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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 3 Months Ended
Mar. 31, 2018
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 have control over the entity or 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, 2018. 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, 2018. 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, capitalized mortgage servicing rights, derivative instruments, and the disclosure of contingent liabilities. Actual results may vary from these estimates.

Contracts with Customers

Contracts with Customers—Substantially all of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is immaterial and derived from contracts with customers. The Company’s contracts with customers do not require significant judgment or estimates that affect the determination of the transaction price (including consideration of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is completed in a short period of time. Revenue derived from contracts with customers is included as a component of Other revenues and totaled $4.3 million and $4.9 million for the three months ended March 31, 2018 and 2017, respectively. The Company had no contract assets or liabilities as of March 31, 2018.

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 and are all multifamily loans with similar risk characteristics. As of March 31, 2018,  Loans held for investment, net consisted of four loans with an aggregate $60.2 million of unpaid principal balance less $0.2 million of net unamortized deferred fees and costs and $0.1 million of allowance for loan losses. As of December 31, 2017,  Loans held for investment, net consisted of five loans with an aggregate $67.0 million of unpaid principal balance less $0.4 million of net unamortized deferred fees and costs and $0.1 million of allowance for loan losses.

 

None of the loans held for investment was delinquent, impaired, or on non-accrual status as of March 31, 2018 or December 31, 2017. 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. The allowances for loan losses recorded as of March 31, 2018 and December 31, 2017 were based on the Company’s collective assessment of the portfolio.

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, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

 

 

March 31, 

 

(in thousands)

    

2018

    

2017

 

Provision (benefit) for loan losses

 

$
(14)

 

$

25

 

Provision (benefit) for risk-sharing obligations

 

 
(463)

 

 

(157)

 

Provision (benefit) for credit losses

 

$

(477)

 

$

(132)

 

 

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 sale or 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 during the period of time the loan is outstanding. Included in Net warehouse interest income for the three months ended March 31, 2018 and 2017 are the following components: 

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

 

 

March 31, 

 

(in thousands)

    

2018

    

2017

 

Warehouse interest income - loans held for sale

 

$

8,763

 

$

11,939

 

Warehouse interest expense - loans held for sale

 

 

(7,655)

 

 

(8,264)

 

Net warehouse interest income - loans held for sale

 

$

1,108

 

$

3,675

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

1,422

 

$

4,678

 

Warehouse interest expense - loans held for investment

 

 

(673)

 

 

(1,733)

 

Net warehouse interest income - loans held for investment

 

$

749

 

$

2,945

 

 

 

 

 

 

 

 

 

Total net warehouse interest income

 

$

1,857

 

$

6,620

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

 

 

 

 

 

 

 

 

For the three months ended 

 

 

 

March 31, 

 

(in thousands)

    

2018

    

2017

 

Warehouse interest income - loans held for sale

 

$

8,763

 

$

11,939

 

Warehouse interest expense - loans held for sale

 

 

(7,655)

 

 

(8,264)

 

Net warehouse interest income - loans held for sale

 

$

1,108

 

$

3,675

 

 

 

 

 

 

 

 

 

Warehouse interest income - loans held for investment

 

$

1,422

 

$

4,678

 

Warehouse interest expense - loans held for investment

 

 

(673)

 

 

(1,733)

 

Net warehouse interest income - loans held for investment

 

$

749

 

$

2,945

 

 

 

 

 

 

 

 

 

Total net warehouse interest income

 

$

1,857

 

$

6,620

 

 

 

 

 

 

 

 

 

Income Taxes—The Company records the excess tax benefits from stock compensation as a reduction to income tax expense. The Company recorded excess tax benefits of $4.1 million and $8.7 million during the three months ended March 31, 2018 and 2017, respectively

Statement of Cash Flows

Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed above) to be restricted cash and restricted cash equivalents. The following table, in conjunction with the detail of Pledged securities, at fair value presented above, 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, 2018 and 2017 and December 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

(in thousands)

2018

    

2017

    

2017

    

2016

 

Cash and cash equivalents

$

193,695

 

$

50,745

 

$

191,218

 

$

118,756

 

Restricted cash

 

16,991

 

 

9,313

 

 

6,677

 

 

9,861

 

Pledged cash and cash equivalents

 

74,445

 

 

84,808

 

 

88,785

 

 

82,742

 

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

$

285,131

 

$

144,866

 

$

286,680

 

$

211,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pledged Securities, at Fair Value

Pledge Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of March 31, 2018 and 2017 and December 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

(in thousands)

2018

    

2017

    

2017

    

2016

 

Pledged cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

2,630

 

$

1,524

 

$

2,201

 

$

4,358

 

Money market funds

 

71,815

 

 

83,284

 

 

86,584

 

 

78,384

 

Total pledged cash and cash equivalents

$

74,445

 

$

84,808

 

$

88,785

 

$

82,742

 

Agency debt securities

 

27,614

 

 

2,092

 

 

9,074

 

 

2,108

 

Total pledged securities, at fair value

$

102,059

 

$

86,900

 

$

97,859

 

$

84,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date. The investments in Agency debt securities consist of multifamily Agency mortgage-backed securities (“Agency MBS”) and have maturity dates ranging primarily from 2024 to 2030. As of March 31, 2018 and December 31, 2017, the fair value of the Agency debt securities approximated their amortized cost. As of March 31, 2018 and December 31, 2017, the total gains for securities with net gains in AOCI was $0.1 million and $0.1 million, respectively. As of March 31, 2018 and December 31, 2017, the total losses for securities with net losses in AOCI were $0.1 million and zero, respectively. As of March 31, 2018, the Company does not intend to sell any of the Agency debt securities, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.

Recently Adopted and Recently Announced Accounting Pronouncements

Recently Adopted and Recently Announced Accounting Pronouncements—The Company adopted Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606) in the first quarter of 2018 without an impact to the Company or its financial statements.  Substantially all of the Company’s revenue streams are related to loans, derivatives, financial instruments, and transfers and servicing, all of which are outside the scope of the new standard. The Company used the full retrospective method for adopting ASU 2014-09. However, there was no change to the revenue amounts recorded or an adjustment to the opening balance of retained earnings as the adoption of ASU 2014-09 did not result in a difference in the amount or timing of the Company’s revenues. Additionally, the Company did not recognize any contract assets or contract liabilities.

The Company adopted Accounting Standards Update 2016-01 (“ASU 2016-01”), Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of 2018 with no impact to the Company’s reported financial results as the Company does not have any equity investments not accounted for under the equity method.

In the first quarter of 2016, Accounting Standards 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 generally recognize lease expense for these leases on a straight-line basis, which is similar to the accounting treatment today. ASU 2016-02 requires additional disclosures and is effective for the Company January 1, 2019. It also requires entities 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 with a cumulative-effect adjustment to retained earnings recorded at the earliest comparative period. The Financial Accounting Standards Board (“FASB”) recently issued a proposed update to ASU 2016-02 that would provide companies with the option to apply a practical expedient that allows adoption of the provisions of ASU 2016-02 prospectively with a cumulative-effect adjustment recorded to retained earnings upon the date of adoption.

The Company intends to adopt the standard when required on January 1, 2019 and to elect the available practical expedients, including the proposed practical expedient discussed in the previous paragraph, if approved by the FASB. The Company has completed its analysis of the new standard and has begun to adapt its accounting systems for adoption. The Company expects to have its accounting systems ready in time for the adoption next year. The Company is also in the process of analyzing the disclosures that will be required for the new standard. We expect ASU 2016-02 to have an impact on the Consolidated Balance Sheets as quantified in the 2017 Form 10-K when we recognize ROU assets and the corresponding lease liability. We expect an immaterial impact on the statements of income. There will be no change to the classification of the Company’s leases, which are all currently classified as operating leases.

In the second quarter of 2016, Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was issued. 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.

The Company plans on adopting ASU 2016-13 when the standard is required to be adopted, January 1, 2020. 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 to increase when ASU 2016-13 is adopted.

 

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 materially 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 2017 Form 10-K.

Reclassifications

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