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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 June 30, 2018

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 July 25, 2018, there were 31,267,236 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

20

 

 

 

 

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

45

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

June 30, 2018

    

December 31, 2017

 

Assets

 

(unaudited)

 

 

 

 

Cash and cash equivalents

 

$

81,531

 

$

191,218

 

Restricted cash

 

 

29,986

 

 

6,677

 

Pledged securities, at fair value

 

 

105,803

 

 

97,859

 

Loans held for sale, at fair value

 

 

1,257,256

 

 

951,829

 

Loans held for investment, net

 

 

130,397

 

 

66,510

 

Servicing fees and other receivables, net

 

 

44,804

 

 

41,693

 

Derivative assets

 

 

26,632

 

 

10,357

 

Mortgage servicing rights

 

 

638,914

 

 

634,756

 

Goodwill and other intangible assets

 

 

157,240

 

 

124,543

 

Other assets

 

 

88,017

 

 

82,985

 

Total assets

 

$

2,560,580

 

$

2,208,427

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

$

188,321

 

$

238,538

 

Performance deposits from borrowers

 

 

29,083

 

 

6,461

 

Derivative liabilities

 

 

8,669

 

 

1,850

 

Guaranty obligation, net of accumulated amortization

 

 

42,470

 

 

41,187

 

Allowance for risk-sharing obligations

 

 

4,070

 

 

3,783

 

Warehouse notes payable

 

 

1,250,642

 

 

937,769

 

Note payable

 

 

163,704

 

 

163,858

 

Total liabilities

 

$

1,686,959

 

$

1,393,446

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Preferred shares, authorized 50,000; none issued.

 

$

 —

 

$

 —

 

Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 30,390 shares at June 30, 2018 and 30,016 shares at December 31, 2017.

 

 

304

 

 

300

 

Additional paid-in capital

 

 

234,564

 

 

229,080

 

Accumulated other comprehensive income (loss) ("AOCI")

 

 

(87)

 

 

93

 

Retained earnings

 

 

633,508

 

 

579,943

 

Total stockholders’ equity

 

$

868,289

 

$

809,416

 

Noncontrolling interests

 

 

5,332

 

 

5,565

 

Total equity

 

$

873,621

 

$

814,981

 

Commitments and contingencies (NOTE 10)

 

 

 —

 

 

 —

 

Total liabilities and equity

 

$

2,560,580

 

$

2,208,427

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

Table of Contents

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains from mortgage banking activities

 

$

102,237

 

$

102,176

 

$

183,746

 

$

198,608

 

Servicing fees

 

 

49,317

 

 

43,214

 

 

97,357

 

 

84,739

 

Net warehouse interest income

 

 

2,392

 

 

5,800

 

 

4,249

 

 

12,420

 

Escrow earnings and other interest income

 

 

9,276

 

 

4,514

 

 

16,624

 

 

7,806

 

Other

 

 

14,982

 

 

10,703

 

 

23,680

 

 

21,346

 

Total revenues

 

$

178,204

 

$

166,407

 

$

325,656

 

$

324,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

$

71,426

 

$

63,516

 

$

126,699

 

$

119,688

 

Amortization and depreciation

 

 

35,489

 

 

32,860

 

 

69,124

 

 

65,198

 

Provision (benefit) for credit losses

 

 

800

 

 

(93)

 

 

323

 

 

(225)

 

Interest expense on corporate debt

 

 

2,343

 

 

2,443

 

 

4,522

 

 

4,846

 

Other operating expenses

 

 

15,176

 

 

11,599

 

 

28,127

 

 

23,207

 

Total expenses

 

$

125,234

 

$

110,325

 

$

228,795

 

$

212,714

 

Income from operations

 

$

52,970

 

$

56,082

 

$

96,861

 

$

112,205

 

Income tax expense

 

 

11,937

 

 

21,570

 

 

19,121

 

 

34,633

 

Net income before noncontrolling interests

 

$

41,033

 

$

34,512

 

$

77,740

 

$

77,572

 

Less: net income (loss) from noncontrolling interests

 

 

(79)

 

 

(55)

 

 

(233)

 

 

(216)

 

Walker & Dunlop net income

 

$

41,112

 

$

34,567

 

$

77,973

 

$

77,788

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains and losses on pledged available-for-sale securities

 

 

(53)

 

 

 8

 

 

(180)

 

 

 8

 

Walker & Dunlop comprehensive income

 

$

41,059

 

$

34,575

 

$

77,793

 

$

77,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.36

 

$

1.15

 

$

2.59

 

$

2.60

 

Diluted earnings per share

 

$

1.28

 

$

1.08

 

$

2.44

 

$

2.43

 

Cash dividends declared per common share

 

$

0.25

 

$

 —

 

$

0.50

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

30,248

 

 

30,131

 

 

30,116

 

 

29,971

 

Diluted weighted average shares outstanding

 

 

32,154

 

 

32,097

 

 

32,009

 

 

32,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 six months ended June 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income before noncontrolling interests

 

$

77,740

 

$

77,572

 

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

 

 

(79,737)

 

 

(90,204)

 

Change in the fair value of premiums and origination fees

 

 

(3,527)

 

 

1,921

 

Amortization and depreciation

 

 

69,124

 

 

65,198

 

Provision (benefit) for credit losses

 

 

323

 

 

(225)

 

Other operating activities, net

 

 

(318,073)

 

 

365,850

 

Net cash provided by (used in) operating activities

 

$

(254,150)

 

$

420,112

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,151)

 

$

(2,049)

 

Purchases of pledged available-for-sale securities

 

 

(38,566)

 

 

 —

 

Funding of preferred equity investments

 

 

(1,100)

 

 

(11,385)

 

Distributions from Interim Program JV

 

 

1,209

 

 

 —

 

Acquisitions, net of cash received

 

 

(33,102)

 

 

(15,000)

 

Purchase of mortgage servicing rights

 

 

(1,814)

 

 

 —

 

Originations of loans held for investment

 

 

(151,754)

 

 

(167,079)

 

Principal collected on loans held for investment upon payoff

 

 

87,688

 

 

100,980

 

Net cash provided by (used in) investing activities

 

$

(138,590)

 

$

(94,533)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Borrowings (repayments) of warehouse notes payable, net

 

$

323,153

 

$

(414,266)

 

Borrowings of interim warehouse notes payable

 

 

50,455

 

 

128,660

 

Repayments of interim warehouse notes payable

 

 

(61,049)

 

 

(75,615)

 

Repayments of note payable

 

 

(552)

 

 

(552)

 

Proceeds from issuance of common stock

 

 

8,067

 

 

2,885

 

Repurchase of common stock

 

 

(21,457)

 

 

(17,590)

 

Cash dividends paid

 

 

(15,699)

 

 

 —

 

Payment of contingent consideration

 

 

(5,150)

 

 

 —

 

Debt issuance costs

 

 

(1,881)

 

 

(1,053)

 

Net cash provided by (used in) financing activities

 

$

275,887

 

$

(377,531)

 

 

 

 

 

 

 

 

 

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

 

$

(116,853)

 

$

(51,952)

 

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

 

 

286,680

 

 

211,359

 

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

 

$

169,827

 

$

159,407

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid to third parties for interest

 

$

21,338

 

$

22,513

 

Cash paid for income taxes

 

 

31,299

 

 

27,748

 

 

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, 2017 (“2017 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 six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 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, 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”), 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 service, 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 2018, the Company acquired JCR Capital Investment Corporation and subsidiaries (“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.

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 June 30, 2018. 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 June 30, 2018. 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.

 

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 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 satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is completed in a short period of time. The Company had no contract assets or liabilities as of June 30, 2018 and December 31, 2017. The following table presents information about the Company’s contracts with customers for the three and six months ended June 30, 2018 and 2017:

 

5


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the six months ended 

 

 

(in thousands)

 

June 30, 

 

June 30, 

 

 

Description

    

2018

    

2017

    

2018

    

2017

 

Statement of income line item

Certain loan origination fees

 

$

12,371

 

$

13,380

 

$

23,656

 

$

23,452

 

Gains from mortgage banking activities

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

 

 

8,092

 

 

4,477

 

 

12,417

 

 

9,418

 

Other revenues

Total revenues derived from contracts with customers

 

$

20,463

 

$

17,857

 

$

36,073

 

$

32,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 generally up to three years and are all multifamily loans with similar risk characteristics. As of June 30, 2018, Loans held for investment, net consisted of 11 loans with an aggregate $131.0 million of unpaid principal balance less $0.5 million of net unamortized deferred fees and costs and $0.1 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.

 

None of the loans held for investment was delinquent, impaired, or on non-accrual status as of June 30, 2018 or December 31, 2017. 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 June 30, 2018 and December 31, 2017 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 six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the six months ended 

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2018

    

2017

    

2018

    

2017

 

Provision (benefit) for loan losses

 

$

79

 

$

(215)

 

$

66

 

$

(190)

 

Provision (benefit) for risk-sharing obligations

 

 

721

 

 

122

 

 

257

 

 

(35)

 

Provision (benefit) for credit losses

 

$

800

 

$

(93)

 

$

323

 

$

(225)

 

 

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 during the period of time the loan is outstanding. Included in Net warehouse interest income for the three and six months ended June 30, 2018 and 2017 are the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

For the six months ended 

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2018

    

2017

    

2018

    

2017

 

Warehouse interest income - loans held for sale

 

$

11,382

 

$

9,413

 

$

20,146

 

$

21,353

 

Warehouse interest expense - loans held for sale

 

 

(9,900)

 

 

(6,983)

 

 

(17,555)

 

 

(15,248)

 

Net warehouse interest income - loans held for sale

 

$

1,482

 

$

2,430

 

$

2,591

 

$

6,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

1,647

 

$

5,315

 

$

3,068

 

$

9,993

 

Warehouse interest expense - loans held for investment

 

 

(737)

 

 

(1,945)

 

 

(1,410)

 

 

(3,678)

 

Net warehouse interest income - loans held for investment

 

$

910

 

$

3,370

 

$

1,658

 

$

6,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net warehouse interest income

 

$

2,392

 

$

5,800

 

$

4,249

 

$

12,420

 

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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 $1.7 million and $0.1 million during the three months ended June 30, 2018 and 2017, respectively, and $5.8 million and $8.8 million during the six months ended June 30, 2018 and 2017, respectively.

 

Pledged Securities, at Fair ValuePledged securities, at fair value consisted of the following balances as of June 30, 2018 and 2017 and December 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

(in thousands)

2018

    

2017

    

2017

    

2016

 

Pledged cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3,238

 

$

1,761

 

$

2,201

 

$

4,358

 

Money market funds

 

55,072

 

 

88,540

 

 

86,584

 

 

78,384

 

Total pledged cash and cash equivalents

$

58,310

 

$

90,301

 

$

88,785

 

$

82,742

 

Agency debt securities

 

47,493

 

 

2,100

 

 

9,074

 

 

2,108

 

Total pledged securities, at fair value

$

105,803

 

$

92,401

 

$

97,859

 

$

84,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date. The investments in Agency debt securities consist of multifamily Agency mortgage-backed securities (“Agency MBS”) and have maturity dates ranging primarily from 2021 to 2030. As of June 30, 2018 and December 31, 2017, the fair value of the Agency debt securities approximated their amortized cost. As of June 30, 2018 and December 31, 2017, the total gains for securities with net gains in AOCI was $0.1 million and $0.1 million, respectively. As of June 30, 2018 and December 31, 2017, the total losses for securities with net losses in AOCI were $0.1 million and zero, respectively. As of June 30, 2018, the Company does not intend to sell any of the Agency debt securities, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.

 

Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed above) to be restricted cash and restricted cash equivalents. The following table, in conjunction with the detail of Pledged securities, at fair value presented above, presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of June 30, 2018 and 2017 and December 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

(in thousands)

2018

    

2017

    

2017

    

2016

 

Cash and cash equivalents

$

81,531

 

$

53,338

 

$

191,218

 

$

118,756

 

Restricted cash

 

29,986

 

 

15,768

 

 

6,677

 

 

9,861

 

Pledged cash and cash equivalents

 

58,310

 

 

90,301

 

 

88,785

 

 

82,742

 

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

$

169,827

 

$

159,407

 

$

286,680

 

$

211,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recently Announced Accounting Pronouncements—In the first quarter of 2016, Accounting Standards Update 2016-02 (“ASU 2016-02”), Leases (Topic 842) was issued. ASU 2016-02 represents a significant reform to the accounting for leases. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term. The 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 is effective for the Company January 1, 2019. The new lease standard requires entities 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 with a cumulative-effect adjustment to retained earnings recorded at the earliest comparative period. The Financial Accounting Standards Board (“FASB”) recently issued a proposed update to ASU 2016-02 that would provide companies with the option to apply a practical expedient that allows adoption of the provisions of ASU 2016-02 prospectively with a cumulative-effect adjustment recorded to retained earnings upon the date of adoption.

 

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The Company intends to adopt the standard when required on January 1, 2019 and to elect the available practical expedients, including the proposed practical expedient discussed in the previous paragraph, if approved by the FASB. The Company has completed its analysis of the new standard and has begun to adapt its accounting systems for adoption. The Company expects to have its accounting systems ready in time for the adoption next year. The Company is also in the process of analyzing the disclosures that will be required for the new standard. The Company expects ASU 2016-02 to have an impact on the Consolidated Balance Sheets as quantified in the 2017 Form 10-K when it recognizes ROU assets and the corresponding lease liabilities. The Company expects an immaterial impact on the statements of income. There will be no change to the classification of the Company’s leases, which are all currently classified as operating leases.

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 on 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.

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 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.

 

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 2017 Form 10-K.

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

NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES

Gains from mortgage banking activities consisted of the following activity for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended 

 

June 30, 

 

June 30, 

(in thousands)

2018

    

2017

 

2018

    

2017

Contractual loan origination related fees, net

$

55,193

 

$

57,507

 

$

104,009

 

$

108,404

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

 

51,725

 

 

48,318

 

 

86,953

 

 

96,995

Fair value of expected guaranty obligation recognized at commitment

 

(4,681)

 

 

(3,649)

 

 

(7,216)

 

 

(6,791)

Total gains from mortgage banking activities

$

102,237

 

$

102,176

 

$

183,746

 

$

198,608

 

 

 

 

 

 

 

 

 

 

 

 

The origination fees shown in the table are net of co-broker fees of $6.9 million and $6.5 million for the three months ended June 30, 2018 and 2017, respectively, and $12.4 million and $10.2 million for the six months ended June 30, 2018 and 2017, respectively.

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.

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The fair values of the MSRs at June 30, 2018 and December 31, 2017 were $842.6 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. For example, see the following sensitivities:

The impact of a 100-basis point increase in the discount rate at June 30, 2018 is a decrease in the fair value of $28.4 million.

The impact of a 200-basis point increase in the discount rate at June 30, 2018 is a decrease in the fair value of $54.7 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 six months ended June 30, 2018 and 2017 is shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2018

    

2017

    

2018

    

2017

 

Beginning balance

 

$

631,031

 

$

562,530

 

$

634,756

 

$

521,930

 

Additions, following the sale of loan

 

 

42,559

 

 

44,650

 

 

73,481

 

 

117,574

 

Purchases

 

 

1,814

 

 

 

 

1,814

 

 

 

Amortization

 

 

(32,801)

 

 

(29,325)

 

 

(64,962)

 

 

(58,224)

 

Pre-payments and write-offs

 

 

(3,689)

 

 

(4,696)

 

 

(6,175)

 

 

(8,121)

 

Ending balance

 

$

638,914

 

$

573,159

 

$

638,914

 

$

573,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables summarize the components of the net carrying value of the Company’s acquired and originated MSRs as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

  

Gross

  

Accumulated

  

Net

 

(in thousands)

 

  carrying value  

 

  amortization  

 

  carrying value  

 

Acquired MSRs

 

$

185,529

 

$

(130,584)

 

$

54,945

 

Originated MSRs

 

 

860,106

 

 

(276,137)

 

 

583,969

 

Total

 

$

1,045,635

 

$

(406,721)

 

$

638,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

  

Gross

  

Accumulated

  

Net

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

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The expected amortization of MSRs recorded as of June 30, 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  

 

Six Months Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2018

 

$

57,405

 

$

5,626

 

$

63,031

 

Year Ending December 31, 

 

 

 

 

 

 

 

 

 

 

2019

 

$

105,354

 

$

10,483

 

$

115,837

 

2020

 

 

92,603

 

 

9,128

 

 

101,731

 

2021

 

 

80,878

 

 

7,688

 

 

88,566

 

2022

 

 

67,591

 

 

5,901

 

 

73,492

 

2023

 

 

56,169

 

 

5,129

 

 

61,298

 

Thereafter

 

 

123,969

 

 

10,990

 

 

134,959

 

Total

 

$

583,969

 

$

54,945

 

$

638,914

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 5—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 typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers.

Activity related to the guaranty obligation for the three and six months ended June 30, 2018 and 2017 is presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 

 

June 30,