Walker & Dunlop(WD) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents Walker & Dunlop's condensed consolidated financial statements, including balance sheets, income statements, statements of changes in equity, and cash flow statements, along with detailed notes on accounting policies, specific assets (MSRs, goodwill), liabilities (guaranty obligations, warehouse notes), fair value measurements, and pending acquisition activities Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2021 | December 31, 2020 | Change (%) | | :-------------------------- | :------------------- | :------------------ | :--------- | | Total Assets | $5,116,862 | $4,650,975 | 10.0% | | Loans held for sale, at fair value | $2,711,900 | $2,449,198 | 10.7% | | Mortgage servicing rights | $929,825 | $862,813 | 7.8% | | Total Liabilities | $3,732,926 | $3,454,753 | 8.0% | | Total Equity | $1,383,936 | $1,196,222 | 15.7% | Condensed Consolidated Statements of Income and Comprehensive Income Condensed Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | Change (%) | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Total revenues | $346,290 | $247,016 | 40.2% | $851,989 | $733,998 | 16.1% | | Total expenses | $251,547 | $177,901 | 41.4% | $609,778 | $521,068 | 17.0% | | Walker & Dunlop net income | $71,721 | $53,190 | 34.8% | $185,831 | $163,078 | 13.9% | | Diluted earnings per share | $2.21 | $1.66 | 33.1% | $5.73 | $5.11 | 12.1% | Consolidated Statements of Changes in Equity Consolidated Statements of Changes in Equity Highlights (in thousands) | Metric | September 30, 2021 | December 31, 2020 | September 30, 2020 | | :-------------------------- | :------------------- | :------------------ | :------------------- | | Total Stockholders' Equity | $1,365,117 | $1,196,222 | $1,115,125 | | Noncontrolling interests | $18,819 | $0 | $0 | | Total Equity | $1,383,936 | $1,196,222 | $1,115,125 | | Cash dividends paid (9 months) | $48,268 | N/A | $33,984 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net cash provided by (used in) operating activities | $(196,979) | $(2,296,868) | $2,099,889 | (91.4)% | | Net cash provided by (used in) investing activities | $49,325 | $147,624 | $(98,299) | (66.6)% | | Net cash provided by (used in) financing activities | $194,265 | $2,341,258 | $(2,146,993) | (91.7)% | | Total cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $404,613 | $328,580 | $76,033 | 23.1% | NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION - Walker & Dunlop is a leading commercial real estate services and finance company in the U.S., operating through various products including agency lending, debt brokerage, principal lending and investing, property sales brokerage, and automated multifamily valuation services[22][23][24][25][26] - In Q3 2021, the Company acquired a 75% interest in Zelman Holdings, LLC, expanding into housing market research and real estate-related investment banking and advisory services[27] NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The Company consolidates entities where it holds a controlling financial interest, applying either the variable interest entity (VIE) or voting interest model, and accounts for noncontrolling interests separately[29] - Loan commitments and forward sale commitments that qualify as derivatives are recorded at fair value, incorporating origination fees, premiums, expected servicing cash flows, and interest rate movements[32] Provision (Benefit) for Credit Losses (in thousands) | Components | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Loan losses | $(12) | $2,179 | $(674) | $3,107 | | Risk-sharing obligations | $1,278 | $1,304 | $(13,706) | $28,922 | | Total | $1,266 | $3,483 | $(14,380) | $32,029 | Net Warehouse Interest Income Components (in thousands) | Components | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Loans held for sale | $3,723 | $4,869 | $9,066 | $12,675 | | Loans held for investment | $1,860 | $2,689 | $5,702 | $9,779 | | Total | $5,583 | $7,558 | $14,768 | $22,454 | Revenues from Contracts with Customers (in thousands) | Description | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Certain loan origination fees | $46,527 | $10,731 | $113,650 | $40,769 | | Property sales broker fees | $33,677 | $6,756 | $65,173 | $19,928 | | Investment management fees, etc. | $10,936 | $4,532 | $25,114 | $14,632 | | Total | $91,140 | $22,019 | $203,937 | $75,329 | NOTE 3—MORTGAGE SERVICING RIGHTS - The fair value of Mortgage Servicing Rights (MSRs) increased to $1.2 billion as of September 30, 2021, from $1.1 billion as of December 31, 2020[49] - A 100-basis point increase in the discount rate would decrease the fair value of MSRs by $37.2 million as of September 30, 2021[49] MSR Activity Roll Forward (in thousands) | Metric | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $862,813 | $718,799 | | Additions | $224,035 | $215,288 | | Amortization | $(130,868) | $(110,243) | | Pre-payments and write-offs | $(26,155) | $(18,189) | | Ending balance | $929,825 | $805,655 | NOTE 4—GUARANTY OBLIGATION and ALLOWANCE FOR RISK-SHARING OBLIGATIONS Guaranty Obligation Roll Forward (in thousands) | Metric | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $52,306 | $54,695 | | Additions | $4,023 | $4,346 | | Amortization | $(7,269) | $(7,035) | | Ending balance | $49,060 | $53,474 | Allowance for Risk-Sharing Obligations Roll Forward (in thousands) | Metric | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $75,313 | $11,471 | | Provision (benefit) for risk-sharing obligations | $(13,706) | $28,922 | | Ending balance | $61,607 | $70,495 | - The CECL reserve for the $47.0 billion at-risk Fannie Mae servicing portfolio decreased to $54.0 million as of September 30, 2021, from $67.0 million as of December 31, 2020, primarily due to improved economic conditions and unemployment forecasts[58][57] - The maximum quantifiable contingent liability for Fannie Mae DUS guaranties was $9.8 billion as of September 30, 2021[60] NOTE 5—SERVICING - The total unpaid principal balance of loans serviced increased to $113.9 billion as of September 30, 2021, from $107.2 billion as of December 31, 2020[61] - Custodial escrow accounts totaled $3.0 billion as of September 30, 2021, down from $3.1 billion as of December 31, 2020[62] NOTE 6—WAREHOUSE NOTES PAYABLE Warehouse Facilities Summary (in thousands) as of September 30, 2021 | Facility Type | Total Facility Capacity | Outstanding Balance | | :-------------------------- | :---------------------- | :------------------ | | Agency Warehouse Facilities | $5,590,000 | $2,717,745 | | Interim Warehouse Facilities| $454,810 | $131,627 | | Total | $6,044,810 | $2,849,372 | - The Company was in compliance with all financial covenants for its warehouse notes payable as of September 30, 2021[80] - Debt agreements have been updated to include fallback language for the transition from LIBOR to an alternative reference rate[80] NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Roll Forward (in thousands) | Metric | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $248,958 | $180,424 | | Additions from acquisitions | $84,291 | $68,534 | | Ending balance | $333,249 | $248,958 | - Additions to goodwill in 2021 include $66.8 million from the acquisition of a 75% controlling interest in Zelman Holdings, LLC[82] Contingent Consideration Liabilities Roll Forward (in thousands) | Metric | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $28,829 | $5,752 | | Additions | $7,504 | $27,645 | | Payments | $(6,080) | $(5,800) | | Ending balance | $31,658 | $28,423 | NOTE 8—FAIR VALUE MEASUREMENTS - Financial assets and liabilities measured at fair value are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable and significant inputs)[90] Financial Assets and Liabilities Measured at Fair Value (in thousands) as of September 30, 2021 | Category | Level 1 | Level 2 | Level 3 | Total | | :-------------------------- | :------ | :------ | :------ | :------ | | Assets: Loans held for sale | $0 | $2,711,900 | $0 | $2,711,900 | | Assets: Pledged securities | $51,550 | $97,224 | $0 | $148,774 | | Assets: Derivative assets | $0 | $0 | $85,486 | $85,486 | | Liabilities: Derivative liabilities | $0 | $0 | $13,263 | $13,263 | Derivative Instruments (Level 3) Roll Forward (in thousands) | Metric | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $44,720 | $15,532 | | Settlements | $(488,356) | $(456,639) | | Realized gains | $443,636 | $441,107 | | Unrealized gains (losses) | $72,223 | $33,432 | | Ending balance | $72,223 | $33,432 | 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 securities as collateral[111] - As of September 30, 2021, the Company was in compliance with Fannie Mae's collateral requirements, maintaining a net worth of $1.1 billion (required $250.2 million) and operational liquidity of $254.7 million (required $49.5 million)[113] Pledged Securities (in thousands) as of September 30, 2021 | Category | Amount | | :-------------------------- | :----- | | Restricted cash | $10,596 | | Money market funds | $40,954 | | Agency MBS | $97,224 | | Total | $148,774 | NOTE 10—EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY Earnings Per Share (EPS) (in thousands, except per share amounts) | Metric | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $2.23 | $1.69 | $5.80 | $5.21 | | Diluted EPS | $2.21 | $1.66 | $5.73 | $5.11 | - The Board approved a stock repurchase program of up to $75.0 million over 12 months starting February 12, 2021, with $75.0 million of authorized capacity remaining as of September 30, 2021[123] - The Company paid a quarterly dividend of $0.50 per share in each of the first three quarters of 2021 and declared a $0.50 per share dividend for Q4 2021[124] NOTE 11—PENDING ACQUISITION ACTIVITIES - The Company entered into a purchase agreement to acquire Alliant Capital, Ltd., an alternative investment manager focused on affordable housing, for a total enterprise value of $696 million, with closing expected in Q4 2021[126][128] - The acquisition consideration includes $361 million in cash, $90 million in Walker & Dunlop common stock, and $100 million in earn-out structured as participating interest in future cash flows[130] - To fund the Alliant acquisition, the Company is refinancing and upsizing its existing Note payable to $600 million, expected to close simultaneously with the acquisition in Q4 2021[129] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, discussing forward-looking statements, business operations, critical accounting policies, the current business environment, detailed results of operations (revenues and expenses), non-GAAP financial measures, and an in-depth analysis of cash flows, liquidity, capital resources, and credit quality Forward-Looking Statements - The report contains forward-looking statements related to expectations, projections, plans, and strategies, which are subject to numerous known and unknown risks and uncertainties[132][133] - Risks include the future of Fannie Mae and Freddie Mac (GSEs), changes in interest rates, growth strategy, liquidity, dividend payments, personnel retention, competition, regulatory changes, and the ability to complete and integrate acquisitions (e.g., Alliant)[133][134] - Statements are not guarantees of future results, and the Company disclaims any obligation to publicly update or revise them, except as required by law[133][134] Business - Walker & Dunlop is a leading commercial real estate services and finance company, primarily focused on multifamily lending, debt brokerage, and property sales, leveraging technology for customer experience and new business identification[135] - Agency Lending and Loan Servicing: Originates, sells, and services loans for Fannie Mae, Freddie Mac, and HUD, retaining servicing rights and asset management responsibilities[136][138][140][146][148][149][150][151][152][153] - Debt Brokerage: Brokers loans for institutional lenders, earning origination and servicing fees[136][138][140][146][148][149][150][151][152][153] - Principal Lending and Investing: Offers interim loans through a joint venture (Interim Program JV) and its own Interim Loan Program, and manages investments through Walker & Dunlop Investment Partners, Inc. (WDIP) with $1.4 billion in AUM[136][138][140][146][148][149][150][151][152][153] - Property Sales: Provides brokerage services for multifamily property sales through Walker & Dunlop Investment Sales, LLC (WDIS)[136][138][140][146][148][149][150][151][152][153] - Appraisal Services: Operates Apprise by Walker & Dunlop, a 50% owned joint venture, offering automated multifamily appraisal services[136][138][140][146][148][149][150][151][152][153] - Housing Market Research and Real Estate Investment Banking Services: Acquired a 75% interest in Zelman & Associates in Q3 2021, providing housing market research and investment banking/advisory services[136][138][140][146][148][149][150][151][152][153] Basis of Presentation - The condensed consolidated financial statements include all accounts of Walker & Dunlop, Inc. and its wholly-owned and majority-owned subsidiaries, prepared in accordance with U.S. GAAP, with all intercompany transactions eliminated[155][156] Critical Accounting Policies and Estimates - Mortgage Servicing Rights (MSRs): Recorded at fair value at loan sale or purchase, based on estimated net cash flows, prepayment assumptions, discount rates (8-14% in 2021), and servicing costs[157][158][160][161][163] - Allowance for Risk-Sharing Obligations: Estimated using the Current Expected Credit Losses (CECL) standard and the Weighted-Average Remaining Maturity (WARM) method for the Fannie Mae at-risk servicing portfolio, with a one-year reasonable and supportable forecast period[157][158][160][161][163] Overview of Current Business Environment - Macroeconomic Recovery: U.S. unemployment rate improved to 4.8% in September 2021 from 6.7% in December 2020, with the Federal Funds Rate maintained at 0-0.25%[166][167][168][170][171][173][174][177][179][180] - Multifamily Market Strength: Occupancy rates reached 97.3% in September 2021, and residential retention rates hit an all-time high of 58.0% in Q3 2021, indicating a robust market[166][167][168][170][171][173][174][177][179][180] - Property Sales & Debt Brokerage: Experienced strong growth in Q3 2021, driven by active acquisitions and increased demand from private capital providers[166][167][168][170][171][173][174][177][179][180] - Agency Lending: Fannie Mae and Freddie Mac's 2022 loan origination caps increased by 11% to $78 billion each, with at least 50% targeted towards affordable housing[166][167][168][170][171][173][174][177][179][180] - HUD Lending: Loan volumes increased 40% in Q3 2021 and 33% for the nine months ended September 30, 2021, driven by strong demand for long-term, fully amortizing debt[166][167][168][170][171][173][174][177][179][180] - Interim Lending: Interim Program JV originated $314.9 million in Q3 2021 (vs. none in Q3 2020), and the Interim Loan Program originated $157.2 million (vs. $37.0 million in Q3 2020)[166][167][168][170][171][173][174][177][179][180] - Affordable Housing Initiatives: The pending acquisition of Alliant Capital, Ltd. and new White House/FHFA initiatives are expected to create significant growth opportunities in the affordable housing sector[166][167][168][170][171][173][174][177][179][180] Results of Operations Total Transaction Volume (in thousands) | Metric | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Debt Financing Volume | $13,260,768 | $7,304,429 | $31,096,071 | $23,611,558 | | Property Sales Volume | $5,230,093 | $1,106,162 | $9,967,385 | $3,283,463 | | Total Transaction Volume | $18,490,861 | $8,410,591 | $41,063,456 | $26,895,021 | Key Performance Metrics | Metric | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating margin | 27% | 28% | 28% | 29% | | Return on equity | 22% | 20% | 20% | 21% | | Diluted EPS | $2.21 | $1.66 | $5.73 | $5.11 | Managed Portfolio (in thousands) as of September 30 | Portfolio | 2021 | 2020 | | :----------------------- | :------------ | :------------ | | Total Servicing Portfolio| $113,920,374 | $103,377,753 | | Assets under management | $2,309,332 | $1,936,679 | | Total Managed Portfolio | $116,229,706 | $105,314,432 | Overview - Revenues (Q3 2021 vs Q3 2020): Total revenues increased by $99.3 million (40%), driven by significant growth in loan origination and debt brokerage fees (+47%), MSR Income (+15%), servicing fees (+17%), property sales broker fees (+398%), and other revenues (+162%)[192][194][195][196][197][198][199] - Revenues (9M 2021 vs 9M 2020): Total revenues increased by $118.0 million (16%), with increases in origination fees (+29%), servicing fees (+19%), property sales broker fees (+227%), and other revenues (+55%), partially offset by decreases in MSR Income (-11%), net warehouse interest income (-34%), and escrow earnings (-62%)[192][194][195][196][197][198][199] - Expenses (Q3 2021 vs Q3 2020): Total expenses increased by $73.6 million (41%), primarily due to higher personnel expenses (+49%), amortization and depreciation (+28%), and other operating expenses (+54%)[192][194][195][196][197][198][199] - Expenses (9M 2021 vs 9M 2020): Total expenses increased by $88.7 million (17%), mainly from personnel expenses (+31%), amortization and depreciation (+20%), and other operating expenses (+31%), partially offset by a shift to a benefit for credit losses in 2021 from a provision in 2020[192][194][195][196][197][198][199] Revenues - Loan origination and debt brokerage fees, net (Q3 2021): Increased due to 65% growth in Fannie Mae and 274% growth in brokered debt financing volume, partially offset by a 17% decrease in the origination fee rate due to a shift in transaction mix[192][194][202][204][205][207][208][209][210][213] - MSR Income (Q3 2021): Increased due to a 16% increase in Agency debt financing volume, despite a 35% decrease in the MSR Rate[192][194][202][204][205][207][208][209][210][213] - MSR Income (9M 2021): Declined due to a 19% decrease in Agency debt financing volumes (Fannie Mae down 25%), partially offset by a 9% increase in the Agency MSR Rate[192][194][202][204][205][207][208][209][210][213] - Servicing Fees (Q3 & 9M 2021): Increased by 17% and 19% respectively, driven by an 11-13% increase in the average servicing portfolio and a 4.7-5.1% increase in the average servicing fee rate[192][194][202][204][205][207][208][209][210][213] - Property sales broker fees (Q3 & 9M 2021): Increased significantly (398% and 227% respectively) due to substantial increases in property sales volumes[192][194][202][204][205][207][208][209][210][213] - Net Warehouse Interest Income (Q3 & 9M 2021): Decreased due to lower net spreads and average outstanding balances for both loans held for sale (LHFS) and loans held for investment (LHFI)[192][194][202][204][205][207][208][209][210][213] - Other Revenues (Q3 & 9M 2021): Increased primarily due to higher prepayment fees ($6.6 million and $4.1 million respectively) and $4.5 million in new revenues from the Zelman acquisition in Q3 2021[192][194][202][204][205][207][208][209][210][213] Expenses - Personnel Expenses (Q3 2021): Increased by $55.6 million (49%) due to higher commission costs ($40.9 million), salaries and benefits ($6.9 million from 22% headcount increase), subjective bonuses ($3.6 million), and stock-based compensation ($3.8 million)[192][194][214][215][216][217][218][219][221][222][223][224] - Personnel Expenses (9M 2021): Increased by $96.8 million (31%) due to higher commission costs ($66.0 million), salaries and benefits ($18.4 million from 16% headcount increase), and stock-based compensation ($8.7 million)[192][194][214][215][216][217][218][219][221][222][223][224] - Amortization and Depreciation (Q3 & 9M 2021): Increased by 28% and 20% respectively, primarily due to growth in the average MSR balance, with $124.2 million of MSRs added net of amortization and write-offs over the past 12 months[192][194][214][215][216][217][218][219][221][222][223][224] - Provision (Benefit) for Credit Losses (9M 2021): Shifted to a $14.4 million benefit from a $32.0 million provision in 2020, driven by improvements in forecasted unemployment rates and sustained multifamily operating fundamentals, leading to a decrease in the CECL reserve[192][194][214][215][216][217][218][219][221][222][223][224] - Other Operating Expenses (Q3 2021): Increased by $8.7 million (54%), including $3.8 million in professional fees ($2.9 million for Alliant acquisition due diligence), $1.4 million in travel/entertainment, and $1.4 million in marketing[192][194][214][215][216][217][218][219][221][222][223][224] - Other Operating Expenses (9M 2021): Increased by $14.8 million (31%), including $6.1 million in professional fees ($2.9 million for Alliant acquisition due diligence), $2.1 million in marketing, $1.8 million in office expenses, and $3.3 million in miscellaneous expenses[192][194][214][215][216][217][218][219][221][222][223][224] - Income Tax Expense (9M 2021): Increased by $6.2 million (12%) due to a 14% increase in income from operations and a $1.2 million increase in realizable excess tax benefits[192][194][214][215][216][217][218][219][221][222][223][224] Non-GAAP Financial Measures - Adjusted EBITDA is a non-GAAP financial measure used to evaluate operating performance, providing more meaningful period-to-period comparisons and better identification of business trends[226][227] Adjusted EBITDA (in thousands) | Metric | 3 months ended Sep 30, 2021 | 3 months ended Sep 30, 2020 | Change ($) | Change (%) | 9 months ended Sep 30, 2021 | 9 months ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Adjusted EBITDA | $72,430 | $45,165 | $27,265 | 60.4% | $199,611 | $157,687 | $41,924 | 26.6% | Financial Condition Cash Flows from Operating Activities - Net cash used in operating activities significantly decreased to $(196.9) million for the nine months ended September 30, 2021, from $(2.3) billion in the prior year, primarily due to a decrease in originations outpacing sales of loans held for sale[240] Cash Flows from Investing Activities - Net cash provided by investing activities decreased to $49.3 million for the nine months ended September 30, 2021, from $147.6 million in the prior year, driven by increased investments in loans held for investment, acquisitions, and joint ventures[241] Cash Flows from Financing Activities - Net cash provided by financing activities decreased to $194.3 million for the nine months ended September 30, 2021, from $2.3 billion in the prior year, mainly due to decreased net warehouse borrowings and repayment of secured borrowings, partially offset by increased interim warehouse notes payable and decreased stock repurchases[242][244] Liquidity and Capital Resources - Key liquidity uses include funding loans, paying cash dividends, equity contributions to joint ventures, meeting working capital needs, and satisfying collateral requirements for Fannie Mae DUS risk-sharing and operational liquidity[245][246][249][257][280][283] - As of September 30, 2021, the Company's net worth was $1.1 billion (required $250.2 million) and operational liquidity was $254.7 million (required $49.5 million), both in compliance with Fannie Mae requirements[245][246][249][257][280][283] - The Company has $75.0 million of authorized capacity remaining under its 2021 stock repurchase program as of September 30, 2021[245][246][249][257][280][283] - Total warehouse facilities capacity was $6.045 billion ($5.59 billion Agency, $454.8 million Interim) as of September 30, 2021, with $2.849 billion outstanding[245][246][249][257][280][283] - The outstanding Term Loan (Note payable) was $292.5 million as of September 30, 2021, maturing November 7, 2025[245][246][249][257][280][283] - The Company is refinancing and upsizing its Note payable to $600 million to fund the $361 million cash portion of the Alliant acquisition, expected to close in Q4 2021[245][246][249][257][280][283] Credit Quality and Allowance for Risk-Sharing Obligations Key Credit Metrics (in thousands) as of September 30 | Metric | 2021 | 2020 | | :-------------------------- | :------------ | :------------ | | Risk-sharing servicing portfolio | $52,342,243 | $46,236,967 | | Total servicing portfolio unpaid principal balance | $113,920,374 | $103,377,753 | | At risk servicing portfolio | $48,209,532 | $41,848,548 | | Maximum exposure to at risk portfolio | $9,784,054 | $8,497,807 | | Allowance for risk-sharing | $61,607 | $70,495 | | Allowance for risk-sharing as a percentage of the at-risk portfolio | 0.13% | 0.17% | - The allowance for risk-sharing obligations decreased to $61.6 million as of September 30, 2021, from $75.3 million as of December 31, 2020, primarily due to improved unemployment forecasts and sustained strength in multifamily operating fundamentals[294] New/Recent Accounting Pronouncements - There have been no material changes to accounting policies discussed in the 2020 Form 10-K, and no recently announced but not yet effective accounting pronouncements are expected to have a material impact as of September 30, 2021[298] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses the company's exposure to market risks, specifically interest rate risk and market value risk, and discusses the impact of potential changes in interest rates on various financial components, as well as the ongoing LIBOR transition Interest Rate Risk - A 100-basis point increase in 30-day LIBOR would increase annual escrow earnings by $29.8 million as of September 30, 2021[301][302][303] - A 100-basis point increase in 30-day LIBOR would decrease annual net warehouse interest income by $26.2 million as of September 30, 2021[301][302][303] - A 100-basis point increase in 30-day LIBOR would decrease annual income from operations by $2.9 million based on the note payable balance as of September 30, 2021[301][302][303] LIBOR Transition - The 30-day LIBOR, the Company's primary reference rate, is scheduled to cease publication on June 30, 2023, with an expected transition to the Secured Overnight Financing Rate (SOFR)[304] - The Company is actively monitoring its LIBOR exposure, reviewing legal contracts, assessing fallback language impacts, and engaging with stakeholders regarding the transition[304] Market Value Risk - A 100-basis point increase in the weighted-average discount rate would decrease the fair value of Mortgage Servicing Rights (MSRs) by approximately $37.2 million as of September 30, 2021[305] - 89% of servicing fees are protected from prepayment risk through prepayment provisions as of September 30, 2021[306] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the effectiveness of the company's disclosure controls and procedures, concluding they were effective as of September 30, 2021, and reported no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2021, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[307][308] - There have been no material changes in internal control over financial reporting during the quarter ended September 30, 2021[309] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various claims and litigation in the ordinary course of business, none of which are considered material, and management believes any potential liability would not have a material adverse effect on its business or financial condition - The Company is party to various claims and litigation in the ordinary course of business, none of which are believed to be material[311] - Management believes that any liability from pending lawsuits would not have a material adverse effect on the Company's business, results of operations, liquidity, or financial condition[311] Item 1A. Risk Factors This section highlights specific risks related to the pending acquisition of Alliant, including the uncertainty of its completion, potential failure to realize anticipated benefits, significant transaction costs, and challenges associated with integrating Alliant's businesses into the Company - The acquisition of Alliant may not be completed on the terms or timeline currently contemplated, or at all, due to conditions such as regulatory approvals and consents[313] - Risks include not realizing potential benefits, liability for significant transaction costs (including a $20.0 million termination fee if the Purchase Agreement is terminated), and diversion of management attention[313][316][318] - Integration challenges for Alliant's businesses may include diverting management attention, significant IT resource allocation, difficulties integrating financial accounting systems and controls, managing expanded operations, retaining key personnel, and addressing cultural differences[313][316][318] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports on equity security transactions, including shares purchased to satisfy tax withholding obligations for grantees and the issuance of common stock as partial consideration for the Zelman acquisition, noting no repurchases under its approved stock repurchase program during Q3 2021 - The Company purchased 13,713 shares of common stock in Q3 2021 at an average price of $108.21 to satisfy grantee tax withholding obligations on share-vesting events[319] - No shares were repurchased under the $75.0 million stock repurchase program during Q3 2021, leaving the full $75.0 million capacity remaining as of September 30, 2021[317][319] - 50,219 shares of common stock were issued on July 13, 2021, as partial consideration for the Zelman acquisition, with transfer restrictions until July 13, 2022[319] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[320] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[321] Item 5. Other Information The company reported no other information - No other information to report[322] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various agreements, corporate documents, and certifications, providing supporting documentation for the report - Exhibit 2.5: Purchase Agreement for Alliant Capital, Ltd., dated August 30, 2021[323] - Exhibits 31.1, 31.2, and 32: Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002[323] Signatures This section contains the official signatures of the company's Chairman and Chief Executive Officer, and Executive Vice President and Chief Financial Officer, certifying the filing of the Form 10-Q - The report was signed by William M. Walker, Chairman and Chief Executive Officer, and Stephen P. Theobald, Executive Vice President and Chief Financial Officer, on November 4, 2021[330]