10-Q 1 wd-20220331x10q.htm 10-Q
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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, 2022

OR

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)

 

 

7272 Wisconsin Avenue, Suite 1300

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 Par Value Per Share

WD

New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  

Smaller Reporting Company

 

Accelerated Filer

Emerging Growth Company

 

Non-accelerated Filer

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 28, 2022, there were 33,130,194 total shares of common stock outstanding.

Walker & Dunlop, Inc.
Form 10-Q
INDEX

Page

PART I

 

FINANCIAL INFORMATION

3

 

 

 

Item 1.

 

Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 4.

Controls and Procedures

57

PART II

OTHER INFORMATION

57

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

59

Signatures

60

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

March 31, 2022

December 31, 2021

Assets

 

Cash and cash equivalents

$

141,375

$

305,635

Restricted cash

 

41,584

 

42,812

Pledged securities, at fair value

 

148,647

 

148,996

Loans held for sale, at fair value

 

703,629

 

1,811,586

Loans held for investment, net

 

216,620

 

269,125

Mortgage servicing rights

 

976,554

 

953,845

Goodwill

908,744

698,635

Other intangible assets

 

211,405

 

183,904

Derivative assets

 

112,023

 

37,364

Receivables, net

 

249,305

 

212,019

Committed investments in tax credit equity

223,771

177,322

Other assets

 

405,974

 

364,746

Total assets

$

4,339,631

$

5,205,989

Liabilities

Warehouse notes payable

$

924,280

$

1,941,572

Notes payable

 

726,555

 

740,174

Allowance for risk-sharing obligations

 

53,244

 

62,636

Derivative liabilities

 

12,400

 

6,403

Commitments to fund investments in tax credit equity

206,605

162,747

Other liabilities

779,376

714,250

Total liabilities

$

2,702,460

$

3,627,782

Stockholders' Equity

Preferred stock (authorized 50,000 shares; none issued)

$

$

Common stock ($0.01 par value; authorized 200,000 shares; issued and outstanding 32,398 shares at March 31, 2022 and 32,049 shares at December 31, 2021)

 

324

 

320

Additional paid-in capital ("APIC")

 

387,009

 

393,022

Accumulated other comprehensive income ("AOCI")

1,588

2,558

Retained earnings

 

1,205,384

 

1,154,252

Total stockholders’ equity

$

1,594,305

$

1,550,152

Noncontrolling interests

 

42,866

 

28,055

Total equity

$

1,637,171

$

1,578,207

Commitments and contingencies (NOTES 2 and 9)

 

 

Total liabilities and equity

$

4,339,631

$

5,205,989

See accompanying notes to condensed consolidated financial statements.

3

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

For the three months ended

March 31, 

    

2022

    

2021

 

Revenues

Loan origination and debt brokerage fees, net

$

82,310

$

75,879

Fair value of expected net cash flows from servicing, net

52,730

57,935

Servicing fees

 

72,681

 

65,978

Property sales broker fees

23,398

9,042

Net warehouse interest income

 

4,773

 

4,555

Escrow earnings and other interest income

 

1,803

 

2,117

Other revenues

 

81,749

 

8,782

Total revenues

$

319,444

$

224,288

Expenses

Personnel

$

144,181

$

96,215

Amortization and depreciation

56,152

46,871

Provision (benefit) for credit losses

 

(9,498)

 

(11,320)

Interest expense on corporate debt

 

6,405

 

1,765

Other operating expenses

 

32,214

 

17,587

Total expenses

$

229,454

$

151,118

Income from operations

$

89,990

$

73,170

Income tax expense

 

19,460

 

15,118

Net income before noncontrolling interests

$

70,530

$

58,052

Less: net income (loss) from noncontrolling interests

 

(679)

 

Walker & Dunlop net income

$

71,209

$

58,052

Net change in unrealized gains (losses) on pledged available-for-sale securities, net of taxes

(970)

(158)

Walker & Dunlop comprehensive income

$

70,239

$

57,894

Basic earnings per share (NOTE 10)

$

2.14

$

1.82

Diluted earnings per share (NOTE 10)

$

2.12

$

1.79

Basic weighted-average shares outstanding

 

32,219

 

30,823

Diluted weighted-average shares outstanding

32,617

 

31,276

See accompanying notes to condensed consolidated financial statements.

4

Walker & Dunlop, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

(In thousands, except per share data)

(Unaudited)

For the three months ended March 31, 2022

Stockholders' Equity

Common Stock

Retained

Noncontrolling

Total Stockholders'

  

Shares

  

Amount

  

APIC

  

AOCI

  

Earnings

  

Interests

  

Equity

 

Balance at December 31, 2021

32,049

$

320

$

393,022

$

2,558

$

1,154,252

$

28,055

$

1,578,207

Walker & Dunlop net income

71,209

71,209

Net income (loss) from noncontrolling interests

(679)

(679)

Other comprehensive income (loss), net of tax

(970)

(970)

Stock-based compensation - equity classified

10,812

10,812

Issuance of common stock in connection with equity compensation plans

544

5

15,526

15,531

Repurchase and retirement of common stock

(195)

(1)

(27,048)

(27,049)

Noncontrolling interests added due to new consolidations

(5,303)

15,490

10,187

Cash dividends paid ($0.60 per common share)

(20,077)

(20,077)

Balance at March 31, 2022

32,398

$

324

$

387,009

$

1,588

$

1,205,384

$

42,866

$

1,637,171

For the three months ended March 31, 2021

Stockholders' Equity

Common Stock

Retained

Total Stockholders'

  

Shares

  

Amount

  

APIC

  

AOCI

  

Earnings

  

Equity

Balance at December 31, 2020

30,678

$

307

$

241,004

$

1,968

$

952,943

$

1,196,222

Walker & Dunlop net income

58,052

58,052

Other comprehensive income (loss), net of tax

(158)

(158)

Stock-based compensation - equity classified

7,836

7,836

Issuance of common stock in connection with equity compensation plans

430

4

12,602

12,606

Repurchase and retirement of common stock

(131)

(1)

(13,373)

(13,374)

Cash dividends paid ($0.50 per common share)

(16,052)

(16,052)

Balance at March 31, 2021

30,977

$

310

$

248,069

$

1,810

$

994,943

$

1,245,132

See accompanying notes to condensed consolidated financial statements.

5

Walker & Dunlop, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

For the three months ended March 31, 

 

    

2022

    

2021

 

Cash flows from operating activities

Net income before noncontrolling interests

$

70,530

$

58,052

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

 

(52,730)

 

(57,935)

Change in the fair value of premiums and origination fees

 

2,883

 

21,562

Amortization and depreciation

 

56,152

 

46,871

Provision (benefit) for credit losses

 

(9,498)

 

(11,320)

Gain from revaluation of previously held equity-method investment

(39,641)

Originations of loans held for sale

(3,185,019)

(3,577,153)

Proceeds from transfers of loans held for sale

4,198,206

4,917,187

Other operating activities, net

(68,955)

(81,572)

Net cash provided by (used in) operating activities

$

971,928

$

1,315,692

Cash flows from investing activities

Capital expenditures

$

(11,790)

$

(1,794)

Purchases of equity-method investments

(5,941)

(1,124)

Purchases of pledged available-for-sale ("AFS") securities

(7,010)

(2,000)

Proceeds from prepayment and sale of pledged AFS securities

1,672

20,884

Investments in joint ventures

(5,040)

(18,445)

Distributions from joint ventures

9,241

11,419

Acquisitions, net of cash received

(78,465)

(7,506)

Originations of loans held for investment

 

(107)

 

(33,750)

Principal collected on loans held for investment

 

53,000

 

113,495

Net cash provided by (used in) investing activities

$

(44,440)

$

81,179

Cash flows from financing activities

Borrowings (repayments) of warehouse notes payable, net

$

(1,006,545)

$

(1,400,704)

Borrowings of interim warehouse notes payable

 

 

25,313

Repayments of interim warehouse notes payable

 

(11,200)

 

(29,534)

Repayments of notes payable

 

(13,759)

 

(745)

Proceeds from issuance of common stock

 

153

 

12,606

Repurchase of common stock

 

(27,049)

 

(13,374)

Cash dividends paid

(20,077)

(16,052)

Payment of contingent consideration

(17,612)

Debt issuance costs

 

(567)

 

(769)

Net cash provided by (used in) financing activities

$

(1,096,656)

$

(1,423,259)

Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2)

$

(169,168)

$

(26,388)

Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period

 

393,180

 

358,002

Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period

$

224,012

$

331,614

Supplemental Disclosure of Cash Flow Information:

Cash paid to third parties for interest

$

13,037

$

9,621

Cash paid for income taxes

1,290

See accompanying notes to condensed consolidated financial statements.

6

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 may not include certain financial statement disclosures and other information required for annual financial statements. The accompanying condensed consolidated financial statements 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, 2021 (“2021 Form 10-K”). In the opinion of management, all adjustments 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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or thereafter.

Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of commercial real estate debt and equity financing products, provides multifamily property sales brokerage and valuation services, engages in commercial real estate investment management activities with a particular focus on the affordable housing sector through low-income housing tax credit (“LIHTC”) syndication, provides housing market research, and delivers real estate-related investment banking and advisory services.

Through its agency lending products, 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”). Through its debt brokerage products, the Company brokers, and in some cases services, loans for various life insurance companies, commercial banks, commercial mortgage-backed securities issuers, and other institutional investors.

The Company also provides a variety of commercial real estate debt and equity solutions through its principal lending and investing products. Interim loans on multifamily properties are offered (i) through the Company and recorded on the Company’s balance sheet (the “Interim Loan Program”) and (ii) through a joint venture with an affiliate of Blackstone Mortgage Trust, Inc., in which the Company holds a 15% ownership interest (the “Interim Program JV”).    

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 owns a majority of the voting interests or has control over an entity, 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 March 31, 2022. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to March

7

31, 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, 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 $5.9 million and $5.3 million for the three months ended March 31, 2022 and 2021, respectively.

Loans Held for Investment, net—Loans held for investment are multifamily loans originated by the Company through the Interim Loan 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 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 March 31, 2022, Loans held for investment, net consisted of 10 loans with an aggregate $221.6 million of unpaid principal balance less $0.9 million of net unamortized deferred fees and costs and $4.1 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 15 basis points as of both March 31, 2022 and December 31, 2021. The loss rate for the remaining period until maturity was six basis points and nine basis points as of March 31, 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 March 31, 2022 and December 31, 2021. The Company had $3.7 million in collateral-based reserves for this loan as of both March 31, 2022 and December 31, 2021 and has not recorded any interest related to this loan since it went on non-accrual status. All other loans were current as of March 31, 2022 and December 31, 2021. The amortized cost basis of loans that were current as of March 31, 2022 and December 31, 2021 was $206.0 million and $258.6 million, respectively. As of March 31, 2022, $178.6 million and $28.3 million of the loans that were current were originated in 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 LossesThe 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 months ended March 31, 2022 and 2021:

8

For the three months ended 

March 31, 

Components of Provision (Benefit) for Credit Losses (in thousands)

    

2022

    

2021

 

Provision (benefit) for loan losses

$

(106)

$

(587)

Provision (benefit) for risk-sharing obligations

 

(9,392)

 

(10,733)

Provision (benefit) for credit losses

$

(9,498)

$

(11,320)

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 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 in 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 months ended March 31, 2021. Included in Net warehouse interest income for the three months ended March 31, 2022 and 2021 are the following components:

For the three months ended 

March 31, 

Components of Net Warehouse Interest Income (in thousands)

    

2022

    

2021

 

Warehouse interest income - loans held for sale

$

8,863

$

9,118

Warehouse interest expense - loans held for sale

 

(5,333)

 

(6,659)

Net warehouse interest income - loans held for sale

$

3,530

$

2,459

Warehouse interest income - loans held for investment

$

2,350

$

3,228

Warehouse interest expense - loans held for investment

 

(1,107)

 

(1,132)

Warehouse interest income - secured borrowings

865

Warehouse interest expense - secured borrowings

(865)

Net warehouse interest income - loans held for investment

$

1,243

$

2,096

Total net warehouse interest income

$

4,773

$

4,555

        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 March 31, 2022 and 2021 and December 31, 2021 and 2020.

March 31, 

December 31,

(in thousands)

2022

    

2021

    

2021

    

2020

 

Cash and cash equivalents

$

141,375

$

277,277

$

305,635

$

321,097

Restricted cash

41,584

14,805

42,812

19,432

Pledged cash and cash equivalents (NOTE 9)

 

41,053

 

39,532

 

44,733

 

17,473

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

$

224,012

$

331,614

$

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 $4.9 million and $4.1 million for the three months ended March 31, 2022 and 2021, respectively.

9

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. Substantially all 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 substantially 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 months ended March 31, 2022 and 2021:  

For the three months ended 

March 31, 

Description (in thousands)

    

2022

    

2021

 

Statement of income line item

Certain loan origination fees

$

37,365

$

23,901

Loan origination and debt brokerage fees, net

Property sales broker fees

23,398

9,042

Property sales broker fees

Investment management fees, application fees, subscription revenues, other revenues from LIHTC operations, and other

 

28,305

 

6,250

Other revenues

Total revenues derived from contracts with customers

$

89,068

$

39,193

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 March 31, 2022.

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

NOTE 3—MORTGAGE SERVICING RIGHTS

The fair value of the mortgage servicing rights (“MSRs”) was $1.3 billion as of both March 31, 2022 and December 31, 2021. 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 related to the discount rate:

The impact of a 100-basis point increase in the discount rate at March 31, 2022 would be a decrease in the fair value of $39.1 million to the MSRs outstanding as of March 31, 2022.

The impact of a 200-basis point increase in the discount rate at March 31, 2022 would be a decrease in the fair value of $75.6 million to the MSRs outstanding as of March 31, 2022.

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.

10

Activity related to MSRs for the three months ended March 31, 2022 and 2021 follows:

For the three months ended

 

March 31, 

 

Roll Forward of MSRs (in thousands)

    

2022

    

2021

 

Beginning balance

$

953,845

$

862,813

Additions, following the sale of loan

 

76,854

 

96,640

Amortization

 

(46,357)

 

(42,552)

Pre-payments and write-offs

 

(7,788)

 

(7,017)

Ending balance

$

976,554

$

909,884

The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s MSRs as of March 31, 2022 and December 31, 2021:

Components of MSRs (in thousands)

March 31, 2022

December 31, 2021

Gross value

$

1,598,350

$

1,548,870

Accumulated amortization

 

(621,796)

 

(595,025)

Net carrying value

$

976,554

$

953,845

The expected amortization of MSRs shown in the Condensed Consolidated Balance Sheet as of March 31, 2022 is shown in the table below. Actual amortization may vary from these estimates.

  

Expected

(in thousands)

  Amortization  

Nine Months Ending December 31, 

2022

$

135,495

Year Ending December 31, 

2023

$

171,194

2024

 

152,155

2025

 

129,694

2026

 

109,489

2027

 

92,535

Thereafter

185,992

Total

$

976,554

NOTE 4—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. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers. The guaranty obligation is presented as a component of Other liabilities on the Condensed Consolidated Balance Sheets. Activity related to the guaranty obligation for the three months ended March 31, 2022 and 2021 is presented in the following table:

For the three months ended

 

March 31, 

 

Roll Forward of Guaranty Obligation (in thousands)

    

2022

    

2021

 

Beginning balance

$

47,378

$

52,306

Additions, following the sale of loan

 

1,551

 

1,721

Amortization and write-offs

 

(2,439)

 

(2,191)

Ending balance

$

46,490

$

51,836

11

Substantially all loans sold under the Fannie Mae DUS program contain partial or full risk-sharing guaranties that are based on the credit performance of the loan. The Company records an estimate of the loss reserve for CECL for all loans in its Fannie Mae at-risk servicing portfolio and presents this loss reserve as Allowance for risk-sharing obligations on the Condensed Consolidated Balance Sheets.

Activity related to the allowance for risk-sharing obligations for the three months ended March 31, 2022 and 2021 follows:

For the three months ended

 

March 31, 

 

Roll Forward of Allowance for Risk-Sharing Obligations (in thousands)

    

2022

    

2021

 

Beginning balance

$

62,636

$

75,313

Provision (benefit) for risk-sharing obligations

 

(9,392)

 

(10,733)

Write-offs

 

 

Ending balance

$

53,244

$

64,580

During the first quarter of 2022, the Company updated its historical loss rate factor calculation to the current 10-year rolling period. The historical loss rate used for the calculation of the CECL reserve was 1.2 basis points as of March 31, 2022 compared to 1.8 basis points as of December 31, 2021, resulting in the benefit for risk-sharing obligations for the three months ended March 31, 2022 seen above. The loss rates for the forecast period and the reversion period did not change from December 31, 2021. During the first quarter of 2021, reported and forecasted unemployment rates significantly improved compared to December 31, 2020. In response to improving unemployment statistics and the expected continued overall health of the multifamily market, the Company reduced the loss rate for the forecast period to four basis points as of March 31, 2021 from six basis points as of December 31, 2020, resulting in the benefit for risk-sharing obligations for the three months ended March 31, 2021 as seen above.

The calculated CECL reserve for the Company’s $49.7 billion at-risk Fannie Mae servicing portfolio as of March 31, 2022 was $42.5 million compared to $52.3 million as of December 31, 2021. The weighted-average remaining life of the at-risk Fannie Mae servicing portfolio as of March 31, 2022 was 7.4 years compared to 7.5 years as of December 31, 2021.

Three loans had aggregate collateral-based reserves of $10.8 million and $10.3 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and 2021, the maximum quantifiable contingent liability associated with the Company’s guaranties for the at-risk loans serviced under the Fannie Mae DUS agreement was $10.2 billion and $9.3 billion, respectively. This maximum quantifiable contingent liability relates to the at-risk loans serviced for Fannie Mae at the specific point in time indicated. 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 were determined to be without value at the time of settlement.

NOTE 5—SERVICING

The total unpaid principal balance of loans the Company was servicing for various institutional investors was $116.3 billion as of March 31, 2022 compared to $115.7 billion as of December 31, 2021.

As of March 31, 2022 and December 31, 2021, custodial escrow accounts relating to loans serviced by the Company totaled $2.5 billion and $3.7 billion, respectively. These amounts are not included in the Condensed Consolidated Balance Sheets as such amounts are not Company assets; however, the Company is entitled to earn interest income on these escrow balances, presented as a component of Escrow earnings and other interest income in the Condensed Consolidated Statements of Income. Certain cash deposits at other financial institutions exceed the Federal Deposit Insurance Corporation insured limits. The Company places these deposits with financial institutions that meet the requirements of the Agencies and where it believes the risk of loss to be minimal.

12

NOTE 6—WAREHOUSE NOTES PAYABLE

As of March 31, 2022, to provide financing to borrowers under the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $3.8 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of these Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale under the Company’s approved programs. The Company’s ability to originate mortgage loans for sale depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.

Additionally, as of March 31, 2022, the Company has arranged for warehouse lines of credit in the amount of $0.5 billion with certain national banks to assist in funding loans held for investment under the Interim Loan Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The Company’s ability to originate loans held for investment depends upon its ability to secure and maintain these types of short-term financings on acceptable terms.  

The maximum amount and outstanding borrowings under Warehouse notes payable at March 31, 2022 follow:

March 31, 2022

 

(dollars in thousands)

    

Committed

    

Uncommitted

Total Facility

Outstanding

    

    

 

Facility(1)

Amount

Amount

Capacity

Balance

Interest rate(2)

 

Agency Warehouse Facility #1

$

425,000

$

$

425,000

$

49,860

 

Adjusted Term SOFR plus 1.30%

Agency Warehouse Facility #2

 

700,000

 

300,000

 

1,000,000

 

46,647

30-day LIBOR plus 1.30%

Agency Warehouse Facility #3

 

600,000

 

265,000

 

865,000

 

274,690

 

30-day LIBOR plus 1.30%

Agency Warehouse Facility #4

350,000

350,000

128,298

30-day LIBOR plus 1.30%

Agency Warehouse Facility #5

1,000,000

1,000,000

135,453

Adjusted Term SOFR plus 1.45%

Agency Warehouse Facility #6

150,000

50,000

200,000

24,800

30-day LIBOR plus 1.30%

Total National Bank Agency Warehouse Facilities

$

2,225,000