SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2022

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of Significant Accounting Policies

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly-owned subsidiaries, and its majority owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or the voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it holds a variable interest in a VIE and has a controlling financial interest and therefore is considered the primary beneficiary, the Company consolidates the entity. In instances where the Company holds a variable interest in a VIE but is not the primary beneficiary, the Company uses the equity-method of accounting.

If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity. If the Company does not have a majority voting interest but has significant influence, it uses the equity method of accounting. In instances where the Company owns less than 100% of the equity interests of an entity but holds a controlling financial interest and is the primary beneficiary or owns a majority of the voting interests, the Company accounts for the portion of equity not attributable to Walker & Dunlop, Inc. as Noncontrolling interests on the Condensed Consolidated Balance Sheets and the portion of net income not attributable to Walker & Dunlop, Inc. as Net income (loss) from noncontrolling interests in the Condensed Consolidated Statements of Income.

Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to June 30, 2022. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to June 30, 2022. There have been no other material subsequent events that would require recognition in the condensed consolidated financial statements.

Use of Estimates—The preparation of condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, including the allowance for risk-sharing obligations, initial fair value of capitalized mortgage servicing

rights, asset management fee receivable related to LIHTC funds, derivative instruments, estimation of contingent consideration for business combinations, estimation of the fair value of the Apprise joint venture (as discussed in NOTE 7), and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates.

Co-broker Fees—Co-broker fees, which are netted against Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income, were $4.4 million and $3.6 million for the three months ended June 30, 2022 and 2021, respectively and $10.3 million and $8.9 million for the six months ended June 30, 2022 and 2021, respectively.

Loans Held for Investment, net—Loans held for investment are multifamily interim loans originated by the Company for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing (“Interim Loan Program”). These loans have terms of up to three years and are all adjustable-rate, interest-only, multifamily loans with similar risk characteristics and no geographic concentration. 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.

As of June 30, 2022, Loans held for investment, net consisted of nine loans with an aggregate $252.1 million of unpaid principal balance less $0.9 million of net unamortized deferred fees and costs and $4.0 million of allowance for loan losses. As of December 31, 2021, Loans held for investment, net consisted of 12 loans with an aggregate $274.5 million of unpaid principal balance less $1.2 million of net unamortized deferred fees and costs and $4.2 million of allowance for loan losses.

The Company assesses the credit quality of loans held for investment in the same manner as it does for the loans in the Fannie Mae at-risk portfolio and records an allowance for these loans as necessary. The allowance for loan losses is estimated collectively for loans with similar characteristics. The collective allowance is based on the same methodology that the Company uses to estimate its allowance for risk-sharing obligations under the Current Expected Credit Losses (“CECL”) standard for at-risk Fannie Mae Delegated Underwriting and Servicing (“DUS”) loans (with the exception of a reversion period) because the nature of the underlying collateral is the same, and the loans have similar characteristics, except they are significantly shorter in maturity. The reasonable and supportable forecast period used for the CECL allowance for loans held for investment is one year.

The loss rate for the forecast period was 11 basis points and 15 basis points as of June 30, 2022 and December 31, 2021, respectively. The loss rate for the remaining period until maturity was six basis points and nine basis points as of June 30, 2022 and December 31, 2021, respectively.

One loan held for investment with an unpaid principal balance of $14.7 million was delinquent and on non-accrual status as of June 30, 2022 and December 31, 2021. The Company had $3.7 million in collateral-based reserves for this loan as of both June 30, 2022 and December 31, 2021 and has not recorded any interest related to this loan since it went on non-accrual status in 2019. All other loans were current as of June 30, 2022 and December 31, 2021. The amortized cost basis of loans that were current as of June 30, 2022 and December 31, 2021 was $236.3 million and $258.6 million, respectively. As of June 30, 2022, $48.6 million, $160.5 million, and $28.3 million of the loans that were current were originated in 2022, 2021, and 2019, respectively. Other than the defaulted loan noted above, the Company has not experienced any delinquencies related to loans held for investment.

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 4 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the three and six months ended June 30, 2022 and 2021:

	For the three months ended				For the six months ended
	June 30,				June 30,
Components of Provision (Benefit) for Credit Losses (in thousands)	2022		2021		2022		2021
Provision (benefit) for loan losses	$	(71)	$	(75)	$	(177)	$	(662)
Provision (benefit) for risk-sharing obligations		(4,769)		(4,251)		(14,161)		(14,984)
Provision (benefit) for credit losses	$	(4,840)	$	(4,326)	$	(14,338)	$	(15,646)

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. Generally, a substantial portion of the Company’s loans is financed with matched borrowings under one of its warehouse facilities. The remaining portion of loans not funded with matched borrowings is financed with the Company’s own cash. The Company also occasionally fully funds a small number of loans held for sale or loans held for investment with its 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. The Company had a portfolio of participating interests in loans held for investment that was accounted for as a secured borrowing and paid off at the end of the second quarter of 2021. The Company recognized Net warehouse interest income on the unpaid principal balance of the loans and secured borrowing for the three and six months ended June 30, 2021. Included in Net warehouse interest income for the three and six months ended June 30, 2022 and 2021 are the following components:

	For the three months ended				For the six months ended
	June 30,				June 30,
Components of Net Warehouse Interest Income (in thousands)	2022		2021		2022		2021
Warehouse interest income - loans held for sale	$	12,175	$	7,863	$	21,038	$	16,981
Warehouse interest expense - loans held for sale		(8,468)		(4,979)		(13,801)		(11,638)
Net warehouse interest income - loans held for sale	$	3,707	$	2,884	$	7,237	$	5,343
Warehouse interest income - loans held for investment	$	3,015	$	2,962	$	5,365	$	6,190
Warehouse interest expense - loans held for investment		(1,454)		(1,216)		(2,561)		(2,348)
Warehouse interest income - secured borrowings		—		883		—		1,748
Warehouse interest expense - secured borrowings		—		(883)		—		(1,748)
Net warehouse interest income - loans held for investment	$	1,561	$	1,746	$	2,804	$	3,842
Total net warehouse interest income	$	5,268	$	4,630	$	10,041	$	9,185

        Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total 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 June 30, 2022 and 2021 and December 31, 2021 and 2020.

	June 30,				December 31,
(in thousands)	2022		2021		2021		2020
Cash and cash equivalents	$	151,252	$	326,518	$	305,635	$	321,097
Restricted cash		34,361		15,842		42,812		19,432
Pledged cash and cash equivalents (NOTE 9)		10,149		47,396		44,733		17,473
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	195,762	$	389,756	$	393,180	$	358,002

        Income Taxes—The Company records the realizable excess tax benefits from stock-based compensation as a reduction to income tax expense. The realizable excess tax benefits were $0.3 million and $1.2 million for the three months ended June 30, 2022 and 2021, respectively, and $5.2 million for each of the six months ended June 30, 2022 and 2021.

Contracts with Customers—A majority 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 derived from contracts with customers. The majority of the Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the majority all of the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The following table presents information about the Company’s contracts with customers for the three and six months ended June 30, 2022 and 2021:  

	For the three months ended				For the six months ended
	June 30,				June 30,
Description (in thousands)	2022		2021		2022		2021		Statement of income line item
Certain loan origination fees	$	53,281	$	43,222	$	90,646	$	67,123	Loan origination and debt brokerage fees, net
Property sales broker fees		46,386		22,454		69,784		31,496	Property sales broker fees
Investment management fees		10,282		3,815		22,930		6,551	Investment management fees
Application fees, subscription revenues, other revenues from LIHTC operations, and other revenues		35,198		4,113		50,855		7,627	Other revenues
Total revenues derived from contracts with customers	$	145,147	$	73,604	$	234,215	$	112,797

Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.

Recently Adopted and Recently Announced Accounting Pronouncements—There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2021 Form 10-K. There are no recently announced but not yet effective accounting pronouncements that are expected to have a material impact to the Company as of June 30, 2022.

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