Document and Entity Information - shares	3 Months Ended
Document and Entity Information - shares	Mar. 31, 2020	Apr. 29, 2020
Document And Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Mar. 31, 2020
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, 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 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		31,131,823
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Entity Central Index Key	0001497770
Amendment Flag	false

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Assets
Cash and cash equivalents	$ 205,309	$ 120,685
Restricted cash	30,745	8,677
Pledged securities, at fair value	121,495	121,767
Loans held for sale, at fair value	1,186,577	787,035
Loans held for investment, net	454,213	543,542
Mortgage servicing rights	722,486	718,799
Goodwill and other intangible assets	247,257	182,959
Derivative assets	158,233	15,568
Receivables, net	52,185	52,146
Other assets	133,475	124,021
Total assets	3,311,975	2,675,199
Liabilities
Warehouse notes payable	1,305,846	906,128
Note payable	293,371	293,964
Guaranty obligation, net of accumulated amortization	55,758	54,695
Allowance for risk-sharing obligations	64,110	11,471
Derivative liabilities	172,623	36
Performance deposits from borrowers	29,575	7,996
Other liabilities	347,377	358,624
Total liabilities	2,268,660	1,632,914
Equity
Preferred shares, authorized 50,000; none issued.
Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 30,330 shares at March 31, 2020 and 30,035 shares at December 31, 2019.	303	300
Additional paid-in capital ("APIC")	236,007	237,877
Accumulated other comprehensive income (loss) ("AOCI")	(1,181)	737
Retained earnings	801,139	796,775
Total stockholders' equity	1,036,268	1,035,689
Noncontrolling interests	7,047	6,596
Total equity	1,043,315	1,042,285
Commitments and contingencies (NOTES 2 and 9)
Total liabilities and equity	$ 3,311,975	$ 2,675,199

Consolidated Balance Sheets (Parenthetical) - $ / shares shares in Thousands	Mar. 31, 2020	Dec. 31, 2019
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	30,330	30,035
Common stock, outstanding	30,330	30,035

Consolidated Statements of Income and Comprehensive Income - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenues
Loan origination and debt brokerage fees, net	$ 76,373	$ 57,797
Fair value of expected net cash flows from servicing, net	68,000	40,938
Servicing fees	55,434	52,199
Net warehouse interest income	5,495	7,021
Escrow earnings and other interest income	10,743	14,068
Other revenues	18,112	15,414
Total revenues	234,157	187,437
Expenses
Personnel	89,525	71,631
Amortization and depreciation	39,762	37,903
Provision for credit losses	23,643	2,675
Interest expense on corporate debt	2,860	3,652
Other operating costs	18,090	15,492
Total expenses	173,880	131,353
Income from operations	60,277	56,084
Income tax expense	12,672	12,024
Net income before noncontrolling interests	47,605	44,060
Less: net income (loss) from noncontrolling interests	(224)	(158)
Walker and Dunlop net income	47,829	44,218
Other comprehensive income (loss), net of tax:
Net change in unrealized gains and losses on pledged available-for-sale securities	(1,917)	301
Walker and Dunlop comprehensive income	$ 45,912	$ 44,519
Basic earnings per share (NOTE 10)	$ 1.53	$ 1.44
Diluted earnings per share (NOTE 10)	$ 1.49	$ 1.39
Basic weighted average shares outstanding	30,226	29,680
Diluted weighted average shares outstanding	31,160	30,684

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities
Net income before noncontrolling interests	$ 47,605	$ 44,060
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	(68,000)	(40,938)
Change in the fair value of premiums and origination fees	(22,414)	2,955
Amortization and depreciation	39,762	37,903
Provision for credit losses	23,643	2,675
Originations of loans held for sale	(3,168,168)	(3,773,443)
Sales of loans to third parties	2,846,631	3,622,404
Other operating activities, net	8,315	(30,978)
Net cash provided by (used in) operating activities	(292,626)	(135,362)
Cash flows from investing activities
Capital expenditures	(778)	(1,461)
Purchase of equity-method investments	(563)
Purchase of pledged available-for-sale ("AFS") securities	(5,000)	(4,078)
Proceeds from prepayment of pledged debt AFS securities	3,711
Distributions from (investments in) joint ventures, net	(6,455)	(1,679)
Acquisitions, net of cash acquired	(43,784)	(7,180)
Originations of loans held for investment		(33,362)
Principal collected on loans held for investment upon payoff	88,779	60,145
Net cash provided by (used in) investing activities	35,910	12,385
Cash flows from financing activities
Borrowings (repayments) of warehouse notes payable, net	419,763	151,814
Borrowings of interim warehouse notes payable	29,898	21,976
Repayments of interim warehouse notes payable	(49,850)
Repayments of note payable	(744)	(750)
Proceeds from issuance of common stock	6,369	4,187
Repurchase of common stock	(26,737)	(24,159)
Cash dividends paid	(11,347)	(9,319)
Payment of contingent consideration	(1,641)	(6,450)
Debt issuance costs	(964)	(824)
Net cash provided by (used in) financing activities	364,747	136,475
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2)	108,031	13,498
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period	136,566	120,348
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period	244,597	133,846
Supplemental Disclosure of Cash Flow Information:
Cash paid to third parties for interest	11,207	17,785
Cash paid for income taxes	$ 121	$ 372

ORGANIZATION AND BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2020

ORGANIZATION AND BASIS OF PRESENTATION

Organization and Basis of Presentation

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

These financial statements represent the condensed consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they may not include certain financial statement disclosures and other information required for annual financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or thereafter.

Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of commercial real estate debt and equity financing products, provides property sales brokerage 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, and preferred 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”).

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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2020

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. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest method. 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. Under the VIE model, the Company consolidates an entity when it both holds a variable interest in an entity and is the primary beneficiary. 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.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty

obligations, allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments and disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Coronavirus Disease 2019—In January 2020, the first cases of a novel strain of the coronavirus known as Coronavirus Disease 2019 (“COVID-19” or, “the virus”) were reported in the U.S., and in March 2020 the World Health Organization recognized the virus as a global pandemic. In the weeks since, the COVID-19 pandemic has caused significant global economic disruption as a result of the measures taken by countries and local municipalities to contain the spread of the virus (the “COVID-19 Crisis” or the “Crisis”). In the U.S., the only country that the Company operates in, Federal, state and local authorities have taken actions to both contain the spread of the virus while simultaneously providing substantial liquidity to Americans, domestic businesses and the financial markets to ensure markets continue to operate smoothly.

The COVID-19 Crisis did not have a material impact on the Company’s operations, its cash flows or the amount and availability of its liquidity during the first quarter 2020. Although it is not possible to reliably estimate the extent and duration of the COVID-19 Crisis as of the date of this quarterly report on Form 10-Q, management has made adjustments to the carrying values of the Company’s assets and liabilities impacted by the Crisis based on its best estimates and assumptions. The most significant adjustments to the carrying amount of the Company’s assets and liabilities include the Company’s estimate of future expected credit losses under both the Fannie Mae Delegated Underwriting and Servicing^TM (“DUS”) program and the loans originated for the Company’s balance sheet. The Company continues to generate positive cash flow to support its business activities as its most significant capital relationships (Fannie Mae, Freddie Mac and HUD) have not been meaningfully affected by the Crisis. In addition, the globally and nationally recognized financial institutions with which the Company partners to provide warehouse financing do not appear to have been materially impacted by the Crisis, and there has not been, and we do not expect there to be, any disruption to the amount or availability of liquidity necessary to support the Company’s operations.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to March 31, 2020. There have been no material events that would require recognition in the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to March 31, 2020. No other material subsequent events have occurred that would require disclosure.

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 Condensed 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 Condensed 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 Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Condensed 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 (or the “guaranty obligation;” included in Derivative assets in the Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Condensed 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 Condensed Consolidated Statements of Income. The co-broker fees for the three months ended March 31, 2020 and 2019 were $8.3 million and $2.9 million, respectively. The fair value of expected guaranty obligation recognized at commitment for the three months ended March 31, 2020 and 2019 were $1.3 million and $4.1 million respectively.

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 Condensed Consolidated Statements of Income. All prior periods have been adjusted to conform to the current-year presentation.

Recently Adopted and Recently Announced Accounting Pronouncements—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" or “CECL”) represents a significant change to the incurred loss model previously 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 modifies 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 adopted the standard as required on January 1, 2020. The Company recognized an increase of $31.6 million in the allowance for risk-sharing obligations with a cumulative-effect adjustment, net of tax recorded to opening retained earnings of $23.7 million and deferred tax assets of $7.9 million. The adjustment to the allowance for loan losses for the Company’s loans held for investment was immaterial. There was no impact to AFS securities because the portfolio consists of agency-backed securities that inherently have an immaterial risk of loss.

There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2019 Form 10-K, except for the changes to the Company’s accounting policies related to the allowance for risk-sharing obligations and allowance for loan losses in connection with the adoption of ASU 2016-13.

Guaranty Obligation and Allowance for risk sharing obligations— When a loan is sold under the DUS program, the Company undertakes an obligation to partially guarantee the credit 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 Condensed Consolidated Balance Sheets. The recognized guaranty obligation is the fair value of the Company’s obligation to stand ready to perform over the term of the guaranty, including credit risk.

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 mortgage servicing right 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 Condensed Consolidated Statements of Income, unless the loan defaults or is paid off prior to maturity.

Overall CECL Approach

The Company uses the weighted-average remaining maturity method (“WARM”) for calculating its allowance for risk-sharing obligations, the Company’s liability for the off-balance-sheet credit exposure associated with the Fannie Mae at risk DUS loans. WARM uses an average annual charge-off rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual charge-off rate is applied to the unpaid principal balance (“UPB”) over the contractual term, further adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below.

Considering the Company’s long history servicing Fannie Mae DUS loans, the Company maximizes the use of historical internal data because the Company has extensive historical data from which to calculate historical loss rates and principal paydown by loan term type for its exposure to credit loss on its homogeneous portfolio of Fannie Mae DUS multifamily loans. Additionally, the Company believes its properties, loss history, and underwriting standards are not similar to public data such as loss histories for loans originated for collateralized mortgage-backed securities conduits.

Runoff Rate

One of the key inputs into a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will prepay and amortize in the future. As the loans the Company originates have different original lives and runoff over different periods, the Company groups loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate.

The Company originates loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate.

The Company uses its historical runoff rate for each of the different loan term pools as a proxy for the expected runoff rate. The Company believes that borrower behavior and macroeconomic conditions will not deviate significantly from historical performance over the approximately ten-year period over which the Company has compiled the actual loss data. The ten-year period captures the various cycles of industry performance and provides a period that is long enough to capture sufficient observations of runoff history. In addition, due to the prepayment protection provisions for Fannie Mae DUS loans, we have not seen significant volatility in historical prepayment rates due to changes in interest rates and would not expect this to change in future periods.

The historical annual runoff rate is calculated for each year of a loan’s life for each vintage in the portfolio and aggregated with the calculated runoff rate for each comparable year in every vintage. For example, the annual runoff rate for the first year of loans originated in 2010 is aggregated with the annual runoff rate for the first year of loans originated in 2011, 2012, and so on to calculate the average annual runoff rate for the first year of a loan. This average runoff calculation is performed for each year of a loan’s life for each of the various loan terms to create a matrix of historical average annual runoffs by year for the entire portfolio.

The Company segments its current portfolio of at risk DUS loans outstanding by original loan term type and years remaining and then applies the appropriate historical average runoff rates to calculate the expected remaining balance at the end of each reporting period in the future. For example, for a loan with an original ten-year term and seven years remaining, the Company applies the historical average annual runoff rate for a ten-year loan for year four to arrive at the remaining UPB one year from the current period, the historical average runoff rate for year five to arrive at the remaining UPB two years from the current period, and so on up to the loan’s maturity date.

CECL Reserve Calculation

Once the Company has calculated the estimated outstanding UPB for each future year until maturity for each loan term type, the Company then applies the average annual charge-off rate (as further described below) to each future year’s expected UPB. The Company then aggregates the allowance calculated for each year within each loan term type and for all different maturity years to arrive at the CECL reserve for the portfolio.

The weighted-average annual charge-off rate is calculated using a ten-year look-back period, utilizing the average portfolio balance and settled losses for each year. A ten-year period is used as the Company believes that this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. This approach captures the adverse impact of the years following the last recession in 2008-2010 because multifamily commercial loans have a lag period from the time of initial distress indications through the timing of loss settlement. The same loss rate is utilized across each loan term type as the Company is not aware of any historical or industry-published data to indicate there is any difference in the occurrence probability or loss severity for a loan based on its loan origination term.

Reasonable and Supportable Forecast Period

The Company currently uses one year for its reasonable and supportable forecast period (the “forecast period”) as the Company believes forecasts beyond one year are inherently less reliable. The Company uses forecasts of unemployment rates, historically a highly correlated indicator for multifamily occupancy rates, and net operating income growth to assess what macroeconomic and multifamily market conditions are expected to be like over the coming year. The Company then associates the forecasted conditions with a similar historical period over the past ten years, which could be one or several years, and uses the Company’s average loss rate for that historical period as a basis for the charge-off rate used for the forecast period. For all remaining years until maturity, the Company uses the weighted-average annual charge-off rate for the ten-year period as described above to estimate losses. The average loss rate from a historical period used for the forecast period may be adjusted as necessary if the forecasted macroeconomic and industry conditions differ materially from the historical period.

Identification of Specific Reserves for Defaulted Loans

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 default 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 (“DSCR”), property condition, and financial strength of the borrower or key principal(s). In instances where payment under the guaranty on a specific loan is determined to be probable (as the loan is probable of foreclosure or has foreclosed), the Company separately measures the expected loss through an assessment of the underlying fair value of the asset, disposition costs, and the risk-sharing percentage (the “specific reserve”) through a charge to the provision for risk-sharing obligations, which is a component of Provision for credit losses in the Condensed Consolidated Statements of Income. These loans are removed from the WARM calculation described above, and the associated loan-specific mortgage servicing right and guaranty obligation are written off. The expected loss on the risk-sharing obligation is dependent on the fair value of the underlying property as the loans are collateral dependent. Historically, initial recognition of a specific reserve occurs at or before a loan becomes 60 days delinquent.

The amount of the specific reserve considers 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 specific reserve 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.

Loans Held for Investment, net—Loans held for investment are multifamily loans originated by the Company 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 multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized fees and costs, and net of any allowance for loan losses.

As of March 31, 2020, Loans held for investment, net consisted of 20 loans with an aggregate $457.9 million of unpaid principal balance less $1.5 million of net unamortized deferred fees and costs and $2.2 million of allowance for loan losses. 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.

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 $78.5 million is presented as a component of Loans held for investment, net in the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, and the secured borrowing of $70.5 million is included within Other liabilities in the Condensed Consolidated Balance Sheets as of March 31, 2020. The Company does not have credit risk related to the $70.5 million of loans that were transferred.

The Company assesses the credit quality in the same manner as it does for the loans in the Fannie Mae at risk portfolio as described above and records a specific reserve for impaired loans. 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 the same methodology that the Company uses to estimate its CECL reserves for at risk Fannie Mae DUS loans as described above because the nature of the underlying collateral is the same, and the loans have similar characteristics, except they are significantly shorter in maturity. The reasonable and supportable forecast period used for the CECL reserve for loans held for investment is one year.

Due to the forecasted economic conditions associated with the Crisis, the Company recorded a $1.1 million provision for loan losses during the three months ended March 31, 2020. The charge-off rate for the forecasted period was 36 basis points and nine basis points as of March 31, 2020 and January 1, 2020, respectively. The charge-off rate for the remaining period until maturity was nine basis points as of both March 31, 2020 and January 1, 2020.

One loan held for investment with an unpaid principal balance of $14.7 million that was originated in 2017 was delinquent, impaired, and on non-accrual status as of March 31, 2020 and December 31, 2019. During the first quarter of 2020, the Company initiated foreclosure proceedings on the property while continuing to work with the borrowers on a restructuring plan. The Company had a $0.6 million specific reserve for this loan as of March 31, 2020 and December 31, 2019 and has not recorded any interest related to this loan since it went on non-accrual status. All other loans were current as of March 31, 2020 and December 31, 2019. The amortized cost basis of loans that were current

as of March 31, 2020 and December 31, 2019 was $443.2 million and $531.9 million, respectively. As of March 31, 2020, $170.8 million of the loans that were current were originated in 2018, while $272.4 million were originated in 2019.

Prior to 2019, the Company had not experienced any delinquencies related to its loans held for investment.

Provision 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 for credit losses in the Condensed Consolidated Statements of Income. NOTE 4 contains additional discussion related to the allowance for risk-sharing obligations. Provision for credit losses consisted of the following activity for the three months ended March 31, 2020 and 2019:


	For the three months ended
	March 31,
Components of Provision for Credit Losses (in thousands)	2020		2019
Provision for loan losses	$	1,106	$	623
Provision for risk-sharing obligations		22,537		2,052
Provision for credit losses	$	23,643	$	2,675

Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Generally, a substantial portion of the loans that are held for sale or held for investment are financed with matched borrowings under one of our warehouse facilities. The portion of loans held for sale or held for investment not funded with matched borrowings is financed with the Company’s own cash. The Company fully funds a small number of loans held for sale or loans held for investment with corporate 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, respectively, 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 months ended March 31, 2020 and 2019 are the following components:


	For the three months ended
	March 31,
Components of Net Warehouse Interest Income (in thousands)	2020		2019
Warehouse interest income - loans held for sale	$	7,402	$	13,984
Warehouse interest expense - loans held for sale		(5,910)		(13,955)
Net warehouse interest income - loans held for sale	$	1,492	$	29

Warehouse interest income - loans held for investment	$	6,306	$	8,779
Warehouse interest expense - loans held for investment		(2,303)		(1,787)
Warehouse interest income - secured borrowings		846		888
Warehouse interest expense - secured borrowings		(846)		(888)
Net warehouse interest income - loans held for investment	$	4,003	$	6,992

Total net warehouse interest income	$	5,495	$	7,021

Statement of Cash Flows—For presentation in the Condensed 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, in conjunction with the detail of Pledged securities, at fair value presented in NOTE 9, presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of March 31, 2020 and 2019 and December 31, 2019 and 2018.


	March 31,				December 31,
(in thousands)	2020		2019		2019		2018
Cash and cash equivalents	$	205,309	$	109,862	$	120,685	$	90,058
Restricted cash		30,745		17,561		8,677		20,821
Pledged cash and cash equivalents (NOTE 9)		8,543		6,423		7,204		9,469
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	244,597	$	133,846	$	136,566	$	120,348

Income Taxes—The Company records the realizable excess tax benefits from stock compensation as a reduction to income tax expense. The Company recorded realizable excess tax benefits of $2.9 million and $3.4 million during the three months ended March 31, 2020 and 2019, respectively.

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 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 following table presents information about the Company’s contracts with customers for the three months ended March 31, 2020 and 2019:


	For the three months ended
	March 31,
Description (in thousands)	2020		2019		Statement of income line item
Certain loan origination fees	$	21,348	$	11,531	Loan origination and debt brokerage fees, net
Property sales broker fees, investment management fees, assumption fees, application fees, and other		15,064		8,961	Other revenues
Total revenues derived from contracts with customers	$	36,412	$	20,492

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.

MORTGAGE SERVICING RIGHTS

3 Months Ended

Mar. 31, 2020

MSRs

Mortgage Servicing Rights

Mortgage Servicing Rights

NOTE 3—MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) represent the carrying value of the commercial servicing rights retained by the Company for mortgage loans originated and sold and MSRs acquired from third parties. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with the servicing rights. MSRs are amortized using the interest method over the period that servicing income is expected to be received. The Company has one class of MSRs.

The fair values of the MSRs at March 31, 2020 and December 31, 2019 were $868.4 million and $910.5 million, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities:

The impact of a 100-basis point increase in the discount rate at March 31, 2020 is a decrease in the fair value of $25.8 million.

The impact of a 200-basis point increase in the discount rate at March 31, 2020 is a decrease in the fair value of $50.0 million.

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

Activity related to capitalized MSRs for the three months ended March 31, 2020 and 2019 is shown in the table below:


	For the three months ended
	March 31,
Roll Forward of MSRs (in thousands)	2020		2019
Beginning balance	$	718,799	$	670,146
Additions, following the sale of loan		44,214		47,102
Amortization		(35,218)		(34,203)
Pre-payments and write-offs		(5,309)		(5,099)
Ending balance	$	722,486	$	677,946

The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of March 31, 2020 and December 31, 2019:


Components of MSRs (in thousands)	March 31, 2020		December 31, 2019
Gross Value	$	1,221,877	$	1,201,542
Accumulated amortization		(499,391)		(482,743)
Net carrying value	$	722,486	$	718,799

The expected amortization of MSRs recorded as of March 31, 2020 is shown in the table below. Actual amortization may vary from these estimates.


	Expected
(in thousands)	Amortization
Nine Months Ending December 31,
2020	$	101,336
Year Ending December 31,
2021	$	124,191
2022		109,526
2023		96,770
2024		83,594
2025		69,674
Thereafter		137,395
Total	$	722,486

GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS

3 Months Ended

Mar. 31, 2020

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 three months ended March 31, 2020 and 2019 is presented in the following table:


	For the three months ended
	March 31,
Roll Forward of Guaranty Obligation (in thousands)	2020		2019
Beginning balance	$	54,695	$	46,870
Additions, following the sale of loan		1,862		4,863
Amortization		(2,267)		(2,349)
Other		1,468		(8)
Ending balance	$	55,758	$	49,376

Activity related to the allowance for risk-sharing obligations for the three months ended March 31, 2020 and 2019 is shown in the following table:


	For the three months ended
	March 31,
Roll Forward of Allowance for Risk-sharing Obligations (in thousands)	2020		2019
Beginning balance	$	11,471	$	4,622
Adjustment related to adoption of ASU 2016-13		31,570		—
Provision for risk-sharing obligations		22,537		2,052
Write-offs		—		—
Other		(1,468)		8
Ending balance	$	64,110	$	6,682

As of January 1, 2020, the Company recognized the CECL transition adjustment based on its assessment of the multifamily market and the macroeconomic environment, concluding that the projections at the time for the coming year were for continued strong performance similar to the past few years. The Company’s losses have been de minimis over the past few years. Considering that the Company’s historical loss rate consisted of both strong and weak multifamily and macroeconomic periods, the Company concluded it was appropriate to adjust the loss rate downward for the forecast period. The loss factor applied for the forecast period in the WARM CECL calculation was one basis point, which approximated the average of the actual loss rate for the past two years as these conditions were expected to prevail over the course of the forecast period. The Company reverted to the actual historical loss rate of 1.76 basis points for all remaining years in the calculation.

Conditions changed drastically beginning in March 2020 due to the Crisis across the world and the resulting global social distancing and lockdown measures that have been put in place by national/state/local authorities with varying expected longevities, macroeconomic conditions have reversed from sustained strength to short-term global economic contraction, causing unemployment rates to rise sharply and a recession to ensue.

These conditions are expected to impact unemployment and consumer incomes and therefore have an adverse impact on multifamily occupancy rates and property cash flows in the near term, increasing the likelihood of delinquencies, loan defaults, and risk-sharing losses. The Company concluded that the potential impacts due to the Crisis are expected to be generally consistent with the great financial crisis of 2007-2010. However, the Company expects the Crisis will impact the multifamily market over a one-year period instead of a two-year period but result in less severe losses over the shortened time frame. The charge offs recorded by the Company during the great financial crisis of 2007-2010 totaled 12 basis points over the two-year period. The Company adjusted the charge-off rate down to seven basis points based on the following:

•

The DSCR of the Company’s current at risk servicing portfolio is substantially higher than it was immediately prior to the last recession,

•

The fair values of the properties collateralizing the at risk servicing portfolio are higher than they were immediately prior to the last recession, and

•

The expected positive impacts of the unprecedented level of economic stimulus from the Federal government.

The charge-off rate of seven basis points was used for the forecast period as of March 31, 2020, with a reversion to the historical weighted average charge-off rate of 1.76 basis points for all remaining years in the calculation.

The calculated CECL reserve for the Company’s $37.2 billion at risk Fannie Mae servicing portfolio as of March 31, 2020 was $57.2 million compared to $34.7 million as of the date of adoption of ASU 2016-13 on January 1, 2020. The significant increase in the CECL reserve was principally related to the forecasted impacts of the Crisis. The weighted-average remaining life of the at risk Fannie Mae servicing portfolio as of March 31, 2020 was 7.5 years.

For the year ended December 31, 2019, two loans defaulted, resulting in the recognition of specific reserves of $6.9 million. The properties related to these two at risk loans were both off-campus student living facilities in the same city. The Company does not have any additional at risk loans related to student living facilities in this city.

As of March 31, 2020, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $7.7 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement.

SERVICING	3 Months Ended
SERVICING	Mar. 31, 2020
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 $94.8 billion as of March 31, 2020 compared to $93.2 billion as of December 31, 2019. As of March 31, 2020 and December 31, 2019, custodial escrow accounts relating to loans serviced by the Company totaled $2.1 billion and $2.6 billion, respectively. These amounts are not included in the accompanying Condensed Consolidated Balance Sheets as such amounts are not Company assets. Certain cash deposits associated with the escrow accounts 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. For most loans we service under the Fannie Mae DUS program, we are required to advance the principal and interest payments and guarantee fees for up to four months should a borrower cease making payments under the terms of their loan, including while that loan is in forbearance. After advancing for four months, we request reimbursement by Fannie Mae for the principal and interest advances, and Fannie Mae will reimburse us within 60 days of the request. For the month of April, the first month principal and interest payments were due following the onset of the COVID-19 Crisis in the U.S., we advanced $0.8 million of principal and interest payments and guarantee fees on loans in our Fannie Mae portfolio. On May 5, 2020, the Company received a commitment from one of its warehouse lending banks to create a $100.0 million sublimit to its Agency warehouse line (as defined below) that would be used to fund its advances of principal and interest payments under the Fannie Mae DUS program. The facility would provide 90% of the principal and interest advance payment and will be collateralized by Fannie Mae’s commitment to repay the advance. Completion of the facility is subject to final documentation, consent of the majority of holders of our term loan, and approval from Fannie Mae. For loans we service under the Ginnie Mae program, we are obligated to advance the principal and interest payments and guarantee fees until the HUD loan is brought current, fully paid, or assigned to HUD. We are eligible to assign a loan to HUD once it is in default for 30 days. If the loan is not brought current, or the loan otherwise defaults, we are not reimbursed for our advances until such time as we assign the loan to HUD or work out a payment modification for the borrower. For loans in default, we may repurchase those loans out of the Ginnie Mae security, at which time our advance requirements cease and we may then modify and resell the loan or assign the loan back to HUD, at which time we will be reimbursed for our advances. For the month of April, we advanced $4.5 million of principal and interest payments and guarantee fees on loans in our HUD portfolio. We are not obligated to make advances on any of the other loans we service in our portfolio, including loans we service under the Freddie Mac Optigo program. As of March 31, 2020 and December 31, 2019, the Company had $2.6 million and $2.1 million of aggregate outstanding principal and interest and tax and escrow advances, respectively. These advances are included as a component of Receivables, net in the Condensed Consolidated Balance Sheets.

WAREHOUSE NOTES PAYABLE

3 Months Ended

Mar. 31, 2020

WAREHOUSE NOTES PAYABLE

Warehouse Notes Payable

NOTE 6—WAREHOUSE NOTES PAYABLE

At March 31, 2020, to provide financing for the Company’s loan origination activities, the Company has arranged for warehouse lines of credit. In support of the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $2.7 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). The Company has pledged substantially all of its loans held for sale against the Agency Warehouse Facilities.

Additionally, at March 31, 2020, 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 all of its loans held for investment for which funding is obtained against these Interim Warehouse Facilities.

The following table provides additional detail about the warehouse lines of credit at March 31, 2020:


	March 31, 2020
(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	$	173,125	30-day LIBOR plus 1.15%
Agency Warehouse Facility #2		500,000		300,000		800,000		207,948	30-day LIBOR plus 1.15%
Agency Warehouse Facility #3		500,000		—		500,000		303,605	30-day LIBOR plus 1.15%
Agency Warehouse Facility #4		350,000		—		350,000		141,921	30-day LIBOR plus 1.15%
Agency Warehouse Facility #5		—		500,000		500,000		207,317	30-day LIBOR plus 1.15%
Total National Bank Agency Warehouse Facilities	$	1,700,000	$	1,000,000	$	2,700,000	$	1,033,916
Fannie Mae repurchase agreement, uncommitted line and open maturity		—		1,500,000		1,500,000		51,235
Total Agency Warehouse Facilities	$	1,700,000	$	2,500,000	$	4,200,000	$	1,085,151

Interim Warehouse Facility #1	$	135,000	$	—	$	135,000	$	100,300	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		42,741	30-day LIBOR plus 1.90% to 2.50%
Interim Warehouse Facility #4		100,000		—		100,000		—	30-day LIBOR plus 1.75%
Interim Warehouse Facility #5²		29,184		—		29,184		29,184	30-day LIBOR plus 3.00%
Total National Bank Interim Warehouse Facilities	$	439,184	$	75,000	$	514,184	$	221,481
Debt issuance costs		—		—		—		(786)
Total warehouse facilities	$	2,139,184	$	2,575,000	$	4,714,184	$	1,305,846

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.

² Interim warehouse facility #5 bears interest at 30-day LIBOR plus 3.00%, with an interest-rate floor of 4.50%

During the second quarter of 2020, the Company executed the fifth amendment to the warehouse agreement related to Agency Warehouse Facility #2 that temporarily increased the total facility capacity by $2.4 billion to $3.2 billion to fund a large portfolio of loans. The temporary increase expires 60 days after the loans are funded. No other material modifications were made to the agreement during 2020.

During the second quarter of 2020, the Company executed the 11^th amendment to the warehouse agreement related to Agency Warehouse Facility #3 that extended the maturity date to April 30, 2021 for the committed borrowing capacity and added $265.0 million in uncommitted borrowing capacity that bears interest at the same rate and has the same maturity date as the committed facility. No other material modifications were made to the agreement during 2020.

During the second quarter of 2020, the Company executed the 11^th amendment to the credit and security agreement related to Interim Warehouse Facility #1 that extended the maturity date to April 30, 2021. No other material modifications were made to the agreement during 2020.

During the first quarter of 2020, the Company executed a loan and security agreement to establish Interim Warehouse Facility #5. The $29.2 million committed warehouse loan and security agreement with a national bank funds two specific loans. The agreement provides for maturity dates to coincide with the maturity dates for the underlying two specific loans. Based on the current underlying loans, the maximum allowable loan term is two and a half years. Borrowings under the facility are full recourse to the Company and bear interest at 30-day LIBOR plus 300 basis points, with an interest-rate floor of 450 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. The committed warehouse loan and security agreement has only two financial covenants, both of which are similar to the other Interim Warehouse Facilities. The Company may request additional capacity under the agreement to fund specific loans.

The Company allowed Interim Warehouse Facility #4 to expire according to its terms April 30, 2020. The Company believes that the four remaining committed and uncommitted credit facilities from national banks and the Company’s corporate cash provide the Company with sufficient borrowing capacity to conduct its Interim Program lending operations.

The warehouse notes payable are subject to various financial covenants, all of which the Company was in compliance with as of the current period end.

GOODWILL AND OTHER INTANGIBLE ASSETS

3 Months Ended

Mar. 31, 2020

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Other Intangible Assets

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

Activity related to goodwill for the three months ended March 31, 2020 and 2019 follows:


	For the three months ended
	March 31,
Roll Forward of Goodwill (in thousands)	2020		2019
Beginning balance	$	180,424	$	173,904
Additions from acquisitions		64,462		6,520
Impairment		—		—
Ending balance	$	244,886	$	180,424

The additions from acquisitions shown in the table above during the three months ended March 31, 2020 relates to the immaterial purchases of certain assets and the assumption of certain liabilities from two debt brokerage companies for aggregate consideration of $64.9 million, which consisted of cash of $43.8 million, $5.0 million of the Company’s stock, and $16.1 million of contingent consideration. The contingent consideration may be earned over either a four-year period or five-year period after the closing of each acquisition, provided certain revenue targets have been met. The contingent consideration included for the acquisitions is non-cash consideration and thus not reflected in the amount of cash consideration paid in the Condensed Consolidated Statement of Cash Flows. The Company estimated the fair value of the contingent consideration using a probability-based, discounted cash flow estimate for the revenue targets (Level 3).

The acquired businesses operate in the Columbus, Ohio and New York City metropolitan areas. These acquisitions expand the Company’s network of loan originators and geographical reach and provide further diversification to its loan origination platform. Substantially all of the value associated with the acquisitions was related to the assembled workforces and commercial lending platform, resulting in substantially all of the consideration being allocated to goodwill. The Company expects all goodwill to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made. The other assets acquired and the liabilities assumed were immaterial. The operations of these two companies have since been merged into the Company’s existing operations. The goodwill resulting from the acquisitions is allocated to the Company’s single reporting unit. The purchase accounting for the two acquisitions has been completed as of March 31, 2020.

The additions from acquisitions during the three months ended March 31, 2019 shown in the table above relates to an immaterial acquisition of a technology company, which was completed in the first quarter of 2019.

As of March 31, 2020 and December 31, 2019, the balance of intangible assets acquired from acquisitions totaled $2.4 million and $2.5 million, respectively. As of March 31, 2020, the weighted-average period over which the Company expects the intangible assets to be amortized is 4.5 years.

A summary of the Company’s contingent consideration liabilities, which is included in Other liabilities, as of and for the three months ended March 31, 2020 and 2019 follows:


	For the three months ended
	March 31,
Roll Forward of Contingent Consideration Liabilities (in thousands)	2020		2019
Beginning balance	$	5,752	$	11,630
Additions		16,073		—
Accretion		227		143
Payments		(5,800)		(6,450)
Ending balance	$	16,252	$	5,323

The contingent consideration liabilities above relate to acquisitions completed in 2017 and 2020. The last of the five earn-out periods related to these contingent consideration liabilities ends in the first quarter of 2025.

The global economic disruption caused by the COVID-19 Crisis has led to significant declines in the value of the U.S. equity markets. Certain sectors of the market have seen substantial impacts to their operations, cash flows, and liquidity. The commercial real estate finance

industry has also been impacted, particularly as it relates to financing and property sales activity for office, retail and hospitality assets. The Company has considered whether the disruption from the COVID-19 Crisis represents a triggering event with respect to impairment of its goodwill. Despite the disruption to many sectors of commercial real estate debt finance, financing activity for multifamily assets, which represents over 80% of the Company’s transaction volumes over the past several years and over 90% of its servicing portfolio, has not been as adversely impacted as a result of Fannie Mae’s, Freddie Mac’s, and HUD’s presence in the market. Consequently, the Company concluded that as of March 31, 2020, the COVID-19 Crisis and its direct impacts to the Company, its operations, available liquidity, and its cash flows does not represent a triggering event.

FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2020

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 adjustments 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 status, 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. These valuation methodologies were applied to all of the Company's assets and liabilities carried at fair value:

●

Derivative Instruments—The derivative positions consist of interest rate lock commitments with borrowers and forward sale agreements to the Agencies. The fair value of these instruments is estimated using a discounted cash flow model developed based on changes in the applicable U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company, and are classified within Level 3 of the valuation hierarchy.

●

Loans Held for Sale—Loans held for sale 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. Therefore, the

Company classifies these loans held for sale as Level 2.

●

Pledged Securities—Investments in 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.

On March 23, 2020, the U.S. Federal Reserve announced steps to support the U.S. economy during the COVID-19 Crisis, including directing the Federal Open Market Committee to purchase Treasury securities and Agency mortgage-backed securities in the amounts necessary to support stable market prices and smooth market function. Consequently, Agency mortgage-backed securities remain actively traded by market participants, and the value of the Company’s investments in Agency debt securities have remained stable despite the economic disruption caused by the COVID-19 Crisis. The fair value of the Company’s rate lock commitments tied to Agency loans and loans held for sale increased significantly from December 31, 2019 to March 31, 2020 as a result of (i) a significant increase in the balance of rate lock commitments and loans held for sale due to increased lending activity during the first quarter and (ii) a steep decline in the underlying interest rates, primarily the 10-year U.S. Treasury rate, from the time of rate lock and the end of the first quarter. The increase in the fair value of the Company’s loans held for sale and derivative assets related to the change in interest rates had an equal and offsetting increase in the fair value of derivative liabilities. No changes were made to the valuation methodologies used to estimate fair value.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2020, and December 31, 2019, 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
March 31, 2020
Assets
Loans held for sale	$	—	$	1,186,577	$	—	$	1,186,577
Pledged securities		8,543		112,952		—		121,495
Derivative assets		—		—		158,233		158,233
Total	$	8,543	$	1,299,529	$	158,233	$	1,466,305

Liabilities
Derivative liabilities	$	—	$	—	$	172,623	$	172,623
Total	$	—	$	—	$	172,623	$	172,623

December 31, 2019
Assets
Loans held for sale	$	—	$	787,035	$	—	$	787,035
Pledged securities		7,204		114,563		—		121,767
Derivative assets		—		—		15,568		15,568
Total	$	7,204	$	901,598	$	15,568	$	924,370

Liabilities
Derivative liabilities	$	—	$	—	$	36	$	36
Total	$	—	$	—	$	36	$	36

There were no transfers between any of the levels within the fair value hierarchy during the three months ended March 31, 2020.

Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below for the three months ended March 31, 2020 and 2019:


	Fair Value Measurements
	Using Significant Unobservable Inputs:
	Derivative Instruments
	For the three months ended
	March 31,
(in thousands)	2020		2019
Derivative assets and liabilities, net
Beginning balance	$	15,532	$	2,839
Settlements		(174,295)		(103,860)
Realized gains recorded in earnings (1)		158,763		101,021
Unrealized gains (losses) recorded in earnings (1)		(14,390)		(2,286)
Ending balance	$	(14,390)	$	(2,286)

(1)	Realized and unrealized gains (losses) from derivatives are recognized in Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income.

The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of March 31, 2020:


	Quantitative Information about Level 3 Measurements
(in thousands)	Fair Value		Valuation Technique	Unobservable Input (1)	Input Value (1)
Derivative assets	$	158,233	Discounted cash flow	Counterparty credit risk	—
Derivative liabilities	$	172,623	Discounted cash flow	Counterparty credit risk	—

(1)	Significant increases in this input may lead to significantly lower fair value measurements.

The carrying amounts and the fair values of the Company's financial instruments as of March 31, 2020 and December 31, 2019 are presented below:


	March 31, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
(in thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	205,309	$	205,309	$	120,685	$	120,685
Restricted cash		30,745		30,745		8,677		8,677
Pledged securities		121,495		121,495		121,767		121,767
Loans held for sale		1,186,577		1,186,577		787,035		787,035
Loans held for investment, net		454,213		457,254		543,542		546,033
Derivative assets		158,233		158,233		15,568		15,568
Total financial assets	$	2,156,572	$	2,159,613	$	1,597,274	$	1,599,765

Financial liabilities:
Derivative liabilities	$	172,623	$	172,623	$	36	$	36
Secured borrowings		70,548		70,548		70,548		70,548
Warehouse notes payable		1,305,846		1,306,632		906,128		906,821
Note payable		293,371		272,874		293,964		297,750
Total financial liabilities	$	1,842,388	$	1,822,677	$	1,270,676	$	1,275,155

The following methods and assumptions were used for recurring fair value measurements as of March 31, 2020.

Cash and Cash Equivalents and Restricted Cash—The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).

Pledged Securities—Consist of cash, highly liquid investments in money market accounts invested in government securities, and investments in Agency debt securities. The investments of the money market funds typically have maturities of 90 days or less and are valued using quoted market prices from recent trades. The fair value of the Agency debt securities incorporates the contractual cash flows

of the security discounted at market-rate, risk-adjusted yields.

Loans Held for Sale—Consist of originated loans that are generally transferred or sold within 60 days from the date that the mortgage loan is funded and are valued using discounted cash flow models that incorporate observable inputs from market participants.

Derivative Instruments—Consist of interest rate lock commitments and forward sale agreements. These instruments are valued using discounted cash flow models developed based on changes in the U.S. Treasury rate and other observable market data. The value is determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company.

Fair Value of Derivative Instruments and Loans Held for Sale—In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move between the time of the "lock-in" of rates by the borrower and the sale date of the loan to an investor.

To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company's policy is to enter into a sale commitment with the investor simultaneous with the rate lock commitment with the borrower. The sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment.

Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. The fair value of the Company's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:

●

the estimated gain from the expected loan sale to the investor (Level 2);

●

the expected net cash flows associated with servicing the loan, net of any guaranty obligations retained (Level 2);

●

the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and

●

the nonperformance risk of both the counterparty and the Company (Level 3; derivative instruments only).

The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to the fair value of future servicing, net at loan sale (Level 2).

To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount (Level 2).

The fair value of the Company's forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

The fair value of the Company’s interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in interest rate lock commitments and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties and the short duration of interest rate lock commitments and forward sale contracts, the risk of nonperformance by the Company’s counterparties has historically been minimal (Level 3).

The following table presents the components of fair value and other relevant information associated with the Company’s derivative instruments and loans held for sale as of March 31, 2020 and December 31, 2019.


			Fair Value Adjustment Components						Balance Sheet Location
													Fair Value
	Notional or		Estimated				Total						Adjustment
	Principal		Gain		Interest Rate		Fair Value		Derivative		Derivative		To Loans
(in thousands)	Amount		on Sale		Movement		Adjustment		Assets		Liabilities		Held for Sale
March 31, 2020
Rate lock commitments	$	2,824,387	$	49,475	$	108,151	$	157,626	$	157,642	$	(16)	$	—
Forward sale contracts		3,920,466		—		(172,016)		(172,016)		591		(172,607)		—
Loans held for sale		1,096,079		26,633		63,865		90,498		—		—		90,498
Total			$	76,108	$	—	$	76,108	$	158,233	$	(172,623)	$	90,498

December 31, 2019
Rate lock commitments	$	511,114	$	12,199	$	(1,975)	$	10,224	$	10,247	$	(23)	$	—
Forward sale contracts		1,285,656		—		5,308		5,308		5,321		(13)		—
Loans held for sale		774,542		15,826		(3,333)		12,493		—		—		12,493
Total			$	28,025	$	—	$	28,025	$	15,568	$	(36)	$	12,493

FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES

3 Months Ended

Mar. 31, 2020

FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES

Fannie Mae Commitments and Pledged Securities

NOTE 9—FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES

Fannie Mae DUS Related Commitments—Commitments for the origination and subsequent sale and delivery of loans to Fannie Mae represent those mortgage loan transactions where the borrower has locked an interest rate and scheduled closing, and the Company has entered into a mandatory delivery commitment to sell the loan to Fannie Mae. As discussed in NOTE 8, the Company accounts for these commitments as derivatives recorded at fair value.

The Company is generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program. The Company is required to secure these obligations by assigning restricted cash balances and securities to Fannie Mae, which are classified as Pledged securities, at fair value on the Condensed Consolidated Balance Sheets. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires restricted liquidity for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Pledged securities held in the form of money market funds holding U.S. Treasuries are discounted 5%, and multifamily Agency mortgage-backed securities (“Agency MBS”) are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As seen below, the Company held substantially all of its pledged securities in Agency MBS as of March 31, 2020. The majority of the loans for which the Company has risk sharing are Tier 2 loans.

The Company is in compliance with the March 31, 2020 collateral requirements as outlined above. As of March 31, 2020, reserve requirements for the DUS loan portfolio will require the Company to fund $68.5 million in additional pledged securities over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within the at risk portfolio. Fannie Mae periodically reassesses the DUS Capital Standards and may make changes to these standards in the future. The Company generates sufficient cash flow from its operations to meet these capital standards and does not expect any future changes to have a material impact on its future operations; however, any future increases to collateral requirements may adversely impact the Company’s available cash.

Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company's servicing authority for all or some of the portfolio if at any time it determines that the Company's financial condition is not adequate to support its obligations under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of March 31, 2020. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk sharing. At March 31, 2020, the net worth requirement was $200.7 million, and the Company's net worth, as defined in the requirements, was $763.6 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of March 31, 2020, the Company was required to maintain at least $39.7 million of liquid assets to meet operational liquidity requirements for

Fannie Mae, Freddie Mac, HUD, and Ginnie Mae. As of March 31, 2020, the Company had operational liquidity, as defined in the requirements, of $291.9 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.

Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of March 31, 2020 and 2019 and December 31, 2019 and 2018:


	March 31,				December 31,
(in thousands)	2020		2019		2019		2018
Pledged cash and cash equivalents:
Restricted cash	$	2,989	$	5,583	$	2,150	$	3,029
Money market funds		5,554		840		5,054		6,440
Total pledged cash and cash equivalents	$	8,543	$	6,423	$	7,204	$	9,469
Agency MBS		112,952		111,143		114,563		106,862
Total pledged securities, at fair value	$	121,495	$	117,566	$	121,767	$	116,331

The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Condensed Consolidated Statements of Cash Flows as more fully discussed in NOTE 2.

The investments in Agency debt securities consist of Agency MBS and are all accounted for as AFS securities. The following table provides additional information related to the AFS Agency MBS as of March 31, 2020 and December 31, 2019:


Fair Value and Amortized Cost of Agency MBS (in thousands)	March 31, 2020		December 31, 2019
Fair value	$	112,952	$	114,563
Amortized cost		114,528		113,580
Total gains for securities with net gains in AOCI		17		1,145
Total losses for securities with net losses in AOCI		(1,593)		(162)
Fair value of securities with unrealized losses		85,974		66,526

The Company has not recorded an allowance for credit losses for any of the securities whose fair value is less than amortized costs as of March 31, 2020. These unrealized losses were primarily related to interest-only Agency MBS securities caused by short-term fluctuations in the fair value of these securities. The contractual cash flows of these securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of these securities. The Company does not intend to sell any of the Agency MBS, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. None of the pledged securities has been in a continuous unrealized loss position for more than 12 months.

The following table provides contractual maturity information related to the Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date.


	March 31, 2020
Detail of Agency MBS Maturities (in thousands)	Fair Value		Amortized Cost
Within one year	$	—	$	—
After one year through five years		2,605		2,630
After five years through ten years		94,860		95,159
After ten years		15,487		16,739
Total	$	112,952	$	114,528

EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2020

EARNINGS PER SHARE

Earnings Per Share

NOTE 10—EARNINGS PER SHARE

EPS is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to each class of common stock and participating securities based on their respective rights to receive dividends. The Company grants share-based awards to various employees and nonemployee directors under the 2015 Equity Incentive Plan that entitle recipients to receive nonforfeitable

dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.

The following table presents the calculation of basic and diluted EPS for the three months ended March 31, 2020 and 2019 under the two-class method. Participating securities are included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the treasury-stock method.


	For the three months ended March 31,
EPS Calculations (in thousands, except per share amounts)	2020		2019
Calculation of basic EPS
Walker & Dunlop net income	$	47,829	$	44,218
Less: dividends and undistributed earnings allocated to participating securities		1,510		1,509
Net income applicable to common stockholders	$	46,319	$	42,709
Weighted-average basic shares outstanding		30,226		29,680
Basic EPS	$	1.53	$	1.44

Calculation of diluted EPS
Net income applicable to common stockholders	$	46,319	$	42,709
Add: reallocation of dividends and undistributed earnings based on assumed conversion		34		38
Net income allocated to common stockholders	$	46,353	$	42,747
Weighted-average basic shares outstanding		30,226		29,680
Add: weighted-average diluted non-participating securities		934		1,004
Weighted-average diluted shares outstanding		31,160		30,684
Diluted EPS	$	1.49	$	1.39

The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasury-stock method includes the unrecognized compensation costs associated with the awards. An immaterial number of average restricted shares were excluded from the computation of diluted earnings per share under the treasury method for the three months ended March 31, 2020 and 2019 because the effect would have been anti-dilutive (the grant date market price of the restricted shares was greater than the average market price of the Company’s shares during the periods presented).

TOTAL EQUITY

3 Months Ended

Mar. 31, 2020

TOTAL EQUITY.

Total Equity

NOTE 11—TOTAL EQUITY

A summary of changes in total equity for the three months ended March 31, 2020 and 2019:


	For the three months ended March 31, 2020

		Stockholders' Equity
	Common Stock							Retained		Noncontrolling		Total
(in thousands)	Shares	Amount		APIC		AOCI		Earnings		Interests		Equity
Balance at December 31, 2019	30,035	$	300	$	237,877	$	737	$	796,775	$	6,596	$	1,042,285
Cumulative-effect adjustment for adoption of ASU 2016-13, net of tax	—		—		—		—		(23,678)		—		(23,678)
Walker & Dunlop net income	—		—		—		—		47,829		—		47,829
Net income (loss) from noncontrolling interests	—		—		—		—		—		(224)		(224)
Contributions from noncontrolling interests											675		675
Other comprehensive income (loss), net of tax	—		—		—		(1,918)		—		—		(1,918)
Stock-based compensation - equity classified	—		—		5,061		—		—		—		5,061
Issuance of common stock in connection with equity compensation plans	675		7		11,362		—		—		—		11,369
Repurchase and retirement of common stock	(380)		(4)		(18,293)		—		(8,440)		—		(26,737)
Cash dividends paid ($0.36 per common share)	—		—		—		—		(11,347)		—		(11,347)
Balance at March 31, 2020	30,330	$	303	$	236,007	$	(1,181)	$	801,139	$	7,047	$	1,043,315


	For the three months ended March 31, 2019

		Stockholders' Equity
	Common Stock							Retained		Noncontrolling		Total
(in thousands)	Shares	Amount		APIC		AOCI		Earnings		Interests		Equity
Balance at December 31, 2018	29,497	$	295	$	235,152	$	(75)	$	666,752	$	5,068	$	907,192
Cumulative-effect adjustment for adoption of ASU 2016-02, net of tax	—		—		—		—		(1,002)		—		(1,002)
Walker & Dunlop net income	—		—		—		—		44,218		—		44,218
Net income (loss) from noncontrolling interests	—		—		—		—		—		(158)		(158)
Other comprehensive income (loss), net of tax	—		—		—		301		—		—		301
Stock-based compensation - equity classified	—		—		6,812		—		—		—		6,812
Issuance of common stock in connection with equity compensation plans	935		9		4,178		—		—		—		4,187
Repurchase and retirement of common stock	(459)		(4)		(22,400)		—		(1,755)		—		(24,159)
Cash dividends paid ($0.30 per common share)	—		—		—		—		(9,319)		—		(9,319)
Balance at March 31, 2019	29,973	$	300	$	223,742	$	226	$	698,894	$	4,910	$	928,072

During the first quarter of 2020, the Company’s Board of Directors approved a new stock repurchase program that permits the repurchase of up to $50.0 million of the Company’s common stock over a 12-month period beginning on February 11, 2020. During the first quarter of 2020, the Company repurchased 0.2 million shares of its common stock under a share repurchase program at a weighted average price of $63.58 per share and immediately retired the shares, reducing stockholders’ equity by $10.2 million. These purchases were made prior to the escalation of the COVID-19 Crisis in mid-March 2020, and future purchases are unlikely until the impacts of the COVID-19 Crisis on the economy and the Company’s liquidity are better understood. As of March 31, 2020, the Company had $39.8 million of authorized share repurchase capacity remaining under the 2020 share repurchase program.

On February 4, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.36 per share. The dividend was paid March 9, 2020 to all holders of record of our restricted and unrestricted common stock as of February 21, 2020. Based upon the Company’s financial performance for the three months ended March 31, 2020, strong cash position, and projected future liquidity needs, on May 5, 2020, the Company’s Board of Directors declared a dividend of $0.36 per share for the second quarter of 2020. The dividend will be paid June 5, 2020 to all holders of record of the Company’s restricted and unrestricted common stock as of May 20, 2020.

As disclosed in NOTE 7, the Company issued $5.0 million of Company stock in connection with acquisitions during the three months ended March 31, 2020, a non-cash transaction.

The Company’s note payable contains direct restrictions to the amount of dividends the Company may pay, and the warehouse credit facilities and agreements with the Agencies contain minimum equity, liquidity, and other capital requirements that indirectly restrict the amount of dividends the Company may pay. The Company does not believe that these restrictions currently limit the amount of dividends the Company intends to pay for the foreseeable future.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Principles of Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest method. 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. Under the VIE model, the Company consolidates an entity when it both holds a variable interest in an entity and is the primary beneficiary. 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.

Use of Estimates

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty

obligations, allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments and disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Coronavirus Disease 2019

Coronavirus Disease 2019—In January 2020, the first cases of a novel strain of the coronavirus known as Coronavirus Disease 2019 (“COVID-19” or, “the virus”) were reported in the U.S., and in March 2020 the World Health Organization recognized the virus as a global pandemic. In the weeks since, the COVID-19 pandemic has caused significant global economic disruption as a result of the measures taken by countries and local municipalities to contain the spread of the virus (the “COVID-19 Crisis” or the “Crisis”). In the U.S., the only country that the Company operates in, Federal, state and local authorities have taken actions to both contain the spread of the virus while simultaneously providing substantial liquidity to Americans, domestic businesses and the financial markets to ensure markets continue to operate smoothly.

The COVID-19 Crisis did not have a material impact on the Company’s operations, its cash flows or the amount and availability of its liquidity during the first quarter 2020. Although it is not possible to reliably estimate the extent and duration of the COVID-19 Crisis as of the date of this quarterly report on Form 10-Q, management has made adjustments to the carrying values of the Company’s assets and liabilities impacted by the Crisis based on its best estimates and assumptions. The most significant adjustments to the carrying amount of the Company’s assets and liabilities include the Company’s estimate of future expected credit losses under both the Fannie Mae Delegated Underwriting and Servicing^TM (“DUS”) program and the loans originated for the Company’s balance sheet. The Company continues to generate positive cash flow to support its business activities as its most significant capital relationships (Fannie Mae, Freddie Mac and HUD) have not been meaningfully affected by the Crisis. In addition, the globally and nationally recognized financial institutions with which the Company partners to provide warehouse financing do not appear to have been materially impacted by the Crisis, and there has not been, and we do not expect there to be, any disruption to the amount or availability of liquidity necessary to support the Company’s operations.

Subsequent Events

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to March 31, 2020. There have been no material events that would require recognition in the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to March 31, 2020. No other material subsequent events have occurred that would require disclosure.

Derivative Assets and Liabilities

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 Condensed 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 Condensed 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 Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Condensed 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 (or the “guaranty obligation;” included in Derivative assets in the Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Condensed 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 Condensed Consolidated Statements of Income. The co-broker fees for the three months ended March 31, 2020 and 2019 were $8.3 million and $2.9 million, respectively. The fair value of expected guaranty obligation recognized at commitment for the three months ended March 31, 2020 and 2019 were $1.3 million and $4.1 million respectively.

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 Condensed Consolidated Statements of Income. All prior periods have been adjusted to conform to the current-year presentation.

Recently Adopted and Recently Announced Accounting Pronouncements

Recently Adopted and Recently Announced Accounting Pronouncements—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" or “CECL”) represents a significant change to the incurred loss model previously 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 modifies 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 adopted the standard as required on January 1, 2020. The Company recognized an increase of $31.6 million in the allowance for risk-sharing obligations with a cumulative-effect adjustment, net of tax recorded to opening retained earnings of $23.7 million and deferred tax assets of $7.9 million. The adjustment to the allowance for loan losses for the Company’s loans held for investment was immaterial. There was no impact to AFS securities because the portfolio consists of agency-backed securities that inherently have an immaterial risk of loss.

There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2019 Form 10-K, except for the changes to the Company’s accounting policies related to the allowance for risk-sharing obligations and allowance for loan losses in connection with the adoption of ASU 2016-13.

Guaranty Obligation and Allowance for Risk-sharing Obligations

Guaranty Obligation and Allowance for risk sharing obligations— When a loan is sold under the DUS program, the Company undertakes an obligation to partially guarantee the credit 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 Condensed Consolidated Balance Sheets. The recognized guaranty obligation is the fair value of the Company’s obligation to stand ready to perform over the term of the guaranty, including credit risk.

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 mortgage servicing right 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 Condensed Consolidated Statements of Income, unless the loan defaults or is paid off prior to maturity.

Overall CECL Approach

The Company uses the weighted-average remaining maturity method (“WARM”) for calculating its allowance for risk-sharing obligations, the Company’s liability for the off-balance-sheet credit exposure associated with the Fannie Mae at risk DUS loans. WARM uses an average annual charge-off rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual charge-off rate is applied to the unpaid principal balance (“UPB”) over the contractual term, further adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below.

Considering the Company’s long history servicing Fannie Mae DUS loans, the Company maximizes the use of historical internal data because the Company has extensive historical data from which to calculate historical loss rates and principal paydown by loan term type for its exposure to credit loss on its homogeneous portfolio of Fannie Mae DUS multifamily loans. Additionally, the Company believes its properties, loss history, and underwriting standards are not similar to public data such as loss histories for loans originated for collateralized mortgage-backed securities conduits.

Runoff Rate

One of the key inputs into a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will prepay and amortize in the future. As the loans the Company originates have different original lives and runoff over different periods, the Company groups loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate.

The Company originates loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate.

The Company uses its historical runoff rate for each of the different loan term pools as a proxy for the expected runoff rate. The Company believes that borrower behavior and macroeconomic conditions will not deviate significantly from historical performance over the approximately ten-year period over which the Company has compiled the actual loss data. The ten-year period captures the various cycles of industry performance and provides a period that is long enough to capture sufficient observations of runoff history. In addition, due to the prepayment protection provisions for Fannie Mae DUS loans, we have not seen significant volatility in historical prepayment rates due to changes in interest rates and would not expect this to change in future periods.

The historical annual runoff rate is calculated for each year of a loan’s life for each vintage in the portfolio and aggregated with the calculated runoff rate for each comparable year in every vintage. For example, the annual runoff rate for the first year of loans originated in 2010 is aggregated with the annual runoff rate for the first year of loans originated in 2011, 2012, and so on to calculate the average annual runoff rate for the first year of a loan. This average runoff calculation is performed for each year of a loan’s life for each of the various loan terms to create a matrix of historical average annual runoffs by year for the entire portfolio.

The Company segments its current portfolio of at risk DUS loans outstanding by original loan term type and years remaining and then applies the appropriate historical average runoff rates to calculate the expected remaining balance at the end of each reporting period in the future. For example, for a loan with an original ten-year term and seven years remaining, the Company applies the historical average annual runoff rate for a ten-year loan for year four to arrive at the remaining UPB one year from the current period, the historical average runoff rate for year five to arrive at the remaining UPB two years from the current period, and so on up to the loan’s maturity date.

CECL Reserve Calculation

Once the Company has calculated the estimated outstanding UPB for each future year until maturity for each loan term type, the Company then applies the average annual charge-off rate (as further described below) to each future year’s expected UPB. The Company then aggregates the allowance calculated for each year within each loan term type and for all different maturity years to arrive at the CECL reserve for the portfolio.

The weighted-average annual charge-off rate is calculated using a ten-year look-back period, utilizing the average portfolio balance and settled losses for each year. A ten-year period is used as the Company believes that this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. This approach captures the adverse impact of the years following the last recession in 2008-2010 because multifamily commercial loans have a lag period from the time of initial distress indications through the timing of loss settlement. The same loss rate is utilized across each loan term type as the Company is not aware of any historical or industry-published data to indicate there is any difference in the occurrence probability or loss severity for a loan based on its loan origination term.

Reasonable and Supportable Forecast Period

The Company currently uses one year for its reasonable and supportable forecast period (the “forecast period”) as the Company believes forecasts beyond one year are inherently less reliable. The Company uses forecasts of unemployment rates, historically a highly correlated indicator for multifamily occupancy rates, and net operating income growth to assess what macroeconomic and multifamily market conditions are expected to be like over the coming year. The Company then associates the forecasted conditions with a similar historical period over the past ten years, which could be one or several years, and uses the Company’s average loss rate for that historical period as a basis for the charge-off rate used for the forecast period. For all remaining years until maturity, the Company uses the weighted-average annual charge-off rate for the ten-year period as described above to estimate losses. The average loss rate from a historical period used for the forecast period may be adjusted as necessary if the forecasted macroeconomic and industry conditions differ materially from the historical period.

Identification of Specific Reserves for Defaulted Loans

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 default 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 (“DSCR”), property condition, and financial strength of the borrower or key principal(s). In instances where payment under the guaranty on a specific loan is determined to be probable (as the loan is probable of foreclosure or has foreclosed), the Company separately measures the expected loss through an assessment of the underlying fair value of the asset, disposition costs, and the risk-sharing percentage (the “specific reserve”) through a charge to the provision for risk-sharing obligations, which is a component of Provision for credit losses in the Condensed Consolidated Statements of Income. These loans are removed from the WARM calculation described above, and the associated loan-specific mortgage servicing right and guaranty obligation are written off. The expected loss on the risk-sharing obligation is dependent on the fair value of the underlying property as the loans are collateral dependent. Historically, initial recognition of a specific reserve occurs at or before a loan becomes 60 days delinquent.

The amount of the specific reserve considers 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 specific reserve 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.

Loans Held for Investment, net