UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o 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 |
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80-0629925 |
(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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7501 Wisconsin Avenue, Suite 1200E
Bethesda, Maryland 20814
(301) 215-5500
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
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 x No o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 5, 2012 there were 34,618,820 total shares of common stock outstanding.
Walker & Dunlop, Inc.
Form 10-Q
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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EX-31.1 |
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EX-31.2 |
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EX-32 |
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EX- 101.1 |
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EX- 101.2 |
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EX- 101.3 |
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EX- 101.4 |
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EX- 101.5 |
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EX- 101.6 |
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Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2012 and December 31, 2011
(In thousands, except share and per share data)
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September 30, |
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December 31, |
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2012 |
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2011 |
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(unaudited) |
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Assets |
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Cash and cash equivalents |
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$ |
82,613 |
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$ |
53,817 |
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Restricted cash |
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6,991 |
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7,164 |
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Pledged securities, at fair value |
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32,080 |
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18,959 |
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Loans held for sale, at fair value |
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1,293,320 |
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268,167 |
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Loans held for investment |
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16,426 |
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Servicing fees and other receivables, net |
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28,443 |
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18,501 |
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Derivative assets |
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37,986 |
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10,638 |
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Mortgage servicing rights |
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294,704 |
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137,079 |
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Goodwill |
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53,401 |
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Intangible assets |
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12,490 |
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1,196 |
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Other assets |
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20,250 |
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7,075 |
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Total assets |
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$ |
1,878,704 |
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$ |
522,596 |
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Liabilities and Stockholders Equity |
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Liabilities |
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Accounts payable and other accrued expenses |
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$ |
108,941 |
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$ |
76,163 |
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Performance deposits from borrowers |
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12,188 |
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10,425 |
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Derivative liabilities |
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17,881 |
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5,223 |
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Guaranty obligation, net of accumulated amortization |
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20,114 |
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9,921 |
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Allowance for risk-sharing obligations |
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16,844 |
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14,917 |
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Warehouse notes payable |
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1,279,947 |
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218,426 |
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Notes payable |
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83,000 |
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23,869 |
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Total liabilities |
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$ |
1,538,915 |
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$ |
358,944 |
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Stockholders Equity |
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Stockholders equity: |
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Preferred shares, Authorized 50,000,000, none issued. |
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$ |
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$ |
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Common stock, $0.01 par value. Authorized 200,000,000; issued and outstanding 33,449,119 shares in 2012 and 21,748,598 shares in 2011. |
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334 |
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217 |
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Additional paid-in capital |
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234,981 |
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81,190 |
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Retained earnings |
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104,474 |
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82,245 |
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Total stockholders equity |
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$ |
339,789 |
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$ |
163,652 |
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Commitments and contingencies |
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Total liabilities and stockholders equity |
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$ |
1,878,704 |
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$ |
522,596 |
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See accompanying notes to condensed consolidated financial statements.
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except share and per share data)
(Unaudited)
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For the three months ended |
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For the nine months ended |
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2012 |
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2011 |
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2012 |
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2011 |
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Revenues |
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Gains from mortgage banking activities |
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$ |
53,400 |
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$ |
21,562 |
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$ |
107,136 |
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$ |
69,678 |
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Servicing fees |
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13,307 |
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8,757 |
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32,513 |
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24,517 |
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Net warehouse interest income |
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1,248 |
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1,052 |
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3,259 |
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2,828 |
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Escrow earnings and other interest income |
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708 |
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342 |
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1,772 |
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1,115 |
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Other |
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1,463 |
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1,643 |
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6,568 |
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6,621 |
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Total revenues |
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$ |
70,126 |
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$ |
33,356 |
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$ |
151,248 |
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$ |
104,759 |
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Expenses |
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Personnel |
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$ |
32,173 |
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$ |
11,343 |
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$ |
61,177 |
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$ |
33,413 |
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Amortization and depreciation |
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17,000 |
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6,267 |
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31,002 |
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16,258 |
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Provision for risk-sharing obligations |
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(848 |
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937 |
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1,126 |
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3,447 |
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Interest expense on corporate debt |
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388 |
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180 |
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719 |
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646 |
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Other operating expenses |
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9,635 |
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4,977 |
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20,843 |
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12,260 |
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Total expenses |
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$ |
58,348 |
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$ |
23,704 |
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$ |
114,867 |
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$ |
66,024 |
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Income from operations |
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$ |
11,778 |
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$ |
9,652 |
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$ |
36,381 |
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$ |
38,735 |
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Income tax expense |
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4,680 |
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3,573 |
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14,152 |
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14,886 |
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Net income |
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$ |
7,098 |
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$ |
6,079 |
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$ |
22,229 |
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$ |
23,849 |
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Basic earnings per share |
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$ |
0.28 |
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$ |
0.28 |
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$ |
0.97 |
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$ |
1.10 |
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Diluted earnings per share |
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$ |
0.28 |
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$ |
0.28 |
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$ |
0.96 |
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$ |
1.10 |
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Basic weighted average shares outstanding |
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25,091,153 |
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21,629,463 |
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22,881,795 |
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21,614,062 |
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Diluted weighted average shares outstanding |
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25,443,601 |
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21,782,383 |
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23,101,832 |
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21,727,540 |
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See accompanying notes to condensed consolidated financial statements.
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended September 30, |
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2012 |
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2011 |
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Cash flows from operating activities: |
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Net income |
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$ |
22,229 |
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$ |
23,849 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Gain attributable to fair value of future servicing rights, net of guaranty obligation |
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(52,091 |
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(37,328 |
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Gain on sale of MSR, less prepayment of MSR |
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(9 |
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235 |
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Provision for risk-sharing obligations |
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1,126 |
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3,447 |
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Amortization and depreciation |
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31,002 |
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16,258 |
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Originations of loans held for sale |
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(2,594,190 |
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(2,007,164 |
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Sales of loans to third parties |
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1,691,226 |
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2,213,038 |
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Stock compensation |
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3,384 |
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1,724 |
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Tax benefit from vesting of equity awards |
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7 |
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Cash paid to settle risk-sharing obligations |
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(2,030 |
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(680 |
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Amortization of leasehold inducement |
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(58 |
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Cash allowance received from landlord |
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1,301 |
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Cash received from sale of assets acquired |
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2,244 |
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Changes in: |
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Restricted cash and pledged securities |
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(3,291 |
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(3,999 |
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Servicing fees and other receivables |
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498 |
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(7,595 |
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Derivative fair value adjustments |
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(9,701 |
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319 |
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Other assets |
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(5,536 |
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(1,061 |
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Accounts payable and other accruals |
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9,850 |
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8,956 |
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Performance deposits from borrowers |
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1,763 |
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3,588 |
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Net cash (used in) provided by operating activities |
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$ |
(902,276 |
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$ |
213,587 |
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Cash flows from investing activities: |
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Capital expenditures |
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$ |
(4,668 |
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$ |
(1,686 |
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Acquisition of CWCapital LLC, net of cash acquired and other assets |
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(208,109 |
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Net increase in loans held for investment |
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(16,368 |
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Net cash used in investing activities |
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$ |
(229,145 |
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$ |
(1,686 |
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Cash flows from financing activities: |
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Borrowings (repayments) of warehouse notes payable, net |
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$ |
951,670 |
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$ |
(158,300 |
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Borrowings (repayments) of notes payable, net |
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59,131 |
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(2,853 |
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Debt issuance costs |
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(1,108 |
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Proceeds from issuance of common stock |
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150,698 |
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2,053 |
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Repurchase of common stock |
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(167 |
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Tax benefit from vesting of equity awards |
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(7 |
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Net cash provided by (used in) financing activities |
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$ |
1,160,217 |
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$ |
(159,100 |
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Net increase in cash and cash equivalents |
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$ |
28,796 |
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$ |
52,801 |
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Cash and cash equivalents at beginning of period |
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53,817 |
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33,285 |
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Cash and cash equivalents at end of period |
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$ |
82,613 |
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$ |
86,086 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid to third parties for interest |
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$ |
4,296 |
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$ |
2,869 |
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Cash paid for taxes |
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$ |
8,256 |
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$ |
10,956 |
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See accompanying notes to condensed consolidated financial statements.
NOTE 1ORGANIZATION 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 accounting principles generally accepted in the United States of America (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 Companys Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or thereafter.
Walker & Dunlop is one of the leading commercial real estate finance companies in the United States, with a primary focus on multifamily lending. The Company originates, sells and services a range of multifamily and other commercial real estate financing products. The Companys clients are owners and developers of commercial real estate across the country. 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 government-sponsored enterprises, or 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), with which Walker & Dunlop has long-established relationships. The Company retains servicing rights and asset management responsibilities on nearly all loans that it sells to GSEs and HUD. Walker & Dunlop is approved as a Fannie Mae Delegated Underwriting and Servicing (DUSTM) lender nationally, a Freddie Mac Program Plus lender in 22 states and the District of Columbia, a HUD Multifamily Accelerated Processing (MAP) lender nationally, and a Ginnie Mae issuer. The Company also originates and services loans for a number of life insurance companies and other institutional investors, in which cases it does not fund the loan but rather acts as a loan broker.
The Company offers its borrowers an interim loan program offering floating-rate debt, for terms of up to two years, to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing. The Company closed its first loans under this program in 2012. The Company underwrites all loans originated through the program. During the time they are outstanding, the Company assumes the full risk of loss on the loans. In addition, the Company services and asset-manages loans originated through the program, with the ultimate goal of providing permanent financing on the properties. These loans are classified as held for investment on the Companys balance sheet during such time that they are outstanding.
On June 7, 2012, the Company entered into a purchase agreement (the Purchase Agreement), by and among the Company, its indirect wholly owned subsidiary, Walker & Dunlop, LLC, CWCapital LLC (CWCapital) and CW Financial Services LLC (CW Financial), pursuant to which Walker & Dunlop, LLC agreed to acquire all of CW Financials interests in CWCapital (the Acquisition), for approximately $220 million, consisting of a cash payment to CW Financial of $80 million and the Companys issuance in a private placement to CW Financial of approximately 11.6 million shares of common stock. The Acquisition closed, pursuant to the terms of the Purchase Agreement, on September 4, 2012, at which time the total consideration transferred was valued at approximately $231 million. The increase in the fair value of the consideration transferred is the result of an increase in the fair value of the Companys common stock from execution of the Purchase Agreement to the closing date. Upon closing of the Acquisition, CWCapital became an indirect wholly owned subsidiary of the Company. By virtue of the Companys ownership of CWCapital, the Company also acquired a 50% ownership in ARA Finance LLC, a joint venture with ARA Finco LLC, in which ARA Finco LLC owns the remaining 50% of ARA Finance LLC. The Company accounts for its investment in ARA Finance LLC under the equity method of accounting.
W&D Balanced Real Estate Fund I GP, LLC, a wholly owned subsidiary, has a general partnership interest in a partnership that invests in commercial real estate. The Company can be removed as general partner at the sole discretion of one of the limited partners. Walker & Dunlop Real Estate Opportunity Fund I Manager, LLC, a wholly owned subsidiary, is the managing member of a limited liability company that invests in commercial real estate. The Company can be removed as the managing member at the sole discretion of one of the members. In their respective capacities as general partner and managing member, the wholly owned subsidiaries of the Company earn fees pursuant to corporate services agreements under which they provide consulting and overhead services to the partnership and limited liability company.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of ConsolidationThe condensed consolidated financial statements include the accounts of the Company as defined in Note 1. All material intercompany transactions have been eliminated. The Company has evaluated all subsequent events.
Use of EstimatesThe preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, including guaranty obligations, capitalized mortgage servicing rights, derivative instruments and hedging relationships, and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates.
Comprehensive IncomeFor the three and nine months ended September 30, 2012 and 2011, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.
Concentrations of Credit RiskFinancial 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 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 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 counterparty risk with respect to the Companys 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 generally an investment bank. 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 a risk mitigated by the non-refundable good faith deposit.
Goodwill and Other Intangible AssetsThe 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.
We do not amortize goodwill; instead, we evaluate goodwill for impairment at least annually. In addition to our annual impairment evaluation, we evaluate whether events or circumstances have occurred in the period subsequent to our annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. We evaluate our identified intangibles for impairment annually or if other events or circumstances indicate that the carrying value may be impaired.
See Notes 3 and 4 for additional information on goodwill and other intangible assets.
Loans Held for SaleLoans 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 initially measures all originated loans at fair value. Subsequent to initial measurement, the Company measures all mortgage 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 market 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 market or on a non-accrual status at September 30, 2012 and December 31, 2011.
Gains from Mortgage Banking ActivitiesMortgage banking activity 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 co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan net of the estimated net future cash flows associated with any risk-sharing obligations. Loans originated in a brokerage capacity tend to have lower origination fees because they often require less time to execute, there is more competition for brokerage assignments and because the borrower will also have to pay an origination fee to the ultimate institutional lender. Also included in gains from mortgage banking activities are changes to the fair value of loan commitments, forward sale commitments, and loans held for sale that occur during their respective holding periods. Upon sale of the loans, no gains or losses are recognized as such loans are recorded at fair value during their holding periods. Mortgage servicing rights and guaranty obligations are recognized as assets or liabilities, respectively, upon the sale of the loans.
The co-broker fees for the three and nine months ended September 30, 2012 were $5.2 million and $13.6 million; and were $3.6. million and $17.4 million for the three and nine months ended September 30, 2011, respectively.
Transfer of financial assets is reported as a sale when (a) the transferor surrenders control over those assets and (b) 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 has determined that all loans sold have met these specific conditions and accounts for all transfers of mortgage loans and mortgage participations as completed sales.
When a mortgage loan is sold, the Company retains the right to service the loan and initially recognizes the mortgage servicing right (MSR) at fair value. Subsequent to the initial measurement date, mortgage servicing assets are amortized using the effective interest method.
Guaranty obligation and allowance for risk-sharing obligationsWhen a loan is sold under the Fannie Mae DUS program, the Company undertakes an obligation to partially guarantee the performance of the loan. At inception, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized. The fair value includes the Companys obligation to stand ready to perform over the term of the guaranty (the non-contingent guaranty), and the Companys obligation to make future payments should those triggering events or conditions occur (contingent guaranty).
Historically, the contingent guaranty recognized at inception has been de minimis. In determining the fair value of the guaranty obligation, we consider 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 future 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 and estimated life used are consistent with those used for the calculation of the MSR for each loan.
Subsequent to the initial measurement date, the liability is amortized over the life of the guaranty period using the straight-line method. We evaluate the allowance for risk-sharing obligations by monitoring the performance of each loan for events or conditions which may signal a potential default. In instances where payment under the guaranty on a specific loan is determined to be probable and estimable, we record an additional liability for the estimated allowance for risk-sharing through a charge to the provision for risk-sharing obligations, along with a write-off of the associated loan-specific MSR (Note 6).
Loans Held for InvestmentLoans held for investment are interim loans originated by the Company for properties that currently do not qualify for permanent GSE or HUD financing. These loans have a maximum term of two years. 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 and is recognized as revenue when earned and deemed collectible.
The Company uses the interest method to determine an effective yield to amortize the loan fees and costs on real estate loans held for investment. The Company uses the initial coupon interest rate of the loans (without regard to future changes in the underlying indices) and anticipated principal payments, if any, to determine periodic amortization.
The Company will reclassify loans held-for-investment as loans held-for-sale if it determines that the loans will be sold or transferred to third parties.
Share-Based PaymentThe Company recognizes compensation costs for all share-based payment awards made to employees and directors, including restricted stock, employee stock options and other forms of equity compensation based on the grant date fair value.
Under the Walker & Dunlop, Inc. 2010 Equity Incentive Plan, the Company has granted restricted stock, unrestricted stock and stock option awards. Restricted stock awards have been granted without cost to the Companys officers, employees and non-employee directors, for which the fair value of the award was calculated as the difference between the market value of the Companys common stock on the date of grant and the purchase price to be paid by the grantee. The Companys stock option and restricted stock awards for its officers and employees vest, predicated on continued employment, satisfaction of performance conditions, or a combination of both. Restricted stock awards for non-employee directors fully vest after one year.
Stock option awards have been granted to officers and certain other employees, with an exercise price equal to the closing price of the Companys common stock on the date of the grant, and were granted for a ten-year term, 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 options exercise price, the price of the underlying stock on the date of the grant, the expected option term, the estimated dividend yield, a risk-free interest rate and the expected volatility. For the risk-free rate, the Company uses a U.S. Treasury strip due in a number of years equal to the options expected term. To determine the expected volatility, the Company has calculated the volatility of the common stock price of a group of peer companies, as the Company has insufficient historical data for its common stock at this time to develop an expectation of volatility over the expected term of the options granted solely based on the historical volatility of its own common stock.
Compensation expense is adjusted for estimated forfeitures and is recognized on a straight-line basis, for the entire award, over the requisite service period of the award. Forfeiture assumptions are evaluated on a quarterly basis and updated as necessary. Compensation is recognized within the income statement as Personnel expense, the same expense line as the cash compensation paid to the respective employees.
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. Net deferred tax liabilities are included in Accounts payable and other accrued expenses in the accompanying condensed consolidated balance sheets.
We had no accruals for tax uncertainties as of September 30, 2012 or December 31, 2011.
Net Warehouse Interest IncomeThe Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans that are held for sale and those 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. 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 interst 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, 2012 and 2011 are the following components (in thousands):
|
|
For the three months ended September 30, |
|
For the nine months ended September 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Warehouse interest income |
|
$ |
4,169 |
|
$ |
2,654 |
|
$ |
9,722 |
|
$ |
6,755 |
|
Warehouse interest expense |
|
2,921 |
|
1,602 |
|
6,463 |
|
3,927 |
| ||||
Net warehouse interest income |
|
$ |
1,248 |
|
$ |
1,052 |
|
$ |
3,259 |
|
$ |
2,828 |
|
Recently Issued Accounting PronouncementsIn May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU No. 2011-04 was issued to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU No. 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The adoption of ASU No. 2011-04 expanded our disclosures regarding fair value measurements but did not have a material impact on our financial statement disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU No. 2011-05 allows an entity to have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU No. 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The adoption of ASU No. 2011-05 did not have a material impact on our financial statements.
NOTE 3ACQUISITION OF CWCAPITAL LLC
On June 7, 2012, the Company entered into a Purchase Agreement, by and among the Company, its indirect wholly owned subsidiary, Walker & Dunlop, LLC, CWCapital and CW Financial, pursuant to which Walker & Dunlop, LLC agreed to acquire all of CW Financials interests in CWCapital, for approximately $220 million (comprising a cash payment to CW Financial of $80 million and the balance consisting of the Companys issuance in a private placement to CW Financial of approximately 11.6 million shares of common stock).
CWCapital, a Massachusetts limited liability company, was one of the leading commercial real estate finance companies in the United States, with a primary focus on multifamily lending, originating and selling mortgage loans pursuant to the programs of
Fannie Mae, Freddie Mac, Ginnie Mae and HUD. CWCapital had approximately 180 employees in 14 offices nationwide. In reaching its decision to recommend and approve the transaction, the Companys management and board of directors considered a variety of factors weighing positively in favor of the Acquisition, including but not limited to, strategic benefits, CWCapitals businesses, operating results, financial condition and management, the consideration and terms of the Purchase Agreement, financing and closing agreements.
The Acquisition closed on September 4, 2012, pursuant to the terms of the Purchase Agreement. Upon closing of the Acquisition, CWCapital became an indirect wholly owned subsidiary of the Company and was renamed Walker & Dunlop Capital, LLC. The consideration transferred at the close of the Acquisition totaled approximately $231 million, consisting of $80 million in cash and 11,647,255 shares of the Companys common stock at a closing date fair value of $151 million.
The Company recorded the fair value of the assets acquired and liabilities assumed as of August 31, 2012, the date which the Company obtained control pursuant to the Closing Side Letter by and among the Company, Walker & Dunlop, LLC, CWCapital and CW Financial, whereby the closing of the Acquisition was deemed to have occurred and become effective at 11:59 p.m. on August 31, 2012. The Company has also included CWCapitals results of operations and cash flows in its financial statements from August 31, 2012 forward. Amounts recorded upon the closing of the acquisition of CWCapital, are as follows (in thousands):
|
|
August 31, 2012 |
| |
Assets acquired and liabilities assumed |
|
|
| |
Cash |
|
$ |
22,955 |
|
Pledged securities |
|
9,657 |
| |
Servicing fees and other accounts receivable |
|
11,777 |
| |
Loans held for sale |
|
332,841 |
| |
Derivative assets |
|
19,852 |
| |
Mortgage servicing rights |
|
130,543 |
| |
Other assets |
|
3,905 |
| |
Mortgage pipeline intangible asset |
|
18,700 |
| |
Accounts payable |
|
(22,921 |
) | |
Derivative liabilities |
|
(16,107 |
) | |
Guaranty obligation |
|
(8,254 |
) | |
Allowance for risk-sharing obligation |
|
(4,063 |
) | |
Notes payable |
|
(321,222 |
) | |
Goodwill |
|
53,401 |
| |
Consideration paid |
|
$ |
231,064 |
|
The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, with the remaining unallocated amount recognized as goodwill. The fair values assigned to identifiable intangible assets acquired and liabilities assumed were determined using the following approaches:
· Mortgage servicing rights: market and income approaches
· Mortgage pipeline: market and income approaches
The recognized goodwill of $53.4 million, all of which is expected to be tax deductible over 15 years, is attributed to the value of the assembled workforce, the broader scale of operations of the combined companys national platform and the long-term expected synergies associated with the combination.
Any changes in the estimated fair values of the assets acquired and liabilities assumed as a result of the completion of the allocation of the purchase price could change the amount of the purchase price allocable to goodwill.
The total revenues and income from operations of CWCapital, since the acquisition date and included in the accompanying consolidated statements of income for both the three and nine months ended September 30, 2012, were $27.0 million and $3.9 million, respectively.
The revenues and earnings of the combined entity, as though the Acquisition had occurred as of January 1, 2011, for the nine months ended September 30, 2012 and 2011, are as follows (in thousands):
Supplementary pro forma information |
|
For the nine months ended September 30, |
| ||||
(in thousands, except per share data) |
|
2012 |
|
2011 |
| ||
|
|
|
|
|
| ||
Revenues |
|
$ |
256,839 |
|
$ |
194,172 |
|
Income from operations (1) |
|
$ |
67,370 |
|
$ |
47,493 |
|
Net income |
|
$ |
53,218 |
|
$ |
33,682 |
|
Diluted earnings per share |
|
$ |
2.30 |
|
$ |
1.55 |
|
Diluted shares outstanding |
|
23,101,832 |
|
21,727,540 |
|
(1) Income from operations includes pro forma adjustments related to interest expense for additional term debt financing obtained to close the Acquisition as well as the additional tax expense as a result of the increased combined earnings. Pro forma adjustments increasing interest expense by $0.8 million and $1.1 million and tax expense by $12.1 million and $3.8 million are included in the supplementary pro forma information presented for 2012 and 2011, respectively.
NOTE 4GOODWILL AND OTHER INTANGIBLE ASSETS
The following summarizes the Companys goodwill activity for the nine months ended September 30, 2012 (in thousands):
|
|
For the nine months ended, |
| |
|
|
September 30, 2012 |
| |
Beginning balance |
|
$ |
|
|
Goodwill related to the CWCapital acquisition |
|
53,401 |
| |
Impairment |
|
|
| |
Ending balance |
|
$ |
53,401 |
|
The following summarizes the Companys other intangible assets, related to acquisition activity, as of September 30, 2012 (in thousands):
|
|
As of September 30, 2012 |
| |||||||
|
|
Gross carrying |
|
Accumulated amortization |
|
Net carrying value |
| |||
Mortgage pipeline intangible asset |
|
18,700 |
|
(7,353 |
) |
11,347 |
| |||
Mortgage servicing rights |
|
130,543 |
|
(2,104 |
) |
128,439 |
| |||
|
|
$ |
149,243 |
|
$ |
(9,457 |
) |
$ |
139,786 |
|
The weighted average remaining lives of the Companys intangible assets are as follows:
· Mortgage pipeline: the mortgage pipeline will be amortized ratably over the lives of the underlying mortgage application contracts, a term that is expected to be between 18 and 24 months but is expected to fluctuate based on customer needs and/or mortgage application cancellations.
· Mortgage servicing rights: mortgage servicing rights acquired through the Acquisition are amortized using the effective yield method. The estimated lives of the mortgage servicing rights are derived based upon the stated yield maintenance and/or prepayment protection term of the underlying loans. The weighted average remaining life of the portfolio acquired is 7.5 years.
NOTE 5GAINS FROM MORTGAGE BANKING ACTIVITIES
The gains from mortgage banking activities consist of the following activity for the three and nine months ended September 30, 2012 and 2011 (in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Contractual loan origination related fees, net |
|
$ |
27,674 |
|
$ |
9,657 |
|
$ |
55,045 |
|
$ |
32,350 |
|
Fair value of expected future cash flows from servicing recognized at commitment |
|
27,237 |
|
12,664 |
|
55,404 |
|
39,214 |
| ||||
Fair value of expected guaranty obligation |
|
(1,511 |
) |
(759 |
) |
(3,313 |
) |
(1,886 |
) | ||||
Total gains from mortgage banking activities |
|
$ |
53,400 |
|
$ |
21,562 |
|
$ |
107,136 |
|
$ |
69,678 |
|
NOTE 6MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (MSRs) represent the fair value of the servicing rights retained by the Company for mortgage loans originated and sold. The capitalized amount is equal to the estimated fair value of the future expected net cash flows associated with the servicing rights. The following describes the key assumptions used in calculating each loans MSR:
Discount rateDepending upon loan type, the discount rate used is managements best estimate of market discount rates. The rates used for loans originated were 10% to 15% for each of the three and nine month periods presented.
Estimated LifeThe estimated life of the MSRs is derived based upon the stated yield maintenance and/or prepayment protection term of the underlying loan and may be reduced by 6 to 12 months based upon the expiration of various types of prepayment penalty and/or lockout provisions prior to that stated maturity date.
Servicing CostThe estimated future cost to service the loan for the estimated life of the MSR is subtracted from the estimated future cash flows.
The fair value of the MSRs was $320.0 million and $158.5 million at September 30, 2012 and December 31, 2011, 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, 2012, is a decrease in the fair value of $9.4 million.
The impact of a 200 basis point increase in the discount rate at September 30, 2012, is a decrease in the fair value of $18.1 million.
Activity related to capitalized MSRs for the three and nine months ended September 30, 2012 and 2011 was as follows (in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Beginning balance |
|
$ |
149,533 |
|
$ |
118,597 |
|
$ |
137,079 |
|
$ |
106,189 |
|
Additions, following the sale of loan |
|
24,585 |
|
18,187 |
|
51,449 |
|
41,319 |
| ||||
Additions, CWCapital acquisition |
|
130,543 |
|
|
|
130,543 |
|
|
| ||||
Amortization |
|
(9,228 |
) |
(5,768 |
) |
(22,279 |
) |
(15,937 |
) | ||||
Pre-payments and write-offs |
|
(729 |
) |
(641 |
) |
(2,088 |
) |
(1,196 |
) | ||||
Ending balance |
|
$ |
294,704 |
|
$ |
130,375 |
|
$ |
294,704 |
|
$ |
130,375 |
|
The MSRs are being amortized in proportion to, and over the period, that net servicing income is expected to be received using the effective interest method. The Company reported write downs of MSRs related to loans that were repaid prior to the expected maturity or the servicing rights being sold. These write-offs are included with the amortization and depreciation expense in the accompanying condensed consolidated statements of income.
Management reviews the capitalized MSRs for impairment quarterly. MSRs are measured for impairment on an asset-by-asset basis, considering factors such as debt service coverage ratio, property location, loan-to-value ratio and property type. In addition, at each reporting period, we compare the aggregate carrying value of the MSR portfolio to the aggregate estimated fair value of the portfolio. No impairments other than write-offs discussed above have been recognized for the periods presented.
NOTE 7GUARANTY 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. No guaranty is provided for loans sold under the Freddie Mac or HUD loan programs.
A summary of our guaranty obligation for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Beginning balance |
|
$ |
10,746 |
|
$ |
9,398 |
|
$ |
9,921 |
|
$ |
8,928 |
|
Guaranty obligation recognized, following the sale of loan |
|
1,778 |
|
740 |
|
3,565 |
|
2,019 |
| ||||
Guaranty obligation recognized, CWCapital acquisition |
|
8,254 |
|
|
|
8,254 |
|
|
| ||||
Amortization of guaranty obligation |
|
(664 |
) |
(470 |
) |
(1,626 |
) |
(1,279 |
) | ||||
Ending Balance |
|
$ |
20,114 |
|
$ |
9,668 |
|
$ |
20,114 |
|
$ |
9,668 |
|
We evaluate the allowance for risk-sharing obligations by monitoring the performance of each loan for triggering events or conditions that may signal a potential default. In situations where payment under the guaranty is probable and estimable on a specific loan, we record an additional liability for the estimated allowance for risk-sharing through a charge to the provision for risk-sharing obligations in the income statement, along with a write-off of the loan-specific MSR. The amount of the provision reflects our assessment of the likelihood of payment by the borrower, the estimated disposition value of the underlying collateral and the level of risk-sharing. Historically, the loss recognition occurs at or before the loan becoming 60 days delinquent. A summary of our allowance for risk-sharing for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Beginning balance |
|
$ |
13,629 |
|
$ |
13,383 |
|
$ |
14,917 |
|
$ |
10,873 |
|
Provision for risk sharing obligations |
|
(848 |
) |
937 |
|
1,126 |
|
3,447 |
| ||||
Allowance for risk-sharing obligations, CWCapital acquisition |
|
4,063 |
|
|
|
4,063 |
|
|
| ||||
Write-offs |
|
|
|
(680 |
) |
(3,262 |
) |
(680 |
) | ||||
Ending Balance |
|
$ |
16,844 |
|
$ |
13,640 |
|
$ |
16,844 |
|
$ |
13,640 |
|
As of September 30, 2012, the maximum quantifiable contingent liability associated with the Companys guarantees under the Fannie Mae DUS agreement was $2.6 billion. The maximum quantifiable contingent liability is not representative of the actual loss we would incur. We would be liable for this amount only if all of the loans we service for Fannie Mae, for which we retain 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.
NOTE 8SERVICING
The total unpaid principal balance of loans the Company was servicing for various institutional investors was $33.9 billion as of September 30, 2012, and reflects the addition of $14.5 billion (unpaid principal balance) of loan servicing on September 4, 2012, through the completion of the Acquisition.
NOTE 9NOTES PAYABLE
To provide financing to borrowers under GSE and HUD programs, and to assist in funding interim loans, the Company has
arranged for committed warehouse lines of credit in the aggregate amount of $885 million with certain national banks, a temporary increase commitment of $640 million with a national bank and a $450 million uncommitted facility with Fannie Mae. Consistent with industry practice, two of these facilities are revolving commitments the Company expects to renew annually, one is a revolving commitment the Company expects to renew every two years, and the last facility is provided on an uncommitted basis without a specific maturity date. The Companys ability to originate mortgage loans depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.
The Company had a $150 million committed warehouse line agreement that was scheduled to mature on November 26, 2012. On September 4, 2012, contemporaneously with the closing of the Acquisition, the Company entered into the Warehousing Credit and Security Agreement with a national bank to replace the existing $150 million warehouse line with a $500 million committed warehouse line that matures on September 3, 2013. The Warehousing Credit and Security Agreement provides the Company with the ability to fund its Fannie Mae, Freddie Mac, HUD and FHA loans. Advances are made at 100% of the loan balance and borrowings under this line bear interest at the average 30-day London Interbank Offered Rate (LIBOR) plus 185 basis points. On December 6, 2012, the warehousing commitment amount will automatically be reduced to $425 million. On or before December 6, 2012, it is anticipated that an alternative lender will (but is not obligated to) become an assignee of up to at least $75 million of committed capacity, and may provide a maximum total commitment of $200 million. At no time will the maximum total commitment for all lenders under the Warehousing Credit and Security Agreement exceed $625 million.
The Warehousing Credit and Security Agreement contains certain affirmative and negative covenants that are binding on the Companys operating subsidiary (which are in some cases subject to exceptions), including, but not limited to, restrictions on its ability to assume, guarantee or become contingently liable for the obligation of another person, to undertake certain fundamental changes such as reorganizations, mergers, amendments to our certificate of formation or operating agreement, liquidations, dissolutions or dispositions or acquisitions of assets or businesses, to cease to be directly or indirectly wholly owned by the Company, to pay any subordinated debt in advance of its stated maturity or to take any action that would cause the Companys operating subsidiary to lose all or any part of its status as an eligible lender, seller, servicer or issuer or any license or approval required for it to engage in the business of originating, acquiring or servicing mortgage loans.
In addition, the Warehousing Credit and Security Agreement requires compliance with certain financial covenants, which are measured for the Company and its subsidiaries on a consolidated basis, as follows:
· a tangible net worth covenant;
· an agency compliance covenant;
· a leverage ratio (as defined in the Warehousing Credit and Security Agreement) of not greater than 2.25;
· a liquid assets covenant;
· a servicing delinquencies covenant; and
· a total servicing portfolio covenant.
The Warehousing Credit and Security Agreement contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods).
On September 28, 2012, the Company amended this committed warehouse line agreement to provide for a temporary increase commitment (Temporary Increase Agreement) of $640 million, temporarily increasing the warehouse commitment amount available to $1.14 billion until the earliest of December 6, 2012, an event of default under the existing warehouse agreement or the termination of the warehousing commitment pursuant to the terms of the existing warehouse agreement. Borrowings under the Temporary Increase Agreement are only available when outstanding funding under the existing warehouse facility exceeds $500 million and will accrue interest at a rate of the average 30-day LIBOR plus 185 basis points. In the event the aggregate interest accrued over the term of the Temporary Increase Agreement is less than $1 million, the borrower is obligated to pay an amount equal to $1 million minus the actual accrued interest. As of September 30, 2012, there were $899.6 million of borrowings outstanding under this line and corresponding loans held for sale.
On September 4, 2012, contemporaneously with the closing of the Acquisition, the Company amended its $350 million committed warehouse agreement that was scheduled to mature on February 28, 2013. The committed warehouse facility provides the Company with the ability to fund its Fannie Mae, Freddie Mac and HUD loans. The amendment, among other things extended the maturity date to September 3, 2013, reduced the rate for borrowing from the average 30-day LIBOR plus 185 basis points to the average 30-day LIBOR plus 175 basis points and amended the negative and financial covenants to conform to those of our $500 million Warehousing Credit and Security Agreement, described above, with the exception of the leverage ratio covenant, which is not included in the amended facility. As of September 30, 2012, there were $182.7 million of borrowings outstanding under this line and corresponding loans held for sale.
The Company has a $450 million uncommitted facility with Fannie Mae under its ASAP funding program. After approval of
certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay the primary warehouse line. Fannie Mae will advance 99% of the loan balance and borrowings under this program bear interest at the average 30-day LIBOR plus 115 basis points. As of September 30, 2012, there were $74.9 million of borrowings outstanding under this program. There is no expiration date for this facility.
The Company had an unlimited master purchase and sale agreement which expired on March 16, 2012. In anticipation of the expiration of the master purchase and sale agreement, the Company amended one of our committed warehouse lines, and on March 16, 2012, the Company allowed the master purchase and sale agreement to expire.
The Company has a $35 million committed warehouse line agreement that matures on July 21, 2013, subject to one year extensions at the lenders discretion. The facility provides the Company with the ability to fund first mortgage loans (interim loans) on multifamily real estate properties for periods of up to two years, using available cash in combination with advances under the facility. All borrowings bear interest at the average 30-day LIBOR plus 250 basis points. Borrowings under the facility are full recourse to the Company. As of September 30, 2012, there were $12.4 million of borrowings outstanding under this line and two corresponding loans held for investment.
Upon closing the Acquisition, the Company, Walker & Dunlop, LLC, CW Financial and Walker & Dunlop Capital, LLC (formerly CWCapital) entered into agreements to amend the three outstanding warehouse lines of Walker & Dunlop Capital, LLC that existed immediately prior to the Acquisition (collectively, the Old Warehouse Lines) to (i) freeze the Old Warehouse Lines on the closing date of the acquisition by eliminating the ability of Walker & Dunlop Capital, LLC, or any other entity, to request advances under the Old Warehouse Lines, (ii) provide for repayment in full of any outstanding borrowings under the Old Warehouse Lines, each within a period of not more than 75 days after the closing date, and (iii) substitute CW Financials guarantees of the Old Warehouse Lines with guarantees by the Company. As of September 30, 2012, there were $110.5 million of borrowings outstanding under these lines.
All of the notes payable, including the warehouse facilities, are senior obligations of the Company. The agreements above contain cross-default provisions, such that if a default occurs under any of our debt agreements, generally the lenders under the Companys other debt agreements could also declare a default. As of September 30, 2012, the Company was in compliance with all of its warehouse line covenants.
Debt Obligations
On October 31, 2006, the Company entered into a $42.5 million term note agreement (the Existing Term Loan Agreement) which, as amended, was scheduled to mature on October 31, 2015. On September 4, 2012, and substantially contemporaneously with the closing of the Acquisition, the Company entered into a senior secured term loan credit agreement (the Credit Agreement) with a group of lenders that replaced the Companys $42.5 million Existing Term Loan Agreement. The Credit Agreement provides for an $83.0 million term loan (the Term Loan). At September 30, 2012, there were $83.0 million of borrowings outstanding under the Credit Agreement.
On September 4, 2012 (the Closing Date), $61.8 million of the Term Loan proceeds were used to pay cash consideration to CW Financial under the Purchase Agreement, $20.7 million of the Term Loan proceeds were used to refinance the Existing Term Loan Agreement and the remaining $0.5 million of the proceeds were used to repay certain existing indebtedness of the Company to former equity holders in our predecessor entities (during 2008, we purchased small amounts of subsidiary equity from certain existing employees and issued notes that were subordinated to the Existing Term Loan Agreement).
The Term Loan amortizes in equal quarterly installments of $2,075,000 commencing 90 days after the Closing Date, with a final maturity date for all remaining amounts due under the Term Loan of August 31, 2017. Other than the scheduled quarterly amortization installments, any payments of Term Loan principal during the first 18 months after the Closing Date (the Lockout Period) must be accompanied by a prepayment penalty fee equal to the amount of interest that would have accrued on the prepaid principal amount during the then remaining portion of the Lockout Period.
Borrowings under the Credit Agreement bear interest at a rate derived from LIBOR for a one-month interest period plus an applicable margin of 3.75%, subject to adjustment if an event of default is continuing.
The obligations of the Company under the Credit Agreement are guaranteed by Walker & Dunlop Multifamily, Inc., Walker & Dunlop, LLC and Walker & Dunlop Capital, LLC (upon closing of the Acquisition, CWCapital became an indirect wholly-owned subsidiary of the Company and changed its name from CWCapital LLC to Walker & Dunlop Capital, LLC), each of which is a direct or indirect wholly owned subsidiary of the Company (together with the Company, the Loan Parties), pursuant to a Guarantee and Collateral Agreement entered into on the Closing Date among the Loan Parties and the lender (the Guarantee and Collateral Agreement).
The Credit Agreement contains certain affirmative and negative covenants that are binding on the Loan Parties, including, but not limited to, restrictions (subject to specified exceptions) on the ability of the Loan Parties to create liens on their respective property, assets or revenues, to make investments, to incur indebtedness, to merge, dissolve, liquidate or consolidate with or into another person, to make a material disposition, to pay certain dividends or related distributions, to prepay, redeem or defease prior to maturity certain indebtedness, to change the nature of their business, to enter into certain transactions with affiliates, to enter into certain burdensome agreements, to amend certain material documents or to change their respective names or fiscal years.
In addition, the Credit Agreement requires the Loan Parties to abide by certain financial covenants calculated for the Company and its subsidiaries on a consolidated basis. As of September 30, 2012, the Company was in compliance with all financial covenants of the Term Loan. The most significant financial covenants are summarized as follows:
· Four-Quarter EBITDA (as defined in the Credit Agreement and calculated to reflect the Acquisition on a pro forma basis) of not less than $35,000,000;
· Debt Service Coverage Ratio (as defined in the Credit Agreement and calculated excluding interest expense on warehouse credit lines) of not less than 3.0 to 1.0; and
· Maximum ratio of Adjusted Funded Debt to Four-Quarter EBITDA (each as defined in the Credit Agreement) of (i) 4.0 to 1.0 for each of the fiscal quarters ending on September 30, 2012, December 31, 2012, March 31, 2013, and June 30, 2013 and (ii) 3.5 to 1.0 for the fiscal quarter ending September 30, 2013 and each fiscal quarter thereafter.
NOTE 10FAIR VALUE MEASUREMENTS
The Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
· Level 1Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
· Level 2Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
· Level 3Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation.
The Companys MSRs are measured at fair value on a nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Companys MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or estimated fair value.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Companys assets and liabilities carried at fair value:
· Derivative InstrumentsThe derivative positions consist of interest rate lock commitments and forward sale agreements. These instruments are valued using a discounted cash flow model developed based on changes in the U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company and are classified within Level 3 of the valuation
hierarchy.
· Loans held for saleThe loans held for sale are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted observable prices from market participants. Therefore, the Company classifies these loans held for sale as Level 2.
· Pledged SecuritiesThe pledged securities are valued using quoted market prices from recent trades. Therefore, the Company classifies pledged securities as Level 1.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2012, and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value (in thousands):
|
|
Quoted Prices in |
|
Significant |
|
Significant |
|
|
| ||||
|
|
Active Markets |
|
Other |
|
Other |
|
|
| ||||
|
|
For Identical |
|
Observable |
|
Unobservable |
|
|
| ||||
|
|
Assets |
|
Inputs |
|
Inputs |
|
Balance as of |
| ||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Period End |
| ||||
September 30, 2012 |
|
|
|
|
|
|
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Loans held for sale |
|
$ |
|
|
$ |
1,293,320 |
|
$ |
|
|
$ |
1,293,320 |
|
Pledged securities |
|
32,080 |
|
|
|
|
|
32,080 |
| ||||
Derivative assets |
|
|
|
|
|
37,986 |
|
37,986 |
| ||||
Total |
|
$ |
32,080 |
|
$ |
1,293,320 |
|
$ |
37,986 |
|
$ |
1,363,386 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities |
|
$ |
|
|
$ |
|
|
$ |
17,881 |
|
$ |
17,881 |
|
Total |
|
$ |
|
|
$ |
|
|
$ |
17,881 |
|
$ |
17,881 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2011 |
|
|
|
|
|
|
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
| ||||
Loans held for sale |
|
$ |
|
|
$ |
268,167 |
|
$ |
|
|
$ |
268,167 |
|
Pledged securities |
|
18,959 |
|
|
|
|
|
18,959 |
| ||||
Derivative assets |
|
|
|
|
|
10,638 |
|
10,638 |
| ||||
Total |
|
$ |
18,959 |
|
$ |
268,167 |
|
$ |
10,638 |
|
$ |
297,764 |
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities |
|
$ |
|
|
$ |
|
|
$ |
5,223 |
|
$ |
5,223 |
|
Total |
|
$ |
|
|
$ |
|
|
$ |
5,223 |
|
$ |
5,223 |
|
There were no transfers into or out of assets that are considered Level 1 or Level 2 fair value measurements.
Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days) and are not outstanding for more than one period. A roll forward of derivative instruments which require valuations based upon significant unobservable inputs, is presented below for the nine months ended September 30, 2012 and 2011 (in thousands):
|
|
Fair Value Measurements |
| |
|
|
Using Significant |
| |
|
|
Unobservable Inputs: |
| |
|
|
Derivative Instruments |
| |
|
|
September 30, 2012 |
| |
Derivative assets and liabilities, net |
|
|
| |
Beginning balance, December 31, 2011 |
|
$ |
5,415 |
|
Transfers in (out) of Level 3 |
|
|
| |
Purchases |
|
|
| |
Sales |
|
|
| |
Issuances |
|
|
| |
Settlements |
|
(92,446 |
) | |
Realized gains (losses) recorded in earnings |
|
87,031 |
| |
Unrealized gains (losses) recorded in earnings |
|
20,105 |
| |
Ending balance, September 30, 2012 |
|
$ |
20,105 |
|
|
|
Derivative Instruments |
| |
|
|
September 30, 2011 |
| |
Derivative assets and liabilities, net |
|
|
| |
Beginning balance, December 31, 2010 |
|
$ |
4,900 |
|
Transfers in (out) of Level 3 |
|
|
| |
Purchases |
|
|
| |
Sales |
|
|
| |
Issuances |
|
|
| |
Settlements |
|
(71,374 |
) | |
Realized gains (losses) recorded in earnings |
|
66,474 |
| |
Unrealized gains (losses) recorded in earnings |
|
3,204 |
| |
Ending balance, September 30, 2011 |
|
$ |
3,204 |
|
The following table presents information about significant unobservable inputs used in the measurement of the fair value of Companys Level 3 assets and liabilities (in thousands):
|
|
Quantitative Information about Level 3 Measurements |
| |||||||
|
|
Fair Value |
|
Valuation |
|
Unobservable |
|
Input Value (1) |
| |
Derivative assets |
|
$ |
37,986 |
|
Discounted cash flow |
|
Counterparty credit risk |
|
|
|
Derivative liabilities |
|
17,881 |
|
Discounted cash flow |
|
Counterparty credit risk |
|
|
| |
(1) Significant increases (decreases) in this input may lead to significantly lower (higher) fair value measurements.
The carrying amounts and the fair values of the Companys financial instruments as of September 30, 2012, and December 31, 2011, are presented below (in thousands):
|
|
September 30, 2012 |
| ||||
|
|
Carrying |
|
Fair |
| ||
|
|
Amount |
|
Value |
| ||
Financial Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
82,613 |
|
$ |
82,613 |
|
Restricted cash |
|
6,991 |
|
6,991 |
| ||
Pledged securities |
|
32,080 |
|
32,080 |
| ||
Loans held for sale |
|
1,293,320 |
|
1,293,320 |
| ||
Loans held for investment |
|
16,426 |
|
16,500 |
| ||
Derivative assets |
|
37,986 |
|
37,986 |
| ||
Total |
|
$ |
1,469,416 |
|
$ |
1,469,490 |
|
|
|
|
|
|
| ||
Financial Liabilities: |
|
|
|
|
| ||
Derivative liabilities |
|
$ |
17,881 |
|
$ |
17,881 |
|
Warehouse notes payable |
|
1,279,947 |
|
1,279,947 |
| ||
Notes payable |
|
83,000 |
|
83,000 |
| ||
Total |
|
$ |
1,380,828 |
|
$ |
1,380,828 |
|
|
|
December 31, 2011 |
| ||||
|
|
Carrying |
|
Fair |
| ||
|
|
Amount |
|
Value |
| ||
Financial Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
53,817 |
|
$ |
53,817 |
|
Restricted cash |
|
7,164 |
|
7,164 |
| ||
Pledged securities |
|
18,959 |
|
18,959 |
| ||
Loans held for sale |
|
268,167 |
|
268,167 |
| ||
Derivative assets |
|
10,638 |
|
10,638 |
| ||
Total |
|
$ |
358,745 |
|
$ |
358,745 |
|
|
|
|
|
|
| ||
Financial Liabilities: |
|
|
|
|
| ||
Derivative liabilities |
|
$ |
5,223 |
|
$ |
5,223 |
|
Warehouse notes payable |
|
218,426 |
|
218,426 |
| ||
Notes payable |
|
23,869 |
|
23,869 |
| ||
Total |
|
$ |
247,518 |
|
$ |
247,518 |
|
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents and Restricted CashThe carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of these instruments (Level 1).
Pledged SecuritiesConsist of highly liquid investments in commercial paper of AAA rated entities and investments in money market accounts invested in government securities. Investments typically have maturities of 90 days or less, and are valued using quoted market prices from recent trades.
Loans Held For SaleConsist of originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded, and are valued using discounted cash flow models that incorporate observable prices from market participants.
Loans Held For InvestmentConsist of originated interim loans which the Company expects to hold for investment for periods of up to two years, and are valued using discounted cash flow models that incorporate observable prices from market participants (Level 2).
Derivative InstrumentsConsist of interest rate lock commitments and forward sale agreements. These instruments are valued using discounted cash flow models developed based on changes in the U.S. Treasury rate and other observable market data. The value is determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company.
Warehouse Notes PayableConsist of borrowings outstanding under warehouse line agreements. The borrowing rates on the warehouse lines are based upon average 30-day LIBOR plus an applicable margin. The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).
Notes PayableConsist of borrowings outstanding under term note agreements. The borrowing rates on the notes payable are based upon average 30-day LIBOR plus an applicable margin. We estimate the fair value by discounting the future cash flows of each instrument at market rates (Level 2).
Fair Value of Derivative Instruments and Loans Held for SaleIn the normal course of business, the Company enters into contractual commitments to originate (purchase) and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers lock-in a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the lock-in of rates by the borrower and the sale date of the loan to an investor.
To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Companys policy is to enter into a sale commitment with the investor simultaneously with the rate lock commitment with the borrower. The sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment.
Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through other income and expenses. The fair value of the Companys rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:
· the assumed gain/loss of the expected resultant loan sale to the buyer;
· the expected net future cash flows associated with servicing the loan (Level 2);
· the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and
· the nonperformance risk of both the counterparty and the Company (Level 3).
The fair value of the Companys forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The assumed gain/loss considers the amount that the Company has discounted the price to the borrower from par for competitive reasons, if at all, and the expected net cash flows from servicing to be received upon securitization of the loan. The fair value of the expected net future cash flows associated with servicing the loan is calculated pursuant to the valuation techniques described previously for mortgage servicing rights.
To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.
The fair value of the Companys forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The fair value of the Companys interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Companys exposure to nonperformance in rate lock and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties, the short duration of interest rate lock commitments and forward sale contracts, and the Companys historical experience with the agreements, the risk of nonperformance by the Companys counterparties is not significant.
|
|
Fair Value Adjustment Components |
|
Balance Sheet Location |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
| |||||||
|
|
Notional or |
|
Assumed |
|
Interest Rate |
|
Total |
|
Derivative |
|
Derivative |
|
Adjustment |
| |||||||
|
|
Principal |
|
Gain (Loss) |
|
Movement |
|
Fair Value |
|
Contract |
|
Contract |
|
To Loans |
| |||||||
(in thousands) |
|
Amount |
|
on Sale |
|
Effect |
|
Adjustment |
|
Assets |
|
Liabilities |
|
Held for Sale |
| |||||||
September 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Rate lock commitments |
|
$ |
700,547 |
|
$ |
22,280 |
|
$ |
5,749 |
|
$ |
28,029 |
|
$ |
31,705 |
|
$ |
(3,733 |
) |
$ |
|
|
Forward sale contracts |
|
1,970,266 |
|
|
|
(7,867 |
) |
(7,867 |
) |
6,281 |
|
(14,148 |
) |
|
| |||||||
Loans held for sale |
|
1,269,719 |
|
21,483 |
|
2,118 |
|
23,601 |
|
|
|
|
|
23,601 |
| |||||||
Total |
|
|
|
$ |
43,763 |
|
$ |
|
|
$ |
43,763 |
|
$ |
37,986 |
|
$ |
(17,881 |
) |
$ |
23,601 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Rate lock commitments |
|
$ |
226,455 |
|
$ |
7,781 |
|
$ |
2,785 |
|
$ |
10,566 |
|
$ |
10,566 |
|
$ |
|
|
$ |
|
|
Forward sale contracts |
|
482,751 |
|
|
|
(5,151 |
) |
(5,151 |
) |
72 |
|
(5,223 |
) |
|
| |||||||
Loans held for sale |
|
256,296 |
|
9,505 |
|
2,366 |
|
11,871 |
|
|
|
|
|
11,871 |
| |||||||
Total |
|
|
|
$ |
17,286 |
|
$ |
|
|
$ |
17,286 |
|
$ |
10,638 |
|
$ |
(5,223 |
) |
$ |
11,871 |
|
NOTE 11LITIGATION, COMMITMENTS AND CONTINGENCIES
Fannie Mae DUS Related CommitmentsCommitments for the origination and subsequent sale and delivery of loans to Fannie Mae represent those mortgage loan transactions where the borrower has locked an interest rate and scheduled closing and the Company has entered into a mandatory delivery commitment to sell the loan to Fannie Mae. As discussed in Note 9, the Company accounts for these commitments as derivatives recorded at fair value.
The Company is generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program (the DUS risk-sharing obligations). The Company is required to secure this obligation by assigning restricted cash balances and securities to Fannie Mae. The reserve for loans may be posted over the first 48 months. As of September 30, 2012, the Company had pledged cash and securities in excess of these requirements. In 2010, Fannie Mae increased its collateral requirements for Tier II loans by approximately 25 basis points effective April 1, 2011. In January 2012, Fannie Mae notified its Multifamily DUS lenders that collateral requirements on Fannie Mae Tier II, III and IV loans will remain unchanged for 2012. However, collateral requirements for existing and new Fannie Mae Tier I loans will increase from 50 basis points to 90 basis points and that Level 2 and Level 3 loss sharing requirements will increase. The Company currently has an insignificant number of loans in our portfolio which will be affected by the announced collateral changes and does not expect it will have a material impact on the Companys future operations; however, future changes to collateral requirements may adversely impact the Company. Based on the Companys aggregate Fannie Mae portfolio as of September 30, 2012, the total incremental collateral required for all existing loans over the life of the portfolio, in accordance with Fannie Mae requirements, is expected to be approximately $29.1 million. Under the provisions of the DUS agreement, the Company must also maintain a certain level of liquid assets referred to as the operational and unrestricted portions of the required reserves each year. These requirements were satisfied by the Company as of September 30, 2012 and September 30, 2011.
For most loans we service under the Fannie Mae DUS program, we are currently required to advance 100% of the principal and interest due to noteholders up to 5% of the unpaid principal balance if the borrower is delinquent in making loan payments. Under the HUD program, we are required to advance 100% of the principal and interest payments due to noteholders if the borrower is delinquent in making loan payments. Advances are included in loan origination related fees and other receivables to the extent such amounts are recoverable.
Fannie Mae has established benchmark standards for capital adequacy, and reserves the right to terminate the Companys servicing authority for all or some of the portfolio, if at any time it determines that the Companys financial condition is not adequate to support its obligation under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of September 30, 2012. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing. At September 30, 2012, the net worth requirement was $86.9 million and the Companys net worth was $153.3 million, as defined. As of September 30, 2012, we were required to maintain at least $15.1 million of liquid assets to meet our operational liquidity requirements, as defined in the agreements, for Fannie Mae, Freddie Mac, HUD and Ginnie Mae. As of September 30, 2012, we had operational liquidity of $82.0 million.
LitigationCapital Funding litigation On February 17, 2010, Capital Funding Group, Inc. (Capital Funding) filed a lawsuit in the state Circuit Court of Montgomery County, Maryland against Walker & Dunlop, LLC, our wholly owned subsidiary, for
alleged breach of contract, unjust enrichment and unfair competition arising out of an alleged agreement that Capital Funding had with Column Guaranteed, LLC (Column) to refinance a large portfolio of senior healthcare facilities located throughout the United States (the Golden Living Facilities). Capital Funding alleges that a contract existed between it and Column (and its affiliates) whereby Capital Funding allegedly had the right to perform the HUD refinancing for the Golden Living Facilities and according to which Capital Funding provided certain alleged proprietary information to Column and its affiliates relating to the refinancing of the Golden Living Facilities on a confidential basis. Capital Funding further alleges that Walker & Dunlop, LLC, as the alleged successor by merger to Column, is bound by Columns alleged agreement with Capital Funding, and breached the agreement by taking for itself the opportunity to perform the HUD refinancing for the Golden Living Facilities.
Capital Funding further claims that Column and its affiliates and Walker & Dunlop, LLC breached the contract, were unjustly enriched, and committed unfair competition by using Capital Fundings alleged proprietary information for certain allegedly unauthorized purposes. Capital Funding also asserts a separate unfair competition claim against Walker & Dunlop, LLC in which it alleges that Walker & Dunlop, LLC is improperly taking credit on its website for certain work actually performed by Capital Funding. Capital Funding seeks damages in excess of $30 million on each of the three claims asserted against all defendants, and an unspecified amount of damages on the separate claim for unfair competition against Walker & Dunlop, LLC. Capital Funding also seeks injunctive relief in connection with its unjust enrichment and unfair competition claims.
Pursuant to an agreement, dated January 30, 2009 (the Column Transaction Agreement), among Column, Walker & Dunlop, LLC, W&D, Inc. and Green Park, Column generally agreed to indemnify Walker & Dunlop, LLC against liability arising from Columns conduct prior to Columns transfer of the assets to Walker & Dunlop, LLC. However, pursuant to the Column Transaction Agreement, Columns indemnification obligation arises only after Column receives a claim notice following the resolution of the litigation that specifies the amount of Walker & Dunlop, LLCs claim.
To provide for greater certainty regarding Columns indemnification obligations before the resolution of this litigation and to cap our total loss exposure, the Company secured a further agreement from Column in November 2010 confirming that it will indemnify the Company for any liabilities that arise as a result of this litigation. As part of this further indemnification agreement, in the event Column is required to pay the Company for any liabilities under the Capital Funding litigation that it otherwise would not have been obligated to pay under the Column Transaction Agreement, the Company will indemnify Column for an amount up to $3.0 million. Also as part of this further indemnification agreement, William Walker, our Chairman, President and Chief Executive Officer, and Mallory Walker, former Chairman and current stockholder, in their individual capacities, agreed that if Column is required to indemnify the Company under this agreement and otherwise would not have been obligated to pay such amounts under the Column Transaction Agreement, Messrs. William Walker and Mallory Walker will pay any such amounts in excess of $3.0 million but equal to or less than $6.0 million. As a result of this agreement, the Company will have no liability or other obligation for any damage amounts in excess of $3.0 million arising out of this litigation. Although Column has assumed defense of the case for all defendants, and is paying applicable counsel fees, as a result of the indemnification claim procedures described above, the Company could be required to bear the significant costs of the litigation and any adverse judgment unless and until the Company is able to prevail on our indemnification claim. The Company believes that it will fully prevail on its indemnification claims against Column, and that the Company ultimately will incur no material loss as a result of this litigation, although there can be no assurance that this will be the case.
On July 19, 2011, the Circuit Court for Montgomery County, Maryland issued an order granting the defendants motion to dismiss the case; without prejudice. After the initial case was dismissed without prejudice, Capital Funding filed an amended complaint. In November 2011, the Circuit Court of Montgomery County rejected the Companys motion to dismiss the amended complaint. The parties agreed to postpone the commencement of a trial that was scheduled to begin July 9, 2012, and are pursuing settlement.
As a result of the indemnification listed above, the Companys loss exposure is limited to $3.0 million.
We cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties and other costs, and our reputation and business may be impacted. Our management believes that any liability that could be imposed on us in connection with the disposition of any pending lawsuits would not have a material adverse effect on our business, results of operations, liquidity or financial condition.
In the normal course of business, the Company may be party to various claims and litigation.
NOTE 12SHARE BASED PAYMENT
In 2010, the Companys shareholders approved the adoption of the Walker & Dunlop, Inc. 2010 Equity Incentive Plan (the 2010 Equity Incentive Plan). There are 5,510,000 shares of stock authorized for issuance under the 2010 Equity Incentive Plan to directors, officers and employees.
On June 29, 2012, the Companys Board of Directors approved amendments to the 2010 Equity Incentive Plan that: (i) increased the number of shares reserved for issuance under the 2010 Equity Incentive Plan by 3,370,000 to 5,510,000, (ii) increased individual limits of categories of awards under the 2010 Equity Incentive Plan, (iii) added additional performance measures applicable to the 2010 Equity Incentive Plan, (iv) extended the termination date of the 2010 Equity Incentive Plan, and (v) made certain other related technical amendments to the 2010 Equity Incentive Plan (collectively, the 2010 Equity Incentive Plan Amendments). The Companys stockholders voted on and approved the 2010 Equity Incentive Plan Amendments and re-approved the material terms and conditions relating to performance-based compensation under the 2010 Equity Incentive Plan at the August 30, 2012 Special Meeting of Stockholders.
During 2012, the Company granted stock options, under the 2010 Equity Incentive Plan, to officers and certain employees, with an exercise price equal to the closing price of the Companys common stock on the date of grant. The stock options have a 10 year term and vest ratably over periods of two to three years dependent solely on continued employment. In addition, the Company granted restricted shares, under the 2010 Equity Incentive Plan, to officers, employees and non-employee directors, without cost to the grantee. The restricted share awards granted to officers and employees vest ratably over three years dependent on continued employment, performance conditions, or some combination thereof. Restricted share awards to non-employee directors fully vest one year from the date of grant.
At September 30, 2012, an additional 3,647,588 shares remain available for grant under the 2010 Equity Incentive Plan.
The following table provides additional information regarding the Companys 2010 Equity Incentive Plan for the nine months ended September 30, 2012 (dollars in thousands, except per share amounts):
|
|
Options / |
|
Weighted |
|
Weighted |
|
Aggregate |
| ||
Restricted Shares |
|
|
|
|
|
|
|
|
| ||
Nonvested at beginning of period |
|
449,236 |
|
|
|
|
|
|
| ||
Granted |
|
780,162 |
|
|
|
|
|
|
| ||
Vested |
|
(66,674 |
) |
|
|
|
|
|
| ||
Forfeited |
|
(37,562 |
) |
|
|
|
|
|
| ||
Nonvested at end of period |
|
1,125,162 |
|
$ |
|
|
|
|
$ |
17,294 |
|
|
|
|
|
|
|
|
|
|
| ||
Stock Options |
|
|
|
|
|
|
|
|
| ||
Outstanding at beginning of period |
|
214,987 |
|
|
|
|
|
|
| ||
Granted |
|
297,981 |
|
|
|
|
|
|
| ||
Exercised |
|
|
|
|
|
|
|
|
| ||
Forfeited |
|
|
|
|
|
|
|
|
| ||
Expired |
|
|
|
|
|
|
|
|
| ||
Outstanding at end of period |
|
512,968 |
|
$ |
12.83 |
|
9.1 |
|
$ |
1,304 |
|
Exercisable at end of period |
|
71,660 |
|
$ |
12.52 |
|
8.5 |
|
$ |
204 |
|
The fair value of stock option awards granted during 2012 was estimated on the grant date using the Black-Scholes option pricing model, based on the following inputs:
|
|
2012 |
| |
Estimated option life |
|
6.00 years |
| |
Risk free interest rate |
|
1.09 |
% | |
Expected volatility |
|
45.76 |
% | |
Expected dividend rate |
|
0.00 |
% | |
Weighted average grant date fair value per share of options granted |
|
$ |
5.79 |
|
The fair values of the restricted stock that vested during the three and nine months ended September 30, 2012 and 2011 (in
thousands) were as follows:
|
|
For the three months ended September 30, |
|
For the nine months ended September 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Restricted stock |
|
$ |
128 |
|
$ |
|
|
$ |
827 |
|
$ |
|
|
For the three months ended September 30, 2012 and September 30, 2011 share based payment expense was $1.7 million and $0.7 million, respectively. For the nine months ended September 30, 2012 and September 30, 2011 share based payment expense was $3.4 million and $1.7 million, respectively. As of September 30, 2012 the total unrecognized compensation cost for outstanding restricted shares and options was $11.7 million, net of estimated forfeitures. The unrecognized compensation cost will be recognized over each grants applicable vesting period, with the latest vesting date being July 1, 2017.
NOTE 13EARNINGS PER SHARE
The following weighted average shares and share equivalents are used to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011:
|
|
For the three months ended |
|
For the nine months ended |
| ||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
Weighted average number of shares outstanding used to calculate basic earnings per share |
|
25,091,153 |
|
21,629,463 |
|
22,881,795 |
|
21,614,062 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities |
|
|
|
|
|
|
|
|
|
Unvested restricted shares |
|
352,448 |
|
152,920 |
|
220,037 |
|
113,478 |
|
Weighted average number of shares and share equivaltents outstanding used to calculate diluted earnings per share |
|
25,443,601 |
|
21,782,383 |
|
23,101,832 |
|
21,727,540 |
|
The assumed proceeds used in the treasury method used for calculating the dilutive impact of restricted stock awards includes the unrecognized compensation costs and excess tax benefits associated with the awards. Options issued under the 2010 Equity Incentive Plan to purchase 214,987 shares of common stock (in both 2012 and 2011), and 161,788 and 30,000 restricted shares were outstanding during the three months ended September 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. Options issued under the 2010 Equity Incentive Plan to purchase 214,987 shares of common stock (in both 2012 and 2011), and 161,788 and 30,000 restricted shares were outstanding during the nine months ended September 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
NOTE 14STOCKHOLDERS EQUITY
A summary of changes in stockholders equity is presented below (dollars in thousands):
|
|
|
|
|
|
Additional |
|
|
|
Total |
| ||||
|
|
Common Stock |
|
Paid-In |
|
Retained |
|
Stockholders |
| ||||||
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Equity |
| ||||
Balances at December 31, 2011 |
|
21,748,598 |
|
$ |
217 |
|
$ |
81,190 |
|
$ |
82,245 |
|
$ |
163,652 |
|
Net income |
|
|
|
|
|
|
|
22,229 |
|
22,229 |
| ||||
Issuance of common shares in connection with equity incentive plans |
|
56,674 |
|
|
|
(167 |
) |
|
|
(167 |
) | ||||
Issuance of common shares in connection with the acquisition of CWCapital LLC |
|
11,647,255 |
|
117 |
|
150,581 |
|
|
|
150,698 |
| ||||
Repurchase and retirement of common stock |
|
(13,408 |
) |
|
|
|
|
|
|
|
| ||||
Stock-based compensation |
|
|
|
|
|
3,384 |
|
|
|
3,384 |
| ||||
Tax benefit from vesting of restricted shares |
|
|
|
|
|
(7 |
) |
|
|
(7 |
) | ||||
Balances at September 30, 2012 |
|
33,439,119 |
|
$ |
334 |
|
$ |
234,981 |
|
$ |
104,474 |
|
$ |
339,789 |
|
NOTE 15TRANSACTIONS WITH RELATED PARTIES
As of September 30, 2012, Credit Suisse Securities (USA) LLC, through its ownership of Column, owns a 14% interest in the Company. From time to time, Credit Suisse refers HUD related financing opportunities to the Company, for which it receives fees. For the three and nine months ended September 30, 2012, Credit Suisse earned fees of $0.1 million and $0.9 million, respectively, for the referral of HUD transactions to the Company (co-broker fees). At September 30, 2012, the Company had accrued $0.1 million of co-broker fees payable to Credit Suisse.
On February 9, 2012, the Company entered into an amendment to the agreement regarding the allocation of origination fees and trade premiums generated by certain transactions, amending the terms of the allocation of origination fees and trade premiums between Credit Suisse and the Company and providing for other terms and conditions with respect to future loan origination opportunities. The amendment resulted in a $2.5 million reduction in the amount the Company owed to Credit Suisse at December 31, 2011, which was recognized as Other revenues in the nine months ended September 30, 2012.
A subsidiary of the Company has contracted with Walker & Dunlop Fund Management, LLC (the Advisor), a registered investment advisor, of which Mr. Walker, our Chairman, President and Chief Executive Officer, is the sole member, for the Advisor to provide investment advisory services to a real estate fund pursuant to an investment advisory agreement. The Company provides consulting, overhead and other corporate services to the Advisor pursuant to a corporate services agreement for a fee which approximates the Companys costs for such services.
A third party entity, Walker & Dunlop Multifamily Equity I, LLC (the Managing Member), in which Mr. Walker and other individuals hold ownership, is the managing member of an investment fund. The Company provides consulting and related services to the Managing Member pursuant to a corporate services agreement for a fee which approximates our cost for such services. The amount of such fees was $0.2 million and $0.1 million for the three months ended September 30, 2012 and 2011; and was approximately $0.6 million and $0.5 million for the nine months ended September 30, 2012 and 2011.
On September 4, 2012, the Company consummated the acquisition of CWCapital LLC and at such time, Fortress Investment Group LLC and its subsidiaries became a related party by virtue of its ownership of approximately 34% of the issued and outstanding common stock of the Company. Following the closing of the Acquisition, pursuant to the Transition Services Agreement, the Company has agreed to pay CW Financial $1.0 million per month for at least three months, for support services during the integration period. For both the three and nine months ended September 30, 2012, the amount of such fees paid to CW Financial was $1.0 million.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward looking statements as a result of certain factors, including those set forth under the headings Forward-Looking Statements and Risk Factors elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q of Walker & Dunlop, Inc. and subsidiaries (the Company, Walker & Dunlop, we, us), may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as may, will, should, expects, intends, plans, anticipates, believes, estimates, predicts, or potential or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:
· the future of Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the government-sponsored enterprises, or the GSEs) and their impact on our business;
· our growth strategy;
· our ability to integrate CWCapitals business with our own successfully;
· our projected financial condition, liquidity and results of operations;
· our ability to obtain and maintain warehouse and other loan funding arrangements;
· availability of and our ability to retain qualified personnel and our ability to develop relationships with borrowers, key principals and lenders;
· degree and nature of our competition;
· the outcome of pending litigation;
· changes in governmental regulations and policies, tax laws and rates, and similar matters and the impact of such regulations, policies and actions;
· our ability to comply with the laws, rules and regulations applicable to us;
· trends in the commercial real estate finance market, interest rates, commercial real estate values, the credit and capital markets or the general economy; and
· general volatility of the capital markets and the market price of our common stock.
While forward-looking statements reflect our good faith projections, assumptions and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see Risk Factors.
Business
We are one of the leading commercial real estate finance companies in the United States, with a primary focus on multifamily lending. We originate, sell and service a range of multifamily and other commercial real estate financing products. Our clients are owners and developers of commercial real estate across the country. We originate and sell loans through the programs of Fannie Mae, Freddie Mac, 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), with which we have long-established relationships. We retain servicing rights and asset management responsibilities on nearly all loans that we originate for GSE and HUD programs. We are approved as a Fannie Mae Delegated Underwriting and Servicing (DUS ) lender nationally, a Freddie Mac Program Plus lender in 22 states and the District of Columbia, a HUD Multifamily Accelerated Processing (MAP) lender nationally, and a Ginnie Mae issuer. We also originate and service loans for a number of life insurance companies, commercial banks and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker. Additionally, through our subsidiary entities, we provide institutional advisory, asset management and investment management services specializing in debt, structured debt and equity.
We fund loans for GSE and HUD programs, generally through warehouse facility financings, and sell them to investors in accordance with the related loan sale commitment, which we obtain prior to loan closing. Proceeds from the sale of the loan are used to pay off the warehouse facility. The sale of the loan is typically completed within 60 days after the loan is closed. In cases where we do not fund the loan, we act as a loan broker and service some of the loans. Our originators who focus on loan brokerage are engaged by borrowers to work with a variety of institutional lenders to find the most appropriate loan instrument for the borrowers needs. These loans are then funded directly by the institutional lender and we receive an origination fee for placing the loan and a servicing fee for any loans we service.
We recognize gains from mortgage banking activities when we commit to both make a loan to a borrower and sell that loan to an investor. The gains from mortgage banking activities reflect the fair value attributable to loan origination fees, premiums or losses on the sale of loans, net of any co-broker fees, and the fair value of the expected net future cash flows associated with the servicing of loans, net of any guaranty obligations retained. We also generate revenue from net warehouse interest income we earn while the loan is held for sale in one of our warehouse facilities.
We retain servicing rights on substantially all of the loans we originate and sell, and generate revenues from the fees we receive for servicing the loans, interest income from escrow deposits held on behalf of borrowers, late charges and other ancillary fees. Servicing fees are set at the time an investor agrees to purchase the loan and are generally paid monthly for the duration of the loan. Our Fannie Mae and Freddie Mac servicing engagements generally provide for prepayment penalties to the Company in the event of a voluntary prepayment. For loans serviced outside of Fannie Mae and Freddie Mac, we typically do not share in any such payments.
We are currently not exposed to interest rate risk during the loan commitment, closing and delivery process. The sale or placement of each loan to an investor is negotiated prior to establishing the coupon rate for the loan. We also seek to mitigate the risk of a loan not closing. We have agreements in place with the GSEs and HUD that specify the cost of a failed loan delivery, also known as a pair off fee, in the event we fail to deliver the loan to the investor. The pair off fee is typically less than the deposit we collect from the borrower. Any potential loss from a catastrophic change in the property condition while the loan is held for sale using warehouse facility financing is mitigated through property insurance equal to replacement cost. We are also protected contractually from any failure to close by an investor. We have experienced only one failed delivery in our history and did not incur any loss.
We have risk-sharing obligations on most loans we originate under the Fannie Mae DUS program. When a Fannie Mae DUS loan is subject to full risk-sharing, we absorb losses on the first 5% of the unpaid principal balance of a loan, and above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the unpaid principal balance of a loan (subject to doubling or tripling if the loan does not meet specific underwriting criteria or if the loan defaults within 12 months of its sale to Fannie Mae). We may, however, request modified risk-sharing at the time of origination, which reduces our potential risk-sharing losses from the levels described above. We regularly request modified risk-sharing based on such factors as the size of the loan, market conditions and loan pricing. We may also request modified risk-sharing on large transactions if we do not believe that we are being fully compensated for the risks of the transactions or to manage overall risk levels. Except for certain Fannie Mae DUS loans acquired in the acquisition of certain assets of Column Guaranteed LLC, in 2009, which were acquired subject to their existing Fannie Mae DUS risk-sharing levels, our current credit management policy is to cap each loan balance subject to full risk-sharing at $60 million. Accordingly, we currently elect to use modified risk-sharing for loans of more than $60 million in order to limit our maximum loss exposure on any one loan to $12 million (such exposure would occur in the event that the underlying collateral is determined to be completely without value at the time of loss).
Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we receive from Fannie Mae for loans with no risk-sharing obligations. We receive a lower servicing fee for modified risk-sharing than for full risk-sharing.
We offer our borrowers an interim loan program offering floating-rate debt, for terms of up to two years, to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing. We closed our first loans under this program in 2012. We underwrite all loans originated through the program. During the time that they are outstanding, we assume the full risk of loss on the loans. In addition, we service and asset-manage loans originated through the program, with the ultimate goal of providing permanent financing on the properties.
On June 7, 2012, the Company entered into a purchase agreement (the Purchase Agreement), by and among the Company, its indirect wholly owned subsidiary, Walker & Dunlop, LLC, CWCapital LLC (CWCapital) and CW Financial Services LLC (CW Financial), pursuant to which Walker & Dunlop, LLC agreed to acquire all of CW Financials interests in CWCapital (the Acquisition), for approximately $220 million (comprising a cash payment to CW Financial of $80 million and the balance consisting of the Companys issuance in a private placement to CW Financial of approximately 11.6 million shares of common stock).
The Acquisition closed, pursuant to the terms of the Purchase Agreement, on September 4, 2012. Upon closing of the Acquisition, CWCapital became an indirect wholly owned subsidiary of the Company and was renamed Walker & Dunlop Captial, LLC. The consideration transferred at the close of the Acquisition totaled approximately $231 million, consisting of $80 million in cash and 11,647,255 shares of the Companys common stock at a closing date fair value of $151 million.
Basis of Presentation
The accompanying condensed consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries and all material intercompany transactions have been eliminated.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions. We believe the following critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed consolidated financial statements.
Mortgage Servicing Rights and Guaranty Obligations. MSRs are recorded at fair value the day we sell a loan. We only recognize MSRs for GSE and HUD originations. Our servicing contracts with non-governmental originations are cancelable with limited notice and as a result, have a de minimis fair value. The fair value is based on the expected future net cash flows associated with the servicing rights. The expected net cash flows are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the underlying loan.
In addition to the MSR, for all Fannie Mae DUS loans with risk-sharing obligations, upon sale we record the fair value of the obligation to stand ready to perform over the term of the guaranty (non-contingent obligation), and the fair value of the expected loss from the risk-sharing obligations in the event of a borrower default (contingent obligation). In determining the fair value of the guaranty obligation, we consider 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 future cash flows expected to be paid under the guaranty over the life of the loan (historically three to five basis points annually), discounted using a 12-15 percent discount rate. Historically, the contingent obligation recognized has been de minimis. The estimated life and discount rate used to calculate the guaranty obligation are consistent with those used to calculate the corresponding MSR.
The MSR and associated guaranty obligation are amortized into expense over the estimated life of the loan. The MSR is amortized in proportion to, and over the period, that net servicing income is expected to be received. The guaranty obligation is amortized evenly over the same period. If a loan defaults and is not expected to become current or pays off prior to the estimated life, the unamortized MSR and guaranty obligation balances are expensed.
We carry the MSRs at the lower of amortized value or fair market value and evaluate the carrying value quarterly. We engage a third party to assist in valuing our MSRs on a semi-annual basis.
The Provision for Risk-Sharing Obligations. The amount of the provision considers our assessment of the likelihood of payment by the borrower or key principal(s), the estimated disposition value of the underlying collateral and the level of risk-sharing. Historically, initial loss recognition occurs at or before the loan becoming 60 days delinquent. We regularly monitor our risk-sharing obligations on all loans and update loss estimates as current information is received.
Goodwill and Other Intangible Assets. The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The Company recognizes identifiable assets acquired, 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.
We do not amortize goodwill; instead, we evaluate goodwill for impairment at least annually. In addition to our annual impairment evaluation, we evaluate whether events or circumstances have occurred in the period subsequent to our annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. We evaluate our identified intangibles for impairment annually or if other events or circumstances indicate that the carrying value may be impaired.
Overview of Current Business Environment
In 2012, U.S. multifamily market fundamentals have continued their improvement following the macroeconomic instability experienced in recent years. Occupancy rates and effective rents appear to have increased based upon increased rental market demand, both of which aid loan performance due to their importance to the cash flows of the underlying properties. Despite this improvement in some market fundamentals, recovery of the overall real estate market continues to be challenged by the slow recovery of the broader economy.
The passage of Dodd-Frank introduced complex, comprehensive legislation into the financial and real estate recoveries, which will have far reaching effects on the industry and its participants. While we are not a banking institution, there is uncertainty as to how, in the coming years, Dodd-Frank may affect us or our competitors. In addition, the scope, extent and timing of GSE reform continues to be uncertain. Although we cannot predict what actions Congress or other governmental agencies may take affecting the GSEs and/or HUD, we
expect some regulatory change is likely. In the interim, the GSEs and HUD continue to supply a significant level of capital to the multifamily market and are expected to continue to do so as commercial and multifamily debt refinancing activity is expected to increase.
Results of Operations
Following is a discussion of our results of operations for the three and nine months ended September 30, 2012 and 2011. The financial results are not necessarily indicative of future results. Our business is not typically subject to seasonal trends. However, our quarterly results have fluctuated in the past and are expected to fluctuate in the future, reflecting the interest rate environment, the volume of transactions and general economic conditions. Please refer to the table below, which provides supplemental data regarding our financial performance.
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
(Dollars in thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Origination Data: |
|
|
|
|
|
|
|
|
| ||||
Origination Volumes by Investor |
|
|
|
|
|
|
|
|
| ||||
Fannie Mae |
|
$ |
1,134,185 |
|
$ |
389,884 |
|
$ |
2,012,225 |
|
$ |
1,248,972 |
|
Freddie Mac |
|
552,971 |
|
178,787 |
|
860,779 |
|
443,218 |
| ||||
Ginnie Mae - HUD |
|
228,135 |
|
57,746 |
|
438,056 |
|
422,331 |
| ||||
Other (1) |
|
265,504 |
|
280,250 |
|
881,174 |
|
609,025 |
| ||||
Total |
|
$ |
2,180,795 |
|
$ |
906,667 |
|
$ |
4,192,234 |
|
$ |
2,723,546 |
|
|
|
|
|
|
|
|
|
|
| ||||
Key Metrics (as a percentage of total revenues): |
|
|
|
|
|
|
|
|
| ||||
Personnel expenses |
|
46 |
% |
34 |
% |
40 |
% |
32 |
% | ||||
Other operating expenses |
|
14 |
% |
15 |
% |
14 |
% |
12 |
% | ||||
Total expenses |
|
83 |
% |
71 |
% |
76 |
% |
63 |
% | ||||
Operating margin |
|
17 |
% |
29 |
% |
24 |
% |
37 |
% | ||||
|
|
|
|
|
|
|
|
|
| ||||
Key Origination Metrics (as a percentage of origination volume): |
|
|
|
|
|
|
|
|
| ||||
Origination related fees |
|
1.27 |
% |
1.07 |
% |
1.31 |
% |
1.19 |
% | ||||
Fair value of MSRs created, net |
|
1.18 |
% |
1.31 |
% |
1.24 |
% |
1.37 |
% | ||||
Fair value of MSRs created, net as a percentage of GSE and HUD origination volume (2) |
|
1.34 |
% |
1.90 |
% |
1.57 |
% |
1.77 |
% |
|
|
As of September 30, |
| ||||
|
|
2012 |
|
2011 |
| ||
Servicing Portfolio by Type: |
|
|
|
|
| ||
Fannie Mae |
|
$ |
18,452,944 |
|
$ |
10,136,692 |
|
Freddie Mac |
|
8,422,748 |
|
2,715,788 |
| ||
Ginnie Mae - HUD |
|
4,422,182 |
|
1,262,989 |
| ||
Other (1) |
|
2,588,688 |
|
1,825,330 |
| ||
Total |
|
$ |
33,886,562 |
|
$ |
15,940,799 |
|
|
|
|
|
|
| ||
Key Servicing Metrics (end of period): |
|
|
|
|
| ||
Weighted-average servicing fee rate |
|
0.23 |
% |
0.22 |
% |
(1) CMBS, life insurance companies, commercial banks and interim loans. 2012 origination volume includes $29.8 million interim loan volume, which are classified as held for investment while outstanding.
(2) The fair value of the expected net future cash flows associated with the servicing of the loan, net of any guaranty obligation retained, as a percentage of GSE and HUD volume reflects revenue recognized, as a percentage of loan origination volume, on those loans which the Company will record an MSR upon sale of the loan. No MSRs are recorded on Other originations or interim loan originations. For the three and nine months ended September 30, 2012, interim loan volume was $13.3 and $29.8 million, respectively.
Non-GAAP Financial Measures
To supplement the condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, the Company presents the following non-GAAP financial measures:
· Adjusted net income;
· Adjusted earnings per diluted share;
· Adjusted total expenses;
· Adjusted operating income; and
· Adjusted operating margin.
These supplemental measures exclude acquisition and integration costs specifically related to the CWCapital acquisition, and amortization of customer contracts and other intangible assets acquired from CWCapital. The Company believes that these non-GAAP measures facilitate a review of the comparability of the Companys operating performance on a period-to-period basis because such costs are not, in our view, related to the Companys ongoing operational performance. We use non-GAAP measures to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors.
These non-GAAP measures are not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. We believe that these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Companys results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Companys results of operations in conjunction with the corresponding GAAP measures. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures.
Adjusted net income, adjusted earnings per diluted share, adjusted total expenses, adjusted operating income and adjusted operating margin are calculated as follows:
ADJUSTED FINANCIAL METRICS RECONCILIATION TO GAAP
(in thousands, except share and per |
|
For the three months ended |
|
For the nine months ended |
| ||||||||
share amounts) |
|
2012 |
|
2011 |
|