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.