WALKER & DUNLOP, INC., 10-K filed on 3/1/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2018
Jan. 31, 2019
Jun. 30, 2018
Document And Entity Information      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Entity Current Reporting Status Yes    
Entity Registrant Name Walker & Dunlop, Inc.    
Entity Central Index Key 0001497770    
Current Fiscal Year End Date --12-31    
Entity Filer Category Large Accelerated Filer    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 1.1
Entity Common Stock, Shares Outstanding   30,259,282  
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Assets    
Cash and cash equivalents $ 90,058 $ 191,218
Restricted cash 20,821 6,677
Pledged securities, at fair value 116,331 97,859
Loans held for sale, at fair value 1,074,348 951,829
Loans held for investment, net 497,291 66,510
Servicing fees and other receivables, net 50,419 41,693
Derivative assets 35,536 10,357
Mortgage servicing rights 670,146 634,756
Goodwill and other intangible assets 177,093 124,543
Other assets 50,014 82,985
Total assets 2,782,057 2,208,427
Liabilities    
Accounts payable and other liabilities 187,407 130,479
Performance deposits from borrowers 20,335 6,461
Derivative liabilities 32,697 1,850
Guaranty obligation, net of accumulated amortization 46,870 41,187
Allowance for risk-sharing obligations 4,622 3,783
Deferred tax liabilities, net 125,542 108,059
Warehouse notes payable 1,161,382 937,769
Note payable 296,010 163,858
Total liabilities 1,874,865 1,393,446
Equity    
Preferred shares, authorized 50,000; none issued.
Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 29,497 shares at December 31, 2018 and 30,016 shares at December 31, 2017. 295 300
Additional paid-in capital ("APIC") 235,152 229,080
Accumulated other comprehensive income (loss) ("AOCI") (75) 93
Retained earnings 666,752 579,943
Total stockholders' equity 902,124 809,416
Noncontrolling interests 5,068 5,565
Total equity 907,192 814,981
Commitments and contingencies (NOTES 2 and 10)
Total liabilities and equity $ 2,782,057 $ 2,208,427
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Dec. 31, 2018
Dec. 31, 2017
Consolidated Balance Sheets    
Preferred shares, authorized 50,000 50,000
Preferred shares, issued 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, authorized 200,000 200,000
Common stock, issued 29,497 30,016
Common stock, outstanding 29,497 30,016
v3.10.0.1
Consolidated Statements of Income and Comprehensive Income - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Revenues      
Gains from mortgage banking activities $ 407,082 $ 439,370 $ 367,185
Servicing fees 200,230 176,352 140,924
Escrow earnings and other interest income 42,985 20,396 9,168
Other 60,918 51,272 34,272
Total revenues 725,246 711,857 575,276
Expenses      
Personnel 297,303 289,277 227,491
Amortization and depreciation 142,134 131,246 111,427
Provision (benefit) for credit losses 808 (243) (612)
Interest expense on corporate debt 10,130 9,745 9,851
Other operating costs 62,021 48,171 41,338
Total expenses 512,396 478,196 389,495
Income from operations 212,850 233,661 185,781
Income tax expense 51,908 21,827 71,470
Net income before noncontrolling interests 160,942 211,834 114,311
Less: net income (loss) from noncontrolling interests (497) 707 414
Walker and Dunlop net income 161,439 211,127 113,897
Other comprehensive income (loss), net of tax:      
Net change in unrealized gains and losses on pledged available-for-sale securities (168) (14) (84)
Walker and Dunlop comprehensive income $ 161,271 $ 211,113 $ 113,813
Basic earnings per share (NOTE 12) $ 5.15 $ 6.72 $ 3.66
Diluted earnings per share (NOTE 12) 4.96 $ 6.47 $ 3.57
Cash dividends declared per common share $ 1.00    
Basic weighted average shares outstanding 30,202 30,176 29,768
Diluted weighted average shares outstanding 31,384 31,386 30,537
Loans Held for Sale      
Revenues      
Net warehouse interest income $ 5,993 $ 15,077 $ 16,245
Loans Held for Investment      
Revenues      
Net warehouse interest income $ 8,038 $ 9,390 $ 7,482
v3.10.0.1
Consolidated Statements of Changes in Equity - USD ($)
shares in Thousands, $ in Thousands
Common Stock
Additional Paid-In Capital
AOCI
Retained Earnings
Noncontrolling Interests
Total
Balances at the beginning of the period at Dec. 31, 2015 $ 295 $ 215,384 $ 191 $ 272,030 $ 4,449 $ 492,349
Balance at the beginning of the period (in shares) at Dec. 31, 2015 29,466          
Change in Stockholders' Equity            
Walker and Dunlop net income       113,897   113,897
Net income (loss) from noncontrolling interests         414 414
Other comprehensive income (loss), net of tax     (84)     (84)
Stock-based compensation - equity classified   17,616       17,616
Issuance of common stock in connection with equity compensation plans $ 6 3,759       3,765
Issuance of common stock in connection with equity compensation plans (in shares) 645          
Repurchase and retirement of common stock $ (5) (8,112)   (4,776)   (12,893)
Repurchase and retirement of common stock (in shares) (560)          
Other         (5) (5)
Balances at the end of the period at Dec. 31, 2016 $ 296 228,782 107 381,031 4,858 615,074
Balance at the end of the period (in shares) at Dec. 31, 2016 29,551          
Change in Stockholders' Equity            
Cumulative effect from change in accounting for stock compensation   135   (120)   15
Walker and Dunlop net income       211,127   211,127
Net income (loss) from noncontrolling interests         707 707
Other comprehensive income (loss), net of tax     (14)     (14)
Stock-based compensation - equity classified   19,973       19,973
Issuance of common stock in connection with equity compensation plans $ 12 3,001       3,013
Issuance of common stock in connection with equity compensation plans (in shares) 1,272          
Repurchase and retirement of common stock $ (8) (22,676)   (12,215)   (34,899)
Repurchase and retirement of common stock (in shares) (807)          
Balances at the end of the period at Dec. 31, 2017 $ 300 229,080 93 579,943 5,565 $ 814,981
Balance at the end of the period (in shares) at Dec. 31, 2017 30,016         30,016
Change in Stockholders' Equity            
Walker and Dunlop net income       161,439   $ 161,439
Net income (loss) from noncontrolling interests         (497) (497)
Other comprehensive income (loss), net of tax     (168)     (168)
Stock-based compensation - equity classified   22,765       22,765
Issuance of common stock in connection with equity compensation plans $ 10 8,939       8,949
Issuance of common stock in connection with equity compensation plans (in shares) 958          
Repurchase and retirement of common stock $ (15) (25,632)   (43,185)   (68,832)
Repurchase and retirement of common stock (in shares) (1,477)          
Cash dividends paid       (31,445)   (31,445)
Balances at the end of the period at Dec. 31, 2018 $ 295 $ 235,152 $ (75) $ 666,752 $ 5,068 $ 907,192
Balance at the end of the period (in shares) at Dec. 31, 2018 29,497         29,497
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities      
Net income before noncontrolling interests $ 160,942 $ 211,834 $ 114,311
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 (172,401) (193,886) (192,825)
Change in the fair value of premiums and origination fees (5,037) 5,781 (10,796)
Amortization and depreciation 142,134 131,246 111,427
Stock compensation-equity and liability classified 23,959 21,134 18,477
Provision (benefit) for credit losses 808 (243) (612)
Deferred tax expense (benefit) 17,483 (30,961) 37,595
Originations of loans held for sale (15,153,003) (17,018,424) (12,040,559)
Sales of loans to third parties 15,050,932 17,937,915 12,697,209
Amortization of deferred loan fees and costs (1,742) (2,298) (1,578)
Amortization of debt issuance costs and debt discount 7,509 4,886 5,581
Origination fees received from loans held for investment 3,968 1,109 2,104
Cash paid to settle risk-sharing obligations     (1,613)
Changes in:      
Servicing fees and other receivables (4,532) (12,234) (5,744)
Other assets (6,861) (7,064) (916)
Accounts payable and other liabilities (13,957) 22,866 22,035
Performance deposits from borrowers 13,874 (4,019) 5,368
Net cash provided by (used in) operating activities 64,076 1,067,642 759,464
Cash flows from investing activities      
Capital expenditures (4,722) (5,207) (2,478)
Proceeds from the sale of equity-method investments 4,993    
Purchase of pledged available-for-sale securities (98,442) (6,966)  
Funding of preferred equity investments (41,100) (16,884) (24,835)
Repayments of preferred equity investments 82,819    
Capital invested in the Interim Program JV, net (4,137) (6,342)  
Net cash paid to increase ownership interest in a previously held equity method investment     (1,058)
Acquisitions, net of cash received (53,249) (15,000) (6,350)
Purchase of mortgage servicing rights (1,814) (7,781) (43,097)
Originations of loans held for investment (597,889) (183,916) (414,763)
Principal collected on loans held for investment upon payoff 161,303 219,516 425,820
Sales of loans held for investment   119,750  
Net cash provided by (used in) investing activities (552,238) 97,170 (66,761)
Cash flows from financing activities      
Borrowings (repayments) of warehouse notes payable, net 139,298 (955,040) (649,845)
Borrowings of interim warehouse notes payable 145,043 140,341 325,828
Repayments of interim warehouse notes payable (61,050) (237,912) (355,738)
Repayments of note payable (166,223) (1,104) (1,104)
Borrowings of note payable 298,500    
Secured borrowings 70,052    
Proceeds from issuance of common stock 8,949 3,013 3,765
Repurchase of common stock (68,832) (34,899) (12,893)
Cash dividends paid (31,445)    
Payment of contingent consideration (5,150)    
Debt issuance costs (7,312) (3,890) (3,630)
Distributions to noncontrolling interest holders     (5)
Net cash provided by (used in) financing activities 321,830 (1,089,491) (693,622)
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) (166,332) 75,321 (919)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period 286,680 211,359 212,278
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period 120,348 286,680 211,359
Supplemental Disclosure of Cash Flow Information:      
Cash paid to third parties for interest 56,430 56,267 39,311
Cash paid for income taxes $ 45,728 $ 45,524 $ 34,432
v3.10.0.1
ORGANIZATION
12 Months Ended
Dec. 31, 2018
ORGANIZATION  
Organization

NOTE 1—ORGANIZATION

 

These financial statements represent the consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies.  

 

Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of multifamily and other commercial real estate financing products, provides multifamily investment sales brokerage services, and engages in commercial real estate investment management activities. The Company originates and sells loans pursuant to the programs of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”) and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). The Company 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 offers a proprietary loan program offering interim loans (the “Interim Program”). During the second quarter of 2017, the Company formed a joint venture with an affiliate of Blackstone Mortgage Trust, Inc. to originate, hold, and finance loans that meet the criteria of the Interim Program (the “Interim Program JV”). The Interim Program JV assumes full risk of loss while the loans it originates are outstanding. The Company holds a 15% ownership interest in the Interim Program JV and is responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. Substantially all loans satisfying the criteria for the Interim Program are originated by the Interim Program JV; however, the Company opportunistically originates loans held for investment through the Interim Program.

During the second quarter of 2018, the Company acquired 100% of the equity interests of JCR Capital Investment Corporation (“JCR”), the operator of a private commercial real estate investment adviser. JCR, a wholly owned subsidiary, is engaged in the management of debt, preferred equity, and mezzanine equity investments in middle-market commercial real estate funds. The operating results of JCR were immaterial for the year ended December 31, 2018.

v3.10.0.1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Summary of Significant Accounting Policies

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and all of its consolidated entities. All intercompany transactions have been eliminated. When the Company has significant influence over operating and financial decisions for an entity but does not own a majority of the voting interests, the Company accounts for the investment using the equity method of accounting.

 

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to December 31, 2018. There have been no material events that would require recognition in the consolidated financial statements. The Company has made certain disclosures in the notes to the consolidated financial statements of events that have occurred subsequent to December 31, 2018. No other material subsequent events have occurred that would require disclosure.

 

Use of Estimates—The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty obligations, allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments, and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates. 

 

Gains from Mortgage Banking Activities and Mortgage Servicing RightsGains from mortgage banking activities income is recognized when the Company records a derivative asset upon the commitment to originate a loan with a borrower and sell the loan to an investor. This commitment asset is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of any co-broker fees, and the estimated fair value of the expected net cash flows associated with the servicing of the loan, net of the estimated net future cash flows associated with any guaranty obligations retained. For loans the Company brokers, gains from mortgage banking activities are recognized when the loan is closed and represent the origination fee earned by the Company. The co-broker fees for the years ended December 31, 2018, 2017, and 2016 are disclosed in NOTE 3.

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

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

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

 

Estimated Life—The estimated life of the MSRs is derived based upon the stated term of the prepayment protection provisions of the underlying loan and may be reduced by 6 to 12 months based upon the expiration or reduction of the prepayment and/or lockout provisions prior to that stated maturity date. The Company’s model for originated MSRs assumes no prepayment while the prepayment provisions have not expired and full prepayment of the loan at or near the point where the prepayment provisions have expired. The Company’s historical experience is that the prepayment provisions typically do not provide a significant deterrent to a borrower’s paying off the loan within 6 to 12 months of the expiration of the prepayment provisions.

 

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

 

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

 

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

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

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

 

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

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

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

 

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

The amount of the allowance considers the Company’s assessment of the likelihood of repayment by the borrower or key principal(s), the risk characteristics of the loan, the loan’s risk rating, historical loss experience, adverse situations affecting individual loans, the estimated disposition value of the underlying collateral, and the level of risk sharing. The estimate of property fair value at initial recognition of the allowance for risk-sharing obligations is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, depending on the facts and circumstances associated with the loan. 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.

 

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

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

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

During the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party. The Company accounted for the transfer as a secured borrowing. The aggregate unpaid principal balance of the loans of $77.8 million is presented as a component of Loans held for investment, net in the Consolidated Balance Sheets as of December 31, 2018, and the secured borrowing of $70.1 million is included within Accounts payable and other liabilities in the Consolidated Balance Sheets as of December 31, 2018. The Company does not have credit risk related to the $70.1 million of loans that were transferred.

During the fourth quarter of 2018, the Company completed a $150.0 million participation in a subordinated note with a large institutional investor in multifamily loans. The participation was fully funded with corporate cash. The note is collateralized, in part, by a portfolio of multifamily loans, has a term of one year, and has scheduled principal curtailments prior to maturity. As compensation for completing the participation, the Company received cash proceeds of $1.6 million and MSRs with an estimated fair value of $3.5 million. The $5.1 million aggregate origination fees, net of amortization and costs, are presented as a component of the December 31, 2018 balance of unamortized fees and costs, and the $150.0 million of unpaid principal balance is presented as a component of the December 31, 2018 loans held for investment.

As of December 31, 2018,  Loans held for investment, net consisted of 14 loans with an aggregate $503.5 million of unpaid principal balance less $6.0 million of net unamortized deferred fees and costs and $0.2 million of allowance for loan losses. As of December 31, 2017,  Loans held for investment, net consisted of five loans with an aggregate $67.0 million of unpaid principal balance less $0.4 million of net unamortized deferred fees and costs and $0.1 million of allowance for loan losses.

The allowance for loan losses is the Company’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is estimated collectively for loans with similar characteristics and for which there is no evidence of impairment. The collective allowance is based on recent historical loss probability and historical loss rates incurred in our risk-sharing portfolio, adjusted as needed for current market conditions. The Company uses the loss experience from its risk-sharing portfolio as a proxy for losses incurred in its loans held for investment portfolio since (i) the Company has not experienced any actual losses related to its loans held for investment to date and (ii) the loans in the loans-held-for-investment portfolio have similar characteristics to loans held in the risk-sharing portfolio. The allowance for loan losses recorded as of December 31, 2018 and December 31, 2017 is based on the Company’s collective assessment of the portfolio.

None of the loans held for investment was delinquent, impaired, or on non-accrual status as of December 31, 2018 or December 31, 2017. Additionally, the Company has not experienced any delinquencies related to these loans or charged off any loan held for investment since the inception of the Interim Program in 2012.

Provision (Benefit) for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit losses in the Consolidated Statements of Income. Provision (benefit) for credit losses consisted of the following activity for the years ended December 31, 2018, 2017, and 2016:

 

 

 

 

 

 

 

 

 

 

 

Components of Provision for Credit Losses (in thousands)

 

2018

    

2017

    

2016

 

Provision (benefit) for loan losses

 

$

128

 

$

(294)

 

$

(467)

 

Provision (benefit) for risk-sharing obligations

 

 

680

 

 

51

 

 

(145)

 

Provision (benefit) for credit losses

 

$

808

 

$

(243)

 

$

(612)

 

 

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

 

GoodwillThe Company evaluates goodwill for impairment annually. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. The Company currently has only one reporting unit; therefore, all goodwill is allocated to that one reporting unit. The Company performs its impairment testing annually as of October 1. The annual impairment analysis begins by comparing the Company’s market capitalization to its net assets. If the market capitalization exceeds the net asset value, further analysis is not required, and goodwill is not considered impaired. As of the date of our latest annual impairment test, October 1, 2018, the Company’s market capitalization exceeded its net asset value by $739.3 million, or 82.0%. As of December 31, 2018, there have been no events subsequent to that analysis that are indicative of an impairment loss.

 

Derivative Assets and LiabilitiesCertain loan commitments and forward sales commitments meet the definition of a derivative and are recorded at fair value in the Consolidated Balance Sheets. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees, (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, 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 Gains on mortgage banking in the Consolidated Statements of Income.

 

Loans Held for Sale—Loans held for sale represent originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded. The Company elects to measure all originated loans at fair value, unless the Company documents at the time the loan is originated that it will measure the specific loan at the lower of cost or fair value for the life of the loan. Electing to use fair value allows a better offset of the change in fair value of the loan and the change in fair value of the derivative instruments used as economic hedges. During the period prior to its sale, interest income on a loan held for sale is calculated in accordance with the terms of the individual loan. There were no loans held for sale that were valued at the lower of cost or fair value or on a non-accrual status at December 31, 2018 and 2017.

 

Share-Based Payment—The Company recognizes compensation costs for all share-based payment awards made to employees and directors, including restricted stock, restricted stock units, and employee stock options based on the grant date fair value. Restricted stock awards are granted without cost to the Company’s officers, employees, and non-employee directors, for which the fair value of the award is calculated as the fair value of the Company’s common stock on the date of grant.

 

Stock option awards are granted to executive officers, with an exercise price equal to the closing price of the Company’s common stock on the date of the grant, and are granted with a ten-year exercise period, vesting ratably over three years dependent solely on continued employment. To estimate the grant-date fair value of stock options, the Company uses the Black-Scholes pricing model. The Black-Scholes model estimates the per share fair value of an option on its date of grant based on the following inputs: the option’s exercise price, the price of the underlying stock on the date of the grant, the estimated option life, the estimated dividend yield, a “risk-free” interest rate, and the expected volatility. For the 2016 and 2017 option awards, the Company used the simplified method to estimate the expected term of the options as the Company did not have sufficient historical exercise data to provide a reasonable basis for estimating the expected term. The Company has historically used an estimated dividend yield of zero as the Company’s stock options are not dividend eligible and at the time of grant there was no expectation that the Company would pay a dividend. For the “risk-free” rate, the Company uses a U.S. Treasury Note due in a number of years equal to the option’s expected term. For the 2016 and 2017 option awards, the expected volatility was calculated based on the Company’s historical common stock volatility. The Company issues new shares from the pool of authorized but not yet issued shares when an employee exercises stock options. The Company did not grant any stock option awards in 2018.

 

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

 

With the exception of 2015, the Company offered a performance share plan (“PSP”) for the Company’s executives and certain other members of senior management for each of the years from 2014 to 2018. The performance period for each PSP is three full calendar years beginning on January 1 of the grant year. Participants in the PSP receive restricted stock units (“RSUs”) on the grant date for the PSP in an amount equal to achievement of all performance targets at a maximum level. If the performance targets are met at the end of the performance period and the participant remains employed by the Company, the participant fully vests in the RSUs, which immediately convert to unrestricted shares of common stock. If the performance targets are not met at the maximum level, the participant forfeits a portion of the RSUs. If the participant is no longer employed by the Company, the participant forfeits all of the RSUs. The performance targets for the 2016, 2017, and 2018 PSPs are based on meeting diluted earnings per share, return on equity, and total revenues goals. The Company records compensation expense for the PSP based on the grant-date fair value in an amount proportionate to the service time rendered by the participant when it is probable that the achievement of the goals will be met.

 

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

 

Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. For the periods presented in the Consolidated Balance Sheets, all loans that were held for sale were financed with matched borrowings under our warehouse facilities incurred to fund a specific loan held for sale. Generally, a portion of loans that are held for investment is financed with matched borrowings under our warehouse facilities. The portion of loans held for investment not funded with matched borrowings is financed with the Company’s own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. Included in Net warehouse interest income for the years ended December 31, 2018 and 2017, and 2016 are the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

(in thousands)

 

2018

    

2017

    

2016

Warehouse interest income - loans held for sale

 

$

55,609

 

$

61,298

 

$

47,523

Warehouse interest expense - loans held for sale

 

 

(49,616)

 

 

(46,221)

 

 

(31,278)

Net warehouse interest income - loans held for sale

 

$

5,993

 

$

15,077

 

$

16,245

 

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

11,197

 

$

15,218

 

$

12,808

Warehouse interest expense - loans held for investment

 

 

(3,159)

 

 

(5,828)

 

 

(5,326)

Warehouse interest income - secured borrowings

 

 

1,852

 

 

 —

 

 

 —

Warehouse interest expense - secured borrowings

 

 

(1,852)

 

 

 —

 

 

 —

Net warehouse interest income - loans held for investment

 

$

8,038

 

$

9,390

 

$

7,482

 

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

 

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

 

For presentation in the Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 10) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Consolidated Statements of Cash Flows to the related captions in the Consolidated Balance Sheets as of December 31, 2018, 2017, 2016, and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(in thousands)

2018

    

2017

    

2016

    

2015

 

Cash and cash equivalents

$

90,058

 

$

191,218

 

$

118,756

 

$

136,988

 

Restricted cash

 

20,821

 

 

6,677

 

 

9,861

 

 

5,306

 

Pledged cash and cash equivalents

 

9,469

 

 

88,785

 

 

82,742

 

 

69,984

 

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

$

120,348

 

$

286,680

 

$

211,359

 

$

212,278

 

 

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

 

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

 

The Company had no accruals for tax uncertainties as of December 31, 2018 and 2017.

 

Pledged Securities—As collateral against its Fannie Mae risk-sharing obligations (NOTES 5 and 10), certain securities have been pledged to the benefit of Fannie Mae to secure the Company's risk-sharing obligations. Substantially all of the balance of Pledged securities, at fair value within the Consolidated Balance Sheets as of December 31, 2018 and 2017 was pledged against Fannie Mae risk-sharing obligations. The balance not pledged against Fannie Mae risk-sharing obligations consists of an immaterial amount of cash pledged as collateral against risk-sharing obligations with Freddie Mac. The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency mortgage-backed securities (“Agency MBS”) and are all accounted for as available-for-sale (“AFS”) securities. When the fair value of AFS Agency MBS are materially lower than the carrying value, the Company performs an analysis to determine whether an other-than-temporary impairment (“OTTI”) exists. The Company has never recorded an OTTI related to AFS Agency MBS.

 

Contracts with Customers—Substantially all of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is not significant and derived from contracts with customers. The Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The Company had no contract assets or liabilities as of December 31, 2018 and 2017. The following table presents information about the Company’s contracts with customers for the years ended December 31, 2018, 2017, and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Description (in thousands)

 

2018

    

2017

    

2016

 

Statement of income line item

Certain loan origination fees

 

$

59,877

 

$

53,116

 

$

28,252

 

Gains from mortgage banking activities

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

 

 

35,837

 

 

29,271

 

 

23,295

 

Other revenues

Total revenues derived from contracts with customers

 

$

95,714

 

$

82,387

 

$

51,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents—The term cash and cash equivalents, as used in the accompanying consolidated financial statements, includes currency on hand, demand deposits with financial institutions, and short-term, highly liquid investments purchased with an original maturity of three months or less. The Company had no cash equivalents as of December 31, 2018 and 2017.

 

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

 

Servicing Fees and Other Receivables, Net—Servicing fees and other receivables, net represents amounts currently due to the Company pursuant to contractual servicing agreements, investor good faith deposits held in escrow by others, general accounts receivable, and advances of principal and interest payments and tax and insurance escrow amounts if the borrower is delinquent in making loan payments, to the extent such amounts are determined to be reimbursable and recoverable.

 

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

 

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

 

Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.

 

Recently Adopted Accounting Pronouncements—The Company adopted Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606) in the first quarter of 2018 without an impact to the Company or its financial statements.  Substantially all of the Company’s revenue streams are related to loans, derivatives, financial instruments, and transfers and servicing, all of which are outside the scope of the new standard. The Company used the full retrospective method for adopting ASU 2014-09. However, there was no change to the revenue amounts recorded or an adjustment to the opening balance of retained earnings as the adoption of ASU 2014-09 did not result in a difference in the amount or timing of the Company’s revenues. Additionally, the Company did not recognize any contract assets or contract liabilities.

   

The Company adopted Accounting Standards Update 2016-01 (“ASU 2016-01”), Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of 2018 with no impact to the Company’s reported financial results as the Company does not have any equity investments not accounted for under the equity method.

 

In the first quarter of 2016, Accounting Standards Update 2016-02 (“ASU 2016-02”), Leases (Topic 842) was issued. ASU 2016-02 represents a significant reform to the accounting for leases. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received, and the lessee’s initial direct costs. Lessees generally recognize lease expense for these leases on a straight-line basis, which is similar to the accounting treatment today. ASU 2016-02 requires additional disclosures and requires one of two adoption approaches: (i) modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements with a cumulative-effect adjustment to retained earnings recorded at the earliest comparative period or (ii) prospective approach with a cumulative-effect adjustment recorded to retained earnings upon the date of adoption.

 

The Company adopted the standard as required on January 1, 2019 and elected the available practical expedients and the prospective approach. The Company recognized ROU assets totaling $31.4 million with an offsetting amount of lease liabilities. There was no change to the classification of the Company’s leases, which are all currently classified as operating leases. The Company has analyzed the disclosures that will be required for the new standard and will implement those disclosures during the first quarter of 2019.

In the third quarter of 2018, Accounting Standards Update 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement was issued. ASU 2018-13 eliminates the following disclosure requirements; (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and (ii) the entity’s valuation processes for Level 3 fair value measurements. ASU 2018-13 adds, among other things, the requirement to (i) provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future, (ii) disclose changes in unrealized gains and losses related to Level 3 measurements for the period included in other comprehensive income, and (iii) disclose for Level 3 measurements the range and weighted average of the significant unobservable inputs and the way it is calculated. ASU 2018-13 is effective for the Company on January 1, 2020 with early adoption permitted. The Company early-adopted ASU 2018-13 during the third quarter of 2018 with little impact to its disclosures as the Company has not historically had transfers between Level 1 and Level 2 of the fair value hierarchy or adjustments to its Level 3 fair value measurements due to unobservable inputs and does not have any Level 3 assets with unrealized gains and losses recorded in other comprehensive income.

In the third quarter of 2018, Accounting Standards Update 2018-15 (“ASU 2018-15”), Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract was issued. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets. Capitalized implementation costs are amortized over the term of the hosting arrangement, and the expense related to the capitalized implementation costs is recorded in the same line in the financial statements as the cloud service cost. ASU 2018-15 is effective for the Company on January 1, 2020, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company early-adopted ASU 2018-15 on January 1, 2019 using the prospective approach. The Company does not expect ASU 2018-15 to have a material impact on its financial statements.

 

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

 

The Company plans on adopting ASU 2016-13 when the standard is required to be adopted, January 1, 2020. The Company is in the preliminary stages of implementation as it is still in the process of determining the significance of the impact the Standard will have on its financial statements. The Company expects its allowance for risk-sharing obligations to increase when ASU 2016-13 is adopted.

 

There were no other accounting pronouncements issued during 2019 or 2018 that have the potential to impact the Company’s consolidated financial statements.

 

Immaterial Correction of an Error—During the year ended December 31, 2018, the Company discovered that it was not properly applying the two-class method for calculating basic and diluted earnings per share (“EPS”). As a result, basic and diluted EPS as previously reported for the years ended December 31, 2017 and 2016 were overstated by an immaterial amount. The Company has properly applied the two-class method for calculating basic and diluted EPS for the year ended December 31, 2018 and has corrected the amounts previously reported for the years ended December 31, 2017 and 2016. NOTE 12 contains additional detail related to the correction of the error.

 

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

v3.10.0.1
GAINS FROM MORTGAGE BANKING ACTIVITIES
12 Months Ended
Dec. 31, 2018
GAINS FROM MORTGAGE BANKING ACTIVITIES  
Gains from mortgage banking activities

NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES

 

Gains from mortgage banking activities consist of the following activity for each of the years ended December 31, 2018, 2017, and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

Components of Gains from Mortgage Banking Activities (in thousands)

2018

    

2017

 

2016

 

Contractual loan origination related fees, gross

$

257,440

 

$

264,809

 

$

210,147

 

Co-broker fees

 

(22,759)

 

 

(19,325)

 

 

(35,787)

 

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

 

188,361

 

 

207,662

 

 

205,311

 

Fair value of expected guaranty obligation recognized at commitment

 

(15,960)

 

 

(13,776)

 

 

(12,486)

 

Total gains from mortgage banking activities

$

407,082

 

$

439,370

 

$

367,185

 

 

 

 

 

 

 

 

 

 

 

 

v3.10.0.1
MORTGAGE SERVICING RIGHTS
12 Months Ended
Dec. 31, 2018
MSRs  
Mortgage Servicing Rights  
Mortgage Servicing Rights

NOTE 4—MORTGAGE SERVICING RIGHTS

 

The fair value of MSRs at December 31, 2018 and December 31, 2017 was $858.7 million and $834.5 million, respectively. The Company uses a discounted static cash flow valuation approach and the key economic assumption is the discount rate. See the following sensitivities related to the discount rate:

 

The impact of a 100-basis point increase in the discount rate at December 31, 2018 is a decrease in the fair value of $26.9 million to the MSRs outstanding as of December 31, 2018.

 

The impact of a 200-basis point increase in the discount rate at December 31, 2018 is a decrease in the fair value of $52.0 million to the MSRs outstanding as of December 31, 2018.

 

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

 

Activity related to capitalized MSRs (net of accumulated amortization) for the years ended December 31, 2018 and 2017 follows:

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

Roll Forward of MSRs (in thousands)

    

2018

    

2017

 

Beginning balance

 

$

634,756

 

$

521,930

 

Additions, following the sale of loan

 

 

176,565

 

 

239,503

 

Purchases1

 

 

5,265

 

 

7,781

 

Amortization

 

 

(131,739)

 

 

(119,599)

 

Pre-payments and write-offs

 

 

(14,701)

 

 

(14,859)

 

Ending balance

 

$

670,146

 

$

634,756

 

 

 

 

 

 

 

 

 


1 For the year ended December 31, 2018, the purchases line also contains $3.5 million of MSRs acquired as compensation for originating a large loan held for investment. NOTE 2 contains additional detail related to this transaction.

 

As shown in the table above, during 2018 and 2017, the Company purchased MSRs. In both years, the servicing rights acquired were for HUD loans. The servicing portfolio acquired in 2017 consisted of approximately $0.6 billion of unpaid principal balance and had a weighted average estimated remaining life of 10.7 years. The purchase in 2018 was immaterial.

 

The following tables summarize the components of the net carrying value of the Company’s acquired and originated MSRs as of December 31, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

  

Gross

  

Accumulated

  

Net

 

Components of MSRs (in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

185,529

 

$

(136,929)

 

$

48,600

 

Originated MSRs

 

 

914,910

 

 

(293,364)

 

 

621,546

 

Total

 

$

1,100,439

 

$

(430,293)

 

$

670,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

  

Gross

  

Accumulated

  

Net

 

Components of MSRs (in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

183,715

 

$

(121,643)

 

$

62,072

 

Originated MSRs

 

 

820,137

 

 

(247,453)

 

 

572,684

 

Total

 

$

1,003,852

 

$

(369,096)

 

$

634,756

 

 

 

 

 

 

 

 

 

 

 

 

The expected amortization of MSRs recorded as of December 31, 2018 is shown in the table below. Actual amortization may vary from these estimates.

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Originated MSRs

  

Acquired MSRs

  

Total MSRs

 

(in thousands)

 

Amortization

 

Amortization

 

  Amortization  

 

Year Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2019

 

$

117,219

 

$

10,003

 

$

127,222

 

2020

 

 

104,015

 

 

8,949

 

 

112,964

 

2021

 

 

90,943

 

 

7,643

 

 

98,586

 

2022

 

 

77,649

 

 

5,893

 

 

83,542

 

2023

 

 

66,114

 

 

5,125

 

 

71,239

 

Thereafter

 

 

165,606

 

 

10,987

 

 

176,593

 

Total

 

$

621,546

 

$

48,600

 

$

670,146

 

 

 

 

 

 

 

 

 

 

 

 

The Company recorded write-offs of MSRs related to loans that were repaid prior to the expected maturity and loans that defaulted. These write-offs are included as a component of the MSR roll forward shown above and as a component of Amortization and depreciation in the accompanying Consolidated Statements of Income and relate to MSRs recognized at loan sale only. Prepayment fees totaling $18.9 million, $17.3 million, and $10.6 million were collected for 2018,  2017, and 2016, respectively, and are included as a component of Other revenues in the Consolidated Statements of Income. Escrow earnings totaling $38.2 million, $19.1 million, and $8.6 million were earned for 2018, 2017, and 2016, respectively, and are included as a component of Escrow earnings and other interest income in the Consolidated Statements of Income. All other ancillary servicing fees were immaterial for the periods presented.

 

Management reviews the capitalized MSRs for temporary impairment quarterly by comparing the aggregate carrying value of the MSR portfolio to the aggregate estimated fair value of the portfolio. Additionally, MSRs related to Fannie Mae loans where the Company has risk-sharing obligations are assessed for permanent impairment on an asset-by-asset basis, considering factors such as debt service coverage ratio, property location, loan-to-value ratio, and property type. Except for defaulted or prepaid loans, no temporary or permanent impairment was recognized for the years ended December 31, 2018, 2017, and 2016.  

 

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

v3.10.0.1
GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS
12 Months Ended
Dec. 31, 2018
GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS  
Guaranty Obligation and Allowance for Risk-Sharing Obligations

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

 

When a loan is sold under the Fannie Mae DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. 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.

 

A summary of the Company’s guaranty obligation for the noncontingent portion of the guaranty obligation as of and for the years ended December 31, 2018 and 2017 follows:

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

Roll Forward of Guaranty Obligation (in thousands)

    

2018

    

2017

 

Beginning balance

 

$

41,187

 

$

32,292

 

Additions, following the sale of loan

 

 

13,851

 

 

16,039

 

Amortization

 

 

(8,009)

 

 

(7,025)

 

Other

 

 

(159)

 

 

(119)

 

Ending balance

 

$

46,870

 

$

41,187

 

 

 

 

 

 

 

 

 

A summary of the Company’s allowance for risk-sharing obligations for the contingent portion of the guaranty obligation as of and for the years ended December 31, 2018 and 2017 follows:

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

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

    

2018

    

2017

 

Beginning balance

 

$

3,783

 

$

3,613

 

Provision for risk-sharing obligations

 

 

680

 

 

51

 

Write-offs

 

 

 —

 

 

 

Other

 

 

159

 

 

119

 

Ending balance

 

$

4,622

 

$

3,783

 

 

 

 

 

 

 

 

 

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

 

The Allowance for risk-sharing obligations as of December 31, 2018 is based primarily on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of December 31, 2018. During 2018, Hurricanes Florence and Michael and wildfires in California each caused substantial damage to the affected areas. Located within the affected areas are multiple properties collateralizing loans for which the Company has risk-sharing obligations. Based on its preliminary assessment of these properties, the Company believes that few, if any, of these properties incurred significant damage, and those that did have adequate insurance coverage. Additionally, the Company has not experienced an increase in late payments from risk-sharing loans collateralized by properties in the affected areas. Accordingly, based on information currently available, the natural disasters did not have a material impact on the Allowance for risk-sharing obligations as of December 31, 2018. Additionally, the Company does not believe that these natural disasters will have a material impact on its Allowance for risk-sharing obligations in the future.

 

As of December 31, 2018 and 2017, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $6.7 billion and $5.7 billion, respectively. This maximum quantifiable contingent liability relates to the at risk loans serviced for Fannie Mae at the specific point in time indicated. The term and the amount of the liability vary with the origination and payoff activity of the at risk portfolio. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. For example, over the past ten years, the Company has recognized net write-offs of risk-sharing obligations of $24.1 million, only a small fraction of the average at risk portfolio during that time period.

v3.10.0.1
SERVICING
12 Months Ended
Dec. 31, 2018
Loans and Other Servicing Accounts  
Servicing  
Servicing

NOTE 6—SERVICING

 

The total unpaid principal balance of loans the Company was servicing for various institutional investors was $85.7 billion as of December 31, 2018 compared to $74.3 billion as of December 31, 2017.

 

As of December 31, 2018 and 2017, custodial escrow accounts relating to loans serviced by the Company totaled $2.3 billion and $2.0 billion, respectively. These amounts are not included in the accompanying consolidated balance sheets as such amounts are not Company assets. Certain cash deposits at other financial institutions exceed the Federal Deposit Insurance Corporation insured limits. The Company places these deposits with financial institutions that meet the requirements of the Agencies and where it believes the risk of loss to be minimal.

v3.10.0.1
DEBT
12 Months Ended
Dec. 31, 2018
DEBT  
Debt

NOTE 7—DEBT

 

At December 31, 2018, to provide financing to borrowers under the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $2.9 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of these Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale under the Company's approved programs. The Company’s ability to originate mortgage loans for sale depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.

 

Additionally, at December 31, 2018, the Company has arranged for warehouse lines of credit in the amount of $0.3 billion with certain national banks to assist in funding loans held for investment under the Interim Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The Company’s ability to originate loans held for investment depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.

 

The maximum amount and outstanding borrowings under the warehouse notes payable at December 31, 2018 and 2017 follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

(dollars in thousands)

    

Committed

    

Uncommitted

 

Total Facility

 

Outstanding

    

    

 

Facility1

 

Amount

 

Amount

 

Capacity

 

Balance

 

Interest rate

 

Agency Warehouse Facility #1

 

$

425,000

 

$

200,000

 

$

625,000

 

$

57,572

 

30-day LIBOR plus 1.20%

 

Agency Warehouse Facility #2

 

 

500,000

 

 

300,000

 

 

800,000

 

 

62,830

 

30-day LIBOR plus 1.20%

 

Agency Warehouse Facility #3

 

 

500,000

 

 

265,000

 

 

765,000

 

 

451,549

 

30-day LIBOR plus 1.25%

 

Agency Warehouse Facility #4

 

 

350,000

 

 

 —

 

 

350,000

 

 

225,538

 

30-day LIBOR plus 1.20%

 

Agency Warehouse Facility #5

 

 

30,000

 

 

 —

 

 

30,000

 

 

12,484

 

30-day LIBOR plus 1.80%

 

Agency Warehouse Facility #6

 

 

250,000

 

 

100,000

 

 

350,000

 

 

66,579

 

30-day LIBOR plus 1.20%

 

Fannie Mae repurchase agreement, uncommitted line and open maturity

 

 

 —

 

 

1,500,000

 

 

1,500,000

 

 

156,700

 

30-day LIBOR plus 1.15%

 

Total Agency Warehouse Facilities

 

$

2,055,000

 

$

2,365,000

 

$

4,420,000

 

$

1,033,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interim Warehouse Facility #1

 

$

85,000

 

$

 —

 

$

85,000

 

$

68,390

 

30-day LIBOR plus 1.90%

 

Interim Warehouse Facility #2

 

 

100,000

 

 

 —

 

 

100,000

 

 

37,899

 

30-day LIBOR plus 2.00%

 

Interim Warehouse Facility #3

 

 

75,000

 

 

 —

 

 

75,000

 

 

23,250

 

30-day LIBOR plus 1.90% to 2.50%

 

Total Interim Warehouse Facilities

 

$

260,000

 

$

 —

 

$

260,000

 

$

129,539

 

 

 

Debt issuance costs

 

 

 —

 

 

 —

 

 

 —

 

 

(1,409)

 

 

 

Total warehouse facilities

 

$

2,315,000

 

$

2,365,000

 

$

4,680,000

 

$

1,161,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

(dollars in thousands)

    

Committed

    

Uncommitted

 

Temporary

 

Total Facility

 

Outstanding

    

    

 

Facility1

 

Amount

 

Amount

 

Increase

 

Capacity

 

Balance

 

Interest rate

 

Agency Warehouse Facility #1

 

$

425,000

 

$

300,000

 

$

 —

 

$

725,000

 

$

100,188

 

30-day LIBOR plus 1.30%

 

Agency Warehouse Facility #2

 

 

500,000

 

 

300,000

 

 

 —

 

 

800,000

 

 

346,291

 

30-day LIBOR plus 1.30%

 

Agency Warehouse Facility #3