Table of Contents


UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2015

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 1-13759
 
REDWOOD TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
68-0329422
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

One Belvedere Place, Suite 300
Mill Valley, California
 
94941
(Address of Principal Executive Offices)
 
(Zip Code)

(415) 389-7373
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Common Stock, $0.01 par value per share
 
          84,257,726 shares outstanding as of May 4, 2015




Table of Contents

REDWOOD TRUST, INC.
2015 FORM 10-Q REPORT
TABLE OF CONTENTS
 
 
 
 
Page
PART I —
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II —
OTHER INFORMATION
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 




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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

 
March 31, 2015
 
December 31, 2014
ASSETS (1)
 
 
 
 
Residential loans, held-for-sale, at fair value
 
$
1,094,885

 
$
1,342,519

Residential loans, held-for-investment, at fair value (2)
 
2,304,870

 
2,056,054

Commercial loans, held-for-sale, at fair value
 
54,407

 
166,234

Commercial loans, held-for-investment (includes $72,619 and $71,262 at fair value)
 
405,935

 
400,693

Real estate securities, at fair value
 
1,285,243

 
1,379,230

Mortgage servicing rights, at fair value
 
120,324

 
139,293

Cash and cash equivalents
 
303,820

 
269,730

Total earning assets
 
5,569,484

 
5,753,753

Restricted cash
 
725

 
628

Accrued interest receivable
 
17,970

 
18,222

Derivative assets
 
30,546

 
16,417

Deferred securities issuance costs
 
14,302

 
16,050

Other assets
 
182,992

 
113,896

Total Assets
 
$
5,816,019

 
$
5,918,966

 
 
 
 
 
LIABILITIES AND EQUITY (1)
 
 
 
 
Liabilities
 
 
 
 
Short-term debt
 
$
1,502,164

 
$
1,793,825

Accrued interest payable
 
14,319

 
8,503

Derivative liabilities
 
68,064

 
58,331

Accrued expenses and other liabilities
 
60,135

 
52,244

Deferred tax liability
 
10,237

 
10,236

Asset-backed securities issued (includes $1,239,065 and $0 at fair value) (2)
 
1,353,021

 
1,545,119

Long-term debt (includes $68,707 and $66,707 at fair value)
 
1,550,869

 
1,194,567

Total liabilities
 
4,558,809

 
4,662,825

Equity
 
 
 
 
Common stock, par value $0.01 per share, 180,000,000 shares authorized; 83,748,621and 83,443,141 issued and outstanding
 
837

 
834

Additional paid-in capital
 
1,779,777

 
1,774,030

Accumulated other comprehensive income
 
135,640

 
140,688

Cumulative earnings
 
931,396

 
906,867

Cumulative distributions to stockholders
 
(1,590,440
)
 
(1,566,278
)
Total equity
 
1,257,210

 
1,256,141

Total Liabilities and Equity
 
$
5,816,019

 
$
5,918,966

——————
(1)
Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to the primary beneficiary (Redwood Trust, Inc.). At March 31, 2015 and December 31, 2014, assets of consolidated VIEs totaled $1,716,563 and $1,900,208, respectively, and liabilities of consolidated VIEs totaled $1,354,298 and $1,546,490, respectively. See Note 4 for further discussion.
(2)
On January 1, 2015, we adopted ASU 2014-13 and began to account for residential loans held-for-investment and asset backed securities issued at consolidated Sequoia entities (which are VIEs) at fair value. At December 31, 2014, amounts presented in residential loans held-for-investment for these assets included $1,474,386 at historical cost. See Note 3 for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.

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REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
 
Three Months Ended
March 31,
(Unaudited)
 
2015
 
2014
Interest Income
 
 
 
 
Residential loans
 
$
25,009

 
$
12,658

Commercial loans
 
10,914

 
10,384

Real estate securities
 
27,775

 
32,431

Cash and cash equivalents
 
48

 
3

Total interest income
 
63,746

 
55,476

Interest Expense
 
 
 
 
Short-term debt
 
(7,224
)
 
(3,827
)
Asset-backed securities issued
 
(6,202
)
 
(8,441
)
Long-term debt
 
(10,535
)
 
(6,792
)
Total interest expense
 
(23,961
)
 
(19,060
)
Net Interest Income
 
39,785

 
36,416

Provision for loan losses
 
(206
)
 
(1,284
)
Net Interest Income After Provision
 
39,579

 
35,132

Non-interest Income
 
 
 
 
Mortgage banking activities
 
1,923

 
(231
)
Mortgage servicing rights income (loss)
 
(10,924
)
 
606

Other market valuation adjustments (1)
 
(1,145
)
 
(6,138
)
Realized gains, net
 
4,306

 
1,092

Other income
 
809

 

Total non-interest income (loss)
 
(5,031
)
 
(4,671
)
Operating expenses
 
(25,063
)
 
(19,971
)
Net income before provision for income taxes
 
9,485

 
10,490

Benefit from income taxes
 
5,316

 
1,843

Net Income
 
$
14,801

 
$
12,333

 
 
 
 
 
Basic earnings per common share
 
$
0.17

 
$
0.14

Diluted earnings per common share
 
$
0.16

 
$
0.14

Regular dividends declared per common share
 
$
0.28

 
$
0.28

Basic weighted average shares outstanding
 
83,360,312

 
82,410,562

Diluted weighted average shares outstanding
 
85,622,216

 
84,940,540

——————
(1)
For the three months ended March 31, 2015, there were no other-than-temporary impairments. For the three months ended March 31, 2014, other-than-temporary impairments were $1,671, of which $113 were recognized through the Income Statement and $1,558 were recognized in Accumulated Other Comprehensive Income.    

The accompanying notes are an integral part of these consolidated financial statements.

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REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)
 
Three Months Ended
March 31, 2015
(Unaudited)
 
2015
 
2014
Net Income
 
$
14,801

 
$
12,333

Other comprehensive income:
 
 
 
 
Net unrealized gain on available-for-sale securities
 
5,053

 
19,323

Reclassification of unrealized (gain) loss on available-for-sale securities to net income
 
(1,690
)
 
1,298

Net unrealized (loss) gain on interest rate agreements
 
(8,442
)
 
(8,795
)
Reclassification of unrealized loss on interest rate agreements to net income
 
31

 
60

Total other comprehensive (loss) income
 
(5,048
)
 
11,886

Total Comprehensive Income
 
$
9,753

 
$
24,219


The accompanying notes are an integral part of these consolidated financial statements.


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REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2015
(In Thousands, Except Share Data)
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Cumulative
 Earnings
 
Cumulative
Distributions
to Stockholders
 
Total
(Unaudited)
 
Shares
 
Amount
 
 
 
 
 
December 31, 2014
 
83,443,141

 
$
834

 
$
1,774,030

 
$
140,688

 
$
906,867

 
$
(1,566,278
)
 
$
1,256,141

Cumulative effect adjustment - adoption of ASU 2014-13 (1)
 

 

 

 

 
9,728

 

 
9,728

January 1, 2015
 
83,443,141

 
834

 
1,774,030

 
140,688

 
916,595

 
(1,566,278
)
 
1,265,869

Net income
 

 

 

 

 
14,801

 

 
14,801

Other comprehensive loss
 

 

 

 
(5,048
)
 

 

 
(5,048
)
Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 

Dividend reinvestment & stock purchase plans
 
185,045

 
2

 
3,239

 

 

 

 
3,241

Employee stock purchase and incentive plans
 
120,435

 
1

 
(184
)
 

 

 

 
(183
)
Non-cash equity award compensation
 

 

 
2,692

 

 

 

 
2,692

Common dividends declared
 

 

 

 

 

 
(24,162
)
 
(24,162
)
March 31, 2015
 
83,748,621

 
$
837

 
$
1,779,777

 
$
135,640

 
$
931,396

 
$
(1,590,440
)
 
$
1,257,210



For the Three Months Ended March 31, 2014
(In Thousands, Except Share Data)
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Cumulative
 Earnings
 
Cumulative
Distributions
to Stockholders
 
Total
(Unaudited)
 
Shares
 
Amount
 
 
 
 
 
December 31, 2013
 
82,504,801

 
$
825

 
$
1,760,899

 
$
148,766

 
$
806,298

 
$
(1,471,005
)
 
$
1,245,783

Net income
 

 

 

 

 
12,333

 

 
12,333

Other comprehensive income
 

 

 

 
11,886

 

 

 
11,886

Issuance of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend reinvestment & stock purchase plans
 
77,660

 
1

 
1,544

 

 

 

 
1,545

Employee stock purchase and incentive plans
 
37,193

 

 
(783
)
 

 

 

 
(783
)
Non-cash equity award compensation
 

 

 
3,872

 

 

 

 
3,872

Common dividends declared
 

 

 

 

 

 
(23,749
)
 
(23,749
)
March 31, 2014
 
82,619,654

 
$
826

 
$
1,765,532

 
$
160,652

 
$
818,631

 
$
(1,494,754
)
 
$
1,250,887

(1) On January 1, 2015, we adopted ASU 2014-13. See Note 3 for further discussion.

The accompanying notes are an integral part of these consolidated financial statements.


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REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
14,801

 
$
12,333

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Amortization of premiums, discounts, and securities issuance costs, net
 
(9,176
)
 
(9,158
)
Depreciation and amortization of non-financial assets
 
143

 
106

Purchases of held-for-sale loans
 
(2,558,425
)
 
(1,181,488
)
Proceeds from sales of held-for-sale loans
 
2,455,452

 
785,380

Principal payments on held-for-sale loans
 
14,394

 
7,014

Net settlements of derivatives
 
(19,373
)
 
(8,394
)
Provision for loan losses
 
206

 
1,284

Non-cash equity award compensation expense
 
2,692

 
3,872

Market valuation adjustments
 
19,435

 
9,446

Realized gains, net
 
(4,306
)
 
(1,092
)
Net change in:
 
 
 
 
Accrued interest receivable and other assets
 
(38,394
)
 
(7,279
)
Accrued interest payable, deferred tax liabilities, and accrued expenses and other liabilities
 
3,476

 
(13,682
)
Net cash used in operating activities
 
(119,075
)
 
(401,658
)
Cash Flows From Investing Activities:
 
 
 
 
Purchases of loans held-for-investment
 
(7,600
)
 
(32,998
)
Principal payments on loans held-for-investment
 
101,754

 
70,800

Purchases of real estate securities
 
(15,613
)
 
(49,709
)
Proceeds from sales of real estate securities
 
77,293

 

Principal payments on real estate securities
 
26,313

 
42,304

Purchase of mortgage servicing rights
 
(5,173
)
 
(928
)
Proceeds from sales of mortgage servicing rights
 
17,235

 

Net increase in restricted cash
 
(97
)
 
(34
)
Net cash provided by investing activities
 
194,112

 
29,435

Cash Flows From Financing Activities:
 
 
 
 
Proceeds from borrowings on short-term debt
 
1,641,380

 
920,955

Repayments on short-term debt
 
(1,933,041
)
 
(494,956
)
Proceeds from issuance of asset-backed securities
 
420

 

Repayments on asset-backed securities issued
 
(80,918
)
 
(88,523
)
Deferred securities issuance costs
 
(32
)
 

Proceeds from issuance of long-term debt
 
354,932

 
36,782

Repayments on long-term debt
 

 
(17
)
Net settlements of derivatives
 
658

 
(721
)
Net proceeds from issuance of common stock
 
134

 
122

Taxes paid on equity award distributions
 
(318
)
 
(905
)
Dividends paid
 
(24,162
)
 
(23,749
)
Net cash (used in) provided by financing activities
 
(40,947
)
 
348,988

Net increase (decrease) in cash and cash equivalents
 
34,090

 
(23,235
)
Cash and cash equivalents at beginning of period
 
269,730

 
173,201

Cash and cash equivalents at end of period
 
$
303,820

 
$
149,966

Supplemental Cash Flow Information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
 Interest
 
$
15,032

 
$
15,386

 Taxes
 
38

 
1,399

Supplemental Noncash Information:
 
 
 
 
Real estate securities retained from loan securitizations
 
$
6,282

 
$

Retention of mortgage servicing rights from loan securitizations and sales
 
15,675

 
2,294

Transfers from loans held-for-sale to loans held-for-investment
 
447,840

 
37,631

Transfers from residential loans to real estate owned
 
3,166

 
135

The accompanying notes are an integral part of these consolidated financial statements.


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REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)



Note 1. Organization
Redwood Trust, Inc., together with its subsidiaries, focuses on investing in mortgage- and other real estate-related assets and engaging in residential and commercial mortgage banking activities. We seek to invest in real estate-related assets that have the potential to generate attractive cash flow returns over time and to generate income through our residential and commercial mortgage banking activities. We operate our business in three segments: residential mortgage banking, residential investments, and commercial mortgage banking and investments. Redwood was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income to shareholders (not including taxable income retained in our taxable subsidiaries) within the time frame set forth in the tax code and also meet certain other requirements related to assets, income, and stock ownership. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our operating subsidiaries” or “our taxable REIT subsidiaries” or “TRS.” We generally intend to distribute as dividends at least 90% of the taxable income we generate at our REIT.
We sponsor our Sequoia securitization program, which we use for the securitization of residential mortgage loans. References to Sequoia with respect to any time or period generally refer collectively to all the then consolidated Sequoia securitization entities for the periods presented. We have also engaged in securitization transactions in order to obtain financing for certain of our securities and commercial loans.
Note 2. Basis of Presentation
The consolidated financial statements presented herein are at March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) —  have been condensed or omitted according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the company at March 31, 2015 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2015 should not be construed as indicative of the results to be expected for the full year.
Principles of Consolidation
In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities where we maintain an ongoing involvement, as well as an entity formed in connection with a resecuritization transaction we engaged in during 2011 (“Residential Resecuritization”), and an entity formed in connection with a commercial securitization we engaged in during 2012 (“Commercial Securitization”). Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have retained, although we are exposed to certain financial risks associated with our role as a sponsor, manager, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

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REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)
Note 2. Basis of Presentation - (continued)

For financial reporting purposes, the underlying loans and securities owned at the consolidated Sequoia entities, the Residential Resecuritization entity, and the Commercial Securitization entity are shown under residential and commercial loans and real estate securities on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, we record interest income on the loans and securities owned at these entities and interest expense on the ABS issued by these entities.
See Note 4 for further discussion on principles of consolidation.
Use of Estimates
The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.
Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies
Included in Note 3 to the Consolidated Financial Statements of our 2014 Annual Report on Form 10-K is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the company’s consolidated financial condition and results of operations for the three months ended March 31, 2015.
Recent Accounting Pronouncements
Adoption of ASU 2014-13
In November 2014, the FASB issued ASU 2014-13, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity” (ASU 2014-13). This update provides a measurement alternative to companies that consolidate collateralized financing entities ("CFEs"). Under the new guidance, companies can measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. This guidance is effective in the first quarter 2016 with early adoption permitted at the beginning of an annual period. The guidance can be applied either retrospectively to all relevant prior periods or by a modified retrospective approach with a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption.
On January 1, 2015, we elected to early adopt ASU 2014-13, as we determined this measurement alternative more accurately reflects our economic interests in, and financial results from, certain consolidated financing entities.  We adopted the measurement alternative under this standard only for our consolidated Sequoia entities, which qualify under the standard as CFEs.  We did not elect the measurement alternative for our Residential Resecuritization or our Commercial Resecuritization, and will continue to account for the assets and liabilities in these CFEs in accordance with existing accounting guidance. 
Under the provisions of ASU 2014-13, we use the fair value of the liabilities issued by the Sequoia CFEs (which we determined to be more observable) to determine the fair value of the assets, whereby the net assets we consolidate in our financial statements related to these entities represents the estimated fair value of our retained interests in the Sequoia CFEs.  Similarly, the periodic net market valuation adjustments we record on our income statement from the consolidated assets and liabilities of the CFEs represents the change in fair value of our retained interests in the Sequoia CFEs.
Using the modified retrospective approach, we recorded a cumulative-effect adjustment to equity of $10 million through retained earnings as of January 1, 2015.  This cumulative-effect adjustment represents the net effect of adjusting the assets and liabilities of the Sequoia CFEs from amortized historical cost to fair value.
Subsequent to the adoption of ASU 2014-13, the consolidated assets and liabilities of the Sequoia CFEs are both carried at fair value, with the periodic net changes in fair value recorded on our income statement, in Other market valuation adjustments.


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REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)

The following table presents the assets and liabilities of the consolidated Sequoia entities at December 31, 2014 prior to the adoption of ASU 2014-13, the adjustments required to adopt the new standard, and the adjusted balances at January 1, 2015.
Impact of Adoption of ASU 2014-13 on Balance Sheet (1) 
(In Millions)
 
December 31, 2014
 
ASU 2014-13 Adjustment
 
January 1, 2015
Loan Principal
 
$
1,486

 
$
(113
)
 
$
1,373

Loan unamortized premium
 
13

 
(13
)
 

Allowance for loan losses
 
(21
)
 
21

 

Residential loans held-for-investment
 
1,478

 
(105
)
 
1,373

Deferred bond issuance costs
 
1

 
(1
)
 

Other assets
 
5

 

 
5

Total assets
 
1,482

 
(105
)
 
1,377

 
 
 
 
 
 

ABS issued principal
 
1,428

 
(125
)
 
1,303

ABS issued unamortized discount
 
(10
)
 
10

 

Total liabilities
 
1,418

 
(115
)
 
1,303

Redwood's investment in consolidated Sequoia entities
 
$
64

 
$
10

 
$
74

(1)
Certain totals may not foot due to rounding.
Other Recent Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. This new guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance is required to be applied on a retrospective basis. We plan to adopt this new guidance by the required date and will reclassify debt issuance costs that we currently present in other assets on our consolidated balance sheets and present them as debt discounts.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” This new guidance provides a new scope exception for certain money market funds, makes targeted amendments to the current consolidation guidance, and ends the deferral granted to investment companies from applying the VIE guidance. This new guidance is effective for annual periods beginning after December 15, 2016. Early adoption is allowed, including in any interim period. We are currently evaluating the impact of adopting this new standard.
In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This new guidance amends the accounting guidance for “repo-to-maturity” transactions and repurchase agreements executed as repurchase financings. In addition, the new standard requires a transferor to disclose more information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term. This new guidance is effective in the first interim reporting period beginning after December 15, 2014. However, for repurchase and securities lending transactions reported as secured borrowing, the new standard’s enhanced disclosures are effective for annual periods beginning after December 15, 2014 and interim period beginning after March 15, 2015. We adopted the new guidance, as required, in the first quarter of 2015 and will adopt the disclosure requirements in the second quarter of 2015, as required. The adoption in the first quarter of 2015 did not have a material impact on our financial statements, as we did not have repo-to-maturity transactions outstanding.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The objective of the guidance is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS. The Amendment supersedes most current revenue recognition guidance, including industry-specific guidance. The Amendment also enhances disclosure requirements

9

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REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)

around revenue recognition and the related cash flows. The guidance is to be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of adopting this new standard.
In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This update to the receivable guidance clarifies when a creditor is considered to have received physical possession of residential real estate resulting from an in substance repossession or foreclosure. In addition, the amendments require disclosure of both: (i) the amount of foreclosed residential real estate property held by the creditor; and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The update requires the guidance to be applied using either a modified retrospective transition method or a prospective transition method for interim and annual periods beginning after December 15, 2014, with early adoption permitted. We adopted this standard in the first quarter of 2015, as required, and it did not have a material impact on our financial statements.
Balance Sheet Netting
Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.
The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at March 31, 2015 and December 31, 2014.
Offsetting of Financial Assets, Liabilities, and Collateral
 
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet
 
Gross Amounts Not Offset in Consolidated
Balance Sheet
(1)
 
Net Amount
March 31, 2015
(In Thousands)
 
 
 
 
Financial Instruments
 
Cash Collateral (Received) Pledged
 
Assets (2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate agreements
 
$
17,554

 
$

 
$
17,554

 
$
(2,719
)
 
$
(10,830
)
 
$
4,005

TBAs
 
4,721

 

 
4,721

 
(4,667
)
 
(54
)
 

Total Assets
 
$
22,275

 
$

 
$
22,275

 
$
(7,386
)
 
$
(10,884
)
 
$
4,005

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities (2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate agreements
 
$
(57,581
)
 
$

 
$
(57,581
)
 
$
2,719

 
$
54,862

 
$

TBAs
 
(8,842
)
 

 
(8,842
)
 
4,666

 
3,201

 
(975
)
Futures
 
(332
)
 

 
(332
)
 

 
332

 

Loan warehouse debt
 
(895,895
)
 

 
(895,895
)
 
895,895

 

 

Security repurchase agreements
 
(606,269
)
 

 
(606,269
)
 
606,269

 

 

Total Liabilities
 
$
(1,568,919
)
 
$

 
$
(1,568,919
)
 
$
1,509,549

 
$
58,395

 
$
(975
)


10

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)

 
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet
 
Gross Amounts Not Offset in Consolidated
Balance Sheet
(1)
 
Net Amount
December 31, 2014
(In Thousands)
 
 
 
 
Financial Instruments
 
Cash Collateral (Received) Pledged
 
Assets (2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate agreements
 
$
7,006

 
$

 
$
7,006

 
$
(1,160
)
 
$
(4,360
)
 
$
1,486

Credit default index swaps
 
1,598

 

 
1,598

 

 
(375
)
 
1,223

TBAs
 
6,653

 

 
6,653

 
(5,815
)
 

 
838

Total Assets
 
$
15,257

 
$

 
$
15,257

 
$
(6,975
)
 
$
(4,735
)
 
$
3,547

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities (2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate agreements
 
$
(48,173
)
 
$

 
$
(48,173
)
 
$
1,160

 
47,013

 
$

TBAs
 
(9,506
)
 

 
(9,506
)
 
5,815

 
2,715

 
(976
)
Futures
 
(372
)
 

 
(372
)
 

 
372

 

Loan warehouse debt
 
(1,185,316
)
 

 
(1,185,316
)
 
1,185,316

 

 

Security repurchase agreements
 
(608,509
)
 

 
(608,509
)
 
608,509

 

 

Total Liabilities
 
$
(1,851,876
)
 
$

 
$
(1,851,876
)
 
$
1,800,800

 
$
50,100

 
$
(976
)
(1)
Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2)
Interest rate agreements, TBAs, and futures are components of derivatives instruments on our consolidated balances sheets. Loan warehouse debt, which is secured by residential and commercial mortgage loans, and security repurchase agreements are components of short-term debt on our consolidated balance sheets.
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be treated as a single transaction. For certain categories of these instruments, some of our transactions are cleared and settled through one or more clearinghouses that are substituted as our counterparty and references herein to master netting arrangements or similar agreements include the arrangements and agreements governing the clearing and settlement of these transactions through the clearinghouses. In the event of the termination and close-out of any of those transactions, the corresponding master netting agreement or similar agreement provides for settlement on a net basis and for settlement to include the proceeds of the liquidation of any corresponding collateral, subject to certain limitations on termination, settlement, and liquidation of collateral that may apply in the event of the bankruptcy or insolvency of a party that should not inhibit the eventual practical realization of the principal benefits of those transactions or the corresponding master netting arrangement or similar agreement and any corresponding collateral.
Note 4. Principles of Consolidation
GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.

11

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 4. Principles of Consolidation - (continued)


Analysis of Consolidated VIEs
As of March 31, 2015, the VIEs we are required to consolidate include certain Sequoia securitization entities, the Residential Resecuritization entity, and the Commercial Securitization entity. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although we are exposed to certain financial risks associated with our role as a sponsor, manager, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. The following table presents a summary of the assets and liabilities of these VIEs. Intercompany balances have been eliminated for purposes of this presentation.
Assets and Liabilities of Consolidated VIEs
March 31, 2015
 
Sequoia
Entities
 
Residential Resecuritization
 
Commercial Securitization
 
Total
(Dollars in Thousands)
 
 
 
 
Residential loans, held-for-investment
 
$
1,304,426

 
$

 
$

 
$
1,304,426

Commercial loans, held-for-investment
 

 

 
191,575

 
191,575

Real estate securities
 

 
211,316

 

 
211,316

Restricted cash
 
147

 

 
135

 
282

Accrued interest receivable
 
1,720

 
449

 
1,491

 
3,660

Other assets
 
5,304

 

 

 
5,304

Total Assets
 
$
1,311,597

 
$
211,765

 
$
193,201

 
$
1,716,563

Accrued interest payable
 
$
893

 
$
10

 
$
374

 
$
1,277

Asset-backed securities issued
 
1,239,065

 
34,280

 
79,676

 
1,353,021

Total Liabilities
 
$
1,239,958

 
$
34,290

 
$
80,050

 
$
1,354,298

Number of VIEs
 
24

 
1

 
1

 
26

Analysis of Unconsolidated VIEs with Continuing Involvement
Since 2012, we have transferred residential loans to 23 Sequoia securitization entities sponsored by us and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For the transferred loans where we held the servicing rights prior to the transfer and continue to hold the servicing rights, we recorded MSRs on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining residential MSRs (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.
The following table presents information related to securitization transactions that occurred during the three months ended March 31, 2015 and 2014.
Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
 
 
Three Months Ended March 31,
(In Thousands)
 
2015
 
2014
Principal balance of loans transferred
 
$
338,796

 
$

Trading securities retained, at fair value
 
3,423

 

AFS securities retained, at fair value
 
2,859

 

MSRs recognized
 
1,872

 


12

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 4. Principles of Consolidation - (continued)


The following table summarizes the cash flows during the three months ended March 31, 2015 and 2014 between us and the unconsolidated VIEs sponsored by us.
Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
 
 
Three Months Ended March 31,
(In Thousands)
 
2015
 
2014
Proceeds from new transfers
 
$
341,716

 
$

MSR fees received
 
3,770

 
3,423

Funding of compensating interest
 
(90
)
 
(33
)
Cash flows received on retained securities
 
12,645

 
12,303

The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization.
Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood
 
 
Issued During The Three Months
Ended March 31, 2015
At Date of Securitization
 
MSRs
 
Subordinate Securities
Prepayment rate
 
 5 - 19 %

 
8
%
Discount rates
 
11
%
 
6
%
Credit loss assumptions
 
N/A

 
0.25
%
The following table presents additional information at March 31, 2015 and December 31, 2014, related to unconsolidated securitizations accounted for as sales since 2012.
Unconsolidated VIEs Sponsored by Redwood
(In Thousands)
 
March 31, 2015
 
December 31, 2014
On-balance sheet assets, at fair value:
 
 
 
 
Interest-only, senior and subordinate securities, classified as trading
 
$
69,258

 
$
93,802

Senior and subordinate securities, classified as AFS
 
391,296

 
460,990

Maximum loss exposure (1)
 
460,554

 
554,792

Assets transferred:
 
 
 
 
Principal balance of loans outstanding
 
7,287,906

 
7,276,825

Principal balance of delinquent loans 30+ days delinquent
 
20,952

 
17,022

(1)
Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.

13

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 4. Principles of Consolidation - (continued)


The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at March 31, 2015 and December 31, 2014.
Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
March 31, 2015
 
MSRs
 
Senior
Securities
 
Subordinate Securities
(Dollars in Thousands)
 
 
 
Fair value at March 31, 2015
 
$
50,156

 
$
65,809

 
$
394,745

Expected life (in years) (1)
 
6

 
6

 
11

Prepayment speed assumption (annual CPR) (1)
 
17
%
 
11
%
 
10
%
Decrease in fair value from:
 
 
 
 
 
 
10% adverse change
 
$
2,329

 
$
3,697

 
$
905

25% adverse change
 
5,530

 
7,035

 
2,356

Discount rate assumption (1)
 
11
%
 
10
%
 
5
%
Decrease in fair value from:
 
 
 
 
 
 
100 basis point increase
 
$
1,645

 
$
2,540

 
$
30,841

200 basis point increase
 
3,216

 
4,899

 
57,886

Credit loss assumption (1)
 
N/A

 
0.25
%
 
0.25
%
Decrease in fair value from:
 
 
 
 
 
 
10% higher losses
 
N/A

 
$
345

 
$
2,397

25% higher losses
 
N/A

 
456

 
5,704


December 31, 2014
 
MSRs
 
Senior
Securities
 
Subordinate Securities
(Dollars in Thousands)
 
 
 
Fair value at December 31, 2014
 
$
56,801

 
$
93,802

 
$
460,990

Expected life (in years) (1)
 
7

 
6

 
10

Prepayment speed assumption (annual CPR) (1)
 
14
%
 
9
%
 
10
%
Decrease in fair value from:
 
 
 
 
 
 
10% adverse change
 
$
2,419

 
$
3,999

 
$
684

25% adverse change
 
5,639

 
9,475

 
2,355

Discount rate assumption (1)
 
11
%
 
8
%
 
5
%
Decrease in fair value from:
 
 
 
 
 
 
100 basis point increase
 
$
2,104

 
$
4,214

 
$
34,149

200 basis point increase
 
4,102

 
8,091

 
64,474

Credit loss assumption (1)
 
N/A

 
0.25
%
 
0.25
%
Decrease in fair value from:
 
 
 
 
 
 
10% higher losses
 
N/A

 
$
126

 
$
3,169

25% higher losses
 
N/A

 
299

 
7,841


(1)
Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

14

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 4. Principles of Consolidation - (continued)


Analysis of Third-Party VIEs
Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at March 31, 2015, grouped by security type.
Third-Party Sponsored VIE Summary
(Dollars in Thousands)
 
March 31, 2015

Residential Mortgage Backed Securities
 
 
Senior
 
$
480,200

Re-REMIC
 
169,240

Subordinate
 
175,250

Total Investments in Third-Party Sponsored VIEs
 
$
824,690

We determined that we are not the primary beneficiary of any third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.
Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.
Note 5. Fair Value of Financial Instruments
For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.
In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

15

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)


The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at March 31, 2015 and December 31, 2014.
 
 
March 31, 2015
 
December 31, 2014
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
(In Thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Residential loans, held-for-sale
 
 
 
 
 
 
 
 
At fair value
 
$
1,093,413

 
$
1,093,413

 
$
1,341,032

 
$
1,341,032

At lower of cost or fair value
 
1,472

 
1,663

 
1,488

 
1,669

Residential loans, held-for-investment (1)
 
 
 
 
 
 
 
 
At fair value
 
2,304,870

 
2,304,870

 
581,668

 
581,668

At amortized cost
 

 

 
1,474,386

 
1,381,918

Commercial loans, held-for-sale
 
54,407

 
54,407

 
166,234

 
166,234

Commercial loans, held-for-investment
 
 
 
 
 
 
 
 
At fair value
 
72,619

 
72,619

 
71,262

 
71,262

At amortized cost
 
333,316

 
338,932

 
329,431

 
334,876

Trading securities
 
106,837

 
106,837

 
111,606

 
111,606

Available-for-sale securities
 
1,178,406

 
1,178,406

 
1,267,624

 
1,267,624

MSRs
 
120,324

 
120,324

 
139,293

 
139,293

Cash and cash equivalents
 
303,820

 
303,820

 
269,730

 
269,730

Restricted cash
 
725

 
725

 
628

 
628

Accrued interest receivable
 
17,970

 
17,970

 
18,222

 
18,222

Derivative assets
 
30,546

 
30,546

 
16,417

 
16,417

REO (2)
 
5,305

 
5,446

 
4,391

 
4,703

Margin receivable (2)
 
79,760

 
79,760

 
65,374

 
65,374

FHLBC stock (2)
 
28,434

 
28,434

 
10,688

 
10,688

Guarantee asset (2)
 
6,118

 
6,118

 
7,201

 
7,201

Pledged collateral (2)
 
10,265

 
10,265

 
9,927

 
9,927

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Short-term debt
 
$
1,502,164

 
$
1,502,164

 
$
1,793,825

 
$
1,793,825

Accrued interest payable
 
14,319

 
14,319

 
8,502

 
8,502

Guarantee obligation
 
6,917

 
6,917

 
7,201

 
7,201

Derivative liabilities
 
68,064

 
68,064

 
58,331

 
58,331

ABS issued (1)
 
 
 
 
 
 
 
 
Fair value
 
1,239,065

 
1,239,065

 

 

Amortized cost
 
113,956

 
114,613

 
1,545,119

 
1,446,605

FHLBC borrowings
 
850,792

 
850,792

 
495,860

 
495,860

Commercial secured borrowings
 
68,077

 
68,077

 
66,707

 
66,707

Convertible notes
 
492,500

 
488,243

 
492,500

 
492,188

Other long-term debt
 
139,500

 
97,650

 
139,500

 
101,835

(1)
Upon adoption of ASU 2014-13 on January 1, 2015, loans held-for-investment and ABS issued by consolidated Sequoia entities began to be recorded at fair value. See Note 3 for further discussion.
(2)
These assets are included in Other Assets on our consolidated balance sheets.

16

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)


During the three months ended March 31, 2015, we elected the fair value option for $23 million of residential subordinate securities, $2.40 billion of residential loans (principal balance), $93 million of commercial loans (principal balance), and $19 million of MSRs, respectively. We anticipate electing the fair value option for all future purchases of residential loans and commercial senior loans that we intend to sell to third parties or transfer to securitizations as well as for MSRs purchased or retained from sales of residential loans.
The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at March 31, 2015, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2015
March 31, 2015
 
Carrying
Value
 
Fair Value Measurements Using
(In Thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
Residential loans
 
$
3,398,283

 
$

 
$
200,869

 
$
3,197,414

Commercial loans
 
127,026

 

 

 
127,026

Trading securities
 
106,837

 

 

 
106,837

Available-for-sale securities
 
1,178,406

 

 

 
1,178,406

Derivative assets
 
30,546

 
4,721

 
17,554

 
8,271

MSRs
 
120,324

 

 

 
120,324

Pledged collateral
 
10,265

 
10,265

 

 

FHLBC stock
 
28,434

 
28,434

 

 

Guarantee asset
 
6,118

 

 

 
6,118

 
 


 
 
 
 
 
 
Liabilities
 


 
 
 
 
 
 
Derivative liabilities
 
68,064

 
9,173

 
58,045

 
846

Commercial secured borrowings
 
68,077

 

 

 
68,077

ABS issued
 
1,239,065

 

 

 
1,239,065


17

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)


The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Assets
 
Liabilities
 
Residential Loans
 
Commercial
Loans
 
Trading Securities
 
AFS
Securities
 
MSRs
 
Guarantee Asset
 
Derivatives(1)
 
Commercial Secured Borrowings
 
ABS
Issued
(In Thousands)
 
 
 
 
 
 
 
Beginning balance -
   December 31, 2014
$
1,677,984

 
$
237,496

 
$
111,606

 
$
1,267,624

 
$
139,293

 
$
7,201

 
$
1,119

 
$
66,707

 
$

Transfer to FVO (2)
1,370,699

 

 

 

 

 

 

 

 
1,302,216

Principal paydowns
(111,716
)
 
(240
)
 
(203
)
 
(26,110
)
 

 

 

 
(152
)
 
(66,517
)
Amortization income

 

 

 
9,838

 

 

 

 

 

Gains (losses) in net income, net
7,570

 
7,366

 
(14,114
)
 
4,306

 
(19,517
)
 
(1,083
)
 
20,087

 
1,509

 
2,946

Unrealized gains in OCI, net

 

 

 
3,795

 

 

 

 

 

Acquisitions
1,112,042

 
92,713

 
23,084

 
9,831

 
18,754

 

 

 

 

Sales
(857,249
)
 
(210,309
)
 
(13,536
)
 
(90,878
)
 
(18,206
)
 

 

 

 

Other settlements, net
(1,916
)
 

 

 

 

 

 
(13,781
)
 
13

 
421

Ending balance -
  March 31, 2015
$
3,197,414

 
$
127,026

 
$
106,837

 
$
1,178,406

 
$
120,324

 
$
6,118

 
$
7,425

 
$
68,077

 
$
1,239,066

(1) For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented on a net basis.
(2) Upon adoption of ASU 2014-13 on January 1, 2015, loans held-for-investment in, and ABS issued by, consolidated financial entities are now recorded at fair value. See Note 3 for further discussion.

18

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)


The following table presents the portion of gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at March 31, 2015 and 2014. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2015 and 2014 are not included in this presentation.
Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2015 and 2014 Included in Net Income
 
 
Included in Net Income
 
 
Three Months Ended March 31,
(In Thousands)
 
2015
 
2014
Assets
 
 
 
 
Residential loans at Redwood
 
$
5,464

 
$
3,483

Residential loans at consolidated Sequoia entities
 
1,179

 

Commercial loans
 
2,959

 
2,530

Trading securities
 
(13,790
)
 
(4,431
)
Available-for-sale securities
 

 
(113
)
MSRs
 
(11,769
)
 
(2,291
)
Loan purchase commitments
 
7,422

 

Other assets - Guarantee asset
 
(1,083
)
 

 
 
 
 
 
Liabilities
 
 
 
 
Loan purchase commitments
 

 
(235
)
Commercial secured borrowing
 
(1,509
)
 

ABS issued
 
(2,946
)
 

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2015. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our balance sheet at March 31, 2015.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2015
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for
March 31, 2015
 
Carrying
Value
 
Fair Value Measurements Using
 
Three Months Ended
(In Thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
March 31, 2015
Assets
 
 
 
 
 
 
 
 
 
 
Residential loans, at lower of cost or fair value
 
$
1,103

 
$

 
$

 
$
1,103

 
$

REO
 
3,410

 

 

 
3,410

 
(74
)

19

Table of Contents
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)


The following table presents the components of market valuation adjustments, net, recorded in our consolidated statements of income for the three months ended March 31, 2015 and 2014.
Market Valuation Adjustments, Net
 
 
Three Months Ended March 31,
(In Thousands)
 
2015
 
2014
Mortgage banking activities
 
 
 
 
Residential loans, at fair value
 
$
2,056

 
$
7,128

Commercial loans, at fair value
 
5,857

 
3,626

Sequoia IO securities
 
(14,359
)
 
(4,277
)
Risk management derivatives, net
 
(10,583
)
 
(7,082
)
Loan purchase and forward sale commitments
 
18,256

 
8

Total mortgage banking activities(1)
 
1,227