Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

wd_Current folio_10Q

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

    (Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File Number: 001-35000

 

Walker & Dunlop, Inc.

 

(Exact name of registrant as specified in its charter)

 

Maryland

 

80-0629925

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

7501 Wisconsin Avenue, Suite 1200E

Bethesda, Maryland 20814

(301) 215-5500

(Address of principal executive offices and registrant’s telephone number, including

area code)

 

Not Applicable

(Former name, former address, and former fiscal year if changed since last report)

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

 

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

 

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

 

 

 

 

 

 

 

 

Large accelerated filer ☒ 

 

Smaller reporting company ☐

 

Accelerated filer ☐

Emerging growth company ☐

 

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 1, 2017, there were 31,064,545 total shares of common stock outstanding.

 

 


 

Table of Contents

Walker & Dunlop, Inc.
Form 10-Q
INDEX

 

 

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

PART I 

 

FINANCIAL INFORMATION

2

 

 

 

 

Item 1. 

 

Financial Statements

2

 

 

 

 

Item 2. 

 

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

21

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

 

Item 4. 

 

Controls and Procedures

44

 

 

 

 

PART II 

 

OTHER INFORMATION

44

 

 

 

 

Item 1. 

 

Legal Proceedings

44

 

 

 

 

Item 1A. 

 

Risk Factors

44

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

45

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

45

 

 

 

 

Item 5. 

 

Other Information

45

 

 

 

 

Item 6. 

 

Exhibits

45

 

 

 

 

 

 

Signatures

47

 

 

 

 

 


 

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

 

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

    

December 31, 2016

 

Assets

 

(unaudited)

 

 

 

 

Cash and cash equivalents

 

$

85,363

 

$

118,756

 

Restricted cash

 

 

17,179

 

 

9,861

 

Pledged securities, at fair value

 

 

95,102

 

 

84,850

 

Loans held for sale, at fair value

 

 

3,275,761

 

 

1,858,358

 

Loans held for investment, net

 

 

152,050

 

 

220,377

 

Servicing fees and other receivables, net

 

 

34,476

 

 

29,459

 

Derivative assets

 

 

43,853

 

 

61,824

 

Mortgage servicing rights

 

 

587,909

 

 

521,930

 

Goodwill and other intangible assets

 

 

124,571

 

 

97,372

 

Other assets

 

 

84,196

 

 

49,645

 

Total assets

 

$

4,500,460

 

$

3,052,432

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

255,785

 

$

232,231

 

Performance deposits from borrowers

 

 

16,575

 

 

10,480

 

Derivative liabilities

 

 

175

 

 

4,396

 

Guaranty obligation, net of accumulated amortization

 

 

38,300

 

 

32,292

 

Allowance for risk-sharing obligations

 

 

3,769

 

 

3,613

 

Warehouse notes payable

 

 

3,305,589

 

 

1,990,183

 

Note payable

 

 

163,935

 

 

164,163

 

Total liabilities

 

$

3,784,128

 

$

2,437,358

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Preferred shares, Authorized 50,000, none issued.

 

$

 —

 

$

 —

 

Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 29,949 shares at September 30, 2017 and 29,551 shares at December 31, 2016

 

 

299

 

 

296

 

Additional paid-in capital

 

 

226,098

 

 

228,889

 

Retained earnings

 

 

484,963

 

 

381,031

 

Total stockholders’ equity

 

$

711,360

 

$

610,216

 

Noncontrolling interests

 

 

4,972

 

 

4,858

 

Total equity

 

$

716,332

 

$

615,074

 

Commitments and contingencies (NOTE 10)

 

 

 —

 

 

 —

 

Total liabilities and equity

 

$

4,500,460

 

$

3,052,432

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

Table of Contents

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains from mortgage banking activities

 

$

111,304

 

$

100,630

 

$

309,912

 

$

249,406

 

Servicing fees

 

 

44,900

 

 

37,134

 

 

129,639

 

 

101,554

 

Net warehouse interest income

 

 

5,358

 

 

5,614

 

 

17,778

 

 

15,925

 

Escrow earnings and other interest income

 

 

5,804

 

 

2,630

 

 

13,610

 

 

6,225

 

Other

 

 

12,370

 

 

8,778

 

 

33,716

 

 

23,775

 

Total revenues

 

$

179,736

 

$

154,786

 

$

504,655

 

$

396,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

$

78,469

 

$

64,377

 

$

198,157

 

$

154,365

 

Amortization and depreciation

 

 

32,343

 

 

29,244

 

 

97,541

 

 

80,824

 

Provision (benefit) for credit losses

 

 

 9

 

 

283

 

 

(216)

 

 

166

 

Interest expense on corporate debt

 

 

2,555

 

 

2,485

 

 

7,401

 

 

7,419

 

Other operating expenses

 

 

11,664

 

 

9,685

 

 

34,871

 

 

29,511

 

Total expenses

 

$

125,040

 

$

106,074

 

$

337,754

 

$

272,285

 

Income from operations

 

$

54,696

 

$

48,712

 

$

166,901

 

$

124,600

 

Income tax expense

 

 

19,988

 

 

18,851

 

 

54,621

 

 

47,295

 

Net income before noncontrolling interests

 

$

34,708

 

$

29,861

 

$

112,280

 

$

77,305

 

Less: net income from noncontrolling interests

 

 

330

 

 

233

 

 

114

 

 

198

 

Walker & Dunlop net income

 

$

34,378

 

$

29,628

 

$

112,166

 

$

77,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.14

 

$

1.01

 

$

3.74

 

$

2.62

 

Diluted earnings per share

 

$

1.06

 

$

0.96

 

$

3.49

 

$

2.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

30,085

 

 

29,374

 

 

30,009

 

 

29,417

 

Diluted weighted average shares outstanding

 

 

32,312

 

 

30,793

 

 

32,170

 

 

30,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

Table of Contents

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income before noncontrolling interests

 

$

112,280

 

$

77,305

 

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

 

 

(140,985)

 

 

(127,724)

 

Change in the fair value of premiums and origination fees

 

 

4,547

 

 

(17,728)

 

Amortization and depreciation

 

 

97,541

 

 

80,824

 

Provision (benefit) for credit losses

 

 

(216)

 

 

166

 

Other operating activities, net

 

 

(1,401,599)

 

 

1,287,414

 

Net cash provided by (used in) operating activities

 

$

(1,328,432)

 

$

1,300,257

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

$

(4,638)

 

$

(1,821)

 

Funding of preferred equity investments

 

 

(16,321)

 

 

(15,538)

 

Capital invested in Interim Program JV

 

 

(6,184)

 

 

 —

 

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

 

 

 —

 

 

(1,058)

 

Acquisitions, net of cash received

 

 

(15,000)

 

 

 —

 

Purchase of mortgage servicing rights

 

 

 —

 

 

(42,705)

 

Originations of loans held for investment

 

 

(167,680)

 

 

(218,958)

 

Principal collected on loans held for investment upon payoff

 

 

117,479

 

 

187,820

 

Principal collected on loans held for investment upon formation of Interim Program JV

 

 

119,750

 

 

 —

 

Net cash provided by (used in) investing activities

 

$

27,406

 

$

(92,260)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Borrowings (repayments) of warehouse notes payable, net

 

$

1,360,969

 

$

(1,239,677)

 

Borrowings of interim warehouse notes payable

 

 

128,661

 

 

148,478

 

Repayments of interim warehouse notes payable

 

 

(175,934)

 

 

(138,898)

 

Repayments of note payable

 

 

(828)

 

 

(829)

 

Proceeds from issuance of common stock

 

 

2,887

 

 

3,439

 

Repurchase of common stock

 

 

(28,863)

 

 

(12,374)

 

Debt issuance costs

 

 

(1,689)

 

 

(2,425)

 

Distributions to noncontrolling interests

 

 

 —

 

 

(5)

 

Net cash provided by (used in) financing activities

 

$

1,285,203

 

$

(1,242,291)

 

 

 

 

 

 

 

 

 

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

 

$

(15,823)

 

$

(34,294)

 

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

 

 

213,467

 

 

214,484

 

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

 

$

197,644

 

$

180,190

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid to third parties for interest

 

$

34,286

 

$

28,592

 

Cash paid for income taxes

 

 

38,707

 

 

23,061

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

Table of Contents

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

These financial statements represent the condensed consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”). In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or thereafter.

Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of multifamily and other commercial real estate financing products and provides multifamily investment sales brokerage services. The Company originates and sells loans pursuant to the programs of the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). The Company also offers a proprietary loan program offering interim loans (the “Interim Program”).

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

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. All intercompany transactions have been eliminated in consolidation. When the Company has significant influence over operating and financial decisions for an entity but does not have control over the entity or 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 September 30, 2017. There have been no material events that would require recognition in the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to September 30, 2017. No other material subsequent events have occurred that would require disclosure.

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

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

5


 

Table of Contents

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 multifamily loans with similar risk characteristics. As of September 30, 2017, Loans held for investment, net consisted of seven loans with an aggregate $152.8 million of unpaid principal balance less $0.6 million of net unamortized deferred fees and costs and $0.1 million of allowance for loan losses. As of December 31, 2016, Loans held for investment, net consisted of 12 loans with an aggregate $222.3 million of unpaid principal balance less $1.5 million of net unamortized deferred fees and costs and $0.4 million of allowance for loan losses.

 

None of the loans held for investment was delinquent, impaired, or on non-accrual status as of September 30, 2017 or December 31, 2016. Additionally, we have not experienced any delinquencies related to these loans or charged off any loan held for investment since the inception of the Interim Program in 2012. The allowances for loan losses recorded as of September 30, 2017 and December 31, 2016 were based on the Company’s collective assessment of the portfolio.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the nine months ended 

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Benefit for loan losses

 

$

(100)

 

$

(49)

 

$

(290)

 

$

(287)

 

Provision for risk-sharing obligations

 

 

109

 

 

332

 

 

74

 

 

453

 

Provision (benefit) for credit losses

 

$

 9

 

$

283

 

$

(216)

 

$

166

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the nine months ended 

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Warehouse interest income - loans held for sale

 

$

15,263

 

$

11,507

 

$

36,616

 

$

32,328

 

Warehouse interest expense - loans held for sale

 

 

(11,776)

 

 

(8,032)

 

 

(27,024)

 

 

(21,548)

 

Net warehouse interest income - loans held for sale

 

$

3,487

 

$

3,475

 

$

9,592

 

$

10,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

3,213

 

$

3,518

 

$

13,205

 

$

8,971

 

Warehouse interest expense - loans held for investment

 

 

(1,342)

 

 

(1,379)

 

 

(5,019)

 

 

(3,826)

 

Net warehouse interest income - loans held for investment

 

$

1,871

 

$

2,139

 

$

8,186

 

$

5,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net warehouse interest income

 

$

5,358

 

$

5,614

 

$

17,778

 

$

15,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes—The Company records the excess tax benefits from stock compensation as a reduction to income tax expense. The Company recorded excess tax benefits of $0.3 million and an immaterial amount during the three months ended September 30, 2017 and 2016, respectively, and $9.1 million and $0.5 million during the nine months ended September 30, 2017 and 2016, respectively.

 

Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers Pledged securities, at fair value to be restricted cash equivalents. The following table presents a reconciliation of the total of cash, cash

6


 

Table of Contents

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 September 30, 2017 and 2016 and December 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

(in thousands)

2017

    

2016

    

2016

    

2015

 

Cash and cash equivalents

$

85,363

 

$

83,887

 

$

118,756

 

$

136,988

 

Restricted cash

 

17,179

 

 

14,370

 

 

9,861

 

 

5,306

 

Pledged securities, at fair value (restricted cash equivalents)

 

95,102

 

 

81,933

 

 

84,850

 

 

72,190

 

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

$

197,644

 

$

180,190

 

$

213,467

 

$

214,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

7


 

Table of Contents

 

 

 

 

 

Standard

Issue Date

Description

Effective Date

Expected Financial Statement Impact

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

Q2 2016

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

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

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

ASU 2016-02, Leases (Topic 842)

Q1 2016

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

January 1, 2019 (early adoption is permitted)

The Company is in the preliminary stages of implementation and is still in the process of determining the significance of the impact ASU 2016-02 will have on its financial statements. The Company will adopt ASU 2016-02 when required in 2019.

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

Q1 2016

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

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

The Company does not believe that ASU 2016-01 will have a material impact on its reported financial results.

8


 

Table of Contents

 

 

 

 

 

Standard

Issue Date

Description

Effective Date

Expected Financial Statement Impact

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

Q2 2014

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

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

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

 

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

There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2016 Form 10-K other than the changes made pursuant to the adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment and ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business as disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (“Q1 2017 10-Q”).

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

NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended 

 

September 30, 

 

September 30, 

(in thousands)

2017

    

2016

 

2017

    

2016

Contractual loan origination related fees, net

$

60,523

 

$

52,401

 

$

168,927

 

$

121,682

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

 

53,614

 

 

50,964

 

 

150,608

 

 

135,971

Fair value of expected guaranty obligation recognized at commitment

 

(2,833)

 

 

(2,735)

 

 

(9,623)

 

 

(8,247)

Total gains from mortgage banking activities

$

111,304

 

$

100,630

 

$

309,912

 

$

249,406

 

 

 

 

 

 

 

 

 

 

 

 

The origination fees shown in the table are net of co-broker fees of $4.5 million and $13.2 million for the three months ended September 30, 2017 and 2016, respectively, and $14.7 million and $29.8 million for the nine months ended September 30, 2017 and 2016, respectively.

9


 

Table of Contents

NOTE 4—MORTGAGE SERVICING RIGHTS

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

The fair values of the MSRs at September 30, 2017 and December 31, 2016 were $773.9 million and $669.4 million, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities:

The impact of a 100-basis point increase in the discount rate at September 30, 2017 is a decrease in the fair value of $24.6 million.

The impact of a 200-basis point increase in the discount rate at September 30, 2017 is a decrease in the fair value of $47.6 million.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Beginning balance

 

$

573,159

 

$

468,093

 

$

521,930

 

$

412,348

 

Additions, following the sale of loan

 

 

48,174

 

 

60,955

 

 

165,748

 

 

124,982

 

Purchases

 

 

 —

 

 

 —

 

 

 —

 

 

42,705

 

Amortization

 

 

(30,174)

 

 

(26,074)

 

 

(88,398)

 

 

(72,030)

 

Pre-payments and write-offs

 

 

(3,250)

 

 

(6,296)

 

 

(11,371)

 

 

(11,327)

 

Ending balance

 

$

587,909

 

$

496,678

 

$

587,909

 

$

496,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables summarize the components of the net carrying value of the Company’s acquired and originated MSRs as of September 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

  

Gross

  

Accumulated

  

Net

 

(in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

175,934

 

$

(117,861)

 

$

58,073

 

Originated MSRs

 

 

760,795

 

 

(230,959)

 

 

529,836

 

Total

 

$

936,729

 

$

(348,820)

 

$

587,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

  

Gross

  

Accumulated

  

Net

 

(in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

175,934

 

 

(104,264)

 

$

71,670

 

Originated MSRs

 

 

642,030

 

 

(191,770)

 

 

450,260

 

Total

 

$

817,964

 

$

(296,034)

 

$

521,930

 

 

 

 

 

 

 

 

 

 

 

 

10


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Originated MSRs

  

Acquired MSRs

  

Total MSRs

 

(in thousands)

 

Amortization

 

Amortization

 

  Amortization  

 

Three Months Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2017

 

$

26,528

 

$

3,065

 

$

29,593

 

Year Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2018

 

$

98,640

 

$

11,310

 

$

109,950

 

2019

 

 

84,761

 

 

10,119

 

 

94,880

 

2020

 

 

76,136

 

 

8,536

 

 

84,672

 

2021

 

 

66,589

 

 

6,821

 

 

73,410

 

2022

 

 

53,579

 

 

4,918

 

 

58,497

 

Thereafter

 

 

123,603

 

 

13,304

 

 

136,907

 

Total

 

$

529,836

 

$

58,073

 

$

587,909

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Beginning balance

 

$

36,492

 

$

28,406

 

$

32,292

 

$

27,570

 

Additions, following the sale of loan

 

 

3,596

 

 

4,039

 

 

11,332

 

 

7,727

 

Amortization

 

 

(1,776)

 

 

(1,682)

 

 

(5,242)

 

 

(4,431)

 

Other

 

 

(12)

 

 

175

 

 

(82)

 

 

72

 

Ending balance

 

$

38,300

 

$

30,938

 

$

38,300

 

$

30,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

Beginning balance

 

$

3,648

 

$

5,810

 

$

3,613

 

$

5,586

 

Provision for risk-sharing obligations

 

 

109

 

 

332

 

 

74

 

 

453

 

Write-offs

 

 

 —

 

 

(2,567)

 

 

 —

 

 

(2,567)

 

Other

 

 

12

 

 

(175)

 

 

82

 

 

(72)

 

Ending balance

 

$

3,769

 

$

3,400

 

$

3,769

 

$

3,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.’

11


 

Table of Contents

The Allowance for risk-sharing obligations as of September 30, 2017 is based primarily on the Company’s collective assessment of the probability of loss related to the loans on the watch list as of September 30, 2017. During the third quarter of 2017, Hurricanes Harvey and Irma made landfall in the United States, causing 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, these natural disasters did not have a material impact on the Allowance for risk-sharing obligations as of September 30, 2017. 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 September 30, 2017, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $5.4 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans were determined to be without value at the time of settlement.

NOTE 6—SERVICING

The total unpaid principal balance of the Company’s servicing portfolio was $70.3 billion as of September 30, 2017 compared to $63.1 billion as of December 31, 2016.

NOTE 7—WAREHOUSE NOTES PAYABLE

At September 30, 2017, to provide financing to borrowers, the Company has arranged for warehouse lines of credit. In support of the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $4.8 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). The Company has pledged substantially all of its loans held for sale against the Agency Warehouse Facilities. The Company has arranged for warehouse lines of credit in the amount of $0.4 billion with certain national banks to assist in funding loans held for investment under the Interim Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The maximum amount and outstanding borrowings under the warehouse notes payable at September 30, 2017 are shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

(dollars in thousands)

    

Committed

    

Uncommitted

 

Temporary

 

Total Facility

 

Outstanding

    

    

 

Facility1

 

Amount

 

Amount

 

Increase

 

Capacity

 

Balance

 

Interest rate

 

Agency Warehouse Facility #1

 

$

425,000

 

$

 —

 

$

 —

 

$

425,000

 

$