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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 3 Months Ended
Mar. 31, 2017
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Consolidation

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

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to March 31, 2017. 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, 2017. No other material subsequent events have occurred that would require disclosure.

Use of Estimates

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 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

Comprehensive Income—For the three months ended March 31, 2017 and 2016, 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, 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 (collectively, the “Agencies”) 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, 2017,  Loans held for investment, net consisted of 14 loans with an aggregate $313.4 million of unpaid principal balance less $1.8 million of net unamortized deferred fees and costs and $0.4 million of allowance for loan losses. As of December 31, 2016,  Loans held for investment, net consisted of 12 loans with an aggregate $222.3 million of unpaid principal balance less $1.5 million of net unamortized deferred fees and costs and $0.4 million of allowance for loan losses.

 

The allowance for loan losses is the Company’s estimate of credit losses inherent in the interim 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 rates, 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 allowances for loan losses recorded as of March 31, 2017 and December 31, 2016 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, 2017 or December 31, 2016. 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 in 2012.

Provision (Benefit) for Credit Losses

 

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. NOTE 5 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

 

 

March 31, 

 

(in thousands)

    

2017

    

2016

 

Provision (benefit) for loan losses

 

$

25

 

$

(255)

 

Provision (benefit) for risk-sharing obligations

 

 

(157)

 

 

(154)

 

Provision (benefit) for credit losses

 

$

(132)

 

$

(409)

 

 

Net Warehouse Interest Income

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, 2017 and 2016 are the following components: 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

 

March 31, 

(in thousands)

    

2017

    

2016

Warehouse interest income - loans held for sale

 

$

11,939

 

$

13,523

Warehouse interest expense - loans held for sale

 

 

(8,264)

 

 

(8,348)

Net warehouse interest income - loans held for sale

 

$

3,675

 

$

5,175

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

4,678

 

$

2,822

Warehouse interest expense - loans held for investment

 

 

(1,733)

 

 

(1,266)

Net warehouse interest income - loans held for investment

 

$

2,945

 

$

1,556

 

 

 

 

 

 

 

Total net warehouse interest income

 

$

6,620

 

$

6,731

 

Income Taxes

Income Taxes—The Company records the excess tax benefits from stock compensation as a reduction to income tax expense. During the three months ended March 31, 2017 and 2016, the Company recorded excess tax benefits of $8.7 million and $0.3 million, respectively.

Statement of Cash Flows

Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers Pledged securities, at fair value to be restricted cash equivalents. The following table presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of March 31, 2017 and 2016 and December 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(in thousands)

2017

    

2016

    

2016

    

2015

 

Cash and cash equivalents

$

50,745

 

$

98,224

 

$

118,756

 

$

136,988

 

Restricted cash

 

9,313

 

 

10,006

 

 

9,861

 

 

5,306

 

Pledged securities, at fair value (restricted cash equivalents)

 

86,900

 

 

75,225

 

 

84,850

 

 

72,190

 

Total cash, cash equivalents, restricted cash, and restricted cash equivalents

$

146,958

 

$

183,455

 

$

213,467

 

$

214,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recently Adopted and Recently Announced Accounting Pronouncements

Recently Adopted Accounting Pronouncements—In the first quarter of 2017, Accounting Standards Update 2017-04 (“ASU 2017-04”), Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, was issued. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of a reporting unit’s goodwill. ASU 2017-04 is effective for the Company on January 1, 2020, with early adoption permitted. The Company prospectively adopted ASU 2017-04 in the first quarter of 2017. There was no impact to the Company as the Company was not required to meaure a goodwill impairment charge.

 

In the first quarter of 2017, Accounting Standards Update 2017-01 (“ASU 2017-01”), Business Combinations (Topic 805): Clarifying the Definition of a Business, was issued. ASU 2017-01 changed the definition of a business in an effort to assist entities with evaluating whether a set of transferred assets and activities is a business. ASU 2017-01 is effective for the Company on January 1, 2018, with early adoption permitted. The Company prospectively adopted ASU 2017-01 in the first quarter of 2017 with no current impact to the Company.

Recently Announced Accounting Pronouncements—The following table presents the accounting pronouncements that the Financial Accounting Standards Board (“FASB”) has issued and that have the potential to impact the Company but have not yet been adopted by the Company.

 

 

 

 

 

 

Standard

Issue Date

Description

Effective Date

Expected Financial Statement Impact

Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

Q2 2016

ASU 2016-13 ("the Standard") represents a significant change to the incurred loss model currently used to account for credit losses. The Standard requires an entity to estimate the credit losses expected over the life of the credit exposure upon initial recognition of that exposure. The expected credit losses consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Exposures with similar risk characteristics are required to be grouped together when estimating expected credit losses. The initial estimate and subsequent changes to the estimated credit losses are required to be reported in current earnings in the income statement and through an allowance in the balance sheet. ASU 2016-13 is applicable to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures. The Standard will modify the way the Company estimates its allowance for risk-sharing obligations and its allowance for loan losses. ASU 2016-13 requires modified retrospective application to all outstanding, in-scope instruments, with a cumulative-effect adjustment recorded to opening retained earnings as of the beginning of the period of adoption.

January 1, 2020 (early adoption permitted January 1, 2019)

The Company is in the preliminary stages of implementation as it is still in the process of determining the significance of the impact the Standard will have on its financial statements and the timing of when it will adopt ASU 2016-13. The Company expects its Allowance for risk-sharing obligations and allowance for loan losses to increase when ASU 2016-13 is adopted. The magnitude of the impacts will not be known until closer to the adoption date.

ASU 2016-02, Leases (Topic 842)

Q1 2016

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 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.

January 1, 2019 (early adoption is permitted)

The Company is in the preliminary stages of implementation as it is still in the process of determining the significance of the impact ASU 2016-02 will have on its financial statements and the timing of when it will adopt ASU 2016-02.

ASU 2016-01, Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities

Q1 2016

The guidance requires that unconsolidated equity investments not accounted for under the equity method be recorded at fair value, with changes in fair value recorded through net income. The accounting principles that permitted available-for-sale classification with unrealized holding gains and losses recorded in other comprehensive income for equity securities will no longer be applicable. The guidance is not applicable to debt securities and loans and requires minor changes to the disclosure and presentation of financial instruments. ASU 2016-01 generally requires a cumulative-effect adjustment to opening retained earnings as of the beginning of the period of adoption.

January 1, 2018 (early adoption permitted for certain parts)

The Company does not believe that ASU 2016-01 will have a material impact on its reported financial results.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

Q2 2014

ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The guidance in the ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the Accounting Standards Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving the core principle: 1) identifying the contract with the customer, 2) identifying the performance obligations in the contract, 3) determining the transaction price, 4) allocating the transaction price to the performance obligations, and 5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. The guidance permits the use of the full retrospective or modified retrospective transition methods.

January 1, 2018 (early adoption permitted January 1, 2017)

The Company completed its analysis of ASU 2014-09 and concluded that it will not have a material impact on the amount or timing of revenue the Company records under its current revenue recognition practices. Additionally, the Company believes that this ASU will not impact the presentation of the Company's financial statements or require significant additional footnote disclosures.

 

There are no other accounting pronouncements previously issued by the FASB but not yet effective or not yet adopted by the Company that have the potential to impact the Company’s condensed consolidated financial statements.

 

There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2016 Form 10-K other than the changes made pursuant to the adoption of the two ASUs as discussed above.

Reclassifications

Reclassifications—The Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation.