rwt-20230331

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2023


☐			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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	RWT	New York Stock Exchange
10% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock, par value $0.01 per share	RWT PRA	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Common Stock, $0.01 par value per share						114,028,712			shares outstanding as of May 2, 2023

REDWOOD TRUST, INC.

2023 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at March 31, 2023 (Unaudited) and December 31, 2022	2
	Consolidated Statements of Income for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	8
	Note 1. Organization	8
	Note 2. Basis of Presentation	8
	Note 3. Summary of Significant Accounting Policies	11
	Note 4. Principles of Consolidation	14
	Note 5. Fair Value of Financial Instruments	20
	Note 6. Residential Loans	28
	Note 7. Business Purpose Loans	31
	Note 8. Multifamily Loans	35
	Note 9. Real Estate Securities	36
	Note 10. Home Equity Investments (HEI)	41
	Note 1 1 . Other Investments	42
	Note 1 2 . Derivative Financial Instruments	43
	Note 1 3 . Other Assets and Liabilities	45
	Note 1 4 . Short-Term Debt	47
	Note 1 5 . Asset-Backed Securities Issued	50
	Note 1 6 . Long-Term Debt	53
	Note 1 7 . Commitments and Contingencies	56
	Note 1 8 . Equity	59
	Note 1 9 . Equity Compensation Plans	61
	Note 20 . Mortgage Banking Activities, Net	63
	Note 21. Other Income, Net	64
	Note 22. Operating Expenses	65
	Note 2 3 . Taxes	67
	Note 2 4 . Segment Information	68

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	72
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	103
Item 4.	Controls and Procedures	103

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	104
Item 1A.	Risk Factors	104
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	104
Item 3.	Defaults Upon Senior Securities	104
Item 4.	Mine Safety Disclosures (Not Applicable)	104
Item 5.	Other Information	104
Item 6.	Exhibits	105
Signatures		106

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands, except Share Data) (Unaudited)	March 31, 2023		December 31, 2022
ASSETS (1)
Residential loans, held-for-sale, at fair value	$	26,975	$	780,781
Residential loans, held-for-investment, at fair value	5,465,883		4,832,407
Business purpose loans, held-for-sale, at fair value	371,385		364,073
Business purpose loans, held-for-investment, at fair value	4,993,264		4,968,513
Consolidated Agency multifamily loans, at fair value	426,599		424,551
Real estate securities, at fair value	243,346		240,475
Home equity investments, at fair value	416,783		403,462
Other investments	381,690		390,938
Cash and cash equivalents	404,449		258,894
Restricted cash	86,037		70,470
Goodwill	23,373		23,373
Intangible assets	37,784		40,892
Derivative assets	11,497		20,830
Other assets	232,221		211,240
Total Assets	$	13,121,286	$	13,030,899

LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net	$	1,616,452	$	2,029,679

Derivative liabilities	10,736		16,855
Accrued expenses and other liabilities	176,271		180,203

Asset-backed securities issued (includes $7,968,135 and $7,424,132 at fair value), net	8,447,119		7,986,752
Long-term debt, net	1,733,028		1,733,425
Total liabilities	11,983,606		11,946,914
Commitments and Contingencies (see Note 17)
Equity
Preferred stock, par value $0.01 per share, 2,800,000 shares authorized; 2,800,000 and zero issued and outstanding	66,923		—
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,864,456 and 113,484,675 issued and outstanding	1,139		1,135
Additional paid-in capital	2,355,139		2,349,845
Accumulated other comprehensive loss	(63,036)		(68,868)
Cumulative earnings	1,156,571		1,153,370
Cumulative distributions to stockholders	(2,379,056)		(2,351,497)
Total equity	1,137,680		1,083,985
Total Liabilities and Equity	$	13,121,286	$	13,030,899

——————

(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 March 31, 2023 and December 31, 2022, assets of consolidated VIEs totaled $9,836,956 and $9,257,291, respectively. At March 31, 2023 and December 31, 2022, liabilities of consolidated VIEs totaled $8,729,585 and $8,270,276, respectively. See Note 4 for further discussion.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


(In Thousands, except Share Data)	Three Months Ended March 31,
(Unaudited)	2023		2022
Interest Income
Residential loans	$	57,874	$	65,203
Business purpose loans	97,296		94,299
Consolidated Agency multifamily loans	4,618		4,753
Real estate securities	6,428		15,955
Other interest income	12,300		9,190
Total interest income	178,516		189,400
Interest Expense
Short-term debt	(31,828)		(11,488)
Asset-backed securities issued	(87,465)		(105,695)
Long-term debt	(32,786)		(19,115)
Total interest expense	(152,079)		(136,298)
Net Interest Income	26,437		53,102
Non-interest Income
Mortgage banking activities, net	16,671		16,315
Investment fair value changes, net	(127)		(6,120)
Other income, net	4,556		5,983
Realized gains (losses), net	(2)		2,581
Total non-interest income, net	21,098		18,759
General and administrative expenses	(35,555)		(33,276)
Portfolio management costs	(3,510)		(1,578)
Loan acquisition costs	(1,289)		(4,465)
Other expenses	(3,684)		(4,085)
Net Income before Benefit from Income Taxes	3,497		28,457
Benefit from income taxes	1,123		2,458
Net Income	$	4,620	$	30,915
Dividends on preferred stock	(1,419)		—
Net income available to common stockholders	$	3,201	$	30,915

Net income available to common stockholders - Basic	$	0.02	$	0.25
Net income available to common stockholders - Diluted	$	0.02	$	0.24
Basic weighted average common shares outstanding	113,678,911		119,884,172
Diluted weighted average common shares outstanding	114,134,556		140,506,157

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(In Thousands)	Three Months Ended March 31,
(Unaudited)	2023		2022
Net Income	$	4,620	$	30,915
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities	5,007		(17,873)
Reclassification of unrealized (gain) on available-for-sale securities to net income	(193)		(692)

Reclassification of unrealized loss on interest rate agreements to net income	1,018		1,018
Total other comprehensive income (loss)	5,832		(17,547)
Comprehensive Income	$	10,452	$	13,368
Dividends on preferred stock	$	(1,419)	$	—
Comprehensive income available to common stockholders	$	9,033	$	13,368

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 Three Months Ended March 31, 2023


(In Thousands, except Share Data)	Preferred Stock		Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)			Shares	Par Value
December 31, 2022	$	—	113,484,675	$	1,135	$	2,349,845	$	(68,868)	$	1,153,370	$	(2,351,497)	$	1,083,985
Net income	—		—	—		—		—		4,620		—		4,620
Other comprehensive income	—		—	—		—		5,832		—		—		5,832


Employee stock purchase and incentive plans	—		379,781	4		(1,048)		—		—		—		(1,044)
Non-cash equity award compensation	—		—	—		6,342		—		—		—		6,342

Issuance of preferred stock	66,923		—	—		—		—		—		—		66,923
Preferred dividends declared ($0.60417 per share)	—		—	—		—		—		(1,419)		—		(1,419)
Common dividends declared ($0.23 per share)(1)	—		—	—		—		—		—		(27,559)		(27,559)
March 31, 2023	$	66,923	113,864,456	$	1,139	$	2,355,139	$	(63,036)	$	1,156,571	$	(2,379,056)	$	1,137,680

For the Three Months Ended March 31, 2022


(In Thousands, except Share Data)	Preferred Stock	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)		Shares	Par Value
December 31, 2021	—	114,892,309	$	1,149	$	2,316,799	$	(8,927)	$	1,316,890	$	(2,239,824)	$	1,386,087
Net income	—	—	—		—		—		30,915		—		30,915
Other comprehensive (loss)	—	—	—		—		(17,547)		—		—		(17,547)
Issuance of common stock	—	5,232,869	52		67,423		—		—		—		67,475

Employee stock purchase and incentive plans	—	164,065	2		(1,048)		—		—		—		(1,046)
Non-cash equity award compensation	—	—	—		8,170		—		—		—		8,170

Common dividends declared ($0.23 per share)(1)	—	—	—		—		—		—		(28,788)		(28,788)
March 31, 2022	—	120,289,243	$	1,203	$	2,391,344	$	(26,474)	$	1,347,805	$	(2,268,612)	$	1,445,266

(1) Includes dividends and dividend equivalents declared on common stock and stock-based awards

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

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands) (Unaudited)	Three Months Ended March 31,
	2023		2022
Cash Flows From Operating Activities:
Net income	$	4,620	$	30,915
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of premiums, discounts, and debt issuance costs, net	5,818		(5,451)
Depreciation and amortization of non-financial assets	3,668		3,969
Originations of held-for-sale loans	(201,081)		(443,289)
Purchases of held-for-sale loans	(55,824)		(2,197,570)
Proceeds from sales of held-for-sale loans	368,633		2,176,422
Principal payments on held-for-sale loans	18,705		46,511
Net settlements of derivatives	(13,933)		67,200

Non-cash equity award compensation expense	6,342		8,170

Market valuation adjustments	(11,270)		1,859
Realized (gains) losses, net	2		(2,581)
Net change in:
Accrued interest receivable and other assets	(13,750)		31,070
Accrued interest payable and accrued expenses and other liabilities	(9,921)		(8,901)
Net cash provided by (used in) operating activities	102,009		(291,676)
Cash Flows From Investing Activities:
Originations of loan investments	(237,309)		(411,938)
Purchases of loan investments	—		(2,983)

Principal payments on loan investments	343,430		660,990
Purchases of real estate securities	—		(15,006)



Proceeds from sales of real estate securities	6,186		—
Principal payments on real estate securities	255		23,050

Repayments from servicer advance investments, net	7,529		45,005

Purchases of HEIs	(16,559)		(40,141)
Repayments on HEIs	7,754		12,671
Other investing activities, net	(557)		(1,151)
Net cash provided by investing activities	110,729		270,497
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	643,085		2,153,516
Repayments on short-term debt	(1,057,380)		(2,684,078)
Proceeds from issuance of asset-backed securities	594,327		680,749
Repayments on asset-backed securities issued	(267,449)		(535,568)

Proceeds from borrowings on long-term debt	126,760		630,865
Deferred long-term debt issuance costs paid	(308)		(532)
Repayments on long-term debt	(128,970)		(308,578)


Taxes paid on equity award distributions	(1,207)		(1,202)
Net proceeds from issuance of common stock	162		67,632
Net proceeds from issuance of preferred stock	66,923		—
Dividends paid on common stock	(27,559)		(28,788)

Other financing activities, net	—		(1,500)
Net cash used in financing activities	(51,616)		(27,484)
Net increase (decrease) in cash, cash equivalents and restricted cash	161,122		(48,663)
Cash, cash equivalents and restricted cash at beginning of period (1)	329,364		531,484
Cash, cash equivalents and restricted cash at end of period (1)	$	490,486	$	482,821

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(In Thousands) (Unaudited)	Three Months Ended March 31,
	2023		2022
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	138,617	$	131,419
Taxes (refunded) paid	(1,388)		(41)
Supplemental Noncash Information:
Dividends declared but not paid on preferred stock	1,419		—
Retention of mortgage servicing rights from loan securitizations and sales	—		4,543




Transfers from loans held-for-sale to loans held-for-investment	873,093		1,098,459

Transfers from residential loans to real estate owned	8,014		1,319
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	337		—
Reduction in operating lease liabilities due to lease modification	274		—

(1) Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $404 million and restricted cash of $86 million at March 31, 2023, and includes cash and cash equivalents of $259 million and restricted cash of $70 million at December 31, 2022.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We deliver customized housing credit investments to a diverse mix of investors through our best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential, business purpose and multifamily assets. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio.

Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and other liabilities. Income from mortgage banking activities is generated through the origination and acquisition of loans, and their subsequent sale, securitization, or transfer to our investment portfolio.

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 generally 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 taxable REIT subsidiaries” or “TRS.”

Redwood Trust, Inc. 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. For a full description of our business, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2022.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at March 31, 2023 and December 31, 2022, and for the three months ended March 31, 2023 and 2022. 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 our annual 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 in these interim financial statements 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, 2022. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at March 31, 2023 and results of operations for all periods presented. The results of operations for the three months ended March 31, 2023 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

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 issued prior to 2012 ("Legacy Sequoia"), certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of CoreVest BPL term and bridge loans ("CAFL") and an entity formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. 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 purchased or retained, although for certain entities we are exposed to financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator 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 Legacy Sequoia, Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment, at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Consolidated Agency multifamily loans, at fair value, the underlying BPL term and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEIs at the consolidated HEI securitization entity are shown under Home equity investments, 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 record interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 15 for further discussion on ABS issued.

We also consolidate two partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships.

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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

Acquisitions

On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding this acquisition, including purchase price allocations. Additionally, in 2019 we acquired 5 Arches and CoreVest, an originator and portfolio manager of business purpose residential loans. In connection with these acquisitions, we identified and recorded finite-lived intangible assets totaling $95 million. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at March 31, 2023.

Table 2.1 – Intangible Assets – Activity


	Intangible Assets at Acquisition		Accumulated Amortization at March 31, 2023		Carrying Value at March 31, 2023		Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network	$	56,300	$	(23,559)	$	32,741	7
Broker network	18,100		(14,782)		3,318		5
Non-compete agreements	11,400		(9,975)		1,425		3
Tradenames	4,400		(4,100)		300		3
Developed technology	1,800		(1,800)		—		2
Loan administration fees on existing loan assets	2,600		(2,600)		—		1
Total	$	94,600	$	(56,816)	$	37,784	6

All of our intangible assets are amortized on a straight-line basis. For the three months ended March 31, 2023, we recorded intangible asset amortization expense of $3 million. For the three months ended March 31, 2022, we recorded intangible asset amortization expense of $4 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year



(In Thousands)	March 31, 2023
2023 (9 months)	$	9,323
2024	9,412
2025	8,426
2026	6,694
2027	1,571
2028 and thereafter	2,358
Total Future Intangible Asset Amortization	$	37,784

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at March 31, 2023.

We recorded total goodwill of $23 million during the three months ended September 30, 2022 as a result of the total consideration exceeding the fair value of the net assets acquired from Riverbend. For reporting purposes, we included the intangible assets and goodwill from the Riverbend acquisition within our Business Purpose Mortgage Banking segment. There were no changes to the balance of goodwill during the three months ended March 31, 2023.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

The potential liability resulting from the contingent consideration arrangement with Riverbend was recorded at its acquisition-date fair value of zero as part of the total consideration for the acquisition of Riverbend. At March 31, 2023, the estimated fair value of this contingent liability was zero on our consolidated balance sheets. Our contingent consideration liability is recorded at fair value and periodic changes in the estimated fair value are recorded through Other expenses on our consolidated statements of income. During the period ended March 31, 2023, we did not record any contingent consideration income or expense related to our acquisition of Riverbend. See Note 17 for additional information on our contingent consideration liability.

The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, as if the acquisition of Riverbend occurred as of January 1, 2022. These pro forma amounts have been adjusted to include the amortization of intangible assets for all periods. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisition had been completed as of January 1, 2022 and should not be taken as indicative of our future consolidated results of operations.

Table 2.3 – Unaudited Pro Forma Financial Information


	Three Months Ended March 31, 2022
(In Thousands)
Supplementary pro forma information:
Net interest income	$	54,815
Non-interest income	22,401
Net income	32,230

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Included in Note 3 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2022 is a summary of our significant accounting policies.

Recent Accounting Pronouncements

Newly Adopted Accounting Standard Updates ("ASUs")

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss ("CECL") model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method," which will expand companies' abilities to hedge the benchmark interest rate risk of portfolios of financial assets (or beneficial interests) in a fair value hedge. The ASU expands the use of the portfolio layer method (previously referred to as the last-of-layer method) to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and amortizing-notional swaps. The ASU also permits both prepayable and non-prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio layer hedge. The ASU further requires that basis adjustments not be allocated to individual assets for active portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a whole. This new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.

In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848." This new guidance defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. Through March 31, 2023, we have not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.

Other Recent Accounting Pronouncements Pending Adoption

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our financial statements.

We have an established cross-functional group that has evaluated our exposure to LIBOR, reviewed relevant contracts and has monitored regulatory updates to assess the potential impact to our business, processes and technology from the ultimate full cessation of LIBOR in 2023, and has established a LIBOR transition plan to facilitate an orderly transition to alternative reference rates. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability with LIBOR exposure. At March 31, 2023, our primary LIBOR exposure included the following: $742 million of bridge loans and $140 million of trust preferred securities and subordinated debt. In 2022, we began benchmarking all newly originated BPL bridge loans to SOFR. The LIBOR-indexed BPL bridge loans we have outstanding have fallback provisions for benchmark replacement. Additionally, as a result of legislation that was passed in the state of New York, our trust preferred securities and subordinated notes are expected to convert to SOFR upon the cessation of LIBOR.

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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

The following table 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, 2023 and December 31, 2022.

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
March 31, 2023 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	8,032	$	—	$	8,032	$	—	$	(1,596)	$	6,436
TBAs	3,037		—		3,037		(1,397)		—		1,640
Futures	75		—		75		(75)		—		—
Total Assets	$	11,144	$	—	$	11,144	$	(1,472)	$	(1,596)	$	8,076

Liabilities (2)

TBAs	$	(3,018)	$	—	$	(3,018)	$	1,397	$	1,277	$	(344)
Futures	(7,712)		—		(7,712)		75		7,637		—
Loan warehouse debt	(938)		—		(938)		631		—		(307)

Total Liabilities	$	(11,668)	$	—	$	(11,668)	$	2,103	$	8,914	$	(651)


	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, 2022 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	14,625	$	—	$	14,625	$	—	$	(5,944)	$	8,681

TBAs	1,893		—		1,893		(1,873)		—		20
Futures	3,976		—		3,976		(57)		—		3,919
Total Assets	$	20,494	$	—	$	20,494	$	(1,930)	$	(5,944)	$	12,620

Liabilities (2)

TBAs	$	(16,784)	$	—	$	(16,784)	$	1,873	$	4,518	$	(10,393)
Futures	(57)		—		(57)		57		—		—
Loan warehouse debt	(224,695)		—		(224,695)		224,695		—		—

Total Liabilities	$	(241,536)	$	—	$	(241,536)	$	226,625	$	4,518	$	(10,393)

(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, we have pledged excess cash collateral or financial assets to a counterparty (which, in certain circumstances, may 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, these excess amounts are excluded from the table; they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

(2)Interest rate agreements, TBAs and futures are components of derivative instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose loans, is a component of Short-term debt and Long-term debt on our consolidated balance sheets.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

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, our transactions generally 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.

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 March 31, 2023, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities 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 for certain securitizations, we are exposed to financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

We also consolidate two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At March 31, 2023, we held an 80% ownership interest in, and were responsible for the management of, each such entity. See Note 11 for a further description of these entities and the investments they hold and Note 13 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 14 for additional information on the servicer advance financing.

During 2021, we consolidated an HEI securitization entity formed to invest in HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At March 31, 2023 and December 31, 2022, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 13 for additional information on non-controlling interests in the entity. We consolidate the HEI securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to 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. The net equity in an entity accounted for under the CFE election effectively represents the fair value of the beneficial interests we own in the entity.

In addition to our consolidated VIEs for which we made the CFE election, we consolidate certain VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities. During the three months ending March 31, 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS.

The following table presents a summary of the assets and liabilities of our consolidated VIEs.

Table 4.1 – Assets and Liabilities of Consolidated VIEs


March 31, 2023	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST(1)		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	170,000	$	3,831,538	$	—	$	1,464,345	$	—	$	—	$	—	$	5,465,883
Business purpose loans, held-for-investment	—		—		3,376,654		—		—		—		—		3,376,654
Consolidated Agency multifamily loans	—		—		—		—		426,599		—		—		426,599

Home equity investments	—		—		—		—		—		—		129,317		129,317
Other investments	—		—		—		—		—		292,636		—		292,636
Cash and cash equivalents	—		—		—		—		—		20,087		—		20,087
Restricted cash	61		70		51,428		—		—		—		4,716		56,275
Accrued interest receivable	324		15,096		18,009		5,069		1,288		160		—		39,946
Other assets	18		—		19,199		2,642		—		7,650		50		29,559
Total Assets	$	170,403	$	3,846,704	$	3,465,290	$	1,472,056	$	427,887	$	320,533	$	134,083	$	9,836,956
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	197,883	$	—	$	197,883
Accrued interest payable	316		11,259		10,816		3,510		1,162		492		—		27,555
Accrued expenses and other liabilities	(106)		78		4,222		—		—		29,737		23,097		57,028
Asset-backed securities issued	168,832		3,570,597		3,072,176		1,143,522		394,469		—		97,523		8,447,119
Total Liabilities	$	169,042	$	3,581,934	$	3,087,214	$	1,147,032	$	395,631	$	228,112	$	120,620	$	8,729,585

Value of our investments in VIEs(1)	$	1,186	$	260,933	$	376,042	$	323,465	$	32,130	$	92,421	$	13,463	$	1,099,640
Number of VIEs	20		19		19		2		1		3		1		65

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2022	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST(1)		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	184,932	$	3,190,417	$	—	$	1,457,058	$	—	$	—	$	—	$	4,832,407
Business purpose loans, held-for-investment	—		—		3,461,367		—		—		—		—		3,461,367
Consolidated Agency multifamily loans	—		—		—		—		424,551		—		—		424,551
Home equity investments	—		—		—		—		—		—		132,627		132,627
Other investments	—		—		—		—		—		301,213		—		301,213
Cash and cash equivalents	—		—		710		—		—		12,765		—		13,475
Restricted cash	69		73		26,296		—		—		—		3,424		29,862
Accrued interest receivable	284		11,227		18,102		5,144		1,293		342		—		36,392
Other assets	637		—		14,265		2,898		—		7,547		50		25,397
Total Assets	$	185,922	$	3,201,717	$	3,520,740	$	1,465,100	$	425,844	$	321,867	$	136,101	$	9,257,291
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	206,510	$	—	$	206,510
Accrued interest payable	282		8,880		10,918		3,561		1,167		492		—		25,300
Accrued expenses and other liabilities	—		81		4,559		—		—		24,745		22,329		51,714
Asset-backed securities issued	184,191		2,971,109		3,115,807		1,222,150		392,785		—		100,710		7,986,752
Total Liabilities	$	184,473	$	2,980,070	$	3,131,284	$	1,225,711	$	393,952	$	231,747	$	123,039	$	8,270,276

Value of our investments in VIEs(1)	$	1,285	$	219,299	$	385,927	$	237,807	$	31,767	$	90,120	$	13,062	$	979,267
Number of VIEs	20		17		19		3		1		3		1		64

(1)Value of our investments in VIEs, as presented in this table, represents the fair value of our economic interests in the consolidated VIEs that we account for under the CFE election. CAFL includes BPL term loan securitizations we account for under the CFE election and two BPL bridge loan securitizations for which we did not make the CFE election. As of March 31, 2023 and December 31, 2022, the fair value of our interests in the CAFL Term securitizations were $295 million and $304 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. At December 31, 2022, Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a re-securitization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. During the three months ended March 31, 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued. As of March 31, 2023 and December 31, 2022, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election was $323 million and $323 million, respectively, with the difference reflected in the December 31, 2022 table above due to ABS issued and carried at amortized historical cost.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following tables present income (loss) from these VIEs for the three months ended March 31, 2023 and 2022.

Table 4.2 – Income (Loss) from Consolidated VIEs


	Three Months Ended March 31, 2023
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,543	$	34,644	$	54,437	$	15,493	$	4,618	$	7,814	$	—	$	119,549
Interest expense	(2,504)		(30,055)		(39,542)		(11,218)		(4,241)		(3,848)		—		(91,408)
Net interest income	39		4,589		14,895		4,275		377		3,966		—		28,141
Non-interest income

Investment fair value changes, net	(94)		2,442		(9,682)		8,934		363		(1,047)		425		1,341
Other income	—		—		172		—		—		—		—		172

Total non-interest income, net	(94)		2,442		(9,510)		8,934		363		(1,047)		425		1,513
General and administrative expenses	—		—		—		—		—		10		—		10
Other expenses	—		—		—		—		—		(577)		—		(577)

Income (loss) from Consolidated VIEs	$	(55)	$	7,031	$	5,385	$	13,209	$	740	$	2,352	$	425	$	29,087


	Three Months Ended March 31, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,012	$	32,098	$	77,334	$	17,200	$	4,753	$	7,919	$	—	$	140,316
Interest expense	(701)		(28,171)		(58,480)		(14,085)		(4,371)		(1,662)		—		(107,470)
Net interest income	311		3,927		18,854		3,115		382		6,257		—		32,846
Non-interest income

Investment fair value changes, net	(714)		(3,822)		2,664		3,036		264		(3,468)		3,411		1,371


Other income	—		—		90		—		—		—		—		90
Total non-interest income, net	(714)		(3,822)		2,754		3,036		264		(3,468)		3,411		1,461
General and administrative expenses	—		—		—		—		—		(31)		—		(31)
Other expenses	—		—		—		—		—		(551)		—		(551)

Income (loss) from Consolidated VIEs	$	(403)	$	105	$	21,608	$	6,151	$	646	$	2,207	$	3,411	$	33,725

We consolidate the assets and liabilities of certain Sequoia, CAFL and HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and HEI entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity, including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and HEI entities in accordance with GAAP.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 46 Sequoia securitization entities sponsored by us that are still outstanding as of March 31, 2023, 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 certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("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 servicing rights (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 summarizes the cash flows during the three months ended March 31, 2023 and 2022 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 March 31,
(In Thousands)	2023		2022

MSR fees received	$	684	$	864
Funding of compensating interest, net	(1)		(16)
Cash flows received on retained securities	2,963		14,126

The following table presents additional information at March 31, 2023 and December 31, 2022, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.4 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	March 31, 2023		December 31, 2022
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	31,208	$	28,722
Subordinate securities, classified as AFS	77,714		74,367
Mortgage servicing rights	11,160		11,589
Maximum loss exposure (1)	$	120,082	$	114,678
Assets transferred:
Principal balance of loans outstanding	$	3,991,357	$	4,052,922
Principal balance of loans 30+ days delinquent	21,906		27,739

(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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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, 2023 and December 31, 2022.

Table 4.5 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood


March 31, 2023	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at March 31, 2023	$	11,160		$	31,208		$	77,714
Expected life (in years) (2)	7			7			15
Prepayment speed assumption (annual CPR) (2)	8		%	8		%	8		%
Decrease in fair value from:
10% adverse change	$	350		$	1,190		$	425
25% adverse change	801			2,908			999
Discount rate assumption (2)	11		%	12		%	8		%
Decrease in fair value from:
100 basis point increase	$	412		$	1,120		$	7,553
200 basis point increase	798			2,162			14,065
Credit loss assumption (2)	N/A			0.03		%	0.03		%
Decrease in fair value from:
10% higher losses	N/A			N/A			$	34
25% higher losses	N/A			N/A			83


December 31, 2022	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2022	$	11,589		$	28,722		$	74,367
Expected life (in years) (2)	7			7			16
Prepayment speed assumption (annual CPR) (2)	8		%	10		%	8		%
Decrease in fair value from:
10% adverse change	$	311		$	970		$	386
25% adverse change	779			2,344			907
Discount rate assumption (2)	11		%	12		%	9		%
Decrease in fair value from:
100 basis point increase	$	430		$	980		$	7,198
200 basis point increase	832			1,894			13,394
Credit loss assumption (2)	N/A			0.03		%	0.03		%
Decrease in fair value from:
10% higher losses	N/A			N/A			$	31
25% higher losses	N/A			N/A			76

(1)Senior securities included $31 million and $29 million of interest-only securities at March 31, 2023 and December 31, 2022, respectively.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Unconsolidated 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 and other investments 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, 2023 and December 31, 2022, grouped by asset type.

Table 4.6 – Third-Party Sponsored VIE Summary


(In Thousands)	March 31, 2023		December 31, 2022
Mortgage-Backed Securities
Senior	$	89	$	145

Subordinate	134,335		137,241
Total Mortgage-Backed Securities	134,424		137,386
Excess MSR	6,548		7,082
Total Investments in Third-Party Sponsored VIEs	$	140,972	$	144,468

We determined that we are not the primary beneficiary of these 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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, 2023 and December 31, 2022.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities


	March 31, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value	$	26,975	$	26,975	$	780,781	$	780,781
Residential loans, held-for-investment, at fair value	5,465,883		5,465,883		4,832,407		4,832,407
Business purpose loans, held-for-sale, at fair value	371,385		371,385		364,073		364,073
Business purpose loans, held-for-investment, at fair value	4,993,264		4,993,264		4,968,513		4,968,513
Consolidated Agency multifamily loans, at fair value	426,599		426,599		424,551		424,551
Real estate securities, at fair value	243,346		243,346		240,475		240,475
HEIs	416,783		416,783		403,462		403,462
Servicer advance investments (1)	260,378		260,378		269,259		269,259
MSRs (1)	24,831		24,831		25,421		25,421
Excess MSRs (1)	38,807		38,807		39,035		39,035
Other investments (1)	5,727		5,727		6,155		6,155
Cash and cash equivalents	404,449		404,449		258,894		258,894
Restricted cash	86,037		86,037		70,470		70,470
Derivative assets	11,497		11,497		20,830		20,830
REO (2)	13,095		3,378		6,455		4,185
Margin receivable (2)	17,079		17,079		13,802		13,802


Liabilities
Short-term debt (3)	$	1,472,968	$	1,472,968	$	1,853,664	$	1,853,664
Margin payable (4)	2,558		2,558		5,944		5,944
Guarantee obligations (4)	6,223		4,612		6,344		4,738
HEI securitization non-controlling interest	23,097		23,097		22,329		22,329
Derivative liabilities	10,736		10,736		16,855		16,855
ABS issued, net
at fair value	7,968,135		7,968,135		7,424,132		7,424,132
at amortized cost	478,984		452,263		562,620		524,768
Other long-term debt, net (5)	1,076,099		1,022,015		1,077,200		1,069,946
Convertible notes, net (5)	661,634		620,465		693,473		638,049
Trust preferred securities and subordinated notes, net (5)	138,779		87,885		138,767		83,700

(1)These investments are included in Other investments on our consolidated balance sheets.

(2)These assets are included in Other assets on our consolidated balance sheets.

(3)Short-term debt excludes short-term convertible notes, which are included below under "Convertible notes, net."

(4)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.

(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See Note 14 for more information on Short-term debt.

During the three months ended March 31, 2023 and 2022, we elected the fair value option for $2 million and $5 million of securities, respectively, $53 million and $2.12 billion (principal balance) of residential loans, respectively, and $442 million and $920 million (principal balance) of business purpose loans, respectively. Additionally, during the three months ended March 31, 2023 and 2022, we elected the fair value option for $17 million and $40 million of HEIs, respectively, and $0 and $6 million of Other investments, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities, fixed-rate securities rated investment grade or higher, and HEIs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

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, 2023 and December 31, 2022, 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


March 31, 2023	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	5,492,828	$	—	$	—	$	5,492,828
Business purpose loans	5,364,649		—		—		5,364,649
Consolidated Agency multifamily loans	426,599		—		—		426,599
Real estate securities	243,346		—		—		243,346
HEIs	416,783		—		—		416,783
Servicer advance investments	260,378		—		—		260,378
MSRs	24,831		—		—		24,831
Excess MSRs	38,807		—		—		38,807
Other investments	5,727		—		—		5,727
Derivative assets	11,497		3,112		8,032		353



Liabilities
HEI securitization non-controlling interest	$	23,097	$	—	$	—	$	23,097
Derivative liabilities	10,736		10,730		—		6
ABS issued	7,968,135		—		—		7,968,135


December 31, 2022	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	5,613,157	$	—	$	—	$	5,613,157
Business purpose loans	5,332,586		—		—		5,332,586
Consolidated Agency multifamily loans	424,551		—		—		424,551
Real estate securities	240,475		—		—		240,475
HEIs	403,462		—		—		403,462
Servicer advance investments	269,259		—		—		269,259
MSRs	25,421		—		—		25,421
Excess MSRs	39,035		—		—		39,035
Other investments	6,155		—		—		6,155
Derivative assets	20,830		5,869		14,625		336



Liabilities
HEI securitization non-controlling interest	$	22,329	$	—	$	—	$	22,329
Derivative liabilities	16,855		16,841		—		14
ABS issued	7,424,132		—		—		7,424,132

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(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, 2023.

Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis


	Assets
	Residential Loans		Business Purpose Loans		Consolidated Agency Multifamily Loans		Trading Securities		AFS Securities		HEIs		Servicer Advance Investments		Excess MSRs		MSRs and Other Investments
(In Thousands)
Beginning balance - December 31, 2022	$	5,613,157	$	5,332,586	$	424,552	$	108,329	$	132,146	$	403,462	$	269,259	$	39,035	$	31,576
Acquisitions	51,816		—		—		1,700		—		16,559		—		—		—
Originations	—		438,390		—		—		—		—		—		—		—
Sales	(163,695)		(205,135)		—		(3,509)		(2,150)		—		—		—		(272)
Principal paydowns	(111,710)		(248,311)		(2,113)		(115)		(139)		(7,754)		(7,529)		—		(70)
Gains (losses) in net income, net	103,660		52,015		4,160		1,961		263		4,516		(1,352)		(228)		(676)
Unrealized losses in OCI, net	—		—		—		—		4,860		—		—		—		—
Other settlements, net (1)	(400)		(4,896)		—		—		—		—		—		—		—
Ending balance - March 31, 2023	$	5,492,828	$	5,364,649	$	426,599	$	108,366	$	134,980	$	416,783	$	260,378	$	38,807	$	30,558


	Liabilities
		Derivatives (2)		HEI Securitization Non-Controlling Interest		ABS Issued
(In Thousands)
Beginning balance - December 31, 2022		$	322	$	22,329	$	7,424,132
Acquisitions		—		—		594,327
Principal paydowns		—		—		(181,696)
Gains (losses) in net income, net		88		768		131,372
Other settlements, net (1)		(57)		—		—
Ending balance - March 31. 2023		$	353	$	23,097	$	7,968,135

(1) Other settlements, net: for residential and business purpose loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and business purpose loans; and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

(2) For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

The following table presents the portion of fair value 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, 2023 and 2022. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2023 and 2022 are not included in this presentation.

Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2023 and 2022 Included in Net Income


	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2023		2022
Assets
Residential loans at Redwood	$	156	$	(35,397)
Business purpose loans	12,239		(14,647)
Net investments in consolidated Sequoia entities (1)	2,349		(4,981)
Net investments in consolidated Freddie Mac SLST entities (1)	8,759		2,940
Net investments in consolidated Freddie Mac K-Series entities (1)	363		264
Net investments in consolidated CAFL Term entities (1)	(8,810)		4,048
Net investment in consolidated HEI securitization entity (1)	1,194		9,628
Trading securities	1,793		(1,401)
Available-for-sale securities	(28)		—
HEIs at Redwood	3,433		1,185
Servicer advance investments	(1,352)		(3,081)
MSRs	(424)		3,526
Excess MSRs	(229)		(1,208)
Loan purchase and interest rate lock commitments	353		2,050
Other investments	(94)		—


Liabilities
Non-controlling interest in consolidated HEI entity	$	—	$	(6,218)
Loan purchase commitments	(6)		(14,442)

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at March 31, 2023 and 2022, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2023. 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 consolidated balance sheets at March 31, 2023.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2023


									Gain (Loss) for
March 31, 2023	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)			Level 1		Level 2		Level 3		March 31, 2023
Assets


REO	$	2,820	$	—	$	—	$	2,820	$	(183)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three months ended March 31, 2023 and 2022.

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended March 31,
(In Thousands)	2023		2022
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	6,994	$	(27,199)
Residential loan purchase commitments	(239)		(41,623)
BPL term loans held-for-sale, at fair value	12,666		(24,468)
BPL term loan interest rate lock commitments	—		(725)
BPL bridge loans	1,153		2,135
Trading securities (1)	—		2,786
Risk management derivatives, net	(8,467)		90,387
Total mortgage banking activities, net (2)	$	12,107	$	1,293
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood (called Sequoia loans)	$	183	$	(4,252)
Business Purpose loans held-for-investment	1,376		(2,143)
Trading securities	1,961		(4,242)
Servicer advance investments	(1,352)		(3,081)
Excess MSRs	(228)		(1,208)
Net investments in Legacy Sequoia entities (3)	(94)		(714)
Net investments in Sequoia entities (3)	2,442		(3,822)
Net investments in Freddie Mac SLST entities (3)	8,934		3,036
Net investment in Freddie Mac K-Series entity (3)	363		264
Net investments in CAFL Term entities (3)	(8,810)		4,048
Net investments in HEI securitization entities (3)	425		3,411
HEIs at Redwood	3,840		1,192
Other investments	(435)		123
Risk management derivatives, net	(8,704)		1,973
Credit losses on AFS securities, net	(28)		(705)
Total investment fair value changes, net	$	(127)	$	(6,120)
Other Income
MSRs	$	(590)	$	2,968
Other	(120)		—
Total other income (4)	$	(710)	$	2,968
Total Market Valuation Gains (Losses), Net	$	11,270	$	(1,859)

(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the market risks associated with our residential mortgage banking operations.

(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.

(3)Includes changes in fair value of the residential loans held-for-investment, securitized HEIs, REO, and ABS issued at the entities, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election.

(4)Other income presented above does not include net MSR fee income or provisions for repurchases of MSRs, as these amounts do not represent market valuation adjustments.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

At March 31, 2023, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


March 31, 2023	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average(1)
Assets
Residential loans, at fair value:

Jumbo fixed-rate loans	$	26,975	Whole loan spread to swap rate	112		-	112		bps	112		bps
			Seasoned whole loan dollar price	$	91		$	91		$	91














Loans held by Legacy Sequoia (2)	170,000		Liability price				N/A			N/A

Loans held by Sequoia (2)	3,831,538		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	1,464,345		Liability price				N/A			N/A

Business purpose loans:
BPL term loans	354,166		Senior credit spread(3)	180		-	180		bps	180		bps
			Subordinate credit spread(3)	240		-	600		bps	337		bps
			Senior credit support(3)	36		-	36		%	36		%
			IO discount rate(3)	7		-	13		%	10		%
			Prepayment rate (annual CPR)(3)	3		-	3		%	3		%
			Whole loan spread to treasury rate	325		-	550		bps	441		bps

BPL term loans held by CAFL (2)	2,891,043		Liability price				N/A			N/A

BPL bridge loans	2,119,440		Whole loan discount rate	5		-	15		%	10		%
			Senior credit spread(3)	280		-	280		bps	280		bps
			Subordinate credit spread(3)	335		-	1,150		bps	654		bps
			Senior credit support(3)	43		-	43		%	43		%


Multifamily loans held by Freddie Mac K-Series (2)	426,599		Liability price				N/A			N/A



Trading and AFS securities	243,346		Discount rate	5		-	18		%	10		%
			Prepayment rate (annual CPR)	5		-	65		%	9		%
			Default rate	—		-	12		%	0.5		%
			Loss severity	—		-	50		%	25		%
			CRT dollar price	$	64	-	$	96		$	87

HEIs	287,466		Discount rate	10		-	10		%	10		%
			Prepayment rate (annual CPR)	1		-	23		%	16		%
			Home price appreciation (depreciation)	(7)		-	4		%	3		%

HEIs held by HEI securitization entity	129,317		Discount Rate				N/A			N/A


Servicer advance investments	260,378		Discount rate	2		-	4		%	3		%
			Prepayment rate (annual CPR)	14		-	30		%	14		%
			Expected remaining life (4)	5		-	6		yrs	5		yrs
			Mortgage servicing income	—		-	18		bps	3		bps

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)


March 31, 2023	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average (1)
Assets (continued)









































































MSRs	$	24,831	Discount rate	11		-	53		%	11		%
			Prepayment rate (annual CPR)	4		-	27		%	8		%
			Per loan annual cost to service	$	93	-	$	93		$	93

Excess MSRs	38,807		Discount rate	13		-	19		%	18		%
			Prepayment rate (annual CPR)	10		-	100		%	17		%
			Excess mortgage servicing amount	8		-	19		bps	11		bps

Residential loan purchase commitments, net	359		Whole loan spread to swap rate	112		-	137		bps	125		bps

			Pull-through rate	36		-	100		%	69		%
			Committed sales price	$	99	-	$	103		$	101








Liabilities




ABS issued (2):
At consolidated Sequoia entities	3,739,429		Discount rate	4		-	18		%	6		%
			Prepayment rate (annual CPR)	5		-	59		%	8		%
			Default rate	—		-	13		%	1		%
			Loss severity	25		-	50		%	29		%

At consolidated CAFL Term entities	2,593,192		Discount rate	—		-	17		%	6		%
			Prepayment rate (annual CPR)	—		-	3		%	0.1		%
			Default rate	5		-	16		%	8		%
			Loss severity	30		-	40		%	31		%

At consolidated Freddie Mac SLST entities	1,143,522		Discount rate	5		-	16		%	5		%
			Prepayment rate (annual CPR)	6		-	7		%	6		%
			Default rate	13		-	14		%	14		%
			Loss severity	35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	394,469		Discount rate	3		-	10		%	5		%





At consolidated HEI entities	97,523		Discount rate	10		-	14		%	10		%
			Prepayment rate (annual CPR)	20		-	20		%	20		%


			Home price appreciation (depreciation)	(7)		-	4		%	3		%

(1)The weighted average input values for all loan types are based on unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.

(2)The fair value of the loans and HEIs held by consolidated entities is based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At March 31, 2023, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $261 million, $295 million, $323 million, $32 million, and $13 million, respectively.

(3)Values represent pricing inputs used in securitization pricing model. Credit spreads generally represent spreads to applicable swap rates.

(4)Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

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

Determination of Fair Value

We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs in isolation — such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions — would likely result in a significantly lower or higher fair value measurement.

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2022 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.

Certain of our Other investments (inclusive of strategic investments in early-stage companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We initially record these investments at cost and adjust their fair value based on observable price changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to valuation from changing market conditions and underlying business performance. As of March 31, 2023, the carrying value of these investments was $6 million.

Note 6. Residential Loans

We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at March 31, 2023 and December 31, 2022.

Table 6.1 – Classifications and Carrying Values of Residential Loans


March 31, 2023			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	26,975	$	—	$	—	$	—	$	26,975
Held-for-investment at fair value	—		170,000		3,831,538		1,464,345		5,465,883
Total Residential Loans	$	26,975	$	170,000	$	3,831,538	$	1,464,345	$	5,492,858


December 31, 2022			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	780,781	$	—	$	—	$	—	$	780,781
Held-for-investment at fair value	—		184,932		3,190,417		1,457,058		4,832,407
Total Residential Loans	$	780,781	$	184,932	$	3,190,417	$	1,457,058	$	5,613,188

At March 31, 2023, we owned mortgage servicing rights associated with $22 million (principal balance) of residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

The following table summarizes the characteristics of residential loans held-for-sale at March 31, 2023 and December 31, 2022.

Table 6.2 – Characteristics of Residential Loans Held-for-Sale


(Dollars in Thousands)	March 31, 2023			December 31, 2022
Number of loans	39			994
Unpaid principal balance	$	27,935		$	822,063
Fair value of loans	$	26,975		$	780,781
Market value of loans pledged as collateral under short-term borrowing agreements	$	26,282		$	775,545
Weighted average coupon	6.24		%	5.12		%

Delinquency information
Number of loans with 90+ day delinquencies	2			1
Unpaid principal balance of loans with 90+ day delinquencies	$	650		$	208
Fair value of loans with 90+ day delinquencies	$	576		$	170
Number of loans in foreclosure	—			—

The following table provides the activity of residential loans held-for-sale during the three months ended March 31, 2023 and 2022.

Table 6.3 – Activity of Residential Loans Held-for-Sale


	Three Months Ended March 31,
(In Thousands)	2023		2022
Principal balance of loans acquired (1)	$	53,046	$	2,115,191
Principal balance of loans sold	173,153		1,827,364
Principal balance of loans transferred to HFI	657,295		687,192
Net market valuation gains (losses) recorded (2)	7,178		(31,451)

(1)For the three months ended March 31, 2023 and 2022, includes zero and $102 million, respectively, of loans acquired through calls of zero and three, respectively, seasoned Sequoia securitizations.

(2)Net market valuation gains (losses) on residential loans held-for-sale are recorded primarily through Mortgage banking activities, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Investment at Fair Value

We invest in residential subordinate securities issued by Legacy Sequoia, Sequoia and Freddie Mac SLST securitization trusts and consolidate the underlying residential loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential loans owned at consolidated Sequoia and Freddie Mac SLST entities at March 31, 2023 and December 31, 2022.

Table 6.4 – Characteristics of Residential Loans Held-for-Investment


March 31, 2023	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,222			5,287			10,748
Unpaid principal balance	$	189,757		$	4,449,021		$	1,695,479
Fair value of loans (2)	$	170,000		$	3,831,538		$	1,464,345
Weighted average coupon	5.57		%	3.56		%	4.50		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	26			7			1,033
Unpaid principal balance of loans with 90+ day delinquencies	$	5,856		$	5,147		$	174,559
Fair value of loans with 90+ day delinquencies	N/A			N/A			N/A
Number of loans in foreclosure	10			3			418
Unpaid principal balance of loans in foreclosure	$	2,336		$	2,308		$	74,676


December 31, 2022	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,304			4,624			10,882
Unpaid principal balance	$	204,404		$	3,847,091		$	1,719,236
Fair value of loans (2)	$	184,932		$	3,190,417		$	1,457,058
Weighted average coupon	4.51		%	3.25		%	4.50		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	30			10			1,211
Unpaid principal balance of loans with 90+ day delinquencies	$	6,824		$	7,799		$	209,397
Fair value of loans with 90+ day delinquencies	N/A			N/A			N/A
Number of loans in foreclosure	11			5			427
Unpaid principal balance of loans in foreclosure	$	1,166		$	4,654		$	72,440

(1)For loans held at consolidated entities, the number of loans 90-or-more days delinquent includes loans in foreclosure.

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

For loans held at our consolidated Legacy Sequoia, Sequoia, and Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded in Investment fair value changes, net on our consolidated statements of income. The following table provides the activity of residential loans held-for-investment at consolidated entities during the three months ended March 31, 2023 and 2022.

Table 6.5 – Activity of Residential Loans Held-for-Investment at Consolidated Entities

Three Months Ended March 31, 2023

Three Months Ended March 31, 2022

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

Fair value of loans transferred from HFS to HFI (1)

N/A

657,295

N/A

684,491

N/A

Net market valuation gains (losses) recorded

(463)

61,867

32,437

6,325

(270,731)

(43,768)

(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with Sequoia securitizations.

REO

See Note 13 for detail on residential loan REO activity for the three months ended March 31, 2023.

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including term loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at March 31, 2023 and December 31, 2022.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


March 31, 2023	BPL Term				BPL Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	354,166	—		$	17,219	$	—	$	371,385
Held-for-investment at fair value	—		2,891,043		1,616,610		485,611		4,993,264
Total Business Purpose Loans	$	354,166	$	2,891,043	$	1,633,829	$	485,611	$	5,364,649


December 31, 2022	BPL Term				BPL Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	358,791	$	—	$	5,282	$	—	$	364,073
Held-for-investment at fair value	—		2,944,984		1,507,146		516,383		4,968,513
Total Business Purpose Loans	$	358,791	$	2,944,984	$	1,512,428	$	516,383	$	5,332,586

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Nearly all of the outstanding BPL term loans at March 31, 2023 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with 1% (based on unpaid principal balance) having original maturities of 30 years.

The outstanding BPL bridge loans held-for-investment at March 31, 2023 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 35% one-month LIBOR-indexed adjustable-rate loans, 57% one-month SOFR-indexed adjustable-rate loans, and 8% fixed-rate loans (in each case based on unpaid principal balance) .

At March 31, 2023, we had $811 million in commitments to fund BPL bridge loans. See Note 17 for additional information on these commitments.

The following table provides the activity of business purpose loans at Redwood during the three months ended March 31, 2023 and 2022.

Table 7.2 – Activity of Business Purpose Loans at Redwood


	Three Months Ended March 31, 2023				Three Months Ended March 31, 2022
(In Thousands)	BPL Term at Redwood		BPL Bridge at Redwood		BPL Term at Redwood		BPL Bridge at Redwood
Principal balance of loans originated	$	174,078	$	255,152	$	442,727	$	411,938
Principal balance of loans acquired	3,815		9,085		61,892		2,983
Principal balance of loans sold to third parties	217,702		12,547		331,502		—
Fair value of loans transferred (1)	—		80,792		—		82,291

Mortgage banking activities income (loss) recorded (2)	12,666		1,162		(24,468)		2,375
Investment fair value changes recorded (3)	—		1,609		—		(759)

(1)For BPL term at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL term securitizations. For BPL bridge at Redwood, represents the transfer of BPL bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their securitization.

(2)Represents loan origination fee income and net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio and, for bridge loans, when transferred into a securitization. See Table 20.1 for additional detail on Mortgage banking activities income (loss).

(3)Represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.

Business Purpose Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying BPL term loans and bridge loans owned by these entities. For loans held at our consolidated CAFL Term entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded through Investment fair value changes, net on our consolidated statements of income. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2. We did not elect to account for the CAFL Bridge securitizations under the CFE guidelines.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)

The following table provides the activity of business purpose loans held-for-investment at CAFL during the three months ended March 31, 2023 and 2022.

Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL


	Three Months Ended March 31, 2023				Three Months Ended March 31, 2022
(In Thousands)	BPL Term at CAFL		BPL Bridge at CAFL		BPL Term at CAFL		BPL Bridge at CAFL
Net market valuation gains (losses) recorded	$	37,179	$	(592)	$	(191,903)	$	(1,384)

REO

See Note 13 for detail on business purpose loan REO activity for the three months ended March 31, 2023.

Business Purpose Loan Characteristics

The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at March 31, 2023 and December 31, 2022.

Table 7.4 – Characteristics of Business Purpose Loans


March 31, 2023	BPL Term at Redwood			BPL Term at CAFL(1)			BPL Bridge at Redwood			BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans	94			1,094			1,473			1,796
Unpaid principal balance	$	349,190		$	3,172,026		$	1,636,460		$	484,124
Fair value of loans	$	354,166		$	2,891,043		$	1,633,829		$	485,611
Weighted average coupon	6.98		%	5.21		%	10.20		%	10.41		%
Weighted average remaining loan term (years)	9			5			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	345,080		N/A			$	675,971		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	—		N/A			$	922,296		N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)	2			19			53			51
Unpaid principal balance of loans with 90+ day delinquencies	$	1,566		$	60,740		$	32,526		$	11,416
Fair value of loans with 90+ day delinquencies (3)	$	1,157		N/A			$	28,387		$	11,416
Number of loans in foreclosure	1			8			52			49
Unpaid principal balance of loans in foreclosure	$	536		$	9,378		$	31,446		$	7,628
Fair value of loans in foreclosure (3)	$	536		N/A			$	27,308		$	7,628

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)


December 31, 2022	BPL Term at Redwood			BPL Term at CAFL(1)			BPL Bridge at Redwood			BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans	91			1,131			1,601			1,875
Unpaid principal balance	$	389,846		$	3,263,421		$	1,518,427		$	514,666
Fair value of loans	$	358,791		$	2,944,984		$	1,512,428		$	516,383
Weighted average coupon	5.98		%	5.22		%	9.61		%	9.67		%
Weighted average remaining loan term (years)	10			6			2			1
Market value of loans pledged as collateral under short-term debt facilities	$	291,406		N/A			$	579,666		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	66,567		N/A			$	897,782		N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)	1			16			49			48
Unpaid principal balance of loans with 90+ day delinquencies	$	536		$	37,072		$	34,264		$	7,328
Fair value of loans with 90+ day delinquencies (3)	$	536		N/A			$	29,663		$	7,438
Number of loans in foreclosure	1			9			48			48
Unpaid principal balance of loans in foreclosure	$	536		$	13,686		$	34,039		$	7,328
Fair value of loans in foreclosure (3)	$	536		N/A			$	29,438		$	7,438

(1)The fair value of the loans held by consolidated CAFL entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for CFEs.

(2)The number of loans 90-or-more days delinquent includes loans in foreclosure.

(3)May include loans that are less than 90 days delinquent.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 8. Consolidated Agency Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at March 31, 2023 and December 31, 2022.

Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans


(Dollars in Thousands)	March 31, 2023			December 31, 2022
Number of loans	28			28
Unpaid principal balance	$	445,080		$	447,193
Fair value of loans	$	426,599		$	424,551
Weighted average coupon	4.25		%	4.25		%
Weighted average remaining loan term (years)	2			3

Delinquency information
Number of loans with 90+ day delinquencies	—			—


Number of loans in foreclosure	—			—

The outstanding Consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at March 31, 2023 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three months ended March 31, 2023 and 2022.

Table 8.2 – Activity of Consolidated Agency Multifamily Loans Held-for-Investment


	Three Months Ended March 31,
(In Thousands)	2023		2022
Net market valuation gains (losses) recorded (1)	$	4,160	$	(19,681)

(1)Net market valuation gains (losses) on multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income. For loans held at our consolidated Freddie Mac K-Series entity, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 9. Real Estate Securities

We invest in real estate securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at March 31, 2023 and December 31, 2022.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	March 31, 2023		December 31, 2022
Trading	$	108,366	$	108,329
Available-for-sale	134,980		132,146
Total Real Estate Securities	$	243,346	$	240,475

Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. Subordinate securities are all interests below mezzanine. Exclusive of our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

Trading Securities

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). The following table presents the fair value of trading securities by position and collateral type at March 31, 2023 and December 31, 2022.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	March 31, 2023		December 31, 2022
Senior
Interest-only securities (1)	$	31,297	$	28,867


Total Senior	31,297		28,867





Subordinate
RPL securities	28,689		29,002
Multifamily securities	4,979		5,027
Other third-party residential securities	43,401		45,433
Total Subordinate	77,069		79,462
Total Trading Securities	$	108,366	$	108,329

(1)Includes $26 million of Sequoia certificated mortgage servicing rights at both March 31, 2023 and December 31, 2022.

The following table presents the unpaid principal balance of trading securities by position and collateral type at March 31, 2023 and December 31, 2022.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	March 31, 2023		December 31, 2022
Senior (1)	$	—	$	—

Subordinate	211,496		215,592
Total Trading Securities	$	211,496	$	215,592

(1)Our senior trading securities are comprised of interest-only securities, for which there is no principal balance.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three months ended March 31, 2023 and 2022.

Table 9.4 – Trading Securities Activity


	Three Months Ended March 31,
(In Thousands)	2023		2022
Fair value of securities acquired	$	1,700	$	5,006
Fair value of securities sold	3,509		—
Net market valuation gains (losses) recorded (1)	1,961		(1,456)

(1)Net market valuation gains (losses) on trading securities are recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income.

AFS Securities

The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at March 31, 2023 and December 31, 2022.

Table 9.5 – Fair Value of Available-for-Sale Securities by Position


(In Thousands)	March 31, 2023		December 31, 2022








Subordinate
Sequoia securities	$	77,714	$	74,367
Multifamily securities	7,670		7,647
Other third-party residential securities	49,596		50,132
Total Subordinate	134,980		132,146
Total AFS Securities	$	134,980	$	132,146

The following table provides the activity of available-for-sale securities during the three months ended March 31, 2023 and 2022.

Table 9.6 – Available-for-Sale Securities Activity


	Three Months Ended March 31,
(In Thousands)	2023		2022
Fair value of securities acquired	$	—	$	10,000
Fair value of securities sold	2,678		—
Principal balance of securities called	—		14,486
Net unrealized gains (losses) on AFS securities (1)	5,007		(17,873)

(1)Net unrealized gains (losses) on AFS securities are recorded on our consolidated balance sheets through Accumulated other comprehensive loss.

We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.

At March 31, 2023, we had $4 million of AFS securities with contractual maturities less than five years, $1 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table presents the components of carrying value (which equals fair value) of AFS securities at March 31, 2023 and December 31, 2022.

Table 9.7 – Carrying Value of AFS Securities


(In Thousands)	March 31, 2023		December 31, 2022
Principal balance	$	217,059	$	221,933
Credit reserve	(28,208)		(28,739)
Unamortized discount, net	(59,334)		(61,650)
Amortized cost	129,517		131,544
Gross unrealized gains	18,773		16,269
Gross unrealized losses	(10,742)		(13,127)
CECL allowance	(2,568)		(2,540)
Carrying Value	$	134,980	$	132,146

The following table presents the changes for the three months ended March 31, 2023, in unamortized discount and designated credit reserves on residential AFS securities.

Table 9.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities


	Three Months Ended March 31, 2023
	Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	28,739	$	61,650
Amortization of net discount	—		(263)
Realized credit recoveries (losses), net	(48)		—
Acquisitions	—		—
Sales, calls, other	(206)		(2,330)

Transfers to (release of) credit reserves, net	(277)		277
Ending Balance	$	28,208	$	59,334

AFS Securities with Unrealized Losses

The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at March 31, 2023 and December 31, 2022.

Table 9.9 – AFS Securities in Gross Unrealized Loss Position by Holding Periods


	Less Than 12 Consecutive Months				12 Consecutive Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(In Thousands)
March 31, 2023	$	47,384	$	(7,927)		$	28,285	$	(2,815)
December 31, 2022	72,679		(12,940)			1,414		(186)

At March 31, 2023, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 78 AFS securities, of which 37 were in an unrealized loss position and six were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2022, our consolidated balance sheet included 79 AFS securities, of which 38 were in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $11 million at March 31, 2023. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At March 31, 2023, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

At March 31, 2023, our current expected credit loss ("CECL") allowance related to our AFS securities was $2.6 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit-related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at March 31, 2023.

Table 9.10 – Significant Credit Quality Indicators

March 31, 2023

Subordinate Securities

Default rate

0.8%

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit losses for AFS securities for the three months ended March 31, 2023.

Table 9.11 – Rollforward of Allowance for Credit Losses


	Three Months Ended March 31, 2023
(In Thousands)
Beginning balance allowance for credit losses	$	2,540

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	99
Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	(71)
Allowance on purchased financial assets with credit deterioration	—
Reduction to allowance for securities sold during the period	—
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	—
Write-offs charged against allowance	—
Recoveries of amounts previously written off	—
Ending balance of allowance for credit losses	$	2,568

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three months ended March 31, 2023 and 2022.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


	Three Months Ended March 31,
(In Thousands)	2023		2022
Gross realized gains - sales	$	527	$	—
Gross realized gains - calls	—		1,914
Gross realized losses - sales	—		—

Total Realized Gains on Sales and Calls of AFS Securities, net	$	527	$	1,914

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 10. Home Equity Investments (HEI)

We purchase home equity investment contracts from third party originators under flow purchase agreements. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by recording a security instrument (e.g., deed of trust) with respect to the property. Our investments in HEI allow us to share in both home price appreciation and depreciation of the associated property.

The following table presents our home equity investments at March 31, 2023 and December 31, 2022.

Table 10.1 – Home Equity Investments


(In Thousands)	March 31, 2023		December 31, 2022
HEI at Redwood	$	287,466	$	270,835
HEI held at consolidated HEI securitization entity	129,317		132,627
Total Home Equity Investments	$	416,783	$	403,462

At March 31, 2023, we had flow purchase agreements with HEI originators with $8 million of cumulative purchase commitments outstanding. See Note 17 for additional information on these commitments.

We consolidate the HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. As such, market valuation changes for the securitized HEI are based on the estimated fair value of the associated ABS issued by the entity, including the securities we own.

The following table details our HEI activity during the three months ended March 31, 2023 and 2022.

Table 10.2 – Activity of HEI


	Three Months Ended March 31, 2023				Three Months Ended March 31, 2022
(In Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Fair value of HEI purchased	$	16,559	$	—	$	40,141	$	—

Net market valuation gains recorded (1)	3,840		1,068		1,192		5,731

(1)We account for HEI at Redwood under the fair value option and record net market valuation changes through Investment fair value changes, net on our Consolidated statements of income. We account for Securitized HEI under the CFE election and net market valuation gains (losses) for these investments are recorded through Investment fair value changes, net on our Consolidated statements of income.

The following tables summarizes the characteristics of our HEI at March 31, 2023 and December 31, 2022.

Table 10.3 – HEI Characteristics


	March 31, 2023				December 31, 2022
(Dollars in Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Number of HEI contracts	2,695		984		2,599		1,007
Average initial amount of contract	$	101	$	94	$	101	$	94

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 11. Other Investments

Other investments at March 31, 2023 and December 31, 2022 are summarized in the following table.

Table 11.1 – Components of Other Investments


(In Thousands)	March 31, 2023		December 31, 2022
Servicer advance investments	$	260,378	$	269,259
Strategic investments	57,397		56,518
Excess MSRs	38,807		39,035
Mortgage servicing rights	24,831		25,421

Other	277		705
Total Other Investments	$	381,690	$	390,938

Servicer advance investments

We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to portfolios of legacy residential mortgage-backed securitizations serviced by the co-investor. Refer to Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding the transactions.

At March 31, 2023, our servicer advance investments had a carrying value of $260 million and were associated with specified pools of residential mortgage loans with an unpaid principal balance of $11.06 billion. The outstanding servicer advance receivables associated with this investment were $233 million at March 31, 2023, which were financed with short-term non-recourse securitization debt. See Note 14 for additional detail on this debt. The servicer advance receivables were comprised of the following types of advances at March 31, 2023 and December 31, 2022.

Table 11.2 – Components of Servicer Advance Receivables


(In Thousands)	March 31, 2023		December 31, 2022
Principal and interest advances	$	78,803	$	81,447
Escrow advances (taxes and insurance advances)	118,561		123,541
Corporate advances	35,471		35,377
Total Servicer Advance Receivables	$	232,835	$	240,365

We account for our servicer advance investments at fair value and during the three months ended March 31, 2023, we recorded $5 million of interest income, through Other interest income, and recorded a net market valuation loss of $1 million, through Investment fair value changes, net in our consolidated statements of income.

Strategic Investments

Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At March 31, 2023, we had made a total of 31 investments in companies through RWT Horizons with a total carrying value of $23 million, as well as six corporate-level investments. During the three months ended March 31, 2023, we recognized a net mark-to-market valuation gain of zero on our strategic investments, which otherwise would have been recorded in Investment fair value changes, net on our consolidated statements of income. During the three months ended March 31, 2023, we recorded losses from our strategic investments of $20 thousand in Other income, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 11. Other Investments - (continued)

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three months ended March 31, 2023, we recognized $4 million of interest income through Other interest income, and recorded net market valuation losses of $0.2 million through Investment fair value changes, net on our consolidated statements of income.

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently sold to third parties. During the three months ended March 31, 2023, we retained zero MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At March 31, 2023 and December 31, 2022, our MSRs had a fair value of $25 million and $25 million, respectively, and were associated with loans with an aggregate principal balance of $2.15 billion and $2.19 billion, respectively. During the three months ended March 31, 2023, including net market valuation gains and losses on our MSRs, we recorded net income related to our MSRs of $1 million through Other income on our consolidated statements of income.

Note 12. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at March 31, 2023 and December 31, 2022.

Table 12.1 – Fair Value and Notional Amount of Derivative Financial Instruments


	March 31, 2023				December 31, 2022
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	8,032	$	240,000	$	14,625	$	285,000
TBAs	3,037		195,000		1,893		220,000
Interest rate futures	75		19,000		3,976		350,600

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	353		39,814		336		8,166

Total Assets	$	11,497	$	493,814	$	20,830	$	863,766



Liabilities - Risk Management Derivatives

TBAs	$	(3,018)	$	135,000	$	(16,784)	$	845,000
Interest rate futures	(7,712)		270,500		(57)		60,000
Liabilities - Other Derivatives
Loan purchase and interest rate lock commitments	(6)		7,174		(14)		3,532

Total Liabilities	$	(10,736)	$	412,674	$	(16,855)	$	908,532
Total Derivative Financial Instruments, Net	$	761	$	906,488	$	3,975	$	1,772,298

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 12. Derivative Financial Instruments - (continued)

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At March 31, 2023, we were party to swaps and swaptions with an aggregate notional amount of $240 million, TBA agreements with an aggregate notional amount of $330 million, and interest rate futures contracts with an aggregate notional amount of $290 million. At December 31, 2022, we were party to swaps and swaptions with an aggregate notional amount of $285 million, futures with an aggregate notional amount of $411 million and TBA agreements with an aggregate notional amount of $1.07 billion.

For the three months ended March 31, 2023, risk management derivatives had net market valuation losses of $17 million. For the three months ended March 31, 2022, risk management derivatives had net market valuation gains of $92 million. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net and Other income on our consolidated statements of income.

Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three months ended March 31, 2023, LPCs and IRLCs had net market valuation losses of $0.2 million, which were recorded in Mortgage banking activities, net on our consolidated statements of income. For the three months ended March 31, 2022, LPCs and IRLCs had net market valuation losses of $42 million, which were recorded in Mortgage banking activities, net on our consolidated statements of income.

Derivatives Designated as Cash Flow Hedges

For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive loss was $71 million and $72 million at March 31, 2023 and December 31, 2022, respectively. We are amortizing this loss into interest expense over the remaining term of our trust preferred securities and subordinated notes. For each of the three months ended March 31, 2023 and 2022, we reclassified $1 million of realized net losses from Accumulated other comprehensive loss into Interest expense. As of March 31, 2023, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At March 31, 2023, we assessed this risk as remote and did not record an associated specific valuation adjustment. At March 31, 2023, we were in compliance with our derivative counterparty ISDA agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 13. Other Assets and Liabilities

Other assets at March 31, 2023 and December 31, 2022 are summarized in the following table.

Table 13.1 – Components of Other Assets


(In Thousands)	March 31, 2023		December 31, 2022
Accrued interest receivable	$	61,397	$	60,893
Investment receivable	45,372		36,623
Deferred tax asset	41,931		41,931
Margin receivable	17,079		13,802
Operating lease right-of-use assets	15,297		16,177
REO	13,095		6,455
Fixed assets and leasehold improvements (1)	9,292		12,616
Income tax receivables	3,047		3,399





Other	25,711		19,344
Total Other Assets	$	232,221	$	211,240

(1)Fixed assets and leasehold improvements had a basis of $18 million and accumulated depreciation of $9 million at March 31, 2023.

Accrued expenses and other liabilities at March 31, 2023 and December 31, 2022 are summarized in the following table.

Table 13.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	March 31, 2023		December 31, 2022
Accrued interest payable	$	51,321	$	46,612
Payable to noncontrolling interests	46,203		44,859
Accrued compensation	20,148		30,929
Operating lease liabilities	17,638		18,563
Guarantee obligations	6,223		6,344
Residential loan and MSR repurchase reserve	5,858		7,051
Accrued operating expenses	5,696		5,740
Current accounts payable	3,162		4,234
Bridge loan holdbacks	2,953		3,301
Margin payable	2,558		5,944
Unsettled trades	1,704		—





Preferred stock dividends payable	1,419		—
Other	11,388		6,626
Total Accrued Expenses and Other Liabilities	$	176,271	$	180,203

Investment Receivable

Investment receivable primarily consists of amounts receivable from third-party servicers related to principal and interest receivable from business purpose loans and fees receivable from servicer advance investments.

Margin Receivable and Payable

Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. Through March 31, 2023, we had met all margin calls due.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 13. Other Assets and Liabilities - (continued)

Operating Lease Right-of-Use Assets and Operating Lease Liabilities

See Note 17 for additional information on leases.

REO

The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the three months ended March 31, 2023.

Table 13.3 – REO Activity


	Three Months Ended March 31, 2023
(In Thousands)	BPL Bridge		Legacy Sequoia		Freddie Mac SLST		BPL Term at CAFL		Total
Balance at beginning of period	$	3,012	$	544	$	2,899	$	—	$	6,455
Transfers to REO	7,615		18		381		—		8,014
Liquidations (1)	—		(544)		(812)		—		(1,356)
Changes in fair value, net	(192)		—		174		—		(18)
Balance at End of Period	$	10,435	$	18	$	2,642	$	—	$	13,095

(1)For the three months ended March 31, 2023, REO liquidations resulted in less than $0.1 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income.

The following table provides detail on the numbers of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL entities at March 31, 2023 and December 31, 2022.

Table 13.4 – REO Assets


Number of REO assets	Redwood Bridge	Legacy Sequoia	Freddie Mac SLST	BPL Term at CAFL	Total
At March 31, 2023	4	1	25	—	30
At December 31, 2022	2	2	24	—	28

Legal and Repurchase Reserves

See Note 17 for additional information on legal and repurchase reserves.

Payable to Non-Controlling Interests

In 2018, Redwood and a third-party co-investor, through two partnership entities consolidated by Redwood, purchased servicer advances and excess MSRs related to a portfolio of residential mortgage loans serviced by the co-investor (see Note 4 and Note 11 for additional information on the partnership entities and associated investments). We account for the co-investor’s interests in the entities as liabilities, and at March 31, 2023, the carrying value of their interests was $23 million, representing their current economic interest in the entities. Earnings from the partnership entities are allocated to the co-investors on a proportional basis and during the three months ended March 31, 2023, and 2022 we allocated $1 million of income, and $1 million of income, respectively, to the co-investors, which were recorded in Other expenses on our consolidated statements of income.

In 2021, Redwood and a third-party investor co-sponsored the transfer and securitization of HEI through the HEI securitization entity and other third-party investors retained subordinate securities issued by the securitization entity alongside Redwood. See Note 10 for a further discussion of the HEI securitization. We account for the co-investors' interests in the HEI securitization entity as a liability, and at March 31, 2023, the carrying value of their interests was $23 million, representing the fair value of their economic interests in the HEI entity. During the three months ended March 31, 2023 and 2022, the investors' share of earnings from their retained interests were $1 million and $6 million, respectively, and were recorded through investment fair value changes, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 14. Short-Term Debt

We enter into repurchase agreements ("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At March 31, 2023, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at March 31, 2023 and December 31, 2022.

Table 14.1 – Short-Term Debt


	March 31, 2023
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity (2)	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	6	$	25,590	$	1,750,000	6.83	%	5/2023-12/2023	229

Business purpose loan warehouse	4	777,067		1,650,000		7.31	%	5/2023-9/2023	112
Real estate securities repo	7	325,549		—		6.11	%	4/2023-6/2023	28
HEI warehouse	1	125,071		150,000		9.39	%	11/2023	216
Total Short-Term Debt Facilities	18	1,253,277
Servicer advance financing	1	197,883		290,000		7.04	%	11/2023	215
Promissory notes	N/A	21,808		—		6.76	%	N/A	N/A
Convertible notes, net	N/A	143,484		—		4.75	%	8/2023	137
Total Short-Term Debt		$	1,616,452


	December 31, 2022
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	7	$	703,406	$	2,550,000	6.16	%	3/2023 - 12/2023	267

Business purpose loan warehouse	4	680,100		1,650,000		6.93	%	3/2023 - 9/2023	179
Real estate securities repo	7	124,909		—		5.22	%	1/2023 - 3/2023	27
HEI warehouse	1	111,681		150,000		8.54	%	11/2023	306
Total Short-Term Debt Facilities	19	1,620,096
Servicer advance financing	1	206,510		290,000		6.67	%	11/2023	305
Promissory notes	N/A	27,058		—		6.64	%	N/A	N/A
Convertible notes, net	N/A	176,015		—		4.75	%	8/2023	227
Total Short-Term Debt		$	2,029,679

(1)Borrowings under our facilities generally are uncommitted and charged interest based on a specified margin over SOFR.

(2)Promissory notes payable on demand to lender with 90-day notice.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 14. Short-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at March 31, 2023 and December 31, 2022.

Table 14.2 – Collateral for Short-Term Debt


(In Thousands)	March 31, 2023		December 31, 2022
Collateral Type
Held-for-sale residential loans	$	26,282	$	775,545
Business purpose loans	1,021,051		871,072
HEI	215,517		191,278
Real estate securities
On balance sheet	71,017		72,133
Sequoia securitizations (1)	110,821		74,170
Freddie Mac SLST securitizations (1)	247,970		—
Freddie Mac K-Series securitization (1)	32,130		31,767

Total real estate securities owned	461,938		178,070
Restricted cash and other assets	2,023		1,097
Total Collateral for Short-Term Debt Facilities	1,726,811		2,017,062
Cash	17,329		12,713
Restricted cash	—		—
Servicer advances	269,259		269,259
Total Collateral for Servicer Advance Financing	286,588		281,972
Total Collateral for Short-Term Debt	$	2,013,399	$	2,299,034

(1)Represents securities we retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.

For the three months ended March 31, 2023, the average balance of our short-term debt facilities was $1.17 billion. At March 31, 2023 and December 31, 2022, accrued interest payable on our short-term debt facilities was $7 million.

Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At March 31, 2023, the accrued interest payable balance on this financing was $0.5 million and the unamortized capitalized commitment costs were $0.5 million.

In connection with our acquisition of Riverbend, we assumed $43 million of promissory notes which are payable on demand with a 90-day notice from the lender or which may be repaid by us with a 90-day notice. These unsecured, non-marginable, recourse notes were issued in three separate series with fixed interest rates between 6% and 8%. During the three months ended March 31, 2023, we repaid $5 million of principal of these notes.

During the three months ended March 31, 2023, we repurchased $33 million of convertible debt due in 2023 and recorded a $0.1 million gain on extinguishment. At March 31, 2023 the outstanding principal balance of our convertible debt due in August 2023 was $144 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 14. Short-Term Debt - (continued)

Remaining Maturities of Short-Term Debt

The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt at March 31, 2023.

Table 14.3 – Short-Term Debt by Collateral Type and Remaining Maturities


	March 31, 2023
(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type
Held-for-sale residential loans	$	—	$	—	$	25,590	$	25,590
Business purpose loans	—		497,066		280,001		777,067
Real estate securities	276,367		49,182		—		325,549
HEI warehouse	—		—		125,071		125,071
Total Secured Short-Term Debt	276,367		546,248		430,662		1,253,277
Servicer advance financing	—		—		197,883		197,883
Promissory notes	—		21,808		—		21,808
Convertible notes, net	—		—		143,484		143,484
Total Short-Term Debt	$	276,367	$	568,056	$	772,029	$	1,616,452

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 15. Asset-Backed Securities Issued

ABS issued represents securities issued by non-recourse securitization entities we consolidate under GAAP. The majority of our ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at March 31, 2023 and December 31, 2022, along with other selected information, are summarized in the following table.

Table 15.1 – Asset-Backed Securities Issued


	March 31, 2023
	Legacy Sequoia		Sequoia		CAFL (1)		Freddie Mac SLST		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	184,937	$	4,155,846	$	3,231,269	$	1,203,589	$	408,612		$	106,923		$	9,291,176
Interest-only certificates	168		57,040		115,990		14,885		6,694			—			194,777
Market valuation adjustments	(16,273)		(642,289)		(275,083)		(74,952)		(20,837)			(9,400)			(1,038,834)


ABS Issued, Net	$	168,832	$	3,570,597	$	3,072,176	$	1,143,522	$	394,469		$	97,523		$	8,447,119
Range of weighted average interest rates, by series(3)	3.09% to 6.06%		2.6% to 5.01%		2.34% to 6.39%		3.50%		3.41		%	3.79		%
Stated maturities(3)	2024 - 2036		2047-2053		2027-2032		2028-2029		2025			2052
Number of series	20		19		19		2		1			1


	December 31, 2022
	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	200,047	$	3,595,715	$	3,322,250	$	1,306,652	$	410,725		$	108,962		$	8,944,351
Interest-only certificates	180		57,871		124,928		15,328		7,379			—			205,686
Market valuation adjustments	(16,036)		(682,477)		(331,371)		(99,830)		(25,319)			(8,252)			(1,163,285)


ABS Issued, Net	$	184,191	$	2,971,109	$	3,115,807	$	1,222,150	$	392,785		$	100,710		$	7,986,752
Range of weighted average interest rates, by series(3)	2.69% to 5.19%		2.57% to 6.13%		2.34% to 5.92%		3.50% to 4.75%		3.41		%	3.78		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2032		2028-2059		2025			2052
Number of series	20		17		19		3		1			1

(1)Includes $485 million (principal balance) of ABS issued by two CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at both March 31, 2023 and December 31, 2022, respectively.

(2)Includes $86 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at December 31, 2022.

(3)Certain ABS issued by CAFL and HEI securitization entities are subject to early redemption and interest rate step-ups as described below.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 15. Asset-Backed Securities Issued - (continued)

During the second quarter of 2022, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest BPL bridge loans (presented within CAFL in Table 15.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $215 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At March 31, 2023, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $5 million in total, for a net carrying value of $220 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in May 2024, and beginning in June 2025, the interest rate on the ABS issued increases by 2% through final maturity in May 2029. The ABS issued by this securitization were collateralized by $217 million of BPL bridge loans and $34 million of restricted cash and other assets at March 31, 2023. The securitization is structured with $250 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 24 months of the transaction (through May 2024), unless an amortization event occurs prior to the expiration of the 24-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest BPL bridge loans (presented within CAFL in table 15.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At March 31, 2023, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $1 million, for a net carrying value of $269 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $269 million of BPL bridge loans, $14 million of other assets, and $28 million of restricted cash at March 31, 2023. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024), unless an amortization event occurs prior to the expiration of the 30-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of the HEI securitization entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income. The ABS issued by the HEI securitization entity were subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.

During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. During the three months ending March 31, 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity was July 2059. The ABS issued were subject to an optional redemption through July 2023, at which time, if the redemption right had not been exercised, the ABS interest rate stepped up to 7.75%.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 15. Asset-Backed Securities Issued - (continued)

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than the stated maturity. At March 31, 2023, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at March 31, 2023 and December 31, 2022. Interest due on consolidated ABS issued is payable monthly.

Table 15.2 – Accrued Interest Payable on Asset-Backed Securities Issued


(In Thousands)	March 31, 2023		December 31, 2022
Legacy Sequoia	$	316	$	282
Sequoia	11,259		8,880
CAFL	10,816		10,918
Freddie Mac SLST (1)	3,510		3,561
Freddie Mac K-Series	1,162		1,167
Total Accrued Interest Payable on ABS Issued	$	27,063	$	24,808

(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 16. Long-Term Debt

The tables below summarize our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at March 31, 2023 and December 31, 2022.

Table 16.1 – Long-Term Debt


	March 31, 2023
(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit		Weighted Average Interest Rate (1)		Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A	$	129,329	$	—	$	129,329	N/A		5.71	%	9/2024
Facility B	101,691		—		101,691		N/A		5.71	%	2/2025
Facility C	66,197		(63)		66,134		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	427,310		(68)		427,242		$	750,000	SOFR + 2.87%		N/A
Facility E	305,159		(912)		304,247		335,000		SOFR + 3.25%		12/2025
Recourse BPL Financing
Facility F	—		—		—		500,000		SOFR + 2.25%-2.50%		9/2024
Recourse MSR Financing
Facility G	47,456		—		47,456		50,000		SOFR + 3.25%		9/2024
Total Long-Term Debt Facilities	1,077,142		(1,043)		1,076,099
Convertible notes
5.625% convertible senior notes	150,200		(1,076)		149,124		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	162,092		(2,207)		159,885		N/A		5.75	%	10/2025
7.75% convertible senior notes	215,000		(5,859)		209,141		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	139,500		(721)		138,779		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,743,934	$	(10,906)	$	1,733,028

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 16. Long-Term Debt - (continued)


	December 31, 2022
(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit		Weighted Average Interest Rate (1)		Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A	$	130,408	$	—	$	130,408	N/A		5.71	%	9/2024
Facility B	101,706		(50)		101,656		N/A		4.21	%	2/2025
Facility C	68,995		(125)		68,870		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	404,622		(667)		403,955		$	750,000	SOFR + 2.87%		N/A
Facility E	308,933		(838)		308,095		335,000		SOFR + 3.25%		12/2025
Recourse BPL Financing
Facility F	64,689		(473)		64,216		500,000		SOFR + 2.25%-2.50%		9/2024
Total Long-Term Debt Facilities	1,079,353		(2,153)		1,077,200
Convertible notes
5.625% convertible senior notes	150,200		(1,282)		148,918		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	162,092		(2,410)		159,682		N/A		5.75	%	10/2025
7.75% convertible senior notes	215,000		(6,142)		208,858		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	139,500		(733)		138,767		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,746,145	$	(12,720)	$	1,733,425

(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) or SOFR, plus an applicable spread.

Refer to Note 16 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for a full description of our long-term debt.

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at March 31, 2023 and December 31, 2022.

Table 16.2 – Collateral for Long-Term Debt


(In Thousands)	March 31, 2023		December 31, 2022
Collateral Type
BPL bridge loans	$	922,296	$	897,782
BPL term loans	—		66,567
Mortgage servicing rights (including certified MSRs)	73,366		—
Real estate securities
Sequoia securitizations (1)	181,897		178,439
CAFL securitizations (1)	236,540		237,068



Total Collateral for Long-Term Debt	$	1,414,099	$	1,379,856

(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 16. Long-Term Debt - (continued)

The following table summarizes the accrued interest payable on long-term debt at March 31, 2023 and December 31, 2022.

Table 16.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	March 31, 2023		December 31, 2022
Long-term debt facilities	$	3,058	$	3,364
Convertible notes

5.625% convertible senior notes	1,784		3,896
5.75% exchangeable senior notes	4,662		2,332
7.75% convertible senior notes	4,906		741
Trust preferred securities and subordinated notes	1,659		1,633
Total Accrued Interest Payable on Long-Term Debt	$	16,069	$	11,966

Recourse Subordinate Securities Financing Facilities

In 2019, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia securitizations (Facility A in Table 16.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through September 2022, which increased to 5.71% from October 2022 through September 2023, and will increase to 7.21% from October 2023 through September 2024. The financing facility has a final maturity in September 2024.

In 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations (Facility B in Table 16.1 above). The financing is fully and unconditionally guaranteed by Redwood, with an interest rate of approximately 4.21% through February 2023, increasing to 5.71% from March 2023 through February 2024, and to 7.21% from March 2024 through February 2025. The financing facility may be terminated, at our option, beginning in February 2023, and has a final maturity in February 2025.

In the third quarter of 2021, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations (Facility C in Table 16.1 above). The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024, increasing to 6.25% from July 2024 through June 2025, and to 7.75% from July 2025 to June 2026. The financing facility may be terminated, at our option, beginning in June 2023, and has a final maturity in June 2026.

Recourse MSR Financing Facility

In the first quarter of 2023, a subsidiary of Redwood entered into a secured revolving debt facility agreement collateralized by MSRs and certificated mortgage servicing rights (Facility G in Table 16.1 above). Borrowings under this facility accrue interest at a per annum rate equal to one-month SOFR plus 3.25% through the maturity of the facility in September 2024. This facility has an aggregate maximum borrowing capacity of $50 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 17. Commitments and Contingencies

Lease Commitments

At March 31, 2023, we were obligated under ten non-cancelable operating leases with expiration dates through 2031 for $20 million of cumulative lease payments. For the three-month periods ended March 31, 2023 and 2022 our operating lease expense was $1 million and $1 million, respectively.

The following table presents our future lease commitments at March 31, 2023.

Table 17.1 – Future Lease Commitments by Year


(In Thousands)	March 31, 2023
2023 (9 months)	$	3,699
2024	4,554
2025	3,629
2026	3,520
2027	2,588
2028 and thereafter	1,991
Total Lease Commitments	19,981
Less: Imputed interest	(2,343)
Operating Lease Liabilities	$	17,638

During the three months ended March 31, 2023, we entered into one new office lease. At March 31, 2023, our operating lease liabilities were $18 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $15 million, which were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the lease commencement date. At March 31, 2023, the weighted-average remaining lease term and weighted-average discount rate for our leases was 5 years and 5.2%, respectively.

Commitment to Fund BPL Bridge Loans

As of March 31, 2023, we had commitments to fund up to $811 million of additional advances on existing BPL bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At March 31, 2023, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three months ended March 31, 2023, we recorded a net market valuation gain of $0.4 million related to this liability through Mortgage banking activities, net on our consolidated statements of income.

Commitment to Fund Partnerships

In 2018, we invested in two partnerships created to acquire and manage certain mortgage servicing related assets. See Note 11 for additional detail on these investments. In connection with these investments, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 17. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

At March 31, 2023, we had flow purchase agreements with HEI originators with $8 million of cumulative purchase commitments outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. We account for these investments under the fair value option. See Note 10 for additional detail on these investments.

Commitments to Fund Strategic Investments

In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At March 31, 2023, we had funded $15 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

In 2021, we entered into a commitment to fund a $5 million RWT Horizons investment. At March 31, 2023, we had funded $1 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

Riverbend Contingent Consideration

As part of the consideration for our acquisition of Riverbend, we may make earnout payments payable in cash, based on generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to a maximum potential amount payable of $25.3 million. These contingent earnout payments are classified as a contingent consideration liability on our consolidated balance sheets and carried at fair value. At March 31, 2023, our estimated fair value of this contingent liability was zero.

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At March 31, 2023, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was partially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At March 31, 2023, we had incurred less than $100 thousand of cumulative losses under these arrangements. For the three months ended March 31, 2023, other income related to these arrangements was $0.2 million.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at March 31, 2023, the loans had an unpaid principal balance of $429 million, a weighted average FICO score of 759 (at origination), and LTV ratio of 74% (at origination). At March 31, 2023, $9 million of the loans were 90 or more days delinquent, of which five of these loans with an unpaid principal balance of $1 million were in foreclosure. At March 31, 2023, the carrying value of our guarantee obligation was $6 million and included $5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to us. At both March 31, 2023 and December 31, 2022, assets of such SPEs totaled $30 million, and liabilities of such SPEs totaled $6 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 17. Commitments and Contingencies - (continued)

Loss Contingencies — Repurchase Reserves

We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential and business purpose loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation.

At March 31, 2023 and December 31, 2022, our repurchase reserve associated with our residential loans and MSRs was $6 million and $6 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the three months ended March 31, 2023 and 2022, we received one and zero repurchase request(s), respectively, and repurchased five and zero loan(s), respectively. During the three months ended March 31, 2023, we recorded a repurchase provision expense of zero. During the three months ended March 31, 2022, we recorded repurchase provision expense of $0.2 million, which was recorded in Mortgage banking activities, net, and Other income on our consolidated statements of income.

At March 31, 2023 and December 31, 2022, our repurchase reserve associated with business purpose loans sold to third-parties was zero and $1 million, respectively. During the three months ended March, 31, 2023 and 2022, we received four and zero repurchase requests, respectively, for business purpose loans sold to third parties. During the three months ended March 31, 2023 and 2022, we repurchased eleven and zero business purpose loans, respectively, that had been sold to third parties. The business purpose loans repurchased in the first quarter of 2023, resolved the open repurchase requests related to loans sold to third-parties that were outstanding as of December 31, 2022, for which the $1 million reserve was previously established. No incremental repurchase provision was recorded in the first quarter of 2023 and, at March 31, 2023, no open repurchase requests were outstanding for business purpose loans sold to third parties.

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 17 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Loss Contingencies - Litigation, Claims and Demands.” At March 31, 2023, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2022 were $2 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 18. Equity

The following table provides a summary of changes to Accumulated other comprehensive income (loss) by component for the three months ended March 31, 2023 and 2022.

Table 18.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component


	Three Months Ended March 31, 2023				Three Months Ended March 31, 2022
(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	$	3,435	$	(72,303)	$	67,503	$	(76,430)
Other comprehensive income (loss) before reclassifications	5,007		—		(17,873)		—
Amounts reclassified from other accumulated comprehensive income (loss)	(193)		1,018		(692)		1,018
Net current-period other comprehensive income (loss)	4,814		1,018		(18,565)		1,018
Balance at End of Period	$	8,249	$	(71,285)	$	48,938	$	(75,412)

The following table provides a summary of reclassifications out of Accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022.

Table 18.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)



		Amount Reclassified From Accumulated Other Comprehensive (Loss)
	Affected Line Item in the	Three Months Ended March 31,
(In Thousands)	Income Statement	2023		2022
Net Realized (Gain) Loss on AFS Securities
Increase (decrease) in allowance for credit losses on AFS securities	Investment fair value changes, net	$	28	$	705
Gain on sale of AFS securities	Realized gains, net	(221)		(1,397)

		$	(193)	$	(692)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	1,018	$	1,018
		$	1,018	$	1,018

Issuance of Common Stock

We have an established program to sell common stock from time to time in at-the-market ("ATM") offerings. During the three months ended March 31, 2023, we did not issue any common shares under this program. At March 31, 2023, the share issuance capacity under this program was $175 million.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 18. Equity - (continued)

Issuance of Preferred Stock

In January 2023, Redwood issued 2,800,000 shares of 10.00% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") for gross proceeds of $70 million and net proceeds of approximately $67 million after deducting the underwriting discount and other estimated expenses. The Series A Preferred Stock will pay quarterly cumulative cash dividends beginning April 15, 2023 to January 15, 2028 at a fixed annual rate of 10%, based on the stated liquidation preference of $25.00 per share, in arrears, when authorized by Redwood's Board of Directors and declared by the Company. Starting April 15, 2028, the annual dividend rate will reset to the five-year U.S. Treasury Rate plus a spread of 6.278%. The Series A Preferred Stock ranks senior to Redwood's common stock with respect to rights to the payment of dividends and the distribution of assets upon any liquidation, dissolution or winding up of the Company. During the three months ended March 31, 2023, the Company declared a preferred stock dividend of $0.60417 per share, payable on April 17, 2023 to stockholders of record on March 31, 2023, which is included in Accrued expenses and other liabilities at March 31, 2023.

Direct Stock Purchase and Dividend Reinvestment Plan

During the three months ended March 31, 2023, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At March 31, 2023, approximately 6 million shares remained outstanding for future offerings under this plan.

Earnings per Common Share

The following table provides the basic and diluted earnings per common share computations for the three months ended March 31, 2023 and 2022.

Table 18.3 – Basic and Diluted Earnings per Common Share


	Three Months Ended March 31,
(In Thousands, except Share Data)	2023		2022
Basic Earnings per Common Share:
Net income available to common stockholders	$	3,201	$	30,915
Less: Dividends and undistributed earnings allocated to participating securities	(1,404)		(1,209)
Net income allocated to common stockholders	$	1,797	$	29,706
Basic weighted average common shares outstanding	113,678,911		119,884,172
Basic Earnings per Common Share	$	0.02	$	0.25
Diluted Earnings per Common Share:
Net income available to common stockholders	$	3,201	$	30,915
Less: Dividends and undistributed earnings allocated to participating securities	(1,404)		(1,348)
Add back: Interest expense on convertible notes for the period, net of tax	—		4,582
Net income allocated to common stockholders	$	1,797	$	34,149
Weighted average common shares outstanding	113,678,911		119,884,172
Net effect of dilutive equity awards	455,645		290,831
Net effect of assumed convertible notes conversion to common shares	—		20,331,154
Diluted weighted average common shares outstanding	114,134,556		140,506,157
Diluted Earnings per Common Share	$	0.02	$	0.24

We included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, in the calculations of basic and diluted earnings per common share as we determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 18. Equity - (continued)

During the three months ended March 31, 2022, certain of our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.

For the three months ended March 31, 2023, 46,316,074 of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three months ended March 31, 2023, the number of outstanding equity awards that were antidilutive totaled 28,474. For the three months ended March 31, 2022, the number of outstanding equity awards that were antidilutive totaled 17,154.

Stock Repurchases

In July 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities. During the three months ended March 31, 2023, we did not repurchase any shares of our common stock under this program. At March 31, 2023, $101 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

Note 19. Equity Compensation Plans

At March 31, 2023 and December 31, 2022, 2,634,034 and 2,896,604 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled $42 million at March 31, 2023, as shown in the following table.

Table 19.1 – Activities of Equity Compensation Costs by Award Type


	Three Months Ended March 31, 2023
(In Thousands)	Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total
Unrecognized compensation cost at beginning of period	$	5,068	$	19,849	$	15,271	$	—	$	40,188
Equity grants	1,982		5,950		—		422		8,354

Equity grant forfeitures	(174)		—		—		—		(174)
Equity compensation expense	(1,420)		(2,930)		(1,734)		(106)		(6,190)
Unrecognized Compensation Cost at End of Period	$	5,456	$	22,869	$	13,537	$	316	$	42,178

At March 31, 2023, the weighted average amortization period remaining for all of our equity awards was less than two years.

Restricted Stock Units ("RSUs")

At March 31, 2023 and December 31, 2022, there were 703,499 and 806,119 RSUs outstanding, respectively. During the three months ended March 31, 2023, there were 249,598 RSUs granted, 336,959 RSUs distributed, and 15,259 RSUs forfeited. Unvested RSUs at March 31, 2023 vest through 2027.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 19. Equity Compensation Plans - (continued)

Deferred Stock Units (“DSUs”)

At March 31, 2023 and December 31, 2022, there were 5,350,399 and 4,831,338 DSUs outstanding, respectively, of which 2,741,004 and 2,495,787, respectively, had vested. During the three months ended March 31, 2023, there were 746,592 DSUs granted, 227,531 DSUs distributed, and zero DSUs forfeited. Unvested DSUs at March 31, 2023 vest through 2027.

Performance Stock Units (“PSUs”)

At March 31, 2023 and December 31, 2022, the target number of PSUs that were unvested was 2,078,171 and 2,354,002, respectively. Vesting for PSUs generally occurs three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

For 275,831 target PSU awards that were granted in December 2019, the performance vesting period ended on January 1, 2023. These 2019 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock underlying these PSUs.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 850,000 shares of common stock to be purchased in aggregate for all employees. As of March 31, 2023 and December 31, 2022, 686,251 and 657,777 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at March 31, 2023.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 20. Mortgage Banking Activities, Net

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three months ended March 31, 2023 and 2022.

Table 20.1 – Mortgage Banking Activities


	Three Months Ended March 31,
(In Thousands)	2023		2022
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)	$	6,994	$	(68,822)
Trading securities (2)	(239)		2,786
Risk management derivatives (3)	(3,371)		73,354
Other income, net (4)	(19)		617
Total residential mortgage banking activities, net	3,365		7,935

Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
BPL term loans, at fair value (1)	12,666		(25,193)
BPL bridge loans, at fair value	1,153		2,135
Risk management derivatives (3)	(5,096)		17,033
Other income, net (5)	4,583		14,405
Total business purpose mortgage banking activities, net	13,306		8,380
Mortgage Banking Activities, Net	$	16,671	$	16,315

(1)For residential loans, includes changes in fair value for associated loan purchase commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.

(2)Represents fair value changes on trading securities that are being used along as hedges to manage the mark-to-market risks associated with our residential mortgage banking operations.

(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations.

(4)Amounts in this line item include other fee income from loan acquisitions and provisions for repurchases, presented net.

(5)Amounts in this line item include other fee income from loan originations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 21. Other Income, Net

The following table presents the components of Other income recorded in our consolidated statements of income for the three months ended March 31, 2023 and 2022.

Table 21.1 – Other Income, Net


	Three Months Ended March 31,
(In Thousands)	2023		2022
MSR income, net (1)	$	1,077	$	4,303
Bridge loan fees	1,592		990





Legal settlement	891		—
Other	996		690
Other Income, Net	$	4,556	$	5,983

(1)Includes servicing fees and fair value changes for MSRs and related hedges, net.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 22. Components of Operating Expenses

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three months ended March 31, 2023 and 2022 are presented in the following table.

Table 22.1 – Components of Operating Expenses


	Three Months Ended March 31,
(In Thousands)	2023		2022
General and Administrative Expenses
Fixed compensation expense (1)	$	15,359	$	14,628
Annual variable compensation expense	4,005		3,357
Long-term incentive award expense (2)	7,942		5,660
Systems and consulting	3,112		3,184
Office costs	2,040		2,025
Accounting and legal	919		1,675
Corporate costs	929		864
Other	1,249		1,883
Total General and Administrative Expenses	35,555		33,276

Portfolio Management Costs	3,510		1,578

Loan Acquisition Costs	1,289		4,465

Other Expenses

Amortization of purchase-related intangible assets	3,107		3,534

Other	577		551
Total Other Expenses	3,684		4,085
Total Operating Expenses	$	44,038	$	43,404

(1)Includes $1 million of severance and transition-related expenses for the three months ended March 31, 2023.

(2)For the three months ended March 31, 2023 and 2022, long-term incentive award expense included $6 million and $5 million of expense for awards settleable in shares of our common stock, and $2 million and $1 million of expense for awards settleable in cash, respectively.

Long-Term Cash-Based Awards

During the three months ended March 31, 2023, there were no long-term cash-based retention awards granted to employees. Cash-based retention awards were granted to certain executive and non-executive employees in 2020, 2021 and 2022 that each vest over three-year periods, and are subject to continued employment through the vesting periods through 2025. At March 31, 2023 and December 31, 2022, the unamortized compensation cost of long-term cash-based awards was $2 million and $3 million, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 22. Components of Operating Expenses - (continued)

Cash Settled Deferred Stock Units

During the three months ended March 31, 2023, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020, 2021 and 2022 and each vest over four-year periods and are subject to continued employment through the vesting periods through 2026. At March 31, 2023 and December 31, 2022, the unamortized compensation cost of cash-settled deferred stock units was $5 million and $5 million, respectively. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of our common stock at the end of each reporting period.

Cash Settled Performance Stock Units

During the three months ended March 31, 2023, $6 million of cash-settled performance stock units ("csPSUs") were granted to certain executive and non-executive employees which vest over approximately three years through January 1, 2026. The target number of csPSUs that were granted totaled 663,499 units based on a per unit grant-date fair value of $9.75. The equivalent number of underlying shares of common stock that vest and that the recipient becomes entitled to receive at the time of vesting will generally range from 0% to 250% of the target number of csPSUs granted, with the target number of csPSUs granted being adjusted to reflect the value of any dividends declared on our common stock during the vesting period. Upon vesting, the recipient will receive the settlement of the vested shares in cash based on the closing market price of our common stock on the final vesting date. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of the csPSUs at the end of each reporting period. At March 31, 2023, unamortized compensation cost of the csPSUs was $5 million.

The grant date fair value of these csPSUs of $9.75 per unit was determined through Monte-Carlo simulations using the following assumptions: the common stock closing price at the grant date for Redwood and each member of the comparator group, the average closing price of the common stock price for the 60 trading days beginning January 1, 2023 for Redwood and each member of the comparator group, and the range of performance-based vesting based on absolute TSR over three years from the grant date. For this csPSU grant, an implied volatility assumption of 71% (based on historical volatility), a risk-free rate of 4.23% (the three-year Treasury rate on the grant date), and a 0% dividend yield (the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs) were used.

With respect to the csPSU awards granted during three months ended March 31, 2023:

•First, vesting would range from 0% - 250% of two-thirds of the Target csPSUs granted based on the level of book value total shareholder return ("bvTSR") attained over the three-year vesting period, with 100% of this two-thirds of the Target csPSUs vesting if three-year bvTSR is 25%. bvTSR is defined as the percentage by which our book value "per share price" has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

•Second, vesting would range from 0% - 250% of one-third of the Target csPSUs granted based on Redwood’s relative total shareholder return (“rTSR”) against a comparator group of companies measured over the three-year vesting period, with 100% of this one-third of the Target csPSUs vesting if three-year rTSR corresponds to 55th percentile rTSR.

•Third, if the aggregate vesting level after steps one and two is greater than 100% of the Target csPSUs, but the Company's absolute total shareholder return ("TSR") is negative over the three-year performance period, vesting would be capped at 100% of Target csPSUs. TSR is defined as the percentage by which our common stock “per share price” has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 23. Taxes

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among other things, the assets it holds, the income it generates, and the composition of its stockholders. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.

For the three months ended March 31, 2023 and 2022, we recognized a benefit from income taxes of $1 million and $2 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at March 31, 2023 and 2022.

Table 23.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate


	March 31, 2023		March 31, 2022
Federal statutory rate	21.0	%	21.0	%
State taxes, net of Federal tax effect, as applicable	(6.3)	%	(1.9)	%
Differences in taxable (loss) income from GAAP income	(14.3)	%	(11.3)	%
Change in valuation allowance	—	%	—	%
REIT GAAP income or loss not subject to federal income	(32.5)	%	(16.4)	%
Effective Tax Rate	(32.1)	%	(8.6)	%

We assessed our tax positions for all open tax years (i.e., Federal, 2019 to 2022, and State, 2018 to 2022) at March 31, 2023 and December 31, 2022, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 24. Segment Information

Redwood operates in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. The accounting policies of the reportable segments are the same as those described in Note 3 — Summary of Significant Accounting Policies. For a full description of our segments, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2022.

Segment contribution represents the measure of profit that management uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our three segments, as well as activity from certain consolidated Sequoia entities, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense from our convertible notes and trust preferred securities, indirect general and administrative expenses and other expense.

The following tables present financial information by segment for the three months ended March 31, 2023 and 2022.

Table 24.1 – Business Segment Financial Information


	Three Months Ended March 31, 2023
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	5,510	$	4,494	$	163,660	$	4,852	$	178,516
Interest expense	(6,866)		(4,038)		(123,452)		(17,723)		(152,079)
Net interest income (loss)	(1,356)		456		40,208		(12,871)		26,437
Non-interest income (loss)
Mortgage banking activities, net	3,365		13,306		—		—		16,671
Investment fair value changes, net	1,076		—		(1,014)		(189)		(127)
Other income, net	—		2,408		2,168		(20)		4,556
Realized gains, net	—		—		(117)		115		(2)
Total non-interest income (loss), net	4,441		15,714		1,037		(94)		21,098
General and administrative expenses	(4,806)		(13,678)		(1,409)		(15,662)		(35,555)
Portfolio management costs	—		—		(3,510)		—		(3,510)
Loan acquisition costs	(175)		(1,114)		—		—		(1,289)
Other expenses	—		(3,108)		(576)		—		(3,684)
Benefit from (provision for) income taxes	633		703		(213)		—		1,123
Segment Contribution	$	(1,263)	$	(1,027)	$	35,537	$	(28,627)
Net income									$	4,620
Non-cash amortization (expense) income, net	$	(255)	$	(3,701)	$	(2,833)	$	(2,106)	$	(8,895)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 24. Segment Information - (continued)


	Three Months Ended March 31, 2022
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	12,967	$	4,841	$	170,572	$	1,020	$	189,400
Interest expense	(6,936)		(2,568)		(116,581)		(10,213)		(136,298)
Net interest income (loss)	6,031		2,273		53,991		(9,193)		53,102
Non-interest income (loss)
Mortgage banking activities, net	7,935		8,380		—		—		16,315
Investment fair value changes, net	—		—		(5,406)		(714)		(6,120)
Other income, net	—		575		5,282		126		5,983
Realized gains, net	—		—		2,581		—		2,581
Total non-interest income (loss), net	7,935		8,955		2,457		(588)		18,759
General and administrative expenses	(6,101)		(10,472)		(1,555)		(15,148)		(33,276)
Portfolio management costs	—		—		(1,578)		—		(1,578)
Loan acquisition costs	(1,417)		(3,048)		—		—		(4,465)
Other expenses	—		(3,534)		(551)		—		(4,085)
Benefit from (provision for) income taxes	1,007		3,281		(1,830)		—		2,458
Segment Contribution	$	7,455	$	(2,545)	$	50,934	$	(24,929)
Net Income									$	30,915
Non-cash amortization income (expense), net	$	104	$	(3,890)	$	7,300	$	(2,033)	$	1,481

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 24. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three months ended March 31, 2023 and 2022.

Table 24.2 – Components of Corporate/Other


	Three Months Ended March 31,
	2023						2022
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	2,543	$	2,309	$	4,852	$	1,012	$	8	$	1,020
Interest expense	(2,504)		(15,219)		(17,723)		(701)		(9,512)		(10,213)
Net interest income (loss)	39		(12,910)		(12,871)		311		(9,504)		(9,193)
Non-interest income (loss)

Investment fair value changes, net	(94)		(95)		(189)		(714)		—		(714)
Other income	—		(20)		(20)		—		126		126
Realized gains, net	—		115		115		—		—		—
Total non-interest income (loss), net	(94)		—		(94)		(714)		126		(588)
General and administrative expenses	—		(15,662)