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EX-32 - EX-32 - Walker & Dunlop, Inc.wd-20170630xex32.htm
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EX-31.1 - EX-31.1 - Walker & Dunlop, Inc.wd-20170630ex31193bdb4.htm

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 June 30, 2017

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)

 

 

7501 Wisconsin Avenue, Suite 1200E

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer ☒ 

 

Smaller reporting company ☐

 

Accelerated filer ☐

Emerging growth company ☐

 

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

 

 

 

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 July 26, 2017, there were 31,246,830 total shares of common stock outstanding.

 

 


 

Walker & Dunlop, Inc.
Form 10-Q
INDEX

 

 

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

PART I 

 

FINANCIAL INFORMATION

2

 

 

 

 

Item 1. 

 

Financial Statements

2

 

 

 

 

Item 2. 

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

 

Item 4. 

 

Controls and Procedures

42

 

 

 

 

PART II 

 

OTHER INFORMATION

42

 

 

 

 

Item 1. 

 

Legal Proceedings

42

 

 

 

 

Item 1A. 

 

Risk Factors

42

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

43

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

43

 

 

 

 

Item 5. 

 

Other Information

43

 

 

 

 

Item 6. 

 

Exhibits

43

 

 

 

 

 

 

Signatures

45

 

 

 

 

 

 

Exhibit Index

46

 

 

 

 

 


 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

 

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,338

 

$

118,756

 

Restricted cash

 

 

15,768

 

 

9,861

 

Pledged securities, at fair value

 

 

92,401

 

 

84,850

 

Loans held for sale, at fair value

 

 

1,608,025

 

 

1,858,358

 

Loans held for investment, net

 

 

167,540

 

 

220,377

 

Servicing fees and other receivables, net

 

 

34,794

 

 

29,459

 

Derivative assets

 

 

24,991

 

 

61,824

 

Mortgage servicing rights

 

 

573,159

 

 

521,930

 

Goodwill and other intangible assets

 

 

124,621

 

 

97,372

 

Other assets

 

 

71,398

 

 

49,645

 

Total assets

 

$

2,766,035

 

$

3,052,432

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

229,471

 

$

232,231

 

Performance deposits from borrowers

 

 

14,894

 

 

10,480

 

Derivative liabilities

 

 

500

 

 

4,396

 

Guaranty obligation, net of accumulated amortization

 

 

36,492

 

 

32,292

 

Allowance for risk-sharing obligations

 

 

3,648

 

 

3,613

 

Warehouse notes payable

 

 

1,630,268

 

 

1,990,183

 

Note payable

 

 

164,011

 

 

164,163

 

Total liabilities

 

$

2,079,284

 

$

2,437,358

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Preferred shares, Authorized 50,000, none issued.

 

$

 —

 

$

 —

 

Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 30,144 shares at June 30, 2017 and 29,551 shares at December 31, 2016

 

 

301

 

 

296

 

Additional paid-in capital

 

 

222,989

 

 

228,889

 

Retained earnings

 

 

458,819

 

 

381,031

 

Total stockholders’ equity

 

$

682,109

 

$

610,216

 

Noncontrolling interests

 

 

4,642

 

 

4,858

 

Total equity

 

$

686,751

 

$

615,074

 

Commitments and contingencies (NOTE 10)

 

 

 —

 

 

 —

 

Total liabilities and equity

 

$

2,766,035

 

$

3,052,432

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains from mortgage banking activities

 

$

102,176

 

$

102,453

 

$

198,608

 

$

148,776

 

Servicing fees

 

 

43,214

 

 

32,771

 

 

84,739

 

 

64,420

 

Net warehouse interest income

 

 

5,800

 

 

3,580

 

 

12,420

 

 

10,311

 

Escrow earnings and other interest income

 

 

4,514

 

 

1,955

 

 

7,806

 

 

3,595

 

Other

 

 

10,703

 

 

7,099

 

 

21,346

 

 

14,997

 

Total revenues

 

$

166,407

 

$

147,858

 

$

324,919

 

$

242,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

$

63,516

 

$

55,758

 

$

119,688

 

$

89,988

 

Amortization and depreciation

 

 

32,860

 

 

26,425

 

 

65,198

 

 

51,580

 

Provision (benefit) for credit losses

 

 

(93)

 

 

292

 

 

(225)

 

 

(117)

 

Interest expense on corporate debt

 

 

2,443

 

 

2,465

 

 

4,846

 

 

4,934

 

Other operating expenses

 

 

11,599

 

 

11,212

 

 

23,207

 

 

19,826

 

Total expenses

 

$

110,325

 

$

96,152

 

$

212,714

 

$

166,211

 

Income from operations

 

$

56,082

 

$

51,706

 

$

112,205

 

$

75,888

 

Income tax expense

 

 

21,570

 

 

19,595

 

 

34,633

 

 

28,444

 

Net income before noncontrolling interests

 

$

34,512

 

$

32,111

 

$

77,572

 

$

47,444

 

Less: net income (loss) from noncontrolling interests

 

 

(55)

 

 

90

 

 

(216)

 

 

(35)

 

Walker & Dunlop net income

 

$

34,567

 

$

32,021

 

$

77,788

 

$

47,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.15

 

$

1.09

 

$

2.60

 

$

1.61

 

Diluted earnings per share

 

$

1.08

 

$

1.05

 

$

2.43

 

$

1.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

30,131

 

 

29,388

 

 

29,971

 

 

29,438

 

Diluted weighted average shares outstanding

 

 

32,097

 

 

30,627

 

 

32,067

 

 

30,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income before noncontrolling interests

 

$

77,572

 

$

47,444

 

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

 

 

(90,204)

 

 

(79,496)

 

Change in the fair value of premiums and origination fees

 

 

1,921

 

 

(11,954)

 

Amortization and depreciation

 

 

65,198

 

 

51,580

 

Provision (benefit) for credit losses

 

 

(225)

 

 

(117)

 

Other operating activities, net

 

 

365,842

 

 

339,053

 

Net cash provided by (used in) operating activities

 

$

420,104

 

$

346,510

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

$

(2,049)

 

$

(777)

 

Funding of preferred equity investments

 

 

(11,385)

 

 

(6,409)

 

Net cash paid to increase ownership interest in a previously held equity-method investment

 

 

 —

 

 

(1,058)

 

Acquisitions, net of cash received

 

 

(15,000)

 

 

 —

 

Purchase of mortgage servicing rights

 

 

 —

 

 

(43,374)

 

Originations of loans held for investment

 

 

(167,079)

 

 

(141,842)

 

Principal collected on loans held for investment

 

 

100,980

 

 

133,120

 

Net cash provided by (used in) investing activities

 

$

(94,533)

 

$

(60,340)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Borrowings (repayments) of warehouse notes payable, net

 

$

(414,266)

 

$

(333,615)

 

Borrowings of interim warehouse notes payable

 

 

128,660

 

 

98,863

 

Repayments of interim warehouse notes payable

 

 

(75,615)

 

 

(97,873)

 

Repayments of note payable

 

 

(552)

 

 

(552)

 

Proceeds from issuance of common stock

 

 

2,885

 

 

3,291

 

Repurchase of common stock

 

 

(17,590)

 

 

(11,979)

 

Debt issuance costs

 

 

(1,053)

 

 

(1,689)

 

Distributions to noncontrolling interests

 

 

 —

 

 

(5)

 

Net cash provided by (used in) financing activities

 

$

(377,531)

 

$

(343,559)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2)

 

$

(51,960)

 

$

(57,389)

 

Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period

 

 

213,467

 

 

214,484

 

Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period

 

$

161,507

 

$

157,095

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid to third parties for interest

 

$

22,513

 

$

18,008

 

Cash paid for income taxes

 

 

27,748

 

 

16,426

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

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 do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”). In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or thereafter.

Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of multifamily and other commercial real estate financing products and provides multifamily investment sales brokerage services. 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”). The Company also offers a proprietary loan program offering interim loans (the “Interim Program”).

During the second quarter of 2017, the Company formed a joint venture with an affiliate of one of the world’s largest owners of commercial real estate that originates, holds, and finances loans that previously met the criteria of the Interim Program. The Company holds a 15% ownership interest in the joint venture and is responsible for underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations using a combination of equity contributions from the partners and third-party credit facilities. The Company expects that substantially all loans satisfying the criteria for the Interim Program will be originated by the joint venture going forward; however, the Company may opportunistically originate loans held for investment through the existing Interim Program in the future. During the third quarter of 2017, the Company sold certain loans from its portfolio of interim loans with an unpaid principal balance of $119.8 million to the joint venture at par. These loans were classified as held for sale as of June 30, 2017. The Company does not expect to sell additional loans held for investment to the joint venture. The Company does not consolidate the activities of the joint venture; therefore, it accounts for the activities associated with its ownership interest using the equity method.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. All intercompany transactions have been eliminated in consolidation. When the Company has significant influence over operating and financial decisions for an entity but does not own a majority of the voting interests, the Company accounts for the investment using the equity method of accounting.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to June 30, 2017. There have been no material events that would require recognition in the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to June 30, 2017. No other material subsequent events have occurred that would require disclosure.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including allowance for risk-sharing obligations, allowance for loan losses, capitalized mortgage servicing rights, derivative instruments, and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Comprehensive Income—For the three and six months ended June 30, 2017 and 2016, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.

5


 

Loans Held for Investment, netLoans held for investment are multifamily loans originated by the Company through the Interim Program for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing. These loans have terms of up to three years. 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. Interest income is accrued based on the actual coupon rate, adjusted for the amortization of net deferred fees and costs, and is recognized as revenue when earned and deemed collectible. All loans held for investment are multifamily loans with similar risk characteristics. As of June 30, 2017, Loans held for investment, net consisted of nine loans with an aggregate $168.7 million of unpaid principal balance less $1.0 million of net unamortized deferred fees and costs and $0.2 million of allowance for loan losses. As of December 31, 2016, Loans held for investment, net consisted of 12 loans with an aggregate $222.3 million of unpaid principal balance less $1.5 million of net unamortized deferred fees and costs and $0.4 million of allowance for loan losses.

 

The allowance for loan losses is the Company’s estimate of credit losses inherent in the interim loan portfolio at the balance sheet date. The Company has established a process to determine the appropriateness of the allowance for loan losses that assesses the losses inherent in the portfolio. That process includes assessing the credit quality of each of the loans held for investment by monitoring the financial condition of the borrower and the financial trends of the underlying property. The allowance levels are influenced by the outstanding portfolio balance, delinquency rates, historic loss experience, and other conditions influencing loss expectations, such as economic conditions. The allowance for loan losses is estimated collectively for loans with similar characteristics and for which there is no evidence of impairment. The allowances for loan losses recorded as of June 30, 2017 and December 31, 2016 were based on the Company’s collective assessment of the portfolio.

 

Loans held for investment are placed on non-accrual status when full and timely collection of interest or principal is not probable. Loans held for investment are considered past due when contractually required principal or interest payments have not been made on the due dates and are charged off when the loan is considered uncollectible. The Company evaluates all loans held for investment for impairment. A loan is considered impaired when the Company believes that the facts and circumstances of the loan suggest that the Company will not be able to collect all contractually due principal and interest. Delinquency status and property financial condition are key components of the Company’s consideration of impairment status.

 

None of the loans held for investment was delinquent, impaired, or on non-accrual status as of June 30, 2017 or December 31, 2016. Additionally, we have not experienced any delinquencies related to these loans or charged off any loan held for investment since the inception of the Interim Program in 2012.

 

Provision (Benefit) for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit losses in the Condensed Consolidated Statements of Income. NOTE 5 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the three and six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the six months ended 

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Provision (benefit) for loan losses

 

$

(215)

 

$

17

 

$

(190)

 

$

(238)

 

Provision (benefit) for risk-sharing obligations

 

 

122

 

 

275

 

 

(35)

 

 

121

 

Provision (benefit) for credit losses

 

$

(93)

 

$

292

 

$

(225)

 

$

(117)

 

 

Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Substantially all loans that are held for sale are financed with matched borrowings under our warehouse facilities incurred to fund a specific loan held for sale. A portion of all loans that are held for investment is financed with matched borrowings under our warehouse facilities. The portion of loans held for sale or investment not funded with matched borrowings is financed with the Company’s own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. Included in Net warehouse interest income for the three and six months ended June 30, 2017 and 2016 are the following components: 

 

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the six months ended 

 

 

June 30, 

 

June 30, 

(in thousands)

    

2017

    

2016

    

2017

    

2016

Warehouse interest income - loans held for sale

 

$

9,413

 

$

7,298

 

$

21,353

 

$

20,821

Warehouse interest expense - loans held for sale

 

 

(6,983)

 

 

(5,168)

 

 

(15,248)

 

 

(13,516)

Net warehouse interest income - loans held for sale

 

$

2,430

 

$

2,130

 

$

6,105

 

$

7,305

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

5,315

 

$

2,630

 

$

9,993

 

$

5,453

Warehouse interest expense - loans held for investment

 

 

(1,945)

 

 

(1,180)

 

 

(3,678)

 

 

(2,447)

Net warehouse interest income - loans held for investment

 

$

3,370

 

$

1,450

 

$

6,315

 

$

3,006

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net warehouse interest income

 

$

5,800

 

$

3,580

 

$

12,420

 

$

10,311

 

Income Taxes—The Company records the excess tax benefits from stock compensation as a reduction to income tax expense. The Company recorded excess tax benefits of $0.1 million and $0.2 million during the three months ended June 30, 2017 and 2016, respectively, and $8.8 million and $0.5 million during the six months ended June 30, 2017 and 2016, respectively.

 

Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers Pledged securities, at fair value to be restricted cash equivalents. The following table presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of June 30, 2017 and 2016 and December 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

(in thousands)

2017

    

2016

    

2016

    

2015

 

Cash and cash equivalents

$

53,338

 

$

60,993

 

$

118,756

 

$

136,988

 

Restricted cash

 

15,768

 

 

17,611

 

 

9,861

 

 

5,306

 

Pledged securities, at fair value (restricted cash equivalents)

 

92,401

 

 

78,491

 

 

84,850

 

 

72,190

 

Total cash, cash equivalents, restricted cash, and restricted cash equivalents

$

161,507

 

$

157,095

 

$

213,467

 

$

214,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recently Announced Accounting Pronouncements—The following table presents the accounting pronouncements that the Financial Accounting Standards Board (“FASB”) has issued and that have the potential to impact the Company but have not yet been adopted by the Company.

 

7


 

 

 

 

 

 

Standard

Issue Date

Description

Effective Date

Expected Financial Statement Impact

Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

Q2 2016

ASU 2016-13 ("the Standard") represents a significant change to the incurred loss model currently used to account for credit losses. The Standard requires an entity to estimate the credit losses expected over the life of the credit exposure upon initial recognition of that exposure. The expected credit losses consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Exposures with similar risk characteristics are required to be grouped together when estimating expected credit losses. The initial estimate and subsequent changes to the estimated credit losses are required to be reported in current earnings in the income statement and through an allowance in the balance sheet. ASU 2016-13 is applicable to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures. The Standard will modify the way the Company estimates its allowance for risk-sharing obligations and its allowance for loan losses. ASU 2016-13 requires modified retrospective application to all outstanding, in-scope instruments, with a cumulative-effect adjustment recorded to opening retained earnings as of the beginning of the period of adoption.

January 1, 2020 (early adoption permitted January 1, 2019)

The Company is in the preliminary stages of implementation as it is still in the process of determining the significance of the impact the Standard will have on its financial statements and the timing of when it will adopt ASU 2016-13. The Company expects its Allowance for risk-sharing obligations and allowance for loan losses to increase when ASU 2016-13 is adopted. The magnitude of the impacts will not be known until closer to the adoption date.

ASU 2016-02, Leases (Topic 842)

Q1 2016

ASU 2016-02 represents a significant reform to the accounting for leases. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. Lessees generally recognize lease expense for these leases on a straight-line basis, which is similar to what they do today. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.

January 1, 2019 (early adoption is permitted)

The Company is in the preliminary stages of implementation. The Company has completed its analysis of  the applicability of the standard to its operations and has now progressed to determining the significance of the impact ASU 2016-02 will have on its financial statements and the timing of when it will adopt ASU 2016-02.

ASU 2016-01, Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities

Q1 2016

The guidance requires that unconsolidated equity investments not accounted for under the equity method be recorded at fair value, with changes in fair value recorded through net income. The accounting principles that permitted available-for-sale classification with unrealized holding gains and losses recorded in other comprehensive income for equity securities will no longer be applicable. The guidance is not applicable to debt securities and loans and requires minor changes to the disclosure and presentation of financial instruments. ASU 2016-01 generally requires a cumulative-effect adjustment to opening retained earnings as of the beginning of the period of adoption.

January 1, 2018 (early adoption permitted for certain parts)

The Company does not believe that ASU 2016-01 will have a material impact on its reported financial results as the Company does not have any unconsolidated equity investments not accounted for under the equity method.

8


 

 

 

 

 

 

Standard

Issue Date

Description

Effective Date

Expected Financial Statement Impact

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

Q2 2014

ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The guidance in the ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the Accounting Standards Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving the core principle: 1) identifying the contract with the customer, 2) identifying the performance obligations in the contract, 3) determining the transaction price, 4) allocating the transaction price to the performance obligations, and 5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. The guidance permits the use of the full retrospective or modified retrospective transition methods.

January 1, 2018 (early adoption permitted January 1, 2017)

The Company completed its analysis of ASU 2014-09 and concluded that it will not have a material impact on the amount or timing of revenue the Company records under its current revenue recognition practices. Additionally, the Company believes that this ASU will not impact the presentation of the Company's financial statements or require significant additional footnote disclosures.

 

There are no other accounting pronouncements previously issued by the FASB but not yet effective or not yet adopted by the Company that have the potential to impact the Company’s condensed consolidated financial statements.

 

There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2016 Form 10-K other than the changes made pursuant to the adoption of two ASUs as disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (“Q1 2017 10-Q”).

ReclassificationsThe Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation,  including an adjustment  relating to the presentation of cash flows associated with restricted cash and restricted cash equivalents  for the adoption of a new accounting standard during the fourth quarter of 2016 as more fully described in NOTE 2 of the 2016 Form 10-K.

NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES

Gains from mortgage banking activities consisted of the following activity for the three and six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended 

 

June 30, 

 

June 30, 

(in thousands)

2017

    

2016

 

2017

    

2016

Contractual loan origination related fees, net

$

57,507

 

$

46,874

 

$

108,404

 

$

69,280

Fair value of expected net cash flows from servicing recognized at commitment

 

48,318

 

 

59,580

 

 

96,995

 

 

85,007

Fair value of expected guaranty obligation recognized at commitment

 

(3,649)

 

 

(4,001)

 

 

(6,791)

 

 

(5,511)

Total gains from mortgage banking activities

$

102,176

 

$

102,453

 

$

198,608

 

$

148,776

 

 

 

 

 

 

 

 

 

 

 

 

The origination fees shown in the table are net of co-broker fees of $6.5 million and $11.1 million for the three months ended June 30, 2017 and 2016, respectively, and $10.2 million and $16.6 million for the six months ended June 30, 2017 and 2016, respectively.

NOTE 4—MORTGAGE SERVICING RIGHTS

Mortgage Servicing Rights (“MSRs”) represent the carrying value of the servicing rights retained by the Company for mortgage loans originated and sold. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with the

9


 

servicing rights. MSRs are amortized using the interest method over the period that servicing income is expected to be received.

The fair values of the MSRs at June 30, 2017 and December 31, 2016 were $748.4 million and $669.4 million, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities:

The impact of a 100-basis point increase in the discount rate at June 30, 2017 is a decrease in the fair value of $23.8 million.

The impact of a 200-basis point increase in the discount rate at June 30, 2017 is a decrease in the fair value of $46.0 million.

These sensitivities are hypothetical and should be used with caution. These estimates do not include interplay among assumptions and are estimated as a portfolio rather than individual assets.

Activity related to capitalized MSRs for the three and six months ended June 30, 2017 and 2016 is shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Beginning balance

 

$

562,530

 

$

421,651

 

$

521,930

 

$

412,348

 

Additions, following the sale of loan

 

 

44,650

 

 

29,053

 

 

117,574

 

 

64,026

 

Purchases

 

 

 —

 

 

44,774

 

 

 —

 

 

44,774

 

Amortization

 

 

(29,325)

 

 

(23,233)

 

 

(58,224)

 

 

(45,956)

 

Pre-payments and write-offs

 

 

(4,696)

 

 

(4,152)

 

 

(8,121)

 

 

(7,099)

 

Ending balance

 

$

573,159

 

$

468,093

 

$

573,159

 

$

468,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following summarizes the components of the net carrying value of the Company’s acquired and originated MSRs as of June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

 

  

Gross

  

Accumulated

  

Net

 

(in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

175,934

 

$

(114,229)

 

$

61,705

 

Originated MSRs

 

 

728,606

 

 

(217,152)

 

 

511,454

 

Total

 

$

904,540

 

$

(331,381)

 

$

573,159

 

 

The expected amortization of MSRs recorded as of June 30, 2017 is shown in the table below. Actual amortization may vary from these estimates.

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Originated MSRs

  

Acquired MSRs

  

Total MSRs

 

(in thousands)

 

Amortization

 

Amortization

 

  Amortization  

 

Six Months Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2017

 

$

51,225

 

$

6,345

 

$

57,570

 

Year Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2018

 

$

92,976

 

$

11,515

 

$

104,491

 

2019

 

 

79,225

 

 

10,187

 

 

89,412

 

2020

 

 

71,000

 

 

8,578

 

 

79,578

 

2021

 

 

61,605

 

 

6,855

 

 

68,460

 

2022

 

 

48,966

 

 

4,921

 

 

53,887

 

Thereafter

 

 

106,457

 

 

13,304

 

 

119,761

 

Total

 

$

511,454

 

$

61,705

 

$

573,159

 

 

 

 

 

 

 

 

 

 

 

 

 

10


 

NOTE 5—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

When a loan is sold under the Fannie Mae Delegated Underwriting and Servicing (“DUS” TM) 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 Company does not provide a guaranty for any other loan product it sells or brokers.

Activity related to the guaranty obligation for the three and six months ended June 30, 2017 and 2016 is presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Beginning balance

 

$

35,311

 

$

28,552

 

$

32,292

 

$

27,570

 

Additions, following the sale of loan

 

 

3,046

 

 

1,777

 

 

7,736

 

 

3,689

 

Amortization

 

 

(1,885)

 

 

(1,537)

 

 

(3,466)

 

 

(2,750)

 

Other

 

 

20

 

 

(386)

 

 

(70)

 

 

(103)

 

Ending balance

 

$

36,492

 

$

28,406

 

$

36,492

 

$

28,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Activity related to the allowance for risk-sharing obligations for the three and six months ended June 30, 2017 and 2016 is shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Beginning balance

 

$

3,546

 

$

5,149

 

$

3,613

 

$

5,586

 

Provision (benefit) for risk-sharing obligations

 

 

122

 

 

275

 

 

(35)

 

 

121

 

Write-offs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other

 

 

(20)

 

 

386

 

 

70

 

 

103

 

Ending balance

 

$

3,648

 

$

5,810

 

$

3,648

 

$

5,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When the Company places a loan for which it has a risk-sharing obligation on its watch list, the Company transfers the remaining unamortized balance of the guaranty obligation to the allowance for risk-sharing obligations. When a loan for which the Company has a risk-sharing obligation is removed from the watch list, the loan’s reserve is transferred from the allowance for risk-sharing obligations to the guaranty obligation, and the amortization of the remaining balance over the remaining estimated life is resumed. This net transfer of the unamortized balance of the guaranty obligation from a noncontingent classification to a contingent classification (and vice versa) is presented in the guaranty obligation and allowance for risk-sharing obligations tables above as ‘Other.’

The Allowance for risk-sharing obligations as of June 30, 2017 is based entirely on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of June 30, 2017.

As of June 30, 2017, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $5.3 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement.

NOTE 6—SERVICING

The total unpaid principal balance of the Company’s servicing portfolio was $66.3 billion as of June 30, 2017 compared to $63.1 billion as of December 31, 2016.

NOTE 7—WAREHOUSE NOTES PAYABLE

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At June 30, 2017, to provide financing to borrowers, the Company has arranged for warehouse lines of credit. In support of the Agencies’ programs, the Company has warehouse lines of credit in the amount of $2.3 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). The Company has pledged substantially all of its loans held for sale against the Agency Warehouse Facilities. The Company has arranged for warehouse lines of credit in the amount of $0.4 billion with certain national banks to assist in funding loans held for investment under the Interim Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The maximum amount and outstanding borrowings under the warehouse notes payable at June 30, 2017 are shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

(dollars in thousands)

    

Maximum

    

Outstanding

    

Loan Type

    

    

 

Facility

 

Amount

 

Balance

 

Funded (1)

 

Interest rate

 

Agency warehouse facility #1

 

$

425,000

 

$

224,431

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #2

 

 

650,000

 

 

470,003

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #3

 

 

880,000

 

 

387,932

 

LHFS

 

30-day LIBOR plus 1.25%

 

Agency warehouse facility #4

 

 

350,000

 

 

238,902

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #5

 

 

30,000

 

 

20,348

 

LHFS

 

30-day LIBOR plus 1.80%

 

Fannie Mae repurchase agreement, uncommitted line and open maturity

 

 

1,500,000

 

 

93,112

 

LHFS

 

30-day LIBOR plus 1.15%

 

Total agency warehouse facilities

 

$

3,835,000

 

$

1,434,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interim warehouse facility #1

 

$

85,000

 

$

43,440

 

LHFI

 

30-day LIBOR plus 1.90%

 

Interim warehouse facility #2

 

 

200,000