UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: June 30, 2017
OR
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o
| 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)
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Maryland | | 68-0329422 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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Large accelerated filer | x | | Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
| | | Emerging growth company | o |
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. 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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Common Stock, $0.01 par value per share | | 77,116,538 shares outstanding as of August 1, 2017 |
REDWOOD TRUST, INC.
2017 FORM 10-Q REPORT
TABLE OF CONTENTS
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| FINANCIAL INFORMATION | | |
Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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| OTHER INFORMATION | | |
Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(In Thousands, except Share Data) (Unaudited) | | June 30, 2017 | | December 31, 2016 |
ASSETS (1) | | | | |
Residential loans, held-for-sale, at fair value | | $ | 837,371 |
| | $ | 835,399 |
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Residential loans, held-for-investment, at fair value | | 3,067,920 |
| | 3,052,652 |
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Real estate securities, at fair value | | 1,218,503 |
| | 1,018,439 |
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Mortgage servicing rights, at fair value | | 63,770 |
| | 118,526 |
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Cash and cash equivalents | | 217,218 |
| | 212,844 |
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Total earning assets | | 5,404,782 |
| | 5,237,860 |
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Restricted cash | | 2,006 |
| | 8,623 |
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Accrued interest receivable | | 20,101 |
| | 18,454 |
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Derivative assets | | 12,264 |
| | 36,595 |
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Other assets | | 216,329 |
| | 181,945 |
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Total Assets | | $ | 5,655,482 |
| | $ | 5,483,477 |
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LIABILITIES AND EQUITY (1) | | | | |
Liabilities | | | | |
Short-term debt (2) | | $ | 1,294,807 |
| | $ | 791,539 |
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Accrued interest payable | | 9,939 |
| | 9,608 |
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Derivative liabilities | | 69,175 |
| | 66,329 |
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Accrued expenses and other liabilities | | 73,185 |
| | 72,428 |
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Asset-backed securities issued, at fair value | | 692,606 |
| | 773,462 |
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Long-term debt, net | | 2,336,346 |
| | 2,620,683 |
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Total liabilities | | 4,476,058 |
| | 4,334,049 |
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Equity | | | | |
Common stock, par value $0.01 per share, 180,000,000 shares authorized; 77,116,875 and 76,834,663 issued and outstanding | | 771 |
| | 768 |
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Additional paid-in capital | | 1,679,475 |
| | 1,676,486 |
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Accumulated other comprehensive income | | 69,676 |
| | 71,853 |
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Cumulative earnings | | 1,223,228 |
| | 1,149,935 |
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Cumulative distributions to stockholders | | (1,793,726 | ) | | (1,749,614 | ) |
Total equity | | 1,179,424 |
| | 1,149,428 |
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Total Liabilities and Equity | | $ | 5,655,482 |
| | $ | 5,483,477 |
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—————— | |
(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 Redwood Trust, Inc. or its affiliates. At June 30, 2017 and December 31, 2016, assets of consolidated VIEs totaled $713,404 and $798,317, respectively. At June 30, 2017 and December 31, 2016, liabilities of consolidated VIEs totaled $693,137 and $773,980, respectively. See Note 4 for further discussion. |
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(2) | During the second quarter of 2017, our convertible notes were reclassified from Long-term debt, net to Short-term debt as the maturity of the notes was less than one year as of April 2017. |
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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(In Thousands, except Share Data) | | Three Months Ended June 30, | | Six Months Ended June 30, |
(Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 |
Interest Income | | | | | | | | |
Residential loans | | $ | 36,635 |
| | $ | 35,154 |
| | $ | 70,997 |
| | $ | 66,554 |
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Commercial loans | | 263 |
| | 12,921 |
| | 345 |
| | 22,381 |
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Real estate securities | | 21,826 |
| | 18,417 |
| | 41,643 |
| | 39,512 |
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Other interest income | | 500 |
| | 295 |
| | 867 |
| | 668 |
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Total interest income | | 59,224 |
| | 66,787 |
| | 113,852 |
| | 129,115 |
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Interest Expense | | | | | | | | |
Short-term debt | | (9,350 | ) | | (5,337 | ) | | (13,803 | ) | | (12,034 | ) |
Asset-backed securities issued | | (3,705 | ) | | (3,982 | ) | | (7,235 | ) | | (8,264 | ) |
Long-term debt | | (11,179 | ) | | (13,125 | ) | | (24,227 | ) | | (26,096 | ) |
Total interest expense | | (24,234 | ) | | (22,444 | ) | | (45,265 | ) | | (46,394 | ) |
Net Interest Income | | 34,990 |
| | 44,343 |
| | 68,587 |
| | 82,721 |
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Reversal of provision for loan losses | | — |
| | 6,532 |
| | — |
| | 6,243 |
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Net Interest Income after Provision | | 34,990 |
| | 50,875 |
| | 68,587 |
| | 88,964 |
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Non-interest Income | | | | | | | | |
Mortgage banking activities, net | | 12,046 |
| | 7,728 |
| | 29,650 |
| | 14,946 |
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Mortgage servicing rights income, net | | 2,778 |
| | 2,783 |
| | 4,491 |
| | 9,064 |
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Investment fair value changes, net | | 8,115 |
| | (11,066 | ) | | 9,666 |
| | (30,604 | ) |
Other income | | 986 |
| | 1,559 |
| | 2,170 |
| | 2,514 |
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Realized gains, net | | 1,372 |
| | 9,884 |
| | 7,075 |
| | 19,422 |
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Total non-interest income, net | | 25,297 |
| | 10,888 |
| | 53,052 |
| | 15,342 |
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Operating expenses | | (18,641 | ) | | (20,155 | ) | | (36,867 | ) | | (50,607 | ) |
Net Income before Provision for Income Taxes | | 41,646 |
| | 41,608 |
| | 84,772 |
| | 53,699 |
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Provision for income taxes | | (5,322 | ) | | (327 | ) | | (11,479 | ) | | (355 | ) |
Net Income | | $ | 36,324 |
| | $ | 41,281 |
| | $ | 73,293 |
| | $ | 53,344 |
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Basic earnings per common share | | $ | 0.46 |
| | $ | 0.52 |
| | $ | 0.93 |
| | $ | 0.67 |
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Diluted earnings per common share | | $ | 0.43 |
| | $ | 0.48 |
| | $ | 0.85 |
| | $ | 0.67 |
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Regular dividends declared per common share | | $ | 0.28 |
| | $ | 0.28 |
| | $ | 0.56 |
| | $ | 0.56 |
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Basic weighted average shares outstanding | | 76,819,703 |
| | 76,664,829 |
| | 76,779,178 |
| | 76,901,255 |
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Diluted weighted average shares outstanding | | 97,494,144 |
| | 97,761,936 |
| | 97,718,550 |
| | 88,728,380 |
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The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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(In Thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, |
(Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 |
Net Income | | $ | 36,324 |
| | $ | 41,281 |
| | $ | 73,293 |
| | $ | 53,344 |
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Other comprehensive income (loss): | | | | | | | | |
Net unrealized gain (loss) on available-for-sale securities (1) | | 1,811 |
| | 6,260 |
| | 4,741 |
| | (3,843 | ) |
Reclassification of unrealized gain on available-for-sale securities to net income | | (2,322 | ) | | (7,711 | ) | | (6,250 | ) | | (18,664 | ) |
Net unrealized loss on interest rate agreements | | (2,429 | ) | | (8,949 | ) | | (696 | ) | | (23,192 | ) |
Reclassification of unrealized loss on interest rate agreements to net income | | 14 |
| | 19 |
| | 28 |
| | 37 |
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Total other comprehensive income (loss) | | (2,926 | ) | | (10,381 | ) | | (2,177 | ) | | (45,662 | ) |
Total Comprehensive Income | | $ | 33,398 |
| | $ | 30,900 |
| | $ | 71,116 |
| | $ | 7,682 |
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(1) | Amounts are presented net of tax benefit (provision) of $0.1 million and $(0.1) million for the three and six months ended June 30, 2017, respectively, and $0.3 million and $0.4 million for the three and six months ended June 30, 2016, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2017
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(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, 2016 | | 76,834,663 |
| | $ | 768 |
| | $ | 1,676,486 |
| | $ | 71,853 |
| | $ | 1,149,935 |
| | $ | (1,749,614 | ) | | $ | 1,149,428 |
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Net income | | — |
| | — |
| | — |
| | — |
| | 73,293 |
| | — |
| | 73,293 |
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Other comprehensive loss | | — |
| | — |
| | — |
| | (2,177 | ) | | — |
| | — |
| | (2,177 | ) |
Employee stock purchase and incentive plans | | 282,212 |
| | 3 |
| | (2,388 | ) | | — |
| | — |
| | — |
| | (2,385 | ) |
Non-cash equity award compensation | | — |
| | — |
| | 5,377 |
| | — |
| | — |
| | — |
| | 5,377 |
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Common dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (44,112 | ) | | (44,112 | ) |
June 30, 2017 | | 77,116,875 |
| | $ | 771 |
| | $ | 1,679,475 |
| | $ | 69,676 |
| | $ | 1,223,228 |
| | $ | (1,793,726 | ) | | $ | 1,179,424 |
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For the Six Months Ended June 30, 2016
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(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, 2015 | | 78,162,765 |
| | $ | 782 |
| | $ | 1,695,956 |
| | $ | 91,993 |
| | $ | 1,018,683 |
| | $ | (1,661,149 | ) | | $ | 1,146,265 |
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Net income | | — |
| | — |
| | — |
| | — |
| | 53,344 |
| | — |
| | 53,344 |
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Other comprehensive loss | | — |
| | — |
| | — |
| | (45,662 | ) | | — |
| | — |
| | (45,662 | ) |
Employee stock purchase and incentive plans | | 431,156 |
| | 4 |
| | (4,249 | ) | | — |
| | — |
| | — |
| | (4,245 | ) |
Non-cash equity award compensation | | — |
| | — |
| | 8,488 |
| | — |
| | — |
| | — |
| | 8,488 |
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Share repurchases | | (1,658,868 | ) | | (17 | ) | | (21,267 | ) | | — |
| | — |
| | — |
| | (21,284 | ) |
Common dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (44,303 | ) | | (44,303 | ) |
June 30, 2016 | | 76,935,053 |
| | $ | 769 |
| | $ | 1,678,928 |
| | $ | 46,331 |
| | $ | 1,072,027 |
| | $ | (1,705,452 | ) | | $ | 1,092,603 |
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The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(In Thousands) (Unaudited) | | Six Months Ended June 30, |
| 2017 | | 2016 |
Cash Flows From Operating Activities: | | | | |
Net income | | $ | 73,293 |
| | $ | 53,344 |
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Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Amortization of premiums, discounts, and securities issuance costs, net | | (9,638 | ) | | (13,945 | ) |
Depreciation and amortization of non-financial assets | | 605 |
| | 575 |
|
Purchases of held-for-sale loans | | (2,309,856 | ) | | (2,578,592 | ) |
Proceeds from sales of held-for-sale loans | | 2,031,326 |
| | 2,158,601 |
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Principal payments on held-for-sale loans | | 22,093 |
| | 35,649 |
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Net settlements of derivatives | | 776 |
| | (9,427 | ) |
Provision for loan losses | | — |
| | (6,243 | ) |
Non-cash equity award compensation expense | | 5,377 |
| | 8,488 |
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Market valuation adjustments | | (30,743 | ) | | 25,584 |
|
Realized gains, net | | (7,075 | ) | | (19,422 | ) |
Net change in: | | | | |
Accrued interest receivable and other assets | | (26,226 | ) | | (20,667 | ) |
Accrued interest payable and accrued expenses and other liabilities | | (16,840 | ) | | 5,390 |
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Net cash used in operating activities | | (266,908 | ) | | (360,665 | ) |
Cash Flows From Investing Activities: | | | | |
Proceeds from sales of loans held-for-investment | | — |
| | 11,395 |
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Principal payments on loans held-for-investment | | 258,267 |
| | 354,188 |
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Purchases of real estate securities | | (236,036 | ) | | (138,527 | ) |
Proceeds from sales of real estate securities | | 99,121 |
| | 451,262 |
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Principal payments on real estate securities | | 34,752 |
| | 41,466 |
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Purchase of mortgage servicing rights | | (316 | ) | | (13,766 | ) |
Proceeds from sales of mortgage servicing rights | | 43,177 |
| | 28,268 |
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Net change in restricted cash | | 6,617 |
| | (2,726 | ) |
Net cash provided by investing activities | | 205,582 |
| | 731,560 |
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Cash Flows From Financing Activities: | | | | |
Proceeds from borrowings on short-term debt | | 2,070,873 |
| | 2,184,069 |
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Repayments on short-term debt | | (1,855,233 | ) | | (2,980,027 | ) |
Repayments on asset-backed securities issued | | (103,371 | ) | | (158,519 | ) |
Proceeds from issuance of long-term debt | | — |
| | 771,287 |
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Repayments on long-term debt | | — |
| | (118,146 | ) |
Net settlements of derivatives | | (72 | ) | | (82 | ) |
Net proceeds from issuance of common stock | | 145 |
| | 146 |
|
Net payments on repurchase of common stock | | — |
| | (24,235 | ) |
Taxes paid on equity award distributions | | (2,530 | ) | | (4,391 | ) |
Dividends paid | | (44,112 | ) | | (44,303 | ) |
Net cash provided by (used in) financing activities | | 65,700 |
| | (374,201 | ) |
Net increase (decrease) in cash and cash equivalents | | 4,374 |
| | (3,306 | ) |
Cash and cash equivalents at beginning of period | | 212,844 |
| | 220,229 |
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Cash and cash equivalents at end of period | | $ | 217,218 |
| | $ | 216,923 |
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Supplemental Cash Flow Information: | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 44,274 |
| | $ | 45,758 |
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Taxes | | 1,040 |
| | 467 |
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Supplemental Noncash Information: | | | | |
Real estate securities retained from loan securitizations | | $ | 38,051 |
| | $ | 1,834 |
|
Retention of mortgage servicing rights from loan securitizations and sales | | 7,387 |
| | 5,688 |
|
Transfers from loans held-for-sale to loans held-for-investment | | 247,377 |
| | 725,825 |
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Transfers from loans held-for-investment to loans held-for-sale | | 459 |
| | 359,005 |
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Transfers from residential loans to real estate owned | | 2,044 |
| | 5,867 |
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Transfers from long-term debt to short-term debt | | 285,900 |
| | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 1. Organization
Redwood Trust, Inc., together with its subsidiaries, focuses on investing in mortgages and other real estate-related assets and engaging in 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 mortgage banking activities. We operate our business in two segments: Investment Portfolio and Residential Mortgage Banking. 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. 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 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 June 30, 2017 and December 31, 2016, and for the three and six months ended June 30, 2017 and 2016. 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 the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the company at June 30, 2017 and results of operations for all periods presented have been made. The results of operations for the three and six months ended June 30, 2017 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. 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.
For financial reporting purposes, the underlying loans owned at the consolidated Sequoia entities are shown under Residential loans, held-for-investment, at fair value 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 recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as other income and expenses associated with these entities' activities. See Note 12 for further discussion on ABS issued.
See Note 4 for further discussion on principles of consolidation.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 2. Basis of Presentation - (continued)
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 2016 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 and six months ended June 30, 2017.
Recent Accounting Pronouncements
Newly Adopted Accounting Standards Updates ("ASUs")
In January 2017, the FASB issued ASU 2017-03, "Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)." This new guidance requires that companies evaluate ASUs that have not been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. This new guidance is effective immediately. We adopted this guidance, as required, in the first quarter of 2017, which did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This new guidance provides simplifications of the accounting for share-based payment transactions, including related income tax accounting, classification of awards, and classification on the statement of cash flows. In addition, this guidance permits the withholding of employee taxes related to the distribution of equity awards up to the maximum individual employee statutory tax rates. This new guidance is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. In the second quarter of 2016, we adopted this new guidance. Upon adoption, we elected to account for forfeitures on employee equity awards as they occur, rather than estimating expected forfeitures. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Other Recent Accounting Pronouncements
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20)." This new guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring the premium to be amortized to the earliest call date. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." This new guidance amends previous guidance on how to classify and present changes in restricted cash on the statement of cash flows. This new guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and we will modify the presentation of our cash flow statement as required.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This new guidance allows an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. It also eliminates the exceptions for an intra-entity transfer of assets other than inventory. This new guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This new guidance provides guidance on how to present and classify certain cash receipts and cash payments in the statement of cash flows. This new guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses." This new guidance provides a new impairment model that is based on expected losses rather than incurred losses to determine the allowance for credit losses. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning December 15, 2018. Currently, a significant portion of our financial instruments are measured at fair value, for which we do not maintain any allowances for loan losses in accordance with fair value accounting. As such, based on our initial evaluation of this new guidance, we do not believe the provisions in this guidance will have a material impact to how we account for these instruments. Separately, we account for our available-for-sale securities under the other-than-temporary impairment ("OTTI") model for debt securities. This new guidance changes the accounting for available-for-sale securities, including AFS securities purchased with credit deterioration. We are currently evaluating the impact that this update will have on our consolidated financial statements in regard to our available-for-sale securities. We plan to adopt this new guidance by the required date.
In February 2016, the FASB issued ASU 2016-02, "Leases." This new guidance requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. This new guidance retains a dual lease accounting model, which requires leases to be classified as either operating or capital leases for lessees, for purposes of income statement recognition. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. As discussed in Note 14, our only material leases are those related to our leased office space, for which future payments under these leases total $18 million at June 30, 2017. Based on our initial evaluation of this new guidance, and taking into consideration our current in-place leases, we do not expect that its adoption will have a material impact on our consolidated financial statements. We will continue evaluating this new standard and caution that any changes in our business or additional leases we may enter into could change our initial assessment.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This new guidance amends accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. This new guidance also amends certain disclosure requirements associated with the fair value of financial instruments and it is effective for fiscal years beginning after December 15, 2017. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. In July 2015, the FASB approved a one year deferral of the effective date. Accordingly, the update is effective for us in the first quarter of 2018 with retrospective application to prior periods presented or as a cumulative effect adjustment in the period of adoption. Early adoption is permitted in the first quarter of 2017. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This new guidance provides additional implementation guidance on how an entity should identify the unit of accounting for the principal versus agent evaluations. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," and in December 2016, the FASB issued ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." These new ASUs provide more specific guidance on certain aspects of Topic 606. Based on our initial evaluation of these new accounting standards, we do not expect that their adoption will have a material impact on our consolidated financial statements, as financial instruments are explicitly scoped out of the standards and nearly all of our income is generated from financial instruments. We will continue evaluating these new standards and caution that any changes in our business or additional amendments to these standards could change our initial assessment.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
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 June 30, 2017 and December 31, 2016.
Table 3.1 – 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 |
June 30, 2017 (In Thousands) | | | | | Financial Instruments | | Cash Collateral (Received) Pledged | |
Assets (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | 4,335 |
| | $ | — |
| | $ | 4,335 |
| | $ | (3,513 | ) | | $ | (822 | ) | | $ | — |
|
TBAs | | 3,381 |
| | — |
| | 3,381 |
| | (1,390 | ) | | (690 | ) | | 1,301 |
|
Futures | | 9 |
| | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
Total Assets | | $ | 7,725 |
| | $ | — |
| | $ | 7,725 |
| | $ | (4,903 | ) | | $ | (1,512 | ) | | $ | 1,310 |
|
| | | | | | | | | | | | |
Liabilities (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | (64,087 | ) | | $ | — |
| | $ | (64,087 | ) | | $ | 3,513 |
| | $ | 60,574 |
| | $ | — |
|
TBAs | | (1,506 | ) | | — |
| | (1,506 | ) | | 1,391 |
| | 37 |
| | (78 | ) |
Futures | | (163 | ) | | — |
| | (163 | ) | | — |
| | 163 |
| | — |
|
Loan warehouse debt | | (575,303 | ) | | — |
| | (575,303 | ) | | 575,303 |
| | — |
| | — |
|
Security repurchase agreements | | (469,491 | ) | | — |
| | (469,491 | ) | | 469,491 |
| | — |
| | — |
|
Total Liabilities | | $ | (1,110,550 | ) | | $ | — |
| | $ | (1,110,550 | ) | | $ | 1,049,698 |
| | $ | 60,774 |
| | $ | (78 | ) |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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, 2016 (In Thousands) | | | | | Financial Instruments | | Cash Collateral (Received) Pledged | |
Assets (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | 24,980 |
| | $ | — |
| | $ | 24,980 |
| | $ | (7,736 | ) | | $ | (4,784 | ) | | $ | 12,460 |
|
TBAs | | 8,300 |
| | — |
| | 8,300 |
| | (3,936 | ) | | (4,364 | ) | | — |
|
Total Assets | | $ | 33,280 |
| | $ | — |
| | $ | 33,280 |
| | $ | (11,672 | ) | | $ | (9,148 | ) | | $ | 12,460 |
|
| | | | | | | | | | | | |
Liabilities (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | (56,919 | ) | | $ | — |
| | $ | (56,919 | ) | | $ | 7,736 |
| | $ | 49,183 |
| | $ | — |
|
TBAs | | (4,681 | ) | | — |
| | (4,681 | ) | | 3,936 |
| | — |
| | (745 | ) |
Futures | | (928 | ) | | — |
| | (928 | ) | | — |
| | 928 |
| | — |
|
Loan warehouse debt | | (485,544 | ) | | — |
| | (485,544 | ) | | 485,544 |
| | — |
| | — |
|
Security repurchase agreements | | (305,995 | ) | | — |
| | (305,995 | ) | | 305,995 |
| | — |
| | — |
|
Total Liabilities | | $ | (854,067 | ) | | $ | — |
| | $ | (854,067 | ) | | $ | 803,211 |
| | $ | 50,111 |
| | $ | (745 | ) |
| |
(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, credit default index swaps, and futures are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by residential 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 aggregated and 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. 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. Any such settlement would 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. Such limitations 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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
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.
Analysis of Consolidated VIEs
At June 30, 2017, we consolidated certain Sequoia securitization entities issued prior to 2012 that we determined were VIEs and for which we determined we were the primary beneficiary. 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.
Table 4.1 – Assets and Liabilities of Consolidated VIEs
|
| | | | | | | | |
(Dollars in Thousands) | | June 30, 2017 | | December 31, 2016 |
Residential loans, held-for-investment | | $ | 707,686 |
| | $ | 791,636 |
|
Restricted cash | | 148 |
| | 148 |
|
Accrued interest receivable | | 925 |
| | 1,000 |
|
Other assets | | 4,645 |
| | 5,533 |
|
Total Assets | | $ | 713,404 |
| | $ | 798,317 |
|
Accrued interest payable | | $ | 531 |
| | $ | 518 |
|
Asset-backed securities issued | | 692,606 |
| | 773,462 |
|
Total Liabilities | | $ | 693,137 |
| | $ | 773,980 |
|
| | | | |
Number of VIEs | | 20 |
| | 20 |
|
Analysis of Unconsolidated VIEs with Continuing Involvement
Since 2012, we have transferred residential loans to 33 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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 4. Principles of Consolidation - (continued)
The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2017 and 2016.
Table 4.2 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Principal balance of loans transferred | | $ | 348,599 |
| | $ | 344,890 |
| | $ | 1,384,123 |
| | $ | 344,890 |
|
Trading securities retained, at fair value | | 10,287 |
| | — |
| | 30,990 |
| | — |
|
AFS securities retained, at fair value | | 1,905 |
| | 1,834 |
| | 7,060 |
| | 1,834 |
|
MSRs recognized | | — |
| | 2,131 |
| | 7,123 |
| | 2,131 |
|
The following table summarizes the cash flows during the three and six months ended June 30, 2017 and 2016 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.
Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Proceeds from new transfers | | $ | 351,485 |
| | $ | 352,042 |
| | $ | 1,373,509 |
| | $ | 352,042 |
|
MSR fees received | | 3,698 |
| | 3,401 |
| | 7,173 |
| | 6,924 |
|
Funding of compensating interest, net | | (41 | ) | | (77 | ) | | (79 | ) | | (156 | ) |
Cash flows received on retained securities | | 6,588 |
| | 6,739 |
| | 12,961 |
| | 17,930 |
|
The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and six months ended June 30, 2017 and 2016.
Table 4.4 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood
|
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 | | Three Months Ended June 30, 2016 |
At Date of Securitization | | MSRs | | Senior Securities | | Subordinate Securities | | MSRs | | Subordinate Securities |
Prepayment rates | | N/A | | 10 | % | | 10 | % | | 20 | % | | 15 | % |
Discount rates | | N/A | | 14 | % | | 5 | % | | 11 | % | | 7 | % |
Credit loss assumptions | | N/A | | 0.25 | % | | 0.25 | % | | N/A |
| | 0.25 | % |
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 | | Six Months Ended June 30, 2016 |
At Date of Securitization | | MSRs | | Senior Securities | | Subordinate Securities | | MSRs | | Subordinate Securities |
Prepayment rates | | 9 | % | | 10 | % | | 10 | % | | 20 | % | | 15 | % |
Discount rates | | 11 | % | | 12 | % | | 5 | % | | 11 | % | | 7 | % |
Credit loss assumptions | | N/A |
| | 0.25 | % | | 0.25 | % | | N/A |
| | 0.25 | % |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 4. Principles of Consolidation - (continued)
The following table presents additional information at June 30, 2017 and December 31, 2016, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.
Table 4.5 – Unconsolidated VIEs Sponsored by Redwood
|
| | | | | | | | |
(In Thousands) | | June 30, 2017 | | December 31, 2016 |
On-balance sheet assets, at fair value: | | | | |
Interest-only, senior and subordinate securities, classified as trading | | $ | 69,825 |
| | $ | 41,909 |
|
Subordinate securities, classified as AFS | | 216,269 |
| | 234,025 |
|
Mortgage servicing rights | | 61,616 |
| | 58,800 |
|
Maximum loss exposure (1) | | $ | 347,710 |
| | $ | 334,734 |
|
Assets transferred: | | | | |
Principal balance of loans outstanding | | $ | 7,760,334 |
| | $ | 6,870,398 |
|
Principal balance of loans 30+ days delinquent | | 18,144 |
| | 21,427 |
|
| |
(1) | Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs 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. |
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 June 30, 2017 and December 31, 2016.
Table 4.6 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
|
| | | | | | | | | | | | |
June 30, 2017 | | MSRs | | Senior Securities (1) | | Subordinate Securities |
(Dollars in Thousands) | | | |
Fair value at June 30, 2017 | | $ | 61,616 |
| | $ | 29,040 |
| | $ | 257,054 |
|
Expected life (in years) (2) | | 7 |
| | 6 |
| | 13 |
|
Prepayment speed assumption (annual CPR) (2) | | 10 | % | | 11 | % | | 11 | % |
Decrease in fair value from: | | | | | | |
10% adverse change | | $ | 2,150 |
| | $ | 1,224 |
| | $ | 794 |
|
25% adverse change | | 5,161 |
| | 2,910 |
| | 1,976 |
|
Discount rate assumption (2) | | 11 | % | | 9 | % | | 6 | % |
Decrease in fair value from: | | | | | | |
100 basis point increase | | $ | 2,326 |
| | $ | 1,144 |
| | $ | 22,023 |
|
200 basis point increase | | 4,483 |
| | 2,205 |
| | 40,929 |
|
Credit loss assumption (2) | | N/A |
| | 0.25 | % | | 0.25 | % |
Decrease in fair value from: | | | | | | |
10% higher losses | | N/A |
| | $ | 4 |
| | $ | 1,348 |
|
25% higher losses | | N/A |
| | 8 |
| | 3,364 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 4. Principles of Consolidation - (continued)
|
| | | | | | | | | | | | |
December 31, 2016 | | MSRs | | Senior Securities (1) | | Subordinate Securities |
(Dollars in Thousands) | | | |
Fair value at December 31, 2016 | | $ | 58,800 |
| | $ | 26,618 |
| | $ | 249,317 |
|
Expected life (in years) (2) | | 7 |
| | 6 |
| | 12 |
|
Prepayment speed assumption (annual CPR) (2) | | 11 | % | | 8 | % | | 12 | % |
Decrease in fair value from: | | | | | | |
10% adverse change | | $ | 2,226 |
| | $ | 1,075 |
| | $ | 997 |
|
25% adverse change | | 5,284 |
| | 2,569 |
| | 2,494 |
|
Discount rate assumption (2) | | 11 | % | | 8 | % | | 6 | % |
Decrease in fair value from: | | | | | | |
100 basis point increase | | $ | 2,088 |
| | $ | 1,105 |
| | $ | 19,574 |
|
200 basis point increase | | 4,032 |
| | 2,128 |
| | 36,574 |
|
Credit loss assumption (2) | | N/A |
| | 0.25 | % | | 0.25 | % |
Decrease in fair value from: | | | | | | |
10% higher losses | | N/A |
| | $ | 19 |
| | $ | 1,174 |
|
25% higher losses | | N/A |
| | 49 |
| | 2,933 |
|
| |
(1) | Senior securities included $29 million and $27 million of interest only securities at June 30, 2017 and December 31, 2016, respectively. |
| |
(2) | Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages. |
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 June 30, 2017, grouped by security type.
Table 4.7 – Third-Party Sponsored VIE Summary
|
| | | | |
(Dollars in Thousands) | | June 30, 2017 |
Mortgage-Backed Securities | | |
Senior | | $ | 147,923 |
|
Re-REMIC | | 73,337 |
|
Subordinate | | 711,149 |
|
Total Investments in Third-Party Sponsored VIEs | | $ | 932,409 |
|
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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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 June 30, 2017 and December 31, 2016.
Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
|
| | | | | | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In Thousands) | | | | |
Assets | | | | | | | | |
Residential loans, held-for-sale | | | | | | | | |
At fair value | | $ | 836,291 |
| | $ | 836,291 |
| | $ | 834,193 |
| | $ | 834,193 |
|
At lower of cost or fair value | | 1,080 |
| | 1,212 |
| | 1,206 |
| | 1,365 |
|
Residential loans, held-for-investment | | | | | | | | |
At fair value | | 3,067,920 |
| | 3,067,920 |
| | 3,052,652 |
| | 3,052,652 |
|
Trading securities | | 668,561 |
| | 668,561 |
| | 445,687 |
| | 445,687 |
|
Available-for-sale securities | | 549,942 |
| | 549,942 |
| | 572,752 |
| | 572,752 |
|
MSRs | | 63,770 |
| | 63,770 |
| | 118,526 |
| | 118,526 |
|
Cash and cash equivalents | | 217,218 |
| | 217,218 |
| | 212,844 |
| | 212,844 |
|
Restricted cash | | 2,006 |
| | 2,006 |
| | 8,623 |
| | 8,623 |
|
Accrued interest receivable | | 20,101 |
| | 20,101 |
| | 18,454 |
| | 18,454 |
|
Derivative assets | | 12,264 |
| | 12,264 |
| | 36,595 |
| | 36,595 |
|
REO (1) | | 4,645 |
| | 4,802 |
| | 5,533 |
| | 5,560 |
|
Margin receivable (1) | | 100,156 |
| | 100,156 |
| | 68,038 |
| | 68,038 |
|
FHLBC stock (1) | | 43,393 |
| | 43,393 |
| | 43,393 |
| | 43,393 |
|
Guarantee asset (1) | | 3,288 |
| | 3,288 |
| | 4,092 |
| | 4,092 |
|
Commercial loans (1) | | — |
| | — |
| | 2,700 |
| | 2,700 |
|
Pledged collateral (1) | | 42,963 |
| | 42,963 |
| | 42,875 |
| | 42,875 |
|
Liabilities | | | | | | | | |
Short-term debt facilities | | $ | 1,044,794 |
| | $ | 1,044,794 |
| | $ | 791,539 |
| | $ | 791,539 |
|
Accrued interest payable | | 9,939 |
| | 9,939 |
| | 9,608 |
| | 9,608 |
|
Margin payable | | 2,020 |
| | 2,020 |
| | 12,783 |
| | 12,783 |
|
Guarantee obligation | | 20,692 |
| | 20,568 |
| | 21,668 |
| | 22,181 |
|
Derivative liabilities | | 69,175 |
| | 69,175 |
| | 66,329 |
| | 66,329 |
|
ABS issued at fair value, net | | 692,606 |
| | 692,606 |
| | 773,462 |
| | 773,462 |
|
FHLBC long-term borrowings | | 1,999,999 |
| | 1,999,999 |
| | 1,999,999 |
| | 1,999,999 |
|
Convertible notes, net | | 447,848 |
| | 464,042 |
| | 482,195 |
| | 493,365 |
|
Trust preferred securities and subordinated notes, net | | 138,512 |
| | 100,440 |
| | 138,489 |
| | 96,255 |
|
| |
(1) | These assets are included in Other assets on our consolidated balance sheets. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
During the three and six months ended June 30, 2017, we elected the fair value option for $13 million and $16 million of residential senior securities, $102 million and $244 million of subordinate securities, $1.20 billion and $2.29 billion of residential loans (principal balance), and $0.2 million and $8 million of MSRs, respectively. We anticipate electing the fair value option for all future purchases of residential loans that we may sell to third parties or transfer to securitizations, for MSRs purchased or retained from sales of residential loans, and for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.
The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at June 30, 2017 and December 31, 2016, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
| | | | | | | | | | | | | | | | |
June 30, 2017 | | Carrying Value | | Fair Value Measurements Using |
(In Thousands) | | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Residential loans | | $ | 3,904,210 |
| | $ | — |
| | $ | — |
| | $ | 3,904,210 |
|
Trading securities | | 668,561 |
| | — |
| | — |
| | 668,561 |
|
Available-for-sale securities | | 549,942 |
| | — |
| | — |
| | 549,942 |
|
Derivative assets | | 12,264 |
| | 3,390 |
| | 4,335 |
| | 4,539 |
|
MSRs | | 63,770 |
| | — |
| | — |
| | 63,770 |
|
Pledged collateral | | 42,963 |
| | 42,963 |
| | — |
| | — |
|
FHLBC stock | | 43,393 |
| | — |
| | 43,393 |
| | — |
|
Guarantee asset | | 3,288 |
| | — |
| | — |
| | 3,288 |
|
| | | | | | | | |
Liabilities | |
|
| | | | | | |
Derivative liabilities | | $ | 69,175 |
| | $ | 1,669 |
| | $ | 64,087 |
| | $ | 3,419 |
|
ABS issued | | 692,606 |
| | — |
| | — |
| | 692,606 |
|
|
| | | | | | | | | | | | | | | | |
December 31, 2016 | | Carrying Value | | Fair Value Measurements Using |
(In Thousands) | | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Residential loans | | $ | 3,886,845 |
| | $ | — |
| | $ | — |
| | $ | 3,886,845 |
|
Trading securities | | 445,687 |
| | — |
| | — |
| | 445,687 |
|
Available-for-sale securities | | 572,752 |
| | — |
| | — |
| | 572,752 |
|
Derivative assets | | 36,595 |
| | 8,300 |
| | 24,980 |
| | 3,315 |
|
MSRs | | 118,526 |
| | — |
| | — |
| | 118,526 |
|
Pledged collateral | | 42,875 |
| | 42,875 |
| | — |
| | — |
|
FHLBC stock | | 43,393 |
| | — |
| | 43,393 |
| | — |
|
Guarantee asset | | 4,092 |
| | — |
| | — |
| | 4,092 |
|
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities | | $ | 66,329 |
| | $ | 5,609 |
| | $ | 56,919 |
| | $ | 3,801 |
|
ABS issued | | 773,462 |
| | — |
| | — |
| | 773,462 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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 six months ended June 30, 2017.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | | | | Liabilities |
| | Residential Loans | | Trading Securities | | AFS Securities | | MSRs | | Guarantee Asset | | Derivatives(1) | | ABS Issued |
(In Thousands) | | | | | | | |
Beginning balance - December 31, 2016 | | $ | 3,886,845 |
| | $ | 445,687 |
| | $ | 572,752 |
| | $ | 118,526 |
| | $ | 4,092 |
| | $ | (486 | ) | | $ | 773,462 |
|
Acquisitions | | 2,329,355 |
| | 260,351 |
| | 27,238 |
| | 7,701 |
| | — |
| | — |
| | — |
|
Sales | | (2,072,512 | ) | | (61,175 | ) | | (37,908 | ) | | (52,966 | ) | | — |
| | — |
| | — |
|
Principal paydowns | | (277,174 | ) | | (6,409 | ) | | (28,343 | ) | | — |
| | — |
| | — |
| | (103,372 | ) |
Gains (losses) in net income, net | | 39,742 |
| | 30,107 |
| | 17,650 |
| | (9,491 | ) | | (804 | ) | | 20,671 |
| | 22,516 |
|
Unrealized losses in OCI, net | | — |
| | — |
| | (1,447 | ) | | — |
| | — |
| | — |
| | — |
|
Other settlements, net (2) | | (2,046 | ) | | — |
| | — |
| | — |
| | — |
| | (19,065 | ) | | — |
|
Ending Balance - June 30, 2017 | | $ | 3,904,210 |
| | $ | 668,561 |
| | $ | 549,942 |
| | $ | 63,770 |
| | $ | 3,288 |
| | $ | 1,120 |
| | $ | 692,606 |
|
| |
(1) | For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented on a net basis. |
| |
(2) | Other settlements, net for derivatives represents the transfer of the fair value of loan purchase commitments at the time loans are acquired to the basis of residential loans. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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 June 30, 2017 and 2016. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2017 and 2016 are not included in this presentation.
Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2017 and 2016 Included in Net Income
|
| | | | | | | | | | | | | | | | |
| | Included in Net Income |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Assets | | | | | | | | |
Residential loans at Redwood | | $ | 16,506 |
| | $ | 8,165 |
| | $ | 19,738 |
| | $ | 32,969 |
|
Residential loans at consolidated Sequoia entities | | 11,038 |
| | 7,592 |
| | 19,452 |
| | (28,064 | ) |
Commercial loans | | — |
| | 198 |
| | — |
| | 2,369 |
|
Trading securities | | 15,880 |
| | (230 | ) | | 24,529 |
| | (8,353 | ) |
Available-for-sale securities | | (128 | ) | | (305 | ) | | (245 | ) | | (305 | ) |
MSRs | | (2,038 | ) | | (19,948 | ) | | (1,354 | ) | | (48,692 | ) |
Loan purchase commitments | | 994 |
| | 6,873 |
| | 1,111 |
| | 7,248 |
|
Other assets - Guarantee asset | | (558 | ) | | (952 | ) | | (804 | ) | | (2,377 | ) |
| | | | |