WALKER & DUNLOP, INC., 10-K filed on 2/26/2020
Annual Report
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Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2019
Jan. 31, 2020
Jun. 30, 2019
Document And Entity Information      
Document Type 10-K    
Document Annual Report true    
Document Transition Report false    
Document Period End Date Dec. 31, 2019    
Entity File Number 001-35000    
Entity Registrant Name Walker & Dunlop, Inc.    
Entity Incorporation, State or Country Code MD    
Entity Tax Identification Number 80-0629925    
Entity Address, Address Line One 7501 Wisconsin Avenue    
Entity Address, Address Line Two Suite 1200E    
Entity Address, City or Town Bethesda    
Entity Address, State or Province MD    
Entity Address, Postal Zip Code 20814    
City Area Code 301    
Local Phone Number 215-5500    
Title of 12(b) Security Common Stock, $0.01 Par Value Per Share    
Trading Symbol WD    
Security Exchange Name NYSE    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Common Stock, Shares Outstanding   30,948,270  
Entity Public Float     $ 1.0
Current Fiscal Year End Date --12-31    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Entity Central Index Key 0001497770    
Amendment Flag false    
v3.19.3.a.u2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Assets    
Cash and cash equivalents $ 120,685 $ 90,058
Restricted cash 8,677 20,821
Pledged securities, at fair value 121,767 116,331
Loans held for sale, at fair value 787,035 1,074,348
Loans held for investment, net 543,542 497,291
Mortgage servicing rights 718,799 670,146
Goodwill and other intangible assets 182,959 177,093
Derivative assets 15,568 35,536
Receivables, net 52,146 50,419
Other assets 124,021 50,014
Total assets 2,675,199 2,782,057
Liabilities    
Warehouse notes payable 906,128 1,161,382
Note payable 293,964 296,010
Guaranty obligation, net of accumulated amortization 54,695 46,870
Allowance for risk-sharing obligations 11,471 4,622
Deferred tax liabilities, net 146,811 125,542
Derivative liabilities 36 32,697
Performance deposits from borrowers 7,996 20,335
Other liabilities 211,813 187,407
Total liabilities 1,632,914 1,874,865
Equity    
Preferred shares, authorized 50,000; none issued.
Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 30,035 shares at December 31, 2019 and 29,497 shares at December 31, 2018 300 295
Additional paid-in capital ("APIC") 237,877 235,152
Accumulated other comprehensive income (loss) ("AOCI") 737 (75)
Retained earnings 796,775 666,752
Total stockholders' equity 1,035,689 902,124
Noncontrolling interests 6,596 5,068
Total equity 1,042,285 907,192
Commitments and contingencies (NOTES 2 and 9)
Total liabilities and equity $ 2,675,199 $ 2,782,057
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Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Dec. 31, 2019
Dec. 31, 2018
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 30,035 29,497
Common stock, outstanding 30,035 29,497
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Consolidated Statements of Income and Comprehensive Income - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenues      
Loan origination and debt brokerage fees, net $ 258,471 $ 234,681 $ 245,484
Fair value of expected net cash flows from servicing, net 180,766 172,401 193,886
Servicing fees 214,550 200,230 176,352
Escrow earnings and other interest income 56,835 42,985 20,396
Other revenues 80,898 60,918 51,272
Total revenues 817,219 725,246 711,857
Expenses      
Personnel 346,168 297,303 289,277
Amortization and depreciation 152,472 142,134 131,246
Provision (benefit) for credit losses 7,273 808 (243)
Interest expense on corporate debt 14,359 10,130 9,745
Other operating costs 66,596 62,021 48,171
Total expenses 586,868 512,396 478,196
Income from operations 230,351 212,850 233,661
Income tax expense 57,121 51,908 21,827
Net income before noncontrolling interests 173,230 160,942 211,834
Less: net income (loss) from noncontrolling interests (143) (497) 707
Walker and Dunlop net income 173,373 161,439 211,127
Other comprehensive income (loss), net of tax:      
Net change in unrealized gains and losses on pledged available-for-sale securities 812 (168) (14)
Walker and Dunlop comprehensive income $ 174,185 $ 161,271 $ 211,113
Basic earnings per share (NOTE 11) $ 5.61 $ 5.15 $ 6.72
Diluted earnings per share (NOTE 11) $ 5.45 $ 4.96 $ 6.47
Basic weighted average shares outstanding 29,913 30,202 30,176
Diluted weighted average shares outstanding 30,815 31,384 31,386
Loans Held for Sale      
Revenues      
Net warehouse interest income $ 1,917 $ 5,993 $ 15,077
Loans Held for Investment      
Revenues      
Net warehouse interest income $ 23,782 $ 8,038 $ 9,390
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Consolidated Statements of Changes in Equity - USD ($)
shares in Thousands, $ in Thousands
Common Stock
APIC
AOCI
Retained Earnings
Noncontrolling Interests
Total
Balances at the beginning of the period at Dec. 31, 2016 $ 296 $ 228,782 $ 107 $ 381,031 $ 4,858 $ 615,074
Balance at the beginning of the period (in shares) at Dec. 31, 2016 29,551          
Change in Stockholders' Equity            
Walker and Dunlop net income       211,127   211,127
Net income (loss) from noncontrolling interests         707 707
Other comprehensive income (loss), net of tax     (14)     (14)
Stock-based compensation - equity classified   19,973       19,973
Issuance of common stock in connection with equity compensation plans $ 12 3,001       3,013
Issuance of common stock in connection with equity compensation plans (in shares) 1,272          
Repurchase and retirement of common stock $ (8) (22,676)   (12,215)   (34,899)
Repurchase and retirement of common stock (in shares) (807)          
Balances at the end of the period at Dec. 31, 2017 $ 300 229,080 93 579,943 5,565 814,981
Balance at the end of the period (in shares) at Dec. 31, 2017 30,016          
Change in Stockholders' Equity            
Walker and Dunlop net income       161,439   161,439
Net income (loss) from noncontrolling interests         (497) (497)
Other comprehensive income (loss), net of tax     (168)     (168)
Stock-based compensation - equity classified   22,765       22,765
Issuance of common stock in connection with equity compensation plans $ 10 8,939       8,949
Issuance of common stock in connection with equity compensation plans (in shares) 958          
Repurchase and retirement of common stock $ (15) (25,632)   (43,185)   (68,832)
Repurchase and retirement of common stock (in shares) (1,477)          
Cash dividends paid       (31,445)   (31,445)
Balances at the end of the period at Dec. 31, 2018 $ 295 235,152 (75) 666,752 5,068 $ 907,192
Balance at the end of the period (in shares) at Dec. 31, 2018 29,497         29,497
Change in Stockholders' Equity            
Walker and Dunlop net income       173,373   $ 173,373
Net income (loss) from noncontrolling interests         (143) (143)
Contributions from noncontrolling interests         1,671 1,671
Other comprehensive income (loss), net of tax     812     812
Stock-based compensation - equity classified   22,819       22,819
Issuance of common stock in connection with equity compensation plans $ 11 5,500       5,511
Issuance of common stock in connection with equity compensation plans (in shares) 1,118          
Repurchase and retirement of common stock $ (6) (25,594)   (5,076)   (30,676)
Repurchase and retirement of common stock (in shares) (580)          
Cash dividends paid       (37,272)   (37,272)
Balances at the end of the period at Dec. 31, 2019 $ 300 $ 237,877 $ 737 796,775 $ 6,596 $ 1,042,285
Balance at the end of the period (in shares) at Dec. 31, 2019 30,035         30,035
Change in Stockholders' Equity            
Cumulative-effect adjustment for adoption of ASU 2016-02, net of tax       $ (1,002)   $ (1,002)
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Consolidated Statements of Changes in Equity (Parenthetical) - $ / shares
3 Months Ended 12 Months Ended
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
TOTAL EQUITY.                    
Cash dividends paid. amount per common share $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 1.20 $ 1.00
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Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities      
Net income before noncontrolling interests $ 173,230 $ 160,942 $ 211,834
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 (180,766) (172,401) (193,886)
Change in the fair value of premiums and origination fees 6,041 (5,037) 5,781
Amortization and depreciation 152,472 142,134 131,246
Stock compensation-equity and liability classified 24,075 23,959 21,134
Provision (benefit) for credit losses 7,273 808 (243)
Deferred tax expense (benefit) 22,012 17,483 (30,961)
Originations of loans held for sale (15,746,949) (15,153,003) (17,018,424)
Sales of loans to third parties 16,007,910 15,050,932 17,937,915
Amortization of deferred loan fees and costs (6,587) (1,742) (2,298)
Amortization of debt issuance costs and debt discount 5,451 7,509 4,886
Origination fees received from loans held for investment 2,553 3,968 1,109
Cash paid for cloud computing implementation costs (6,194)    
Changes in:      
Receivables, net (2,298) (4,532) (12,234)
Other assets (20,924) (6,861) (7,064)
Other liabilities 2,601 (13,957) 22,866
Performance deposits from borrowers (12,339) 13,874 (4,019)
Net cash provided by (used in) operating activities 427,561 64,076 1,067,642
Cash flows from investing activities      
Capital expenditures (4,711) (4,722) (5,207)
Purchase of equity-method investments (923)    
Proceeds from the sale of equity-method investments   4,993  
Purchase of pledged available-for-sale ("AFS") securities (30,611) (98,442) (6,966)
Proceeds from prepayment of pledged debt AFS securities 22,756    
Funding of preferred equity investments   (41,100) (16,884)
Proceeds from the payoff of preferred equity investments   82,819  
Distributions from (investments in) joint ventures, net (15,944) (4,137) (6,342)
Acquisitions, net of cash received (7,180) (53,249) (15,000)
Purchase of mortgage servicing rights   (1,814) (7,781)
Originations of loans held for investment (362,924) (597,889) (183,916)
Principal collected on loans held for investment upon payoff 319,832 161,303 219,516
Sales of loans held for investment     119,750
Net cash provided by (used in) investing activities (79,705) (552,238) 97,170
Cash flows from financing activities      
Borrowings (repayments) of warehouse notes payable, net (367,864) 139,298 (955,040)
Borrowings of interim warehouse notes payable 179,765 145,043 140,341
Repayments of interim warehouse notes payable (67,871) (61,050) (237,912)
Repayments of note payable (2,250) (166,223) (1,104)
Borrowings of note payable   298,500  
Secured borrowings   70,052  
Proceeds from issuance of common stock 5,511 8,949 3,013
Repurchase of common stock (30,676) (68,832) (34,899)
Cash dividends paid (37,272) (31,445)  
Payment of contingent consideration (6,450) (5,150)  
Debt issuance costs (4,531) (7,312) (3,890)
Net cash provided by (used in) financing activities (331,638) 321,830 (1,089,491)
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) 16,218 (166,332) 75,321
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period 120,348 286,680 211,359
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period 136,566 120,348 286,680
Supplemental Disclosure of Cash Flow Information:      
Cash paid to third parties for interest 63,564 56,430 56,267
Cash paid for income taxes $ 39,908 $ 45,728 $ 45,524
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ORGANIZATION
12 Months Ended
Dec. 31, 2019
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 commercial real estate debt and equity financing products, provides property sales brokerage services with a focus on multifamily, and engages in commercial real estate investment management activities. Through its mortgage bankers and property sales brokers, the Company offers its customers agency lending, debt brokerage, and principal lending and investing products and multifamily property sales services.

Through its agency lending products, the Company originates and sells loans pursuant to the programs of the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). Through its debt brokerage products, the Company brokers, and in some cases services, loans for various life insurance companies, commercial banks, commercial mortgage backed securities issuers, and other institutional investors, in which cases the Company does not fund the loan.

The Company also provides a variety of commercial real estate debt and equity solutions through its principal lending and investing products, including interim loans, preferred equity, and joint venture (“JV”) equity on commercial real estate properties. Interim loans on multifamily properties are offered (i) through the Company and recorded on the Company’s balance sheet (the “Interim Program”) and (ii) through a joint venture with an affiliate of Blackstone Mortgage Trust, Inc., in which the Company holds a 15% ownership interest (the “Interim Program JV”). Interim loans on all commercial real estate property types are also offered through separate accounts managed by the Company’s subsidiary, JCR Capital Investment Corporation (“JCR”). Preferred equity and JV equity on commercial real estate properties are offered through funds managed by JCR.

The Company brokers the sale of multifamily properties through its majority-owned subsidiary, Walker & Dunlop Investment Sales (“WDIS”). In some cases, the Company also provides the debt financing for the property sale. During the second quarter of 2019, the Company formed a joint venture with an international technology services company to offer automated multifamily appraisal services (“Appraisal JV”). The Company owns a 50% interest in the Appraisal JV and accounts for the interest as an equity-method investment. The operations of the Appraisal JV for the year ended December 31, 2019 and the Company’s investment in the Appraisal JV as of December 31, 2019 were immaterial.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Summary of Significant Accounting Policies

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity. If the Company does not have a majority voting interest but has significant influence, it uses the equity method of accounting. In instances where the Company owns less than 100% of the equity interests of an entity but owns a majority of the voting interests or has control over an entity, the Company accounts for the portion of equity not attributable to Walker & Dunlop, Inc. as Noncontrolling interests in the balance sheet and the portion of net income not attributable to Walker & Dunlop, Inc. as Net income from noncontrolling interests in the income statement.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to December 31, 2019. 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, 2019. 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, capitalized mortgage servicing rights, derivative instruments, and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Transfers of Financial Assets— Transfers of financial assets are reported as sales 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.

Derivative Assets and Liabilities—Certain loan commitments and forward sales commitments meet the definition of a derivative asset and are recorded at fair value in the Consolidated Balance Sheets upon the executions of the commitment to originate a loan with a borrower and to sell the loan to an investor, with a corresponding amount recognized as revenue in the Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees (included in Derivative assets in the Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Consolidated Income Statements), (ii) the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the risk-sharing obligation (included in Derivative assets in the Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Consolidated Income Statements), and (iii) the effects of interest rate movements between the trade date and balance sheet date. 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 Loan origination and debt brokerage fees, net in the Consolidated Statements of Income. The co-broker fees for the years ended December 31, 2019, 2018, and 2017 were $20.6 million, $22.8 million and $19.3 million, respectively. The fair value of expected guaranty obligation recognized at commitment for the years ended December 31, 2019, 2018, and 2017 were $16.3 million, $16.0 million and $13.8 million, respectively.

In 2019, the Company presents two components of its revenue as Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net. Previously, the Company presented these two lines as one line item called Gains from mortgage banking activities and disclosed the breakout of Gains from mortgage banking activities in a footnote to the consolidated financial statements. The footnote disclosure is no longer considered necessary as the breakout is provided on the face of the Consolidated Statements of Income. All prior periods have been adjusted to conform to the current-year presentation.

Mortgage Servicing Rights—When a loan is sold, the Company retains the right to service the loan and initially recognizes an individual originated mortgage servicing right (“OMSR”) 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 estimating the fair value of capitalized OMSRs:

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 OMSRs is derived based upon the stated term of the prepayment protection provisions of the underlying loan and may be reduced by 6 to 12 months based upon the expiration or reduction of the prepayment and/or lockout provisions prior to that stated maturity date. The Company’s model for OMSRs assumes no prepayment while the prepayment provisions have not expired and full prepayment of the loan at or near the point where the prepayment provisions have expired. 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.

Escrow Earnings—The estimated earnings rate on escrow accounts associated with the servicing of the loans for the life of the OMSR is added to the estimated future cash flows.

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

The assumptions used to estimate the fair value of OMSRs 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, OMSRs 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. The individual loan-level OMSR is written off through a charge to Amortization and depreciation when a loan prepays, defaults, or is probable of default. The Company evaluates all MSRs for impairment quarterly. The Company tests for impairment on purchased stand-alone servicing portfolios (“PMSRs”) separately from the Company’s OMSRs. OMSRs and PMSRs 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 PMSRs is equal to the purchase price paid. For PMSRs, the Company records a portfolio-level MSR asset and determines the estimated life of the portfolio based on the prepayment characteristics of the portfolio. The Company subsequently amortizes such PMSRs and tests for impairment quarterly as discussed in more detail above.

For PMSRs, 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 loans do not change the level of amortization expense recorded for the portfolio unless the pattern of actual prepayments and defaults varies significantly from the estimated pattern. When such a significant difference in the pattern of estimated and actual prepayments and defaults occurs, the Company prospectively adjusts the estimated life of the portfolio (and thus future amortization) to approximate the actual pattern observed. The Company has not made any adjustments to the estimated life of any PMSRs.

Guaranty Obligation and Allowance for Risk-sharing Obligations—When a loan is sold under the Fannie Mae Delegated Underwriting and ServicingTM (“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 on the Consolidated Balance Sheets. 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 underlying multifamily collateral for 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 discounted using a rate consistent with what is used for the calculation of the OMSR 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. The Company’s 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 OMSR.

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. The Company regularly monitors the specific reserves on all applicable loans and updates 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. The maximum amount of the loss the Company absorbs at the time of default is generally 20% of the origination unpaid principal balance of the loan.

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 the Company’s 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 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 it has a risk-sharing obligation, the Company records 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 the Company has 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, netLoans held for investment are multifamily loans originated by the Company through the Interim Program for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing. These loans have terms of up to three years and are all interest-only, multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs, and net of any allowance for loan losses. Interest income is accrued based on the actual coupon rate, adjusted for the level-yield amortization of net deferred fees and costs, and is recognized as revenue when earned and deemed collectible.

During the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party that is scheduled to mature in the third quarter of 2021. The Company accounted for the transfer as a secured borrowing. The aggregate unpaid principal balance of the loans of $78.3 million is presented as a component of Loans held for investment, net in the Consolidated Balance Sheets as of December 31, 2019, and the secured borrowing of $70.5 million is included within Other liabilities in the Consolidated Balance Sheets as of December 31, 2019. The Company does not have credit risk related to the $70.5 million of loans that were transferred.

As of December 31, 2019, Loans held for investment, net consisted of 22 loans with an aggregate $546.6 million of unpaid principal balance less $2.0 million of net unamortized deferred fees and costs and $1.1 million of allowance for loan losses. As of December 31, 2018, Loans held for investment, net consisted of 14 loans with an aggregate $503.5 million of unpaid principal balance less $6.0 million of net unamortized deferred fees and costs and $0.2 million of allowance for loan losses. Included within the Loans held for investment, net balance as of December 31, 2019 and December 31, 2018 is a participation in a subordinated note with a large institutional investor in multifamily loans that was fully funded with corporate cash. The unpaid principal balance of the participation was $7.8 million as of December 31, 2019 and $150.0 million as of December 31, 2018.

The allowance for loan losses is the Company’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. 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, because the nature of the underlying collateral is the same adjusted as needed for current market conditions. The Company uses the loss experience from its risk-sharing portfolio as a proxy for losses incurred in its loans held for investment portfolio since (i) the Company has not experienced any charge offs related to its 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.

One loan held for investment with an unpaid principal balance of $14.7 million was delinquent, impaired, and on non-accrual status as of December 31, 2019. The Company expects to complete a restructuring of the loan later in 2020. In connection with the restructuring, the Company expects to lose an immaterial amount of default interest under the terms of the loan. None of the loans held for investment was delinquent, impaired, or on non-accrual status as of December 31, 2018. Prior to 2019, the Company had not experienced any delinquencies related to loans held for investment. The Company has never charged off any loan held for investment. The allowance for loan losses recorded as of December 31, 2019 consisted primarily of the specific reserve on the impaired loan, while the allowance for loan losses as of December 31, 2018 was based on the Company’s collective assessment of the portfolio.

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, 2019, 2018, and 2017:

Components of Provision (benefit) for Credit Losses (in thousands)

 

2019

    

2018

    

2017

 

Provision (benefit) for loan losses

$

875

$

128

$

(294)

Provision (benefit) for risk-sharing obligations

 

6,398

 

680

 

51

Provision (benefit) for credit losses

$

7,273

$

808

$

(243)

Business Combinations—The 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 adjustments 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.

Goodwill—The 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, 2019, the Company’s market capitalization exceeded its net asset value by $703.1 million, or 71.0%. As of December 31, 2019, there have been no events subsequent to that analysis that are indicative of an impairment loss.

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 elects to measure all originated 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, 2019 and 2018.

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 is calculated as the fair value of the Company’s common stock on the date of grant.

Stock option awards were granted 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 were 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 used 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 the 2017 option awards, 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 used an estimated dividend yield of zero as the Company’s stock options were not dividend eligible and at the time of grant there was no expectation that the Company would pay a dividend. For the “risk-free” rate, the Company used a U.S. Treasury Note due in a number of years equal to the option’s expected term. For the 2017 option awards, 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. The Company did not grant any stock option awards in 2018 or 2019 and does not expect to issue stock options for the foreseeable future.

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. Some of the Company’s restricted stock awards vest over a period of up to eight years.

With the exception of 2015, the Company offered a performance share plan (“PSP”) for the Company’s executives and certain other members of senior management for each of the years from 2014 to 2019. The performance period for each PSP is three full calendar years beginning on January 1 of the grant year. Participants in the PSP receive restricted stock units (“RSUs”) on the grant date for the PSP in an amount equal to achievement of all performance targets at a maximum level. 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 at the maximum level, the participant forfeits a portion of the RSUs.

If the participant is no longer employed by the Company, the participant forfeits all of the RSUs. The performance targets for the 2017, 2018, and 2019 PSPs 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 for restricted shares and stock options 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. Generally, a portion of 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 years ended December 31, 2019 and 2018, and 2017 are the following components:

Components of Net Warehouse Interest Income (in thousands)

 

2019

    

2018

    

2017

Warehouse interest income - loans held for sale

$

48,211

$

55,609

$

61,298

Warehouse interest expense - loans held for sale

 

(46,294)

 

(49,616)

 

(46,221)

Net warehouse interest income - loans held for sale

$

1,917

$

5,993

$

15,077

Warehouse interest income - loans held for investment

$

32,059

$

11,197

$

15,218

Warehouse interest expense - loans held for investment

 

(8,277)

 

(3,159)

 

(5,828)

Warehouse interest income - secured borrowings

3,549

1,852

Warehouse interest expense - secured borrowings

(3,549)

(1,852)

Net warehouse interest income - loans held for investment

$

23,782

$

8,038

$

9,390

Statement of Cash Flows—The Company records the fair value of premiums and origination fees as a component of the fair value of derivative assets on the loan commitment date and records the related income within Loan origination and debt brokerage fees, net 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.

For presentation in the Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total 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, 2019, 2018, 2017, and 2016.

December 31,

(in thousands)

2019

    

2018

    

2017

    

2016

 

Cash and cash equivalents

$

120,685

$

90,058

$

191,218

$

118,756

Restricted cash

8,677

20,821

6,677

9,861

Pledged cash and cash equivalents (NOTE 9)

 

7,204

 

9,469

 

88,785

 

82,742

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

$

136,566

$

120,348

$

286,680

$

211,359

Income Taxes—The 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 uncertain tax positions as of December 31, 2019 and 2018.

Pledged Securities—As collateral against its Fannie Mae risk-sharing obligations (NOTES 4 and 9), certain securities have been pledged to the benefit of Fannie Mae to secure the Company's risk-sharing obligations. Substantially all of the balance of Pledged securities, at fair value within the Consolidated Balance Sheets as of December 31, 2019 and 2018 was pledged against Fannie Mae risk-sharing obligations. The balance not pledged against Fannie Mae risk-sharing obligations consists of an immaterial amount of cash pledged as collateral against an immaterial amount of risk-sharing obligations with Freddie Mac. The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency mortgage-backed securities (“Agency MBS”) and are all accounted for as available-for-sale (“AFS”) securities. When the fair value of AFS Agency MBS are materially lower than the carrying value, the Company performs an analysis to determine whether an other-than-temporary impairment (“OTTI”) exists. The Company has never recorded an OTTI related to AFS Agency MBS.

Contracts with Customers—Substantially all of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is not significant and derived from contracts with customers. The Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is generally completed in a short period of

time. The Company had no contract assets or liabilities as of December 31, 2019 and 2018. The following table presents information about the Company’s contracts with customers for the years ended December 31, 2019, 2018, and 2017:

Description (in thousands)

 

2019

    

2018

    

2017

 

Statement of income line item

Certain loan origination fees

$

75,599

$

59,877

$

53,116

Loan origination and debt brokerage fees, net

Property sales broker fees, investment management fees, assumption fees, application fees, and other

 

51,885

 

35,837

 

29,271

Other revenues

Total revenues derived from contracts with customers

$

127,484

$

95,714

$

82,387

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, 2019 and 2018.

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.

Receivables, Net—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.

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 residual 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.

Leases—In the normal course of business, the Company enters into lease arrangements for all of its office space. All such lease arrangements are accounted for as operating leases. The Company initially recognizes 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, accrued rent, lease incentives received, and the lessee’s initial direct costs. Lease expense is generally recognized on a straight-line basis over the term of the lease.

These operating leases do not provide an implicit discount rate; therefore, the Company uses the incremental borrowing rate of its note payable at lease commencement to calculate lease liabilities as the terms on this debt most closely resemble the terms on the Company’s largest leases. The Company’s lease agreements often include options to extend or terminate the lease. Single lease cost related to these lease agreements is recognized on the straight-line basis over the term of the lease, which includes options to extend when it is reasonably certain that such options will be exercised and the Company knows what the lease payments will be during the optional periods.

Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be

subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.

Recently Adopted and Recently Announced Accounting Pronouncements— In the first quarter of 2016, Accounting Standards Update 2016-02 (“ASU 2016-02”), Leases (Topic 842) was issued. 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 Company adopted the standard as required on January 1, 2019 and elected the available practical expedients that were applicable to the Company and the prospective adoption approach. There was no change to the classification of the Company’s leases, which are all currently classified as operating leases. NOTE 14 contains additional detail about the impact ASU 2016-02 had on the Company’s financial position as of December 31, 2019 and results of operations for the year ended December 31, 2019.

The Company elected the practical expedients that allowed the Company to not reassess (i) whether any existing agreement are or contain leases, (ii) lease classification of any existing agreements, and (iii) initial direct costs. The Company also elected the hindsight practical expedient to determine the lease term for all of its leases. In conjunction with the election of the hindsight practical expedient, the Company recorded a $1.0 million cumulative-effect adjustment, net of tax to reduce retained earnings as of January 1, 2019.

In the third quarter of 2018, Accounting Standards Update 2018-15 (“ASU 2018-15”), Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract was issued. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets. Capitalized implementation costs are amortized over the term of the hosting arrangement once the hosting arrangement is placed in service, and the amortization expense related to the capitalized implementation costs is recorded in the same line in the financial statements as the cloud service cost. The Company early-adopted ASU 2018-15 on January 1, 2019, using the prospective approach. During 2019, the Company capitalized $6.2 million of implementation costs. Amortization of these costs has not begun as the Company has not placed the hosting arrangements into service.

In the second quarter of 2016, Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was issued. 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 and the way it assesses impairment on its pledged AFS securities. 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.

The Company is adopting the standard as required on January 1, 2020. The Company expects to recognize an increase of between $30 and $35 million in the allowance for risk-sharing obligations with a cumulative-effect adjustment, net of tax recorded to opening retained earnings of between $25 and $30 million. The Company is in the final stages of refining its calculations, establishing certain aspects of the accounting policy for the Standard, and implementing internal controls over financial reporting. The adjustment to the allowance for loan losses for the Company’s portfolio of 22 loans held for investment is expected to be de minimis. There will be no impact to AFS securities because the portfolio consists

of agency-backed securities that inherently have an immaterial risk of loss. The Company has analyzed the disclosures that will be required for the new standard and will implement those disclosures during the first quarter of 2020.

There were no other accounting pronouncements issued during 2020 or 2019 that have the potential to impact the Company’s consolidated financial statements.

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

v3.19.3.a.u2
MORTGAGE SERVICING RIGHTS
12 Months Ended
Dec. 31, 2019
MSRs  
Mortgage Servicing Rights  
Mortgage Servicing Rights

NOTE 3—MORTGAGE SERVICING RIGHTS

The fair value of MSRs at December 31, 2019 and December 31, 2018 was $910.5 million and $858.7 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, 2019 would be a decrease in the fair value of $28.5 million to the MSRs outstanding as of December 31, 2019.

The impact of a 200-basis point increase in the discount rate at December 31, 2019 would be a decrease in the fair value of $55.0 million to the MSRs outstanding as of December 31, 2019.

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 (net of accumulated amortization) for the years ended December 31, 2019 and 2018 follows:

For the year ended December 31, 

 

Roll Forward of MSRs (in thousands)

    

2019

    

2018

 

Beginning balance

$

670,146

$

634,756

Additions, following the sale of loan

 

206,885

 

176,565

Purchases1

5,265

Amortization

 

(137,792)

 

(131,739)

Pre-payments and write-offs

 

(20,440)

 

(14,701)

Ending balance

$

718,799

$

670,146

1 For the year ended December 31, 2018, the purchases line also contains $3.5 million of MSRs acquired as compensation for originating a large loan held for investment.

The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of December 31, 2019 and 2018:

Components of MSRs (in thousands)

December 31, 2019

December 31, 2018

Gross Value

$

1,201,542

$

1,100,439

Accumulated amortization

 

(482,743)

 

(430,293)

Net carrying value

$

718,799

$

670,146

The expected amortization of MSRs recorded as of December 31, 2019 is shown in the table below. Actual amortization may vary from these estimates.

  

Expected

(in thousands)

  Amortization  

Year Ending December 31, 

2020

$

131,447

2021

 

118,500

2022

 

103,567

2023

 

91,498

2024

 

78,362

Thereafter

195,425

Total

$

718,799

The Company recorded write-offs of OMSRs related to loans that were repaid prior to the expected maturity and loans that defaulted. These write-offs are included as a component of the MSR roll forward shown above and as a component of Amortization and depreciation in the accompanying Consolidated Statements of Income and relate to OMSRs only. Prepayment fees totaling $26.8 million, $18.9 million, and $17.3 million were collected for 2019, 2018, and 2017, respectively, and are included as a component of Other revenues in the Consolidated Statements of Income. Escrow earnings totaling $51.4 million, $38.2 million, and $19.1 million were earned for the years ended December 31, 2019, 2018, and 2017, respectively, and are included as a component of Escrow earnings and other interest income in the Consolidated Statements of Income. All other ancillary servicing fees were immaterial for the periods presented.

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, 2019, 2018, and 2017.

The weighted average remaining life of the aggregate MSR portfolio is 7.5 years.

v3.19.3.a.u2
GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS
12 Months Ended
Dec. 31, 2019
GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS  
Guaranty Obligation and Allowance for Risk-Sharing Obligations

NOTE 4—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. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers. Activity related to the guaranty obligation for the years ended December 31, 2019 and 2018 is presented in the following table:

For the year ended

December 31, 

 

Roll Forward of Guaranty Obligation (in thousands)

    

2019

    

2018

 

Beginning balance

$

46,870

$

41,187

Additions, following the sale of loan

 

17,939

 

13,851

Amortization

 

(9,663)

 

(8,009)

Other

(451)

(159)

Ending balance

$

54,695

$

46,870

Activity related to the allowance for risk-sharing obligations for the years ended December 31, 2019 and 2018 follows:

For the year ended December 31, 

 

Roll Forward of Allowance for Risk-sharing Obligations (in thousands)

    

2019

    

2018

 

Beginning balance

$

4,622

$

3,783

Provision (benefit) for risk-sharing obligations

 

6,398

 

680

Write-offs

 

 

Other

451

159

Ending balance

$

11,471

$

4,622

When the Company places a loan for which it has a risk-sharing obligation on its watch list, the Company transfers the remaining unamortized balance of the guaranty obligation to the allowance for risk-sharing obligations. When a loan for which the Company has a risk-sharing obligation is removed from the watch list, the loan’s reserve is transferred from the allowance for risk-sharing obligations back 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 the year ended December 31, 2019, two loans defaulted, resulting in the recognition of a specific reserve of $6.9 million with a corresponding amount included as a component of provision expense. The properties related to these two at risk loans were in the same city. The Company does not have any additional at risk loans related to properties in this city. The Allowance for risk-sharing obligations as of December 31, 2019 is substantially comprised of the specific reserves related to these two loans. The Allowance for risk-sharing obligations as of December 31, 2018 was based primarily on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of December 31, 2018.

As of December 31, 2019 and 2018, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $7.5 billion and $6.7 billion, respectively. This maximum quantifiable contingent liability relates to the at risk loans serviced for Fannie Mae at the specific point in time indicated. The term and the amount of the liability vary with the origination and payoff activity of the at risk portfolio. 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 at risk loans it services for Fannie Mae were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement. For example, over the past three years, the Company recognized no net write-offs of risk-sharing obligations, while the average unpaid principal balance of the at risk loans within the Company’s servicing portfolio over the past three years was $30.3 billion.

v3.19.3.a.u2
SERVICING
12 Months Ended
Dec. 31, 2019
Loans and Other Servicing Accounts  
Servicing  
Servicing

NOTE 5—SERVICING

The total unpaid principal balance of loans the Company was servicing for various institutional investors was $93.2 billion as of December 31, 2019 compared to $85.7 billion as of December 31, 2018.

As of December 31, 2019 and 2018, custodial escrow accounts relating to loans serviced by the Company totaled $2.6 billion and $2.3 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.

v3.19.3.a.u2
WAREHOUSE NOTES PAYABLE
12 Months Ended
Dec. 31, 2019
DEBT  
Warehouse Notes Payable

NOTE 6—DEBT

At December 31, 2019, to provide financing to borrowers under the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $3.3 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of these

Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale under the Company's approved programs. The Company’s ability to originate mortgage loans for sale depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.

Additionally, at December 31, 2019, the Company has arranged for warehouse lines of credit in the amount of $0.5 billion with certain national banks to assist in funding loans held for investment under the Interim 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, 2019 and 2018 follow:

December 31, 2019

 

(dollars in thousands)

    

Committed

    

Uncommitted

Total Facility

Outstanding

    

    

 

Facility1

Amount

Amount

Capacity

Balance

Interest rate

 

Agency Warehouse Facility #1

$

350,000

$

200,000

$

550,000

$

148,877

 

30-day LIBOR plus 1.15%

Agency Warehouse Facility #2

 

500,000

 

300,000

 

800,000

 

15,291

 

30-day LIBOR plus 1.15%

Agency Warehouse Facility #3

 

500,000

 

265,000

 

765,000

 

35,510

 

30-day LIBOR plus 1.15%

Agency Warehouse Facility #4

350,000

350,000

258,045

30-day LIBOR plus 1.15%

Agency Warehouse Facility #5

500,000

500,000

60,751

30-day LIBOR plus 1.15%

Agency Warehouse Facility #6

250,000

100,000

350,000

14,930

30-day LIBOR plus 1.15%

Total National Bank Agency Warehouse Facilities

$

1,950,000

$

1,365,000

$

3,315,000

$

533,404

Fannie Mae repurchase agreement, uncommitted line and open maturity

 

 

1,500,000

 

1,500,000

 

131,984

 

Total Agency Warehouse Facilities

$

1,950,000

$

2,865,000

$

4,815,000

$

665,388

Interim Warehouse Facility #1

$

135,000

$

$

135,000

$

98,086

 

30-day LIBOR plus 1.90%

Interim Warehouse Facility #2

 

100,000

 

 

100,000

 

49,256

 

30-day LIBOR plus 1.65%

Interim Warehouse Facility #3

 

75,000

 

75,000

 

150,000

 

65,991

 

30-day LIBOR plus 1.90% to 2.50%

Interim Warehouse Facility #4

100,000

100,000

28,100

30-day LIBOR plus 1.75%

Total National Bank Interim Warehouse Facilities

$

410,000

$

75,000

$

485,000

$

241,433

Debt issuance costs

 

 

 

 

(693)

Total warehouse facilities

$

2,360,000

$

2,940,000

$

5,300,000

$

906,128

December 31, 2018

 

(dollars in thousands)

    

Committed

    

Uncommitted

Total Facility

Outstanding

    

    

 

Facility1

Amount

Amount

Capacity

Balance

Interest rate

 

Agency Warehouse Facility #1

$

425,000

$

200,000

$

625,000

$

57,572

 

30-day LIBOR plus 1.20%

Agency Warehouse Facility #2

 

500,000

 

300,000

 

800,000

 

62,830

 

30-day LIBOR plus 1.20%

Agency Warehouse Facility #3

 

500,000

 

265,000

 

765,000

 

451,549

 

30-day LIBOR plus 1.25%

Agency Warehouse Facility #4

350,000

350,000

225,538

30-day LIBOR plus 1.20%

Agency Warehouse Facility #5

30,000

30,000

12,484

 

30-day LIBOR plus 1.80%

Agency Warehouse Facility #6

250,000

100,000

350,000

66,579

30-day LIBOR plus 1.20%

Total National Bank Agency Warehouse Facilities

$

2,055,000

$

865,000

$

2,920,000

$

876,552

Fannie Mae repurchase agreement, uncommitted line and open maturity

 

 

1,500,000

 

1,500,000

 

156,700

Total agency warehouse facilities

$

2,055,000

$

2,365,000

$

4,420,000

$

1,033,252

 

Interim Warehouse Facility #1

$

85,000

$

$

85,000

$

68,390

 

30-day LIBOR plus 1.90%

Interim Warehouse Facility #2

 

100,000

 

 

100,000

 

37,899

 

30-day LIBOR plus 2.00%

Interim Warehouse Facility #3

 

75,000

 

 

75,000

 

23,250

30-day LIBOR plus 1.90% to 2.50%

Total interim warehouse facilities

$

260,000

$

$

260,000

$

129,539

Debt issuance costs

 

 

 

 

(1,409)

Total warehouse facilities

$

2,315,000

$

2,365,000

$

4,680,000

$

1,161,382

1 Agency Warehouse Facilities, including the Fannie Mae repurchase agreement are used to fund loans held for sale, while Interim Warehouse Facilities are used to fund loans held for investment.

30-day LIBOR was 1.76% as of December 31, 2019 and 2.50% as of December 31, 2018. Interest expense under the warehouse notes payable for the years ended December 31, 2019, 2018, and 2017 aggregated to $58.1 million, $54.6 million, and $52.0 million, respectively. Included in interest expense in 2019, 2018, and 2017 are the amortization of facility fees totaling $4.9 million, $5.0 million, and $4.6 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, 2019.

Warehouse Facilities

Agency Warehouse Facilities

The following section provides a summary of the key terms related to each of the Agency Warehouse Facilities. During the third quarter of 2019, an Agency warehouse line with a $30.0 million aggregate committed and uncommitted borrowing capacity expired according to its terms. The Company believes that the six remaining committed and uncommitted credit facilities from national banks and the uncommitted credit facility from Fannie Mae provide the Company with sufficient borrowing capacity to conduct its Agency lending operations.

Agency Warehouse Facility #1:

The Company has a warehousing credit and security agreement with a national bank for a $350.0 million committed warehouse line that is scheduled to mature on October 26, 2020. The 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 115 basis points. In addition to the committed borrowing capacity, the agreement provides $200.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. The 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 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 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 1.00.

The agreement contains customary events of default, which are in some cases subject to certain exceptions, thresholds, notice requirements, and grace periods. During the third quarter of 2019, the Company executed the third amendment to the warehouse agreement that decreased the borrowing rate to 30-day LIBOR plus 115 basis points from 30-day LIBOR plus 120 basis points as of September 30, 2019. During the fourth quarter of 2019, the Company executed the fourth amendment to the warehouse and security agreement that extended the maturity date to October 26, 2020. Additionally, at the Company’s request, the committed amount was reduced to $350.0 million. No other material modifications were made to the agreement in 2019.

Agency Warehouse Facility #2:

The Company has a warehousing credit and security agreement with a national bank for a $500.0 million committed warehouse line that is scheduled to mature on September 8, 2020. 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 30-day LIBOR plus 115 basis points. In addition to the committed borrowing capacity, the agreement provides $300.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. During the second quarter of 2019, the Company executed the fourth amendment to the warehouse and security agreement that extended the maturity date to September 8, 2020. No other material modifications were made to the agreement in 2019.

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 $500.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on April 30, 2020. 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 30-day LIBOR plus 115 basis points. In addition to the committed borrowing capacity, the agreement provides $265.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. During the second quarter of 2019, the Company executed the tenth amendment to the

warehouse agreement that extended the maturity date to April 30, 2020 and decreased the borrowing rate to 30-day LIBOR plus 115 basis points from 30-day LIBOR plus 125 basis points. Additionally, the amendment provided for an uncommitted amount of $265.0 million until January 31, 2020. No other material modifications were made to the agreement during 2019.

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 4, 2020. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, FHA, and defaulted 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 30-day LIBOR plus 115 basis points. During the second quarter of 2019, the Company executed sixth amendment to the warehouse agreement that decreased the borrowing rate to 30-day LIBOR plus 115 basis points from 30-day LIBOR plus 120 basis points. During the fourth quarter of 2019, the Company executed Amended and Restated Mortgage Loan and Security Agreement (the “Amended and Restated Agreement”). The Amended and Restated Agreement has the same terms and conditions as the agreement it replaced except that it provides the Company with the ability to fund defaulted HUD and FHA loans up to $30.0 million and extends the maturity date to October 4, 2020.  No other material modifications were made to the agreement during 2019.

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 2019, the Company executed a warehousing and security agreement with a national bank to establish Agency Warehouse Facility #5. The facility, which is structured as a master repurchase agreement, has an uncommitted $500.0 million maximum borrowing amount and is scheduled to mature on August 5, 2020. The Company can fund Fannie Mae, Freddie Mac, HUD, and FHA loans under the facility. Advances are made at 100% of the loan balance, and the borrowings under the agreement bear interest at a rate of 30-day LIBOR plus 115 basis points. No other material modifications were made to the agreement during 2019.

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 #6:

The Company had a $250.0 million committed warehouse credit and security agreement with a national bank that was scheduled to mature on January 31, 2020. The warehouse facility provided the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans under the facility. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bore interest at a rate of LIBOR plus 115 basis points. The agreement provided $100.0 million of uncommitted borrowing capacity that bore interest at the same rate as the committed facility. During the first quarter of 2019, the Company executed the second amendment to the warehouse and security agreement that extended the maturity date to January 31, 2020. During the fourth quarter of 2019, the Company executed the third amendment to the warehouse and security agreement that decreased the borrowing rate to 30-day LIBOR plus 115 basis points from 30-day LIBOR plus 120 basis points. No other material modifications were made to the agreement during 2019. The Agency Warehouse Facility expired on January 31, 2020 according to its terms. The Company believes that the five remaining committed and uncommitted credit facilities from national banks, the uncommitted credit facility from Fannie Mae, and the Company’s corporate cash provide the Company with sufficient borrowing capacity to conduct its Agency lending operations without this facility.

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

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. There is no expiration date for this facility. 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 a $135.0 million committed warehouse line agreement that is scheduled to mature on April 30, 2020. 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 and bear interest at 30-day LIBOR plus 190 basis points. 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 first quarter of 2019, the Company executed the ninth amendment to the credit and security agreement that increased the maximum borrowing capacity to $135.0 million. During the second quarter of 2019, the Company executed the tenth amendment to the credit and security agreement that extended the maturity date to April 30, 2020. No other material modifications were made to the agreement during 2019.

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 1.00.

Interim Warehouse Facility #2:

The Company has a $100.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2021. 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 30-day LIBOR plus 165 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. During the fourth quarter of 2019, the Company executed the fifth amendment to the warehouse and security agreement that decreased the borrowing rate to 30-day LIBOR plus 165 basis points from 30-day LIBOR plus 200 basis points and extended the maturity date to December 13, 2021. No other material modifications were made to the agreement during 2019.

The credit agreement 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 1.00.

Interim Warehouse Facility #3:

The Company has a $75.0 million repurchase agreement with a national bank that is scheduled to mature on May 18, 2020. 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 30-day LIBOR plus 1.90% 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 2019, the Company executed the fourth amendment to the credit and security agreement that extended the maturity date to May 18, 2020 and provides for an uncommitted amount of $75.0 million. No other material modifications were made to the agreement during 2019.

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 1.00.

Interim Warehouse Facility #4:

During the first quarter of 2019, the Company executed a warehousing credit and security agreement to establish an additional interim warehouse facility. The warehouse facility has a committed $100.0 million maximum borrowing amount and is scheduled to mature on April 30, 2020. The Company can fund certain interim loans to a specific large institutional borrower, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 175 basis points. During the second quarter of 2019, the Company executed the first amendment to the warehousing credit and security agreement that extended the maturity date to April 30, 2020. No other material modifications were made to the agreement in 2019.

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

leverage ratio, as defined, of not more than 2.25 to 1.00.

The warehouse agreements contain cross-default provisions, such that if a default occurs under any of the Company’s warehouse agreements, generally the lenders under the other warehouse agreements could also declare a default. As of December 31, 2019, the Company was in compliance with all of its warehouse line covenants.

Note Payable

On November 7, 2018, the Company entered into a senior secured credit agreement (the “Credit Agreement”) that amended and restated the Company’s prior credit agreement and provided for a $300.0 million term loan (the “Term Loan”). The Term Loan was issued at a 0.5% discount, has a stated maturity date of November 7, 2025, and bears interest at 30-day LIBOR plus 200 basis points. At any time, the Company may also elect to request one or more incremental term loan commitments not to exceed $150.0 million, provided that the total indebtedness would not cause the leverage ratio (as defined in the Credit Agreement) to exceed 2.00 to 1.00.

The Company used $165.4 million of the Term Loan proceeds to repay in full the prior term loan. In connection with the repayment of the prior term loan, the Company recognized a $2.1 million loss on extinguishment of debt related to unamortized debt issuance costs and unamortized debt discount, which is included in Other operating expenses in the Consolidated Statements of Income for the year ended December 31, 2018.

The Company is obligated to repay the aggregate outstanding principal amount of the term loan in consecutive quarterly installments equal to $0.8 million on the last business day of each of March, June, September, and December commencing on March 31, 2019. The term loan also requires certain other prepayments in certain circumstances pursuant to the terms of the Term Loan Agreement. The final principal installment of the term loan is required to be paid in full on November 7, 2025 (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). During the fourth quarter of 2019, the Company executed the first amendment to the Term Loan that decreased the borrowing rate to 30-day LIBOR plus 200 basis points from 30-day LIBOR plus 225 basis points. No other material modifications were made to the agreement in 2019.

The obligations of the Company under the Credit 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 the Amended and Restated Guarantee and Collateral Agreement entered into on November 7, 2018 among the Loan Parties and Wells Fargo, National Association, as administrative agent (the “Guarantee and Collateral Agreement”). Subject to certain exceptions and qualifications contained in the Credit 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 Credit Agreement) by the Company in accordance with the terms of the Credit Agreement, to guarantee the obligations of the Company under the Credit 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 Credit Agreement are met. 

The Credit 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 Credit Agreement and business activities reasonably related or ancillary thereto, to amend certain material contracts or to enter into any sale leaseback arrangements. The Credit Agreement contains only one financial covenant, which requires the Company not to permit its asset coverage ratio (as defined in the Credit Agreement) to be less than 1.50 to 1.00. 

The Credit Agreement contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods), including, but not limited to, non-payment of principal or interest or other amounts, misrepresentations, failure to perform or observe covenants, cross-defaults with certain other indebtedness or material agreements, certain change in control events, voluntary or involuntary bankruptcy proceedings, failure of the Credit Agreements or other loan documents to be valid and binding, certain ERISA events and judgments. As of December 31, 2019, the Company was in compliance with all covenants related to the Credit Agreement.

The following table shows the components of the note payable as of December 31, 2019 and 2018:

(in thousands, unless otherwise specified)

December 31, 

Component

    

2019

    

2018

  

Interest rate and repayments

 

Unpaid principal balance

$

297,750

$

300,000

Interest rate varies - see above for further details;

Unamortized debt discount

(1,245)

(1,466)

quarterly principal payments of $0.8 million

Unamortized debt issuance costs

(2,541)

(2,524)

Carrying balance

$

293,964

$

296,010

The scheduled maturities, as of December 31, 2019, for the aggregate of the warehouse notes payable and the note payable are shown below. The warehouse notes payable obligations are incurred in support of the related loans held for sale and loans held for investment. Amounts advanced under the warehouse notes payable for loans held for sale are

included in the subsequent year as the amounts are usually drawn and repaid within 60 days. The amounts below related to the note payable include only the quarterly and final principal payments required by the related credit agreement (i.e., the non-contingent payments) and do not include any principal payments that are contingent upon Company cash flow, as defined in the credit agreement (i.e., the contingent payments). The maturities below are in thousands.

Year Ending December 31,

    

Maturities

  

2020

$

825,802

2021

13,032

2022

76,986

2023

3,000

2024

3,000

Thereafter

282,750

Total

$

1,204,570

All of the debt instruments, including the warehouse facilities, are senior obligations of the Company. All warehouse notes payable balances associated with loans held for sale and outstanding as of December 31, 2019 were or are expected to be repaid in 2020.

v3.19.3.a.u2
GOODWILL AND OTHER INTANGIBLE ASSETS
12 Months Ended
Dec. 31, 2019
GOODWILL AND OTHER INTANGIBLE ASSETS  
Goodwill and Other Intangible Assets

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

A summary of the Company’s goodwill as of and for the year ended December 31, 2019 and 2018 follows:

For the year ended December 31, 

Roll Forward of Goodwill (in thousands)

    

2019

    

2018

 

Beginning balance

$

173,904

$

123,767

Additions from acquisitions

 

6,520

 

50,137

Impairment

 

 

Ending balance

$

180,424

$

173,904

The additions from acquisitions during 2019 shown in the table above relate to an immaterial acquisition of a technology company, which was completed in the first quarter of 2019.

The Company has completed the accounting for all acquisitions completed in 2019. For all acquisitions completed in 2019, total revenues and income from operations since the acquisition and the pro-forma incremental revenues and earnings related to the acquired entities as if the acquisitions had occurred as of January 1, 2018 are immaterial.

During the first quarter of 2020, the Company acquired two debt brokerage companies for an aggregate consideration of $70.5 million. The Company has not completed the accounting for the acquisitions as of the issuance date of these financial statements. Therefore, disclosures relating to the goodwill recognized, if any, the amount of contingent consideration recognized, if any, and the fair value of the assets acquired and liabilities assumed could not be presented.

As of December 31, 2019 and December 31, 2018, the balance of intangible assets acquired from acquisitions totaled $2.5 million and $3.2 million, respectively. As of December 31, 2019, the weighted-average period over which the Company expects the intangible assets to be amortized is 4.7 years.

A summary of the Company’s contingent consideration, which is included in Other liabilities, as of and for the years ended December 31, 2019 and 2018 follows:

For the year ended December 31, 

Roll Forward of Contingent Consideration Liabilities (in thousands)

    

2019

    

2018

Beginning balance

$

11,630

$

14,091

Accretion

572

927

Payments

(6,450)

(5,150)

Adjustment to discounted disposition value

1,762

Ending balance

$

5,752

$

11,630

The contingent consideration above relates to an acquisition completed in 2017. The last of the three earn-out periods related to this contingent consideration ended in the first quarter of 2020.

v3.19.3.a.u2
FAIR VALUE MEASUREMENTS
12 Months Ended
Dec. 31, 2019
FAIR VALUE MEASUREMENTS  
Fair Value Measurements

NOTE 8—FAIR VALUE MEASUREMENTS

The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation.

The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement when there is evidence of impairment. The Company's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur on occasion, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of the Company’s MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, estimated revenue from escrow accounts, delinquency rates, late charges, costs to service, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Derivative Instruments—The derivative positions consist of interest rate lock commitments and forward sale agreements to the Agencies. The fair value of these instruments is estimated using a discounted cash flow model developed based on changes in the U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company, and are classified within Level 3 of the valuation hierarchy.
Loans Held for Sale—All loans held for sale presented in the Consolidated Balance Sheets are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted observable inputs from market participants such as changes in the U.S. Treasury rate. Therefore, the Company classifies these loans held for sale as Level 2.
Pledged Securities—Investments in cash and money market funds are valued using quoted market prices from recent trades. Therefore, the Company classifies this portion of pledged securities as Level 1. The Company determines the fair value of its AFS investments in Agency debt securities using discounted cash flows that incorporate observable inputs from market participants and then compares the fair value to broker estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:

    

Quoted Prices in

    

Significant

    

Significant

    

    

 

Active Markets

Other

Other

 

For Identical

Observable

Unobservable

 

Assets

Inputs

Inputs

Balance as of

 

(in thousands)

(Level 1)

(Level 2)

(Level 3)

Period End

 

December 31, 2019

Assets