wd_Current folio

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2016


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

For the transition period from to

Commission File Number: 001-35000

Walker & Dunlop, Inc.

(Exact name of registrant as specified in its charter)

Maryland		80-0629925
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

7501 Wisconsin Avenue, Suite 1200E

Bethesda, Maryland 20814

(301) 215-5500

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

area code)

Not Applicable

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
	(Do not check if a smaller reporting company)

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

As of April 27, 2016, there were 30,868,971 total shares of common stock outstanding.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2016 and December 31, 2015

(In thousands, except per share data)


	March 31,		December 31,
	2016		2015
	(unaudited)
Assets
Cash and cash equivalents	$	98,224	$	136,988
Restricted cash		10,006		5,306
Pledged securities, at fair value		75,225		72,190
Loans held for sale, at fair value		547,827		2,499,111
Loans held for investment, net		190,551		231,493
Servicing fees and other receivables, net		21,712		23,844
Derivative assets		16,130		11,678
Mortgage servicing rights		421,651		412,348
Goodwill and other intangible assets		91,439		91,488
Other assets		22,540		30,545
Total assets	$	1,495,305	$	3,514,991

Liabilities
Accounts payable and other liabilities	$	133,551	$	169,109
Performance deposits from borrowers		9,543		5,112
Derivative liabilities		7,563		1,333
Guaranty obligation, net of accumulated amortization		28,552		27,570
Allowance for risk-sharing obligations		5,149		5,586
Warehouse notes payable		640,307		2,649,470
Note payable		164,388		164,462
Total liabilities	$	989,053	$	3,022,642

Equity
Preferred shares, Authorized 50,000, none issued.	$	—	$	—
Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 29,358 shares at March 31, 2016 and 29,466 shares at December 31, 2015		294		295
Additional paid-in capital		217,684		215,575
Retained earnings		283,950		272,030
Total stockholders’ equity	$	501,928	$	487,900
Noncontrolling interests		4,324		4,449
Total equity	$	506,252	$	492,349
Commitments and contingencies (Note 9)		—		—
Total liabilities and equity	$	1,495,305	$	3,514,991

See accompanying notes to condensed consolidated financial statements.

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	For the three months ended
	March 31,
	2016		2015
Revenues
Gains from mortgage banking activities	$	46,323	$	72,720
Servicing fees		31,649		26,841
Net warehouse interest income		6,731		4,354
Escrow earnings and other interest income		1,640		787
Other		7,898		7,419
Total revenues	$	94,241	$	112,121

Expenses
Personnel	$	34,230	$	40,045
Amortization and depreciation		25,155		24,674
Provision (benefit) for credit losses		(409)		84
Interest expense on corporate debt		2,469		2,477
Other operating expenses		8,614		9,435
Total expenses	$	70,059	$	76,715
Income from operations	$	24,182	$	35,406
Income tax expense		8,849		14,093
Net income before noncontrolling interests	$	15,333	$	21,313
Less: net income from noncontrolling interests		(125)		—
Walker & Dunlop net income	$	15,458	$	21,313

Basic earnings per share	$	0.52	$	0.68
Diluted earnings per share	$	0.50	$	0.66

Basic weighted average shares outstanding		29,489		31,515
Diluted weighted average shares outstanding		30,782		32,464

See accompanying notes to condensed consolidated financial statements.

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2016		2015
Cash flows from operating activities
Net income before noncontrolling interests	$	15,333	$	21,313
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gains attributable to the fair value of future servicing rights, net of guaranty obligation		(23,917)		(31,317)
Change in the fair value of premiums and origination fees		(63)		(7,381)
Amortization and depreciation		25,155		24,674
Provision (benefit) for credit losses		(409)		84
Other operating activities, net		1,940,132		(228,032)
Net cash provided by (used in) operating activities	$	1,956,231	$	(220,659)

Cash flows from investing activities
Capital expenditures	$	(484)	$	(448)
Net cash paid to increase ownership interest in a previously held equity method investment		(1,058)		—
Originations of loans held for investment		—		(8,420)
Principal collected on loans held for investment		41,548		—
Net cash provided by (used in) investing activities	$	40,006	$	(8,868)

Cash flows from financing activities
(Repayments) borrowings of warehouse notes payable, net	$	(1,999,202)	$	221,525
Borrowings of interim warehouse notes payable		—		6,315
Repayments of interim warehouse notes payable		(30,469)		—
Repayments of note payable		(276)		(438)
Proceeds from issuance of common stock		3,291		2,819
Repurchase of common stock		(8,345)		(47,804)
Debt issuance costs		—		(662)
Tax shortfall from vesting of equity awards		—		(66)
Net cash provided by (used in) financing activities	$	(2,035,001)	$	181,689

Net increase (decrease) in cash and cash equivalents	$	(38,764)	$	(47,838)
Cash and cash equivalents at beginning of period		136,988		113,354
Cash and cash equivalents at end of period	$	98,224	$	65,516

Supplemental Disclosure of Cash Flow Information:
Cash paid to third parties for interest	$	11,880	$	7,793
Cash paid for taxes	$	11,315	$	9,114

See accompanying notes to condensed consolidated financial statements.

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

These financial statements represent the condensed consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”). In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or thereafter.

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

Prior to 2016, the Company executed the CMBS Program through a partnership in which the Company owned a noncontrolling interest. The Company accounted for its investment in the partnership under the equity method of accounting. Effective January 1, 2016, the other partner exited the CMBS Program, and the Company increased its ownership percentage to 100%. As the CMBS Program is now wholly owned, the Company began to consolidate the activities, financial results, and balances of the CMBS Program beginning in the first quarter of 2016, primarily impacting loans held for sale, warehouse notes payable, and gains from mortgage banking activities.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. All intercompany transactions have been eliminated in consolidation. When the Company has significant influence over operating and financial decisions for an entity but does not own a majority of the voting interests, the Company accounts for the investment using the equity method of accounting.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to March 31, 2016. There have been no material events that would require recognition in the condensed consolidated financial statements. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to March 31, 2016. No other material subsequent events have occurred that would require disclosure.

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

Comprehensive Income—For the three months ended March 31, 2016 and 2015, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.

Loans Held for Investment, net—Loans held for investment are multifamily loans originated by the Company through the Interim Program for properties that currently do not qualify for permanent GSE or HUD financing. These loans have terms of up to three 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, adjusted for the amortization of net deferred fees and costs, and is recognized as revenue when earned and deemed collectible. All loans held for investment are multifamily loans with similar risk characteristics. As of

March 31, 2016, Loans held for investment, net consisted of $191.8 million of unpaid principal balance less $0.6 million of net unamortized deferred fees and costs and $0.6 million of allowance for loan losses. As of December 31, 2015, Loans held for investment, net consisted of $233.4 million of unpaid principal balance less $1.1 million of net unamortized deferred fees and costs and $0.8 million of allowance for loan losses.

The allowance for loan losses is the Company’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. The Company has established a process to determine the appropriateness of the allowance for loan losses that assesses the losses inherent in the portfolio. That process includes assessing the credit quality of each of the loans held for investment by monitoring the financial condition of the borrower and the financial trends of the underlying property. The allowance levels are influenced by the outstanding portfolio balance, delinquency status, historic loss experience, and other conditions influencing loss expectations, such as economic conditions. The allowance for loan losses is estimated collectively for loans with similar characteristics and for which there is no evidence of impairment. The allowance for loan losses recorded as of March 31, 2016 and December 31, 2015 were based on the Company’s collective assessment of the portfolio.

Loans held for investment are placed on non-accrual status when full and timely collection of interest or principal is not probable. Loans held for investment are considered past due when contractually required principal or interest payments have not been made on the due dates and are charged off when the loan is considered uncollectible. The Company evaluates all loans held for investment for impairment. A loan is considered impaired when the Company believes that the facts and circumstances of the loan suggest that the Company will not be able to collect all contractually due principal and interest. Delinquency status and property financial condition are key components of the Company’s consideration of impairment status.

None of the loans held for investment was delinquent, impaired, or on non-accrual status as of March 31, 2016 or December 31, 2015. Additionally, we have not experienced any delinquencies related to these loans or charged off any loan held for investment since the inception of the Interim Program.

Provision (benefit) for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit losses in the Condensed Consolidated Statements of Income. Provision (benefit) for credit losses consisted of the following activity for the three months ended March 31, 2016 and 2015:


	For the three months ended
	March 31,
(in thousands)	2016		2015
Provision (benefit) for loan losses	$	(255)	$	(66)
Provision (benefit) for risk-sharing obligations		(154)		150
Provision (benefit) for credit losses	$	(409)	$	84

Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. Substantially all loans that are held for sale are financed with matched borrowings under our warehouse facilities incurred to fund a specific loan held for sale. A portion of all loans that are held for investment is financed with matched borrowings under our warehouse facilities. The portion of loans held for investment not funded with matched borrowings is financed with the Company’s own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. Included in Net warehouse interest income for the three months ended March 31, 2016 and 2015 are the following components:


	For the three months ended
	March 31,
(in thousands)	2016		2015
Warehouse interest income - loans held for sale	$	13,523	$	7,408
Warehouse interest expense - loans held for sale		(8,348)		(4,954)
Net warehouse interest income - loans held for sale	$	5,175	$	2,454

Warehouse interest income - loans held for investment	$	2,822	$	3,057
Warehouse interest expense - loans held for investment		(1,266)		(1,157)
Net warehouse interest income - loans held for investment	$	1,556	$	1,900

Total net warehouse interest income	$	6,731	$	4,354

Recently Announced Accounting Pronouncements—In the first quarter of 2016, Accounting Standard Update 2016‑02 (“ASU 2016-02”), Leases (Topic 842), was issued. ASU 2016‑02 represents a significant reform to the accounting for leases. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. Lessees can make an accounting policy election, by class of underlying asset, to not recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise.

For finance leases, lessees increase the lease liability to reflect interest and reduce the liability for lease payments made. The related ROU asset is amortized on a straight-line basis unless another systematic basis is more representative of the pattern in which the lessee expects to consume the asset’s future economic benefits. Total periodic expense will generally be higher in the earlier periods of a finance lease. For operating leases, lessees measure the lease liability at the present value of the remaining lease payments, which results in the same subsequent measurement as the liability for a finance lease. Lessees subsequently measure the ROU asset at the amount of the remeasured lease liability, adjusted for cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, unamortized lease incentives, unamortized initial direct costs and any impairment of the ROU asset. Lessees generally recognize lease expense for these leases on a straight-line basis, which is similar to what they do today.

Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. ASU 2016-02 is effective for the Company January 1, 2019. The Company is still in the process of determining the significance of the impact ASU 2016-02 will have on its financial statements.

In the first quarter of 2016, Accounting Standards Update 2016-09 (“ASU 2016-09”), Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, was issued. ASU 2016-09 includes the following changes to the accounting for share-based payments that will have an impact to the Company’s reported financial results:

All excess tax benefits and tax deficiencies arising from stock compensation arrangements are recognized as an income tax benefit or expense in the income statement instead of as an adjustment to additional paid in capital (“APIC”). The APIC pool is eliminated. In addition, excess tax benefits are no longer included in the calculation of diluted shares outstanding. The transition guidance related to these changes requires prospective application.

Excess tax benefits are recorded along with other income tax cash flows as an operating activity in the statement of cash flows. The transition guidance related to this change requires prospective application. Cash paid when remitting cash to the tax authorities must be classified as a financing activity in the statement of cash flows. The transition guidance related to this change requires retrospective application. There was no effect on prior periods for the retrospective application of the classification of payments to tax authorities as the Company previously presented such payments in a manner consistent with ASU 2016-09.

Entities can elect to continue to apply current GAAP or to reverse compensation cost of forfeited awards when they occur. If an entity makes a change in its accounting policy to account for forfeitures as they occur, the transition guidance requires a cumulative-effect adjustment to beginning retained earnings.

ASU 2016-09 is effective for the Company on January 1, 2017. Early adoption is permitted as long as the entire ASU is early adopted. The Company early adopted the entire ASU during the first quarter of 2016. In connection with the early adoption of ASU 2016-09, the

Company changed its accounting policy related to forfeitures. The Company’s previous accounting policy was to adjust compensation expense for estimated forfeitures. With the adoption of ASU 2016-09, the Company changed its accounting policy to adjust compensation expense for actual forfeitures and recorded an immaterial cumulative-effect adjustment to beginning total equity as disclosed in Note 11.

There have been no other material changes to the accounting policies discussed in Note 2 of the Company’s 2015 Form 10-K.

NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES

The gains from mortgage banking activities consisted of the following activity for the three months ended March 31, 2016 and 2015:


	For the three months ended
	March 31,
(in thousands)	2016		2015
Contractual loan origination related fees, net	$	22,406	$	41,403
Fair value of expected net cash flows from servicing recognized at commitment		25,427		33,692
Fair value of expected guaranty obligation recognized at commitment		(1,510)		(2,375)
Total gains from mortgage banking activities	$	46,323	$	72,720

The origination fees shown in the table are net of co-broker fees of $5.4 million and $6.4 million for the three months ended March 31, 2016 and 2015, respectively. Additionally, included in the contractual loan origination related fees, net balance for the three months ended March 31, 2016 are realized and unrealized losses of $2.1 million from the sale and mark-to-market of loans and derivative instruments related to the CMBS Program.

NOTE 4—MORTGAGE SERVICING RIGHTS

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

The fair values of the MSRs at March 31, 2016 and December 31, 2015 were $519.0 million and $510.6 million, respectively. The Company uses a discounted static cash flow valuation approach and the key economic assumption is the discount rate. For example, see the following sensitivities:

The impact of a 100 basis point increase in the discount rate at March 31, 2016 is a decrease in the fair value of $16.3 million.

The impact of a 200 basis point increase in the discount rate at March 31, 2016 is a decrease in the fair value of $31.4 million.

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

Activity related to capitalized MSRs for the three months ended March 31, 2016 and 2015 was as follows:


	For the three months ended
	March 31,
(in thousands)	2016		2015
Beginning balance	$	412,348	$	375,907
Additions, following the sale of loan		34,973		24,182
Amortization		(22,723)		(18,820)
Pre-payments and write-offs		(2,947)		(6,110)
Ending balance	$	421,651	$	375,159

The following summarizes the components of the net carrying value of the Company’s acquired and originated MSRs as of March 31, 2016:


	As of March 31, 2016
	Gross		Accumulated		Net
(in thousands)	carrying value		amortization		carrying value
Acquired MSRs	$	132,837	$	(91,126)	$	41,711
Originated MSRs		538,924		(158,984)		379,940
Total	$	671,761	$	(250,110)	$	421,651

The expected amortization of MSRs recorded as of March 31, 2016 is shown in the table below. Actual amortization may vary from these estimates.


	Originated MSRs		Acquired MSRs		Total MSRs
(in thousands)	Amortization		Amortization		Amortization
Nine Months Ending December 31,
2016	$	58,378	$	8,455	$	66,833
Year Ending December 31,
2017		68,616		10,209		78,825
2018		57,964		7,761		65,725
2019		51,789		6,449		58,238
2020		44,187		4,792		48,979
2021		35,518		2,903		38,421
Thereafter		63,488		1,142		64,630
Total	$	379,940	$	41,711	$	421,651

NOTE 5—GUARANTY 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 or under the Company’s CMBS Program.

Activity related to the guaranty obligation for the three months ended March 31, 2016 and 2015 was as follows:


	For the three months ended
	March 31,
(in thousands)	2016		2015
Beginning balance	$	27,570	$	24,975
Additions, following the sale of loan		1,911		1,755
Amortization		(1,212)		(1,397)
Other		283		—
Ending balance	$	28,552	$	25,333

The Company evaluates 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, the Company records an allowance for the estimated risk-sharing loss through a charge to the provision for risk-sharing obligations, which is a component of Provision (benefit) for credit losses in the Condensed Consolidated Statements of Income, along with a write-off of the loan-specific MSR and guaranty obligation. 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 becomes 60 days delinquent. Activity related to the allowance for risk-sharing obligations for the three months ended March 31, 2016 and 2015 follows:


	For the three months ended
	March 31,
(in thousands)	2016		2015
Beginning balance	$	5,586	$	3,904
Provision (benefit) for risk-sharing obligations		(154)		150
Write-offs		—		—
Other		(283)		—
Ending balance	$	5,149	$	4,054

When the Company places a loan for which it has a risk-sharing obligation on its watch list, the Company ceases to amortize the guaranty obligation and transfers the remaining unamortized balance of the guaranty obligation to the allowance for risk-sharing obligations. This transfer of the unamortized balance of the guaranty obligation from a noncontingent classification to a contingent classification is presented in the guaranty obligation and allowance for risk-sharing obligations tables above as ‘Other.’

As of March 31, 2016, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $4.2 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.

NOTE 6—SERVICING

The total unpaid principal balance of loans the Company was servicing for various institutional investors was $51.0 billion as of March 31, 2016 compared to $50.2 billion as of December 31, 2015.

NOTE 7—WAREHOUSE NOTES PAYABLE

At March 31, 2016, to provide financing to borrowers under the GSE and HUD programs and the Company’s CMBS and Interim Programs, the Company has arranged for warehouse lines of credit. In support of the GSE and HUD programs, the Company has warehouse lines of credit in the amount of $1.5 billion with certain national banks and a $0.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of the CMBS Program, the Company has warehouse lines of credit in the amount of $0.2 billion with certain national banks (the “CMBS Warehouse Facilities”). The Company has pledged substantially all of its loans held for sale against the Agency Warehouse Facilities and the CMBS Warehouse Facilities. The Company has arranged for warehouse lines of credit in the amount of $0.4 billion with certain national banks to assist in funding loans held for investment under the Interim Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The maximum amount and outstanding borrowings under the warehouse notes payable at March 31, 2016 follow:


	March 31, 2016
(dollars in thousands)	Maximum		Outstanding		Loan Type
Facility	Amount		Balance		Funded (1)	Interest rate
Agency warehouse facility #1	$	425,000	$	49,773	LHFS	30-day LIBOR plus 1.40%
Agency warehouse facility #2		650,000		63,155	LHFS	30-day LIBOR plus 1.40%
Agency warehouse facility #3		240,000		53,435	LHFS	30-day LIBOR plus 1.40%
Agency warehouse facility #4		250,000		201,779	LHFS	30-day LIBOR plus 1.40%
Fannie Mae repurchase agreement, uncommitted line and open maturity		450,000		93,268	LHFS	30-day LIBOR plus 1.15%
Total agency warehouse facilities	$	2,015,000	$	461,410

CMBS warehouse facility #1	$	100,000	$	38,228	LHFS	30-day LIBOR plus 2.25%
CMBS warehouse facility #2		100,000		—	LHFS	30-day LIBOR plus 2.25%
Total CMBS warehouse facilities	$	200,000	$	38,228

Interim warehouse facility #1	$	85,000	$	—	LHFI	30-day LIBOR plus 1.90%
Interim warehouse facility #2		200,000		125,964	LHFI	30-day LIBOR plus 2.00%
Interim warehouse facility #3		75,000		16,594	LHFI	30-day LIBOR plus 2.00% to 2.50%
Total interim warehouse facilities	$	360,000	$	142,558
Debt issuance costs		—		(1,889)
Total warehouse facilities	$	2,575,000	$	640,307

(1)

Type of loan the borrowing facility is used to fully or partially fund – loans held for sale (“LHFS”) or loans held for investment (“LHFI”).

During the second quarter of 2016, the Company executed the fourth amendment to the credit and security agreement related to Agency Warehouse Facility #3. The amendment increased the committed amount to $280.0 million, reduced the interest rate to the 30-day London Interbank Offered Rate (“LIBOR”) plus 135 basis points, and extended the maturity date to April 30, 2017. No other material modifications have been made to the credit and security agreement.

During the second quarter of 2016, the Company executed the sixth amendment to the credit and security agreement related to Interim Warehouse Facility #1. The amendment extended the maturity date to April 30, 2017. No other material modifications have been made to the agreement.

During the second quarter of 2016, the Company executed a repurchase agreement to establish CMBS Warehouse Facility #3. The new warehouse facility has a maximum borrowing capacity of $100.0 million and matures in one year. The agreement provides the Company with the ability to fund first mortgage loans on various real estate property types for a short-term period, using available cash in combination with advances under the facility. All borrowings bear interest at 30-day LIBOR plus 275 basis points. The lender retains a first priority security interest in all mortgages funded by such advances on a cross-collateralized basis. Repayments under the credit agreement mirror the underlying mortgage loan, with each advance repaid upon sale of the underlying mortgage loan.

The warehouse notes payable and the note payable are subject to various financial covenants. The Company was in compliance with all covenants related to the note payable, the Agency Warehouse Facilities, the Interim Warehouse Facilities, and CMBS Warehouse Facility #1 as of March 31, 2016. With respect to CMBS Warehouse Facility #2, the Company was in compliance with all but one of the covenants as of March 31, 2016. The Company received a one-time waiver for the one covenant for which it was not compliant.

NOTE 8—FAIR 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 entity's 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 1—Financial 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 2—Financial 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 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation.

The Company's 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 Company's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of the Company’s 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 periodically reassesses and adjusts, when necessary, 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 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 Company's assets and liabilities carried at fair value:

Derivative Instruments—The derivative positions consist of interest rate lock commitments (“IRLC”), forward sale agreements (“forwards”), interest rate swaps “(IRS”), and synthetic credit default swap index contracts (“CMBX”). The IRLCs and forwards 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. CMBX are traded on an active market with prices determined based on observable inputs such as credit curves, recovery rates, and current credit spreads obtained from market participants. IRS trade in the over-the-counter market where quoted prices are not available. Therefore, the Company uses internal valuation techniques with observable inputs from a liquid market, the most significant of which is the related yield curve, to estimate the fair value of interest rate swaps. There were no CMBX outstanding as of March 31, 2016 as the positions were closed on that date. During the rest of the three months ended March 31, 2016, the Company had CMBX with a $25.0 million notional amount outstanding. The Company classifies IRS and CMBX as Level 2.

Loans Held for Sale—The loans held for sale are reported at fair value as the Company has elected the fair value option for all loans held for sale. The Company determines the fair value of the loans held for sale intended to be sold to the GSEs and HUD using discounted cash flow models that incorporate quoted observable prices from market participants. The Company determines the fair value of the loans held for sale intended to be sold under a CMBS execution using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing of loans with similar characteristics. As necessary, these fair values are adjusted for typical securitization activities, including portfolio composition, market conditions, and liquidity. The Company classifies all loans held for sale as Level 2.

Pledged Securities—The 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 March 31, 2016, and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:


	Quoted Prices in		Significant		Significant
	Active Markets		Other		Other
	For Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Balance as of
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Period End
March 31, 2016
Assets
Loans held for sale	$	—	$	547,827	$	—	$	547,827
Pledged securities		75,225		—		—		75,225
Derivative assets		—		—		16,130		16,130
Total	$	75,225	$	547,827	$	16,130	$	639,182

Liabilities
Derivative liabilities	$	—	$	1,011	$	6,552	$	7,563
Total	$	—	$	1,011	$	6,552	$	7,563

December 31, 2015
Assets
Loans held for sale	$	—	$	2,499,111	$	—	$	2,499,111
Pledged securities		72,190		—		—		72,190
Derivative assets		—		—		11,678		11,678
Total	$	72,190	$	2,499,111	$	11,678	$	2,582,979

Liabilities
Derivative liabilities	$	—	$	—	$	1,333	$	1,333
Total	$	—	$	—	$	1,333	$	1,333

There were no transfers between any of the levels within the fair value hierarchy during the three months ended March 31, 2016.

Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below for the three months ended March 31, 2016 and 2015:


	Fair Value Measurements
	Using Significant Unobservable Inputs:
	Derivative Instruments
	For the three months ended
	March 31,
(in thousands)	2016		2015
Derivative assets and liabilities, net
Beginning balance	$	10,345	$	9,658
Settlements		(49,159)		(58,704)
Realized gains recorded in earnings (1)		38,814		49,046
Unrealized gains recorded in earnings (1)		9,578		23,674
Ending balance	$	9,578	$	23,674

(1)

Realized and unrealized gains from derivatives are recognized in Gains from mortgage banking activities in the Condensed Consolidated Statements of Income.

The following table presents information about significant unobservable inputs used in the measurement of the fair value of the Company’s Level 3 assets and liabilities as of March 31, 2016:


	Quantitative Information about Level 3 Measurements
(in thousands)	Fair Value		Valuation Technique	Unobservable Input (1)	Input Value (1)
Derivative assets	$	16,130	Discounted cash flow	Counterparty credit risk	—
Derivative liabilities	$	6,552	Discounted cash flow	Counterparty credit risk	—

(1)

Significant increases in this input may lead to significantly lower fair value measurements.

The carrying amounts and the fair values of the Company's financial instruments as of March 31, 2016 and December 31, 2015 are presented below:


	March 31, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair
(in thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	98,224	$	98,224	$	136,988	$	136,988
Restricted cash		10,006		10,006		5,306		5,306
Pledged securities		75,225		75,225		72,190		72,190
Loans held for sale		547,827		547,827		2,499,111		2,499,111
Loans held for investment, net		190,551		191,822		231,493		233,370
Derivative assets		16,130		16,130		11,678		11,678
Total financial assets	$	937,963	$	939,234	$	2,956,766	$	2,958,643

Financial liabilities:
Derivative liabilities	$	7,563	$	7,563	$	1,333	$	1,333
Warehouse notes payable		640,307		642,196		2,649,470		2,652,011
Note payable		164,388		168,155		164,462		168,431
Total financial liabilities	$	812,258	$	817,914	$	2,815,265


		Page

PART I	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	38

PART II	OTHER INFORMATION	39

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

	Signatures	42

	Exhibit Index	43