WALKER & DUNLOP, INC., 10-K filed on 2/24/2017
Annual Report
v3.6.0.2
Document and Entity Information - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2016
Jan. 31, 2017
Jun. 30, 2016
Document And Entity Information      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2016    
Document Fiscal Year Focus 2016    
Document Fiscal Period Focus FY    
Entity Current Reporting Status Yes    
Entity Registrant Name Walker & Dunlop, Inc.    
Entity Central Index Key 0001497770    
Current Fiscal Year End Date --12-31    
Entity Filer Category Large Accelerated Filer    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Public Float     $ 541.1
Entity Common Stock, Shares Outstanding   30,816,755  
v3.6.0.2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2016
Dec. 31, 2015
Assets    
Cash and cash equivalents $ 118,756 $ 136,988
Restricted cash 9,861 5,306
Pledged securities, at fair value 84,850 72,190
Loans held for sale, at fair value 1,858,358 2,499,111
Loans held for investment, net 220,377 231,493
Servicing fees and other receivables, net 29,459 23,844
Derivative assets 61,824 11,678
Mortgage servicing rights 521,930 412,348
Goodwill and other intangible assets 97,372 91,488
Other assets 49,645 30,545
Total assets 3,052,432 3,514,991
Liabilities    
Accounts payable and other liabilities 93,211 67,684
Performance deposits from borrowers 10,480 5,112
Derivative liabilities 4,396 1,333
Guaranty obligation, net of accumulated amortization 32,292 27,570
Allowance for risk-sharing obligations 3,613 5,586
Deferred tax liabilities, net 139,020 101,425
Warehouse notes payable 1,990,183 2,649,470
Note payable 164,163 164,462
Total liabilities 2,437,358 3,022,642
Equity    
Preferred shares, 50,000 authorized, none issued.
Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 29,551 shares at December 31, 2016 and 29,466 shares at December 31, 2015 296 295
Additional paid-in capital 228,889 215,575
Retained earnings 381,031 272,030
Total stockholders' equity 610,216 487,900
Noncontrolling interests 4,858 4,449
Total equity 615,074 492,349
Commitments and contingencies (NOTE 10)
Total liabilities and equity $ 3,052,432 $ 3,514,991
v3.6.0.2
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Dec. 31, 2016
Dec. 31, 2015
Consolidated Balance Sheets    
Preferred shares, authorized 50,000 50,000
Preferred shares, issued 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, authorized 200,000 200,000
Common stock, issued 29,551 29,466
Common stock, outstanding 29,551 29,466
v3.6.0.2
Consolidated Statements of Income - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenues      
Gains from mortgage banking activities $ 367,185 $ 290,466 $ 221,983
Servicing fees 140,924 114,757 98,414
Escrow earnings and other interest income 9,168 4,473 4,526
Other 34,272 34,542 18,355
Total revenues 575,276 468,198 360,772
Expenses      
Personnel 227,491 184,590 149,374
Amortization and depreciation 111,427 98,173 80,138
Provision (benefit) for credit losses (612) 1,644 2,206
Interest expense on corporate debt 9,851 9,918 10,311
Other operating costs 41,338 38,507 34,831
Total expenses 389,495 332,832 276,860
Income from operations 185,781 135,366 83,912
Income tax expense 71,470 52,771 32,490
Net income before noncontrolling interests 114,311 82,595 51,422
Less: net income from noncontrolling interests 414 467  
Walker & Dunlop net income $ 113,897 $ 82,128 $ 51,422
Basic earnings per share $ 3.87 $ 2.76 $ 1.60
Diluted earnings per share $ 3.65 $ 2.65 $ 1.58
Basic weighted average shares outstanding 29,432 29,754 32,210
Diluted weighted average shares outstanding 31,172 30,949 32,624
Loans Held for Sale      
Revenues      
Net warehouse interest income $ 16,245 $ 14,541 $ 11,343
Loans Held for Investment      
Revenues      
Net warehouse interest income $ 7,482 $ 9,419 $ 6,151
v3.6.0.2
Consolidated Statements of Changes in Equity - USD ($)
shares in Thousands, $ in Thousands
Common Stock
Additional Paid-In Capital
Retained Earnings
Noncontrolling Interests
Total
Balance at the beginning of the period at Dec. 31, 2013 $ 340 $ 244,954 $ 157,547   $ 402,841
Balance at the beginning of the period (in shares) at Dec. 31, 2013 34,000        
Change in Stockholders' Equity          
Walker & Dunlop net income     51,422   51,422
Stock-based compensation - equity classified   9,063     9,063
Issuance of common stock in connection with equity compensation plans $ 4 1,832     1,836
Issuance of common stock in connection with equity compensation plans (in shares) 403        
Issuance of unvested restricted common stock in connection with acquisitions   5,920     5,920
Repurchase and retirement of common stock (NOTE 12) $ (26) (37,567)     (37,593)
Repurchase and retirement of common stock (NOTE 12) (in shares) (2,581)        
Tax benefit from vesting of restricted shares   (38)     (38)
Balance at the end of the period at Dec. 31, 2014 $ 318 224,164 208,969   433,451
Balance at the end of the period (in shares) at Dec. 31, 2014 31,822        
Change in Stockholders' Equity          
Walker & Dunlop net income     82,128   82,128
Net income from noncontrolling interests       $ 467 467
Stock-based compensation - equity classified   13,428     13,428
Issuance of common stock in connection with equity compensation plans $ 8 5,653     5,661
Issuance of common stock in connection with equity compensation plans (in shares) 815        
Issuance of unvested restricted common stock in connection with acquisitions   1,892     1,892
Repurchase and retirement of common stock (NOTE 12) $ (31) (31,163) (19,067)   (50,261)
Repurchase and retirement of common stock (NOTE 12) (in shares) (3,171)        
Tax benefit from vesting of restricted shares   1,410     1,410
Noncontrolling interest acquired       4,339 4,339
Other   191   (357) (166)
Balance at the end of the period at Dec. 31, 2015 $ 295 215,575 272,030 4,449 $ 492,349
Balance at the end of the period (in shares) at Dec. 31, 2015 29,466       29,466
Change in Stockholders' Equity          
Walker & Dunlop net income     113,897   $ 113,897
Net income from noncontrolling interests       414 414
Stock-based compensation - equity classified   17,616     17,616
Issuance of common stock in connection with equity compensation plans $ 6 3,759     3,765
Issuance of common stock in connection with equity compensation plans (in shares) 645        
Repurchase and retirement of common stock (NOTE 12) $ (5) (8,112) (4,776)   (12,893)
Repurchase and retirement of common stock (NOTE 12) (in shares) (560)        
Other   (84)   (5) (89)
Balance at the end of the period at Dec. 31, 2016 $ 296 228,889 381,031 $ 4,858 $ 615,074
Balance at the end of the period (in shares) at Dec. 31, 2016 29,551       29,551
Change in Stockholders' Equity          
Cumulative effect from change in accounting for stock compensation   $ 135 $ (120)   $ 15
v3.6.0.2
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities      
Net income before noncontrolling interests $ 114,311 $ 82,595 $ 51,422
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 (192,825) (133,631) (96,515)
Change in the fair value of premiums and origination fees (NOTE 2) (10,796) 1,959 2,059
Amortization and depreciation 111,427 98,173 80,138
Stock compensation-equity and liability classified 18,477 14,084 9,994
Provision (benefit) for credit losses (612) 1,644 2,206
Deferred tax expense 37,595 16,919 10,260
Originations of loans held for sale (12,040,559) (12,111,553) (8,103,452)
Sales of loans to third parties 12,697,209 10,688,356 7,326,908
Amortization of deferred loan fees and costs (1,578) (1,775) (1,273)
Amortization of debt issuance costs and debt discount 5,581 3,756 4,174
Origination fees received from loans held for investment 2,104 1,429 2,145
Tax shortfall (benefit) from vesting of equity awards   (1,410) 38
Cash paid to settle risk-sharing obligations (1,613) (795) (2,138)
Changes in:      
Servicing fees and other receivables (5,744) (623) 1,943
Other assets (1,014) 2,974 (11,759)
Accounts payable and other liabilities 22,035 7,739 12,415
Performance deposits from borrowers 5,368 (8,556) 8,434
Net cash provided by (used in) operating activities 759,366 (1,338,715) (703,001)
Cash flows from investing activities      
Capital expenditures (2,478) (1,413) (2,525)
Purchase of equity-method investments   (5,000)  
Funding of preferred equity investments (24,835)    
Net cash paid to increase ownership interest in a previously held equity method investment (1,058)    
Acquisitions, net of cash received (6,350) (12,767) (23,417)
Purchase of mortgage servicing rights (43,097)    
Originations of loans held for investment (414,763) (180,375) (339,802)
Principal collected on loans held for investment 425,820 172,323 250,104
Net cash provided by (used in) investing activities (66,761) (27,232) (115,640)
Cash flows from financing activities      
Borrowings (repayments) of warehouse notes payable, net (649,845) 1,423,911 774,935
Borrowings of interim warehouse notes payable 325,828 137,397 248,024
Repayments of interim warehouse notes payable (355,738) (125,542) (179,941)
Repayments of note payable (1,104) (4,819) (1,750)
Repayments of secured borrowings     (22,050)
Proceeds from issuance of common stock 3,765 7,553 7,756
Repurchase of common stock (12,893) (50,261) (37,593)
Debt issuance costs (3,630) (4,145) (1,416)
Distributions to noncontrolling interests (5)    
Tax benefit from vesting of equity awards   1,410 (38)
Net cash provided by (used in) financing activities (693,622) 1,385,504 787,927
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) (1,017) 19,557 (30,714)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period 214,484 194,927 225,641
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period 213,467 214,484 194,927
Supplemental Disclosure of Cash Flow Information:      
Cash paid to third parties for interest 39,311 32,854 23,950
Cash paid for income taxes $ 34,432 $ 34,832 $ 18,481
v3.6.0.2
ORGANIZATION
12 Months Ended
Dec. 31, 2016
ORGANIZATION  
Organization

NOTE 1—ORGANIZATION

 

These financial statements represent the 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.  

 

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”) and 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.

 

Through the third quarter of 2016, we offered commercial mortgage-backed securities (“CMBS”) executions through our own proprietary CMBS platform (the “CMBS Program”). We terminated the CMBS Program in the fourth quarter of 2016. Prior to 2016, the CMBS Program was managed through a partnership with another entity in which we owned less than 50%. At the beginning of the first quarter of 2016, the other partner exited the CMBS Program, and we assumed full ownership of the CMBS Program. We consolidated the operations of the CMBS Program in our financial statements during 2016 and accounted for our investment in the partnership under the equity method of accounting prior to 2016. In connection with the termination of the CMBS Program in 2016, we recognized $2.0 million of severance and other termination costs.

v3.6.0.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2016
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Summary of Significant Accounting Policies

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and all of its consolidated entities. All intercompany transactions have been eliminated. 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 December 31, 2016. There have been no material events that would require recognition in the consolidated financial statements. The Company has made certain disclosures in the notes to the consolidated financial statements of events that have occurred subsequent to December 31, 2016. No other material subsequent events have occurred that would require disclosure.

 

Use of Estimates—The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty obligations, 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.

 

Gains from Mortgage Banking Activities and Mortgage Servicing RightsGains from mortgage banking activities income is recognized when the Company records a derivative asset upon the commitment to originate a loan with a borrower and sell the loan to an investor. This commitment asset is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of any co-broker fees, and the estimated fair value of the expected net cash flows associated with the servicing of the loan, net of the estimated net future cash flows associated with any guaranty obligations retained. For loans the Company brokers, gains from mortgage banking activities are recognized when the loan is closed and represent the origination fee earned by the Company. The co-broker fees for the years ended December 31, 2016, 2015, and 2014 were $35.8 million, $18.0 million, and $15.9 million, respectively.

Transfer of financial assets is reported as a sale when (a) the transferor surrenders control over those assets, (b) the transferred financial assets have been legally isolated from the Company’s creditors, (c) the transferred assets can be pledged or exchanged by the transferee, and (d) consideration other than beneficial interests in the transferred assets is received in exchange. The transferor is considered to have surrendered control over transferred assets if, and only if, certain conditions are met. The Company determined that all loans sold during the periods presented met these specific conditions and accounted for all transfers of loans held for sale as completed sales.

When a loan is sold, the Company retains the right to service the loan and initially recognizes an individual mortgage servicing right (“MSR”) for the loan sold at fair value. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with servicing the loans, net of the expected net cash flows associated with any guaranty obligations. The following describes the principal assumptions used in estimated capitalized MSRs:

Discount rate—Depending upon loan type, the discount rate used is management's best estimate of market discount rates. The rates used for loans sold were 10% to 15% for each of the periods presented and varied based on loan type.

 

Estimated Life—The estimated life of the MSRs is derived based upon the stated yield maintenance and/or prepayment protection term of the underlying loan and may be reduced by 6 to 12 months based upon the expiration of various types of prepayment penalty and/or lockout provisions prior to that stated maturity date. The Company’s historical experience is that the prepayment provisions typically do not provide a significant deterrent to a borrower’s paying off the loan within 6 to 12 months of the expiration of the prepayment provisions.

 

Servicing Cost—The estimated future cost to service the loan for the estimated life of the MSR is subtracted from the estimated future cash flows.

 

The assumptions used to estimate the fair value of MSRs at loan sale are based on internal models and are compared to assumptions used by other market participants periodically. When such comparisons indicate that these assumptions have changed significantly, the Company adjusts its assumptions accordingly.

Subsequent to the initial measurement date, MSRs are amortized using the interest method over the period that servicing income is expected to be received and presented as a component of Amortization and depreciation in the Consolidated Statements of Income. For MSRs recognized at loan sale, the individual loan-level MSR is written off through a charge to Amortization and depreciation when a loan prepays, defaults, or is probable of default. We evaluate MSRs for impairment quarterly. The Company tests for impairment on the purchased stand-alone servicing portfolio separately from the Company’s other MSRs. The MSRs from both stand-alone portfolio purchases and from loan sales are tested for impairment at the portfolio level. The Company engages a third party to assist in determining an estimated fair value of our existing and outstanding MSRs on at least a semi-annual basis.

The fair value of MSRs acquired through a stand-alone servicing portfolio purchase is equal to the purchase price paid. For purchased stand-alone servicing portfolios, we record a portfolio-level MSR asset and determine the estimated life of the portfolio based on the prepayment characteristics of the portfolio. We subsequently amortize such MSRs and test for impairment quarterly as discussed in more detail above.

 

For MSRs related to purchased stand-alone servicing portfolios, a constant rate of prepayments and defaults is included in the determination of the portfolio’s estimated life (and thus included as a component of the portfolio’s amortization). Accordingly, prepayments and defaults of individual MSRs do not change the level of amortization expense recorded for the portfolio unless the pattern of actual prepayments and defaults varies significantly from the estimated pattern. When such a significant difference in the pattern of estimated and actual prepayments and defaults occurs, we prospectively adjust the estimated life of the portfolio (and thus future amortization) to approximate the actual pattern observed.

Guaranty Obligation and Allowance for Risk-sharing Obligations—When a loan is sold under the Fannie Mae DUS program, the Company undertakes an obligation to partially guarantee the performance of the loan. Upon loan sale, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized and presented as Guaranty obligation, net of accumulated amortization. The recognized guaranty obligation is the greater of the fair value of the Company’s obligation to stand ready to perform over the term of the guaranty (the noncontingent guaranty) and the fair value of the Company’s obligation to make future payments should those triggering events or conditions occur (contingent guaranty).

Historically, the fair value of the contingent guaranty at inception has been de minimis; therefore, the fair value of the noncontingent guaranty has been recognized. In determining the fair value of the guaranty obligation, the Company considers the risk profile of the collateral, historical loss experience, and various market indicators. Generally, the estimated fair value of the guaranty obligation is based on the present value of the cash flows expected to be paid under the guaranty over the estimated life of the loan (historically three to five basis points per year) discounted using a 12-15 percent discount rate. The discount rate used is consistent with what is used for the calculation of the MSR for each loan. The estimated life of the guaranty obligation is the estimated period over which the Company believes it will be required to stand ready under the guaranty. Subsequent to the initial measurement date, the liability is amortized over the life of the guaranty period using the straight-line method as a component of and reduction to Amortization and depreciation in the Consolidated Statements of Income, unless, as discussed more fully below, the loan defaults or management determines that the loan’s risk profile is such that amortization should cease.

 

The Company monitors the performance of each risk-sharing loan for events or conditions which may signal a potential default. Our process for identifying which risk-sharing loans may be probable of loss consists of an assessment of several qualitative and quantitative factors including payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. Historically, initial loss recognition occurs at or before a loan becomes 60 days delinquent. In instances where payment under the guaranty on a specific loan is determined to be probable and estimable (as the loan is probable of foreclosure or in foreclosure), the Company records a liability for the estimated allowance for risk-sharing (a “specific reserve”) through a charge to the provision for risk-sharing obligations, which is a component of Provision (benefit) for credit losses in the Consolidated Statements of Income, along with a write-off of the associated loan-specific MSR.

The amount of the allowance considers the Company’s assessment of the likelihood of repayment by the borrower or key principal(s), the risk characteristics of the loan, the loan’s risk rating, historical loss experience, adverse situations affecting individual loans, the estimated disposition value of the underlying collateral, and the level of risk sharing. The estimate of property fair value at initial recognition of the allowance for risk-sharing obligations is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, depending on the facts and circumstances associated with the loan. We regularly monitor the specific reserves on all applicable loans and update loss estimates as current information is received. The settlement with Fannie Mae is based on the actual sales price of the property and selling and property preservation costs and considers the Fannie Mae loss-sharing requirements.

 

In addition to the specific reserves discussed above, the Company also records an allowance for risk-sharing obligations related to risk-sharing loans on its watch list (“general reserves”). Such loans are not probable of foreclosure but are probable of loss as the characteristics of these loans indicate that it is probable that these loans include some losses even though the loss cannot be attributed to a specific loan. For all other risk-sharing loans not on our watch list, the Company continues to carry a guaranty obligation. The Company calculates the general reserves based on a migration analysis of the loans on its historical watch lists, adjusted for qualitative factors. When the Company places a risk-sharing loan on its watch list, the Company ceases to amortize the guaranty obligation and transfers the remaining unamortized balance of the guaranty obligation to the general reserves. The Company recognizes a provision for risk-sharing obligations to the extent the calculated general reserve exceeds the remaining unamortized guaranty obligation. If a risk-sharing loan is subsequently removed from the watch list due to improved financial performance or other factors, the Company transfers the unamortized balance of the guaranty obligation back to the guaranty obligation classification on the balance sheet and amortizes the remaining unamortized balance evenly over the remaining estimated life.

For each loan for which we have a risk-sharing obligation, we record one of the following liabilities associated with that loan as discussed above: guaranty obligation, general reserve, or specific reserve. Although the liability type may change over the life of the loan, at any particular point in time, only one such liability is associated with a loan for which we have a risk-sharing obligation. The total of the specific reserves and general reserves is presented as Allowance for risk-sharing obligations in the Consolidated Balance Sheets.

Loans Held for Investment, netThe Company offers an interim loan program for floating-rate, interest-only loans for terms of up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent GSE or HUD (collectively, the “Agencies”) financing (the “Interim Program”). These loans are classified as held for investment on the Company’s consolidated balance sheet during such time that they are outstanding. 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 with no geographic concentration.

The Company uses the interest method to determine an effective yield to amortize the loan fees and costs on real estate loans held for investment. All loans held for investment are floating-rate loans; therefore, the Company uses the initial coupon interest rate of the loans (without regard to future changes in the underlying indices) and anticipated principal payments, if any, to determine periodic amortization. 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. As of December 31, 2015,  Loans held for investment, net consisted of 13 loans with an aggregate $233.4 million of unpaid principal balance less $1.1 million of net unamortized deferred fees and costs and $0.8 million of allowance for loan losses.

The Company will reclassify loans held for investment as loans held for sale if it determines that the loans will be sold or transferred to third parties. To date, the Company has not sold any of its loans held for investment.

The allowance for loan losses is the Company’s estimate of credit losses inherent in the 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 aggregate outstanding principal balance, delinquency status, 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 collective allowance is based on recent historical loss probability and historical loss rates incurred in our risk-sharing portfolio, adjusted as needed for current market conditions. We use the loss experience from our risk-sharing portfolio as a proxy for losses incurred in our loans held for investment portfolio since (i) we have not experienced any actual losses related to our loans held for investment to date and (ii) the loans in the loans-held-for-investment portfolio have similar characteristics to loans held in the risk-sharing portfolio. The allowance for loan losses recorded as of December 31, 2016 and December 31, 2015 is 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 December 31, 2016 or December 31, 2015. 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 Consolidated Statements of Income. Provision (benefit) for credit losses consisted of the following activity for the years ended December 31, 2016, 2015, and 2014:

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

2016

    

2015

    

2014

 

Provision (benefit) for loan losses

 

$

(467)

 

$

(36)

 

$

423

 

Provision (benefit) for risk-sharing obligations

 

 

(145)

 

 

1,680

 

 

1,783

 

Provision (benefit) for credit losses

 

$

(612)

 

$

1,644

 

$

2,206

 

 

Business CombinationsThe Company accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The Company recognizes identifiable assets acquired and liabilities (both specific and contingent) assumed at their fair values at the acquisition date. Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. The excess of the purchase price over the assets acquired, identifiable intangible assets and liabilities assumed is recognized as goodwill. During the measurement period, the Company records adjustments to the assets acquired and liabilities assumed with corresponding adjustment to goodwill in the reporting period in which the adjustment is identified. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded to the Company’s Consolidated Statements of Income.

 

GoodwillThe Company evaluates goodwill for impairment annually. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. The Company currently has only one reporting unit; therefore, all goodwill is allocated to that one reporting unit. The Company performs its impairment testing annually as of October 1. The annual impairment analysis begins by comparing the Company’s market capitalization to its net assets. If the market capitalization exceeds the net asset value, further analysis is not required, and goodwill is not considered impaired. As of the date of our latest annual impairment test, October 1, 2016, the Company’s market capitalization exceeded its net asset value by $218.6 million, or 38.5%. As of December 31, 2016, there have been no events subsequent to that analysis that are indicative of an impairment loss.

 

Derivative Assets and LiabilitiesCertain loan commitments and forward sales commitments meet the definition of a derivative and are recorded at fair value in the Consolidated Balance Sheets. The estimated fair value of loan commitments includes the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees, and the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the risk-sharing obligation. The estimated fair value of forward sale commitments includes the effects of interest rate movements between the trade date and balance sheet date. Adjustments to the fair value are reflected as a component of income within Gains on mortgage banking in the Consolidated Statements of Income.

 

Loans Held for Sale—Loans held for sale represent originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded. The Company initially measures all originated loans at fair value. Subsequent to initial measurement, the Company measures all mortgage loans at fair value, unless the Company documents at the time the loan is originated that it will measure the specific loan at the lower of cost or fair value for the life of the loan. Electing to use fair value allows a better offset of the change in fair value of the loan and the change in fair value of the derivative instruments used as economic hedges. During the period prior to its sale, interest income on a loan held for sale is calculated in accordance with the terms of the individual loan. There were no loans held for sale that were valued at the lower of cost or fair value or on a non-accrual status at December 31, 2016 and 2015.

 

Share-Based Payment—The Company recognizes compensation costs for all share-based payment awards made to employees and directors, including restricted stock, restricted stock units, and employee stock options based on the grant date fair value.

 

Restricted stock awards are granted without cost to the Company’s officers, employees, and non-employee directors, for which the fair value of the award was calculated as the fair value of the Company’s common stock on the date of grant.

 

Stock option awards are granted principally to executive officers, with an exercise price equal to the closing price of the Company’s common stock on the date of the grant, and are granted with a ten-year exercise period, vesting ratably over three years dependent solely on continued employment. To estimate the grant-date fair value of stock options, the Company uses the Black-Scholes pricing model. The Black-Scholes model estimates the per share fair value of an option on its date of grant based on the following inputs: the option’s exercise price, the price of the underlying stock on the date of the grant, the estimated option life, the estimated dividend yield, a “risk-free” interest rate, and the expected volatility. For each of the years presented, the Company used the simplified method to estimate the expected term of the options as the Company did not have sufficient historical exercise data to provide a reasonable basis for estimating the expected term. The Company uses an estimated dividend yield of zero as the Company has not historically issued dividends and does not currently pay dividends. For the “risk-free” rate, the Company uses a U.S. Treasury Bond due in a number of years equal to the option’s expected term. For all years presented in the Consolidated Statements of Income, the expected volatility was calculated based on the Company’s historical common stock volatility. The Company issues new shares from the pool of authorized but not yet issued shares when an employee exercises stock options.

 

Generally, the Company’s stock option and restricted stock awards for its officers and employees vest ratably over a three-year period based solely on continued employment.  Restricted stock awards for non-employee directors fully vest after one year.

 

In 2014 and 2016, the Company offered a performance share plan (“PSP”) for the Company’s executives and certain other members of senior management. The performance period for each PSP is three full calendar years beginning on January 1 of the first year of the performance period. Participants in the PSP receive restricted stock units (“RSUs”) on the grant date for the PSP. If the performance targets are met at the end of the performance period and the participant remains employed by the Company, the participant fully vests in the RSUs, which immediately convert to unrestricted shares of common stock. If the performance targets are not met or the participant is no longer employed by the Company, the participant forfeits the RSUs. The performance targets for the 2014 PSP are based on meeting adjusted diluted earnings per share and total revenues goals. The performance targets for the 2016 PSP are based on meeting diluted earnings per share, return on equity, and total revenues goals. The Company records compensation expense for the PSP based on the grant-date fair value in an amount proportionate to the service time rendered by the participant when it is probable that the achievement of the goals will be met.

 

Compensation expense is adjusted for actual forfeitures and is recognized on a straight-line basis, for each separately vesting portion of the award as if the award were in substance multiple awards, over the requisite service period of the award. Share-based compensation is recognized within the income statement as Personnel, the same expense line as the cash compensation paid to the respective employees.

 

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. For the periods presented in the Consolidated Balance Sheets, all loans that were held for sale were 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 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 year ended December 31, 2016 and 2015 are the following components: 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

(in thousands)

 

2016

    

2015

    

2014

Warehouse interest income - loans held for sale

 

$

47,523

 

$

37,675

 

$

24,615

Warehouse interest expense - loans held for sale

 

 

(31,278)

 

 

(23,134)

 

 

(13,272)

Net warehouse interest income - loans held for sale

 

$

16,245

 

$

14,541

 

$

11,343

 

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

12,808

 

$

15,456

 

$

11,092

Warehouse interest expense - loans held for investment

 

 

(5,326)

 

 

(6,037)

 

 

(4,941)

Net warehouse interest income - loans held for investment

 

$

7,482

 

$

9,419

 

$

6,151

 

Statement of Cash Flows—The Company records the fair value of premiums and origination fees as a component of the fair value of derivatives when a loan intended to be sold is rate locked and records the related income within Gains from mortgage banking activities within the Consolidated Statements of Income. The cash for the origination fee is received upon closing of the loan, and the cash for the premium is received upon loan sale, resulting in a mismatch of the recognition of income and the receipt of cash in a given period when the derivative or loan held for sale remains outstanding at period end.

 

The Company accounts for this mismatch by recording an adjustment called Change in the fair value of premiums and origination fees within the Consolidated Statements of Cash Flows. The amount of the adjustment reflects a reduction to cash provided by or used in operations for the amount of income recognized upon rate lock (i.e., non-cash income) for derivatives and loans held for sale outstanding at period end and an increase to cash provided by or used in operations for cash received upon loan origination or sale for derivatives and loans held for sale that were outstanding at prior period end. When income recognized upon rate lock is greater than cash received upon loan origination or sale, the adjustment is a negative amount. When income recognized upon rate lock is less than cash received upon loan origination or loan sale, the adjustment is a positive amount.

 

As noted below in greater detail, in 2016 the Company early adopted an accounting standard related to the presentation of the statement of cash flows that requires entities to show the change in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. For presentation in the 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 Consolidated Statements of Cash Flows to the related captions in the Consolidated Balance Sheets as of December 31, 2016, 2015, 2014, and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(in thousands)

2016

    

2015

    

2014

    

2013

 

Cash and cash equivalents

$

118,756

 

$

136,988

 

$

113,354

 

$

170,563

 

Restricted cash

 

9,861

 

 

5,306

 

 

13,854

 

 

5,427

 

Pledged securities, at fair value (restricted cash equivalents)

 

84,850

 

 

72,190

 

 

67,719

 

 

49,651

 

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

$

213,467

 

$

214,484

 

$

194,927

 

$

225,641

 

 

Income TaxesThe Company files income tax returns in the applicable U.S. federal, state, and local jurisdictions and generally is subject to examination by the respective jurisdictions for three years from the filing of a tax return. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.

 

Deferred tax assets are recognized only to the extent that it is more likely than not that they will be realizable based on consideration of available evidence, including future reversals of existing taxable temporary differences, projected future taxable income and tax planning strategies.

 

The Company had no accruals for tax uncertainties as of December 31, 2016 and 2015.

 

Comprehensive Income—For the years ended December 31, 2016, 2015, and 2014, comprehensive income equaled Net income before noncontrolling interests; therefore, a separate statement of comprehensive income is not included in the accompanying consolidated financial statements.

 

Pledged Securities—As collateral against its Fannie Mae risk-sharing obligations (NOTES 5 and 10), certain securities have been pledged to the benefit of Fannie Mae to secure the Company's risk-sharing obligations. The balance of securities pledged against Fannie Mae risk-sharing obligations and included as a component of Pledged securities, at fair value within the Consolidated Balance Sheets as of December 31, 2016 and 2015 was $80.5 million and $70.9 million, respectively. Additionally, the Company has pledged an immaterial amount of cash as collateral against its risk-sharing obligations with Fannie Mae and Freddie Mac. The pledged securities as of December 31, 2016 and 2015 consist primarily of a highly liquid investment valued using quoted market prices from recent trades, and are therefore considered restricted cash equivalents for presentation in the Consolidated Statements of Cash Flows.

 

Cash and Cash Equivalents—The term cash and cash equivalents, as used in the accompanying consolidated financial statements, includes currency on hand, demand deposits with financial institutions, and short-term, highly liquid investments purchased with an original maturity of three months or less. The Company had no cash equivalents as of December 31, 2016 and 2015.

 

Restricted Cash—Restricted cash represents primarily good faith deposits from borrowers. The Company records a corresponding liability for these good faith deposits from borrowers within Performance deposits from borrowers within the Consolidated Balance Sheets.

 

Servicing Fees and Other Receivables, Net—Servicing fees and other receivables, net represents amounts currently due to the Company pursuant to contractual servicing agreements, investor good faith deposits held in escrow by others, general accounts receivable, and advances of principal and interest payments and tax and insurance escrow amounts if the borrower is delinquent in making loan payments, to the extent such amounts are determined to be reimbursable and recoverable. Advances related to Fannie Mae at-risk loans may be used to reduce the amount of cash required to settle loan losses under the Company’s risk-sharing obligation with Fannie Mae.

 

Concentrations of Credit Risk—Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, loans held for sale, and derivative financial instruments.

 

The Company places the cash and temporary investments with high-credit-quality financial institutions and believes no significant credit risk exists. The counterparties to the loans held for sale and funding commitments are owners of residential multifamily properties located throughout the United States. Mortgage loans are generally transferred or sold within 60 days from the date that a mortgage loan is funded. There is no material counterparty risk with respect to the Company's funding commitments as each potential borrower must make a non-refundable good faith deposit when the funding commitment is executed. The counterparty to the forward sale is Fannie Mae, Freddie Mac, or a broker-dealer that has been determined to be a credit-worthy counterparty by us and our warehouse lenders. There is a risk that the purchase price agreed to by the investor will be reduced in the event of a late delivery. The risk for non-delivery of a loan primarily results from the risk that a borrower does not close on the funding commitment in a timely manner. This risk is generally mitigated by the non-refundable good faith deposit.

 

Recently Adopted Accounting Pronouncements—In the second quarter of 2015, Accounting Standards Update 2015-05 (“ASU 2015-05”), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, was issued. ASU 2015-05 provides entities with guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. ASU 2015-05 is effective for the annual and interim periods beginning January 1, 2016, with early adoption permitted. Entities may select retrospective or prospective adoption of ASU 2015-05. The Company prospectively adopted ASU 2015-05 in the first quarter of 2016. There was no impact to the Company as none of the Company’s cloud computing arrangements permits the Company the contractual right to take possession of the software.

 

In the first quarter of 2016, Accounting Standards Update 2016-09 (“ASU 2016-09”), Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, was issued. ASU 2016-09 includes the following changes to the accounting for share-based payments that have the potential to impact the Company’s reported financial results:

   

 

 

 

All excess tax benefits and tax deficiencies arising from stock compensation arrangements are recognized as an income tax benefit or expense in the income statement instead of as an adjustment to additional paid in capital (“APIC”). The APIC pool is eliminated. In addition, excess tax benefits are no longer included in the calculation of diluted shares outstanding. The transition guidance related to these changes requires prospective application. NOTE 13 discloses the current-year impact of recognizing excess tax benefit related to stock compensation arrangements through the Consolidated Statements of Income.

   

 

 

 

Excess tax benefits are recorded along with other income tax cash flows as an operating activity in the statement of cash flows. The transition guidance related to this change requires prospective application. Cash paid when remitting cash to the tax authorities must be classified as a financing activity in the statement of cash flows. The transition guidance related to this change requires retrospective application. There was no effect on prior periods for the retrospective application of the classification of payments to tax authorities as the Company previously presented such payments in a manner consistent with ASU 2016-09.

   

 

 

 

Entities can elect to continue to apply current GAAP or to reverse compensation cost of forfeited awards when they occur. If an entity makes a change in its accounting policy to account for forfeitures as they occur, the transition guidance requires a cumulative-effect adjustment to beginning retained earnings.

   

ASU 2016-09 is effective for the Company on January 1, 2017. Early adoption is permitted as long as the entire ASU is early adopted. The Company early adopted the entire ASU during the first quarter of 2016. In connection with the early adoption of ASU 2016-09, the Company changed its accounting policy related to forfeitures. The Company’s previous accounting policy was to adjust compensation expense for estimated forfeitures. With the adoption of ASU 2016-09, the Company changed its accounting policy to adjust compensation expense for actual forfeitures and recorded an immaterial cumulative-effect adjustment to beginning total equity as disclosed in the Consolidated Statements of Changes in Equity. The Company did not adjust any balances related to prior periods as a result of adopting ASU 2016-09.

 

In the fourth quarter of 2016, Accounting Standards Update 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230) – Restricted Cash, was issued. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. Previous guidance required the change in cash and cash equivalents be shown on the statement of cash flows, with cash used to fund restricted cash and restricted cash equivalents shown as a component of operating, investing, or financing activities. Entities are now also required to reconcile the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the statement of cash flows to the related captions in the balance sheet when these balances are presented separately in the balance sheet. ASU 2016-18 is effective January 1, 2018 for the Company, with retrospective application required. The Company early adopted ASU 2016-18 as permitted in the fourth quarter of 2016. The adoption of ASU 2016-18 had the following impact on the Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014.

 

 

 

 

 

 

(in thousands)

 

December 31, 2015

 

 

December 31, 2014

As previously reported under GAAP applicable at the time

 

 

 

 

 

Cash and cash equivalents at beginning of period

$

113,354

 

$

170,563

Net increase (decrease) in cash and cash equivalents

 

23,634

 

 

(57,209)

Cash and cash equivalents at end of period

 

136,988

 

 

113,354

Cash provided by (used in) operating activities: change in restricted cash and pledged securities

 

4,268

 

 

(26,495)

 

 

 

 

 

 

As currently reported under ASU 2016-18

 

 

 

 

 

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

$

194,927

 

$

225,641

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

 

19,557

 

 

(30,714)

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

 

214,484

 

 

194,927

Cash provided by (used in) operating activities: change in restricted cash and pledged securities

 

 —

 

 

 —

 

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.

 

 

 

 

 

 

 

 

 

 

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.

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 as it is still in the process of 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.

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 were no other accounting pronouncements issued during 2017 or 2016 that have the potential to impact the Company’s consolidated financial statements. 

 

ReclassificationsThe Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation. 

v3.6.0.2
GAINS FROM MORTGAGE BANKING ACTIVITIES
12 Months Ended
Dec. 31, 2016
GAINS FROM MORTGAGE BANKING ACTIVITIES  
Gains from mortgage banking activities

NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES

 

Gains from mortgage banking activities consist of the following activity for each of the years ended December 31, 2016, 2015, and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

(in thousands)

2016

    

2015

 

2014

 

Contractual loan origination related fees, net

$

174,360

 

$

156,835

 

$

125,468

 

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

 

205,311

 

 

142,420

 

 

103,410

 

Fair value of expected guaranty obligation recognized at commitment

 

(12,486)

 

 

(8,789)

 

 

(6,895)

 

Total gains from mortgage banking activities

$

367,185

 

$

290,466

 

$

221,983

 

 

v3.6.0.2
MORTGAGE SERVICING RIGHTS
12 Months Ended
Dec. 31, 2016
MSRs  
Mortgage Servicing Rights  
Mortgage Servicing Rights

NOTE 4—MORTGAGE SERVICING RIGHTS

 

The fair value of MSRs at December 31, 2016 and December 31, 2015 was $669.4 million and $510.6 million, respectively. The Company uses a discounted static cash flow valuation approach and the key economic assumption is the discount rate. See the following sensitivities related to the discount rate:

 

The impact of a 100 basis point increase in the discount rate at December 31, 2016 is a decrease in the fair value of $21.2 million to the MSRs outstanding as of December 31, 2016.

 

The impact of a 200 basis point increase in the discount rate at December 31, 2016 is a decrease in the fair value of $41.0 million to the MSRs outstanding as of December 31, 2016.

 

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 year ended December 31, 2016 and 2015 follows:

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

(in thousands)

    

2016

    

2015

 

Beginning balance

 

$

412,348

 

$

375,907

 

Additions, following the sale of loan

 

 

181,032

 

 

135,441

 

Purchases

 

 

43,097

 

 

 —

 

Amortization

 

 

(99,417)

 

 

(80,702)

 

Pre-payments and write-offs

 

 

(15,130)

 

 

(18,298)

 

Ending balance

 

$

521,930

 

$

412,348

 

 

As shown in the table above, during 2016, the Company purchased the rights to service a HUD loan portfolio from a third-party servicer. The closing-date purchase price was $44.8 million of cash consideration. The amount in the ‘Purchases’ line in the table above consists of the closing amount of $44.8 million, net of purchase-price adjustments reducing the closing amount by $1.7 million, for a revised purchase amount of $43.1 million. The servicing portfolio, after consideration of purchase-price adjustments, consisted of approximately $3.6 billion of unpaid principal balance and had a weighted average estimated remaining life of 10.9 years.

 

The following summarizes the components of the net carrying value of the Company’s acquired and originated MSRs as of December 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

  

Gross

  

Accumulated

  

Net

 

(in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

175,934

 

$

(104,264)

 

$

71,670

 

Originated MSRs

 

 

642,030

 

 

(191,770)

 

 

450,260

 

Total

 

$

817,964

 

$

(296,034)

 

$

521,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

  

Gross

  

Accumulated

  

Net

 

(in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

132,837

 

$

(84,754)

 

$

48,083

 

Originated MSRs

 

 

511,915

 

 

(147,650)

 

 

364,265

 

Total

 

$

644,752

 

$

(232,404)

 

$

412,348

 

 

The expected amortization of MSRs recorded as of December 31, 2016 is shown in the table below. Actual amortization may vary from these estimates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Originated MSRs

  

Acquired MSRs

  

Total MSRs

 

 

(in thousands)

 

Amortization

 

Amortization

 

  Amortization  

 

 

Year Ending December 31, 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

90,304

 

$

14,711

 

$

105,015

 

 

2018

 

 

78,092

 

 

12,227

 

 

90,319

 

 

2019

 

 

67,493

 

 

10,795

 

 

78,288

 

 

2020

 

 

59,847

 

 

8,924

 

 

68,771

 

 

2021

 

 

50,738

 

 

7,018

 

 

57,756

 

 

Thereafter

 

 

103,786

 

 

17,995

 

 

121,781

 

 

Total

 

$

450,260

 

$

71,670

 

$

521,930

 

 

 

The Company recorded write-offs of MSRs related to loans that were repaid prior to the expected maturity and loans that defaulted. These write-offs are included as a component of Amortization and depreciation in the accompanying Consolidated Statements of Income and the MSR roll forward shown above and relate to MSRs recognized at loan sale only. Prepayment fees totaling $10.6 million, $15.0 million, and $9.3 million were collected for 2016,  2015, and 2014, respectively, and are included as a component of Other revenues in the Consolidated Statements of Income.

 

Management reviews the capitalized MSRs for temporary impairment quarterly by comparing the aggregate carrying value of the MSR portfolio to the aggregate estimated fair value of the portfolio. Additionally, MSRs related to Fannie Mae loans where the Company has risk-sharing obligations are assessed for permanent impairment on an asset-by-asset basis, considering factors such as debt service coverage ratio, property location, loan-to-value ratio, and property type. Except for defaulted or prepaid loans, no temporary or permanent impairment was recognized for the years ended December 31, 2016, 2015, and 2014.  

 

The weighted average remaining life of the aggregate MSR portfolio is 7.4 years.

v3.6.0.2
GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS
12 Months Ended
Dec. 31, 2016
GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS  
Guaranty Obligation and Allowance for Risk-Sharing Obligations

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

 

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. No guaranty is provided for loans sold under the Freddie Mac or HUD loan programs.

 

A summary of the Company’s guaranty obligation for the noncontingent portion of the guaranty obligation as of and for the years ended December 31, 2016 and 2015 follows:

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

(in thousands)

    

2016

    

2015

 

Beginning balance

 

$

27,570

 

$

24,975

 

Additions, following the sale of loan

 

 

10,597

 

 

8,828

 

Amortization

 

 

(5,946)

 

 

(5,423)

 

Other

 

 

71

 

 

(810)

 

Ending balance

 

$

32,292

 

$

27,570

 

 

A summary of the Company’s allowance for risk-sharing obligations for the contingent portion of the guaranty obligation as of and for the years ended December 31, 2016 and 2015 follows:

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

(in thousands)

    

2016

    

2015

 

Beginning balance

 

$

5,586

 

$

3,904

 

Provision (benefit) for risk-sharing obligations

 

 

(145)

 

 

1,680

 

Write-offs

 

 

(1,757)

 

 

(808)

 

Other

 

 

(71)

 

 

810

 

Ending balance

 

$

3,613

 

$

5,586

 

 

When the Company places a loan for which it has a risk-sharing obligation on its watch list, the Company ceases to amortize the guaranty obligation and 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.’

 

During 2016, the Company and Fannie Mae settled the loss sharing amounts related to the last three remaining previously defaulted at risk loans. As a result of these loss settlements, the Allowance for risk-sharing obligations as of December 31, 2016 is based entirely on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of December 31, 2016. The write-offs in the table above are net of $0.8 million and $0 of recoveries for the years ended December 31, 2016 and 2015, respectively. The net benefit for risk-sharing obligations for the year ended December 31, 2016 is the result of the aforementioned recoveries.

 

As of December 31, 2016 and 2015, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $4.9 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 was determined to be without value at the time of settlement.

v3.6.0.2
SERVICING
12 Months Ended
Dec. 31, 2016
Loans and Other Servicing Accounts  
Servicing  
Servicing

NOTE 6—SERVICING

 

The total unpaid principal balance of loans the Company was servicing for various institutional investors was $63.1 billion as of December 31, 2016 compared to $50.2 billion as of December 31, 2015. The December 31, 2016 balance includes the unamortized portion of the addition of $3.6 billion related to purchase activity as more fully discussed in NOTE 4.

 

As of December 31, 2016 and 2015, custodial escrow accounts relating to loans serviced by the Company totaled $1.6 billion and $1.1 billion, respectively. These amounts are not included in the accompanying consolidated balance sheets as such amounts are not Company assets. 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.

v3.6.0.2
DEBT
12 Months Ended
Dec. 31, 2016
DEBT  
Debt

NOTE 7—DEBT

 

At December 31, 2016, to provide financing to borrowers under the Agencies’ programs, the Company has arranged for warehouse lines of credit in the amount of $2.1 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 depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.

 

Additionally, at December 31, 2016, 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 Company’s ability to originate loans held for investment depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.

 

The maximum amount and outstanding borrowings under the warehouse notes payable at December 31, 2016 and 2015 follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

(dollars in thousands)

    

Maximum

    

Outstanding

    

Loan Type

    

    

 

Facility

 

Amount

 

Balance

 

Funded (1)

 

Interest rate

 

Agency warehouse facility #1

 

$

425,000

 

$

109,087

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #2

 

 

650,000

 

 

274,181

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #3

 

 

680,000

 

 

320,801

 

LHFS

 

30-day LIBOR plus 1.35%

 

Agency warehouse facility #4

 

 

350,000

 

 

186,869

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #5

 

 

30,000

 

 

14,551

 

LHFS

 

30-day LIBOR plus 1.80%

 

Fannie Mae repurchase agreement, uncommitted line and open maturity

 

 

1,500,000

 

 

943,505

 

LHFS

 

30-day LIBOR plus 1.15%

 

Total agency warehouse facilities

 

$

3,635,000

 

$

1,848,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interim warehouse facility #1

 

$

85,000

 

$

36,916

 

LHFI

 

30-day LIBOR plus 1.90%

 

Interim warehouse facility #2

 

 

200,000

 

 

70,196

 

LHFI

 

30-day LIBOR plus 2.00%

 

Interim warehouse facility #3

 

 

75,000

 

 

36,005

 

LHFI

 

30-day LIBOR plus 2.00% to 2.50%

 

Total interim warehouse facilities

 

$

360,000

 

$

143,117

 

 

 

 

 

Debt issuance costs

 

 

 —

 

 

(1,928)

 

 

 

 

 

Total warehouse facilities

 

$

3,995,000

 

$

1,990,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

(dollars in thousands)

    

Maximum

    

Outstanding

    

Loan Type

    

    

 

Facility

 

Amount

 

Balance

 

Funded (1)

 

Interest rate

 

Agency warehouse facility #1

 

$

685,000

 

$

418,891

 

LHFS

 

30-day LIBOR plus 1.40% or 1.75%

 

Agency warehouse facility #2

 

 

1,900,000

 

 

1,619,800

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #3

 

 

490,000

 

 

227,305

 

LHFS

 

30-day LIBOR plus 1.40%

 

Agency warehouse facility #4

 

 

250,000

 

 

 —

 

LHFS

 

30-day LIBOR plus 1.40%

 

Fannie Mae repurchase agreement, uncommitted line and open maturity

 

 

450,000

 

 

212,988

 

LHFS

 

30-day LIBOR plus 1.15%

 

Total agency warehouse facilities

 

$

3,775,000

 

$

2,478,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interim warehouse facility #1

 

$

85,000

 

$

15,000

 

LHFI

 

30-day LIBOR plus 1.90%

 

Interim warehouse facility #2

 

 

200,000

 

 

141,433

 

LHFI

 

30-day LIBOR plus 2.00%

 

Interim warehouse facility #3

 

 

75,000

 

 

16,594

 

LHFI

 

30-day LIBOR plus 2.00% to 2.50%

 

Total interim warehouse facilities

 

$

360,000

 

$

173,027

 

 

 

 

 

Debt issuance costs

 

 

 —

 

 

(2,541)

 

 

 

 

 

Total warehouse facilities

 

$

4,135,000

 

$

2,649,470

 

 

 

 

 


(1)

Type of loan the borrowing facility is used to fully or partially fund – loans held for sale (“LHFS”) or loans held for investment (“LHFI”).


30-day LIBOR was 0.77% as of December 31, 2016 and 0.43% as of December 31, 2015. Interest expense under the warehouse notes payable for the years ended December 31, 2016, 2015, and 2014 aggregated to $36.6 million, $29.2 million, and $18.2 million, respectively. Included in interest expense in 2016, 2015, and 2014 are the amortization of facility fees totaling $5.5 million,  $4.5 million, and $3.4 million, respectively. The warehouse notes payable are subject to various financial covenants, and the Company was in compliance with all such covenants at December 31, 2016.

 

Warehouse Facilities

 

Agency Warehouse Facilities

 

The following section provides a summary of the key terms related to each of the Agency Warehouse Facilities.

 

Agency Warehouse Facility #1:

The Company has a Warehousing Credit and Security Agreement with a national bank for a $425.0 million committed warehouse line that is scheduled to mature on October 30, 2017. The Warehousing Credit and Security Agreement provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. Advances are made at 100% of the loan balance and borrowings under this line bear interest at the 30-day London Interbank Offered Rate (“LIBOR”) plus 140 basis points.  The Warehousing Credit and Security Agreement contains certain affirmative and negative covenants that are binding on the Company’s operating subsidiary, Walker & Dunlop, LLC (which are in some cases subject to exceptions), including, but not limited to, restrictions on its ability to assume, guarantee, or become contingently liable for the obligation of another person, to undertake certain fundamental changes such as reorganizations, mergers, amendments to the Company’s certificate of formation or operating agreement, liquidations, dissolutions or dispositions or acquisitions of assets or businesses, to cease to be directly or indirectly wholly owned by the Company, to pay any subordinated debt in advance of its stated maturity or to take any action that would cause Walker & Dunlop, LLC to lose all or any part of its status as an eligible lender, seller, servicer or issuer or any license or approval required for it to engage in the business of originating, acquiring, or servicing mortgage loans.

 

In addition, the Warehousing Credit and Security Agreement requires compliance with certain financial covenants, which are measured for the Company and its subsidiaries on a consolidated basis, as follows:

 

·

tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing date,

·

compliance with the applicable net worth and liquidity requirements of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and HUD,

·

liquid assets of the Company of not less than $15.0 million,

·

maintenance of aggregate unpaid principal amount of all mortgage loans comprising the Company’s consolidated servicing portfolio of not less than $20.0 billion or (ii) all Fannie Mae DUS mortgage loans comprising the Company’s consolidated servicing portfolio of not less than $10.0 billion, exclusive in both cases of mortgage loans which are 60 or more days past due or are otherwise in default or have been transferred to Fannie Mae for resolution,

·

aggregate unpaid principal amount of Fannie Mae DUS mortgage loans within the Company’s consolidated servicing portfolio which are 60 or more days past due or otherwise in default not to exceed 3.5% of the aggregate unpaid principal balance of all Fannie Mae DUS mortgage loans within the Company’s consolidated servicing portfolio, and

·

maximum indebtedness (excluding warehouse lines) to tangible net worth of 2.25 to 1.0.

 

The Warehousing Credit and Security Agreement contains customary events of default,  which are in some cases subject to certain exceptions, thresholds, notice requirements, and grace periods.

 

During the fourth quarter of 2016, the Company executed the 12th amendment to the credit and security agreement that extended the maturity date to October 30, 2017. No other material modifications were made to the agreement during 2016.

 

Agency Warehouse Facility #2:

 

The Company has a Warehousing Credit and Security Agreement with a syndicate of national banks for a $650.0 million committed warehouse line that is scheduled to mature on June 21, 2017.  The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD and FHA loans. Advances are made at 100% of the loan balance, and borrowings under this line bear interest at LIBOR plus 140 basis points. During the second quarter of 2016, the Company executed the eighth amendment to the amended and restated credit and security agreement that extended the maturity date to June 21, 2017. No other material modifications were made to the agreement during 2016.

 

The negative and financial covenants of the amended and restated warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #2.

 

Agency Warehouse Facility #3:

 

The Company has a $680.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on April 30, 2017.  The total commitment amount of $680.0 million as of December 31, 2016 consists of a base committed amount of $280.0 million and a temporary increase of $400.0 million, as more fully described below. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD and FHA loans. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of LIBOR plus 135 basis points. During the second quarter of 2016, the Company executed the fourth amendment to the credit and security agreement that increased the committed amount to $280.0 million, decreased the interest rate to 30-day LIBOR plus 135 basis points, and extended the maturity date to April 30, 2017. Additionally, during the second and third quarters of 2016, the Company executed the fifth and sixth amendments to the credit and security agreement that provide temporary increases totaling $400.0 million to the maximum borrowing capacity that expire in January 2017. No other material modifications were made to the agreement during 2016.

 

The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above.

Agency Warehouse Facility #4:

 

The Company has a $350.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on October 27, 2017. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. The borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 140 basis points. During the fourth quarter of 2016, the Company executed the second amendment to the warehouse loan and security agreement that provided a $100.0 million permanent increase to the maximum borrowing capacity and extended the maturity date of the facility to October 27, 2017.  No other material modifications were made to the agreement during 2016. 

 

The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #4.

Agency Warehouse Facility #5: 

  

During the third quarter of 2016, the Company executed a warehousing credit and security agreement to establish Agency Warehouse Facility #5. The committed warehouse facility provides the Company with the ability to fund defaulted HUD and FHA loans. The warehouse agreement provides for a maximum borrowing amount of $30.0 million and is scheduled to mature in January 2018. The borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 180 basis points. No material modifications were made to the agreement in 2016.

 

The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #5.

 

Uncommitted Agency Warehouse Facility:

 

The Company has a $1.5 billion uncommitted facility with Fannie Mae under its ASAP funding program. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay the primary warehouse line. Fannie Mae will advance 99% of the loan balance, and borrowings under this program bear interest at LIBOR plus 115 basis points, with a minimum LIBOR rate of 35 basis points. There is no expiration date for this facility. During 2016, Fannie Mae increased the maximum borrowing capacity from $450.0 million to $1.5 billion. The uncommitted facility has no specific negative or financial covenants.

 

Interim Warehouse Facilities

 

The following section provides a summary of the key terms related to each of the Interim Warehouse Facilities.

 

Interim Warehouse Facility #1:

 

The Company has an $85.0 million committed warehouse line agreement that is scheduled to mature on April 30, 2017. The facility provides the Company with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement.  During the second quarter of 2016, the Company executed the sixth amendment to the credit and security agreement that extended the maturity date to April 30, 2017. No other material modifications were made to the agreement during 2016.

 

The facility agreement requires the Company’s compliance with the same financial covenants as Agency Warehouse Facility #1, described above, and also includes the following additional financial covenant:

·

minimum rolling four-quarter EBITDA, as defined, to total debt service ratio of 2.00 to 1.0

 

Interim Warehouse Facility #2:

 

The Company has a $200.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2017.  The agreement provides the Company with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company. All borrowings originally bear interest at LIBOR plus 200 basis points.  The lender retains a first priority security interest in all mortgages funded by such advances on a cross-collateralized basis.  Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. No material modifications were made to the agreement during 2016.

 

The credit agreement, as amended and restated, requires the borrower and the Company to abide by the same financial covenants as Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Interim Warehouse Facility #2. Additionally, Interim Warehouse Facility #2 has the following additional financial covenants:

 

·

rolling four-quarter EBITDA, as defined, of not less than $35.0 million and

·

debt service coverage ratio, as defined, of not less than 2.75 to 1.0

 

Interim Warehouse Facility #3:

 

The Company has a $75.0 million repurchase agreement with a national bank that is scheduled to mature on May 19, 2017.  The agreement provides the Company with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility.  Borrowings under the facility are full recourse to the Company. The borrowings under the agreement bear interest at a rate of LIBOR plus 2.00% to 2.50% (“the spread”). The spread varies according to the type of asset the borrowing finances. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement.  During the second quarter of 2016, the Company exercised its option to extend the maturity date of the repurchase agreement to May 19, 2017. Additionally, the Company executed the second amendment to the repurchase agreement that provides the Company with an additional unilateral option to extend the maturity date one year. As a result of the amendment, the Company now has three remaining one-year options that, if exercised, extend the maturity date through May 19, 2020. No other material modifications were made to the agreement during 2016.

 

The Repurchase Agreement requires the borrower and the Company to abide by the following financial covenants:

 

·

tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing date,

·

liquid assets of the Company of not less than $15.0 million,

·

leverage ratio, as defined, of not more than 3.0 to 1.0, and

·

debt service coverage ratio, as defined, of not less than 2.75 to 1.0.

 

 

The agreements above contain cross-default provisions, such that if a default occurs under any of the Company’s debt agreements, generally the lenders under the other debt agreements could also declare a default. As of December 31, 2016, the Company was in compliance with all of its warehouse line covenants.

 

Note Payable

 

On December 20, 2013, the Company entered into a $175.0 million senior secured term loan credit agreement (the “Term Loan Agreement”) that was issued at a discount of 1.0%. At any time, the Company may also elect to request the establishment of one or more incremental term loan commitments to make up to three additional term loans in an aggregate principal amount not to exceed $60.0 million.

 

The term loan requires certain mandatory prepayments in certain circumstances pursuant to the terms of the Term Loan Agreement. In April of 2015, the Company made a mandatory prepayment of $3.6 million. In connection with the mandatory prepayment, the Company’s quarterly principal installments were reduced to $0.3 million from $0.4 million, beginning with the June 30, 2015 principal payment. The final principal installment of the term loan is required to be paid in full on the maturity date of December 20, 2020 (or, if earlier, the date of acceleration of the term loan pursuant to the terms of the Term Loan Agreement) and will be in an amount equal to the aggregate outstanding principal of the term loan on such date (together with all accrued interest thereon).

 

At the Company’s election, the term loan will bear interest at either (i) the “Base Rate” plus an applicable margin or (ii) the London Interbank Offered Rate (“LIBOR Rate”) plus an applicable margin, subject to adjustment if an event of default under the Term Loan Agreement has occurred and is continuing with a minimum LIBOR Rate of 1.0%. The “Base Rate” means the highest of (a) the Agent’s “prime rate,” (b) the federal funds rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1%. In each case, the applicable margin is determined by the Company’s Consolidated Corporate Leverage Ratio (as defined in the Term Loan Agreement). If such Consolidated Corporate Leverage Ratio is greater than 2.50 to 1.00, the applicable margin will be 4.50% for LIBOR Rate loans and 3.50% for Base Rate loans, and if such Consolidated Corporate Leverage Ratio is less than or equal to 2.50 to 1.00, the applicable margin will be 4.25% for LIBOR Rate loans and 3.25% for Base Rate loans. The calculated Consolidated Corporate Leverage Ratio dropped to below 2.50 in 2014. Consequently, the applicable margin is 4.25% for LIBOR Rate loans and 3.25% for Base Rate loans as of December 31, 2016.

 

The obligations of the Company under the Term Loan Agreement are guaranteed by Walker & Dunlop Multifamily, Inc.; Walker & Dunlop, LLC; Walker & Dunlop Capital, LLC; and W&D BE, Inc., each of which is a direct or indirect wholly owned subsidiary of the Company (together with the Company, the “Loan Parties”), pursuant to a Guarantee and Collateral Agreement entered into on December 20, 2013 among the Loan Parties and the Agent (the “Guarantee and Collateral Agreement”). Subject to certain exceptions and qualifications contained in the Term Loan Agreement, the Company is required to cause any newly created or acquired subsidiary, unless such subsidiary has been designated as an Excluded Subsidiary (as defined in the Term Loan Agreement) by the Company in accordance with the terms of the Term Loan Agreement, to guarantee the obligations of the Company under the Term Loan Agreement and become a party to the Guarantee and Collateral Agreement. The Company may designate a newly created or acquired subsidiary as an Excluded Subsidiary so long as certain conditions and requirements provided for in the Term Loan Agreement are met.

 

The Term Loan Agreement contains certain affirmative and negative covenants that are binding on the Loan Parties, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Loan Parties to incur indebtedness, to create liens on their property, to make investments, to merge, consolidate or enter into any similar combination, or enter into any asset disposition of all or substantially all assets, or liquidate, wind-up or dissolve, to make asset dispositions, to declare or pay dividends or make related distributions, to enter into certain transactions with affiliates, to enter into any negative pledges or other restrictive agreements, to engage in any business other than the business of the Loan Parties as of the date of the Term Loan Agreement and business activities reasonably related or ancillary thereto, to amend certain material contracts or to enter into any sale leaseback arrangements.

 

In addition, the Term Loan Agreement requires the Company to abide by certain financial covenants calculated for the Company and its subsidiaries on a consolidated basis as follows:

 

·

As of the last day of any fiscal quarter ending during the periods specified below, permit the Consolidated Corporate Leverage Ratio (as defined in the Term Loan Agreement) to be greater than the corresponding ratio set forth below: