Walker & Dunlop(WD) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The condensed consolidated financial statements and accompanying notes detail the company's financial position and performance Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Assets ||| | Cash and cash equivalents | $275,202 | $120,685 | | Loans held for sale, at fair value | $1,733,598 | $787,035 | | Total assets | $3,793,049 | $2,675,199 | | Liabilities ||| | Warehouse notes payable | $1,863,654 | $906,128 | | Total liabilities | $2,702,498 | $1,632,914 | | Equity ||| | Total stockholders' equity | $1,090,551 | $1,035,689 | | Total equity | $1,090,551 | $1,042,285 | - Total assets increased by 41.8% from $2,675,199 thousand at December 31, 2019, to $3,793,049 thousand at June 30, 2020, primarily driven by a significant increase in loans held for sale[9] - Total liabilities increased by 65.5% from $1,632,914 thousand at December 31, 2019, to $2,702,498 thousand at June 30, 2020, mainly due to a substantial rise in warehouse notes payable[9] Condensed Consolidated Statements of Income and Comprehensive Income Condensed Consolidated Statements of Income and Comprehensive Income | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Total revenues | $252,825 | $200,325 | $486,982 | $387,762 | | Total expenses | $169,287 | $143,347 | $343,167 | $274,700 | | Income from operations | $83,538 | $56,978 | $143,815 | $113,062 | | Walker & Dunlop net income | $62,059 | $42,196 | $109,888 | $86,414 | | Diluted earnings per share | $1.95 | $1.33 | $3.44 | $2.72 | - Total revenues increased by 26.2% for the three months ended June 30, 2020, and by 25.6% for the six months ended June 30, 2020, compared to the same periods in 2019[12] - Walker & Dunlop net income increased by 47.1% for the three months ended June 30, 2020, and by 27.2% for the six months ended June 30, 2020, year-over-year[12] - Diluted EPS grew by 46.6% to $1.95 for the three months ended June 30, 2020, and by 26.5% to $3.44 for the six months ended June 30, 2020, compared to the prior year periods[12] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---| | Net cash provided by (used in) operating activities | $(822,643) | $(159,204) | | Net cash provided by (used in) investing activities | $73,971 | $30,707 | | Net cash provided by (used in) financing activities | $903,974 | $101,869 | | Total cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $291,868 | $93,720 | - Net cash used in operating activities significantly increased to $(822,643) thousand for the six months ended June 30, 2020, from $(159,204) thousand in the prior year, primarily due to higher originations of loans held for sale[15] - Net cash provided by financing activities surged to $903,974 thousand for the six months ended June 30, 2020, from $101,869 thousand in the prior year, mainly driven by increased borrowings of warehouse notes payable[15] NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION - Walker & Dunlop, Inc is a holding company operating primarily through Walker & Dunlop, LLC, a leading commercial real estate services and finance company in the U.S[17] - The company originates, sells, and services commercial real estate debt and equity financing products, provides multifamily property sales brokerage, and engages in commercial real estate investment management[17] - Products include agency lending (Fannie Mae, Freddie Mac, Ginnie Mae, HUD), debt brokerage, and principal lending and investing products (interim loans, preferred equity, managed separate accounts)[18][19] NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The company consolidates entities where it has a controlling financial interest, applying either the variable interest entity (VIE) or voting interest method[21] - The COVID-19 Crisis has not materially impacted the company's operations, cash flows, or liquidity, with management making adjustments to liability carrying values based on best estimates for future credit losses[24] - Loan commitments and forward sales commitments are treated as derivative assets or liabilities, recorded at fair value, with adjustments reflected in income[26] - The company uses the weighted-average remaining maturity method (WARM) for calculating its allowance for risk-sharing obligations, maximizing historical internal data for Fannie Mae DUS loans[30][31] - For loans held for investment, the allowance for loan losses is estimated collectively using the same CECL methodology as for Fannie Mae DUS loans, with a one-year reasonable and supportable forecast period[45] Components of Provision for Credit Losses (in thousands) | Components of Provision for Credit Losses (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Provision (benefit) for loan losses | $(178) | $25 | $928 | $648 | | Provision for risk-sharing obligations | $5,081 | $936 | $27,618 | $2,988 | | Provision for credit losses | $4,903 | $961 | $28,546 | $3,636 | - Provision for credit losses significantly increased by 410% for the three months and 685% for the six months ended June 30, 2020, primarily due to a substantial increase in the provision for risk-sharing obligations[49] Components of Net Warehouse Interest Income (in thousands) | Components of Net Warehouse Interest Income (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Net warehouse interest income - loans held for sale | $6,313 | $210 | $7,806 | $239 | | Net warehouse interest income - loans held for investment | $3,088 | $6,201 | $7,090 | $13,193 | | Total net warehouse interest income | $9,401 | $6,411 | $14,896 | $13,432 | - Total net warehouse interest income increased by 46.6% for the three months and 10.9% for the six months ended June 30, 2020, driven by a significant rise in net warehouse interest income from loans held for sale[50] NOTE 3—MORTGAGE SERVICING RIGHTS - Mortgage servicing rights (MSRs) are carried at the lower of amortized cost or fair value, with fair values at June 30, 2020, and December 31, 2019, being $959.0 million and $910.5 million, respectively[56] - A 100-basis point increase in the discount rate would decrease the fair value of MSRs by $28.6 million at June 30, 2020[56] Roll Forward of MSRs (in thousands) | Roll Forward of MSRs (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Beginning balance | $722,486 | $677,946 | $718,799 | $670,146 | | Additions, following the sale of loan | $99,589 | $48,695 | $143,803 | $95,797 | | Amortization | $(36,706) | $(34,267) | $(71,924) | $(68,470) | | Pre-payments and write-offs | $(7,100) | $(4,347) | $(12,409) | $(9,446) | | Ending balance | $778,269 | $688,027 | $778,269 | $688,027 | - MSR additions from loan sales significantly increased by 104.5% for the three months and 50.1% for the six months ended June 30, 2020, compared to the prior year periods[57] NOTE 4—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS Roll Forward of Guaranty Obligation (in thousands) | Roll Forward of Guaranty Obligation (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Beginning balance | $55,758 | $49,376 | $54,695 | $46,870 | | Additions, following the sale of loan | $1,608 | $4,731 | $3,470 | $9,594 | | Amortization | $(2,494) | $(2,347) | $(4,761) | $(4,696) | | Ending balance | $54,872 | $51,414 | $54,872 | $51,414 | Roll Forward of Allowance for Risk-sharing Obligations (in thousands) | Roll Forward of Allowance for Risk-sharing Obligations (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Beginning balance | $64,110 | $6,682 | $11,471 | $4,622 | | Adjustment related to adoption of ASU 2016-13 | — | — | $31,570 | — | | Provision (benefit) for risk-sharing obligations | $5,081 | $936 | $27,618 | $2,988 | | Ending balance | $69,191 | $7,964 | $69,191 | $7,964 | - The allowance for risk-sharing obligations increased significantly to $69.191 million at June 30, 2020, from $7.964 million at June 30, 2019, primarily due to the adoption of ASU 2016-13 (CECL) and forecasted impacts of the COVID-19 Crisis[60][64] - The calculated CECL reserve for the $39.9 billion at-risk Fannie Mae servicing portfolio was $62.3 million at June 30, 2020, up from $34.7 million at January 1, 2020, reflecting the expected impacts of the Crisis[64] - The charge-off rate for the forecast period was adjusted to seven basis points as of March 31, 2020, and June 30, 2020, from one basis point at January 1, 2020, due to the COVID-19 Crisis[63] NOTE 5—SERVICING - The total unpaid principal balance of loans serviced for institutional investors increased to $100.0 billion at June 30, 2020, from $93.2 billion at December 31, 2019[67] - Custodial escrow accounts totaled $2.3 billion at June 30, 2020, and $2.6 billion at December 31, 2019, which are not included in the consolidated balance sheets[67] - Advances for Fannie Mae loans in forbearance were $1.1 million at June 30, 2020, and for HUD loans were $4.8 million, with the company having borrowing capacity to fund these advances[69][70] NOTE 6—WAREHOUSE NOTES PAYABLE Warehouse Notes Payable | Facility Type | Committed Amount (in thousands) | Uncommitted Amount (in thousands) | Total Facility Capacity (in thousands) | Outstanding Balance (in thousands) | |:---|:---|:---|:---|:---| | Agency Warehouse Facilities | $1,700,000 | $2,765,000 | $4,465,000 | $1,674,690 | | Interim Warehouse Facilities | $288,571 | — | $288,571 | $189,601 | | Total warehouse facilities | $1,988,571 | $2,765,000 | $4,753,571 | $1,863,654 | - Total warehouse facility capacity was $4.75 billion at June 30, 2020, with an outstanding balance of $1.86 billion[75] - Agency Warehouse Facility 1 had a $100.0 million sublimit created for COVID-19 forbearance advances, with immaterial borrowings as of June 30, 2020[77] - Agency Warehouse Facility 3's maturity date was extended to April 30, 2021, and $265.0 million in uncommitted capacity was added, with a 30-day LIBOR floor of 50 basis points[78] - Interim Warehouse Facility 3 expired in Q2 2020, but the lender continues to fund $33.8 million in outstanding interim loan balances[81][82] NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS Roll Forward of Goodwill (in thousands) | Roll Forward of Goodwill (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---| | Beginning balance | $180,424 | $173,904 | | Additions from acquisitions | $68,534 | $6,520 | | Ending balance | $248,958 | $180,424 | - Goodwill increased by $68.5 million in the first six months of 2020 due to acquisitions of three debt brokerage companies for $69.4 million, expanding the company's network and geographical reach[85][86] Roll Forward of Contingent Consideration Liabilities (in thousands) | Roll Forward of Contingent Consideration Liabilities (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---| | Beginning balance | $5,752 | $11,630 | | Additions | $17,649 | — | | Payments | $(5,800) | $(6,450) | | Ending balance | $18,098 | $5,466 | - Contingent consideration liabilities increased to $18.1 million at June 30, 2020, from $5.5 million at June 30, 2019, primarily due to $17.6 million in additions from 2020 acquisitions[89] NOTE 8—FAIR VALUE MEASUREMENTS - The company uses a fair value hierarchy (Level 1, 2, 3) for valuation inputs, with MSRs valued using discounted cash flow models (nonrecurring basis) and derivative instruments (loan commitments, forward sales) valued using discounted cash flow models based on market data (Level 3)[90][91][93] Fair Value Measurements | Financial Assets (in thousands) | Level 1 | Level 2 | Level 3 | Balance as of June 30, 2020 | |:---|:---|:---|:---|:---| | Loans held for sale | $— | $1,733,598 | $— | $1,733,598 | | Pledged securities | $5,772 | $122,524 | $— | $128,296 | | Derivative assets | $— | $— | $27,085 | $27,085 | | Total Assets | $5,772 | $1,856,122 | $27,085 | $1,888,979 | | Financial Liabilities (in thousands) | Level 1 | Level 2 | Level 3 | Balance as of June 30, 2020 | |:---|:---|:---|:---|:---| | Derivative liabilities | $— | $— | $13,739 | $13,739 | | Total Liabilities | $— | $— | $13,739 | $13,739 | - Loans held for sale are classified as Level 2, pledged securities are a mix of Level 1 and Level 2, and derivative assets/liabilities are classified as Level 3[94] Derivative Instruments | Derivative Instruments (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Beginning balance (net) | $(14,390) | $(2,286) | $15,532 | $2,839 | | Realized gains recorded in earnings | $154,930 | $119,583 | $299,303 | $218,318 | | Unrealized gains (losses) recorded in earnings | $13,346 | $(12,702) | $13,346 | $(12,702) | | Ending balance (net) | $13,346 | $(12,702) | $13,346 | $(12,702) | - Realized gains from derivatives increased by 29.6% for the three months and 37.1% for the six months ended June 30, 2020, year-over-year[95] NOTE 9—FANNIE MAE COMMITMENTS AND PLEDGED SECURITIES - The company is required to secure Fannie Mae DUS risk-sharing obligations by assigning restricted cash and pledged securities, with $68.8 million in additional pledged securities needed over the next 48 months[113][114] - At June 30, 2020, the company's net worth was $861.6 million against a Fannie Mae requirement of $216.6 million, and operational liquidity was $325.0 million against a $42.9 million requirement[115][116] Pledged Securities (in thousands) | Pledged Securities (in thousands) | June 30, 2020 | December 31, 2019 | |:---|:---|:---| | Total pledged cash and cash equivalents | $5,772 | $7,204 | | Agency MBS | $122,524 | $114,563 | | Total pledged securities, at fair value | $128,296 | $121,767 | - Pledged securities, primarily Agency MBS, increased to $128.3 million at June 30, 2020, from $121.8 million at December 31, 2019[117] NOTE 10—EARNINGS PER SHARE - EPS is calculated using the two-class method, including unvested share-based awards as participating securities[121][122] EPS Calculations (in thousands, except per share amounts) | EPS Calculations (in thousands, except per share amounts) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Walker & Dunlop net income | $62,059 | $42,196 | $109,888 | $86,414 | | Net income applicable to common stockholders (basic) | $60,186 | $40,868 | $106,496 | $83,579 | | Basic EPS | $1.98 | $1.36 | $3.52 | $2.80 | | Diluted EPS | $1.95 | $1.33 | $3.44 | $2.72 | - Basic EPS increased by 45.6% to $1.98 for the three months and 25.7% to $3.52 for the six months ended June 30, 2020, year-over-year[123] - Diluted EPS increased by 46.6% to $1.95 for the three months and 26.5% to $3.44 for the six months ended June 30, 2020, year-over-year[123] NOTE 11—TOTAL EQUITY - Total equity increased to $1,090,551 thousand at June 30, 2020, from $1,042,285 thousand at December 31, 2019[124] - The company repurchased 0.2 million shares of common stock for $10.2 million under a new $50.0 million program in Q1 2020, with $39.8 million remaining capacity[127][243] - Cash dividends of $0.36 per share were paid in Q1 and Q2 2020, a 20% increase year-over-year, with another $0.36 dividend declared for Q3 2020[128][241] - The company purchased noncontrolling interests in WDIS for $5.2 million in Q2 2020, with the remaining interests to be purchased in Q3 2020, effective April 1, 2020[131][132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and key performance drivers for the reported periods Forward-Looking Statements - The report contains forward-looking statements regarding future events, strategies, and financial performance, which are subject to numerous risks and uncertainties[135][136] - Key forward-looking topics include the future of Fannie Mae and Freddie Mac, the impact of the COVID-19 Crisis, interest rate changes, growth strategy, liquidity, dividend payments, personnel, competition, and regulatory changes[136] Business - Walker & Dunlop is a leading commercial real estate services and finance company, primarily focused on multifamily lending, debt brokerage, and property sales, with over 80 years in business[137] - The company is an approved lender for Fannie Mae DUS, Ginnie Mae, HUD, and Freddie Mac Optigo programs, retaining servicing rights on most originated Agency loans[137] - Business segments include Agency Lending and Loan Servicing, Debt Brokerage, Principal Lending and Investing (including Interim Program JV and WDIP), and Property Sales[139][145][146][150] - The company mitigates interest rate risk on loan commitments and loans held for sale by entering into simultaneous sale commitments with investors[142] - Under the Fannie Mae DUS program, the company has risk-sharing obligations, absorbing 100% of losses on the first 5% of UPB and sharing a percentage above that, capped at 20% of original UPB[143] - Walker & Dunlop Investment Partners (WDIP) manages $1.2 billion in assets, primarily debt, preferred equity, and mezzanine equity investments in middle-market commercial real estate funds and separate accounts[149] Basis of Presentation - The condensed consolidated financial statements include all accounts of the company and its wholly-owned subsidiaries, with intercompany transactions eliminated[151] - Following repurchase activity in Q2 2020, the company no longer had noncontrolling interests as of June 30, 2020[151] Critical Accounting Policies - Mortgage Servicing Rights (MSRs) are recorded at fair value at loan sale or purchase, based on estimated net cash flows and discounted at a rate reflecting credit and liquidity risk[153] - The company carries MSRs at the lower of amortized cost or fair value and has never recorded an impairment[154] - In Q2 2020, the estimated life of two PMSR portfolios was reduced by 2.6 years due to material differences in actual vs expected prepayment experience from declining interest rates[156] - The Allowance for Risk-sharing Obligations uses the CECL standard and the Weighted-Average Remaining Maturity (WARM) method, applying an average annual charge-off rate to the unpaid principal balance[157] - A one-year reasonable and supportable forecast period is used for CECL, with the charge-off rate adjusted based on macroeconomic and multifamily market conditions[161] - Specific reserves are recorded for risk-sharing loans probable of default, based on property fair value, disposition costs, and risk-sharing percentage[163] Overview of Current Business Environment - The COVID-19 Crisis has caused significant economic disruption, impacting multifamily renters and leading to unprecedented economic stimulus from Congress, including the CARES Act[166] - The CARES Act provided unemployment insurance, direct stimulus payments, and tax relief, which helped renters meet obligations and provided tax deferrals to the company[167] - The Federal Reserve's actions, including lowering the Federal Funds Rate to 0%-0.25% and buying Agency mortgage-backed securities, have contributed to low long-term mortgage interest rates, boosting lending volumes[168][169] - Agencies (Fannie Mae, Freddie Mac) offered loan forbearance, leading to increased advances by the company for Fannie Mae ($1.1M) and HUD ($4.8M) loans at June 30, 2020, compared to March 31, 2020[170] - Multifamily property sales activity declined significantly due to COVID-19 uncertainty, but market fundamentals are expected to recover in H2 2020[171] - Agency multifamily debt financing operations remain strong, with Agencies increasing market share as other capital sources pulled back, and low interest rates incentivizing refinances[172][173] - HUD debt financing volumes grew, accounting for 10% of debt financing in Q2 2020, up from 3% in Q2 2019, due to countercyclical nature and prior year government shutdown[175] - Non-multifamily mortgage brokerage and interim lending saw a pullback in capital, with the company maintaining a cautious outlook on new interim loan originations[177][178] Results of Operations Key Operating Metrics | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Total Debt Financing Volume | $6,681,320 | $6,204,851 | $16,307,129 | $11,449,544 | | Property Sales Volume | $446,684 | $1,101,518 | $2,177,301 | $1,798,129 | | Total Transaction Volume | $7,128,004 | $7,306,369 | $18,484,430 | $13,247,673 | | Operating margin | 33% | 28% | 30% | 29% | | Return on equity | 23% | 18% | 21% | 19% | | Diluted EPS | $1.95 | $1.33 | $3.44 | $2.72 | | Personnel expenses (% of total revenues) | 42% | 42% | 40% | 40% | | Other operating expenses (% of total revenues) | 5% | 8% | 6% | 8% | | Origination related fees (% of debt financing volume) | 1.17% | 1.08% | 0.95% | 1.09% | | Gains attributable to MSRs (% of debt financing volume) | 1.36% | 0.68% | 0.98% | 0.73% | | Gains attributable to MSRs (% of Agency debt financing volume) | 1.75% | 1.01% | 1.48% | 1.05% | Managed Portfolio | Managed Portfolio (in thousands) | As of June 30, 2020 | As of June 30, 2019 | |:---|:---|:---| | Total Servicing Portfolio | $99,988,084 | $89,897,025 | | Assets under management | $1,884,673 | $1,595,446 | | Total Managed Portfolio | $101,872,757 | $91,492,471 | | Weighted-average servicing fee rate (basis points) | 23.3 | 23.4 | | Weighted-average remaining servicing portfolio term (years) | 9.5 | 9.8 | - Total Debt Financing Volume increased by 7.7% for the three months and 42.4% for the six months ended June 30, 2020, year-over-year[182] - Property Sales Volume decreased by 59.5% for the three months but increased by 21.1% for the six months ended June 30, 2020, year-over-year[182] - Operating margin improved to 33% (Q2 2020) and 30% (H1 2020) from 28% and 29% respectively, in the prior year[182] - Return on equity increased to 23% (Q2 2020) and 21% (H1 2020) from 18% and 19% respectively, in the prior year[182] - Total Servicing Portfolio grew by 11.2% to $100.0 billion at June 30, 2020, from $89.9 billion at June 30, 2019[183] Revenues (in thousands) | Revenues (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Loan origination and debt brokerage fees, net | $77,907 | $65,610 | $154,280 | $123,407 | | Fair value of expected net cash flows from servicing, net | $90,369 | $41,271 | $158,369 | $82,209 | | Servicing fees | $56,862 | $53,006 | $112,296 | $105,205 | | Net warehouse interest income | $9,401 | $6,411 | $14,896 | $13,432 | | Escrow earnings and other interest income | $2,671 | $14,616 | $13,414 | $28,684 | | Property sales broker fees | $3,561 | $5,752 | $13,173 | $10,293 | | Other revenues | $12,054 | $13,659 | $20,554 | $24,532 | | Total revenues | $252,825 | $200,325 | $486,982 | $387,762 | - Total revenues increased by 26% for both the three and six months ended June 30, 2020, driven by significant increases in loan origination and debt brokerage fees and fair value of expected net cash flows from servicing[190][192][193][197] - Fair value of expected net cash flows from servicing, net (MSR Income) increased by 119% for the three months and 93% for the six months ended June 30, 2020, due to higher debt financing volume and increased weighted-average servicing fees on Fannie Mae debt[190][192][193][197][201][202] - Escrow earnings and other interest income decreased by 82% for the three months and 53% for the six months ended June 30, 2020, due to substantial decreases in average earnings rates from lower short-term interest rates[190][192][193][197][206] Expenses (in thousands) | Expenses (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Personnel | $106,920 | $84,398 | $196,445 | $156,029 | | Amortization and depreciation | $42,317 | $37,381 | $82,079 | $75,284 | | Provision for credit losses | $4,903 | $961 | $28,546 | $3,636 | | Interest expense on corporate debt | $2,078 | $3,777 | $4,938 | $7,429 | | Other operating expenses | $13,069 | $16,830 | $31,159 | $32,322 | | Total expenses | $169,287 | $143,347 | $343,167 | $274,700 | - Total expenses increased by 18% for the three months and 25% for the six months ended June 30, 2020, primarily due to higher personnel expenses and provision for credit losses[190][192][194][198] - Personnel expenses increased by 27% for the three months and 26% for the six months ended June 30, 2020, driven by increased headcount, subjective bonuses, and commissions[190][192][194][198][209][210] - Provision for credit losses surged by 410% for the three months and 685% for the six months ended June 30, 2020, mainly due to the adoption of the CECL accounting standard and increased CECL reserve from COVID-19 impacts[190][192][194][195][198][212][214] Non-GAAP Financial Measures - Adjusted EBITDA is a non-GAAP financial measure used to evaluate operating performance, compare with forecasts, and benchmark against competitors[218][219] - Adjusted EBITDA represents net income before income taxes, interest expense on term loan, amortization and depreciation, adjusted for provision for credit losses net of write-offs, stock-based compensation, and non-cash revenues like fair value of expected net cash flows from servicing[218] Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA (in thousands) | Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---|:---|:---| | Walker & Dunlop Net Income | $62,059 | $42,196 | $109,888 | $86,414 | | Income tax expense | $21,479 | $14,832 | $34,151 | $26,856 | | Interest expense on corporate debt | $2,078 | $3,777 | $4,938 | $7,429 | | Amortization and depreciation | $42,317 | $37,381 | $82,079 | $75,284 | | Provision for credit losses | $4,903 | $961 | $28,546 | $3,636 | | Stock compensation expense | $5,927 | $4,733 | $11,289 | $11,883 | | Fair value of expected net cash flows from servicing, net | $(90,369) | $(41,271) | $(158,369) | $(82,209) | | Adjusted EBITDA | $48,394 | $62,609 | $112,522 | $129,293 | - Adjusted EBITDA decreased by 23% for the three months and 13% for the six months ended June 30, 2020, year-over-year, primarily due to the significant increase in non-cash fair value of expected net cash flows from servicing, net, which is subtracted in the calculation[220][223][224] Financial Condition - Cash flows from operating activities are generated from loan sales, servicing fees, escrow earnings, net warehouse interest income, property sales broker fees, and other income, net of originations and operating costs[226] - Cash flows from investing activities include funding/repayment of loans held for investment, joint venture contributions/distributions, and purchases of AFS securities[227] - Cash flows from financing activities involve warehouse loan facilities, long-term debt, acquisitions, share repurchases, dividend payments, and funding servicing advances[228] Cash Flow Components (in thousands) | Cash Flow Components (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---| | Net cash provided by (used in) operating activities | $(822,643) | $(159,204) | | Net cash provided by (used in) investing activities | $73,971 | $30,707 | | Net cash provided by (used in) financing activities | $903,974 | $101,869 | | Total cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $291,868 | $93,720 | - Total cash increased by $198.1 million to $291.9 million at June 30, 2020, from $93.7 million at June 30, 2019, driven by increased net loan origination activity and net payoff on loans held for investment[233] - Net cash used in loan origination activity increased to $0.9 billion in H1 2020 from $0.2 billion in H1 2019, while net cash provided by operations (excluding loan origination) increased by 32% to $77.5 million[234] - The company's liquidity needs include funding loans held for sale/investment, dividends, JV equity, working capital for operations and servicing advances, and collateral for Fannie Mae DUS risk-sharing[239] - At June 30, 2020, the company had $4.465 billion in Agency Warehouse Facilities and $288.6 million in Interim Warehouse Facilities, with $1.675 billion and $189.6 million outstanding, respectively[250] - The company's $300.0 million senior secured term loan (Note Payable) had an outstanding balance of $296.3 million at June 30, 2020, bearing interest at 30-day LIBOR plus 200 basis points[267][270] Key Credit Metrics (in thousands) | Key Credit Metrics (in thousands) | June 30, 2020 | June 30, 2019 | |:---|:---|:---| | Total risk-sharing servicing portfolio | $45,171,119 | $38,229,813 | | Total servicing portfolio unpaid principal balance | $99,988,084 | $89,897,025 | | At risk servicing portfolio | $40,640,024 | $34,795,771 | | Maximum exposure to at risk portfolio | $8,266,261 | $7,118,314 | | Defaulted loans | $48,481 | $20,981 | | Defaulted loans as a percentage of the at risk portfolio | 0.12% | 0.06% | | Allowance for risk-sharing as a percentage of the at risk portfolio | 0.17% | 0.02% | | Allowance for risk-sharing as a percentage of maximum exposure | 0.84% | 0.11% | - The at-risk servicing portfolio increased to $40.6 billion at June 30, 2020, from $34.8 billion at June 30, 2019, with defaulted loans increasing to $48.5 million from $21.0 million[273] - The allowance for risk-sharing obligations significantly increased to $69.2 million at June 30, 2020, from $8.0 million at June 30, 2019, primarily due to the CECL transition adjustment and forecasted COVID-19 impacts[281][282] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risks, primarily interest rate and market value risk, and its mitigation strategies are discussed Interest Rate Risk - The company is not exposed to unhedged interest rate risk for loans held for sale to Agencies due to simultaneous sale commitments[287] Change in annual escrow earnings due to: (in thousands) | Change in annual escrow earnings due to: (in thousands) | As of June 30, 2020 | As of June 30, 2019 | |:---|:---|:---| | 100 basis point increase in 30-day LIBOR | $22,939 | $19,981 | | 100 basis point decrease in 30-day LIBOR | $(3,269) | $(19,981) | Change in annual net warehouse interest income due to: (in thousands) | Change in annual net warehouse interest income due to: (in thousands) | As of June 30, 2020 | As of June 30, 2019 | |:---|:---|:---| | 100 basis point increase in 30-day LIBOR | $(15,377) | $(6,595) | | 100 basis point decrease in 30-day LIBOR | $1,864 | $6,595 | Change in annual income from operations due to: (in thousands) | Change in annual income from operations due to: (in thousands) | As of June 30, 2020 | As of June 30, 2019 | |:---|:---|:---| | 100 basis point increase in 30-day LIBOR | $(2,963) | $(2,985) | | 100 basis point decrease in 30-day LIBOR | $474 | $2,985 | - A 100-basis point increase in 30-day LIBOR would increase annual escrow earnings by $22.9 million and decrease annual net warehouse interest income by $15.4 million and annual income from operations by $3.0 million at June 30, 2020[289][291][292] Market Value Risk - A 100-basis point increase or decrease in the weighted average discount rate would decrease or increase the fair value of MSRs by approximately $28.6 million at June 30, 2020[293] - 87% of servicing fees are protected from prepayment risk through prepayment provisions as of June 30, 2020, leading the company not to hedge its servicing portfolio for this risk[293] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020, ensuring timely and accurate financial reporting[294][295] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2020[296] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course litigation not considered material to its financial condition or operations - The company is party to various claims and litigation in the ordinary course of business, none of which are believed to be material[299] - Management believes any potential liability from pending lawsuits would not materially adversely affect the company's business, results of operations, liquidity, or financial condition[299] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2019 Form 10-K and Q1 2020 Form 10-Q - No material changes to the risk factors disclosed in the 2019 Form 10-K and the Q1 2020 Form 10-Q[300] - Investors should consider the previously disclosed risk factors before making investment decisions[300] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details share purchases for tax obligations, repurchase program status, and shares issued for an acquisition - The company purchased 11 thousand shares in Q2 2020 to satisfy tax withholding obligations for share-vesting events[301] - No shares were repurchased under the 2020 share repurchase program in Q2 2020, with $39.8 million of authorized capacity remaining[301] - 75,734 shares of common stock were issued in Q1 2020 as partial consideration for an acquisition, exempt from registration requirements[301] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reported period - No defaults upon senior securities occurred[302] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[303] Item 5. Other Information No other information is reported under this item - No other information is reported[304] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements, corporate documents, and certifications - The exhibits include various agreements (Contribution, Purchase, Employment, Indemnification), corporate documents (Articles, Bylaws, Stock Certificates), equity incentive plans (2020 Equity Incentive Plan and related agreements), and certifications (Sarbanes-Oxley Act)[305][308] - Several employment agreements and an indemnification agreement were dated May 14, 2020[305] - The 2nd amendment to the Credit Agreement was dated June 5, 2020[305] SIGNATURES - The report was signed on August 5, 2020, by William M Walker, Chairman and Chief Executive Officer, and Stephen P Theobald, Executive Vice President and Chief Financial Officer[310]