | 125,808 | |
Total | | $ | — | | $ | — | | $ | 132,211 | | $ | 132,211 | |
There were no transfers between any of the levels within the fair value hierarchy during the nine months ended September 30, 2022.
21
Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Derivative Assets and Liabilities, net (in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Beginning balance | | $ | 42,634 | | $ | 6,340 | | $ | 30,961 | | $ | 44,720 | |
Settlements | |
| 42,458 | |
| (146,841) | |
| (235,463) | |
| (488,356) | |
Realized gains recorded in earnings(1) | |
| (85,092) | |
| 140,501 | |
| 204,502 | |
| 443,636 | |
Unrealized gains (losses) recorded in earnings(1) | |
| 231,241 | |
| 72,223 | |
| 231,241 | |
| 72,223 | |
Ending balance | | $ | 231,241 | | $ | 72,223 | | $ | 231,241 | | $ | 72,223 | |
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of September 30, 2022:
| | | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements | |||||||||
(in thousands) |
| Fair Value |
| Valuation Technique |
| Unobservable Input (1) |
| Input Range (1) |
| Weighted Average (3) | |
Derivative assets | | $ | 255,295 |
| Discounted cash flow |
| Counterparty credit risk |
| — | | — |
Derivative liabilities | | $ | 24,054 |
| Discounted cash flow |
| Counterparty credit risk |
| — | | — |
Contingent consideration liabilities | | $ | 220,984 | | Monte Carlo Simulation(2) | | Probability of earn-out achievement | | 65% - 100% | | 76% |
The carrying amounts and the fair values of the Company's financial instruments as of September 30, 2022 and December 31, 2021 are presented below:
| | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
(in thousands) | | Amount | | Value | | Amount | | Value |
| ||||
Financial Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 152,188 | | $ | 152,188 | | $ | 305,635 | | $ | 305,635 | |
Restricted cash | |
| 40,246 | |
| 40,246 | |
| 42,812 | |
| 42,812 | |
Pledged securities | |
| 151,413 | |
| 151,413 | |
| 148,996 | |
| 148,996 | |
Loans held for sale | |
| 2,180,117 | |
| 2,180,117 | |
| 1,811,586 | |
| 1,811,586 | |
Loans held for investment, net | |
| 247,106 | |
| 248,098 | |
| 269,125 | |
| 270,826 | |
Derivative assets | |
| 255,295 | |
| 255,295 | |
| 37,364 | |
| 37,364 | |
Total financial assets | | $ | 3,026,365 | | $ | 3,027,357 | | $ | 2,615,518 | | $ | 2,617,219 | |
| | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | |
Derivative liabilities | | $ | 24,054 | | $ | 24,054 | | $ | 6,403 | | $ | 6,403 | |
Contingent consideration liabilities | | | 220,984 | | | 220,984 | | | 125,808 | | | 125,808 | |
Warehouse notes payable | |
| 2,545,406 | |
| 2,546,298 | |
| 1,941,572 | |
| 1,942,448 | |
Notes payable | |
| 711,107 | |
| 715,688 | |
| 740,174 | |
| 745,175 | |
Total financial liabilities | | $ | 3,501,551 | | $ | 3,507,024 | | $ | 2,813,957 | | $ | 2,819,834 | |
The following methods and assumptions were used for recurring fair value measurements as of September 30, 2022 and December 31, 2021.
Cash and Cash Equivalents and Restricted Cash—The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).
22
Pledged Securities—Consist of cash, highly liquid investmentsInvestments in money market accounts invested in government securities, and investments in Agency debt securities. The investments of the money market funds typically have maturities of 90 days or less and are valued using quoted market prices from recent trades. Therefore, the Company classifies this portion of pledged securities as Level 1. The Company determines the fair value of theits AFS investments in Agency debt securities incorporates the contractual cash flows of the security discounted at market-rate, risk-adjusted yields.
Loans Held for Sale—Consist of originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded and are valued using discounted cash flow modelsflows that incorporate observable pricesinputs from market participants.participants
and then compares the fair value to broker estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2.
● | Contingent Consideration |
17
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:
| | | | | | | | | | | | | |
| | | | | | | | Balance as of |
| ||||
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Period End |
| ||||
March 31, 2023 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 934,991 | | $ | — | | $ | 934,991 | |
Pledged securities | |
| 25,806 | |
| 139,275 | |
| — | |
| 165,081 | |
Derivative assets | |
| — | |
| — | |
| 14,531 | |
| 14,531 | |
Total | | $ | 25,806 | | $ | 1,074,266 | | $ | 14,531 | | $ | 1,114,603 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 22,260 | | $ | 22,260 | |
Contingent consideration liabilities | | | — | | | — | | | 174,833 | | | 174,833 | |
Total | | $ | — | | $ | — | | $ | 197,093 | | $ | 197,093 | |
| | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 396,344 | | $ | — | | $ | 396,344 | |
Pledged securities | |
| 14,658 | |
| 142,624 | |
| — | |
| 157,282 | |
Derivative assets | |
| — | |
| — | |
| 17,636 | |
| 17,636 | |
Total | | $ | 14,658 | | $ | 538,968 | | $ | 17,636 | | $ | 571,262 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 2,076 | | $ | 2,076 | |
Contingent consideration liabilities | | | — | | | — | | | 200,346 | | | 200,346 | |
Total | | $ | — | | $ | — | | $ | 202,422 | | $ | 202,422 | |
There were no transfers between any of the levels within the fair value hierarchy during the three months ended March 31, 2023 and 2022.
Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below for the three months ended March 31, 2023 and 2022:
| | | | | | |
| | For the three months ended | ||||
| | March 31, | ||||
Derivative Assets and Liabilities, net (in thousands) |
| 2023 |
| 2022 | ||
Beginning balance | | $ | 15,560 | | $ | 30,961 |
Settlements | |
| (100,386) | |
| (66,378) |
Realized gains recorded in earnings(1) | |
| 84,826 | |
| 35,417 |
Unrealized gains (losses) recorded in earnings(1) | |
| (7,729) | |
| 99,623 |
Ending balance | | $ | (7,729) | | $ | 99,623 |
(1) | Realized and |
18
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of March 31, 2023:
| | | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements | |||||||||
(in thousands) |
| Fair Value |
| Valuation Technique |
| Unobservable Input (1) |
| Input Range (1) |
| Weighted Average (2) | |
Derivative assets | | $ | 14,531 |
| Discounted cash flow |
| Counterparty credit risk |
| — | | — |
Derivative liabilities | | $ | 22,260 |
| Discounted cash flow |
| Counterparty credit risk |
| — | | — |
Contingent consideration liabilities | | $ | 174,833 | | Monte Carlo Simulation | | Probability of earn-out achievement | | 64% - 100% | | 77% |
(1) | Significant increases in this input may lead to |
(2) | Contingent consideration weighted based on |
The carrying amounts and the fair values of the Company's financial instruments as of March 31, 2023 and December 31, 2022 are presented below:
| | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
(in thousands) | | Amount | | Value | | Amount | | Value |
| ||||
Financial Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 188,389 | | $ | 188,389 | | $ | 225,949 | | $ | 225,949 | |
Restricted cash | |
| 20,504 | |
| 20,504 | |
| 17,676 | |
| 17,676 | |
Pledged securities | |
| 165,081 | |
| 165,081 | |
| 157,282 | |
| 157,282 | |
Loans held for sale | |
| 934,991 | |
| 934,991 | |
| 396,344 | |
| 396,344 | |
Loans held for investment, net | |
| 180,890 | |
| 181,646 | |
| 200,247 | |
| 200,900 | |
Derivative assets(1) | |
| 14,531 | |
| 14,531 | |
| 17,636 | |
| 17,636 | |
Total financial assets | | $ | 1,504,386 | | $ | 1,505,142 | | $ | 1,015,134 | | $ | 1,015,787 | |
| | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | |
Derivative liabilities(2) | | $ | 22,260 | | $ | 22,260 | | $ | 2,076 | | $ | 2,076 | |
Contingent consideration liabilities(2) | | | 174,833 | | | 174,833 | | | 200,346 | | | 200,346 | |
Warehouse notes payable | |
| 1,031,277 | |
| 1,031,578 | |
| 537,531 | |
| 538,134 | |
Notes payable | |
| 777,311 | |
| 792,500 | |
| 704,103 | |
| 708,546 | |
Total financial liabilities | | $ | 2,005,681 | | $ | 2,021,171 | | $ | 1,444,056 | | $ | 1,449,102 | |
(1) | Included as a component of Other Assets on the |
(2) | Included as a component of |
The following methods and assumptions were used for recurring fair value measurements as of March 31, 2023 and December 31, 2022.
Cash and Cash Equivalents and Restricted Cash—The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).
Pledged Securities—Consist of cash, highly liquid investments in money market accounts invested in government securities, and investments in Agency debt securities. The investments of the money market funds typically have maturities of 90 days or less and are valued using quoted market prices from recent trades. The fair value of the Agency debt securities incorporates the contractual cash flows of the security discounted at market-rate, risk-adjusted yields.
Loans Held for Sale—Consist of originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded and are valued using discounted cash flow models that incorporate observable prices from market participants.
19
Contingent Consideration Liabilities—Consists of the estimated fair values of expected future earn-out payments related to acquisitions completed over the past several years. The earn-out liabilities are valued using a Monte Carlo simulation analysis. The fair value of the contingent consideration liabilities incorporates unobservable inputs, such as the probability of earn-out achievement, volatility rates, and discount rate, to determine the expected earn-out cash flows. The probability of the earn-out achievement is based on management’s estimate of the expected future performance and other financial metrics of each of the acquired entities, which are subject to significant uncertainty.
Derivative Instruments—Consist of interest rate lock commitments and forward sale agreements. These instruments are valued using discounted cash flow models developed based on changes in the U.S. Treasury rate and other observable market data. The value is determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company.
Fair Value of Derivative Instruments and Loans Held for Sale—In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to an investor.
To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into a sale commitment with the investor simultaneously with the rate lock commitment with the borrower. The sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment.
Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. The fair value of the Company's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:
● | the estimated gain of the expected loan sale to the investor (Level 2); |
● |
The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan, is calculated pursuant to the valuation techniques applicable to the fair valuenet of future servicing, net at loan sale (Levelany guaranty obligations retained (Level 2).;
To calculate
● | the
|
The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to the fair value of future servicing, net at loan sale (Level 2).
To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount (Level 2).
The fair value of the Company's forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The fair value of the Company’s interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in interest rate lock commitments and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties and the short duration of interest rate lock commitments and forward sale contracts, the risk of nonperformance by the Company’s counterparties has historically been minimal (Level 3).
20
The following table presents the components of fair value and other relevant information associated with the Company’s derivative instruments and loans held for sale as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Adjustment Components | | Balance Sheet Location |
| ||||||||||||||
|
| | |
| | |
| | |
| | |
| | |
| | |
| Fair Value |
| |
| | Notional or | | Estimated | | | | | Total | | | | | | | | Adjustment |
| ||||
| | Principal | | Gain | | Interest Rate | | Fair Value | | Derivative | | Derivative | | to Loans |
| |||||||
(in thousands) | | Amount | | on Sale | | Movement | | Adjustment | | Assets | | Liabilities | | Held for Sale |
| |||||||
March 31, 2023 | | | | | | | | | | | | | | | | | | | | | | |
Rate lock commitments | | $ | 382,230 | | $ | 11,583 | | $ | 2,356 | | $ | 13,939 | | $ | 13,939 | | $ | — | | $ | — | |
Forward sale contracts | |
| 1,286,072 | |
| — | |
| (21,668) | |
| (21,668) | |
| 592 | | | (22,260) | |
| — | |
Loans held for sale | |
| 903,842 | |
| 11,837 | |
| 19,312 | |
| 31,149 | |
| — | |
| — | |
| 31,149 | |
Total | | | | | $ | 23,420 | | $ | — | | $ | 23,420 | | $ | 14,531 | | $ | (22,260) | | $ | 31,149 | |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | |
Rate lock commitments | | $ | 376,870 | | $ | 12,349 | | $ | (4,495) | | $ | 7,854 | | $ | 7,854 | | $ | — | | $ | — | |
Forward sale contracts | |
| 769,585 | |
| — | |
| 7,706 | |
| 7,706 | |
| 9,782 | | | (2,076) | |
| — | |
Loans held for sale | |
| 392,715 | |
| 6,840 | |
| (3,211) | |
| 3,629 | |
| — | |
| — | |
| 3,629 | |
Total | | | | | $ | 19,189 | | $ | — | | $ | 19,189 | | $ | 17,636 | | $ | (2,076) | | $ | 3,629 | |
NOTE 9—FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES
Fannie Mae DUS Related Commitments—Commitments for the origination and subsequent sale and delivery of loans to Fannie Mae represent those mortgage loan transactions where the borrower has locked an interest rate and scheduled closing, and the Company has entered into a mandatory delivery commitment to sell the loan to Fannie Mae. As discussed in NOTE 8, the Company accounts for these commitments as derivatives recorded at fair value.
The Company is generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program. The Company is required to secure these obligations by assigning restricted cash balances and securities to Fannie Mae, which are classified as Pledged securities, at fair value on the Condensed Consolidated Balance Sheets. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires restricted liquidity for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Pledged securities held in the form of money market funds holding U.S. Treasuries are discounted 5%, and Agency mortgage-backed securities (“Agency MBS”) are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As seen below, the Company held the majority of its pledged securities in Agency MBS as of March 31, 2023. The majority of the loans for which the Company has risk sharing are Tier 2 loans.
The Company is in compliance with the March 31, 2023 collateral requirements as outlined above. As of March 31, 2023, reserve requirements for the DUS loan portfolio will require the Company to fund $75.3 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within the at-risk portfolio. Fannie Mae has reassessed the DUS Capital Standards in the past and may make changes to these standards in the future. The Company generates sufficient cash flow from its operations to meet these capital standards and does not expect any future changes to have a material impact on its future operations; however, any future increases to collateral requirements may adversely impact the Company’s available cash.
Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company's servicing authority for all or some of the portfolio if, at any time, it determines that the Company's financial condition is not adequate to support its obligations under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of March 31, 2023. The net worth requirement is derived primarily from unpaid principal balances on Fannie Mae loans and the level of risk sharing. As of March 31, 2023, the net worth requirement was $287.3 million, and the Company's net worth, as defined in the requirements, was $1.0 billion, as measured at our wholly-owned operating subsidiary, Walker & Dunlop, LLC. As of March 31, 2023, the Company was required to maintain at least $57.2 million of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Ginnie Mae, and the Company had operational liquidity, as defined in the requirements, of $164.5 million as of March 31, 2023, as measured at our wholly-owned operating subsidiary, Walker & Dunlop, LLC.
21
Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of March 31, 2023 and 2022 and December 31, 2022 and 2021:
| | | | | | | | | | | | |
| March 31, | | December 31, | | ||||||||
Pledged Securities (in thousands) | 2023 |
| 2022 |
| 2022 |
| 2021 |
| ||||
Restricted cash | $ | 8,536 | | $ | 4,099 | | $ | 5,788 | | $ | 3,779 | |
Money market funds | | 17,270 | | | 36,954 | | | 8,870 | | | 40,954 | |
Total pledged cash and cash equivalents | $ | 25,806 | | $ | 41,053 | | $ | 14,658 | | $ | 44,733 | |
Agency MBS |
| 139,275 | | | 107,594 | |
| 142,624 | |
| 104,263 | |
Total pledged securities, at fair value | $ | 165,081 | | $ | 148,647 | | $ | 157,282 | | $ | 148,996 | |
The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Condensed Consolidated Statements of Cash Flows as more fully discussed in NOTE 2.
The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency MBS and are all accounted for as AFS securities. When the fair value of Agency MBS is lower than the carrying value, the Company assesses whether an allowance for credit losses is necessary. The Company does not record an allowance for credit losses for its AFS securities, including those whose fair value is less than amortized cost, when the AFS securities are issued by the GSEs. The contractual cash flows of these AFS securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of these securities. The Company does not intend to sell any of the Agency MBS whose fair value is less than the carrying value, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The following table provides additional information related to the Agency MBS as of March 31, 2023 and December 31, 2022:
| | | | | | |
Fair Value and Amortized Cost of Agency MBS (in thousands) | March 31, 2023 |
| December 31, 2022 |
| ||
Fair value | $ | 139,275 | | $ | 142,624 | |
Amortized cost | | 141,302 | | | 144,801 | |
Total gains for securities with net gains in AOCI | | 643 | | | 797 | |
Total losses for securities with net losses in AOCI |
| (2,670) | |
| (2,974) | |
Fair value of securities with unrealized losses |
| 114,010 | |
| 118,565 | |
Ten of the pledged securities with a fair value of $37.7 million, an amortized cost of $39.5 million, and a net unrealized loss of $1.8 million have been in a continuous unrealized loss position for more than 12-months, with the unrealized losses driven primarily by widening investor spreads as a result of the rapid increase in interest rates and related market uncertainty over the last 12 months. All ten securities that have been in a continuous loss position are Agency debt securities that carry a guarantee of the contractual payments. The Company concluded that an allowance for credit losses is not warranted, as the Company does not intend to sell the securities and does not believe it would be required to sell the securities, and as they carry the guarantee of payment from the Agencies.
The following table provides contractual maturity information related to Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date.
| | | | | | |
| March 31, 2023 | | ||||
Detail of Agency MBS Maturities (in thousands) | Fair Value |
| Amortized Cost |
| ||
Within one year | $ | — | | $ | — | |
After one year through five years | | 15,345 | | | 15,403 | |
After five years through ten years | | 102,288 | | | 102,719 | |
After ten years |
| 21,642 | | | 23,180 | |
Total | $ | 139,275 | | $ | 141,302 | |
| | | | | | |
22
NOTE 10—EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY
Earnings per share (“EPS”) is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to each class of common stock and participating securities based on their respective rights to receive dividends. The Company grants share-based awards to various employees and nonemployee directors under the 2020 Equity Incentive Plan that entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
The following table presents the calculation of basic and diluted EPS for the three months ended March 31, 2023 and 2022 under the two-class method. Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the treasury-stock method.
| | | | | |
| For the three months ended March 31, | ||||
EPS Calculations (in thousands, except per share amounts) | 2023 | | 2022 | ||
Calculation of basic EPS | | | | | |
Walker & Dunlop net income | $ | 26,665 | | $ | 71,209 |
Less: dividends and undistributed earnings allocated to participating securities |
| 707 | |
| 2,172 |
Net income applicable to common stockholders | $ | 25,958 | | $ | 69,037 |
Weighted-average basic shares outstanding | | 32,529 | | | 32,219 |
Basic EPS | $ | 0.80 | | $ | 2.14 |
| | | | | |
Calculation of diluted EPS | | | | | |
Net income applicable to common stockholders | $ | 25,958 | | $ | 69,037 |
Add: reallocation of dividends and undistributed earnings based on assumed conversion | | 1 | | | 19 |
Net income allocated to common stockholders | $ | 25,959 | | $ | 69,056 |
Weighted-average basic shares outstanding | | 32,529 | | | 32,219 |
Add: weighted-average diluted non-participating securities | | 287 | | | 398 |
Weighted-average diluted shares outstanding | | 32,816 | | | 32,617 |
Diluted EPS | $ | 0.79 | | $ | 2.12 |
The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasury-stock method includes the unrecognized compensation costs associated with the awards. For the three months ended March 31, 2023, 368 thousand average restricted shares were excluded from the computation of diluted EPS under the treasury-stock method. For the three months ended March 31, 2022, an immaterial number of average restricted shares were excluded from the computation. These average restricted shares were excluded from the computation of diluted EPS under the treasury method because the effect would have been anti-dilutive, as the grant date market price of the restricted shares was greater than the average market price of the Company’s shares of common stock during the periods presented.
The following non-cash transactions did not impact the amount of cash paid on the Condensed Consolidated Statements of Cash Flows. During the first quarter of 2022, the operating agreement of three of the Company’s tax-credit-related joint ventures changed. The Company reconsidered its consolidation conclusion based on these changes and concluded that the joint ventures should be consolidated, resulting in a $5.3 million reduction in APIC and $15.5 million of noncontrolling interests consolidated as shown on the Consolidated Statements of Changes in Equity for the three months ended March 31, 2021 and 2020:
| | | | | | | | | | | | |
| September 30, | | December 31, | | ||||||||
Pledged Securities (in thousands) | 2022 |
| 2021 |
| 2021 |
| 2020 |
| ||||
Restricted cash | $ | 8,454 | | $ | 10,596 | | $ | 3,779 | | $ | 4,954 | |
Money market funds | | 4,170 | | | 40,954 | | | 40,954 | | | 12,519 | |
Total pledged cash and cash equivalents | $ | 12,624 | | $ | 51,550 | | $ | 44,733 | | $ | 17,473 | |
Agency MBS |
| 138,789 | | | 97,224 | |
| 104,263 | |
| 119,763 | |
Total pledged securities, at fair value | $ | 151,413 | | $ | 148,774 | | $ | 148,996 | | $ | 137,236 | |
The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Condensed Consolidated Statements of Cash Flows as more fully discussed in NOTE 2.
The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency MBS and are all accounted for as AFS securities. When the fair value of Agency MBS is lower than the carrying value, the Company assesses whether an allowance for credit losses is necessary. The Company does not record an allowance for credit losses for its AFS securities, including those whose fair value is less than amortized cost, when the AFS securities are issued by the GSEs. The contractual cash flows of these AFS securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of these securities. The Company does not intend to sell any of the Agency MBS whose fair value is less than the carrying value, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The following table provides additional information related to the Agency MBS as of September 30, 2022 and December 31, 2021:
| | | | | | |
Fair Value and Amortized Cost of Agency MBS (in thousands) | September 30, 2022 |
| December 31, 2021 |
| ||
Fair value | $ | 138,789 | | $ | 104,263 | |
Amortized cost | | 140,782 | | | 100,847 | |
Total gains for securities with net gains in AOCI | | 762 | | | 3,636 | |
Total losses for securities with net losses in AOCI |
| (2,755) | |
| (220) | |
Fair value of securities with unrealized losses |
| 116,989 | |
| 4,757 | |
An immaterial amount of the pledged securities has been in a continuous unrealized loss position for more than 12 months.
The following table provides contractual maturity information related to Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date.
| | | | | | |
| September 30, 2022 | | ||||
Detail of Agency MBS Maturities (in thousands) | Fair Value |
| Amortized Cost |
| ||
Within one year | $ | — | | $ | — | |
After one year through five years | | 16,018 | | | 16,063 | |
After five years through ten years | | 99,612 | | | 100,327 | |
After ten years |
| 23,159 | | | 24,392 | |
Total | $ | 138,789 | | $ | 140,782 | |
| | | | | | |
25
NOTE 10—EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY
Earnings per share (“EPS”) is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to each class of common stock and participating securities based on their respective rights to receive dividends. The Company grants share-based awards to various employees and nonemployee directors under the 2020 Equity Incentive Plan that entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
The following table presents the calculation of basic and diluted EPS for the three and nine months ended September 30, 2022 and 2021 under the two-class method. Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the treasury-stock method.
| | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| ||||||||
EPS Calculations (in thousands, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
| ||||
Calculation of basic EPS | | | | | | | | | | | | |
Walker & Dunlop net income | $ | 46,833 | | $ | 71,721 | | $ | 172,328 | | $ | 185,831 | |
Less: dividends and undistributed earnings allocated to participating securities |
| 1,296 | |
| 2,364 | |
| 4,984 | |
| 6,163 | |
Net income applicable to common stockholders | $ | 45,537 | | $ | 69,357 | | $ | 167,344 | | $ | 179,668 | |
Weighted-average basic shares outstanding | | 32,290 | | | 31,064 | | | 32,300 | | | 30,969 | |
Basic EPS | $ | 1.41 | | $ | 2.23 | | $ | 5.18 | | $ | 5.80 | |
| | | | | | | | | | | | |
Calculation of diluted EPS | | | | | | | | | | | | |
Net income applicable to common stockholders | $ | 45,537 | | $ | 69,357 | | $ | 167,344 | | $ | 179,668 | |
Add: reallocation of dividends and undistributed earnings based on assumed conversion | | 7 | | | 23 | | | 34 | | | 57 | |
Net income allocated to common stockholders | $ | 45,544 | | $ | 69,380 | | $ | 167,378 | | $ | 179,725 | |
Weighted-average basic shares outstanding | | 32,290 | | | 31,064 | | | 32,300 | | | 30,969 | |
Add: weighted-average diluted non-participating securities | | 330 | | | 395 | | | 345 | | | 398 | |
Weighted-average diluted shares outstanding | | 32,620 | | | 31,459 | | | 32,645 | | | 31,367 | |
Diluted EPS | $ | 1.40 | | $ | 2.21 | | $ | 5.13 | | $ | 5.73 | |
The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasury-stock method includes the unrecognized compensation costs associated with the awards. For the three and nine months ended September 30, 2022, 218 thousand average restricted shares and 111 thousand average restricted shares, respectively, were excluded from the computation of diluted EPS under the treasury-stock method. For the three months and nine months ended September 30, 2021, an immaterial number of average restricted shares were excluded from the computation. These average restricted shares were excluded from the computation of diluted EPS under the treasury method because the effect would have been anti-dilutive, as the grant date market price of the restricted shares was greater than the average market price of the Company’s shares of common stock during the periods presented.
The following non-cash transactions did not impact the amount of cash paid on the Condensed Consolidated Statements of Cash Flows. During 2022, the operating agreement of three of the Company’s tax-credit-related joint ventures changed. The Company reconsidered its consolidation conclusion based on these changes and concluded that the joint ventures should be consolidated, resulting in a $3.7 million increase in APIC and $6.8 million of noncontrolling interests consolidated as shown on the Consolidated Statements of Changes in Equity for the nine months ended September 30, 2022. The consolidation also resulted in a $35.0 million increase in Receivables, net, a $21.3 million reduction in Other assets, and a $3.6 million increase in Other liabilities.
In February 2022, the Company’s Board of Directors approved a stock repurchase program that permits the repurchase of up to $75.0 million of the Company’s common stock over a 12-month period beginning on February 13, 2022. During the first quarter of 2022, the Company did not repurchase any shares of its common stock under the share repurchase program. During the second quarter of 2022, the Company repurchased 109 thousand shares of its common stock under the 2022 share repurchase program at a weighted-average price of $101.77 per share and immediately retired the shares, reducing stockholders’ equity by $11.1 million. During the third quarter of 2022, the Company did not repurchase any shares of its common stock under the share repurchase program. As of September 30, 2022, the Company had $63.9 million of authorized share repurchase capacity remaining under the 2022 share repurchase program.
26
During each of the first three quarters of 2022, the Company paid a dividend of $0.60 per share. On November 8, 2022, the Company’s Board of Directors declared a dividend of $0.60 per share for the fourth quarter of 2022. The dividend will be paid on December 9, 2022 to all holders of record of the Company’s restricted and unrestricted common stock as of November 25, 2022. The consolidation also resulted in a $35.0 million increase in Receivables, net, a $21.3 million reduction in Other assets, and a $3.6 million increase in Other liabilities.
In February 2023, the Company’s Board of Directors approved a stock repurchase program that permits the repurchase of up to $75.0 million of the Company’s common stock over a 12-month period beginning on February 23, 2023. During the first quarter of 2023, the Company did not repurchase any shares of its common stock under the share repurchase program. As of March 31, 2023, the Company had $75.0 million of authorized share repurchase capacity remaining under the 2023 share repurchase program.
During the first quarter of 2023, the Company paid a dividend of $0.63 per share. On May 3, 2023, the Company’s Board of Directors declared a dividend of $0.63 per share for the second quarter of 2023. The dividend will be paid on June 2, 2023 to all holders of record of the Company’s restricted and unrestricted common stock as of May 18, 2023.
The Company’s Note Payable (“Term Loan”) contains direct restrictions to the amount of dividends the Company may pay, and the warehouse debt facilities and agreements with the Agencies contain minimum equity, liquidity, and other capital requirements that indirectly
23
restrict the amount of dividends the Company may pay. The Company does not believe that these restrictions currently limit the amount of dividends the Company can pay for the foreseeable future.
NOTE 11—SEGMENTS
The Company’s executive leadership team, which functions as the Company’s chief operating decision making body, makes decisions and assesses performance based on the following three reportable segments. The reportable segments are determined based on the product or service provided and reflect the manner in which management is currently evaluating the Company’s financial information.
(i) | Capital Markets (“CM”)—CM provides a comprehensive range of commercial real estate finance products to its customers, including Agency lending, debt brokerage, property sales, and appraisal and valuation services. The Company’s long-established relationships with the Agencies
As part of Agency lending, CM temporarily funds the loans it originates (loans held for sale) before selling them to the Agencies and earns net interest income on the spread between the interest income on the loans and the warehouse interest expense. For Agency loans, CM recognizes the fair value of expected net cash flows from servicing, which represents the right to receive future servicing fees. CM also earns fees for origination of loans for both Agency lending and debt brokerage, fees for property sales, appraisals, and investment banking and advisory services, and subscription revenue for its housing market research. Direct internal, including compensation, and external costs that are specific to CM are included within the results of this reportable segment.
SAM earns revenue through (i) fees for servicing the loans in the Company’s servicing portfolio, (ii) asset management fees for managing third-party capital invested in funds, primarily LIHTC tax credit funds, and (iii) net interest income on the spread between the interest income on the loans and the warehouse interest expense for loans held for investment. Direct internal, including compensation, and external costs that are specific to SAM are included within the results of this reportable segment.
|
24
The following tables provide a summary and reconciliation of each segment’s results for the three months ended March 31, 2023 and 2022 and total assets as of March 31, 2023 and 2022.
| | | | | | | | | | | | |
| As of and for the three months ended March 31, 2023 | |||||||||||
Segment Results and Total Assets | | | | | | Servicing & | | | | | | |
(in thousands) | | | Capital | | | Asset | | | | | | |
| | | Markets | | | Management | | | Corporate | | | Consolidated |
Revenues | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 46,956 | | $ | 128 | | $ | — | | $ | 47,084 |
Fair value of expected net cash flows from servicing, net | | | 30,013 | | | — | | | — | | | 30,013 |
Servicing fees | | | — | | | 75,766 | | | — | | | 75,766 |
Property sales broker fees | | | 11,624 | | | — | | | — | | | 11,624 |
Investment management fees | | | — | | | 15,173 | | | — | | | 15,173 |
Net warehouse interest income | | | (1,689) | | | 1,690 | | | — | | | 1 |
Escrow earnings and other interest income | | | — | | | 28,824 | | | 2,100 | | | 30,924 |
Other revenues | | | 17,100 | | | 11,615 | | | (554) | | | 28,161 |
Total revenues | | $ | 104,004 | | $ | 133,196 | | $ | 1,546 | | $ | 238,746 |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Personnel | | $ | 90,462 | | $ | 15,341 | | $ | 12,810 | | $ | 118,613 |
Amortization and depreciation | | | 1,186 | | | 54,010 | | | 1,770 | | | 56,966 |
Provision (benefit) for credit losses | |
| — | |
| (10,775) | |
| — | |
| (10,775) |
Interest expense on corporate debt | |
| 4,269 | |
| 9,582 | |
| 1,423 | |
| 15,274 |
Other operating expenses | |
| 5,644 | |
| 1,480 | |
| 16,939 | |
| 24,063 |
Total expenses | | $ | 101,561 | | $ | 69,638 | | $ | 32,942 | | $ | 204,141 |
Income from operations | | $ | 2,443 | | $ | 63,558 | | $ | (31,396) | | $ | 34,605 |
Income tax expense (benefit) | |
| 504 | | | 13,104 | | | (6,473) | |
| 7,135 |
Net income before noncontrolling interests | | $ | 1,939 | | $ | 50,454 | | $ | (24,923) | | $ | 27,470 |
Less: net income (loss) from noncontrolling interests | |
| 1,435 | |
| (630) | |
| — | |
| 805 |
Walker & Dunlop net income | | $ | 504 | | $ | 51,084 | | $ | (24,923) | | $ | 26,665 |
| | | | | | | | | | | | |
Total assets | | $ | 1,586,339 | | $ | 2,484,437 | | $ | 422,276 | | $ | 4,493,052 |
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| | | | | | | | | | | | |
| As of and for the three months ended March 31, 2022 | |||||||||||
Segment Results and Total Assets | | | | | | Servicing & | | | | | | |
(in thousands) | | | Capital | | | Asset | | | | | | |
| | | Markets | | | Management | | | Corporate | | | Consolidated |
Revenues | | | | | | | | | | | | |
Loan origination and debt brokerage fees, net | | $ | 81,823 | | $ | 487 | | $ | — | | $ | 82,310 |
Fair value of expected net cash flows from servicing, net | | | 52,730 | | | — | | | — | | | 52,730 |
Servicing fees | | | — | | | 72,681 | | | — | | | 72,681 |
Property sales broker fees | | | 23,398 | | | — | | | — | | | 23,398 |
Investment management fees | | | — | | | 14,858 | | | — | | | 14,858 |
Net warehouse interest income | | | 3,530 | | | 1,243 | | | — | | | 4,773 |
Escrow earnings and other interest income | | | — | | | 1,758 | | | 45 | | | 1,803 |
Other revenues | | | 7,336 | | | 15,466 | | | 44,089 | | | 66,891 |
Total revenues | | $ | 168,817 | | $ | 106,493 | | $ | 44,134 | | $ | 319,444 |
| | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
Personnel | | $ | 104,959 | | $ | 16,664 | | $ | 22,558 | | $ | 144,181 |
Amortization and depreciation | | | 56 | | | 54,893 | | | 1,203 | | | 56,152 |
Provision (benefit) for credit losses | |
| — | |
| (9,498) | |
| — | |
| (9,498) |
Interest expense on corporate debt | |
| 1,523 | |
| 4,536 | |
| 346 | |
| 6,405 |
Other operating expenses | |
| 7,201 | |
| 5,029 | |
| 19,984 | |
| 32,214 |
Total expenses | | $ | 113,739 | | $ | 71,624 | | $ | 44,091 | | $ | 229,454 |
Income from operations | | $ | 55,078 | | $ | 34,869 | | $ | 43 | | $ | 89,990 |
Income tax expense (benefit) | |
| 11,911 | | | 7,540 | | | 9 | |
| 19,460 |
Net income before noncontrolling interests | | $ | 43,167 | | $ | 27,329 | | $ | 34 | | $ | 70,530 |
Less: net income (loss) from noncontrolling interests | |
| 65 | |
| (744) | |
| — | |
| (679) |
Walker & Dunlop net income | | $ | 43,102 | | $ | 28,073 | | $ | 34 | | $ | 71,209 |
| | | | | | | | | | | | |
Total assets | | $ | 1,475,655 | | $ | 2,495,729 | | $ | 368,247 | | $ | 4,339,631 |
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NOTE 12—VARIABLE INTEREST ENTITIES
The Company, through its subsidiary Alliant, provides alternative investment management services through the syndication of tax credit funds and the joint development of affordable housing projects. To facilitate the syndication and development of affordable housing projects, the Company is involved with the acquisition and/or formation of limited partnerships and joint ventures with investors, property developers, and property managers that are VIEs.
A detailed discussion of the Company’s accounting policies regarding the consolidation of VIEs and significant transactions involving VIEs is included in NOTE 2 and NOTE 17 of the Company’s 2022 Form 10-K.
As of March 31, 2023 and December 31, 2022, the assets and liabilities of the consolidated tax credit funds were immaterial.
The table below presents the assets and liabilities of the Company’s consolidated joint development VIEs included in the Condensed Consolidated Balance Sheets:
| | | | | | |
Consolidated VIEs (in thousands) |
| | March 31, 2023 |
| | December 31, 2022 |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 314 | | $ | 201 |
Restricted cash | | | 1,532 | | | 1,532 |
Receivables, net | | | 33,321 | | | 33,593 |
Other Assets | | | 50,909 | | | 49,768 |
Total assets of consolidated VIEs | | $ | 86,076 | | $ | 85,094 |
| | | | | | |
Liabilities: | | | | | | |
Other liabilities | | $ | 40,622 | | $ | 39,148 |
Total liabilities of consolidated VIEs | | $ | 40,622 | | $ | 39,148 |
| | | | | | |
The table below presents the carrying value and classification of the Company’s interests in nonconsolidated VIEs included in the Condensed Consolidated Balance Sheets:
| | | | | | |
Nonconsolidated VIEs (in thousands) | | | March 31, 2023 |
| | December 31, 2022 |
Assets | | | | | | |
Committed investments in tax credit equity | | $ | 207,750 | | $ | 254,154 |
Other assets: Equity-method investments | | | 57,466 | | | 57,981 |
Total interests in nonconsolidated VIEs | | $ | 265,216 | | $ | 312,135 |
| | | | | | |
Liabilities | | | | | | |
Commitments to fund investments in tax credit equity | | $ | 196,522 | | $ | 239,281 |
Total commitments to fund nonconsolidated VIEs | | $ | 196,522 | | $ | 239,281 |
| | | | | | |
Maximum exposure to losses(1)(2) | | $ | 265,216 | | $ | 312,135 |
| | | | | | |
(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 Company may incur.
27 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:
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 28 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 We are one of the largest 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
Walker & Dunlop, Inc. is a holding company. We conduct the majority of our operations through Walker & Dunlop, LLC, our operating company. Segments
Capital Markets Capital Markets provides a comprehensive range of commercial real estate finance products to our customers, including Agency lending, debt brokerage, property sales, 29 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 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 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
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. 30 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 Servicing & Asset Management Servicing & Asset Management focuses on 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. 31 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 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
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.
Corporate
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 Mortgage Servicing Rights (“MSRs”).MSRs are recorded at fair value at loan The assumptions used to estimate the fair value of capitalized
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 33 forecasts from a market survey and a blended loss rate from historical 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 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, We actively monitor the judgments and assumptions used in our Allowance for Risk-Sharing Contingent Consideration Liabilities.The Company typically includes an earnout as part of the consideration paid for acquisitions to align the long-term interests of the acquiree with the Company. These earnouts contain milestones for achievement, which typically are revenue, revenue-like, or productivity measurements. If the milestone is achieved, the acquiree is paid the additional consideration. Upon acquisition, the Company is required to estimate the fair value of the earnout and include that fair value measurement as a component of the total consideration paid in the calculation of goodwill. The fair value of the earnout is recorded as a contingent consideration liability and included
within Other liabilities in the 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 34 assistance of third-party valuation specialists to assist with the fair value estimation. The probability of the
Overview of Current Business Environment The
The high rate of inflation The
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 35 expected to remain
The Federal Housing Finance Agency (“FHFA”) establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In
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 Our debt brokerage platform had lower volumes this quarter compared to the As noted above, our debt financing operations with HUD declined
We entered into the Interim Program JV to expand our capacity to originate Interim Program loans beyond the use of our own balance sheet. 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 36 Consolidated Results of Operations The following is a discussion of our consolidated results of operations for the three SUPPLEMENTAL OPERATING DATA CONSOLIDATED
The following tables present period-to-period comparisons of our financial results for the three FINANCIAL RESULTS – THREE MONTHS CONSOLIDATED
Overview
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
The decrease in expenses was due to decreases in personnel costs, other cost reduction initiatives. The increase in 38 increase the balance of our corporate debt subject to Income Tax Expense. The decrease in income tax expense primarily relates to a 62% decrease in income from operations, and a
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
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:
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. 39 Adjusted EBITDA is reconciled to net income as follows: ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CONSOLIDATED
The following ADJUSTED EBITDA – THREE MONTHS CONSOLIDATED
Origination fees decreased primarily due to a decline in
40 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 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 41
The following table presents a period-to-period comparison of the significant components of cash flows for the SIGNIFICANT COMPONENTS OF CASH FLOWS
The
origination activities is primarily attributable to The change from 42 The change from cash used
Segment Results The Company is managed based on our three Capital Markets SUPPLEMENTAL OPERATING DATA CAPITAL MARKETS
FINANCIAL RESULTS – THREE MONTHS CAPITAL MARKETS
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:
44
See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the
Property sales broker fees.
See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the 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.
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. 45 Expenses Personnel.
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. 46 Non-GAAP Financial Measure A reconciliation of adjusted EBITDA for our CM segment is presented below. Our ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CAPITAL MARKETS
The following tables present period-to-period comparisons of the components of CM adjusted EBITDA for the three
ADJUSTED EBITDA – THREE MONTHS CAPITAL MARKETS
Servicing & Asset Management SUPPLEMENTAL OPERATING DATA SERVICING & ASSET MANAGEMENT
FINANCIAL RESULTS – THREE MONTHS SERVICING & ASSET MANAGEMENT
Revenues Servicing Fees.
Escrow earnings and other interest income.
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 ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP SERVICING & ASSET MANAGEMENT
50 The following tables present period-to-period comparisons of the components of SAM adjusted EBITDA for the three ADJUSTED EBITDA – THREE MONTHS SERVICING & ASSET MANAGEMENT
Servicing fees increased due to growth in the average servicing portfolio period over period as a result of loan originations,
Corporate FINANCIAL RESULTS – THREE MONTHS CORPORATE
Other interest income.
Other Revenues. Expenses Personnel.
Interest expense on corporate debt. Other Operating Expenses.
52 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 ADJUSTED FINANCIAL MEASURE RECONCILIATION TO GAAP CORPORATE
53 The following tables present period-to-period comparisons of the components of Corporate adjusted EBITDA for the three ADJUSTED EBITDA – THREE MONTHS CORPORATE
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
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, Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate our servicing authority for all or some of the portfolio if, at any time, it determines that our financial condition is not adequate to support our obligations under the DUS agreement. We are required to maintain acceptable net worth as defined in the standards, and we satisfied the requirements as of We paid a cash dividend of
54 In February Historically, our cash flows from operations and warehouse facilities have been sufficient to enable us to meet our short-term liquidity needs and other funding requirements. We believe that cash flows from operations will continue to be sufficient for us to meet our current obligations for the foreseeable future. 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
We are in compliance with the Under the provisions of the DUS agreement, we must also maintain a certain level of liquid assets referred to as the operational and unrestricted portions of the required reserves each year. We satisfied these requirements as of Sources of Liquidity: Warehouse Facilities and Notes Payable Warehouse Facilities We 55 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). On January 12, 2023, we 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 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
Credit Quality and Allowance for Risk-Sharing Obligations The following table sets forth certain information useful in evaluating our credit performance.
For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at-risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans.
Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described in the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan.
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 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 As of We have never been required to repurchase a loan. New/Recent Accounting Pronouncements As seen in NOTE 2 in the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, there are no accounting pronouncements that the Financial Accounting Standards Board has issued and that have the potential to impact us but have not yet been adopted by us as of
Item 3. Quantitative and Qualitative 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. 58 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
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
Our
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
HUD do not require them to provide us with prepayment fees. As of 59 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. Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting during the quarter ended
PART II OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of business, we may be party to various claims and litigation, none of which we believe is material. We cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties and other costs, and our reputation and business may be impacted. Our management believes that any liability that could be imposed on us in connection with the disposition of any pending lawsuits would not have a material adverse effect on our business, results of operations, liquidity, or financial condition. Item 1A. Risk Factors We have included in Part I, Item 1A of our 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 60 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
Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. Item 6. Exhibits (a) Exhibits:
†: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.
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