The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, 20172022 and December 31, 2016,2021, as well as the fair value hierarchy of the valuation inputs used to measure fair value.
The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2017.2022. 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 sheetsheets at September 30, 2017.2022.
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.
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 September 30, 20172022 and December 31, 2016.2021.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in Thousands) | | Number of Facilities | | Outstanding Balance | | Limit | | Weighted Average Interest Rate | | Maturity | | Weighted Average Days Until Maturity |
Facilities | | | | | | | | | | | | |
Residential loan warehouse | | 4 |
| | $ | 485,544 |
| | $ | 1,325,000 |
| | 2.40 | % | | 1/2017-12/2017 | | 206 |
Real estate securities repo | | 7 |
| | 305,995 |
| | — |
| | 1.91 | % | | 1/2017-3/2017 | | 24 |
Total Short-Term Debt | | 11 |
| | $ | 791,539 |
| | | | | | | | |
Borrowings under our facilities are generally charged interest based on a specified margin over the one-month LIBOR interest rate. At September 30, 2017, all of these borrowings were under uncommitted facilities and were due within 364 days (or less) of the borrowing date.
During the three months ended June 30, 2017, $288 million principal amount of 4.625% convertible senior notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the accrued interest payable balance on this debt was $5 million. See Note 13 for additional information on our convertible notes.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 11.14. Short-Term Debt - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(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 | | | $ | 1,669,344 | | | $ | 2,900,000 | | | 1.87 | % | | 1/2022-12/2022 | | 153 |
| | | | | | | | | | | | |
Business purpose loan warehouse | | 2 | | | 138,746 | | | 350,000 | | | 3.34 | % | | 3/2022-7/2022 | | 105 |
Real estate securities repo | | 4 | | | 74,825 | | | — | | | 1.13 | % | | 1/2022-3/2022 | | 33 |
Total Short-Term Debt Facilities | | 13 | | | 1,882,915 | | | | | | | | | |
Servicer advance financing | | 1 | | | 294,447 | | | 350,000 | | | 1.90 | % | | 11/2022 | | 306 |
Convertible notes, net | | N/A | | — | | | | | | | | | |
Total Short-Term Debt | | | | $ | 2,177,362 | | | | | | | | | |
(1)Borrowings under our facilities generally are uncommitted and charged interest based on a specified margin over 1-month SOFR or 1- or 3-month LIBOR.
(2)Promissory notes payable on demand to lender with 90-day notice. Assumed maturity date at September 30, 2022 is December 30, 2022 for this presentation.
The fairfollowing table below presents the value of held-for-sale residential loans, securities, and real estate securitiesother assets pledged as collateral under our short-term debt facilities was $493 million and $663 million, respectively, at September 30, 20172022 and $534 million and $363 million, respectively, at December 31, 2016. 2021.
Table 14.2 – Collateral for Short-Term Debt
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2022 | | December 31, 2021 |
Collateral Type | | | | |
Held-for-sale residential loans | | $ | 828,192 | | | $ | 1,838,797 | |
Business purpose loans | | 982,745 | | | 167,687 | |
Real estate securities | | | | |
On balance sheet | | 60,457 | | | 5,823 | |
Sequoia securitizations (1) | | 77,470 | | | 61,525 | |
| | | | |
Freddie Mac K-Series securitization (1) | | 32,047 | | | 31,657 | |
| | | | |
Total real estate securities owned | | 169,974 | | | 99,005 | |
Restricted cash and other assets | | 4,116 | | | 1,962 | |
Total Collateral for Short-Term Debt Facilities | | 1,985,027 | | | 2,107,451 | |
Cash | | 15,891 | | | 6,480 | |
Restricted cash | | 18,569 | | | 25,420 | |
Servicer advances | | 274,934 | | | 310,953 | |
Total Collateral for Servicer Advance Financing | | 309,394 | | | 342,853 | |
Total Collateral for Short-Term Debt | | $ | 2,294,421 | | | $ | 2,450,304 | |
(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.
For the three and nine months ended September 30, 2017,2022, the average balancesbalance of our short-term debt facilities were $1.07was $1.64 billion and $0.97$1.65 billion, respectively. At September 30, 20172022 and December 31, 2016,2021, accrued interest payable on our short-term debt facilities was $5 million and $3$2 million, respectively.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 14. Short-Term Debt - (continued)
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 September 30, 2022, the accrued interest payable balance on this financing was $0.3 million and the unamortized capitalized commitment costs were $0.1 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 September 30, 2022, we repaid $12 million of principal of these notes.
We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $6$1 million at September 30, 2017.2022. At both September 30, 20172022 and December 31, 2016,2021, we had no outstanding borrowings on this facility.
During the three and nine months ended September 30, 2022, business purpose loan warehouse facilities with a borrowing limits of $450 million and $900 million, respectively, were reclassified to short-term debt from long-term debt as the maturity of these facilities became less than one year.
During the three months ended September 30, 2022, $199 million principal amount of 4.75% convertible debt and $1 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt as the maturity of the notes was less than one year as of August 2022.
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 as well as our convertible notes at September 30, 2017.2022.
Table 11.214.3 – Short-Term Debt by Collateral Type and Remaining Maturities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
(In Thousands) | | Within 30 days | | 31 to 90 days | | Over 90 days | | Total |
Collateral Type | | | | | | | | |
Held-for-sale residential loans | | $ | — | | | $ | 262,804 | | | $ | 486,158 | | | $ | 748,962 | |
Business purpose loans | | — | | | — | | | 775,491 | | | 775,491 | |
Real estate securities | | 72,233 | | | 52,202 | | | — | | | 124,435 | |
Total Secured Short-Term Debt | | 72,233 | | | 315,006 | | | 1,261,649 | | | 1,648,888 | |
Servicer advance financing | | — | | | — | | | 233,104 | | | 233,104 | |
Promissory notes | | — | | | 30,702 | | | — | | | 30,702 | |
Convertible notes, net | | — | | | — | | | 197,585 | | | 197,585 | |
Total Short-Term Debt | | $ | 72,233 | | | $ | 345,708 | | | $ | 1,692,338 | | | $ | 2,110,279 | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 |
(In Thousands) | | Within 30 days | | 31 to 90 days | | Over 90 days | | Total |
Collateral Type | | | | | | | | |
Held-for-sale residential loans | | $ | — |
| | $ | 120,219 |
| | $ | 318,024 |
| | $ | 438,243 |
|
Real estate securities | | 422,300 |
| | 127,511 |
| | — |
| | 549,811 |
|
Total Secured Short-Term Debt | | 422,300 |
| | 247,730 |
| | 318,024 |
| | 988,054 |
|
Convertible notes, net | | — |
| | — |
| | 250,142 |
| | 250,142 |
|
Total Short-Term Debt | | $ | 422,300 |
| | $ | 247,730 |
| | $ | 568,166 |
| | $ | 1,238,196 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 12.15. Asset-Backed Securities Issued
Through our Sequoia securitization program, we sponsor securitization transactions in which ABS backed by residential mortgage loans areissued represents securities issued by Sequoia entities. We consolidated the Legacy Sequoianon-recourse securitization entities and beginning in September 2017, the Sequoia Choice securitization entity, that we determined were VIEs and for which we determined we were the primary beneficiary. Each consolidated 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. Our exposure to these entities is primarily through the financial interests we have retained, although we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a resultconsolidate under GAAP. The majority of our having sold assets directly or indirectly to these entities.
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 theseour consolidated securitization entities consistat September 30, 2022 and December 31, 2021, along with other selected information, are summarized in the following table.
Table 15.1 – Asset-Backed Securities Issued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | | Legacy Sequoia | | Sequoia | | CAFL (1) | | Freddie Mac SLST (2) | | Freddie Mac K-Series | | HEI | | Total |
(Dollars in Thousands) | | | | | | | |
Certificates with principal balance | | $ | 213,786 | | | $ | 3,650,411 | | | $ | 3,375,688 | | | $ | 1,344,521 | | | $ | 412,764 | | | $ | 112,380 | | | $ | 9,109,550 | |
Interest-only certificates | | 170 | | | 62,311 | | | 134,348 | | | 13,930 | | | 8,075 | | | — | | | 218,834 | |
Market valuation adjustments | | (16,602) | | | (699,473) | | | (330,549) | | | (109,410) | | | (25,428) | | | (7,629) | | | (1,189,091) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
ABS Issued, Net | | $ | 197,354 | | | $ | 3,013,249 | | | $ | 3,179,487 | | | $ | 1,249,041 | | | $ | 395,411 | | | $ | 104,751 | | | $ | 8,139,293 | |
Range of weighted average interest rates, by series(3) | | 2.52% to 3.90% | | 2.56% to 4.99% | | 2.34% to 5.93% | | 3.50% to 4.75% | | 3.41 | % | | 3.76 | % | | |
Stated maturities(3) | | 2024 - 2036 | | 2047-2052 | | 2027-2032 | | 2028-2059 | | 2025 | | 2052 | | |
Number of series | | 20 | | | 17 | | | 19 | | | 3 | | | 1 | | | 1 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | Legacy Sequoia | | Sequoia | | CAFL(1) | | Freddie Mac SLST (2) | | Freddie Mac K-Series | | HEI | | Total |
(Dollars in Thousands) | | | | | | | |
Certificates with principal balance | | $ | 259,505 | | | $ | 3,353,073 | | | $ | 3,264,766 | | | $ | 1,535,638 | | | $ | 418,700 | | | $ | 138,792 | | | $ | 8,970,474 | |
Interest-only certificates | | 619 | | | 32,749 | | | 193,725 | | | 11,714 | | | 10,184 | | | — | | | 248,991 | |
Market valuation adjustments | | (32,243) | | | (2,774) | | | 16,407 | | | 41,111 | | | 12,973 | | | (1,382) | | | 34,092 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
ABS Issued, Net | | $ | 227,881 | | | $ | 3,383,048 | | | $ | 3,474,898 | | | $ | 1,588,463 | | | $ | 441,857 | | | $ | 137,410 | | | $ | 9,253,557 | |
Range of weighted average interest rates, by series(3) | | 0.23% to 1.44% | | 2.40% to 5.03% | | 2.64% to 5.24% | | 3.50% to 4.75% | | 3.41 | % | | 3.31 | % | | |
Stated maturities(3) | | 2024 - 2036 | | 2047-2052 | | 2027-2031 | | 2028-2059 | | 2025 | | 2052 | | | |
Number of series | | 20 | | | 16 | | | 16 | | | 3 | | | 1 | | | 1 | | | |
(1)Includes $485 million and $270 million (principal balance) of various classes of securities that pay interest on a monthly or quarterly basis. All ABS issued by the Sequoia Choice entity pay fixed ratestwo CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at September 30, 2022 and December 31, 2021, respectively.
(2)Includes $100 million and $145 million (principal balance) of interest and substantially all ABS issued by the Legacy Sequoia entities pay variable rates of interest, which are indexed to one-, three-, or six-month LIBOR. Somea re-securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2022 and December 31, 2021, respectively.
(3)Certain ABS issued by the Legacy SequoiaCAFL, Freddie Mac SLST, and HEI securitization entities pay hybrid rates, which are fixed rates that subsequently adjustsubject to variable rates. ABS issued also includes some interest-only classes with coupons set at a fixed spread to a benchmarkearly redemption and interest rate or set at a spread to the interest rates earned on the assets less the interest rates paid on the liabilities of a securitization entity.step-ups as described below.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 12.15. Asset-Backed Securities Issued - (continued)
The carrying valuesDuring the second quarter of 2022, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest 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 September 30, 2022, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $7 million in total, for a net carrying value of $208 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by Sequoiathe 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 entities we sponsoredwere collateralized by $229 million of bridge loans and $19 million of restricted cash and other assets at September 30, 20172022. The securitization is structured with $250 million of total funding capacity and December 31, 2016, alonga 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 other selected information,the securitization of CoreVest bridge loans (presented within CAFL in table 15.1 above), which we determined was a VIE and for which we determined we are summarizedthe 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 following table.trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2022, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $2 million, for a net carrying value of $268 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 collateralized by $283 million of bridge loans and $24 million of restricted cash and other assets at September 30, 2022. 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 are 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.
Table 12.1 –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. At September 30, 2022, the principal balance of the ABS issued was $100 million, and the debt discount and deferred issuance costs totaled $1 million, for a net carrying value of $99 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued are subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 15. Asset-Backed Securities Issued
- (continued)
|
| | | | | | | | | | | | |
September 30, 2017 | | Legacy Sequoia | | Sequoia Choice | | Total |
(Dollars in Thousands) | | | |
Certificates with principal balance | | $ | 730,312 |
| | $ | 276,873 |
| | $ | 1,007,185 |
|
Interest-only certificates | | 2,829 |
| | 4,153 |
| | 6,982 |
|
Market valuation adjustments | | (75,181 | ) | | 5,302 |
| | (69,879 | ) |
ABS Issued, Net | | $ | 657,960 |
| | $ | 286,328 |
| | $ | 944,288 |
|
Range of weighted average interest rates, by series | | 1.20% to 2.56% |
| | 4.53% |
| | |
Stated maturities | | 2024 - 2036 |
| | 2047 |
| | |
Number of series | | 20 |
| | 1 |
| | |
|
| | | | | | | | | | | | |
December 31, 2016 | | Legacy Sequoia | | Sequoia Choice | | Total |
(Dollars in Thousands) | | | |
Certificates with principal balance | | $ | 880,517 |
| | $ | — |
| | $ | 880,517 |
|
Interest-only certificates | | 3,774 |
| | — |
| | 3,774 |
|
Market valuation adjustments | | (110,829 | ) | | — |
| | (110,829 | ) |
ABS Issued, Net | | $ | 773,462 |
| | $ | — |
| | $ | 773,462 |
|
Range of weighted average interest rates, by series | | 0.74% to 2.23% |
| | — | % | | |
Stated maturities | | 2024 - 2036 |
| | N/A |
| | |
Number of series | | 20 |
| | — |
| | |
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 itsthe stated maturity. At September 30, 2017, all2022, the majority of the ABS issued and outstanding had contractual maturities beyond five years.
At both September 30, 2017 See Note 4 for detail on the carrying value components of the collateral for ABS issued and December 31, 2016,outstanding. The following table summarizes the accrued interest payable on ABS issued by the Legacy Sequoia entities was $1 million. Atat September 30, 2017, accrued interest payable on ABS issued by the Sequoia Choice entity was $1 million.2022 and December 31, 2021. Interest due on consolidated ABS issued is payable monthly.
Table 15.2 – Accrued Interest Payable on Asset-Backed Securities Issued
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2022 | | December 31, 2021 |
Legacy Sequoia | | $ | 223 | | | $ | 99 | |
Sequoia | | 9,003 | | | 8,452 | |
CAFL | | 11,202 | | | 11,030 | |
Freddie Mac SLST (1) | | 4,026 | | | 4,630 | |
Freddie Mac K-Series | | 1,173 | | | 1,190 | |
Total Accrued Interest Payable on ABS Issued | | $ | 25,627 | | | $ | 25,401 | |
(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
September 30, 20172022
(Unaudited)
Note 12. Asset-Backed Securities Issued - (continued)
The following table summarizes the carrying value components of the collateral for ABS issued and outstanding at September 30, 2017 and December 31, 2016.
Table 12.2 – Collateral for Asset-Backed Securities Issued |
| | | | | | | | | | | | |
September 30, 2017 | | Legacy Sequoia | | Sequoia Choice | | Total |
(In Thousands) | | | |
Residential loans | | $ | 673,134 |
| | $ | 317,303 |
| | $ | 990,437 |
|
Restricted cash | | 147 |
| | — |
| | 147 |
|
Accrued interest receivable | | 898 |
| | 1,266 |
| | 2,164 |
|
REO | | 3,020 |
| | — |
| | 3,020 |
|
Total Collateral for ABS Issued | | $ | 677,199 |
| | $ | 318,569 |
| | $ | 995,768 |
|
|
| | | | | | | | | | | | |
December 31, 2016 | | Legacy Sequoia | | Sequoia Choice | | Total |
(In Thousands) | | | |
Residential loans | | $ | 791,636 |
| | $ | — |
| | $ | 791,636 |
|
Restricted cash | | 148 |
| | — |
| | 148 |
|
Accrued interest receivable | | 1,000 |
| | — |
| | 1,000 |
|
REO | | 5,533 |
| | — |
| | 5,533 |
|
Total Collateral for ABS Issued | | $ | 798,317 |
| | $ | — |
| | $ | 798,317 |
|
Note 13.16. Long-Term Debt
FHLBC Borrowings
In July 2014,The tables below summarize our FHLB-member subsidiary entered into a borrowing agreement with the Federal Home Loan Bank of Chicago. At September 30, 2017, under this agreement, our subsidiary could incur borrowings up to $2.00 billion, also referred to as “advances,” from the FHLBC secured by eligible collateral, including residential mortgage loans. During the three and nine months ended September 30, 2017, our FHLB-member subsidiary made no additional borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through the five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until its stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion maximum.
At September 30, 2017, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with aincluding the facilities that are available to us, the outstanding balances, the weighted average interest rate, of 1.3% and a weighted averagethe maturity of approximately eight years. At December 31, 2016, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 0.64% and a weighted average maturity of nine years. Advances under this agreement incur interest charges based on a specified margin over the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billioninformation at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings at September 30, 2017,2022 and is presented as restricted cash on our consolidated balance sheet. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At September 30, 2017, our subsidiary held $43 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.December 31, 2021.
Table 16.1 – Long-Term Debt
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 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 | | $ | 131,316 | | | $ | — | | | $ | 131,316 | | | N/A | | 4.21 | % | | 9/2024 |
CAFL | | | | | | | | | | | | |
Facility B | | 102,006 | | | (126) | | | 101,880 | | | N/A | | 4.21 | % | | 2/2025 |
Facility C | | 71,792 | | | (189) | | | 71,603 | | | N/A | | 4.75 | % | | 6/2026 |
Non-Recourse BPL Financing | | | | | | | | | | | | |
Facility D | | 565,028 | | | (976) | | | 564,052 | | | $ | 750,000 | | | L + 2.51% | | N/A |
Recourse BPL Financing | | | | | | | | | | | | |
Facility G | | — | | | — | | | — | | | 500,000 | | | SOFR + 2.25% - 2.50% | | 9/2024 |
| | | | | | | | | | | | |
Total Long-Term Debt Facilities | | 870,142 | | | (1,291) | | | 868,851 | | | | | | | |
Convertible notes | | | | | | | | | | | | |
| | | | | | | | | | | | |
5.625% convertible senior notes | | 150,200 | | | (1,484) | | | 148,716 | | | N/A | | 5.625 | % | | 7/2024 |
5.75% exchangeable senior notes | | 172,092 | | | (2,769) | | | 169,323 | | | N/A | | 5.75 | % | | 10/2025 |
7.75% convertible senior notes | | 215,000 | | | (6,419) | | | 208,581 | | | N/A | | 7.75 | % | | 6/2027 |
Trust preferred securities and subordinated notes | | 139,500 | | | (745) | | | 138,755 | | | N/A | | L + 2.25% | | 7/2037 |
Total Long-Term Debt | | $ | 1,546,934 | | | $ | (12,708) | | | $ | 1,534,226 | | | | | | | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 13.16. Long-Term Debt - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(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 | | $ | 144,385 | | | $ | (313) | | | $ | 144,072 | | | N/A | | 4.21 | % | | 9/2024 |
CAFL | | | | | | | | | | | | |
Facility B | | 102,351 | | | (353) | | | 101,998 | | | N/A | | 4.21 | % | | 2/2025 |
Facility C | | 91,707 | | | (376) | | | 91,331 | | | N/A | | 4.75 | % | | 6/2026 |
Non-Recourse BPL Financing | | | | | | | | | | | | |
Facility D | | 307,215 | | | (507) | | | 306,708 | | | $ | 400,000 | | | L + 2.75% | | N/A |
Recourse BPL Financing | | | | | | | | | | | | |
Facility E | | 234,349 | | | (123) | | | 234,226 | | | 450,000 | | | L + 2.21% | | 9/2023 |
Facility F | | 110,148 | | | — | | | 110,148 | | | 450,000 | | | L + 3.35% | | 6/2023 |
Total Long-Term Debt Facilities | | 990,155 | | | (1,672) | | | 988,483 | | | | | | | |
Convertible notes | | | | | | | | | | | | |
4.75% convertible senior notes | | 198,629 | | | (1,836) | | | 196,793 | | | N/A | | 4.75 | % | | 8/2023 |
5.625% convertible senior notes | | 150,200 | | | (2,072) | | | 148,128 | | | N/A | | 5.625 | % | | 7/2024 |
5.75% exchangeable senior notes | | 172,092 | | | (3,384) | | | 168,708 | | | N/A | | 5.75 | % | | 10/2025 |
Trust preferred securities and subordinated notes | | 139,500 | | | (779) | | | 138,721 | | | N/A | | L + 2.25% | | 7/2037 |
Total Long-Term Debt | | $ | 1,650,576 | | | $ | (9,743) | | | $ | 1,640,833 | | | | | | | |
The following(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table presents maturities ofabove) or 1-month SOFR plus an applicable spread.
Refer to Note 15 to the Consolidated Financial Statements included in our FHLBC borrowings by year at September 30, 2017.
Table 13.1 – Maturities of FHLBC Borrowings by Year |
| | | | |
(In Thousands) | | September 30, 2017 |
2024 | | $ | 470,171 |
|
2025 | | 887,639 |
|
2026 | | 642,189 |
|
Total FHLBC Borrowings | | $ | 1,999,999 |
|
For additional information about our FHLBC borrowings, see Part I, Item 2 of QuarterlyAnnual Report on Form 10-Q10-K for the year ended December 31, 2021, for a full description of our long-term debt.
Non-Recourse BPL Financing Facility
During the three months ended March 31, 2022, we amended facility D (see Table 16.1 above) to increase the borrowing limit from $400 million to $600 million. During the three months ended September 30, 2022, we amended facility D to increase the borrowing limit from $600 million to $750 million.
Recourse BPL Financing Facilities
During the three months ended September 30, 2022, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable financing for business purpose bridge loan and single-family rental loans (Facility G in Table 16.1 above). At September 30, 2022, there were no borrowings under this facility. During the heading “Risks Relatingthree months ended September 30, 2022, Facility E was reclassified to short-term debt as the maturity of this facility was less than one year.
During the three months ended June 30, 2022, Facility F was reclassified to short-term debt as the maturity of this facility was less than one year. During the three months ended March 31, 2022, we amended the interest rate for Facilities E and F (see Table 16.1 above) to be indexed to a spread over one-month SOFR compared to a LIBOR-indexed spread.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 16. Long-Term Debt Incurred under Short- and Long-Term Borrowing Facilities.”- (continued)
Convertible Notes
In August 2017,June 2022, we issued $245$215 million principal amount of 4.75%7.75% convertible senior notes due 2023.2027. These convertible notes require semi-annual interest payments at a fixed annual coupon rate of 4.75%7.75% until maturity or conversion, which will be no later than AugustJune 15, 2023.2027. After deducting the underwriting discount and offering costs, we received $238 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2017, these notes were convertible at the option of the holder at a conversion rate of 53.8394 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $18.57 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. At September 30, 2017, the outstanding principal amount of these notes was $245 million. At September 30, 2017, the accrued interest payable balance on this debt was $1 million and the unamortized deferred issuance costs were $7 million.
In November 2014, RWT Holdings, Inc., a wholly-owned subsidiary of Redwood Trust, Inc., issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. These exchangeable notes require semi-annual interest payments at a fixed coupon rate of 5.625% until maturity or exchange, which will be no later than November 15, 2019. After deducting the underwriting discount and offering costs, we received $198$208 million of net proceeds. Including amortization of deferred securitiesdebt issuance costs, the weighted averageeffective interest expense yield on these exchangeablenotes was approximately 8.50% per annum. We may elect to settle conversions either entirely in cash or in a combination of cash and shares of common stock. Upon conversion, the conversion value will be paid in cash up to at least the principal amount of the notes being converted. The initial conversion rate of the notes is approximately 6.3% per annum. At September 30, 2017, these notes were exchangeable at the option of the holder at an exchange rate of 46.179895.6823 common shares per $1,000 principal amount of exchangeable senior notes (equivalent to an exchange price of $21.65 per common share). Upon exchange of these notes by a holder, the holder will receive shares of our common stock. During the nine months ended September 30, 2017, we did not repurchase any of these notes. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million and the unamortized deferred issuance costs were $3 million.
In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. These convertible notes require semi-annual interest payments at a fixed coupon rate of 4.625% until maturity or conversion, which will be no later than April 15, 2018. After deducting the underwriting discount and offering costs, we received $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. At September 30, 2017, these notes were convertible at the option of the holder at a conversion rate of 41.1320 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $24.31$10.45 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock.
During the three months ended JuneSeptember 30, 2017, $2882022, $199 million principal amount of these4.75% convertible notesdebt and $2$1 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt as the maturity of the notes was less than one year as of April 2017. Additionally, duringAugust 2022.
The following table below presents the three months ended June 30, 2017, we repurchased $37 million par value of these notesloans, securities, and other assets pledged as collateral under our long-term debt at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017,2022 and December 31, 2021.
Table 16.2 – Collateral for Long-Term Debt
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2022 | | December 31, 2021 |
Collateral Type | | | | |
Bridge loans | | $ | 699,704 | | | $ | 554,597 | |
Single-family rental loans | | — | | | 244,703 | |
Real estate securities | | | | |
Sequoia securitizations (1) | | 184,363 | | | 247,227 | |
CAFL securitizations (1) | | 240,683 | | | 260,405 | |
| | | | |
| | | | |
| | | | |
Total Collateral for Long-Term Debt | | $ | 1,124,750 | | | $ | 1,306,932 | |
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the outstanding principal amount ofloans and non-recourse ABS debt issued from these notes was $250 million. At September 30, 2017,securitizations.
The following table summarizes the accrued interest payable balance on thislong-term debt was $5 millionat September 30, 2022 and the unamortized deferred issuance costs were $0.3 million.December 31, 2021.
Table 16.3 – Accrued Interest Payable on Long-Term Debt
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2022 | | December 31, 2021 |
Long-term debt facilities | | $ | 2,685 | | | $ | 815 | |
Convertible notes | | | | |
4.75% convertible senior notes | | — | | | 3,564 | |
5.625% convertible senior notes | | 1,784 | | | 3,896 | |
5.75% exchangeable senior notes | | 4,947 | | | 2,474 | |
7.75% convertible senior notes | | 5,184 | | | — | |
Trust preferred securities and subordinated notes | | 1,228 | | | 581 | |
Total Accrued Interest Payable on Long-Term Debt | | $ | 15,828 | | | $ | 11,330 | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 13. Long-Term Debt - (continued)
Trust Preferred Securities and Subordinated Notes
At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% until the notes are redeemed. The $100 million trust preferred securities will be redeemed no later than January 30, 2037, and the $40 million subordinated notes will be redeemed no later than July 30, 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. At both September 30, 2017 and December 31, 2016, the accrued interest payable balance on our trust preferred securities and subordinated notes was $1 million.
Under the terms of this debt, we covenant, among other things, to use our best efforts to continue to qualify as a REIT. If an event of default were to occur in respect of this debt, we would generally be restricted under its terms (subject to certain exceptions) from making dividend distributions to stockholders, from repurchasing common stock or repurchasing or redeeming any other then-outstanding equity securities, and from making any other payments in respect of any equity interests in us or in respect of any then-outstanding debt that is pari passu or subordinate to this debt.
Note 14.17. Commitments and Contingencies
Lease Commitments
At September 30, 2017,2022, we were obligated under fourten non-cancelable operating leases with expiration dates through 20282031 for $18$22 million of cumulative lease payments. Our operating lease expense was $2 million for bothFor the nine-month periods ended September 30, 20172022 and 2016.2021 our operating lease expense was $4 million and $3 million, respectively.
The following table presents our future lease commitments at September 30, 2017.2022.
Table 14.117.1 – Future Lease Commitments by Year
| | | | | | | | |
(In Thousands) | | September 30, 2022 |
2022 (3 months) | | $ | 1,216 | |
2023 | | 4,956 | |
2024 | | 4,601 | |
2025 | | 3,580 | |
2026 | | 3,420 | |
2027 and thereafter | | 4,553 | |
Total Lease Commitments | | 22,326 | |
Less: Imputed interest | | (2,793) | |
Operating Lease Liabilities | | $ | 19,533 | |
|
| | | | |
(In Thousands) | | September 30, 2017 |
2017 (3 months) | | $ | 387 |
|
2018 | | 1,948 |
|
2019 | | 1,987 |
|
2020 | | 1,965 |
|
2021 and thereafter | | 11,691 |
|
Total Lease Commitments | | $ | 17,978 |
|
During the nine months ended September 30, 2022, we did not enter into any new office leases. During the three months ended September 30, 2022, we assumed three operating office leases as a result of our acquisition of Riverbend on July 1, 2022. At September 30, 2022, our operating lease liabilities were $20 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $17 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 date of adoption. At September 30, 2022, the weighted-average remaining lease term and weighted-average discount rate for our leases was 5 years and 5.2%, respectively.
Commitment to Fund Bridge Loans
As of September 30, 2022, we had commitments to fund up to $990 million of additional advances on existing 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 September 30, 2022, we carried a $3 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2022, we recorded a net market valuation gain of $1 million and a net market valuation loss of $2 million, respectively, related to this liability through Mortgage banking activities, net and Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2021, we recorded a net market valuation loss of $0.3 million and a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).
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 this investment, 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
September 30, 20172022
(Unaudited)
Note 14.17. Commitments and Contingencies - (continued)
Commitment to Acquire HEIs
At September 30, 2022, we had outstanding flow purchase agreements with multiple third parties, with an aggregate commitment to purchase $350 million of HEIs, $149 million of which commitments remained outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. We may terminate the purchase agreement and associated purchase commitment relating to $85 million of remaining commitments upon 90 days prior notice. 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 September 30, 2022, 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 September 30, 2022, 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 September 30, 2022, our estimated fair value of this contingent liability was zero.
Loss Contingencies — Risk SharingRisk-Sharing
At September 30, 2017,During 2015 and 2016, we had sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk sharingrisk-sharing arrangements with the Agencies. At September 30, 2017,2022, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was fullypartially 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 September 30, 2017,2022, we had not incurred anyless than $100 thousand of cumulative losses under these arrangements. For the three and nine months ended September 30, 2017,2022, other income related to these arrangements was $1 million and $2 million, respectively. For the three and nine months ended September 30, 2016, other income related to these arrangements was $1 million and $3 million, respectively. For the three and nine months ended September 30, 2017, net market valuation losses related to these investments were $0.3 million and $1 million, respectively. For the three and nine months ended September 30, 2016, net market valuation losses related to these investments were zero and $1 million, respectively.
All of the loans in the reference pools subject to these risk sharingrisk-sharing arrangements were originated in 2014 and 2015, and at September 30, 2017,2022, the loans had an unpaid principal balance of $2.19 billion and$454 million, a weighted average FICO score of 758756 (at origination), and LTV ratio of 77%74% (at origination). At September 30, 2017, $32022, $10 million of the loans were 90 days or more days delinquent, andof which four of these loans with an unpaid principal balance of $1 million were in foreclosure. At September 30, 2017,2022, the carrying value of our guarantee obligation was $20$7 million and included $10$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 sharingrisk-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 Redwood Trust, Inc. or its affiliates.us. At both September 30, 20172022 and December 31, 2016,2021, assets of such SPEs totaled $47$30 million, and $49 million, respectively, and liabilities of such SPEs totaled $20 million$7 million.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 17. Commitments and $22 million, respectively.Contingencies - (continued)
Loss Contingencies — Residential Repurchase Reserve
We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential 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 both September��September 30, 20172022 and December 31, 2016,2021, our repurchase reserve associated with our residential loans and MSRs was $5$6 million and $9 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. We received 13 repurchase requests during the nine months ended September 30, 2017, and repurchased one loan during this period. During the nine months ended September 30, 20172022 and 2016,2021, we received seven and eight repurchase requests, respectively, and repurchased one and one loan(s), respectively. During the three and nine months ended September 30, 2022, we recorded $0.5a repurchase provision expense of $0.1 million ofand a reversal of repurchase provision for repurchasesexpense of $4 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2021, we recorded repurchase provision expense of $0.3 million of provision for repurchases,and $0.6 million, respectively, thatwhich were recorded in Mortgage banking activities, net, and MSROther income net on our consolidated statements of income.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 14. Commitments and Contingencies - (continued)
income (loss).
Loss Contingencies — Litigation, Claims and Demands
On or about December 23, 2009,There is no significant update regarding the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaintlitigation matters described in Note 16 within the Superior Courtfinancial statements included in Redwood’s Annual Report on Form 10-K for the State of Washington (case number 09-2-46348-4 SEA) against Redwood Trust, Inc., our subsidiary, Sequoia Residential Funding, Inc. (“SRF”), Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”) alleging that the FHLB-Seattle Defendants made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Seattle Certificate”) issued in the Sequoia Mortgage Trust 2005-4 securitization transaction (the “2005-4 RMBS”) and purchased by the FHLB-Seattle. Specifically, the complaint alleged that the alleged misstatements concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Seattle Certificate. The FHLB-Seattle alleges claimsyear ended December 31, 2021 under the Securities Act of Washington (Section 21.20.005, et seq.) and sought to rescind the purchase of the Seattle Certificate and to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received) as well as attorneys’ fees and costs. The Seattle Certificate was issued with an original principal amount of approximately $133 million, and, at September 30, 2017, the FHLB-Seattle has received approximately $125 million of principal and $11 million of interest payments in respect of the Seattle Certificate. The matter was subsequently resolved and the claims were dismissed by the FHLB Seattle as to all the FHLB Seattle Defendants. At the time the Seattle Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.
On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaint in the Superior Court for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”) alleging that the Schwab Defendants made false or misleading statements in offering materials for various residential mortgage-backed securities sold or issued by the Schwab Defendants. Schwab alleged only a claim for negligent misrepresentation under California state law against SRF and sought unspecified damages and attorneys’ fees and costs from SRF. Schwab claimed that SRF made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Schwab Certificate”) issued in the 2005-4 RMBS and purchased by Schwab. Specifically, the complaint alleged that the misstatements for the 2005-4 RMBS concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Schwab Certificate. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2017, approximately $14 million of principal and $1 million of interest payments have been made in respect of the Schwab Certificate. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.
Through certain of our wholly-owned subsidiaries, we have in the past engaged in, and expect to continue to engage in, activities relating to the acquisition and securitization of residential mortgage loans. In addition, certain of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of this involvement in the securitization and CDO businesses, we could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions, or lawsuits, and governmental authorities could allege that we violated applicable law or regulation in the conduct of our business. As an example, in July 2016 we became aware of a complaint filed by the State of California on April 1, 2016 against Morgan Stanley & Co. and certain of its affiliates alleging, among other things, that there were misleading statements contained in offering materials for 28 different mortgage pass-through certificates purchased by various California investors, including various California public pension systems, from Morgan Stanley and alleging that Morgan Stanley made false or fraudulent claims in connection with the sale of those certificates. Of the 28 mortgage pass-through certificates that are the subject of the complaint, two are Sequoia mortgage pass-through certificates issued in 2004 and two are Sequoia mortgage pass-through certificates issued in 2007. With respect to each of those certificates our wholly-owned subsidiary, RWT Holdings, Inc., was the sponsor and our wholly-owned subsidiary, Sequoia Residential Funding, Inc., was the depositor. At the time these
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 14. Commitments andheading “Loss Contingencies - (continued)
four Sequoia mortgage pass-through certificates were issued, Sequoia Residential Funding, Inc.Litigation, Claims and Redwood Trust agreed to indemnify the underwriters of these certificates for certain losses and expenses they might incur as a result of claims made against them relating to these certificates, including, without limitation, certain legal expenses. Regardless of the outcome of this litigation, we could incur a loss as a result of these indemnities.
In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due.Demands.” At September 30, 2017,2022, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described abovein our Annual Report on Form 10-K for the year ended December 31, 2021 was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.
In the ordinary course of any litigation matter, including certain of the above-referenced matters, we have engaged and may continue to engage in formal or informal settlement communications with the plaintiffs or co-defendants. Settlement communications we have engaged in relating to certain of the above-referenced litigation matters are one of the factors that have resulted in our determination to establish the loss contingency reserves described above. We cannot be certain that any of these matters will be resolved through a settlement prior to trial and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the above-referenced litigation matters may be materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters, including in the event that any of these matters proceeds to trial and the plaintiff prevails. Other factors that could result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 15.18. Equity
The following table provides a summary of changes to accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 15.118.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
(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 | | $ | 16,595 | | | $ | (74,383) | | | $ | 88,251 | | | $ | (78,511) | |
Other comprehensive (loss) income before reclassifications | | (8,731) | | | — | | | (2,658) | | | — | |
Amounts reclassified from other accumulated comprehensive (income) loss | | 544 | | | 1,040 | | | (6,200) | | | 1,041 | |
Net current-period other comprehensive (loss) income | | (8,187) | | | 1,040 | | | (8,858) | | | 1,041 | |
Balance at End of Period | | $ | 8,408 | | | $ | (73,343) | | | $ | 79,393 | | | $ | (77,470) | |
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(In Thousands) | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges | (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 | | $ | 114,364 |
| | $ | (44,688 | ) | | $ | 116,849 |
| | $ | (70,518 | ) | Balance at beginning of period | | $ | 67,503 | | | $ | (76,430) | | | $ | 76,336 | | | $ | (80,557) | |
Other comprehensive income (loss) before reclassifications (1) | | 13,158 |
| | 321 |
| | 9,038 |
| | 647 |
| |
Amounts reclassified from other accumulated comprehensive income | | (853 | ) | | 14 |
| | (1,319 | ) | | 18 |
| |
Net current-period other comprehensive income (loss) | | 12,305 |
| | 335 |
| | 7,719 |
| | 665 |
| |
Other comprehensive (loss) income before reclassifications | | Other comprehensive (loss) income before reclassifications | | (60,013) | | | — | | | 19,552 | | | — | |
Amounts reclassified from other accumulated comprehensive (income) loss | | Amounts reclassified from other accumulated comprehensive (income) loss | | 918 | | | 3,087 | | | (16,495) | | | 3,087 | |
Net current-period other comprehensive (loss) income | | Net current-period other comprehensive (loss) income | | (59,095) | | | 3,087 | | | 3,057 | | | 3,087 | |
Balance at End of Period | | $ | 126,669 |
| | $ | (44,353 | ) | | $ | 124,568 |
| | $ | (69,853 | ) | Balance at End of Period | | $ | 8,408 | | | $ | (73,343) | | | $ | 79,393 | | | $ | (77,470) | |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
(In Thousands) | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges |
Balance at beginning of period | | $ | 115,873 |
| | $ | (44,020 | ) | | $ | 139,356 |
| | $ | (47,363 | ) |
Other comprehensive income (loss) before reclassifications (1) | | 17,899 |
| | (375 | ) | | 5,195 |
| | (22,545 | ) |
Amounts reclassified from other accumulated comprehensive income | | (7,103 | ) | | 42 |
| | (19,983 | ) | | 55 |
|
Net current-period other comprehensive income (loss) | | 10,796 |
| | (333 | ) | | (14,788 | ) | | (22,490 | ) |
Balance at End of Period | | $ | 126,669 |
| | $ | (44,353 | ) | | $ | 124,568 |
| | $ | (69,853 | ) |
| |
(1) | Amounts presented for net unrealized gains on available-for-sale securities are net of tax benefit (provision) of zero and $(0.1) million for the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 15.18. Equity - (continued)
The following table provides a summary of reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 15.218.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss) | | | | | | | |
| | Amount Reclassified From Accumulated Other Comprehensive Income | | Amount Reclassified From Accumulated Other Comprehensive (Loss) |
| | Affected Line Item in the | | Three Months Ended September 30, | | Affected Line Item in the | | Three Months Ended September 30, |
(In Thousands) | | Income Statement | | 2017 | | 2016 | (In Thousands) | | Income Statement | | 2022 | | 2021 |
Net Realized (Gain) Loss on AFS Securities | | | | | Net Realized (Gain) Loss on AFS Securities | | | | | | |
Other than temporary impairment (1) | | Investment fair value changes, net | | $ | 3 |
| | $ | — |
| |
Increase (decrease) in allowance for credit losses on AFS securities | | Increase (decrease) in allowance for credit losses on AFS securities | | Investment fair value changes, net | | $ | 544 | | | $ | — | |
Gain on sale of AFS securities | | Realized gains, net | | (856 | ) | | (1,319 | ) | Gain on sale of AFS securities | | Realized gains, net | | — | | | (6,200) | |
| | | $ | (853 | ) | | $ | (1,319 | ) | | $ | 544 | | | $ | (6,200) | |
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | | Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | |
Amortization of deferred loss | | Interest expense | | $ | 14 |
| | $ | 18 |
| Amortization of deferred loss | | Interest expense | | $ | 1,040 | | | $ | 1,041 | |
| | $ | 14 |
| | $ | 18 |
| | $ | 1,040 | | | $ | 1,041 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | Amount Reclassified From Accumulated Other Comprehensive (Loss) |
| | Affected Line Item in the | | Nine Months Ended September 30, |
(In Thousands) | | Income Statement | | 2022 | | 2021 |
Net Realized (Gain) Loss on AFS Securities | | | | | | |
Increase (decrease) in allowance for credit losses on AFS securities | | Investment fair value changes, net | | $ | 2,315 | | | $ | (388) | |
Gain on sale of AFS securities | | Realized gains, net | | (1,397) | | | (16,107) | |
| | | | | | |
| | | | $ | 918 | | | $ | (16,495) | |
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | | | |
Amortization of deferred loss | | Interest expense | | $ | 3,087 | | | $ | 3,087 | |
| | | | $ | 3,087 | | | $ | 3,087 | |
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 nine months ended September 30, 2022, we issued 5.2 million common shares for net proceeds of $67 million under this program. During the three months ended March 31, 2022, we increased the capacity of this program to $175 million, all of which remained outstanding for future offerings under this program as of September 30, 2022.
Direct Stock Purchase and Dividend Reinvestment Plan
During the nine months ended September 30, 2022, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2022, approximately 6 million shares remained outstanding for future offerings under this plan.
|
| | | | | | | | | | |
| | | | Amount Reclassified From Accumulated Other Comprehensive Income |
| | Affected Line Item in the | | Nine Months Ended September 30, |
(In Thousands) | | Income Statement | | 2017 | | 2016 |
Net Realized (Gain) Loss on AFS Securities | | | | | | |
Other than temporary impairment (1) | | Investment fair value changes, net | | $ | 248 |
| | $ | 305 |
|
Gain on sale of AFS securities | | Realized gains, net | | (7,351 | ) | | (20,288 | ) |
| | | | $ | (7,103 | ) | | $ | (19,983 | ) |
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | | | |
Amortization of deferred loss | | Interest expense | | $ | 42 |
| | $ | 55 |
|
| | | | $ | 42 |
| | $ | 55 |
|
| |
(1) | For the nine months ended September 30, 2017, other-than-temporary impairments were $0.6 million, of which $0.2 million were recognized through our consolidated statements of income and $0.4 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. For the three months ended September 30, 2016, there were no other-than-temporary impairments. For the nine months ended September 30, 2016, other-than-temporary impairments were $3 million, of which $0.3 million were recognized through our consolidated statements of income and $2 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 15.18. Equity - (continued)
Earnings per Common Share
The following table provides the basic and diluted (loss) earnings per common share computations for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 15.318.3 – Basic and Diluted Earnings per Common Share
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands, except Share Data) | | 2017 | | 2016 | | 2017 | | 2016 | (In Thousands, except Share Data) | | 2022 | | 2021 | | 2022 | | 2021 |
Basic Earnings per Common Share: | | | | | | | | | Basic Earnings per Common Share: | | | | | | | | |
Net income attributable to Redwood | | $ | 36,180 |
| | $ | 52,553 |
| | $ | 109,473 |
| | $ | 105,897 |
| |
Net (loss) income attributable to Redwood | | Net (loss) income attributable to Redwood | | $ | (50,411) | | | $ | 88,286 | | | $ | (119,462) | | | $ | 275,568 | |
Less: Dividends and undistributed earnings allocated to participating securities | | (948 | ) | | (1,485 | ) | | (2,800 | ) | | (3,040 | ) | Less: Dividends and undistributed earnings allocated to participating securities | | (1,158) | | | (2,984) | | | (3,445) | | | (8,979) | |
Net income allocated to common shareholders | | $ | 35,232 |
| | $ | 51,068 |
| | $ | 106,673 |
| | $ | 102,857 |
| |
Net (loss) income allocated to common shareholders | | Net (loss) income allocated to common shareholders | | $ | (51,569) | | | $ | 85,302 | | | $ | (122,907) | | | $ | 266,589 | |
Basic weighted average common shares outstanding | | 76,850,830 |
| | 76,680,183 |
| | 76,803,324 |
| | 76,827,026 |
| Basic weighted average common shares outstanding | | 116,087,890 | | | 112,995,847 | | | 118,530,172 | | | 112,754,691 | |
Basic Earnings per Common Share | | $ | 0.46 |
| | $ | 0.67 |
| | $ | 1.39 |
| | $ | 1.34 |
| |
Basic (Loss) Earnings per Common Share | | Basic (Loss) Earnings per Common Share | | $ | (0.44) | | | $ | 0.75 | | | $ | (1.04) | | | $ | 2.36 | |
Diluted Earnings per Common Share: | | | | | | | | | Diluted Earnings per Common Share: | |
Net income attributable to Redwood | | $ | 36,180 |
| | $ | 52,553 |
| | $ | 109,473 |
| | $ | 105,897 |
| |
Net (loss) income attributable to Redwood | | Net (loss) income attributable to Redwood | | $ | (50,411) | | | $ | 88,286 | | | $ | (119,462) | | | $ | 275,568 | |
Less: Dividends and undistributed earnings allocated to participating securities | | (986 | ) | | (1,439 | ) | | (2,926 | ) | | (3,226 | ) | Less: Dividends and undistributed earnings allocated to participating securities | | (1,158) | | | (2,747) | | | (3,445) | | | (8,151) | |
Add back: Interest expense on convertible notes for the period, net of tax | | 6,564 |
| | 6,115 |
| | 18,639 |
| | 18,263 |
| Add back: Interest expense on convertible notes for the period, net of tax | | — | | | 6,870 | | | — | | | 20,585 | |
Net income allocated to common shareholders | | $ | 41,758 |
| | $ | 57,229 |
| | $ | 125,186 |
| | $ | 120,934 |
| |
Net (loss) income allocated to common shareholders | | Net (loss) income allocated to common shareholders | | $ | (51,569) | | | $ | 92,409 | | | $ | (122,907) | | | $ | 288,002 | |
Weighted average common shares outstanding | | 76,850,830 |
| | 76,680,183 |
| | 76,803,324 |
| | 76,827,026 |
| Weighted average common shares outstanding | | 116,087,890 | | | 112,995,847 | | | 118,530,172 | | | 112,754,691 | |
Net effect of dilutive equity awards | | 298,955 |
| | 54,696 |
| | 215,141 |
| | 18,665 |
| Net effect of dilutive equity awards | | — | | | 292,749 | | | — | | | 253,819 | |
Net effect of assumed convertible notes conversion to common shares | | 25,553,323 |
| | 21,096,738 |
| | 22,379,401 |
| | 21,145,987 |
| Net effect of assumed convertible notes conversion to common shares | | — | | | 28,566,875 | | | — | | | 28,566,875 | |
Diluted weighted average common shares outstanding | | 102,703,108 |
| | 97,831,617 |
| | 99,397,866 |
| | 97,991,678 |
| Diluted weighted average common shares outstanding | | 116,087,890 | | | 141,855,471 | | | 118,530,172 | | | 141,575,385 | |
Diluted Earnings per Common Share | | $ | 0.41 |
| | $ | 0.58 |
| | $ | 1.26 |
| | $ | 1.23 |
| |
Diluted (Loss) Earnings per Common Share | | Diluted (Loss) Earnings per Common Share | | $ | (0.44) | | | $ | 0.65 | | | $ | (1.04) | | | $ | 2.03 | |
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.
During the three and nine months ended September 30, 2017 and 2016,2021, 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 and nine months ended September 30, 2017,2022, 49,137,808 and 37,307,705 of common shares, respectively, 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 and nine months ended September 30, 2022, the number of outstanding equity awards that were antidilutive totaled 6,149249,178 and 5,843,268,737, respectively. For the three and nine months ended September 30, 2016,2021, the number of outstanding equity awards that were antidilutive totaled 6,62322,102 and 6,565,18,736, respectively.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 15.18. Equity - (continued)
Stock Repurchases
In February 2016,July 2022, our Board of Directors approved an authorization for the repurchase of up to $100$125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced allour previous share$100 million stock repurchase plans andauthorization. This authorization has no expiration date. This repurchase authorizationdate and does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
During the three and nine months ended September 30, 2017, there were no2022, we repurchased 3.4 million shares of our common stock acquired under this authorization.for a total cost of $24 million. At September 30, 2017, approximately $862022, $101 million of thisthe current authorization remained available for the repurchase of shares of our common stock.stock and we also continued to be authorized to repurchase outstanding debt securities. During the nine months ended September 30, 2022, we repurchased 7.1 million shares of our common stock for a total cost of $56 million under our current and previously-approved Board of Director authorizations.
Note 16.19. Equity Compensation Plans
At September 30, 20172022 and December 31, 2016, 1,469,9912021, 5,258,817 and 1,787,9745,958,390 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 $18$35 million at September 30, 2017,2022, as shown in the following table.
Table 16.119.1 – Activities of Equity Compensation Costs by Award Type | | | | Nine Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2022 |
(In Thousands) | | Restricted Stock | | Deferred Stock Units | | Performance Stock Units | | Employee Stock Purchase Plan | | Total | (In Thousands) | | | Restricted Stock Awards | | Restricted Stock Units | | Deferred Stock Units | | Performance Stock Units | | Employee Stock Purchase Plan | | Total |
Unrecognized compensation cost at beginning of period | | $ | 2,091 |
| | $ | 11,506 |
| | $ | 4,549 |
| | $ | — |
| | $ | 18,146 |
| Unrecognized compensation cost at beginning of period | | | $ | 84 | | | $ | 3,589 | | | $ | 26,473 | | | $ | 12,237 | | | $ | — | | | $ | 42,383 | |
Equity grants | | 2,237 |
| | 5,747 |
| | — |
| | 129 |
| | 8,113 |
| Equity grants | | | — | | | 2,513 | | | 7,960 | | | — | | | 323 | | | 10,796 | |
Performance-based valuation adjustment | | Performance-based valuation adjustment | | | — | | | — | | | — | | | (3,205) | | | — | | | (3,205) | |
Equity grant forfeitures | | (174 | ) | | (472 | ) | | — |
| | — |
| | (646 | ) | Equity grant forfeitures | | | (5) | | | (448) | | | (101) | | | — | | | — | | | (554) | |
Equity compensation expense | | (934 | ) | | (4,866 | ) | | (1,738 | ) | | (96 | ) | | (7,634 | ) | Equity compensation expense | | | (79) | | | (1,567) | | | (10,412) | | | (2,524) | | | (242) | | | (14,824) | |
Unrecognized Compensation Cost at End of Period | | $ | 3,220 |
| | $ | 11,915 |
| | $ | 2,811 |
| | $ | 33 |
| | $ | 17,979 |
| Unrecognized Compensation Cost at End of Period | | | $ | — | | | $ | 4,087 | | | $ | 23,920 | | | $ | 6,508 | | | $ | 81 | | | $ | 34,596 | |
The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three and nine months ended September 30, 20172022 and 2016.2021.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 19. Operating22. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Components of our operatinggeneral and administrative expenses, loan acquisition costs, and other expenses for the three and nine months ended September 30, 20172022 and 20162021 are presented in the following table.
Table 19.122.1 – Components of OperatingGeneral and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
General and Administrative Expenses | | | | | | | | |
Fixed compensation expense (1) | | $ | 18,626 | | | $ | 11,285 | | | $ | 45,364 | | | $ | 34,359 | |
Annual variable compensation expense | | 3,521 | | | 19,844 | | | 8,689 | | | 51,021 | |
Long-term incentive award expense (2) | | 4,998 | | | 4,915 | | | 16,190 | | | 14,766 | |
Acquisition-related equity compensation expense (3) | | — | | | 1,189 | | | — | | | 3,613 | |
Systems and consulting | | 3,909 | | | 2,975 | | | 10,796 | | | 9,224 | |
Office costs | | 2,381 | | | 2,197 | | | 6,489 | | | 6,029 | |
Accounting and legal | | 1,775 | | | 1,197 | | | 5,026 | | | 3,132 | |
Corporate costs | | 928 | | | 964 | | | 2,792 | | | 2,528 | |
Other | | 3,969 | | | 3,126 | | | 11,581 | | | 7,165 | |
Total General and Administrative Expenses | | 40,107 | | | 47,692 | | | 106,927 | | | 131,837 | |
| | | | | | | | |
Loan Acquisition Costs | | | | | | | | |
Commissions | | 1,549 | | | 1,906 | | | 6,279 | | | 4,830 | |
Underwriting costs | | 545 | | | 2,351 | | | 3,013 | | | 5,872 | |
Transfer and holding costs | | 332 | | | 364 | | | 1,079 | | | 1,226 | |
| | | | | | | | |
Total Loan Acquisition Costs | | 2,426 | | | 4,621 | | | 10,371 | | | 11,928 | |
| | | | | | | | |
Other Expenses | | | | | | | | |
| | | | | | | | |
Amortization of purchase-related intangible assets | | 3,891 | | | 3,873 | | | 10,731 | | | 11,619 | |
| | | | | | | | |
Other | | 370 | | | 150 | | | 1,083 | | | 485 | |
Total Other Expenses | | 4,261 | | | 4,023 | | | 11,814 | | | 12,104 | |
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses | | $ | 46,794 | | | $ | 56,336 | | | $ | 129,112 | | | $ | 155,869 | |
(1)Includes $3 million of severance and transition-related expenses for the three and nine months ended September 30, 2022.
(2)For the three months ended September 30, 2022 and 2021, long-term incentive award expense included $5 million and $3 million of expense for awards settleable in shares of our common stock, and $0.1 million and $1 million of expense for awards settleable in cash, respectively. For the nine months ended September 30, 2022 and 2021, long-term incentive award expense included $15 million and $10 million of expense for awards settleable in shares of our common stock, and $1 million and $4 million of expense for awards settleable in cash, respectively.
(3)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest in 2019. The grant date fair value of these restricted stock awards was $10 million, which was recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Fixed compensation expense | | $ | 5,233 |
| | $ | 5,253 |
| | $ | 16,556 |
| | $ | 19,022 |
|
Variable compensation expense | | 6,467 |
| | 5,802 |
| | 14,713 |
| | 11,824 |
|
Equity compensation expense | | 2,337 |
| | 2,031 |
| | 7,634 |
| | 7,117 |
|
Total compensation expense | | 14,037 |
| | 13,086 |
| | 38,903 |
| | 37,963 |
|
Systems and consulting | | 1,856 |
| | 2,692 |
| | 5,183 |
| | 7,274 |
|
Loan acquisition costs (1) | | 1,187 |
| | 1,393 |
| | 3,397 |
| | 4,680 |
|
Office costs | | 988 |
| | 1,056 |
| | 3,231 |
| | 3,501 |
|
Accounting and legal | | 519 |
| | 721 |
| | 2,322 |
| | 3,043 |
|
Corporate costs | | 415 |
| | 478 |
| | 1,363 |
| | 1,589 |
|
Other operating expenses | | 920 |
| | 925 |
| | 2,390 |
| | 2,367 |
|
Operating expenses before restructuring charges | | 19,922 |
| | 20,351 |
| | 56,789 |
| | 60,417 |
|
Restructuring charges (2) | | — |
| | 4 |
| | — |
| | 10,545 |
|
Total Operating Expenses | | $ | 19,922 |
| | $ | 20,355 |
| | $ | 56,789 |
| | $ | 70,962 |
|
| |
(1) | Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value. |
| |
(2) | For the nine months ended September 30, 2016, restructuring charges included $5 million of fixed compensation expense and $4 million of equity compensation expense related to one-time termination benefits, as well as $2 million of other contract termination costs, associated with the restructuring of our conforming and commercial mortgage banking operations and related charges associated with the departure of Redwood's President announced in the first quarter of 2016. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 22. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses - (continued)
Long-Term Cash-Based Awards and Cash Settled Deferred Stock Units
During the nine months ended September 30, 2022, $2 million of long-term cash-based retention awards were granted to employees that will vest and be paid over a three-year period, subject to continued employment through the vesting periods from 2022 through 2025. At both September 30, 2022 and December 31, 2021, the unamortized compensation cost of long-term cash-based awards was $4 million.
During the nine months ended September 30, 2022, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020 and 2021 vest over four years through 2025. At September 30, 2022 and December 31, 2021, the unamortized compensation cost of cash-settled deferred stock units was $2 million and $7 million, respectively. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period.
Refer to Note 21 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.
Note 20.23. 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.
For the nine months ended September 30, 20172022 and 2016,2021, we recognized a benefit from income taxes of $10 million and a provision for income taxes of $17 million and $1$14 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, 20172022 and 2016.2021.
Table 20.123.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate
| | | | September 30, 2017 | | September 30, 2016 | | September 30, 2022 | | September 30, 2021 |
Federal statutory rate | | 34.0 | % | | 34.0 | % | Federal statutory rate | | 21.0 | % | | 21.0 | % |
State statutory rate, net of Federal tax effect | | 7.2 | % | | 7.2 | % | State statutory rate, net of Federal tax effect | | 8.6 | % | | 8.6 | % |
Differences in taxable (loss) income from GAAP income | | (6.8 | )% | | (21.7 | )% | Differences in taxable (loss) income from GAAP income | | (29.6) | % | | (13.1) | % |
Change in valuation allowance | | (2.8 | )% | | 6.6 | % | Change in valuation allowance | | (2.4) | % | | (6.8) | % |
Dividends paid deduction | | (18.3 | )% | | (24.9 | )% | Dividends paid deduction | | 10.5 | % | | (4.9) | % |
Effective Tax Rate | | 13.3 | % | | 1.2 | % | Effective Tax Rate | | 8.1 | % | | 4.8 | % |
We assessed our tax positions for all open tax years (i.e., Federal, 20142018 to 2017,2022, and State, 20132017 to 2017)2022) at September 30, 20172022 and December 31, 2016,2021, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.
Note 21.24. Segment Information
DuringRedwood operates in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. The accounting policies of the first quarterreportable segments are the same as those described in Note 3 — Summary of 2017, we reorganized our segments to align with changes in how we view our segments for making operating decisions and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following isSignificant Accounting Policies. For a full description of our current segments.
Our Investment Portfolio segment primarily consists of investments segments, see Part I, Item 1—Business in residential jumbo loans and real estate securities. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued CRT securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are primarily made through a subsidiary of Redwood Trust that is a member ofAnnual Report on Form 10-K for the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. This segment also includes residential loans from our consolidated Sequoia Choice entity. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans and valuation changes from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 21. Segment Information - (continued)
year ended December 31, 2021.
Segment contribution represents the measure of profit that we usemanagement 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 twothree segments, as well as activity from certain consolidated Sequoia entities, and commercial mortgage banking activities (in the prior year), are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense associated with certain long-term debt,from our convertible notes and trust preferred securities, indirect operatinggeneral and administrative expenses and other expense.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note 24. Segment Information - (continued)
The following tables present financial information by segment for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 21.124.1 – Business Segment Financial Information | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 |
(In Thousands) | | Residential Mortgage Banking | | Business Purpose Mortgage Banking | | Investment Portfolio | | Corporate/ Other | | Total |
Interest income | | $ | 9,882 | | | $ | 9,082 | | | $ | 156,882 | | | $ | 1,816 | | | $ | 177,662 | |
Interest expense | | (8,083) | | | (5,971) | | | (111,876) | | | (16,797) | | | (142,727) | |
Net interest income | | 1,799 | | | 3,111 | | | 45,006 | | | (14,981) | | | 34,935 | |
Non-interest (loss) income | | | | | | | | | | |
Mortgage banking activities, net | | 2,158 | | | 14,377 | | | — | | | — | | | 16,535 | |
Investment fair value changes, net | | — | | | — | | | (61,780) | | | 4,083 | | | (57,697) | |
Other income, net | | — | | | 399 | | | 3,906 | | | (278) | | | 4,027 | |
Realized gains, net | | — | | | — | | | — | | | — | | | — | |
Total non-interest income (loss), net | | 2,158 | | | 14,776 | | | (57,874) | | | 3,805 | | | (37,135) | |
General and administrative expenses | | (5,735) | | | (18,535) | | | (3,502) | | | (12,335) | | | (40,107) | |
Loan acquisition costs | | (550) | | | (1,876) | | | — | | | — | | | (2,426) | |
Other expenses | | — | | | (3,891) | | | (370) | | | — | | | (4,261) | |
Benefit from (provision for) income taxes | | 1,688 | | | 2,559 | | | (5,664) | | | — | | | (1,417) | |
Segment Contribution | | $ | (640) | | | $ | (3,856) | | | $ | (22,404) | | | $ | (23,511) | | | |
Net (Loss) | | | | | | | | | | $ | (50,411) | |
Non-cash amortization (expense) income, net | | $ | (185) | | | $ | (3,609) | | | $ | (3,658) | | | $ | (2,843) | | | $ | (10,295) | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 |
(In Thousands) | | Residential Mortgage Banking | | Business Purpose Mortgage Banking | | Investment Portfolio | | Corporate/ Other | | Total |
Interest income | | $ | 36,048 | | | $ | 22,509 | | | $ | 471,932 | | | $ | 4,028 | | | $ | 534,517 | |
Interest expense | | (23,316) | | | (12,797) | | | (331,047) | | | (38,832) | | | (405,992) | |
Net interest income | | 12,732 | | | 9,712 | | | 140,885 | | | (34,804) | | | 128,525 | |
Non-interest (loss) income | | | | | | | | | | |
Mortgage banking activities, net | | (7,694) | | | 10,527 | | | — | | | — | | | 2,833 | |
Investment fair value changes, net | | — | | | — | | | (165,297) | | | 13,508 | | | (151,789) | |
Other income, net | | — | | | 2,028 | | | 15,423 | | | (435) | | | 17,016 | |
Realized gains, net | | — | | | — | | | 2,581 | | | — | | | 2,581 | |
Total non-interest (loss) income, net | | (7,694) | | | 12,555 | | | (147,293) | | | 13,073 | | | (129,359) | |
General and administrative expenses | | (17,918) | | | (40,076) | | | (9,676) | | | (39,257) | | | (106,927) | |
Loan acquisition costs | | (2,848) | | | (7,523) | | | — | | | — | | | (10,371) | |
Other expenses | | 74 | | | (10,731) | | | (1,157) | | | — | | | (11,814) | |
Benefit from (provision for) income taxes | | 8,283 | | | 9,009 | | | (6,808) | | | — | | | 10,484 | |
Segment Contribution | | $ | (7,371) | | | $ | (27,054) | | | $ | (24,049) | | | $ | (60,988) | | | |
Net (Loss) | | | | | | | | | | $ | (119,462) | |
Non-cash amortization (expense) income, net | | $ | (699) | | | $ | (11,563) | | | $ | 4,385 | | | $ | (6,428) | | | $ | (14,305) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 47,023 |
| | $ | 10,626 |
| | $ | 5,088 |
| | $ | 62,737 |
|
Interest expense | | (9,445 | ) | | (4,135 | ) | | (13,863 | ) | | (27,443 | ) |
Net interest income (loss) | | 37,578 |
|
| 6,491 |
|
| (8,775 | ) | | 35,294 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 21,200 |
| | — |
| | 21,200 |
|
MSR income, net | | 1,615 |
| | — |
| | — |
| | 1,615 |
|
Investment fair value changes, net | | 1,372 |
| | — |
| | (1,048 | ) | | 324 |
|
Other income | | 1,197 |
| | — |
| | — |
| | 1,197 |
|
Realized gains, net | | 1,734 |
| | — |
| | — |
| | 1,734 |
|
Total non-interest income, net | | 5,918 |
|
| 21,200 |
|
| (1,048 | ) | | 26,070 |
|
Direct operating expenses | | (1,324 | ) | | (6,107 | ) | | (12,491 | ) | | (19,922 | ) |
Provision for income taxes | | (433 | ) | | (4,829 | ) | | — |
| | (5,262 | ) |
Segment Contribution | | $ | 41,739 |
|
| $ | 16,755 |
|
| $ | (22,314 | ) | | |
Net Income | | | | | | | | $ | 36,180 |
|
Non-cash amortization income (expense) | | $ | 5,222 |
| | $ | (25 | ) | | $ | (787 | ) | | $ | 4,410 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 21.24. Segment Information - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
(In Thousands) | | Residential Mortgage Banking | | Business Purpose Mortgage Banking | | Investment Portfolio | | Corporate/ Other | | Total |
Interest income | | $ | 14,712 | | | $ | 3,967 | | | $ | 125,994 | | | $ | 1,049 | | | $ | 145,722 | |
Interest expense | | (7,537) | | | (2,013) | | | (84,049) | | | (10,155) | | | (103,754) | |
Net interest income | | 7,175 | | | 1,954 | | | 41,945 | | | (9,106) | | | 41,968 | |
Non-interest income | | | | | | | | | | |
Mortgage banking activities, net | | 32,946 | | | 30,217 | | | — | | | — | | | 63,163 | |
Investment fair value changes, net | | — | | | — | | | 26,324 | | | (247) | | | 26,077 | |
Other income, net | | — | | | 216 | | | 1,842 | | | 330 | | | 2,388 | |
Realized gains, net | | — | | | — | | | 6,703 | | | — | | | 6,703 | |
Total non-interest income, net | | 32,946 | | | 30,433 | | | 34,869 | | | 83 | | | 98,331 | |
General and administrative expenses | | (7,891) | | | (12,017) | | | (4,483) | | | (23,301) | | | (47,692) | |
Loan acquisition costs | | (2,395) | | | (2,175) | | | (51) | | | — | | | (4,621) | |
Other expenses | | — | | | (3,873) | | | (150) | | | — | | | (4,023) | |
(Provision for) benefit from income taxes | | (10,429) | | | (3,485) | | | (1,045) | | | 19,282 | | | 4,323 | |
Segment Contribution | | $ | 19,406 | | | $ | 10,837 | | | $ | 71,085 | | | $ | (13,042) | | | |
Net Income | | | | | | | | | | $ | 88,286 | |
Non-cash amortization (expense) income, net | | $ | (33) | | | $ | (4,224) | | | $ | 5,682 | | | $ | (1,995) | | | $ | (570) | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
(In Thousands) | | Residential Mortgage Banking | | Business Purpose Mortgage Banking | | Investment Portfolio | | Corporate/ Other | | Total |
Interest income | | $ | 35,536 | | | $ | 9,849 | | | $ | 363,751 | | | $ | 3,586 | | | $ | 412,722 | |
Interest expense | | (19,903) | | | (5,134) | | | (258,685) | | | (30,649) | | | (314,371) | |
Net interest income | | 15,633 | | | 4,715 | | | 105,066 | | | (27,063) | | | 98,351 | |
Non-interest income | | | | | | | | | | |
Mortgage banking activities, net | | 115,646 | | | 84,543 | | | — | | | — | | | 200,189 | |
Investment fair value changes, net | | — | | | — | | | 121,812 | | | (1,168) | | | 120,644 | |
Other income, net | | — | | | 494 | | | 7,121�� | | | 742 | | | 8,357 | |
Realized gains, net | | — | | | — | | | 17,803 | | | — | | | 17,803 | |
Total non-interest income (loss), net | | 115,646 | | | 85,037 | | | 146,736 | | | (426) | | | 346,993 | |
General and administrative expenses | | (27,478) | | | (34,567) | | | (10,804) | | | (58,988) | | | (131,837) | |
Loan acquisition costs | | (5,686) | | | (5,528) | | | (710) | | | (4) | | | (11,928) | |
Other expenses | | (6) | | | (11,523) | | | (592) | | | 17 | | | (12,104) | |
Provision for income taxes | | (23,640) | | | (6,988) | | | (2,561) | | | 19,282 | | | (13,907) | |
Segment Contribution | | $ | 74,469 | | | $ | 31,146 | | | $ | 237,135 | | | $ | (67,182) | | | |
Net Income | | | | | | | | | | $ | 275,568 | |
Non-cash amortization income (expense), net | | $ | 8,867 | | | $ | (16,154) | | | $ | 317 | | | $ | (5,845) | | | $ | (12,815) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 47,176 |
| | $ | 8,831 |
| | $ | 4,899 |
| | $ | 60,906 |
|
Interest expense | | (5,013 | ) | | (3,826 | ) | | (12,758 | ) | | (21,597 | ) |
Net interest income (loss) | | 42,163 |
| | 5,005 |
| | (7,859 | ) | | 39,309 |
|
Reversal of provision for loan losses | | 859 |
| | — |
| | — |
| | 859 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 9,766 |
| | — |
| | 9,766 |
|
MSR income, net | | 3,770 |
| | — |
| | — |
| | 3,770 |
|
Investment fair value changes, net | | 12,176 |
| | — |
| | (258 | ) | | 11,918 |
|
Other income | | 1,643 |
| | — |
| | — |
| | 1,643 |
|
Realized gains, net | | 6,615 |
| | — |
| | — |
| | 6,615 |
|
Total non-interest income, net | | 24,204 |
| | 9,766 |
| | (258 | ) | | 33,712 |
|
Direct operating expenses | | (2,751 | ) | | (5,807 | ) | | (11,797 | ) | | (20,355 | ) |
Provision for income taxes | | (732 | ) | | (240 | ) | | — |
| | (972 | ) |
Segment Contribution | | $ | 63,743 |
| | $ | 8,724 |
|
| $ | (19,914 | ) | | |
Net Income | | | | | | | | $ | 52,553 |
|
Non-cash amortization income (expense) | | $ | 6,123 |
| | $ | (28 | ) | | $ | (983 | ) | | $ | 5,112 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 135,106 |
| | $ | 26,515 |
| | $ | 14,968 |
| | $ | 176,589 |
|
Interest expense | | (21,940 | ) | | (11,462 | ) | | (39,306 | ) | | (72,708 | ) |
Net interest income (loss) | | 113,166 |
|
| 15,053 |
| | (24,338 | ) | | 103,881 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 50,850 |
| | — |
| | 50,850 |
|
MSR income, net | | 6,106 |
| | — |
| | — |
| | 6,106 |
|
Investment fair value changes, net | | 13,846 |
| | — |
| | (3,856 | ) | | 9,990 |
|
Other income | | 3,367 |
| | — |
| | — |
| | 3,367 |
|
Realized gains, net | | 9,561 |
| | — |
| | (752 | ) | | 8,809 |
|
Total non-interest income, net | | 32,880 |
|
| 50,850 |
| | (4,608 | ) | | 79,122 |
|
Direct operating expenses | | (4,371 | ) | | (18,009 | ) | | (34,409 | ) | | (56,789 | ) |
Provision for income taxes | | (4,490 | ) | | (12,251 | ) | | — |
| | (16,741 | ) |
Segment Contribution | | $ | 137,185 |
| | $ | 35,643 |
|
| $ | (63,355 | ) | | |
Net Income | | | | | | | | $ | 109,473 |
|
Non-cash amortization income (expense) | | $ | 16,263 |
| | $ | (79 | ) | | $ | (2,528 | ) | | $ | 13,656 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 21.24. Segment Information - (continued)
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 149,985 |
| | $ | 24,610 |
| | $ | 15,426 |
| | $ | 190,021 |
|
Interest expense | | (18,679 | ) | | (10,719 | ) | | (38,593 | ) | | (67,991 | ) |
Net interest income (loss) | | 131,306 |
|
| 13,891 |
| | (23,167 | ) | | 122,030 |
|
Reversal of provision for loan losses | | 7,102 |
| | — |
| | — |
| | 7,102 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 26,774 |
| | (2,062 | ) | | 24,712 |
|
MSR income, net | | 12,834 |
| | — |
| | — |
| | 12,834 |
|
Investment fair value changes, net | | (16,505 | ) | | — |
| | (2,181 | ) | | (18,686 | ) |
Other income | | 4,157 |
| | — |
| | — |
| | 4,157 |
|
Realized gains, net | | 25,745 |
| | — |
| | 292 |
| | 26,037 |
|
Total non-interest income, net | | 26,231 |
|
| 26,774 |
| | (3,951 | ) | | 49,054 |
|
Direct operating expenses (1) | | (7,689 | ) | | (17,175 | ) | | (46,098 | ) | | (70,962 | ) |
Provision for income taxes | | (1,087 | ) | | (240 | ) | | — |
| | (1,327 | ) |
Segment Contribution | | $ | 155,863 |
| | $ | 23,250 |
| | $ | (73,216 | ) | | |
Net Income | | | | | | | | $ | 105,897 |
|
Non-cash amortization income (expense) | | $ | 20,507 |
| | $ | (102 | ) | | $ | (2,978 | ) | | $ | 17,427 |
|
| |
(1) | For the nine months ended September 30, 2016, $11 million of costs associated with the restructuring of our conforming residential mortgage loan operations and commercial operations, included in the direct operating expense line item, are presented under the Corporate/Other column. |
The following tables presenttable presents the components of Corporate/Other for the three and nine months ended September 30, 20172022 and 2016.2021.
Table
21.224.2 – Components of Corporate/Other
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | 2017 | | 2016 | | 2022 | | 2021 |
(In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total | (In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total |
Interest income | | $ | 4,875 |
| | $ | 213 |
| | $ | 5,088 |
| | $ | 4,837 |
| | $ | 62 |
| | $ | 4,899 |
| Interest income | | $ | 1,473 | | | $ | 343 | | | $ | 1,816 | | | $ | 1,042 | | | $ | 7 | | | $ | 1,049 | |
Interest expense | | (3,838 | ) | | (10,025 | ) | | (13,863 | ) | | (3,274 | ) | | (9,484 | ) | | (12,758 | ) | Interest expense | | (1,486) | | | (15,311) | | | (16,797) | | | (641) | | | (9,514) | | | (10,155) | |
Net interest income (loss) | | 1,037 |
| | (9,812 | ) | | (8,775 | ) | | 1,563 |
| | (9,422 | ) | | (7,859 | ) | |
Net interest income | | Net interest income | | (13) | | | (14,968) | | | (14,981) | | | 401 | | | (9,507) | | | (9,106) | |
Non-interest income | | | | | | | | | | | | | Non-interest income | |
| Investment fair value changes, net | | (1,045 | ) | | (3 | ) | | (1,048 | ) | | (255 | ) | | (3 | ) | | (258 | ) | Investment fair value changes, net | | (329) | | | 4,412 | | | 4,083 | | | (247) | | | — | | | (247) | |
Other income | | Other income | | — | | | (278) | | | (278) | | | — | | | 330 | | | 330 | |
| Total non-interest income, net | | (1,045 | ) | | (3 | ) | | (1,048 | ) | | (255 | ) | | (3 | ) | | (258 | ) | Total non-interest income, net | | (329) | | | 4,134 | | | 3,805 | | | (247) | | | 330 | | | 83 | |
Direct operating expenses | | — |
| | (12,491 | ) | | (12,491 | ) | | — |
| | (11,797 | ) | | (11,797 | ) | |
General and administrative expenses | | General and administrative expenses | | — | | | (12,335) | | | (12,335) | | | — | | | (23,301) | | | (23,301) | |
Loan acquisition costs | | Loan acquisition costs | | — | | | — | | | — | | | — | | | — | | | — | |
Other expenses | | Other expenses | | — | | | — | | | — | | | — | | | — | | | — | |
Provision for income taxes | | Provision for income taxes | | — | | | — | | | — | | | — | | | 19,282 | | | 19,282 | |
Total | | $ | (8 | ) | | $ | (22,306 | ) | | $ | (22,314 | ) | | $ | 1,308 |
| | $ | (21,222 | ) | | $ | (19,914 | ) | Total | | $ | (342) | | | $ | (23,169) | | | $ | (23,511) | | | $ | 154 | | | $ | (13,196) | | | $ | (13,042) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
(In Thousands) | | Legacy Consolidated VIEs(1) | | Other | | Total | | Legacy Consolidated VIEs(1) | | Other | | Total |
Interest income | | $ | 3,593 | | | $ | 435 | | | $ | 4,028 | | | $ | 3,559 | | | $ | 27 | | | $ | 3,586 | |
Interest expense | | (3,154) | | | (35,678) | | | (38,832) | | | (2,271) | | | (28,378) | | | (30,649) | |
Net interest income | | 439 | | | (35,243) | | | (34,804) | | | 1,288 | | | (28,351) | | | (27,063) | |
Non-interest income | | | | | | | | | | | | |
| | | | | | | | | | | | |
Investment fair value changes, net | | (1,379) | | | 14,887 | | | 13,508 | | | (1,162) | | | (6) | | | (1,168) | |
Other income | | — | | | (435) | | | (435) | | | — | | | 742 | | | 742 | |
| | | | | | | | | | | | |
Total non-interest income, net | | (1,379) | | | 14,452 | | | 13,073 | | | (1,162) | | | 736 | | | (426) | |
General and administrative expenses | | — | | | (39,257) | | | (39,257) | | | — | | | (58,988) | | | (58,988) | |
Loan acquisition costs | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
Other expenses | | — | | | — | | | — | | | — | | | 17 | | | 17 | |
Provision for income taxes | | — | | | — | | | — | | | — | | | 19,282 | | | 19,282 | |
Total | | $ | (940) | | | $ | (60,048) | | | $ | (60,988) | | | $ | 126 | | | $ | (67,308) | | | $ | (67,182) | |
(1) Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Note 21.24. Segment Information - (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
(In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total |
Interest income | | $ | 14,576 |
| | $ | 392 |
| | $ | 14,968 |
| | $ | 14,525 |
| | $ | 901 |
| | $ | 15,426 |
|
Interest expense | | (11,046 | ) | | (28,260 | ) | | (39,306 | ) | | (9,842 | ) | | (28,751 | ) | | (38,593 | ) |
Net interest income (loss) | | 3,530 |
| | (27,868 | ) | | (24,338 | ) | | 4,683 |
| | (27,850 | ) | | (23,167 | ) |
Non-interest income | | | | | | | | | | | | |
Investment fair value changes, net | | (3,842 | ) | | (14 | ) | | (3,856 | ) | | (2,086 | ) | | (95 | ) | | (2,181 | ) |
Realized gains, net | | — |
| | (752 | ) | | (752 | ) | | — |
| | 292 |
| | 292 |
|
Total non-interest income, net | | (3,842 | ) | | (766 | ) | | (4,608 | ) | | (2,086 | ) | | (1,865 | ) | | (3,951 | ) |
Direct operating expenses | | — |
| | (34,409 | ) | | (34,409 | ) | | — |
| | (46,098 | ) | | (46,098 | ) |
Total | | $ | (312 | ) | | $ | (63,043 | ) | | $ | (63,355 | ) | | $ | 2,597 |
| | $ | (75,813 | ) | | $ | (73,216 | ) |
| |
(1) | Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.
|
The following table presents supplemental information by segment at September 30, 20172022 and December 31, 2016.2021.
Table 21.324.3 – Supplemental Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Residential Mortgage Banking | | Business Purpose Mortgage Banking | | | | Investment Portfolio | | Corporate/ Other | | Total |
September 30, 2022 | | | | | | | | | | | | |
Residential loans | | $ | 676,458 | | | $ | — | | | | | $ | 4,877,938 | | | $ | 198,160 | | | $ | 5,752,556 | |
Business purpose loans | | — | | | 337,238 | | | | | 4,919,980 | | | — | | | 5,257,218 | |
Consolidated Agency multifamily loans | | — | | | — | | | | | 427,458 | | | — | | | 427,458 | |
Real estate securities | | — | | | — | | | | | 259,212 | | | — | | | 259,212 | |
Home equity investments | | — | | | — | | | | | 340,437 | | | — | | | 340,437 | |
Other investments | | — | | | — | | | | | 341,155 | | | 71,607 | | | 412,762 | |
Goodwill | | — | | | 23,373 | | | | | — | | | — | | | 23,373 | |
Intangible assets | | — | | | 44,130 | | | | | — | | | — | | | 44,130 | |
Total assets | | 738,301 | | | 473,748 | | | | | 11,301,836 | | | 632,062 | | | 13,145,947 | |
| | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | |
Residential loans | | $ | 1,673,235 | | | $ | — | | | | | $ | 5,688,742 | | | $ | 230,455 | | | $ | 7,592,432 | |
Business purpose loans | | — | | | 347,860 | | | | | 4,443,129 | | | — | | | 4,790,989 | |
Consolidated Agency multifamily loans | | — | | | — | | | | | 473,514 | | | — | | | 473,514 | |
Real estate securities | | 4,927 | | | — | | | | | 372,484 | | | — | | | 377,411 | |
Home equity investments | | — | | | — | | | | | 192,740 | | | — | | | 192,740 | |
Other investments | | — | | | — | | | | | 413,527 | | | 35,702 | | | 449,229 | |
Intangible assets | | — | | | 41,561 | | | | | — | | | — | | | 41,561 | |
Total assets | | 1,716,285 | | | 464,967 | | | | | 11,770,486 | | | 755,206 | | | 14,706,944 | |
|
| | | | | | | | | | | | | | | | |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
September 30, 2017 | | | | | | | | |
Residential loans | | $ | 2,586,105 |
| | $ | 925,681 |
| | $ | 673,134 |
| | $ | 4,184,920 |
|
Real estate securities | | 1,356,272 |
| | — |
| | — |
| | 1,356,272 |
|
Mortgage servicing rights | | 62,928 |
| | — |
| | — |
| | 62,928 |
|
Total assets | | 4,236,023 |
| | 947,503 |
| | 947,173 |
| | 6,130,699 |
|
| | | | | | | | |
December 31, 2016 | | | | | | | | |
Residential loans | | $ | 2,261,016 |
| | $ | 835,399 |
| | $ | 791,636 |
| | $ | 3,888,051 |
|
Real estate securities | | 1,018,439 |
| | — |
| | — |
| | 1,018,439 |
|
Mortgage servicing rights | | 118,526 |
| | — |
| | — |
| | 118,526 |
|
Total assets | | 3,615,535 |
| | 866,356 |
| | 1,001,586 |
| | 5,483,477 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in sixfive main sections:
Off Balance Sheet Arrangements and Contractual Obligations
New Accounting StandardsOther Risks
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward lookingforward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”MD&A and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our website can be found at www.redwoodtrust.com. We make available, free of charge through the investor informationrelations section of our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director or senior officer (as defined in the Code).of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.
Our Business
Redwood Trust, Inc., together with its subsidiaries, focusesis a specialty finance company focused on investingseveral 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 mortgages and other real estate-related assets and engaging in mortgage banking activities.the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not well served by government programs. We seekdeliver customized housing credit investments to invest in real estate-related assets that have the potential to generate attractive cash flow returns over time and to generate incomea diverse mix of investors through our mortgage banking activities.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 twothree segments: Investment Portfolio and Residential Mortgage Banking.
Our primary sources of income are net interest income from our investment portfolioBanking, Business Purpose Mortgage Banking, and non-interest income from our mortgage banking activities. Net interest income 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 consists of the profit we seek to generate through the acquisition of loans and their subsequent sale or securitization.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our operating subsidiaries” or “our taxable REIT subsidiaries” or “TRS.” Our mortgage banking activities and investments in MSRs are generally carried out through our taxable REIT subsidiaries, while our portfolio of mortgage- and other real estate-related investments is primarily held at our REIT. We generally intend to retain profits generated and taxed at our taxable REIT subsidiaries, and to distribute as dividends at least 90% of the taxable income we generate at our REIT.
Redwood Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. Our executive offices are located at One Belvedere Place, Suite 300, Mill Valley, California 94941.
Our Business Segments
During the first quarter of 2017, we reorganized our segments to align with changes in how we view our segments for making operating decisions and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following isPortfolio. For a full description of our current segments.
Our Investment Portfolio segment primarily consists of investments segments, see Part 1, Item 1—Business in residential jumbo loans and real estate securities. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued credit risk transfer ("CRT") securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are primarily made through a subsidiary of Redwood Trust that is a member of the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rightsAnnual Report on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans and valuation changes from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
Consolidated Securitization Entities
We sponsor our Sequoia securitization program, which we useForm 10-K for the securitization of residential mortgage loans. We are required under Generally Accepted Accounting Principles in the United States (“GAAP”) to consolidate the assets and liabilities of certain Sequoia securitization entities we have sponsored for financial reporting purposes. However, each of these entities is independent of Redwood and of each other, and the assets and liabilities of these entities are not owned by us or legal obligations of ours, respectively, although we are exposed to certain financial risks associated with our role as the sponsor or depositor of these entities and, to the extent we hold securities issued by, or other investments in, these entities, we are exposed to the performance of these entities and the assets they hold. We refer to certain of these securitization entities issued prior to 2012 as “consolidated Legacy Sequoia entities,” and the securitization entity formed in connection with the securitization of Redwood Choice expanded-prime loans as the "consolidated Sequoia Choice entity." Where applicable, in analyzing our results of operations, we distinguish results from current operations “at Redwood” and from consolidated Legacy Sequoia entities or the consolidated Sequoia Choice entity.year ended December 31, 2021.
Cautionary Statement
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and this Quarterly Report on Form 10-Q, in each case2021, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood’sRedwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects;prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, and our ability to pay dividends in the future); (ii) statements related to our financial outlook and expectations for 2022 and future years, including statements regarding our long-term debtthe economic impact of inflation, supply chain disruptions, and upcoming maturity of convertible noteswar in 2018;Europe; (iii) statements regarding our expectations with respect to Riverbend’s integration into, and effect upon, the Redwood and CoreVest businesses; (iv) statements related to our opportunities for growth, including opportunities to grow and increase our market share for our residential and business purpose mortgage banking platforms; (v) statements related to our investment portfolio, including that there remains potential upside in our portfolio through market discount, and that at September 30, 2022, our securities portfolio had approximately $458 million of net discount to par (approximately $4.05 per share), which we have the potential impact of changes to the capital requirement underrecover over time; (vi) statements related to RWT Horizons and our FHLB borrowing facility; (iv)strategic investment initiatives; (vii) statements regarding our mortgage banking activities, including expectations relating to residential mortgage banking margins, securitization execution, and our expanded-prime Redwood Choice loan program; (v)estimate of our available capital (including that we estimate our available capital at September 30, 2022 was approximately $160 million); (viii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the third quarter of 20172022 and at September 30, 2017, and2022, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (vi) statements relatingpurchase, and residential mortgage loans subject to our estimate of our available capital (including that we estimate our available capital as of September 30, 2017 was approximately $330 million, expectations relating to our upcoming $250 million convertible debt maturity, and that we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio); (vii)forward sale commitments; (ix) statements we make regarding future dividends, including with respect to our dividend policy, including our intention to pay a regular dividend of $0.28 per share per quarterquarterly dividends in 2017;2022; and (viii)(x) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.
Many of the factors that could affect our actual results are summarized below. One of the most significant factors, however, is the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Moreover, each of the factors summarized below is likely to also be impacted directly or indirectly by the ongoing impact of the pandemic and investors are cautioned to interpret substantially all of the risks identified in the Company’s previously published “Risk Factors” as being heightened as a result of the ongoing impact of the pandemic.
Important factors, among others, that may affect our actual results include:
•the pace at which we redeploy our available capital into new investments;impact of the COVID-19 pandemic;
interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
changes in the demand from investors for residential mortgages and investments, and our ability to distribute residential mortgages through our whole-loan distribution channel;
our ability to finance our investments in securities and our acquisition of residential mortgages with short-term debt;
changes in the values of assets we own;
•general economic trends and the performance of the housing, real estate, mortgage credit,finance, and broader financial markets, and their effects on the prices of earning assets and the credit status of borrowers;markets;
•federal and state legislative and regulatory developments and the actions of governmental authorities includingand entities;
•changing benchmark interest rates, and the new U.S. presidential administration,Federal Reserve’s actions and in particular those affecting the mortgage industry orstatements regarding monetary policy;
•our ability to compete successfully;
•our ability to adapt our business (including, but not limitedmodel and strategies to the Federal Housing Finance Agency’s rules relating to FHLB membership requirements and the implications for our captive insurance subsidiary’s membership in the FHLB);changing circumstances;
•strategic business and capital deployment decisions we make;
developments related•our use of financial leverage;
•our exposure to the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;a breach of our cybersecurity or data security;
•our exposure to credit risk and the timing of credit losses within our portfolio;
•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, and the geographical concentration of real estate underlying assets we own;
own, and our exposure to adjustable-rate mortgage loans;environmental and climate-related risks;
•the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;
•changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;
changes in interest rates; •changes in mortgage prepayment rates;
•changes in interest rates;
•our ability to redeploy our available capital into new investments;
•interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
•our ability to finance the acquisition of real estate-related assets with short-term debt;
•changes in the values of assets we own;
•the ability of counterparties to satisfy their obligations to us;
•our exposure to the discontinuation of LIBOR;
•our exposure to liquidity risk, risks associated with the use of leverage, and market risks;
•changes in the demand from investors for residential and business purpose mortgages and investments, and our ability to distribute residential and business purpose mortgages through our whole-loan distribution channel;
•our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;
•exposure to claims and litigation, including litigation arising from our involvement in loan origination and securitization transactions;
ongoing litigation against various trustees of RMBS transactions;
•whether we have sufficient liquid assets to meet short-term needs;
•our ability to successfully compete and retain or attract key personnel;
our ability to adapt our business model and strategies to changing circumstances;
•changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;
•our exposure to a disruption or breach of the security of our technology infrastructure and systems;
exposure to environmental liabilities;
our failure to comply with applicable laws and regulations;
our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the impact on our reputation that could result from our actions or omissions or from those of others;
•our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the termination of our captive insurance subsidiary’s membership in the Federal Home Loan Bank and the implications for our income generating abilities;
•the impact of changes in accounting principlesto U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and tax rules;our business;
•our failure to comply with applicable laws and regulation, including our ability to obtain or maintain the governmental licenses;
•our ability to maintain our status as a REIT for tax purposes;
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;
•our common stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances;
•decisions about raising, managing, and distributing capital;
•our exposure to broad market fluctuations; and
•other factors not presently identified.
This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.
OVERVIEW
Business Update
We had a strong third quarter of 2017 operationally and financially, and are well positionedOur GAAP book value declined to achieve the operating metrics we set out for the year and build momentum as we head towards 2018. Perhaps most importantly, we completed our executive search process with the hiring of Dash Robinson, who started with us in late September in his capacity as Executive Vice President. We also completed three successful securitization issuances, including our first expanded-prime Redwood Choice ("Choice") transaction, and issued convertible debt$10.18 per share at an attractive level. We deployed $119 million of capital in new investments, much of it after asset pricing declines in early September. We timed our capital deployment well, as asset prices subsequently reverted, in most cases finishing the quarter at or above June 30, 2017 levels.
In this update, we review our mortgage banking activities, provide our thoughts on capital and investing, and conclude with our outlook for the balance of 2017.
Residential Mortgage Banking
Our mortgage banking team had a strong third quarter of 2017, with our expanded-prime Choice program continuing to drive outperformance. Our initial Choice securitization, backed by $318 million of loans, was received favorably by the market, and attracted a good number of both new and existing investors. The issuance created $31 million of investments for our portfolio, utilizing approximately $13 million of capital - more than double the investment for our portfolio than is produced through a traditional Sequoia securitization. Given the current pace and expected growth of loan purchases under our Choice program, we expect to issue Choice securitizations on a regular basis.
We also completed our fifth and sixth traditional Sequoia securitizations of the year during the third quarter of 2017, backed by loans totaling $839 million; this was followed closely by another traditional Sequoia securitization in early October. In addition, we sold $212 million of whole loans to portfolio buyers during the third quarter.
As loan and RMBS pricing has improved, our loan purchase volumes have risen and we have become more competitive with bank retail and correspondent mortgage channels. Loan purchase commitments, adjusted for fallout, increased to $1.6 billion in the third quarter of 2017, up from $1.4 billion and $1.1 billion in the second and first quarters of 2017, respectively. We had strong growth during the third quarter with our Choice program, which accounted for approximately 30% of our total third quarter loan purchase commitments, adjusted for fallout, versus approximately 20% in the second quarter of 2017. Overall margins remained at or above our long-term expectations of 75-100 basis points during the third quarter of 2017.
Capital and Investing
We aggressively pursued new investments in September when volatility due to hurricane activity drove asset prices down. The bulk of the quarter’s $119 million of capital deployment occurred during this period, and included $63 million in GSE residential credit risk transfer (CRT) securities, $39 million in Sequoia and third-party RMBS, and $17 million in multifamily securities. Year-to-date through September 30, 2017, we have deployed $393 million of capital towards new investments (including $37 million of debt repurchases).
We also sold $49 million of mostly lower yielding securities in the third quarter of 2017, freeing up $20 million of capital for reinvestment, after the repayment of associated debt. Additionally, we issued $245 million of six-year, 4.75% convertible debt in August.
As of September 30, 2017, we estimate that our available capital was approximately $330 million, versus $180 million2022, a 5.6% decline from $10.78 per share at June 30, 2017. Although we continue to evaluate our options with regard to the April 2018 maturity2022, driving a GAAP loss of $250 million of our convertible debt, at current market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio.
We continue to evaluate the potential impact of hurricane activity in Houston and Florida on our investment portfolio, although it is still very early in the process. The vast majority of our non-Agency loans and securities were not impacted by the storms and, to date, we have not incurred any realized losses related to properties in the affected areas. Although we did see some impact to pricing from the hurricanes, most of our investments had positive net market valuation adjustments as the benefit from overall credit spread tightening exceeded any negative impact from the hurricanes.
Outlook
As we progress through the fourth quarter of 2017, our current operating metrics are in line with our expectations. While investment portfolio returns have been bolstered by persistent market value increases, we have also maintained consistent levels of net interest income and refined our portfolio mix by selling lower-yielding investments and realizing gains where appropriate. Mortgage banking margins continue to be robust and we are encouraged by the relative mix of Select and Choice loans in our pipeline.
We remain cognizant of forces outside of our control (both financial and otherwise) and their potential impact on our business. With this backdrop, a fully-seated executive team is an important milestone as we continue to think critically about our business assumptions and look ahead to next year and beyond.
Financial and Operational Overview - Third Quarter of 2017
Highlights
Our GAAP earnings were $0.41$(0.44) per share for the third quarter of 2017, as compared with $0.43 per share forquarter. As was the case in the second quarter, mark-to-market adjustments were the primary driver of 2017. Higherour GAAP loss for the quarter and contributed $(0.50) per share of unrealized fair value changes in the third quarter.
During the third quarter, we focused on maintaining liquidity and maximizing our balance sheet flexibility. We ended the quarter with $297 million of unrestricted cash on hand, unencumbered assets of $491 million, and approximately $3.8 billion of excess capacity on our warehouse lines. We were successful during the quarter in adding $900 million of new financing capacity across multiple borrowing facilities (with both new and existing domestic depository institutions) to further support our operating platforms. Our overall recourse leverage ratio(1) was 2.6x, which included only 0.8x secured recourse leverage within our Investment Portfolio(2). This allowed us to remain opportunistic across our operating segments, a posture we expect to carry through year-end.
For the third quarter, we deployed $235 million of capital, which included repurchases of our common stock, the acquisition of Riverbend Funding, LLC (“Riverbend”), and further investments in organically created business-purpose loans (“BPL”) and third-party investments. We closed the Riverbend acquisition on July 1, 2022, and have progressed with key integration workstreams that we expect to be largely completed by year-end. At current levels, we believe there is an attractive opportunity to invest in our own common shares and, as such, we expect opportunistic share repurchases to be an on-going option for capital deployment in the near term.
Within our Investment Portfolio, at September 30, 2022, we had $3.6 billion of economic investments; 77% of which were organically created and 23% of which were purchased from third-parties. We estimate there was $458 million (or $4.05 per share) of net discount to par value at September 30, 2022 that we believe represents potential upside in Redwood’s book value.
Our investment portfolio sits in a strong fundamental credit position given consistent cash flows, underlying seasoning and robust home price appreciation. Delinquencies in our portfolio remain low, at approximately 2% across our organically-created Residential and BPL investments combined at September 30, 2022. We believe the seasoning of our portfolio assets is a positive factor in light of near-term downward pressure on home prices expected as a result of the Federal Reserve's monetary policy actions. Our portfolio overall has benefited from significant appreciation in home prices and rents the last several years, providing a tailwind to fundamental performance even in a more stressed housing market. This inherent downside protection may support the potential recoverability of the unrealized losses we have taken over the last few quarters.
While markets need to stabilize for our operating businesses to return to their optimal levels of operations, both of our mortgage banking income and interest income were offset by higher interest costs and less benefit from market value increases on our trading securities portfolio relativeplatforms delivered substantially better quarter-on-quarter results as compared to the second quarter of 2017.2022, notwithstanding continued market dislocation. Across our Residential and Business Purpose Mortgage Banking businesses, we distributed almost $1 billion of loans during the quarter. Despite capital markets in the consumer residential sector remaining largely distressed, we sold $612 million of residential loans to various whole loans buyers at accretive levels and within our historical target range for gain on sale margins. Our BPL team also completed an innovative $274 million private SFR securitization at the end of the third quarter, in addition to selling $85 million of loans. Our ability to distribute loans through both securitization and whole loan sales in challenging markets is a testament to the strength of our platforms, the quality of our products and the depth of our whole loan networks.
Our GAAP book value was $15.67 per share at September 30, 2017,We expect conditions in the consumer residential sector to remain challenging for a number of quarters as comparedindustry volumes continue to be affected by rapidly increasing mortgage rates, which, along with $15.29 per share at June 30, 2017.record home price appreciation in recent years, has pushed housing affordability to new lows. The spread between mortgage rates and the 10-year Treasury recently reached an all-time high, even as the 10-year Treasury yield itself has risen over 250 basis points since the beginning of the year. The institution that has been the largest buyer of mortgage-backed securities, the Federal Reserve, has exited the market, and money center banks and overseas investors have also pulled back significantly. This increase was primarily driven bydynamic, in the near term, has resulted in significant market risk for those aggregating loans for future securitizations, including us.
As a result of these market conditions, we have remained conservatively positioned in Residential Mortgage Banking, reducing our quarterly earnings exceeding our dividend, and higher fair values on our available-for-sale securities.
We deployed $119 million of capitaljumbo loan locks(3) in the third quarter to $461 million and focusing on moving risk expediently, operating efficiently and preserving flexibility. This includes ongoing rationalization of 2017 toward new investments,our cost structure and disciplined pipeline management, including $63 millionthrough maintaining lower overall loan inventory balances and nimble distribution strategies with whole loan buyers. In light of these conditions, we intentionally reduced our capital allocation to our Residential Mortgage Banking business by almost 60% since the beginning of 2022. We see attractive uses for this freed-up capital, including investment opportunities in Agency residential CRT securities, $39 millioncredit made possible by the market downturn.
Turning to Business Purpose Mortgage Banking, while we have seen some resiliency in Sequoiademand for shorter duration bridge loan products that we originate, we expect volumes to moderate from record levels earlier this year as higher interest rates and third-party RMBS, and $17 million in Agency multifamily securities. Year-to-date through September 30, 2017, we deployed $393 million of capital into new investments (including $37 million of debt repurchases).
We sold $49 million of securities duringmacroeconomic uncertainty cause housing investors to be more cautious. In the third quarter, we saw this trend play out as 83% of 2017, freeing up $20our origination volume was in our bridge product and 17% was in our SFR product. As affordability remains challenged, we believe that strong occupancy rates, low vacancies, and high consumer mortgage rates should continue to support strong and consistent cash flows for our rental loan products. We have long promoted our BPL franchise as a life-cycle lender and our ability to provide both short- and long-term financing options makes us an attractive lender for borrowers.
Footnotes to Business Update
(1) Recourse leverage ratio is defined as recourse debt at Redwood divided by tangible stockholders' equity. Recourse debt excludes $8.9 billion of consolidated securitization debt (ABS issued and servicer advance financing) and other debt that is non-recourse to Redwood, and tangible stockholders' equity excludes $68 million of goodwill and intangible assets.
(2) Secured recourse leverage for our investment portfolio is defined as secured recourse debt financing our investment portfolio assets divided by capital allocated to our investment portfolio.
(3) Lock volume does not account for reinvestment afterpotential fallout from pipeline that typically occurs through the repayment of associated debt. Year-to-date through September 30, 2017, we sold $148 million of mostly lower yielding securities and $53 million of conforming MSRs, freeing up $131 million of capital for reinvestment after the repayment of associated debt.lending process.
We purchased $1.5 billion of residential jumbo loans during the third quarter of 2017, and $3.8 billion year-to-date through September 30, 2017. At September 30, 2017, our pipeline of jumbo residential loans identified for purchase was $1.5 billion.Residential loan sales totaled $1.4 billion during the third quarter of 2017 and included $0.2 billion of whole loan sales to third parties and $1.2 billion of loans that were securitized. Year-to-date through September 30, 2017, residential loan sales totaled $3.5 billion, and included $0.9 billion of whole loan sales to third parties and $2.6 billion of loans that were securitized in seven separate transactions including our first expanded-prime Choice securitization.
We issued $245 million of six-year, 4.75% convertible debt during the third quarter of 2017.
Key Earnings MetricsThird Quarter Overview
The following table presents key earningsfinancial metrics for the three and nine months ended September 30, 2017.2022.
Table 1 – Key EarningsFinancial Results and Metrics | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands, except per Share Data) | | September 30, 2022 | | September 30, 2022 |
Net (loss) income per diluted common share | | $ | (0.44) | | | $ | (1.04) | |
Annualized GAAP return on equity | | (16.4) | % | | (11.8) | % |
Dividends per share | | $ | 0.23 | | | $ | 0.69 | |
Book value per share | | $ | 10.18 | | $ | 10.18 |
Economic return on book value (1) | | (3.4)% | | (9.9)% |
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands, except per Share Data) | | September 30, 2017 | | September 30, 2017 |
Net income | | $ | 36,180 |
| | $ | 109,473 |
|
Net income per diluted common share | | $ | 0.41 |
| | $ | 1.26 |
|
Annualized GAAP return on equity | | 12 | % | | 12 | % |
REIT taxable income per share | | $ | 0.26 |
| | $ | 0.73 |
|
Dividends per share | | $ | 0.28 |
| | $ | 0.84 |
|
A detailed discussion of our third quarter of 2017 net income is included in the Results of Operations section of this MD&A that follows.
Book Value per Share
At September 30, 2017, our(1)Economic return on book value was $1.21 billion, or $15.67 per share, an increase from $15.29 per share at June 30, 2017 and $14.96 at December 31, 2016. The following table sets forthis based on the changesperiodic change in our book value per share for the three and nine months ended September 30, 2017.
Table 2 – Changes in Book Value per Share
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Dollars, per share basis) | | September 30, 2017 | | September 30, 2017 |
Beginning book value per share | | $ | 15.29 |
| | $ | 14.96 |
|
Net income | | 0.41 |
| | 1.26 |
|
Changes in unrealized gains on securities, net from: | | | | |
Realized gains recognized in net income | | (0.03 | ) | | (0.09 | ) |
Amortization income recognized in net income | | (0.05 | ) | | (0.15 | ) |
Mark-to-market adjustments, net | | 0.27 |
| | 0.47 |
|
Total change in unrealized gains on securities, net | | 0.19 |
| | 0.23 |
|
Dividends | | (0.28 | ) | | (0.84 | ) |
Equity compensation, net | | 0.02 |
| | 0.01 |
|
Changes in unrealized losses on derivatives hedging long-term debt | | — |
| | (0.01 | ) |
Other, net | | 0.04 |
| | 0.06 |
|
Ending Book Value per Share | | $ | 15.67 |
| | $ | 15.67 |
|
Our GAAP book value per common share increased $0.38plus dividends declared per share to $15.67 percommon share during the thirdperiod.
Business Highlights
Investment Portfolio
•Deployed $167 million of capital into new organic and third-party investments
•Credit performance remained strong with stable delinquencies and continued declining LTVs
•Investment Portfolio secured recourse leverage of 0.8x as of September 30, 2022
Business Purpose Mortgage Banking
•Funded $570 million in business purpose loans, 83% Bridge and 17% Single-Family Rental ("SFR")
•Securitized $274 million of loans in a private securitization backed by SFR loans
•Closed the previously announced acquisition of Riverbend Funding, LLC and its subsidiaries ("Riverbend"), a best-in-class private mortgage lender to investors in transitional residential and multifamily real estate, for an initial cash purchase price of approximately $44 million paid at closing (and subject to certain adjustments including potential earnout consideration)
Residential Mortgage Banking
•Distributed $612 million of jumbo loans through whole loan sales; at September 30, 2022, total net jumbo loan exposure was $712 million
•Intentionally maintained light volume, locking $461 million of jumbo loans, down from $1.0 billion in second quarter 2022; loan purchase commitments were $256 million, down from $538 million in second quarter 2022
Financing Highlights
•Maintained robust balance sheet with unrestricted cash of 2017. This increase was primarily driven by positive mark-to-market adjustments on our available-for-sale securities$297 million and our quarterly earnings exceeding our dividend.unencumbered assets of $491 million at September 30, 2022
Unrealized gains on our available-for-sale securities increased $0.19 per share during•Added $900 million of new financing capacity across multiple borrowing facilities (with both new and existing domestic depository institutions) in the third quarter to further support operating platforms
◦Successfully renewed warehouse lines with maturities in the third quarter at unchanged advance rates
◦Ended third quarter with $3.8 billion of 2017, primarily asunused financing capacity across Residential and Business Purpose Mortgage Banking segments
•Total margin call activity in the third quarter resulted in a resultnet return of cash to Redwood from financing and hedging counterparties
•Repurchased 3.4 million shares of Redwood’s common stock at a positive $0.27 per share mark-to-market adjustment on our available-for-sale securities due to credit spread tightening during the quarter. This increase was partially offset by $0.05cost of $24 million, resulting in $0.12 per share of discount amortization income recognized in earnings from the appreciationbook value accretion in the amortized cost basis of our available-for-sale securities, and $0.03 per share of previously unrealized net gains that were realized as income from the sale of securities.third quarter
RWT Horizons Highlights
Capital Allocation Summary
This section provides an overview of our capital position and how it was allocated at the end of•Completed three new investments in the third quarter
•Since inception, RWT Horizons has completed 27 technology venture investments in 24 companies with an aggregate of 2017. A detailed discussion of our liquidity and capital resources is provided in the Liquidity and Capital Resources section of this MD&A that follows.
We use a combination of equity and corporate debt (which we collectively refer to as “capital”) to fund our business. We also utilize various forms of collateralized short-term and long-term debt to finance certain investments and to warehouse some of our inventory of residential loans held-for-sale. We do not consider this collateralized debt as "capital" and, therefore, it is presented separately from allocated capital in the table below. The following table presents how our capital was allocated between business segments and investment types at September 30, 2017.
Table 3 – Capital Allocation Summary
|
| | | | | | | | | | | | | | | |
At September 30, 2017 | | | | | | | | |
(Dollars in Thousands) | | Fair Value | | Collateralized Debt | | Allocated Capital | | % of Total Capital |
Investment portfolio | | | | | | | | |
Residential loans/FHLB stock | | $ | 2,312,195 |
| | $ | (1,999,999 | ) | | $ | 312,196 |
| | 17 | % |
Residential securities (1) | | 1,144,397 |
| | (370,838 | ) | | 773,559 |
| | 43 | % |
Commercial/Multifamily securities (2) | | 243,071 |
| | (178,973 | ) | | 64,098 |
| | 4 | % |
Mortgage servicing rights | | 62,928 |
| | — |
| | 62,928 |
| | 4 | % |
Other assets/(other liabilities) | | 187,325 |
| | (53,551 | ) | | 133,774 |
| | 7 | % |
Cash and liquidity capital | | | | | | 266,746 |
| | 15 | % |
Total investment portfolio | | $ | 3,949,916 |
| | $ | (2,603,361 | ) | | 1,613,301 |
| | 90 | % |
Residential mortgage banking | | | | | | 170,000 |
| | 10 | % |
Total | | | | | | $ | 1,783,301 |
| | 100 | % |
| |
(1) | Residential securities presented above includes our $31 million net economic investment in our consolidated Sequoia Choice securitization. This net investment represents the fair value of the securities we retained from this securitization. |
| |
(2) | Includes $223 million of multifamily securities and $20 million of investment grade CMBS. |
Our total capital was $1.78 billion at September 30, 2017, and included $1.21 billion of equity capital and $0.57 billion of the total $2.57 billion of long-term debt on our consolidated balance sheet. This portion of debt included $201over $26 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023, and $140 million of trust-preferred securities due in 2037.investment commitments
Of our $1.78 billion of total capital at September 30, 2017, $1.61 billion (or 90%) was allocated to our investments with the remaining $170 million (or 10%) allocated to our residential mortgage banking activities.As of September 30, 2017, we estimate that our available capital was approximately $330 million. Although we continue to evaluate our options with regard to the April 2018 maturity of $250 million of our convertible debt, at current market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio.
RESULTS OF OPERATIONS
Within this Results of Operations section, we provide commentary that compares results year-over-year for 20172022 and 2016.2021. Most tables include a "change" column that shows the amount by which the results from 20172022 are greater or less than the results from the respective period in 2016.2021. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of 2017,2022, compared to the third quarter of 2016,2021, and increases or decreases induring the "nine-month periods" refer to the change in results for the first nine months of 2017,ended September 30, 2022 compared to the first nine months ended September 30, 2021.
Consolidated Results of 2016.Operations
The following table presents the components of our net (loss) income for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 42 – Net (Loss) Income
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands, except per Share Data) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Net Interest Income | | $ | 35,294 |
| | $ | 39,309 |
| | $ | (4,015 | ) | | | $ | 103,881 |
| | $ | 122,030 |
| | $ | (18,149 | ) |
Reversal of provision for loan losses | | — |
| | 859 |
| | (859 | ) | | | — |
| | 7,102 |
| | (7,102 | ) |
Net Interest Income After Provision | | 35,294 |
| | 40,168 |
| | (4,874 | ) | | | 103,881 |
| | 129,132 |
| | (25,251 | ) |
Non-interest Income | | | | | |
|
| | | | | | |
|
|
Mortgage banking activities, net | | 21,200 |
| | 9,766 |
| | 11,434 |
| | | 50,850 |
| | 24,712 |
| | 26,138 |
|
MSR income, net | | 1,615 |
| | 3,770 |
| | (2,155 | ) | | | 6,106 |
| | 12,834 |
| | (6,728 | ) |
Investment fair value changes, net | | 324 |
| | 11,918 |
| | (11,594 | ) | | | 9,990 |
| | (18,686 | ) | | 28,676 |
|
Other income | | 1,197 |
| | 1,643 |
| | (446 | ) | | | 3,367 |
| | 4,157 |
| | (790 | ) |
Realized gains, net | | 1,734 |
| | 6,615 |
| | (4,881 | ) | | | 8,809 |
| | 26,037 |
| | (17,228 | ) |
Total non-interest income, net | | 26,070 |
| | 33,712 |
| | (7,642 | ) | | | 79,122 |
| | 49,054 |
| | 30,068 |
|
Operating expenses | | (19,922 | ) | | (20,355 | ) | | 433 |
| | | (56,789 | ) | | (70,962 | ) | | 14,173 |
|
Net income before income taxes | | 41,442 |
| | 53,525 |
| | (12,083 | ) | | | 126,214 |
| | 107,224 |
| | 18,990 |
|
Provision for income taxes | | (5,262 | ) | | (972 | ) | | (4,290 | ) | | | (16,741 | ) | | (1,327 | ) | | (15,414 | ) |
Net Income | | $ | 36,180 |
| | $ | 52,553 |
| | $ | (16,373 | ) | | | $ | 109,473 |
| | $ | 105,897 |
| | $ | 3,576 |
|
Diluted earnings per common share | | $ | 0.41 |
| | $ | 0.58 |
| | $ | (0.17 | ) | | | $ | 1.26 |
| | $ | 1.23 |
| | $ | 0.03 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands, except per Share Data) | | 2022 | | 2021 | | Change | | | 2022 | | 2021 | | Change |
Net Interest Income | | $ | 34,935 | | | $ | 41,968 | | | $ | (7,033) | | | | $ | 128,525 | | | $ | 98,351 | | | $ | 30,174 | |
Non-interest Income | | | | | | | | | | | | | |
Mortgage banking activities, net | | 16,535 | | | 63,163 | | | (46,628) | | | | 2,833 | | | 200,189 | | | (197,356) | |
Investment fair value changes, net | | (57,697) | | | 26,077 | | | (83,774) | | | | (151,789) | | | 120,644 | | | (272,433) | |
Other income, net | | 4,027 | | | 2,388 | | | 1,639 | | | | 17,016 | | | 8,357 | | | 8,659 | |
Realized gains, net | | — | | | 6,703 | | | (6,703) | | | | 2,581 | | | 17,803 | | | (15,222) | |
Total non-interest (loss) income, net | | (37,135) | | | 98,331 | | | (135,466) | | | | (129,359) | | | 346,993 | | | (476,352) | |
General and administrative expenses | | (40,107) | | | (47,692) | | | 7,585 | | | | (106,927) | | | (131,837) | | | 24,910 | |
Loan acquisition costs | | (2,426) | | | (4,621) | | | 2,195 | | | | (10,371) | | | (11,928) | | | 1,557 | |
Other expenses | | (4,261) | | | (4,023) | | | (238) | | | | (11,814) | | | (12,104) | | | 290 | |
Net (loss) income before income taxes | | (48,994) | | | 83,963 | | | (132,957) | | | | (129,946) | | | 289,475 | | | (419,421) | |
(Provision for) benefit from income taxes | | (1,417) | | | 4,323 | | | (5,740) | | | | 10,484 | | | (13,907) | | | 24,391 | |
Net (Loss) Income | | $ | (50,411) | | | $ | 88,286 | | | $ | (138,697) | | | | $ | (119,462) | | | $ | 275,568 | | | $ | (395,030) | |
Diluted (loss) earnings per common share | | $ | (0.44) | | | $ | 0.65 | | | $ | (1.09) | | | | $ | (1.04) | | | $ | 2.03 | | | $ | (3.07) | |
Net Interest Income
The decreaseNet interest income from our investment portfolio increased by $3 million and $36 million during the three and nine-month periods, respectively, and generally resulted from higher average asset balances in 2022, as we increased our investments in bridge loans and in securities we retained from CoreVest securitizations during the prior twelve months. We recognized elevated levels of discount accretion on our available-for-sale securities and yield maintenance income on our SFR securities during the first quarter of 2022. In association with a continued rise in interest rates throughout 2022, prepayment speeds on many of our assets slowed, and resulted in a reduction in discount accretion and yield maintenance income on our SFR securities in the second and third quarters. Additionally, net interest income from Business Purpose Mortgage Banking operations increased by $1 million and $5 million, during the three and nine-month periods, respectively, as a result of higher average balances of SFR loan inventory during the respective periods.
These increases were offset by $6 million and $8 million decreases in net interest income during the three-three and nine-month periods, primarily resultedrespectively, from higher corporate interest expense resulting from the saleissuance of new convertible debt in June 2022 and from our commercial mezzanine loans during 2016. This decline was partially offsettrust preferred securities, which are variable rate and were impacted by higher benchmark interest rates in 2022. Additionally, Residential Mortgage Banking operations experienced $5 million and $3 million decreases in net interest income from our residential investmentsduring the three and nine-month periods, respectively, as a result of a lower average balance of loan inventory in the respective periods.
Continued increases in benchmark interest rates and borrowing spreads could negatively impact our future net interest income in relation to the portion of our fixed-rate assets that are financed with floating-rate debt, as well as in relation to fixed-rate debt that matures in the near-term that is refinanced with new debt at current market rates. Additionally, to the extent we add incremental leverage to our investment portfolio, net interest income could decrease while proceeds from those financings are redeployed into other assets or if additional capital redeploymentis deployed into HEIs which do not earn interest income.
Additional detail on net interest income is provided in the “Net Interest Income” section that follows.
Mortgage Banking Activities, Net
The decrease in income from mortgage banking activities during 2016the three and nine-month periods was attributable to $31 million and $123 million decreases, respectively, from our Residential Mortgage Banking operations and $16 million and $74 million decreases, respectively, from our Business Purpose Mortgage Banking operations.
The decreases from Residential Mortgage Banking operations were attributable to lower acquisition volumes as well as decreased margins during 2022, as a sharp increase in mortgage rates during 2022 contributed to an industry-wide decrease in residential mortgage origination activity. Additionally, given market volatility, we focused on risk management and were deliberate in moderating volume and transferring financial risk quickly during 2022. Margins and profitability for Residential Mortgage Banking during the first nine months of 2017.2022 were impacted by wider credit spreads for securitizations and whole loans, as well as increased rate volatility, which resulted in higher hedging costs. In the third quarter of 2022, margins recovered on improved distribution execution.
Provision for Loan Losses
The reversalDespite increased volumes during the first nine months of provision for loan losses in 2016 was related to our commercial mezzanine loans. Prior to their sale in 2016, the commercial loans were reclassified to held-for-sale status, at which point the allowance for loan losses was reversed and no longer maintained for these loans.
2022, Business Purpose Mortgage Banking Activities, Net
Income fromincome declined year-over-year, as continued market volatility and extreme credit spread widening in 2022 negatively impacted profitability. Spreads stabilized in the third quarter and volume remained fairly healthy, which contributed to $14 million of BPL mortgage banking activities, net includes results from our residential jumbo mortgage banking operations and, prior toactivity income in the secondthird quarter of 2016, results from our residential conforming and commercial mortgage banking operations. The increase in mortgage banking activities during the three- and nine-month periods was predominantly due to higher gross margins from our jumbo residential mortgage banking activities on higher volume.2022.
A more detailed analysis of the changes in this line item is included in Residential Mortgage Banking portion of the “Results of Operations by Segment” section that follows.
MSR Income, Net
MSR income, net is comprised of the net fee income we earn from our MSR investments as well as changes in their market value and the market value of their associated derivatives. MSR income decreased in 2017 primarily due to lower average balances of MSRs outstanding during 2017, as sales and paydowns outpaced new acquisitions.
Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our residential loans held-for-investmentportfolio investments accounted for under the fair value option and financed with FHLB borrowings,their associated interest rate hedges. During the three and nine months ended September 30, 2022, negative investment fair value changes reflected extreme levels of credit spread widening across many of our investmentlonger-duration, fixed-rate investments, partially offset by fair value increases in our IO securities, classified as trading,MSRs, and interest rate hedges, associated with eachwhich benefited from rising interest rates. While our home equity investments ("HEIs") experienced price increases in the first half of these investments.2022 due to home price appreciation, in the third quarter of 2022, they saw declines in prices as the outlook for home price appreciation deteriorated. Negative fair value changes primarily reflected unrealized mark-to-market losses, while fundamental credit performance, including delinquencies and LTVs, remained stable across our portfolio.
During the three and nine months ended September 30, 2017, the2021, positive investment fair value changes primarily resulted from net increasesreflected improvements in the fair value ofcredit performance and spread tightening across our trading securitiesinvestment portfolio, particularly in our third-party re-performing loan ("RPL") and their associated hedges, which were primarily due to tightening credit spreads on these securities during these periods. For the nine months ended September 30, 2017, the increase was partially offset by net decreases in the fair value of our residential loans held-for-investment and their associated hedges, primarily resulting from principal paydowns and hedging costs.retained CAFL SFR securities.
During the three months ended September 30, 2016, the positive investment fair value changes resulted from increases in the fair value of our investments in both trading securities and loans held-for-investment, which were primarily the result of tightening credit spreads. During the nine months ended September 30, 2016, the negative investment fair value changes primarily resulted from decreases in the fair value of our loans held for investment and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatility during the first nine months of the year, as well as decreases in fair value resulting from the write-off of premium from loan repayments.
Additional detail on our investment fair value changes during 2022 is included in the Investment Portfolio portion of the “Results of Operations bySegment” section that follows.follows as well as Table 5.6 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Other Income
OtherThe increase in other income for the three and nine month periods primarily resulted from higher income on our MSR investments, which increased by $3 million and $12 million, respectively. The increase in both the three- and nine-month periodsincome from MSRs was primarily compriseddue to positive valuation changes resulting from a slowdown in prepayment speeds during 2022 as interest rates rose.
Additional detail on our other income is presented in Table 21.1 of income from our residential loan risk sharing arrangements with Fannie Mae and Freddie Mac.Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Realized Gains, Net
During the third quarter of 2017,three and nine months ended September 30, 2022, we realized gains of $2zero and $3 million, respectively, primarily resulting from calls associated with third-party available-for-sale ("AFS") securities during the salefirst quarter of $23 million of AFS securities.2022. During the third quarter of 2016,three and nine months ended September 30, 2021, we realized gains of $7 million whichand $18 million, respectively, primarily resulting from the call of two and six seasoned Sequoia securitizations, respectively.
General and Administrative Expenses
General and administration expenses decreased for the three and nine month periods, primarily due to $16 million and $42 million decreases in variable compensation expense, respectively, associated with the decreases in earnings during the respective periods. Additionally, fixed compensation expense in the second quarter of 2022 included a $2 million primarilybenefit from a payroll tax refund related to a prior year that was realized during the sale of $26 million of AFS securities and $5 million from the sale of $208 million of commercial mezzanine loans.
During the nine months ended September 30, 2017, we realized gains of $9 million, which included $10 million of realized gains primarily from the sale of $61 million of AFS securities, partiallyquarter. These decreases were offset by a $1 million increase in costs associated with the acquisition of Riverbend, including $1 million of realized lossdirect transaction costs incurred over the second and third quarters of 2022, and $2 million of fixed compensation costs in the third quarter of 2022 from the repurchaseaddition of $37Riverbend employees. Additionally, in the third quarter of 2022, we incurred $4 million of convertible debt. During the nine months ended September 30, 2016, we realized gains of $26 million, which included $21 million of realized gains primarily from the sale of $241 million of AFS securitiesemployee severance and $5 million of realized gains from the sale of $208 million of commercial mezzanine loans.transition-related expenses.
Operating Expenses
The decreaseAdditional detail on our General and administrative expenses is presented in operating expenses during the three- and nine-month periods was primarily due to the restructuringTable 22.1 of our residential conforming and commercialNotes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Loan Acquisition Costs
Loan acquisition costs for our mortgage banking operations duringdecreased $2 million for both the first quarterthree and nine month periods, as a result of 2016, which resultedlower loan origination volumes in a lower run-rate of expenses. Excluding $11 million of restructuring charges recorded during the nine months ended September 30, 2016, operating expenses for that period were $60 million.2022.
Provision for Income Taxes
Our provision for income taxes resultis almost entirely fromrelated to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments. For both the three-investments, as well as certain other investment and nine-month periods, the increase in provision for income taxes resulted primarily from higher incomehedging activities. Losses from our mortgage banking activities. operations during the first nine months of 2022 contributed to a tax benefit during that period. For the third quarter of 2022, a small loss from our mortgage banking operations was more than offset by gains on hedges associated with certain of our investments, resulting in a tax provision for the quarter.
During the third quarter of 2021, we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets contributing to a net tax benefit during that quarter. The tax provision for the nine months ended September 30, 2021 reflects positive income earned from our mortgage banking operations during that period, partially offset by the benefit from the release of valuation allowance.
For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.
Net Interest Income
The following tables presenttable presents the components of net interest income for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 53 – Net Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 11,844 | | | $ | 984,365 | | | 4.8 | % | | $ | 15,377 | | | $ | 1,936,882 | | | 3.2 | % |
| | | | | | | | | | | | |
Residential loans - HFI at Legacy Sequoia (2) | | 1,473 | | | 199,264 | | | 3.0 | % | | 1,042 | | | 248,791 | | | 1.7 | % |
Residential loans - HFI at Sequoia (2) | | 31,587 | | | 3,468,730 | | | 3.6 | % | | 18,867 | | | 2,104,357 | | | 3.6 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | 16,098 | | | 1,600,215 | | | 4.0 | % | | 18,707 | | | 2,043,813 | | | 3.7 | % |
Business purpose loans - HFS | | 9,070 | | | 535,017 | | | 6.8 | % | | 4,090 | | | 314,641 | | | 5.2 | % |
Business purpose loans - HFI | | 24,688 | | | 1,257,222 | | | 7.9 | % | | 14,102 | | | 704,752 | | | 8.0 | % |
Single-family rental loans - HFI at CAFL (2) | | 50,959 | | | 2,960,614 | | | 6.9 | % | | 48,723 | | | 3,455,645 | | | 5.6 | % |
Bridge loans - HFI at CAFL (2) | | 10,480 | | | 529,993 | | | 7.9 | % | | 214 | | | 12,015 | | | 7.1 | % |
Multifamily loans at Freddie Mac K-Series (2) | | 4,762 | | | 439,966 | | | 4.3 | % | | 4,846 | | | 483,930 | | | 4.0 | % |
Trading securities | | 3,924 | | | 131,626 | | | 11.9 | % | | 5,710 | | | 147,925 | | | 15.4 | % |
Available-for-sale securities | | 3,065 | | | 136,203 | | | 9.0 | % | | 8,532 | | | 120,183 | | | 28.4 | % |
Other interest income | | 9,712 | | | 898,111 | | | 4.3 | % | | 5,512 | | | 769,308 | | | 2.9 | % |
Total interest income | | 177,662 | | | 13,141,326 | | | 5.4 | % | | 145,722 | | | 12,342,242 | | | 4.7 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (19,436) | | | 1,561,146 | | | (5.0) | % | | (10,808) | | | 1,982,726 | | | (2.2) | % |
Short-term debt - servicer advance financing | | (2,606) | | | 225,002 | | | (4.6) | % | | (1,018) | | | 149,450 | | | (2.7) | % |
Promissory notes | | (572) | | | 33,302 | | | (6.9) | % | | — | | | — | | | — | % |
Short-term debt - convertible notes, net | | (1,330) | | | 100,895 | | | (5.3) | % | | — | | | — | | | — | % |
ABS issued - Legacy Sequoia (2) | | (1,486) | | | 198,166 | | | (3.0) | % | | (641) | | | 245,910 | | | (1.0) | % |
ABS issued - Sequoia (2) | | (27,541) | | | 3,233,716 | | | (3.4) | % | | (15,368) | | | 1,872,636 | | | (3.3) | % |
ABS issued - Freddie Mac SLST (2) | | (12,829) | | | 1,325,930 | | | (3.9) | % | | (15,774) | | | 1,765,465 | | | (3.6) | % |
ABS issued - Freddie Mac K-Series (2) | | (4,377) | | | 408,164 | | | (4.3) | % | | (4,460) | | | 453,031 | | | (3.9) | % |
ABS issued - CAFL (2) | | (44,677) | | | 3,075,551 | | | (5.8) | % | | (37,489) | | | 3,118,792 | | | (4.8) | % |
Long-term debt facilities | | (14,464) | | | 1,148,700 | | | (5.0) | % | | (8,715) | | | 881,669 | | | (4.0) | % |
Long-term debt - corporate | | (13,409) | | | 761,712 | | | (7.0) | % | | (9,481) | | | 651,468 | | | (5.8) | % |
Total interest expense | | (142,727) | | | 12,072,284 | | | (4.7) | % | | (103,754) | | | 11,121,147 | | | (3.7) | % |
Net Interest Income | | $ | 34,935 | | | | | | | $ | 41,968 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 10,396 |
| | $ | 980,067 |
| | 4.2 | % | | $ | 8,835 |
| | $ | 995,136 |
| | 3.6 | % |
Residential loans - HFI at Redwood (2) | | 23,145 |
| | 2,344,427 |
| | 3.9 | % | | 21,923 |
| | 2,260,895 |
| | 3.9 | % |
Residential loans - HFI at Legacy Sequoia (2) | | 4,873 |
| | 682,772 |
| | 2.9 | % | | 4,837 |
| | 849,234 |
| | 2.3 | % |
Residential loans - HFI at Sequoia Choice (2) | | 127 |
| | 10,365 |
| | 4.9 | % | | — |
| | — |
| | — | % |
Commercial loans | | — |
| | — |
| | — | % | | 6,453 |
| | 261,194 |
| | 9.9 | % |
Trading securities | | 12,691 |
| | 737,186 |
| | 6.9 | % | | 5,831 |
| | 301,110 |
| | 7.7 | % |
Available-for-sale securities | | 10,734 |
| | 420,896 |
| | 10.2 | % | | 12,769 |
| | 488,842 |
| | 10.4 | % |
Other interest income | | 771 |
| | 202,019 |
| | 1.5 | % | | 258 |
| | 226,730 |
| | 0.5 | % |
Total interest income | | 62,737 |
| | 5,377,732 |
| | 4.7 | % | | 60,906 |
| | 5,383,141 |
| | 4.5 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (7,158 | ) | | 1,066,695 |
| | (2.7 | )% | | (5,405 | ) | | 1,071,757 |
| | (2.0 | )% |
Short-term debt - convertible notes, net | | (3,024 | ) | | 250,098 |
| | (4.8 | )% | | — |
| | — |
| | — | % |
ABS issued - Legacy Sequoia (2) | | (3,852 | ) | | 667,070 |
| | (2.3 | )% | | (3,193 | ) | | 828,411 |
| | (1.5 | )% |
ABS issued - Sequoia Choice (2) | | (104 | ) | | 9,349 |
| | (4.4 | )% | | — |
| | — |
| | — | % |
Long-term debt - FHLBC | | (6,319 | ) | | 1,999,999 |
| | (1.3 | )% | | (2,892 | ) | | 1,999,999 |
| | (0.6 | )% |
Long-term debt - other | | (6,986 | ) | | 444,440 |
| | (6.3 | )% | | (10,107 | ) | | 674,131 |
| | (6.0 | )% |
Total interest expense | | (27,443 | ) | | 4,437,651 |
| | (2.5 | )% | | (21,597 | ) | | 4,574,298 |
| | (1.9 | )% |
Net Interest Income | | $ | 35,294 |
| | | | | | $ | 39,309 |
| | | | |
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2022 | | 2021 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | (Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | | Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 26,246 |
| | $ | 846,335 |
| | 4.1 | % | | $ | 24,062 |
| | $ | 886,777 |
| | 3.6 | % | Residential loans, held-for-sale | | $ | 42,201 | | | $ | 1,406,219 | | | 4.0 | % | | $ | 35,308 | | | $ | 1,568,966 | | | 3.0 | % |
Residential loans - HFI at Redwood (2) | | 68,591 |
| | 2,318,064 |
| | 3.9 | % | | 63,562 |
| | 2,178,997 |
| | 3.9 | % | |
| Residential loans - HFI at Legacy Sequoia (2) | | 14,574 |
| | 718,691 |
| | 2.7 | % | | 14,525 |
| | 907,617 |
| | 2.1 | % | Residential loans - HFI at Legacy Sequoia (2) | | 3,592 | | | 211,707 | | | 2.3 | % | | 3,559 | | | 262,007 | | | 1.8 | % |
Residential loans - HFI at Sequoia Choice (2) | | 127 |
| | 3,493 |
| | 4.8 | % | | — |
| | — |
| | — | % | |
Commercial loans | | 345 |
| | 1,424 |
| | N/A |
| | 28,834 |
| | 338,390 |
| | 11.4 | % | |
Residential loans - HFI at Sequoia (2) | | Residential loans - HFI at Sequoia (2) | | 95,608 | | | 3,732,108 | | | 3.4 | % | | 48,842 | | | 1,644,256 | | | 4.0 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | Residential loans - HFI at Freddie Mac SLST (2) | | 49,851 | | | 1,717,544 | | | 3.9 | % | | 58,372 | | | 2,110,555 | | | 3.7 | % |
Business purpose loans - HFS | | Business purpose loans - HFS | | 22,823 | | | 536,366 | | | 5.7 | % | | 10,105 | | | 277,486 | | | 4.9 | % |
Business purpose loans - HFI | | Business purpose loans - HFI | | 52,226 | | | 1,003,673 | | | 6.9 | % | | 38,877 | | | 668,413 | | | 7.8 | % |
Single-family rental loans - HFI at CAFL (2) | | Single-family rental loans - HFI at CAFL (2) | | 173,630 | | | 3,070,972 | | | 7.5 | % | | 152,444 | | | 3,349,828 | | | 6.1 | % |
Bridge loans - HFI at CAFL(2) | | Bridge loans - HFI at CAFL(2) | | 21,751 | | | 412,766 | | | 7.0 | % | | 214 | | | 4,049 | | | 7.0 | % |
Multifamily loans at Freddie Mac K-Series (2) | | Multifamily loans at Freddie Mac K-Series (2) | | 14,247 | | | 451,757 | | | 4.2 | % | | 14,492 | | | 488,804 | | | 4.0 | % |
Trading securities | | 31,622 |
| | 643,736 |
| | 6.5 | % | | 15,639 |
| | 271,758 |
| | 7.7 | % | Trading securities | | 13,520 | | | 151,898 | | | 11.9 | % | | 17,133 | | | 140,241 | | | 16.3 | % |
Available-for-sale securities | | 33,446 |
| | 441,038 |
| | 10.1 | % | | 42,473 |
| | 553,278 |
| | 10.2 | % | Available-for-sale securities | | 17,252 | | | 137,134 | | | 16.8 | % | | 16,051 | | | 128,564 | | | 16.6 | % |
Other interest income | | 1,638 |
| | 210,765 |
| | 1.0 | % | | 926 |
| | 318,138 |
| | 0.4 | % | Other interest income | | 27,816 | | | 917,975 | | | 4.0 | % | | 17,325 | | | 790,499 | | | 2.9 | % |
Total interest income | | 176,589 |
| | 5,183,546 |
| | 4.5 | % | | 190,021 |
| | 5,454,955 |
| | 4.6 | % | Total interest income | | 534,517 | | | 13,750,119 | | | 5.2 | % | | 412,722 | | | 11,433,668 | | | 4.8 | % |
Interest Expense | | | | | |
|
| | | | | |
|
| Interest Expense | |
Short-term debt facilities | | (18,174 | ) | | 967,834 |
| | (2.5 | )% | | (17,439 | ) | | 1,150,206 |
| | (2.0 | )% | Short-term debt facilities | | (41,081) | | | 1,628,316 | | | (3.4) | % | | (27,380) | | | 1,609,295 | | | (2.3) | % |
Short-term debt - servicer advance financing | | Short-term debt - servicer advance financing | | (6,110) | | | 241,582 | | | (3.4) | % | | (3,414) | | | 166,605 | | | (2.7) | % |
Promissory notes | | Promissory notes | | (572) | | | 11,223 | | | (6.8) | % | | — | | | — | | | — | % |
Short-term debt - convertible notes, net | | (5,811 | ) | | 159,744 |
| | (4.9 | )% | | — |
| | — |
| | — | % | Short-term debt - convertible notes, net | | (1,330) | | | 34,001 | | | (5.2) | % | | — | | | — | | | — | % |
ABS issued - Redwood | | — |
| | — |
| | — | % | | (1,615 | ) | | 28,264 |
| | (7.6 | )% | |
ABS issued - Legacy Sequoia (2) | | (11,087 | ) | | 702,084 |
| | (2.1 | )% | | (9,842 | ) | | 885,752 |
| | (1.5 | )% | ABS issued - Legacy Sequoia (2) | | (3,154) | | | 209,931 | | | (2.0) | % | | (2,271) | | | 258,915 | | | (1.2) | % |
ABS issued - Sequoia Choice (2) | | (104 | ) | | 3,151 |
| | (4.4 | )% | | — |
| | — |
| | — | % | |
ABS issued - Sequoia (2) | | ABS issued - Sequoia (2) | | (84,041) | | | 3,491,194 | | | (3.2) | % | | (38,848) | | | 1,419,153 | | | (3.6) | % |
ABS issued - Freddie Mac SLST (2) | | ABS issued - Freddie Mac SLST (2) | | (40,287) | | | 1,424,032 | | | (3.8) | % | | (49,756) | | | 1,859,559 | | | (3.6) | % |
ABS issued - Freddie Mac K-Series (2) | | ABS issued - Freddie Mac K-Series (2) | | (13,099) | | | 419,954 | | | (4.2) | % | | (13,294) | | | 459,648 | | | (3.9) | % |
ABS issued - CAFL (2) | | ABS issued - CAFL (2) | | (144,883) | | | 3,105,387 | | | (6.2) | % | | (118,543) | | | 3,041,714 | | | (5.2) | % |
Long-term debt facilities | | Long-term debt facilities | | (37,664) | | | 1,231,057 | | | (4.1) | % | | (32,518) | | | 776,846 | | | (5.6) | % |
Long-term debt - FHLBC | | (15,125 | ) | | 1,999,999 |
| | (1.0 | )% | | (8,634 | ) | | 1,974,582 |
| | (0.6 | )% | Long-term debt - FHLBC | | — | | | — | | | — | % | | (2) | | | 374 | | | (0.7) | % |
Long-term debt - other | | (22,407 | ) | | 481,232 |
| | (6.2 | )% | | (30,461 | ) | | 680,576 |
| | (6.0 | )% | |
Long-term debt - corporate | | Long-term debt - corporate | | (33,771) | | | 706,504 | | | (6.4) | % | | (28,345) | | | 650,828 | | | (5.8) | % |
Total interest expense | | (72,708 | ) | | 4,314,044 |
| | (2.2 | )% | | (67,991 | ) | | 4,719,380 |
| | (1.9 | )% | Total interest expense | | (405,992) | | | 12,503,181 | | | (4.3) | % | | (314,371) | | | 10,242,937 | | | (4.1) | % |
Net Interest Income | | $ | 103,881 |
| | | | | | $ | 122,030 |
| | | | | Net Interest Income | | $ | 128,525 | | | $ | 98,351 | | |
| |
(1) | Average balances for residential loans held-for-sale, residential loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value. |
| |
(2) | (1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for certain ABS issued, which is based upon fair value. (2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia Choice and the interest expense from ABS issued - Sequoia Choice represent activity from our consolidated Sequoia Choice entity. |
The following table presents net interest income by segment for the three and nine months ended September 30, 2017 and 2016.
Table 6 – Net Interest Income by Segment
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Net Interest Income by Segment | | | | | | | | | | | | | |
Investment Portfolio | | $ | 37,578 |
| | $ | 42,163 |
| | $ | (4,585 | ) | | | $ | 113,166 |
| | $ | 131,306 |
| | $ | (18,140 | ) |
Residential Mortgage Banking | | 6,491 |
| | 5,005 |
| | 1,486 |
| | | 15,053 |
| | 13,891 |
| | 1,162 |
|
Corporate/Other | | (8,775 | ) | | (7,859 | ) | | (916 | ) | | | (24,338 | ) | | (23,167 | ) | | (1,171 | ) |
Net Interest Income | | $ | 35,294 |
| | $ | 39,309 |
| | $ | (4,015 | ) | | | $ | 103,881 |
| | $ | 122,030 |
| | $ | (18,149 | ) |
Additional details regarding the activities impacting net interest income at each segment are included in the “Results of Operations by Segment” section that follows.
The Corporate/Other line item in the table above primarily includes interest expense related to long-term debt not directly allocated to our segments and net interest income from consolidated Legacy Sequoia entities. Details regarding consolidated LegacyInterest income from residential loans - HFI at Sequoia entities are included in the "Results of Consolidated Legacy Sequoia Entities" section that follows.
The following table presents the net interest rate spread between the yield on unsecuritized loans and securities and the debt yield ofinterest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the short-term debt used in part to finance each investment typeinterest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities. Interest income from multifamily loans at September 30, 2017.
Table 7 –Freddie Mac K-Series and the interest expense from ABS issued - Freddie Mac K-Series represent activity from our consolidated Freddie Mac K-Series entities. Interest Expense — Specific Borrowing Costsincome from single-family rental loans - HFI at CAFL, bridge loans - HFI at CAFL and the interest expense from ABS issued - CAFL represent activity from our consolidated CAFL entities.
|
| | | | | | |
September 30, 2017 | | Residential Loans Held-for-Sale | | Residential Securities |
Asset yield | | 4.09 | % | | 5.10 | % |
Short-term debt yield | | 2.80 | % | | 2.46 | % |
Net Spread | | 1.29 | % | | 2.64 | % |
For additional discussion on short-term debt, including information regarding margin requirements and financial covenants, see “Risks Relating to Debt Incurred under Short-Term and Long-Term Borrowing Facilities" in the Liquidity and Capital Resources section of this MD&A.
Results of Operations by Segment
As discussed in the Introduction section of this MD&A, we changed our reportable segments in the first quarter of 2017 and nowWe report on our business using two distinctthree segments: Investment Portfolio and Residential Mortgage Banking. Our segments are based on our organizationalBanking, Business Purpose Mortgage Banking, and management structure, which aligns with how our results are monitored and performance is assessed.Investment Portfolio. For additional information on our segments, refer to Note 2124 of our Notes to Consolidated Financial Statements in Part I, Item I1 of this Quarterly Report on Form 10-Q.
The following table presents the segment contribution from our twothree segments reconciled to our consolidated net (loss) income for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 84 – Segment Results Summary
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
(In Thousands) | | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | (In Thousands) | | 2022 | | 2021 | | Change | | | 2022 | | 2021 | | Change |
Segment Contribution from: | | | | | | | | | | | | | | Segment Contribution from: | | | | | | | | | | | | | |
Residential Mortgage Banking | | Residential Mortgage Banking | | $ | (640) | | | $ | 19,406 | | | $ | (20,046) | | | | $ | (7,371) | | | $ | 74,469 | | | $ | (81,840) | |
Business Purpose Mortgage Banking | | Business Purpose Mortgage Banking | | (3,856) | | | 10,837 | | | (14,693) | | | | (27,054) | | | 31,146 | | | (58,200) | |
Investment Portfolio | | $ | 41,739 |
| | $ | 63,743 |
| | $ | (22,004 | ) | | | $ | 137,185 |
| | $ | 155,863 |
| | $ | (18,678 | ) | Investment Portfolio | | (22,404) | | | 71,085 | | | (93,489) | | | | (24,049) | | | 237,135 | | | (261,184) | |
Residential Mortgage Banking | | 16,755 |
| | 8,724 |
| | 8,031 |
| | | 35,643 |
| | 23,250 |
| | 12,393 |
| |
Corporate/Other | | (22,314 | ) | | (19,914 | ) | | (2,400 | ) | | | (63,355 | ) | | (73,216 | ) | | 9,861 |
| Corporate/Other | | (23,511) | | | (13,042) | | | (10,469) | | | | (60,988) | | | (67,182) | | | 6,194 | |
Net Income | | $ | 36,180 |
| | $ | 52,553 |
| | $ | (16,373 | ) | | | $ | 109,473 |
| | $ | 105,897 |
| | $ | 3,576 |
| |
Net (Loss) Income | | Net (Loss) Income | | $ | (50,411) | | | $ | 88,286 | | | $ | (138,697) | | | | $ | (119,462) | | | $ | 275,568 | | | $ | (395,030) | |
The following sections that follow provide a detailed discussion of thefurther detail on our three business segments and their results of operations at each of our two business segments for the three and nine months ended September 30, 2017 and 2016.2022.
Corporate/Other
The $2 million decreaseincrease in net incomeexpense from Corporate/Other for the three-month periods was primarily due to a $1$19 million increase in interest expensebenefit from convertible debt issuedtaxes in the third quarter of 2017,2021 resulting from the reversal of a $1 million decrease in income from consolidated Legacy Sequoia entities (the details of which are discussed in the "Results of Consolidated Legacy Sequoia Entities" section that follows), and $2deferred tax asset valuation allowance, as well as $6 million of upfront costs associated with the hiring of a new executivehigher interest expense in the third quarter of 2017. 2022 resulting from the issuance of new convertible debt in June 2022 and from our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates. These increases in expenses were offset by $11 million and $20 million decreases in the three- and nine-month periods, respectively, in compensation expense for corporate employees, primarily related to variable compensation, which decreased in association with lower earnings year-over-year.
The $10 million improvementdecrease in net expense from Corporate/Other for the nine-month periods was primarily due to the $11a $20 million of costs incurreddecrease in compensation expense for corporate employees, primarily related to variable compensation, which decreased in association with lower earnings year-over-year, offset both by $8 million of higher interest expense in 2022 and the restructuring$19 million benefit from income taxes in 2021 described previously.
Residential Mortgage Banking Segment
Our Residential Mortgage Banking segment consists of a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale to whole loan buyers, securitization through our Sequoia private-label securitization program, or transfer into our investment portfolio. We typically acquire prime jumbo mortgages and the related mortgage servicing rights on a flow basis from our extensive network of loan sellers. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential conforming and commercialloans held-for-sale within this segment. This segment’s main source of mortgage banking operations during the first quarterincome is net interest income from its inventory of 2016. In addition, $3 million of net losses related to our commercialloans held-for-sale, as well as income from mortgage banking operations wereactivities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Direct operating expenses and tax expenses associated with these activities are also included in Corporate/Other for the first quarter of 2016, prior to those operations being wound down.
this segment.
Investment Portfolio Segment
Our Investment PortfolioNet income from this segment is primarily comprised of our portfolio of residentialnet interest income earned on loans while they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on loans held-for-investmentfrom the time they are purchased to when they are sold or securitized, mark-to-market adjustments on new and financed through the FHLBCoutstanding loan purchase commitments and our real estategains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities portfolio. Additionally, beginning in the third quarter of 2017, this segment includes residential loans held-for-investment at our consolidated Sequoia Choice entity.
For segment reporting purposes, certain ofthat we retain from our Sequoia senior trading securities were included in our Residential Mortgage Banking segment. As such, theysecuritizations (many of which we consolidate for GAAP purposes) are excluded from any amountstransferred to and tables in this section and may not agree with similarly titled amounts and tables in our consolidated financial statements and footnotes.
The following table presents the components of segment contribution for the Investment Portfolio segment for the three and nine months ended September 30, 2017 and 2016.
Table 9 – Investment Portfolio Segment Contribution |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Interest income | | $ | 47,023 |
| | $ | 47,176 |
| | $ | (153 | ) | | | $ | 135,106 |
| | $ | 149,985 |
| | $ | (14,879 | ) |
Interest expense | | (9,445 | ) | | (5,013 | ) | | (4,432 | ) | | | (21,940 | ) | | (18,679 | ) | | (3,261 | ) |
Net interest income | | 37,578 |
| | 42,163 |
| | (4,585 | ) | | | 113,166 |
| | 131,306 |
| | (18,140 | ) |
Reversal of provision for loan losses | | — |
| | 859 |
| | (859 | ) | | | — |
| | 7,102 |
| | (7,102 | ) |
Net Interest Income after Provision | | 37,578 |
| | 43,022 |
| | (5,444 | ) | | | 113,166 |
| | 138,408 |
| | (25,242 | ) |
Non-interest income | | | | | | | | | | | | | |
MSR income, net | | 1,615 |
| | 3,770 |
| | (2,155 | ) | | | 6,106 |
| | 12,834 |
| | (6,728 | ) |
Investment fair value changes, net | | 1,372 |
| | 12,176 |
| | (10,804 | ) | | | 13,846 |
| | (16,505 | ) | | 30,351 |
|
Other income | | 1,197 |
| | 1,643 |
| | (446 | ) | | | 3,367 |
| | 4,157 |
| | (790 | ) |
Realized gains, net | | 1,734 |
| | 6,615 |
| | (4,881 | ) | | | 9,561 |
| | 25,745 |
| | (16,184 | ) |
Total non-interest income, net | | 5,918 |
| | 24,204 |
| | (18,286 | ) | | | 32,880 |
| | 26,231 |
| | 6,649 |
|
Direct operating expenses | | (1,324 | ) | | (2,751 | ) | | 1,427 |
| | | (4,371 | ) | | (7,689 | ) | | 3,318 |
|
Segment contribution before income taxes | | 42,172 |
| | 64,475 |
| | (22,303 | ) | | | 141,675 |
| | 156,950 |
| | (15,275 | ) |
Provision for income taxes | | (433 | ) | | (732 | ) | | 299 |
| | | (4,490 | ) | | (1,087 | ) | | (3,403 | ) |
Total Segment Contribution | | $ | 41,739 |
| | $ | 63,743 |
| | $ | (22,004 | ) | | | $ | 137,185 |
| | $ | 155,863 |
| | $ | (18,678 | ) |
The following table presents our primary portfolios of investment assetsheld in our Investment Portfolio segment at September 30, 2017 and December 31, 2016.
Table 10 – Investment Portfolio
|
| | | | | | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 | | Change |
Residential loans held-for-investment at Redwood | | $ | 2,268,802 |
| | $ | 2,261,016 |
| | $ | 7,786 |
|
Residential securities | | 1,113,201 |
| | 926,669 |
| | 186,532 |
|
Commercial/Multifamily securities | | 243,071 |
| | 91,770 |
| | 151,301 |
|
Residential loans held-for-investment at Sequoia Choice | | 317,303 |
| | — |
| | 317,303 |
|
Mortgage servicing rights | | 62,928 |
| | 118,526 |
| | (55,598 | ) |
Other assets | | 230,718 |
| | 217,554 |
| | 13,164 |
|
Total Assets at Investment Portfolio | | $ | 4,236,023 |
| | $ | 3,615,535 |
| | $ | 620,488 |
|
Overview
The increase in our total investments in the first nine months of 2017 was primarily attributable to the deployment of $230 million of capital into new residential and multifamily securities investments. Additionally, we consolidated $317 million of residential Sequoia Choice loans from a securitization we completed during the third quarter. At September 30, 2017, our economic investment in the Sequoia Choice entity was $31 million, representing subordinate securities we retained in the securitization. For the nine months ended September 30, 2017, the segment contribution from our Investment Portfolio was comprised of $43 million from residential loans, $73 million from residential securities, $18 million from commercial/multifamily securities, and $4 million from MSRs.
Net Interest Income
Net interest income from our Investment Portfolio primarily includes interest income from our residential loans held-for-investment and our securities, as well as the associated interest expense from short-term debt, FHLBC borrowings, and ABS issued. The following table presents the components of net interest income for our Investment Portfolio segment for the three and nine months ended September 30, 2017 and 2016.
Table 11 - Net Interest Income ("NII") from Investment Portfolio
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Net interest income from: | | | | | | | | | | | | | |
HFI residential loans at Redwood | | $ | 16,826 |
| | $ | 19,031 |
| | $ | (2,205 | ) | | | $ | 53,466 |
| | $ | 54,920 |
| | $ | (1,454 | ) |
HFI residential loans at Sequoia Choice | | 23 |
| | — |
| | 23 |
| | | 23 |
| | — |
| | 23 |
|
Residential securities | | 19,105 |
| | 16,279 |
| | 2,826 |
| | | 53,969 |
| | 51,013 |
| | 2,956 |
|
Commercial/Multifamily securities | | 1,298 |
| | 742 |
| | 556 |
| | | 4,388 |
| | 1,093 |
| | 3,295 |
|
Commercial mezzanine loans | | — |
| | 5,911 |
| | (5,911 | ) | | | 345 |
| | 23,477 |
| | (23,132 | ) |
Other interest income | | 326 |
| | 200 |
| | 126 |
| | | 975 |
| | 803 |
| | 172 |
|
NII from Investment Portfolio | | $ | 37,578 |
| | $ | 42,163 |
| | $ | (4,585 | ) | | | $ | 113,166 |
| | $ | 131,306 |
| | $ | (18,140 | ) |
The decrease in net interest income from our Investment Portfolio segment during the three- and nine-month periods was primarily due to the sale of our commercial mezzanine loans during 2016, as well as from higher interest costs on our FHLB borrowings during 2017 and higher interest expense associated with securities that were financed during the second and third quarters of 2017. These decreases were partially offset by higher net interest income from real estate securities, primarily resulting from higher average balances of these investments from the redeployment of capital.
Investment fair value changes, net
Market valuation changes included in Investment fair value changes, net, result from changes in the fair value of investments and their associated hedges, generally due to changes in market interest rates, changes in credit spreads, and reductions in the basis of investments due to changes in principal balances. See Note 18 of our Notes to Consolidated Financial Statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional detail regarding the components of Investment fair value changes, net presented on our consolidated statements of income.
The following table presents the components of investment fair value changes for the Investment Portfolio segment by investment type, inclusive of fair value changes of associated risk management derivatives, for the three and nine months ended September 30, 2017 and 2016.
Table 12 - Investment Portfolio Fair Value Changes, Net by Investment Type
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Market valuation changes: | | | | | | | | | | | | | |
Residential loans held-for-investment at Redwood | | $ | 1,412 |
| | $ | 3,187 |
| | $ | (1,775 | ) | | | $ | (11,065 | ) | | $ | (19,218 | ) | | $ | 8,153 |
|
Net investment in Sequoia Choice entity (1) | | (256 | ) | | — |
| | (256 | ) | | | (256 | ) | | — |
| | (256 | ) |
Residential trading securities | | (721 | ) | | 8,770 |
| | (9,491 | ) | | | 13,074 |
| | 3,227 |
| | 9,847 |
|
Commercial/Multifamily trading securities | | 1,210 |
| | 203 |
| | 1,007 |
| | | 13,327 |
| | 408 |
| | 12,919 |
|
Other valuation changes | | (273 | ) | | 16 |
| | (289 | ) | | | (1,234 | ) | | (922 | ) | | (312 | ) |
Investment Portfolio Fair Value Changes, Net | | $ | 1,372 |
| | $ | 12,176 |
| | $ | (10,804 | ) | | | $ | 13,846 |
| | $ | (16,505 | ) | | $ | 30,351 |
|
| |
(1) | Includes changes in fair value of the residential loans held-for-sale and the ABS issued at the entity, which netted together represent the change in value of our retained investment (subordinate securities) at the consolidated VIE. |
During the three and nine months ended September 30, 2017, the positive investment fair value changes primarily resulted from net increases in the fair value of our trading securities and their associated hedges, which were primarily due to tightening credit spreads on these securities during these periods. In addition, for the three months ended September 30, 2017, investment fair value changes, net benefited from an increase in the fair value of residential loans, driven by tighter credit spreads on these investments during that period. In both the three and nine months ended September 30, 2017, these increases were partially offset by decreases in the fair value of our residential loans held-for-investment and their associated hedges, primarily resulting from principal paydowns and hedging costs.
During the three months ended September 30, 2016, the positive investment fair value changes resulted from increases in the fair value of our investments in both trading securities and loans held-for-investment, which were primarily the result of tightening credit spreads. During the nine months ended September 30, 2016, the negative investment fair value changes primarily resulted from decreases in the fair value of our loans held for investment and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatility during the first nine months of the year, as well as decreases in fair value resulting from the write-off of premium from loan repayments.
The increase in fair values from commercial/multifamily trading securities and their associated derivatives during the three- and nine-month periods primarily resulted from credit spread tightening during each period.
MSR Income, net
The following table presents the components of MSR income, net for the three and nine months ended September 30, 2017 and 2016.
Table 13 – MSR Income, net
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Net servicing fee income | | $ | 3,396 |
| | $ | 8,726 |
| | $ | 14,775 |
| | $ | 27,241 |
|
Changes in fair value of MSR from the receipt of expected cash flows | | (1,914 | ) | | (5,705 | ) | | (7,392 | ) | | (17,766 | ) |
MSR reversal of provision for repurchases | | (8 | ) | | — |
| | 304 |
| | 208 |
|
MSR income before the effect of changes in interest rates and other assumptions | | 1,474 |
| | 3,021 |
| | 7,687 |
| | 9,683 |
|
Changes in fair value of MSRs from interest rates and other assumptions (1) | | 563 |
| | 7,085 |
| | (3,450 | ) | | (52,723 | ) |
Changes in fair value of associated derivatives | | (422 | ) | | (6,336 | ) | | 1,869 |
| | 55,874 |
|
Total net effect of changes in assumptions and rates | | 141 |
| | 749 |
| | (1,581 | ) | | 3,151 |
|
MSR Income, Net | | $ | 1,615 |
| | $ | 3,770 |
| | $ | 6,106 |
| | $ | 12,834 |
|
| |
(1) | Primarily reflects changes in prepayment assumptions on our MSRs due to changes in benchmark interest rates. |
MSR income before the effect of changes in interest rates and other assumptions declined in both the three- and nine-month periods, primarily due to the sale of our conforming MSRs during the second quarter of 2017. The total net effect of changes in assumptions and rates decreased during the nine-month periods, primarily due to lower hedging expenses on MSRs during the first quarter of 2016.
Realized Gains, net
During the third quarter of 2017, we realized gains of $2 million, primarily from the sale of $23 million of AFS securities. During the third quarter of 2016, we realized gains of $7 million, which included $2 million primarily from the sale of $26 million of AFS securities and $5 million from the sale of $208 million of commercial mezzanine loans.
Direct Operating Expenses and Provision for Income Taxes
The decrease in operating expenses at our Investment Portfolio segment for the three and nine months ended September 30, 2017 was primarily attributable to lower operating costs associated with the management of our servicing portfolio. For the three and nine months ended September 30, 2017, the provision for income taxes at our Investment Portfolio segment resulted from GAAP income earned at our TRS during those periods, primarily from MSR income and income on certain securities we hold at our TRS.
Residential Loans Held-for-Investment at Redwood Portfoliosegment.
The following table provides the activity of residential loans held-for-investmentheld in inventory for sale at Redwoodour mortgage banking business during the three and nine months ended September 30, 2017 and 2016.2022.
Table 145 – Loan Inventory for Residential Loans Held-for-Investment at Redwood -Mortgage Banking Operations — Activity
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2022 | | September 30, 2022 |
Balance at beginning of period | | $ | 990,924 | | | $ | 1,673,236 | |
Acquisitions | | 337,922 | | | 3,483,833 | |
Sales | | (602,842) | | | (3,653,601) | |
Transfers between segments (1) | | — | | | (684,491) | |
Principal repayments | | (29,486) | | | (72,771) | |
Changes in fair value, net | | (20,060) | | | (69,748) | |
Balance at End of Period | | $ | 676,458 | | | $ | 676,458 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Fair value at beginning of period | | $ | 2,360,234 |
| | $ | 2,277,561 |
| | $ | 2,261,016 |
| | $ | 1,791,195 |
|
Transfers between portfolios (1) | | (20,025 | ) | | 151,919 |
| | 226,893 |
| | 821,273 |
|
Principal repayments | | (74,550 | ) | | (146,151 | ) | | (228,271 | ) | | (351,955 | ) |
Changes in fair value, net | | 3,143 |
| | (655 | ) | | 9,164 |
| | 22,161 |
|
Fair Value at End of Period | | $ | 2,268,802 |
| | $ | 2,282,674 |
| | $ | 2,268,802 |
| | $ | 2,282,674 |
|
(1)Represents the fair value of the net transfers of loans from held-for-sale to held-for-investment within our Residential Lending investment portfolio, associated with securitizations we sponsored that we consolidate under GAAP. | |
(1) | Represents the net transfers of loans into our Investment Portfolio segment from our Residential Mortgage Banking segment and their reclassification from held-for-sale to held-for-investment. |
During the three and nine months ended September 30, 2017, we had net transfers of $202022, our residential mortgage loan conduit locked $461 million and $227 million, respectively, of residential loans from our Residential Mortgage Banking segment to our Investment Portfolio segment. At September 30, 2017, $2.26$4.10 billion of loans, were held by our FHLB-member subsidiaryrespectively ($256 million and were financed with $2.00$2.75 billion adjusted for expected pipeline fallout – i.e., loan purchase commitments), including $379 million and $3.59 billion of borrowings from the FHLBC. In connection with these borrowings, our FHLB-member subsidiary is required to hold $43Select loans and $82 million and $512 million of FHLB stock.
At September 30, 2017, the weighted average maturity of these FHLB borrowings was approximately eight yearsChoice loans, respectively, and they had a weighted average cost of 1.3% per annum. This interest cost resets every 13 weekspurchased $338 million and we seek to fix the interest cost of these FHLB borrowings over their weighted average maturity by using a combination of swaps, TBAs and other derivatives.
In October 2017, the FHLB increased the capital requirement on our borrowing facility, which effectively increases the portion$3.48 billion of loans, we finance with equity relative to what was required previously. This change will result in additional capital being allocated to these investments as well as a lower return onrespectively. During the capital as leverage on this portfolio will be reduced.
Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through the five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until its stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion.
The following table presents the unpaid principal balances for residential real estate loans held-for-investment at fair value by product type at September 30, 2017.
Table 15 – Characteristics of Residential Real Estate Loans Held-for-Investment at Redwood
|
| | | | | | | |
September 30, 2017 | | | | |
(Dollars in Thousands) | | Principal Balance | | Weighted Average Coupon |
Fixed - 30 year | | $ | 2,031,944 |
| | 4.10 | % |
Fixed - 15, 20, & 25 year | | 71,138 |
| | 3.64 | % |
Hybrid | | 128,343 |
| | 4.00 | % |
Total Outstanding Principal | | $ | 2,231,425 |
| | |
The outstanding loans held-for-investment at Redwood at September 30, 2017 were prime-quality, first lien loans, of which 95% were originated between 2013 and 2017 and 5% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 772 (at origination) and the weighted average loan-to-value ("LTV") ratio was 65% (at origination). At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.
Real Estate Securities Portfolio
The following table sets forth our real estate securities activity by collateral type in our Investment Portfolio segment for the three and nine months ended September 30, 2017.
Table 16 – Real Estate Securities Activity by Collateral Type
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Three Months Ended September 30, 2017 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | Residential | | Residential (1) | | Residential | | Commercial (2) | |
Beginning fair value | | $ | 176,962 |
| | $ | 73,337 |
| | $ | 797,895 |
| | $ | 170,309 |
| | $ | 1,218,503 |
|
Transfers | | 34,375 |
| | (34,375 | ) | | — |
| | — |
| | — |
|
Acquisitions | | | | | | | | | | |
Sequoia securities | | 5,908 |
| | — |
| | 23,125 |
| | — |
| | 29,033 |
|
Third-party securities | | 10,475 |
| | — |
| | 74,507 |
| | 74,123 |
| | 159,105 |
|
Sales | | | | | | | | | | |
Sequoia securities | | — |
| | — |
| | — |
| | — |
| | — |
|
Third-party securities | | (3,324 | ) | | — |
| | (45,486 | ) | | — |
| | (48,810 | ) |
Gains on sales and calls, net | | 824 |
| | — |
| | 910 |
| | — |
| | 1,734 |
|
Effect of principal payments (3) | | (7,324 | ) | | (1,745 | ) | | (7,944 | ) | | (2,484 | ) | | (19,497 | ) |
Change in fair value, net | | (1,897 | ) | | 1,816 |
| | 15,162 |
| | 1,123 |
| | 16,204 |
|
Ending Fair Value | | $ | 215,999 |
| | $ | 39,033 |
| | $ | 858,169 |
| | $ | 243,071 |
| | $ | 1,356,272 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | Residential | | Residential (1) | | Residential | | Commercial (2) | |
Beginning fair value | | $ | 173,613 |
| | $ | 85,479 |
| | $ | 667,577 |
| | $ | 91,770 |
| | $ | 1,018,439 |
|
Transfers | | 46,604 |
| | (46,604 | ) | | — |
| | — |
| | — |
|
Acquisitions | | | | | | | | | | |
Sequoia securities | | 11,555 |
| | — |
| | 55,529 |
| | — |
| | 67,084 |
|
Third-party securities | | 20,901 |
| | — |
| | 231,494 |
| | 156,248 |
| | 408,643 |
|
Sales | | | | | | | | | | |
Sequoia securities | | — |
| | — |
| | (26,601 | ) | | — |
| | (26,601 | ) |
Third-party securities | | (13,399 | ) | | — |
| | (92,035 | ) | | (15,858 | ) | | (121,292 | ) |
Gains on sales and calls, net | | 5,327 |
| | — |
| | 4,234 |
| | — |
| | 9,561 |
|
Effect of principal payments (3) | | (21,399 | ) | | (3,099 | ) | | (22,592 | ) | | (3,172 | ) | | (50,262 | ) |
Change in fair value, net | | (7,203 | ) | | 3,257 |
| | 40,563 |
| | 14,083 |
| | 50,700 |
|
Ending Fair Value | | $ | 215,999 |
| | $ | 39,033 |
| | $ | 858,169 |
| | $ | 243,071 |
| | $ | 1,356,272 |
|
| |
(1) | Re-REMIC securities, as presented herein, were created by third parties through the resecuritization of certain senior RMBS. |
| |
(2) | Our commercial securities are primarily comprised of Agency multifamily securities. |
| |
(3) | The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security. |
At September 30, 2017, our securities consisted2022, approximately 80% of fixed-rate assets (78%), adjustable-rate assets (5%), hybrid assets that reset within the next year (9%),locked loans were purchase-money loans and hybrid assets that reset between 12 and 36 months (8%).
We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. The following table presents the fair value of our real estate securities that20% were financed with repurchase debt at September 30, 2017.
Table 17 – Real Estate Securities Financed with Repurchase Debt |
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | Real Estate Securities | | Repurchase Debt | | Allocated Capital | | Weighted Average Price(1) | | Financing Haircut(2) |
(Dollars in Thousands, except Weighted Average Price) | | | | | |
Residential Securities | | | | | | | | | | |
Senior | | $ | 102,697 |
| | $ | (90,205 | ) | | $ | 12,492 |
| | $ | 98 |
| | 13 | % |
Subordinate - Mezzanine | | 337,153 |
| | (280,633 | ) | | 56,520 |
| | 99 |
| | 17 | % |
Total Residential Securities | | 439,850 |
| | (370,838 | ) | | 69,012 |
| | 99 |
| | 16 | % |
Commercial/Multifamily Securities | | 223,269 |
| | (178,973 | ) | | 44,296 |
| | 96 |
| | 20 | % |
Total | | $ | 663,119 |
| | $ | (549,811 | ) | | $ | 113,308 |
| | | |
|
| |
(1) | GAAP fair value per $100 of principal. |
| |
(2) | Allocated capital divided by GAAP fair value. |
At September 30, 2017, we had short-term debt incurred through repurchase facilities of $550 million, which was secured by $663 million of real estate securities. The remaining $693 million of our securities were financed with capital. Our repo borrowings were made under facilities with eight different counterparties, and the weighted average cost of funds for these facilities during the third quarter of 2017 was approximately 2.48% per annum.
At September 30, 2017, the securities we financed through repurchase facilities had no material credit issues. In addition to the allocated capital listed in the table above that directly supports our repurchase facilities (the "financing haircut”), we continue to hold a designated amount of supplemental risk capital available for potential margin calls or future obligations relating to these facilities.
The majority of the $103 million of senior securities noted in the table above are supported by seasoned residential loans originated prior to 2008. The $337 million of mezzanine securities financed through repurchase facilities at September 30, 2017 carry investment grade credit ratings and are supported by residential loans originated between 2012 and 2017. The loans underlying these securities have experienced minimal delinquencies to date. The $223 million of multifamily securities financed through repurchase facilities at September 30, 2017 carry investment grade credit ratings with 7%-8% of structural credit enhancement.
The following table presents our residential securities at September 30, 2017 and December 31, 2016, categorized by portfolio vintage (the years the securities were issued), and by priority of cash flows (senior, re-REMIC, and subordinate). We have additionally separated securities issued through our Sequoia platform or by third parties, including the Agencies.
Table 18 – Residential Securities by Vintage and Type
|
| | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | Sequoia 2012-2017 | | Third Party 2013-2017 | | Agency CRT 2013-2017 | | Third Party <=2008 | | Total Residential Securities | | % of Total Residential Securities |
(Dollars in Thousands) | | | | | |
Senior | | $ | 34,276 |
| | $ | 24,574 |
| | $ | — |
| | $ | 157,149 |
| | $ | 215,999 |
| | 19 | % |
Re-REMIC | | — |
| | — |
| | — |
| | 39,033 |
| | 39,033 |
| | 4 | % |
Subordinate | | | | | | | | | | | | |
Mezzanine (1) | | 157,050 |
| | 177,865 |
| | — |
| | — |
| | 334,915 |
| | 30 | % |
Subordinate | | 131,929 |
| | 77,625 |
| | 286,780 |
| | 26,920 |
| | 523,254 |
| | 47 | % |
Total Subordinate | | 288,979 |
| | 255,490 |
| | 286,780 |
| | 26,920 |
| | 858,169 |
| | 77 | % |
Total Securities (2) | | $ | 323,255 |
| | $ | 280,064 |
| | $ | 286,780 |
| | $ | 223,102 |
| | $ | 1,113,201 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | Sequoia 2012-2016 | | Third Party 2013-2016 | | Agency CRT 2013-2016 | | Third Party <=2008 | | Total Residential Securities | | % of Total Residential Securities |
(Dollars in Thousands) | | | | | |
Senior | | $ | 26,618 |
| | $ | 5,611 |
| | $ | — |
| | $ | 141,384 |
| | $ | 173,613 |
| | 19 | % |
Re-REMIC | | — |
| | — |
| | — |
| | 85,479 |
| | 85,479 |
| | 9 | % |
Subordinate | | | | | | | | | | | | |
Mezzanine (1) | | 136,007 |
| | 179,390 |
| | — |
| | — |
| | 315,397 |
| | 34 | % |
Subordinate | | 113,310 |
| | 64,450 |
| | 152,126 |
| | 22,294 |
| | 352,180 |
| | 38 | % |
Total Subordinate | | 249,317 |
| | 243,840 |
| | 152,126 |
| | 22,294 |
| | 667,577 |
| | 72 | % |
Total Securities | | $ | 275,935 |
| | $ | 249,451 |
| | $ | 152,126 |
| | $ | 249,157 |
| | $ | 926,669 |
|
| 100 | % |
| |
(1) | Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later. |
| |
(2) | Excludes $31 million of securities retained from our consolidated Sequoia Choice securitization. For GAAP purposes we consolidated $317 million of residential loans and $286 million of non-recourse ABS debt associated with these retained securities. |
At September 30, 2017 and December 31, 2016, we held $243 million and $92 million, respectively, of commercial securities that were all classified as subordinate securities and issued from 2015 through 2017. At September 30, 2017 and December 31, 2016, commercial securities included $223 million and $74 million, respectively, of multifamily securities issued by Agencies and the remainder were third-party CMBS.
At both September 30, 2017 and December 31, 2016, our available-for-sale securities were entirely comprised of residential securities. The following tables present the components of the interest income we earned on AFS securities for the three and nine months ended September 30, 2017 and 2016.
Table 19 – Interest Income — AFS Securities
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2017 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 1,374 |
| | $ | 1,928 |
| | $ | 3,302 |
| | $ | 103,781 |
| | 5.30 | % | | 7.43 | % | | 12.73 | % |
Re-REMIC | | 696 |
| | 734 |
| | 1,430 |
| | 46,646 |
| | 5.97 | % | | 6.29 | % | | 12.26 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 1,136 |
| | 509 |
| | 1,645 |
| | 115,565 |
| | 3.93 | % | | 1.76 | % | | 5.69 | % |
Subordinate | | 2,897 |
| | 1,460 |
| | 4,357 |
| | 154,904 |
| | 7.48 | % | | 3.77 | % | | 11.25 | % |
Total AFS Securities | | $ | 6,103 |
| | $ | 4,631 |
| | $ | 10,734 |
| | $ | 420,896 |
| | 5.80 | % | | 4.40 | % | | 10.20 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 609 |
| | $ | 529 |
| | $ | 1,138 |
| | $ | 68,219 |
| | 3.57 | % | | 3.10 | % | | 6.67 | % |
Re-REMIC | | 1,799 |
| | 3,596 |
| | 5,395 |
| | 113,638 |
| | 6.33 | % | | 12.66 | % | | 18.99 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 1,764 |
| | 665 |
| | 2,429 |
| | 180,108 |
| | 3.92 | % | | 1.48 | % | | 5.40 | % |
Subordinate | | 2,473 |
| | 1,334 |
| | 3,807 |
| | 126,877 |
| | 7.80 | % | | 4.21 | % | | 12.01 | % |
Total AFS Securities | | $ | 6,645 |
| | $ | 6,124 |
| | $ | 12,769 |
| | $ | 488,842 |
| | 5.44 | % | | 5.01 | % | | 10.45 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 3,976 |
| | $ | 5,971 |
| | $ | 9,947 |
| | $ | 100,808 |
| | 5.26 | % | | 7.90 | % | | 13.16 | % |
Re-REMIC | | 2,476 |
| | 2,619 |
| | 5,095 |
| | 57,283 |
| | 5.76 | % | | 6.10 | % | | 11.86 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 3,818 |
| | 1,777 |
| | 5,595 |
| | 131,460 |
| | 3.87 | % | | 1.80 | % | | 5.67 | % |
Subordinate | | 8,479 |
| | 4,330 |
| | 12,809 |
| | 151,487 |
| | 7.46 | % | | 3.81 | % | | 11.27 | % |
Total AFS Securities | | $ | 18,749 |
| | $ | 14,697 |
| | $ | 33,446 |
| | $ | 441,038 |
| | 5.67 | % | | 4.44 | % | | 10.11 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 3,594 |
| | $ | 3,832 |
| | $ | 7,426 |
| | $ | 126,592 |
| | 3.79 | % | | 4.04 | % | | 7.83 | % |
Re-REMIC | | 5,484 |
| | 10,400 |
| | 15,884 |
| | 112,029 |
| | 6.53 | % | | 12.38 | % | | 18.91 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 5,745 |
| | 2,038 |
| | 7,783 |
| | 193,643 |
| | 3.96 | % | | 1.40 | % | | 5.36 | % |
Subordinate | | 7,119 |
| | 4,261 |
| | 11,380 |
| | 121,014 |
| | 7.84 | % | | 4.69 | % | | 12.53 | % |
Total AFS Securities | | $ | 21,942 |
| | $ | 20,531 |
| | $ | 42,473 |
| | $ | 553,278 |
| | 5.29 | % | | 4.95 | % | | 10.24 | % |
During the fourth quarter of 2016 and the first nine months of 2017, several Re-REMIC securities we held were exchanged for the underlying senior securities. Several of these exchanged investments had higher relative yields and, as such, the balance of our investments in Re-REMICs and their associated yields declined and the yields of our senior securities increased during the three and nine months ended September 30, 2017, as compared to the same periods in 2016.
The following tables present the components of carrying value at September 30, 2017 and December 31, 2016 for our AFS securities.
Table 20 – Carrying Value of AFS Securities
|
| | | | | | | | | | | | | | | | |
September 30, 2017 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | | | |
Principal balance | | $ | 156,936 |
| | $ | 44,896 |
| | $ | 442,219 |
| | $ | 644,051 |
|
Credit reserve | | (3,024 | ) | | (5,810 | ) | | (38,041 | ) | | (46,875 | ) |
Unamortized discount, net | | (36,575 | ) | | (10,412 | ) | | (142,405 | ) | | (189,392 | ) |
Amortized cost | | 117,337 |
| | 28,674 |
| | 261,773 |
| | 407,784 |
|
Gross unrealized gains | | 37,155 |
| | 10,359 |
| | 83,185 |
| | 130,699 |
|
Gross unrealized losses | | (1,260 | ) | | — |
| | (1,085 | ) | | (2,345 | ) |
Carrying Value | | $ | 153,232 |
| | $ | 39,033 |
| | $ | 343,873 |
| | $ | 536,138 |
|
|
| | | | | | | | | | | | | | | | |
December 31, 2016 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | | | |
Principal balance | | $ | 148,862 |
| | $ | 95,608 |
| | $ | 456,359 |
| | $ | 700,829 |
|
Credit reserve | | (4,814 | ) | | (6,857 | ) | | (35,802 | ) | | (47,473 | ) |
Unamortized discount, net | | (41,877 | ) | | (19,613 | ) | | (136,622 | ) | | (198,112 | ) |
Amortized cost | | 102,171 |
| | 69,138 |
| | 283,935 |
| | 455,244 |
|
Gross unrealized gains | | 36,304 |
| | 16,341 |
| | 68,032 |
| | 120,677 |
|
Gross unrealized losses | | (1,929 | ) | | — |
| | (1,240 | ) | | (3,169 | ) |
Carrying Value | | $ | 136,546 |
| | $ | 85,479 |
| | $ | 350,727 |
| | $ | 572,752 |
|
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 each security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.
At September 30, 2017, credit reserves for our AFS securities totaled $47 million, or 7.3% of the principal balance of our AFS securities, as compared to $47 million, or 6.8%, at December 31, 2016. During the nine months ended September 30, 2017, increases resulting from acquisitions and impairments were partially offset by reductions in the credit reserve from realized losses, sales and transfers out of credit reserve to accretable discount.refinancings. During the three and nine months ended September 30, 2017, realized credit losses on our residential securities totaled $12022, we distributed $612 million and $3 million,$3.68 billion of loans (unpaid principal balance) through whole loan sales, respectively. During the three and nine months ended September 30, 2016, realized credit losses on our residential securities totaled $0.3 million and $3 million, respectively.
Residential Loans Held-for-Investment at Sequoia Choice Portfolio
During the third quarter of 2017, we issued our first securitization primarily comprised of expanded-prime Choice loans. We consolidate this Sequoia Choice securitization entity for financial reporting purposes in accordance with GAAP. This entity is independent of Redwood and the assets and liabilities of this entity are not, respectively, owned by us or legal obligations of ours. We record the assets and liabilities of the consolidated Sequoia Choice entity at fair value, based on the estimated fair value of the debt securities (ABS) issued from the securitizations, in accordance with GAAP provisions for collateralized financing entities. At September 30, 2017, the estimated fair value of our economic investment in the consolidated Sequoia Choice entity was $31 million, and was comprised of retained subordinate securities.
The following table presents the balance sheets of the consolidated Sequoia Choice entity at September 30, 2017 and December 31, 2016.
Table 21 – Consolidated Sequoia Choice Entity Balance Sheets
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Residential loans, held-for-investment, at fair value | | $ | 317,303 |
| | $ | — |
|
Other assets | | 1,266 |
| | — |
|
Total Assets | | $ | 318,569 |
|
| $ | — |
|
Other liabilities | | $ | 1,045 |
| | $ | — |
|
Asset-backed securities issued, at fair value | | 286,328 |
| | — |
|
Total liabilities | | 287,373 |
|
| — |
|
Equity (fair value of Redwood's retained investments in entity) | | 31,196 |
| | — |
|
Total Liabilities and Equity | | $ | 318,569 |
|
| $ | — |
|
The following table provides details of residential loan activity at the consolidated Sequoia Choice entity for the three and nine months ended September 30, 2017 and 2016.
Table 22 – Residential Loans Held-for-Investment at Sequoia Choice - Activity
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
New securitization issuance | | 318,129 |
| | | | 318,129 |
| | |
Changes in fair value, net | | (826 | ) | | — |
| | (826 | ) | | — |
|
Balance at End of Period | | $ | 317,303 |
|
| $ | — |
|
| $ | 317,303 |
|
| $ | — |
|
The outstanding loans held-for-investment at our Sequoia Choice entity at September 30, 2017 were prime-quality, first lien, 30-year, fixed-rate loans and were originated in 2014 or later. The gross weighted average coupon of these loans was 4.98%, the weighted average FICO score of borrowers backing these loans was 744 (at origination) and the weighted average original LTV ratio was 75% (at origination). At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.
Mortgage Servicing Rights Portfolio
Our MSRs are held and managed at our taxable REIT subsidiary and typically are acquired together with loans from originators and then separately recognized under GAAP when the MSR is retained and the associated loan is sold to a third party or transferred to a Sequoia residential securitization sponsored by us that meets the GAAP criteria for sale. In addition, we have also purchased MSRs on a flow basis from third parties that sold the associated loans directly to the Agencies. Although we own the rights to service loans, we contract with sub-servicers to perform these activities. Our receipt of MSR income is not subject to any covenants other than customary performance obligations associated with servicing residential loans. If a sub-servicer we contract with was to fail to perform these obligations, our servicing rights could be terminated and we would evaluate our MSR asset for impairment at that time.
The following table provides the activity for MSRs by portfolio for the three and nine months ended September 30, 2017.
Table 23 – MSR Activity by Portfolio
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(In Thousands) | | Jumbo | | Conforming | | Total MSRs | | Jumbo | | Conforming | | Total MSRs |
Balance at beginning of period | | $ | 63,084 |
| | $ | 686 |
| | $ | 63,770 |
| | $ | 60,003 |
| | $ | 58,523 |
| | $ | 118,526 |
|
Additions | | | | | | | | | | | | |
MSRs retained from Sequoia securitizations | | — |
| | — |
| | — |
| | 7,123 |
| | — |
| | 7,123 |
|
MSRs retained from third-party loan sales | | — |
| | — |
| | — |
| | 263 |
| | — |
| | 263 |
|
Purchased MSRs | | — |
| | 256 |
| | 256 |
| | — |
| | 571 |
| | 571 |
|
Sold MSRs | | — |
| | — |
| | — |
| | — |
| | (52,966 | ) | | (52,966 | ) |
Market valuation adjustments | | (1,281 | ) | | 183 |
| | (1,098 | ) | | (5,586 | ) | | (5,003 | ) | | (10,589 | ) |
Balance at End of Period | | $ | 61,803 |
| | $ | 1,125 |
| | $ | 62,928 |
| | $ | 61,803 |
| | $ | 1,125 |
| | $ | 62,928 |
|
During the nine months ended September 30, 2017,2022, we sold conforming MSRs with a fair value of $53 million. The remaining $63completed one securitization backed by $687 million of MSRs are primarily associated with loans transferred to Sequoia securitizations we completed over the past several years.(unpaid principal balance).
The following table presents characteristics of our MSR investments and their associated loans at September 30, 2017.
Table 24 – Characteristics of MSR Investments Portfolio
|
| | | | |
(Dollars In Thousands) | | September 30, 2017 |
Unpaid principal balance | | $ | 5,747,006 |
|
Fair value of MSRs | | $ | 62,928 |
|
MSR values as percent of unpaid principal balance | | 1.09 | % |
Gross cash yield (1) | | 0.26 | % |
Number of loans | | 8,900 |
|
Average loan size | | $ | 646 |
|
Average coupon | | 3.96 | % |
Average loan age (months) | | 38 |
|
Average original loan-to-value | | 67 | % |
Average original FICO score | | 770 |
|
60+ day delinquencies | | 0.08 | % |
| |
(1) | Gross cash yield is calculated by dividing the annualized quarterly gross servicing fees we received for the three months ended September 30, 2017, by the weighted average notional balance of loans associated with MSRs we owned during that period. |
At September 30, 2017, nearly all of our MSRs were comprised of base MSRs and we did not own any portion of a servicing right related to any loan where we did not own the entire servicing right. At September 30, 2017 and December 31, 2016,2022, we had $0.5total net jumbo loan exposure of $712 million and $1(down 5% from June 30, 2022), with an average gross mortgage rate of 5%. This balance included $703 million (principal value) of servicer advances outstanding related to our MSRs, respectively, which are presentedloans in Other assetsinventory on our consolidated balance sheets.
Residential Mortgage Banking Segment
The following table presents the components of segment contribution for the Residential Mortgage Banking segment for the three and nine months ended September 30, 2017 and 2016.
Table 25 – Residential Mortgage Banking Segment Contribution
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Interest income | | | | | | | | | | | | | |
Loans | | $ | 10,626 |
| | $ | 8,831 |
| | $ | 1,795 |
| | | $ | 26,515 |
| | $ | 24,038 |
| | $ | 2,477 |
|
Sequoia securities | | — |
| | — |
| | — |
| | | — |
| | 572 |
| | (572 | ) |
Total interest income | | 10,626 |
| | 8,831 |
| | 1,795 |
| | | 26,515 |
| | 24,610 |
| | 1,905 |
|
Interest expense | | (4,135 | ) | | (3,826 | ) | | (309 | ) | | | (11,462 | ) | | (10,719 | ) | | (743 | ) |
Net interest income | | 6,491 |
| | 5,005 |
| | 1,486 |
| | | 15,053 |
| | 13,891 |
| | 1,162 |
|
Mortgage banking activities, net | | 21,200 |
| | 9,766 |
| | 11,434 |
| | | 50,850 |
| | 26,774 |
| | 24,076 |
|
Direct operating expenses | | (6,107 | ) | | (5,807 | ) | | (300 | ) | | | (18,009 | ) | | (17,175 | ) | | (834 | ) |
Segment contribution before income taxes | | 21,584 |
| | 8,964 |
| | 12,620 |
| | | 47,894 |
| | 23,490 |
| | 24,404 |
|
Provision for income taxes | | (4,829 | ) | | (240 | ) | | (4,589 | ) | | | (12,251 | ) | | (240 | ) | | (12,011 | ) |
Segment Contribution | | $ | 16,755 |
| | $ | 8,724 |
| | $ | 8,031 |
| | | $ | 35,643 |
| | $ | 23,250 |
| | $ | 12,393 |
|
The following tables provide the activity of unsecuritized residential loans during the three and nine months ended September 30, 2017 and 2016.
Table 26 – Residential Loans Held-for-Sale — Activity
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 837,371 |
| | $ | 882,380 |
| | $ | 835,399 |
| | $ | 1,115,738 |
|
Acquisitions | | 1,462,116 |
| | 1,252,135 |
| | 3,791,471 |
| | 3,812,863 |
|
Sales (1) | | (1,393,323 | ) | | (774,106 | ) | | (3,465,835 | ) | | (2,874,215 | ) |
Transfers between portfolios (2) | | 20,025 |
| | (151,919 | ) | | (226,893 | ) | | (821,273 | ) |
Principal repayments | | (16,436 | ) | | (20,574 | ) | | (38,704 | ) | | (56,495 | ) |
Changes in fair value, net | | 15,928 |
| | 598 |
| | 30,243 |
| | 11,896 |
|
Balance at End of Period | | $ | 925,681 |
| | $ | 1,188,514 |
| | $ | 925,681 |
| | $ | 1,188,514 |
|
| |
(1) | Includes $318sheet, $146 million of Choice loans securitized during the third quarter of 2017, which were not treated as sales for GAAP purposes and continue to be reported on our consolidated balance sheets within our Investment Portfolio segment. |
| |
(2) | Represents the net transfers of loans out of our Residential Mortgage Banking segment into our Investment Portfolio segment and their reclassification from held-for-sale to held-for-investment. |
Overview
During the first nine months of 2017, we purchased $3.79 billion of predominately prime residential jumbo loans, sold $874 million of jumbo loans to third parties and securitized $2.59 billion of jumbo loans through our Sequoia platform. In addition, we had net transfers of $227 million of jumbo loans to our Investment Portfolio segment and financed them with borrowings from the FHLBC. Our pipeline of loans identified for purchase (locked loans, unadjusted for fallout), and $137 million of forward sale agreements for loans. Given current market conditions, we reduced our capital allocation to Residential Mortgage Banking to $150 million at September 30, 2017 included $1.49 billionthe end of jumbo loans.the third quarter of 2022, down from $200 million at the end of the second quarter of 2022. As we look ahead, we expect conditions in the consumer residential sector to remain challenging for a number of quarters as industry volumes continue to be affected by rapidly increasing mortgage rates, which, along with record home price appreciation in recent years, has pushed housing affordability to new lows.
We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2017,2022, we had $438 millionresidential warehouse facilities outstanding with nine different counterparties, with $2.85 billion of warehouse debt outstandingtotal capacity and $2.10 billion of available capacity. These included non-marginable facilities (i.e., not subject to fundmargin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) with $1.38 billion of total capacity and marginable facilities with $1.48 billion of total capacity.
The following table presents key earnings and operating metrics for our Residential Mortgage Banking segment during the three and nine months ended September 30, 2022.
Table 6 – Residential Mortgage Banking Earnings Summary and Operating Metrics
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2022 | | 2021 | | Change | | | 2022 | | 2021 | | Change |
Mortgage banking (loss) income | | $ | 3,957 | | | $ | 40,121 | | | $ | (36,164) | | | | $ | 5,038 | | | $ | 131,279 | | | $ | (126,241) | |
Operating expenses | | (6,285) | | | (10,286) | | | 4,001 | | | | (20,692) | | | (33,170) | | | 12,478 | |
Benefit from (provision for) income taxes | | 1,688 | | | (10,429) | | | 12,117 | | | | 8,283 | | | (23,640) | | | 31,923 | |
Segment Contribution | | $ | (640) | | | $ | 19,406 | | | $ | (20,046) | | | | $ | (7,371) | | | $ | 74,469 | | | $ | (81,840) | |
Loan purchase commitments (loan locks, adjusted for expected fallout) | | $ | 256,044 | | | $ | 3,288,102 | | | $ | (3,032,058) | | | | $ | 2,749,910 | | | $ | 9,541,499 | | | $ | (6,791,589) | |
Residential mortgage banking income presented in the table above is comprised of net interest income from residential loans held-for-sale. held-for-sale in inventory and mortgage banking activities, net from this segment (see Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities, net). Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.
The weighted average cost of the borrowings outstanding under these facilities during the third quarter of 2017 was 2.86% per annum. Our warehouse capacity at September 30, 2017 totaled $1.33 billion across four separate counterparties, which should continue to provide sufficient liquidity to funddecrease in contribution from our residential mortgage banking operations during the three- and nine-month periods was primarily attributable to lower mortgage banking activities income, as discussed in the near-term.
Our residentialpreceding Consolidated Results of Operations section of this MD&A. While margins improved in the third quarter of 2022, a re-widening of credit spreads or further rate volatility could continue to negatively impact our margins and profitability. The decreases in mortgage banking operations created investments that allowed us to deploy $57 million of capital into our investment portfolio during the first nine months of 2017. At September 30, 2017, we had 446 loan sellers, up from 406 at the end of 2016. This included 187 jumbo sellers and 259 sellers from various FHLB districts participating in the FHLB's MPF Direct program.
Net Interest Income
Net interest income from residential mortgage banking is primarily comprised of interest income earned on residential loans from the time we purchase the loans to when we sell or securitize them,were partially offset by interest expense incurred on short-term warehouse debt used in part to finance the loans while we hold them on our consolidated balance sheet.
Net interest income from residential mortgage banking increased for bothlower general and administrative expenses, which declined during the three- and nine-month periods, primarily due to lower variable compensation expenses.
Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes for the third quarter of 2022 was due to an overall GAAP loss incurred at our TRS during that period.
Business Purpose Mortgage Banking Segment
Our Business Purpose Mortgage Banking segment consists of a platform that originates and acquires business purpose loans (consisting of SFR loans and bridge loans) for subsequent securitization, sale to whole loan warehouse borrowings usedbuyers, or transfer into our investment portfolio. SFR loans are business purpose mortgage loans to financeinvestors in single-family (primarily 1-4 unit) rental properties. Bridge loans are business purpose mortgage loans to investors rehabilitating and subsequently reselling or renting residential and multifamily properties. We typically originate SFR loans and distribute most of our residentialSFR loans held-for-salethrough our CAFL private-label securitization program and, on occasion, will sell them as whole loans. We originate and acquire bridge loans and typically transfer these loans into our Investment Portfolio where they will be retained for each period in 2017,investment; on occasion, we may sell them as comparedwhole loans. This segment also includes various derivative financial instruments that we utilize to 2016.manage certain risks associated with our inventory of SFR loans held-for-sale.
The amountNet income from this segment is primarily comprised of net interest income we earnearned on loans held-for-sale is dependentwhile they are held in inventory, mortgage banking activities income (including mark-to-market adjustments on many variables, including the amount of loans andfrom the time they are outstandingpurchased to when they are sold, securitized or transferred into our investment portfolio, fee income earned on originations, and gains/losses from associated hedges), and all direct expenses associated with these activities. Subordinate securities that we retain from our consolidated balance sheetCAFL securitizations (which we consolidate for GAAP purposes) and their interest rates, as well asbridge loans we originate in this segment are transferred to and held in our Investment Portfolio segment.
On July 1, 2022, we closed the amountpreviously announced acquisition of leverage we employ throughRiverbend, a private mortgage lender to investors in transitional residential and multifamily real estate. This acquisition adds capacity, product breadth and geographic footprint to our existing bridge loan origination platform.
The following table provides business purpose loan origination activity at Redwood during the use of short-term debtthree and nine months ended September 30, 2022.
Table 7 – Business Purpose Loans — Funding Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
(In Thousands) | | Single-Family Rental | | Bridge (1) | | Total | | Single-Family Rental | | Bridge (1) | | Total |
Fair value at beginning of period | | $ | 505,171 | | | $ | — | | | $ | 505,171 | | | $ | 358,309 | | | $ | — | | | $ | 358,309 | |
Fundings | | 99,736 | | | 470,425 | | | 570,161 | | | 966,648 | | | 1,446,610 | | | 2,413,258 | |
| | | | | | | | | | | | |
Sales | | (34,970) | | | (48,279) | | | (83,249) | | | (366,720) | | | (48,279) | | | (414,999) | |
Transfers between segments (2) | | (266,181) | | | (423,425) | | | (689,606) | | | (561,218) | | | (1,400,849) | | | (1,962,067) | |
Principal repayments | | (5,582) | | | (2,220) | | | (7,802) | | | (37,166) | | | (2,220) | | | (39,386) | |
Riverbend loans acquired at acquisition | | — | | | 59,748 | | | 59,748 | | | — | | | 59,748 | | | 59,748 | |
Changes in fair value, net | | (17,069) | | | (116) | | | (17,185) | | | (78,748) | | | 1,123 | | | (77,625) | |
Fair Value at End of Period | | $ | 281,105 | | | $ | 56,133 | | | $ | 337,238 | | | $ | 281,105 | | | $ | 56,133 | | | $ | 337,238 | |
(1)We originate bridge loans at our TRS and then transfer them to finance theour REIT. Origination fees and any fair value changes on these loans and the interest rates on that debt. These factors will impact net interest income in future periods.
Mortgage Banking Activities, Net
prior to transfer are recognized within Mortgage banking activities, net includeson our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, we record any changes in marketfair value from the date of bothorigination or purchase to the loans we hold for sale and commitments for loans we intend to purchase (collectively, our loan pipeline),time of securitization as well as the effect of hedges we utilize to manage risks associated with our loan pipeline. Our loan sale profit margins are measured over the period from when we commit to purchase a loan and subsequently sell or securitize the loan. Accordingly, these profit margins may encompass positive or negative market valuation adjustments on loans, hedging gains or losses associated with our loan pipeline, and any other related transaction expenses, and may be realized over the course of one or more quarters for financial reporting purposes.
The following table presents the components of residential mortgage banking activities, net. Amounts presented include both the changes in market values for loans that were sold and associated derivative positions that were settled during the periods presented, as well as changes in market values of loans, derivatives and hedges outstanding at the end of each period.
Table 27 – Components of Residential Mortgage Banking Activities, Net
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Changes in fair value of: | | | | | | | | | | | | | |
Residential loans, at fair value (1) | | $ | 28,135 |
| | $ | 12,671 |
| | $ | 15,464 |
| | | $ | 63,122 |
| | $ | 47,456 |
| | $ | 15,666 |
|
Sequoia securities | | — |
| | — |
| | — |
| | | — |
| | 1,455 |
| | (1,455 | ) |
Risk management derivatives (2) | | (7,077 | ) | | (3,287 | ) | | (3,790 | ) | | | (13,787 | ) | | (22,743 | ) | | 8,956 |
|
Other income, net (3) | | 142 |
| | 382 |
| | (240 | ) | | | 1,515 |
| | 606 |
| | 909 |
|
Total Residential Mortgage Banking Activities, Net | | $ | 21,200 |
| | $ | 9,766 |
| | $ | 11,434 |
| | | $ | 50,850 |
| | $ | 26,774 |
| | $ | 24,076 |
|
| |
(1) | Includes changes in fair value for loan purchase commitments. |
| |
(2) | Represents market valuation changes of derivatives that are used to manage risks associated with our accumulation of residential loans. |
| |
(3) | Amounts in this line include other fee income from loan acquisitions and the provision for repurchase expense, presented net. |
The increases in mortgage banking activities, net for bothon our consolidated statements of income. Once loans are transferred into a securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the three-carrying value and nine-month periods were primarily dueactivity of our bridge loans held-for-investment, see the Investment Portfolio section that follows.
(2)For single-family rental loans, amounts represent transfers of loans from held-for-sale at our Business Purpose Mortgage Banking segment to higherheld-for-investment at our Investment Portfolio segment, associated with securitizations we sponsored that we consolidate under GAAP. Bridge loan purchase volumeamounts represent the transfer of loans originated or acquired by our Business Purpose Mortgage Banking segment at our TRS and higher gross margins primarily duetransferred to improved securitization executionour Investment Portfolio segment at our REIT as described in 2017 as compared to 2016.the preceding footnote.
Loan purchase commitments ("LPCs"), adjusted for fallout expectations, were $1.57 billion and $4.07 billionSFR loan fundings for the three and nine months ended September 30, 2017, respectively. Our gross margins for our jumbo loans, which we define as net interest income plus income from mortgage banking activities, divided by LPCs, benefited from tightening credit spreads for both securitizations2022 included zero and whole loans during the first nine months of 2017 and remained above our long-term expectations.
At both September 30, 2017 and December 31, 2016, we had repurchase reserves of $4 million outstanding related to residential loans sold through this segment. For the nine months ended September 30, 2017 and 2016, we recorded $0.2$100 million of reversal of provision for repurchases and $0.5 million of provision for repurchases, respectively, that was included in incomeloans acquired from mortgage banking activities, net, in this segment. We review ourthird parties, respectively. Bridge loan repurchase reserves each quarter and adjust them as necessary based on current information available at each reporting date.
The following table details outstanding principal balances for residential loans held-for-sale by product type at September 30, 2017.
Table 28 – Characteristics of Residential Loans Held-for-Sale
|
| | | | | | | |
September 30, 2017 | | Principal Value | | Weighted Average Coupon |
(Dollars in Thousands) | | |
First Lien Prime | | | | |
Fixed - 30 year | | $ | 771,172 |
| | 4.34 | % |
Fixed - 10, 15, 20, & 25 year | | 28,869 |
| | 3.75 | % |
Hybrid | | 102,843 |
| | 3.50 | % |
ARM | | 703 |
| | 2.53 | % |
Total Outstanding Principal | | $ | 903,587 |
| |
|
|
Operating Expenses and Taxes
Operating expenses for this segment primarily include costs associated with the underwriting, purchase and sale of jumbo residential loans. Operating expenses were relatively consistent for both the three- and nine-month periods.
All residential mortgage banking activities are performed at our taxable REIT subsidiary and the provision for income taxes is generally correlated to the amount of this segment's contribution before income taxes in relation to the TRS's overall GAAP income and associated tax provision. The increase in provision for income taxes in both the three- and nine-month periods primarily resulted from higher segment contribution before income taxes for both periods in 2017. In addition, during 2016 we reversed our valuation allowance on certain deferred tax assets, which further reduced our tax provision in those periods.
Results of Consolidated Legacy Sequoia Entities
We sponsored Sequoia securitization entities prior to 2012 that are reported on our consolidated balance sheets for financial reporting purposes in accordance with GAAP. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not, respectively, owned by us or legal obligations of ours. We record the assets and liabilities of the consolidated Legacy Sequoia entities at fair value, based on the estimated fair value of the debt securities (ABS) issued from the securitizations, in accordance with GAAP provisions for collateralized financing entities. At September 30, 2017, the estimated fair value of our investments in the consolidated Legacy Sequoia entities was $19 million.
The following tables present the statements of incomefundings for the three and nine months ended September 30, 2017,2022 included zero and $22 million of loans acquired from third parties, respectively. During the three and nine months ended September 30, 2022, we acquired $60 million of bridge loans with our acquisition of Riverbend on July 1, 2022. During the nine months ended September 30, 2022, we completed two business purpose loan securitizations backed by $588 million of SFR loans, including a private securitization of $274 million of loans in the third quarter with a large global institutional investor. During the nine months ended September 30, 2022, we completed one business purpose loan securitization backed by approximately $250 million of bridge loans that includes a 24-month revolving feature. At September 30, 2022, we had $281 million of SFR loans and $56 million of bridge loans in inventory on our balance sheetssheet.
During the third quarter of 2022, the decline in overall volume was predominantly in our SFR product, as borrowers continue in this higher rate environment to prefer short-term fully prepayable bridge loans, for which demand remains elevated (driven by multifamily product). Given current market conditions, we reduced our capital allocation to Business Purpose Mortgage Banking to $100 million at the end of the consolidated Legacy Sequoia entitiesthird quarter of 2022, down from $150 million at the end of the second quarter of 2022 (excluding capital associated with goodwill and intangibles). While the fourth quarter has historically been a very busy one for BPL originations – with sponsors often seeking to complete transactions by year-end – we would expect the recent slowdown in lending activity to continue in some capacity, as transaction flow ebbs and borrowers not facing near-term maturities wait for more favorable conditions.
We utilize a combination of capital and loan warehouse facilities to manage our inventory of business purpose loans that we hold for sale. At September 30, 20172022, we had business purpose warehouse facilities outstanding with six different counterparties, with $3.00 billion of total capacity (used for both SFR and December 31, 2016.bridge loans) and $1.66 billion of available capacity (inclusive of capacity on non-recourse facilities). All amountsof these facilities are non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the statements of income and balance sheets presented below are included in our consolidated financial statements.
Table 29 – Consolidated Legacy Sequoia Entities Statements of Income
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change |
| | 2017 | | 2016 | | Change |
Interest income | | $ | 4,875 |
| | $ | 4,837 |
| | $ | 38 |
| | | $ | 14,576 |
| | $ | 14,525 |
| | $ | 51 |
|
Interest expense | | (3,838 | ) | | (3,274 | ) | | (564 | ) | | | (11,046 | ) | | (9,842 | ) | | (1,204 | ) |
Net interest income | | 1,037 |
| | 1,563 |
| | (526 | ) | | | 3,530 |
| | 4,683 |
| | (1,153 | ) |
Investment fair value changes, net | | (1,045 | ) | | (255 | ) | | (790 | ) | | | (3,842 | ) | | (2,086 | ) | | (1,756 | ) |
Net Income from Consolidated Legacy Sequoia Entities | | $ | (8 | ) | | $ | 1,308 |
| | $ | (1,316 | ) | | | $ | (312 | ) | | $ | 2,597 |
| | $ | (2,909 | ) |
Table 30 – Consolidated Legacy Sequoia Entities Balance Sheets
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Residential loans, held-for-investment, at fair value | | $ | 673,134 |
| | $ | 791,636 |
|
Other assets | | 4,065 |
| | 6,681 |
|
Total Assets | | $ | 677,199 |
| | $ | 798,317 |
|
Other liabilities | | $ | 540 |
| | $ | 518 |
|
Asset-backed securities issued, at fair value | | 657,960 |
| | 773,462 |
|
Total liabilities | | 658,500 |
| | 773,980 |
|
Equity (fair value of Redwood's retained investments in entities) | | 18,699 |
| | 24,337 |
|
Total Liabilities and Equity | | $ | 677,199 |
| | $ | 798,317 |
|
Net Interest Income at Consolidated Legacy Sequoia Entities
The decreases in net interest income for the three- and nine-month periods were primarily attributable to the continued pay down of loans at the consolidated entities.
Investment Fair Value Changes, net at Consolidated Legacy Sequoia Entities
Investment fair value changes, net at consolidated Legacy Sequoia entities includes the change in fairmarket value of the residential loans held-for-investment, REO, and the ABS issued at the entities, which netted together represent the change in value of our retained investments in the consolidated Legacy Sequoia entities. The negative investment fair value changes in both three- and nine-month periods were primarily related to the reduction in basis of retained IO securities as the loans underlying these securities continued to pay down.collateral that is non-delinquent).
Residential Loans at Consolidated Legacy Sequoia Entities
The following table provides details of residential loan activity at consolidated Legacy Sequoia entitiespresents an earnings summary for our Business Purpose Mortgage Banking segment for the three and nine months ended September 30, 20172022 and 2016.2021.
Table 318 – Residential LoansBusiness Purpose Mortgage Banking Earnings Summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2022 | | 2021 | | Change | | | 2022 | | 2021 | | Change |
Mortgage banking income | | $ | 17,887 | | | $ | 32,387 | | | $ | (14,500) | | | | $ | 22,267 | | | $ | 89,752 | | | $ | (67,485) | |
Operating expenses | | (24,302) | | | (18,065) | | | (6,237) | | | | (58,330) | | | (51,618) | | | (6,712) | |
Benefit from income taxes | | 2,559 | | | (3,485) | | | 6,044 | | | | 9,009 | | | (6,988) | | | 15,997 | |
Segment Contribution | | $ | (3,856) | | | $ | 10,837 | | | $ | (14,693) | | | | $ | (27,054) | | | $ | 31,146 | | | $ | (58,200) | |
Business Purpose Mortgage Banking income presented in the table above is comprised of net interest income from SFR loans held-for-sale in inventory, mortgage banking activities, net (see Note 20 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of mortgage banking activities), and other income, net for this segment. Operating expenses presented in the table above includes general and administrative expenses, loan acquisition costs and other expenses for this segment.
The decrease in contribution from our business purpose mortgage banking operations during the three and nine month periods was attributable to lower mortgage banking income and higher operating expenses. While margins stabilized during the third quarter of 2022, mortgage banking income year-to-date was negatively impacted by severe credit spread widening in the first half 2022 and remains challenged given current market conditions. Continued rate volatility or a further widening of spreads would continue to impact our margins and profitability at Consolidated Legacy Sequoia Entities — Activitythis business.
General and administrative expenses increased during the three- and nine-month periods, as lower variable compensation expenses were offset by higher fixed compensation and other costs associated with an increased headcount during 2022, in particular from the addition of employees from the Riverbend acquisition. Additionally, in the third quarter, we incurred $4 million of employee severance and transition-related expenses at this segment.
Activity at this segment is performed within our taxable REIT subsidiary and subject to federal and state income taxes. The benefit from income taxes during the three- and nine-month periods in 2022 was due to an overall GAAP loss incurred at our TRS during those periods.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 707,686 |
| | $ | 880,197 |
| | $ | 791,636 |
| | $ | 1,021,870 |
|
Principal repayments | | (37,742 | ) | | (46,810 | ) | | (139,099 | ) | | (147,748 | ) |
Transfers to REO | | (1,133 | ) | | (2,612 | ) | | (3,177 | ) | | (8,412 | ) |
Deconsolidation adjustments | | — |
| | — |
| | — |
| | (6,871 | ) |
Changes in fair value, net | | 4,323 |
| | 9,201 |
| | 23,774 |
| | (18,863 | ) |
Balance at End of Period | | $ | 673,134 |
| | $ | 839,976 |
| | $ | 673,134 |
| | $ | 839,976 |
|
Investment Portfolio SegmentCharacteristicsOur Investment Portfolio segment consists of Loans at Consolidated Legacy Sequoia Entitiesinvestments sourced through our residential and business purpose mortgage banking operations, including primarily securities retained from our residential and business purpose loan securitization activities (some of which we consolidate for GAAP purposes), business purpose residential and multifamily bridge loans, as well as third-party investments including RMBS issued by third parties (including Agency CRT securities), investments in Freddie Mac K-Series multifamily loan securitizations and re-performing loan securitizations (both of which we consolidate for GAAP purposes), servicer advance investments, HEIs, and other housing-related investments. This segment’s main sources of income are net interest income and other income from investments, changes in fair value of investments and associated hedges, and realized gains and losses upon the sale of securities. Direct operating expenses and tax provisions associated with these activities are also included in this segment.
The following table highlights unpaidpresents details of our Investment Portfolio at September 30, 2022 and December 31, 2021 organized by investments organically created through our mortgage banking segments and those acquired from third-parties. Amounts presented in the table represent our retained economic investments in consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, Servicing Investment and HEI securitizations as noted.
Table 9 – Investment Portfolio - Detail of Economic Interests
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2022 | | December 31, 2021 |
Organic Residential Investments | | | | |
Residential loans at Redwood (1) | | $ | 157,804 | | | $ | 172,047 | |
Residential securities at Redwood | | 106,576 | | | 143,838 | |
Residential securities at consolidated Sequoia entities (2) | | 223,920 | | | 245,417 | |
Other investments (3) | | 48,100 | | | 12,438 | |
Organic Business Purpose Investments | | | | |
Bridge loans | | 1,900,986 | | | 944,606 | |
Single-family rental securities at consolidated CAFL SFR entities (4) | | 314,431 | | | 301,506 | |
Other investments | | 972 | | | 5,935 | |
Third-Party Investments | | | | |
Residential securities at Redwood | | 131,055 | | | 195,930 | |
Residential securities at consolidated Freddie Mac SLST entities (5) | | 335,185 | | | 444,751 | |
Multifamily securities at Redwood | | 21,232 | | | 32,715 | |
Multifamily securities at consolidated Freddie Mac K-Series entities (6) | | 32,047 | | | 31,657 | |
Servicing investments (7) | | 92,530 | | | 102,540 | |
HEIs (8) | | 214,922 | | | 43,638 | |
Other investments | | 7,664 | | | 10,400 | |
Total Segment Investments | | $ | 3,587,424 | | | $ | 2,687,418 | |
(1)Balance comprised of loans called from Sequoia securitizations.
(2)Represents our retained economic investment in securities issued by consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $3.24 billion of loans and $3.01 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $3.63 billion of loans and $3.38 billion of ABS issued associated with these investments at December 31, 2021.
(3)Organic residential other investments at September 30, 2022 includes net risk share investments of $23 million, representing $30 million of restricted cash and other assets, net of other liabilities of $7 million.
(4)Represents our retained economic investment in securities issued by consolidated CAFL SFR securitization VIEs. For GAAP purposes, we consolidated $3.02 billion of loans and $2.70 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $3.49 billion of loans and $3.21 billion of ABS issued associated with these investments at December 31, 2021.
(5)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we consolidated $1.48 billion of loans and $1.15 billion of ABS issued associated with these investments at September 30, 2022. We consolidated $1.89 billion of loans and $1.45 billion of ABS issued associated with these investments at December 31, 2021.
(6)Represents our economic investment in securities issued by consolidated Freddie Mac K-Series securitization entities. For GAAP purposes, we consolidated $427 million of loans and $395 million of ABS issued associated with these investments at September 30, 2022. We consolidated $474 million of loans and $442 million of ABS issued associated with these investments at December 31, 2021.
(7)Represents our economic investment in consolidated Servicing Investment variable interest entities. At September 30, 2022, for GAAP purposes, we consolidated $308 million of servicing investments and $233 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities. At December 31, 2021, for GAAP purposes, we consolidated $385 million of servicing investments and $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these entities.
(8)At September 30, 2022 and December 31, 2021, represents HEIs owned at Redwood of $201 million and $33 million, respectively, as well as our retained economic investment in securities issued by the consolidated HEI securitization entity of $14 million and $10 million, respectively. At September 30, 2022, for GAAP purposes, we consolidated $140 million of HEIs and $105 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity. At December 31, 2021, for GAAP purposes, we consolidated $160 million of HEIs and $137 million of ABS issued, as well as other assets and liabilities for the consolidated HEI securitization entity.
The growth in our Investment Portfolio during the first nine months of 2022 was primarily attributable to a net increase in business purpose bridge loans and incremental investments in HEIs through third-party flow purchase agreements. See the Investments Detail and Activity section that follows for additional detail on our portfolio investments and their associated borrowings.
The following table presents an earnings summary for our Investment Portfolio segment for the three and nine months ended September 30, 2022 and 2021.
Table 10 – Investment Portfolio Earnings Summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2022 | | 2021 | | Change | | | 2022 | | 2021 | | Change |
Net interest income | | $45,006 | | $41,945 | | $ | 3,061 | | | | $ | 140,885 | | | $ | 105,066 | | | $ | 35,819 | |
Investment fair value changes, net | | (61,780) | | | 26,324 | | | (88,104) | | | | (165,297) | | | 121,812 | | | (287,109) | |
Other income, net | | 3,906 | | | 1,842 | | | 2,064 | | | | 15,423 | | | 7,121 | | | 8,302 | |
Realized gains, net | | — | | | 6,703 | | | (6,703) | | | | 2,581 | | | 17,803 | | | (15,222) | |
Operating expenses | | (3,872) | | | (4,684) | | | 812 | | | | (10,833) | | | (12,106) | | | 1,273 | |
Benefit from (provision for) income taxes | | (5,664) | | | (1,045) | | | (4,619) | | | | (6,808) | | | (2,561) | | | (4,247) | |
Segment Contribution | | $ | (22,404) | | | $ | 71,085 | | | $ | (93,489) | | | | $ | (24,049) | | | $ | 237,135 | | | $ | (261,184) | |
The decrease in contribution from the Investment Portfolio during the three- and nine-month periods was primarily attributable to negative investment fair value changes, as discussed in the preceding Consolidated Results of Operations section of this MD&A. These decreases were partially offset by higher net interest income and other income during the three- and nine-month periods, each as discussed in the Consolidated Results of Operations section of this MD&A.
The increase in net interest income from our Investment Portfolio during the nine-month periods primarily resulted from an increase in the average balance of investments in that period in 2022 as we deployed capital into new investments, including primarily into business purpose bridge loans. Net interest income for the nine months ended September 30, 2022, included yield maintenance income (triggered by prepayments) received on retained SFR securities of $8 million in the first quarter of 2022, $4 million in the second quarter of 2022, and $3 million in the third quarter of 2022. Additionally, during the first quarter of 2022, we recorded $8 million of discount accretion for AFS securities, much of which was associated with securities we expected to be called given high prepayment speeds experienced during 2021. As a result of interest rate increases, early in 2022 we changed our assumptions for expected call dates for certain available-for-sale securities and discount accretion income from these securities declined, resulting in $1 million of discount accretion in both the second and third quarters of 2022. Net interest income from the investment portfolio was also impacted by higher borrowing costs in 2022, driven primarily by rising benchmark interest rates. While the majority of the floating-rate debt utilized within our investment portfolio finances floating-rate assets, we do have some exposure to rising interest rates and further increases in benchmark interest rates or borrowing spreads could negatively impact our net interest income. Additionally, to the extent market interest rates remain elevated and we refinance fixed-rate debt that matures in the near-term, our interest costs could increase and negatively impact our net interest income.
Investment fair value changes, net is primarily comprised of the change in fair value (both realized and unrealized) of our portfolio investments accounted for under the fair value option and hedges associated with these investments. See Table 5.6 in Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on the composition of investment fair value changes (the difference in amounts in the table above and in Table 5.6 in the notes to our consolidated financial statements relates to fair value changes for investments held at corporate/other). The negative investment fair value changes in the first nine months of 2022 were predominantly unrealized and resulted primarily from credit spread widening across many of our investments. Rising interest rates and slower actual and expected prepayment speeds resulted in positive fair value changes for our interest-only securities and hedges allocated to our investment portfolio, which partially offset the negative fair value changes. Additionally, credit improvements in several of our investments including, in particular, our retained CAFL SFR securities and bridge loans positively impacted fair values for those assets. While our investments generally continue to experience stable credit performance, further spread widening, a deterioration in credit, or declines in home price appreciation could result in additional negative investment fair value changes for our investments.
Other income, net within this segment is primarily comprised of income (loss) from our MSR investments, bridge loan extension fees, and risk share investment income. Details on the composition of Other income, net are included inNote 21 in Part I, Item 1 of this Quarterly Report on Form 10-Q. Realized gains, net generally result from sales or calls of available-for-sale securities we own. Refer to the analysis of this line item in the Consolidated Results of Operations section of this MD&A for an explanation of activity during 2022. Operating expenses at this segment are primarily attributable to compensation expenses and decreased overall during the three and nine month periods, as decreases in variable compensation were partially offset by higher fixed compensation costs resulting from higher headcount in 2022. We hold certain of our investments, primarily our MSRs, at our taxable REIT subsidiary. Our Provision for income taxes at this segment is primarily driven by the amount of income earned from portfolio assets as well as from gains or losses from hedges held at the TRS and, for 2022, reflects positive net income earned from investment portfolio activities at our taxable REIT subsidiary.
Investments Detail and Activity
This section presents additional details on our investments and their activity during the three and nine months ended September 30, 2022.
Real Estate Securities Portfolio
The following table sets forth our real estate securities activity by collateral type for the three and nine months ended September 30, 2022.
Table 11 – Real Estate Securities Activity by Collateral Type (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2022 | | Residential | | Multifamily | | Total |
(In Thousands) | | Senior | | | | Subordinate | | Mezzanine | |
Beginning fair value | | $ | 31,496 | | | | | $ | 231,652 | | | $ | 21,130 | | | $ | 284,278 | |
| | | | | | | | | | |
Acquisitions | | — | | | | | — | | | — | | | — | |
Sales | | (4,142) | | | | | — | | | — | | | (4,142) | |
Gains on sales and calls, net | | — | | | | | — | | | — | | | — | |
Effect of principal payments (2) | | — | | | | | (359) | | | — | | | (359) | |
Change in fair value, net | | 1,506 | | | | | (22,173) | | | 102 | | | (20,565) | |
Ending Fair Value | | $ | 28,860 | | | | | $ | 209,120 | | | $ | 21,232 | | | $ | 259,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | | Residential | | Multifamily | | Total |
(In Thousands) | | Senior | | | | Subordinate | | Mezzanine | |
Beginning fair value | | $ | 21,787 | | | | | $ | 322,909 | | | $ | 32,715 | | | $ | 377,411 | |
| | | | | | | | | | |
Acquisitions | | 5,006 | | | | | 10,000 | | | — | | | 15,006 | |
Sales | | (14,334) | | | | | (13,137) | | | — | | | (27,471) | |
Gains on sales and calls, net | | — | | | | | 1,914 | | | — | | | 1,914 | |
Effect of principal payments (2) | | — | | | | | (16,036) | | | (8,688) | | | (24,724) | |
Change in fair value, net | | 16,401 | | | | | (96,530) | | | (2,795) | | | (82,924) | |
Ending Fair Value | | $ | 28,860 | | | | | $ | 209,120 | | | $ | 21,232 | | | $ | 259,212 | |
(1)Amounts presented in this table include securities reported on our balance sheet and do not include securities we own in consolidated entities. See the following table for a presentation of all securities we own, including those in consolidated entities.
(2)Effect of principal balancespayments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for loansthat security.
At September 30, 2022, our securities at Redwood (exclusive of securities owned in consolidated Legacyentities) consisted of fixed-rate assets (90%), adjustable-rate assets (7%), and hybrid assets that reset within the next year (3%).
The following table sets forth activity in our real estate securities portfolio for the three and nine months ended September 30, 2022, organized by investments organically created through our mortgage banking segments and acquired from third-parties. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.
Table 12 – Activity of Real Estate Securities Owned at Redwood and in Consolidated Entities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2022 | | Residential Organic | | Business Purpose Organic | | Third-Party Investments | | Total |
| Sequoia Securities on Balance Sheet | | Consolidated Sequoia Securities | | Consolidated CAFL Securities | | Consolidated SLST Securities | | Consolidated Multifamily Securities | | Other Third-Party Securities | |
(In Thousands) | | | | | | | |
Beginning fair value | | $ | 112,562 | | | $ | 236,777 | | | $ | 307,413 | | | $ | 390,416 | | | $ | 31,732 | | | $ | 171,716 | | | $ | 1,250,616 | |
Acquisitions (1) | | — | | | — | | | 13,603 | | | — | | | — | | | — | | | 13,603 | |
Sales | | — | | | — | | | — | | | — | | | — | | | (4,142) | | | (4,142) | |
Gains on sales and calls, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Effect of principal payments (2) | | (123) | | | (1,856) | | | — | | | (13,144) | | | — | | | (236) | | | (15,359) | |
Change in fair value, net | | (5,863) | | | (11,001) | | | (6,585) | | | (42,088) | | | 315 | | | (14,702) | | | (79,924) | |
Ending Fair Value | | $ | 106,576 | | | $ | 223,920 | | | $ | 314,431 | | | $ | 335,184 | | | $ | 32,047 | | | $ | 152,636 | | | $ | 1,164,794 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | | Residential Organic | | Business Purpose Organic | | Third-Party Investments | | Total |
| Sequoia Securities on Balance Sheet | | Consolidated Sequoia Securities | | Consolidated CAFL Securities | | Consolidated SLST Securities | | Consolidated Multifamily Securities | | Other Third-Party Securities | |
(In Thousands) | | | | | | | |
Beginning fair value | | $ | 145,757 | | | $ | 245,417 | | | $ | 301,506 | | | $ | 444,751 | | | $ | 31,657 | | | $ | 231,654 | | | $ | 1,400,742 | |
Acquisitions (1) | | — | | | 3,742 | | | 37,290 | | | — | | | — | | | 15,006 | | | 56,038 | |
Sales | | (3,854) | | | (612) | | | — | | | — | | | — | | | (23,617) | | | (28,083) | |
Gains on sales and calls, net | | 284 | | | — | | | — | | | — | | | — | | | 1,630 | | | 1,914 | |
Effect of principal payments (2) | | (10,755) | | | (3,889) | | | — | | | (34,716) | | | — | | | (13,969) | | | (63,329) | |
Change in fair value, net | | (24,856) | | | (20,738) | | | (24,365) | | | (74,851) | | | 390 | | | (58,068) | | | (202,488) | |
Ending Fair Value | | $ | 106,576 | | | $ | 223,920 | | | $ | 314,431 | | | $ | 335,184 | | | $ | 32,047 | | | $ | 152,636 | | | $ | 1,164,794 | |
(1)During the nine months ended September 30, 2022, we retained $4 million of securities from one Sequoia securitization.
(2)Effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.
At September 30, 2022, our securities (both those held on our balance sheet and our economic interests in consolidated VIEs) consisted of fixed-rate assets (98%), adjustable-rate assets (1%) and hybrid assets that reset within the next year (1%).
We directly finance our holdings of real estate securities with a combination of non-recourse debt, non-marginable term debt and marginable debt in the form of repurchase (or “repo”) financing. At September 30, 2022, real estate securities with a fair value of $425 million (including securities owned in consolidated Sequoia and CAFL securitization entities) were financed with $305 million of long-term, non-marginable recourse debt through our subordinate securities financing facilities, re-performing loan securities with a fair value of $335 million were financed with $99 million of non-recourse securitization debt, and real estate securities with a fair value of $170 million (including securities owned in consolidated securitization entities) were financed with $124 million of short-term debt incurred through repurchase facilities with seven different counterparties. The remaining $235 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital.
The following table summarizes the credit characteristics of our entire real estate securities portfolio by productcollateral type at September 30, 2017.2022. This table includes both our securities held on balance sheet and our economic interests in securities we own in securitizations we consolidate in accordance with GAAP.
Table 3213 – CharacteristicsCredit Statistics of LoansReal Estate Securities Owned at Redwood and in Consolidated Legacy Sequoia Entities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | | | | | | | | Weighted Average Values |
| Market Value - IO Securities | | Market Value - Non-IO Securities | | Principal Balance - Non-IO Securities | | Gross Weighted Average Coupon | | 90+ Delinquency | | 3-Month Prepayment Rate | | Investment Thickness(1) |
(Dollars in Thousands) | | | | | | | |
Sequoia securities on balance sheet | | $ | 28,511 | | | $ | 78,065 | | | $ | 140,149 | | | 3.8 | % | | 0.4 | % | | 10 | % | | 7 | % |
Consolidated Sequoia securities | | 23,955 | | | 199,965 | | | 246,570 | | | 4.7 | % | | 2.0 | % | | 16 | % | | 42 | % |
Total Sequoia Securities | | 52,466 | | | 278,030 | | | 386,719 | | | 4.4 | % | | 1.5 | % | | 14 | % | | 30 | % |
Consolidated Freddie Mac SLST securities | | 18,089 | | | 317,095 | | | 498,023 | | | 4.5 | % | | 12.9 | % | | 8 | % | | 29 | % |
RPL securities on balance sheet | | 347 | | | 31,963 | | | 142,734 | | | 4.3 | % | | 3.7 | % | | 8 | % | | 2 | % |
Total RPL Securities | | 18,436 | | | 349,058 | | | 640,757 | | | 4.5 | % | | 12.0 | % | | 8 | % | | 26 | % |
Consolidated Freddie Mac K-Series securities | | — | | | 32,047 | | | 36,468 | | | 4.3 | % | | — | % | | — | % | | 10 | % |
Multifamily securities on balance sheet | | 166 | | | 21,066 | | | 22,809 | | | 4.1 | % | | — | % | | 24 | % | | 11 | % |
Total Multifamily Securities | | 166 | | | 53,113 | | | 59,277 | | | 4.2 | % | | — | % | | 10 | % | | 11 | % |
Consolidated CAFL securities | | 34,268 | | | 280,163 | | | 424,677 | | | 5.3 | % | | 2.2 | % | | 16 | % | | 17 | % |
Other third-party securities | | 12 | | | 99,082 | | | 142,912 | | | 3.4 | % | | 0.6 | % | | 10 | % | | 2 | % |
Total Securities | | $ | 105,348 | | | $ | 1,059,446 | | | $ | 1,654,342 | | | | | | | | | |
|
| | | | | | | |
September 30, 2017 | | | | |
(Dollars in Thousands) | | Principal Balance | | Weighted Average Coupon |
First Lien | | | | |
Hybrid (1) | | $ | 15,709 |
| | 3.29 | % |
ARM | | 722,133 |
| | 2.62 | % |
Total Outstanding Principal | | $ | 737,842 |
| | |
| |
(1) | All of these loans have reached the initial interest rate reset date and are currently adjustable rate mortgages. |
First lien adjustable rate mortgage ("ARM") and hybrid loans comprise all(1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by subordinate securities) in multifamily and other third-party securities.
We primarily target investments that have a sensitivity to housing credit risk, typically sourced through our operating businesses where we control the underwriting and review of underlying collateral. During the first nine months of 2022, our investment portfolio continued to demonstrate strong performance across a range of credit metrics, including loan delinquencies which generally remained stable, and loan-to-value ratios (LTVs), which continued to decline or remain stable. Given the seasoned nature of our investments (particularly within our RPL securities and Sequoia securities), many of these investments are supported by substantial home price appreciation and borrower equity in the consolidated Legacy Sequoia entitiesunderlying homes.
Bridge Loans Held-for-Investment
The following table provides the activity of bridge loans held-for-investment during the three and were primarily originated in 2006 or prior. For outstandingnine months ended September 30, 2022.
Table 14 – Bridge Loans Held-for-Investment - Activity
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2022 | | September 30, 2022 |
Fair value at beginning of period | | $ | 1,651,489 | | | $ | 944,606 | |
| | | | |
| | | | |
| | | | |
Transfers between portfolios (1) | | 423,425 | | | 1,400,849 | |
Transfers to REO | | — | | | (963) | |
Principal repayments | | (175,007) | | | (436,545) | |
Changes in fair value, net | | 1,079 | | | (6,961) | |
Fair Value at End of Period | | $ | 1,900,986 | | | $ | 1,900,986 | |
(1)We originate bridge loans at our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated Legacy Sequoia entitiesstatements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitizations, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss).
Our $1.90 billion of bridge loans held-for-investment and $56 million of bridge loans held-for-sale at September 30, 2017,2022 were comprised of first-lien, interest-only loans with a weighted average coupon of 8.05% and original maturities of six to 36 months. At origination, the weighted average FICO score of borrowers backing these loans was 728 (at origination)743 and the weighted average original LTV ratio of these loans was 66% (at origination). At September 30, 20172022, of the 3,579 loans in this portfolio, 49 of these loans with an aggregate fair value of $31 million and December 31, 2016, thean aggregate unpaid principal balance of $33 million were in foreclosure and 98 loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14with an aggregate fair value of $38 million and $19 million, respectively, and thean unpaid principal balance of $41 million were 90-or-more days delinquent (certain loans in foreclosure were also at least 90 days delinquent).
We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities, non-recourse, non-marginable warehouse facilities, and non-recourse securitization debt. During the second quarter of 2022, we completed our second bridge loan securitization. This bridge loan securitization included a 24-month revolving feature that allows us to add additional loans as loans within the structure pay down. The two bridge securitization structures have $550 million of total capacity. At September 30, 2022, we had: $524 million of debt incurred through short-term warehouse facilities with four counterparties, which was $12secured by $703 million of business purpose bridge loans; $565 million of debt incurred through long-term facilities with two different counterparties, which was secured by $700 million of business purpose bridge loans; and $11$485 million respectively.
of securitization debt secured by $512 million of business purpose bridge loans and $16 million of restricted cash.
Taxable IncomeThe following table provides the composition of bridge loans held-for-investment by product type as of September 30, 2022 and Tax ProvisionDecember 31, 2021.
Taxable IncomeTable 15 – Bridge Loans Held-for-Investment - By Product Type
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2022 | | December 31, 2021 |
Multifamily | | $ | 1,049,538 | | | $ | 326,004 | |
| | | | |
| | | | |
| | | | |
Renovate / Build to rent | | 660,870 | | | 375,729 | |
Fix and Flip | | 107,333 | | | 150,928 | |
Other | | 83,245 | | | 91,945 | |
Fair Value at End of Period | | $ | 1,900,986 | | | $ | 944,606 | |
Residential Loans
The following table summarizesprovides the activity of residential loans held at our taxable incomeinvestment portfolio during the three and distributionsnine months ended September 30, 2022.
Table 16 – Investment Portfolio Residential Loans - Activity
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2022 | | September 30, 2022 |
Fair value at beginning of period | | $ | 222,144 | | | $ | 172,048 | |
Acquisitions | | — | | | 102,258 | |
| | | | |
Sales | | (48,759) | | | (48,759) | |
| | | | |
| | | | |
Principal repayments | | (8,967) | | | (48,831) | |
Changes in fair value, net | | (6,614) | | | (18,912) | |
Fair Value at End of Period | | $ | 157,804 | | | $ | 157,804 | |
During the nine months ended September 30, 2022, we called three of our unconsolidated Sequoia securitizations and purchased $102 million (unpaid principal balance) of loans from the securitization trusts.
Home Equity Investments
Table 17 – HEI at Investment Portfolio Segment - Activity
| | | | | | | | | | | | | | | | | | | | |
Home Equity Investments(1) | | | | Three Months Ended | | Nine Months Ended | | | | |
(In Thousands) | | September 30, 2022 | | September 30, 2022 |
Balance at beginning of period | | | | $ | 276,366 | | | $ | 192,740 | | | | | |
New/additional investments | | | | 79,050 | | | 176,439 | | | | | |
Sales/distribution | | | | — | | | — | | | | | |
Repayments | | | | (9,361) | | | (35,187) | | | | | |
Changes in fair value, net | | | | (5,618) | | | 6,445 | | | | | |
Other | | | | — | | | — | | | | | |
Balance at End of Period | | | | $ | 340,437 | | | $ | 340,437 | | | | | |
(1)Our home equity investments presented in this table as of September 30, 2022, include $140 million of HEIs owned in our consolidated HEI securitization entity and $201 millionof HEIs owned directly at Redwood. At September 30, 2022, our economic investment in the consolidated HEI securitization entity was $14 million (for GAAP purposes, we consolidated $140 million of HEIs and $105 million of ABS issued, as well as other assets and liabilities for this entity).
Changes in fair value, net for HEIs primarily reflects changes in actual and expected home price appreciation (HPA). While home prices generally increased during the first half of 2022, in the third quarter of 2022, some regions began experiencing home price declines leading to shareholdersa downward adjustment of our HPA assumptions, which negatively affected HEI valuations. Additional details on our HEIs is included in Note 10 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other Investments
The following table sets forth our other investments activity at our Investment Portfolio segment by significant asset type for the three and nine months ended September 30, 20172022.
Table 18 – Other Investments at Investment Portfolio Segment - Activity(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2022 | | Servicing Investments(2) | | | | MSRs and Excess Servicing | | Other | | Total |
(In Thousands) | |
Balance at beginning of period | | $ | 273,210 | | | | | $ | 64,363 | | | $ | 1,868 | | | $ | 339,441 | |
New/additional investments | | — | | | | | — | | | — | | | — | |
Sales/distribution | | — | | | | | — | | | (813) | | | (813) | |
Servicer advances (repayments), net | | 5,629 | | | | | — | | | — | | | 5,629 | |
Changes in fair value, net | | (3,905) | | | | | 885 | | | 25 | | | (2,995) | |
Other | | — | | | | | — | | | (107) | | | (107) | |
Balance at End of Period | | $ | 274,934 | | | | | $ | 65,248 | | | $ | 973 | | | $ | 341,155 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | | Servicing Investments(2) | | | | MSRs and Excess Servicing | | Other | | Total |
(In Thousands) | |
Balance at beginning of period | | $ | 350,923 | | | | | $ | 56,669 | | | $ | 5,935 | | | $ | 413,527 | |
New/additional investments | | — | | | | | 4,543 | | | — | | | 4,543 | |
Sales/distribution | | — | | | | | — | | | (5,582) | | | (5,582) | |
Servicer (repayments) advances, net | | (65,772) | | | | | — | | | — | | | (65,772) | |
Changes in fair value, net | | (10,217) | | | | | 4,245 | | | 757 | | | (5,215) | |
Other | | — | | | | | (209) | | | (137) | | | (346) | |
Balance at End of Period | | $ | 274,934 | | | | | $ | 65,248 | | | $ | 973 | | | $ | 341,155 | |
(1)Excludes $72 million of Strategic investments which are included in Corporate/Other.
(2)Our servicing investments are owned through our consolidated Servicing Investment entities. At September 30, 2022, our economic investment in these entities was $93 million (for GAAP purposes, we consolidated $308 million of servicing investments, $233 million of non-recourse short-term securitization debt, as well as other assets and 2016. For eachliabilities for these entities). At December 31, 2021, our economic investment in these entities was $103 million (for GAAP purposes, we consolidated $385 million of servicing investments, $294 million of non-recourse short-term securitization debt, as well as other assets and liabilities for these periods, we had no undistributedentities).
Reductions in investments for our servicing investments primarily represents recoveries of servicing advances within our consolidated servicing VIEs. Changes in fair value, net for MSRs and Excess Servicing for the three and nine months ended September 30, 2022 includes a reduction in basis from the regular receipt of scheduled cash flows, which was more than offset by a positive impact to fair value from a decrease in forecasted prepayment speeds. Additional details on our Other Investments is included in Note 11 of our Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Income Taxes
Taxable Income, REIT Status and Dividend Characterization
As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income.income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.
Table 33 – Taxable IncomeIn September 2022, our Board of Directors declared a regular dividend of $0.23 per share for the third quarter of 2022, which was paid on September 30, 2022 to shareholders of record on September 23, 2022. As of September 30, 2022, our year-to-date dividend distributions of $0.69 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. 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.
While our minimum REIT dividend requirement is generally 90% of our annual REIT taxable income, we carried a $37 million federal net operating loss carry forward (NOL) into 2022 at our REIT that affords us the ability to retain REIT taxable income up to the NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of NOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our NOL and any remaining NOL amount will carry forward into future years. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands, except per Share Data) | | 2017 est. (1) | | 2016 | | 2017 est. (1) | | 2016 |
REIT taxable income | | $ | 19,923 |
| | $ | 26,001 |
| | $ | 56,042 |
| | $ | 71,169 |
|
Taxable REIT subsidiary income | | 17,781 |
| | 10,896 |
| | 36,528 |
| | 41,010 |
|
Total Taxable Income | | $ | 37,704 |
| | $ | 36,897 |
| | $ | 92,570 |
| | $ | 112,179 |
|
| | | | | | | | |
REIT taxable income per share | | $ | 0.26 |
| | $ | 0.34 |
| | $ | 0.73 |
| | $ | 0.93 |
|
Total taxable income per share | | $ | 0.49 |
| | $ | 0.48 |
| | $ | 1.21 |
| | $ | 1.46 |
|
| | | | | | | | |
Distributions to shareholders | | $ | 21,593 |
| | $ | 21,536 |
| | $ | 64,753 |
| | $ | 64,759 |
|
Distributions to shareholders per share | | $ | 0.28 |
| | $ | 0.28 |
| | $ | 0.84 |
| | $ | 0.84 |
|
| |
(1) | Our tax results for the three and nine months ended September 30, 2017 are estimates untilWhile the exact amount is uncertain at this time, we file our tax return for 2017. |
We currently expect all or nearly alla significant portion of the dividends we distribute in 2017 willour 2022 dividend distributions to be taxable to shareholders as ordinary income and a smaller portion, if any, willfor federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is generally non-taxable. Based onnontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules relatedapplicable to capital loss carryforwards,REITs, none of our 2017Redwood’s 2022 dividend distributions are currently expected to be characterized as long-term capital gains for federalgain dividends. The income or loss generated at our TRS will not directly affect the tax purposes.characterization of our 2022 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.
Tax Provision under GAAP
For the three and nine months ended September 30, 2017,2022, we recorded tax provisions of $5 million and $17 million, respectively, compared to a tax provision of $1 million for bothand a tax benefit of $10 million, respectively. For the three and nine months ended September 30, 2016.2021, we recorded tax benefit of $4 million and a tax provision of $14 million, respectively. Our tax provision is primarily derived from the activities at our TRS as we do not book a material tax provision associated with income generated at our REIT. The change inFor the nine-month periods, the switch to a tax benefit from a tax provision year-over-year was primarily the result of us benefitingGAAP income being recorded at our TRS during this period in 2021 versus GAAP losses being recorded at our TRS during this period in 2022. For the three-month periods, while GAAP income was earned at the TRS during both periods, the switch to a tax provision from a tax benefit year-over-year was due to the reversalrelease of the valuation allowance recorded againston a portion of our federal netdeferred tax assets in 2021.
Realization of our deferred tax assets ("DTAs") in 2016. As the federal valuation allowance was fully released in 2016, our TRS effective tax rate in 2017 is expected to be approximately equal to the federal statutory rate. The income or loss generated at our TRS will not affect the tax characterization of our 2017 dividends.
Realization of our DTAs is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determineTo the extent we determine it is more likely than not that we will not be able to which realization of our DTAs is not assured andrealize a deferred tax asset, we establish a valuation allowance accordingly. At December 31, 2016,2021, we reported net federal ordinary and capital DTAs with no valuation allowance recorded against them. We continue to believe it is more likely than not that we will realize all of our federal deferred tax liabilities ("DTLs"), and, as such, hadassets; therefore, there continues to be no associated valuation allowance.allowance recorded against our net federal DTAs. As a result ofwe have experienced year-to-date GAAP incomelosses at our TRS, we forecast that weare continuing to monitor our estimate of the realizability of our net deferred tax assets and will report net federal ordinary and capital DTLs at December 31, 2017 and consequently noreassess the need for a valuation allowance, is expected to be recorded against any federal DTA. in whole or in part, in future periods.
Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs. Our estimateDTAs as realization of net deferred tax assets could change in future periods to the extent that actual or revised estimates of futureour state DTAs is dependent on generating sufficient taxable income during the carryforward periods change from current expectations.
Differences between Estimated Total Taxable Income and GAAP Income
Differences between estimated taxable income and GAAP income are largely due to the following: (i) we cannot establish loss reserves for future anticipated events for tax but we can for GAAP, as realized credit losses are expensed when incurred for tax and these losses are anticipated through lower yields on assets or through loss provisions for GAAP; (ii) the timing, and possibly the amount, of some expenses (e.g., certain compensation expenses) are different for tax than for GAAP; (iii) since amortization and impairments differ for tax and GAAP, the tax and GAAP gains and losses on sales may differ, resulting in differences in realized gains on sale; (iv) at the REIT and certain TRS entities, unrealized gains and losses on market valuation adjustments of securities and derivatives are not recognized for tax until the instrument is sold or extinguished; (v) for tax, basis may not be assigned to mortgage servicing rights retained when whole loans are sold resulting in lower tax gain on sale; (vi) for tax, we do not consolidate securitization entities as we do under GAAP; and, (vii) dividend distributions to our REIT from our TRS are included in REIT taxable income, but not GAAP income. As a result of these differences in accounting, our estimated taxable income can vary significantly from our GAAP income during certain reporting periods.
The table below reconciles our estimated total taxable income to our GAAP income for the nine months ended September 30, 2017.
Table 34 – Differences between Estimated Total Taxable Income and GAAP Net Income
|
| | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
(In Thousands, except per Share Data) | | REIT (Est.) | | TRS (Est.) | | | Total Tax (Est.) | | GAAP | | Differences |
Interest income | | $ | 137,254 |
| | $ | 27,299 |
| | | $ | 164,553 |
| | $ | 176,589 |
| | $ | (12,036 | ) |
Interest expense | | (41,251 | ) | | (21,038 | ) | | | (62,289 | ) | | (72,708 | ) | | 10,419 |
|
Net interest income | | 96,003 |
| | 6,261 |
| | | 102,264 |
| | 103,881 |
| | (1,617 | ) |
Realized credit losses | | (2,865 | ) | | — |
| | | (2,865 | ) | | — |
| | (2,865 | ) |
Mortgage banking activities, net | | — |
| | 41,905 |
| | | 41,905 |
| | 50,850 |
| | (8,945 | ) |
MSR income, net | | — |
| | 5,149 |
| | | 5,149 |
| | 6,106 |
| | (957 | ) |
Investment fair value changes, net | | (14,476 | ) | | 5,213 |
| | | (9,263 | ) | | 9,990 |
| | (19,253 | ) |
Operating expenses | | (32,883 | ) | | (22,684 | ) | | | (55,567 | ) | | (56,789 | ) | | 1,222 |
|
Other income | | 11,021 |
| | 779 |
| | | 11,800 |
| | 3,367 |
| | 8,433 |
|
Realized gains, net | | (736 | ) | | — |
| | | (736 | ) | | 8,809 |
| | (9,545 | ) |
Provision for income taxes | | (22 | ) | | (95 | ) | | | (117 | ) | | (16,741 | ) | | 16,624 |
|
Net Income | | $ | 56,042 |
| | $ | 36,528 |
| | | $ | 92,570 |
| | $ | 109,473 |
| | $ | (16,903 | ) |
| | | | | | | | | | | |
Income per basic common share | | $ | 0.73 |
| | $ | 0.48 |
| | | $ | 1.21 |
| | $ | 1.39 |
| | $ | (0.18 | ) |
Potential Taxable Income Volatility
We expect period-to-period volatility in our estimated taxable income. A description of the factors that can cause this volatility is described in the Taxable Income portion ofsame jurisdictions in which the Results of Operations section in the MD&A included in Part II, Item 7,DTAs exist and we project most of our Annual Report on Form 10-K.state DTAs will expire prior to their utilization.
LIQUIDITY AND CAPITAL RESOURCES
Summary
OurIn addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash and liquidity consist of borrowings under mortgage loan warehouse facilities, secured term financing facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios,portfolio assets, proceeds from the sale of investment portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations to fund investments in residential loans,and manage hedges associated with those activities, to purchase investment securities and make other investments, to repay principal and interest on our warehouse facilities, repurchase agreements,debt, to meet margin calls associated with our debt and long-term debt,other obligations, to make dividend payments on our capital stock, and to fund our operations.
OurAt September 30, 2022, our total capital was $1.78$2.02 billion at September 30, 2017, and included $1.21$1.15 billion of equity capital and $0.57 billion$863 million of the total $2.57 billion ofconvertible notes and long-term debt on our consolidated balance sheet. This portionsheet, including $199 million of convertible debt included $201due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2019, $2452025, $215 million of convertible debt due in 2023,2027 and $140 million of trust-preferred securities due in 2037.
As of September 30, 2017,2022, our unrestricted cash was $297 million, and we estimate that our available capital waswe had approximately $330 million. Although we continue to evaluate our options with regard to our upcoming $250 million convertible debt maturity, at current market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio.
In February 2016, our Board of Directors approved an authorization for the repurchase of up to $100$160 million of our common stock and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced all previous share repurchase plans and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2017, there were no shares acquired under this authorization. At September 30, 2017, approximately $86 million of this current authorization remained available for the repurchases of shares of our common stock. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital described above.
capital. While we believe our available capitalcash is sufficient to fund our currently contemplated investment activities,operations, we may raise equity or debt capital from time-to-timetime to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, to fund our operations and investment activities or repay existing debt, our approach to raising capital will continue to be based on what we believe to be in the best long-term interests of shareholders.the company.
In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional mortgage loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, an extended dwell time (i.e., period of time financed using a particular financing facility) for certain types of loans, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender).
We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.
At September 30, 2022, in aggregate, we had $2.86 billion of secured recourse debt outstanding, financing our mortgage banking and investment portfolio, of which $480 million was marginable and $2.38 billion was non-marginable.
We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential and commercial loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."
Repurchase Authorization
During the third quarter of 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. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. This common stock repurchase authorization replaced the $100 million common stock repurchase authorization approved by the Board of Directors in 2018, has no time limit, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any specific number of shares or securities. The Board of Directors also continued its previous authorization for the repurchase of outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.
During the three and nine months ended September 30, 2022, we repurchased 3.4 million and 7.1 million shares of our common stock for $24 million and $56 million, respectively. At September 30, 2022, $101 million of the authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities. Subsequent to September 30, 2022, and through November 4, 2022, we repurchased $3 million of our convertible notes due in August 2023.
Cash Flows and Liquidity for the Nine Months Ended September 30, 20172022
Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the timing and amount of loan and securities acquisitions and sales and repayments, the profitability of mortgage banking activities, the timing and amount of securities acquisitions, sales and repayments, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.
Cash Flows from Operating Activities
Cash flows from operating activities were negative $629$129 million during the nine months ended September 30, 2017.2022. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. ExcludingDuring the first nine months of 2022, excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale and the settlement of associated derivatives (which cumulatively totaled $218 million), cash flows from operating activities were positive $13 million and positive $75 million during the first nine months of 2017 and 2016, respectively. Contributing to the negative cash flows from operating activities during the first nine months of 2017 were $38 million of net cash outflows associated with margin funding requirements for our derivatives and short-term debt, which are presented as Other assets on our consolidated balance sheets.$88 million.
Cash Flows from Investing Activities
During the nine months ended September 30, 2017,2022, our net cash provided by investing activities was $205$169 million and primarily resulted from proceeds from principal payments on loans held-for-investment, at Redwoodsecurities and at our consolidated Sequoia entities, proceeds from salesother investment in excess of MSRs, and principal payments from, and proceeds from net sales of, real estate securities. Although we generally intendcash deployed to hold our investment securities as long-term investments, we may sell certain of these securities in order to manage our interest rate risk and liquidity needs, to meet other operating objectives, and to adapt to market conditions. We cannot predict the timing and impact of future sales of investment securities, if any.
investments. Because many of our investment securities and loans are financed through repurchasevarious borrowing agreements, a significant portion of the proceeds from any sales or principal payments of our investment securities wouldthese assets are generally be used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated Sequoiasecuritization entities (as detailed in the subsection titled "Residential Loans at Consolidated Sequoia Entities" in the Results of Operations section of this MD&A) would generally be used to repay ABS issued by those entities.
In addition,Although we generally intend to hold our loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market conditions.
As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the nine months ended September 30, 2017,2022, we had transfers of residentialtransferred loans with a carrying value of $644 million frombetween held-for-sale and held-for-investment classification and long-term debt to held-for-investment, and we retained MSRs with a carrying value of $7 million from the sale of residential loans. Theseshort-term debt, which represent significant non-cash transactions that were not included in cash flows from investing activities.
Cash Flows from Financing Activities
During the nine months ended September 30, 2017,2022, our net cash provided by financing activities was $468$202 million. This primarily resulted from net long-term debt borrowings of $787 million, which included the issuance of asset-backed securities from our Sequoia Choice securitization in the third quarter of 2017, the issuance$215 million of convertible debt in August 2017, and $159June 2022, as well as $132 million of net borrowings under ABS issued, including from the issuance of short-term debt, whichCAFL SFR, CAFL bridge and Sequoia ABS securitizations during the nine months ended September 30, 2022. These amounts were partially offset by $146$1.04 billion of net paydowns on short-term borrowings, resulting primarily from a reduction in financed loan inventory at our mortgage banking operations through September 30, 2022, as well as the payment of our three quarterly dividends totaling $85 million. Cash raised through stock issuances under our ATM program of $68 million during the first quarter of repayments2022 were partially offset by stock repurchases of ABS issued.$56 million during the second and third quarters of 2022.
In December 2016, our Board of Directors announced its intention to pay a regular dividend of $0.28 per share per quarter in 2017. During the nine months ended September 30, 2017,2022, we paid $66 million of cash dividends on our common stock, representing cumulativedeclared dividends of $0.84$0.69 per common share. Additionally, in November 2017,On September 13, 2022, the Board of Directors declared a regular dividend of $0.28$0.23 per share for the fourththird quarter of 2017,2022, which is payablewas paid on December 28, 2017September 30, 2022 to shareholders of record on December 15, 2017.September 23, 2022.
In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are stock-basedgenerally long-term compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent cash payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit.
Short-Term DebtMaterial Cash Requirements
In the ordinarynormal course of our business, we use recourse debt through severalenter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, while others are off-balance sheet or recorded on the balance sheet in amounts different typesfrom the full contract or notional amount of borrowing facilities and usethe transaction.
Our material cash borrowings under these facilities to, among other things, fund the acquisition of residential loans (including those we acquire and originate in anticipation of securitization), finance investments in securitiesrequirements from known contractual and other investments,obligations during the twelve months following September 30, 2022 include maturing short-term debt, interest payments on short-term and otherwise fund our businesslong-term debt, payments on operating leases, and operations.funding commitments for bridge loans and under HEI flow purchase agreements. Our material cash requirements from known contractual and other obligations beyond the twelve months following September 30, 2022 include maturing long-term debt, interest payments on long-term debt, payments on operating leases and funding commitments for bridge loans and under HEI flow purchase agreements.
At September 30, 2017,2022, we had four short-term residentialcommitments to fund up to $990 million of additional advances on existing 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 (e.g. funding is dependent on actual progress on a project and we retain the option to conduct due diligence with respect to each draw request to confirm conditions have been met). Approximately $650 million of the commitments are for longer-term build-for-rent loans (which generally have funding caps below their full commitment amount) and are expected to fund over the next eight quarters. Additionally, at September 30, 2022, we had $1.66 billion of available warehouse capacity for business purpose loans and the majority of our $1.96 billion balance of bridge loans outstanding matures over the next 12 to 24 months, which will provide an additional source of cash that can be used to fund our commitments.
At September 30, 2022, we had outstanding flow purchase agreements with multiple third parties, with an aggregate commitment to purchase $350 million of HEIs, $149 million of which commitments remained outstanding. These purchase agreements specify monthly minimum and maximum amounts of HEIs subject to such purchase commitments. We may terminate the purchase agreement and associated purchase commitment relating to $85 million of remaining commitments upon 90 days prior notice. Subsequent to September 30, 2022, we entered into a repurchase agreement providing financing for HEIs. The committed amount and maximum borrowing limit under the facility is $150 million and the facility has a one-year term. As of the date of this report, there were no borrowings outstanding under this facility.
For additional information regarding our material cash requirements, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption Contractual Obligations. For additional information on commitments and contingencies as of September 30, 2022 that could impact our liquidity and capital resources, see Note 17 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Several of our loan warehouse facilities were established with a total outstanding debt balanceinitial one-year terms and are regularly amended on an annual basis to extend the terms for an additional year ahead of $438 million (secured by residential loanstheir maturity. We renewed several of these facilities in the first nine months of 2022 and have other such facilities with an aggregate fair value of $493 million) and a total uncommitted borrowing limit of $1.33 billion. In addition, at September 30, 2017, we had an aggregate outstanding short-term debt balance of $550 million under eight securities repurchase facilities, which were secured by securities with a fair market value of $663 million. We also had a secured line of credit withscheduled maturities during the next twelve months. While there is no outstanding debt balance and a total borrowing limit of $10 million (secured by securities with a fair market value of $6 million) at September 30, 2017.
During the three months ended June 30, 2017, $288 million principal amountassurance of our convertible notesability to renew these facilities, given current market conditions we would expect to extend these in the normal course of business.
We expect to meet our obligations coming due in 2018 and $2 million of associated unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At from September 30, 2017,2022, through a combination of cash on hand, payments of principal and interest we receive from our investment portfolio assets, proceeds from the outstanding principal amountsale of these notes was $250 million.
At investment portfolio assets, cash generated from our operating activities, or incremental borrowings under existing, new or amended financing arrangements. As of September 30, 2017,2022, we had $1.24 billionapproximately $500 million of short-term debt outstanding. pledgeable and unencumbered assets.
During the first nine months of 2017,2022, the highest balance of our short-term debt outstanding was $1.60$2.39 billion.See Note 14 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our short-term debt. See Note 15 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our long-term debt.
Liquidity Needs for our Mortgage Banking Activities Long-Term Debt
FHLBC Borrowings
In July 2014,We generally use loan warehouse facilities to finance the residential loans we acquire and the business purpose loans we originate or acquire in our FHLB-member subsidiary entered into a borrowing agreement withmortgage banking operations while we aggregate the Federal Home Loan Bankloans for sale or securitization. These facilities may be designated as short-term or long-term for financial reporting purposes, depending on the remaining maturity of Chicago. At September 30, 2017, under this agreement, our subsidiary could incurthe facility or the amount of time individual borrowings up to $2.00 billion, also referred to as “advances,” from the FHLBC secured by eligible collateral, including, but not limited to residential mortgage loans. During the nine months ended September 30, 2017, our FHLB-member subsidiary made no additional borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through a five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted tomay remain outstanding until stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion maximum.on a facility.
At September 30, 2017, $2.002022, we had residential warehouse facilities outstanding with nine different counterparties, with $2.85 billion of advances were outstanding under this agreement, which were classified as long-term debt,total capacity and $2.10 billion of available capacity. These included non-marginable facilities with a weighted average interest rate$1.38 billion of 1.26% per annumtotal capacity and a weighted average maturitymarginable facilities with $1.48 billion of eight years. At September 30, 2017, accrued interest payable on these borrowings was $4 million. Advances under this agreement are charged interest based on a specified margin over the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Our total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billion at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings at September 30, 2017, and is presented as restricted cash on our consolidated balance sheet. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At September 30, 2017, our subsidiary held $43 million of FHLBC stock that is included in Other assets on our consolidated balance sheets.
Convertible Notes
In August 2017, we issued $245 million principal amount of 4.75% convertible senior notes due 2023. After deducting the underwriting discount and issuance costs, we received approximately $238 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2017, the outstanding principal amount of these notes was $245 million. At September 30, 2017, the accrued interest payable balance on this debt was $1 million.
In November 2014, one of our taxable subsidiaries issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. After deducting the underwriting discount and issuance costs, we received approximately $198 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million.
In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. After deducting the underwriting discount and issuance costs, we received approximately $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. During the three months ended June 30, 2017, $288 million principal amount of these convertible notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million. At September 30, 2017, the accrued interest payable balance on this debt was $5 million.
Trust Preferred Securities and Subordinated Notescapacity.
At September 30, 2017,2022, we had trust preferred securitiesbusiness purpose warehouse facilities outstanding with six different counterparties, with $3 billion of total capacity and subordinated notes outstanding$1.66 billion of $100 millionavailable capacity. All of these facilities are non-marginable.
Several of these facilities have variable interest rates based on LIBOR or SOFR benchmarks and $40 million, respectively, issued by us in 2006 and 2007. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% and must be redeemed no later than 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedgerecent policy statements from the variability in this long-term debt interest expense. Including hedging costs and amortizationFederal Reserve indicate the likelihood of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. These swaps are accounted for as cash flow hedges with all interest recorded as a component of net interest income and other valuation changes recorded as a component of equity.
Asset-Backed Securities
At September 30, 2017, there were $738 million (principal balance) of loans owned at consolidated Legacy Sequoia securitization entities, which were funded with $730 million (principal balance) of ABS issued at these entities. In addition, at September 30, 2017, there were $308 million (principal balance) of loans owned at the consolidated Sequoia Choice securitization entity, which was funded with $277 million (principal balance) of ABS issued at this entity. The loans and ABS issued from these entities are reported at estimated fair value. See the subsections titled "Residential Loans at Sequoia Choice" and "Results of Consolidated Legacy Sequoia Entities"further increases in the Resultsfederal funds rate, which would result in higher benchmark rates and interest costs for us under certain of Operations sectionour debt facilities.
As discussed above, several of this MD&A forthe facilities we use to finance our mortgage banking loan inventory are short-term in nature and will require renewals. Additionally, because several of our warehouse facilities are uncommitted, at any given time we may not be able to obtain additional details on these entities.
financing under them when we need it, exposing us to, among other things, liquidity risks. Additional information regarding risks related to the debt we use to finance our mortgage banking operations can be found under the heading "Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities" that follows within this section.
Liquidity Needs for our Investment Portfolio
We use various forms of secured recourse and non-recourse debt to finance assets in our investment portfolio. We distinguish our debt between recourse and non-recourse, as our non-recourse debt is mostly comprised of ABS issued, which has unique characteristics that differentiate it in important ways from our recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.
ABS issued represents debt of securitization entities that we consolidate for GAAP reporting purposes. Our exposure to these entities is primarily through the financial interests we have purchased or retained from these entities (typically subordinate securities and interest only securities). 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. As the debt issued by these entities is not a direct obligation of Redwood, and since the debt generally can remain outstanding for the full term of the loans it is financing within each securitization, this debt effectively provides permanent financing for these assets. SeeNotes 4 and 15, respectively, in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our principles of consolidation and our asset-backed securities issued.
Separately, we use non-recourse debt in the form of non-marginable term facilities to finance a portion of our business purpose bridge loan portfolio. While this debt is non-recourse to Redwood, it does have fixed terms with prepayment options that allows us to refinance this debt or ultimately repay it upon maturity. The remainder of the debt we use to finance our investments is recourse debt. For securities we have financed, the majority of our financing is in the form of recourse non-marginable secured term debt, with the smaller remaining amount being marginable securities repurchase debt. Additionally, a portion of our business purpose bridge loan portfolio is financed with recourse non-marginable secured term debt.
We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. Recent policy statements from the Federal Reserve indicate the likelihood of further increases in the federal funds rate, which if enacted could result in lower net interest income to the extent our variable rate assets and liabilities are not aligned. Additionally, to the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income.
Corporate Capital
In addition to secured recourse and non-recourse debt we use specifically in association with our mortgage banking operations and within our investment portfolio, we also use unsecured recourse debt to finance our overall operations. This is generally in the form of convertible debt securities we issue in the public markets and also includes trust preferred securities. SeeNote 15 in Part II, Item 8 of our Annual Report on Form 10-K, for additional information on our long-term debt.
Risks Relating to Debt Incurred Under Short- and Long-Term Borrowing Facilities
As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and/or origination of residential and business purpose mortgage loans (including those we acquire or originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock. DebtRecourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, 2016,2021, under the captioncaption(s) “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities.Facilities,”
and “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements.”
Our sources of debt financing include short-term secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC.subordinate securities financing facilities.
Aggregate borrowing limits are stated under certain of these facilities, and certain other facilities have no stated borrowing limit, but eachmany of the facilities (with the exception of the $10 million committed line of short-term secured credit) isare uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined by the lender for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans or securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets). While
Under many of our mortgage loan warehouse facilities and our short-term securities repurchase facilities, while transferred or pledged assets are financed under athe facility, to the extent the market value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. We refer to borrowing facilities with margin call provisions based solely on the lender's determination, in its discretion, of changes in the market value of transferred or pledged assets, as marginable debt. Borrowing facilities that we refer to as non-marginable debt may be subject to a margin call due to delinquency or another credit event related to the mortgage or security being financed, a decline in the value of the underlying asset securing the collateral, or a change in the interest rate of a specified reference security relative to a base interest rate amount. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the estimated value of the property securing the mortgage loan that is financed by us under a loan warehouse facility, or based on the occurrence of a triggering credit event impacting the financed collateral which is followed by a decline in the market value of the financed collateral (as determined by the lender), in which case the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at September 30, 2022, only our short-term securities repurchase facilities (with $124 million of borrowings outstanding at September 30, 2022), and six of our residential mortgage loan warehouse facilities (with $356 million of borrowings outstanding at September 30, 2022) retain market-value based margin call provisions based solely on the lender's determination of market value and, as such, are considered marginable.
Margin call provisions under these facilities are further described in Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, 20162021 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 21A of our Annual Report on Form 10-K for the year ended December 31, 20162021 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in
Because many of these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2016 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”
Because these warehouseborrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162021 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20162021 under the heading “Market Risks.” In addition, with respect to residentialmortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162021 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20162021 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility. Additionally, our access to financing under the borrowing facility with the FHLBC is subject to the risks described under the heading “Risk Factors - Recently adopted Federal regulations may limit, eliminate, or reduce the attractiveness of our subsidiary’s ability to use borrowings from the Federal Home Loan Bank of Chicago to finance the mortgage loans and securities it holds and acquires, which could negatively impact our business and operating results” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.
At September 30, 2017,2022, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at September 30, 20172022 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at September 30, 20172022 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $600 millionmore than $5 billion in additional recourse indebtedness.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off Balance Sheet Arrangements
We do not have any material off balance sheet arrangements.
Contractual Obligations
The following table presents our contractual obligations and commitments at September 30, 2017, as well as the obligations of the securitization entities that we consolidate for financial reporting purposes.
Table 35 – Contractual Obligations and Commitments
|
| | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | Payments Due or Commitment Expiration by Period |
(In Millions) | | Less Than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | After 5 Years | | Total |
Obligations of Redwood | | | | | | | | | | |
Short-term debt | | $ | 988 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 988 |
|
Convertible notes | | 250 |
| | 201 |
| | — |
| | 245 |
| | 696 |
|
Anticipated interest payments on convertible notes | | 35 |
| | 40 |
| | 23 |
| | 12 |
| | 110 |
|
FHLBC borrowings | | — |
| | — |
| | — |
| | 2,000 |
| | 2,000 |
|
Anticipated interest payments on FHLBC borrowings | | 36 |
| | 88 |
| | 98 |
| | 154 |
| | 376 |
|
Other long-term debt | | — |
| | — |
| | — |
| | 140 |
| | 140 |
|
Anticipated interest payments on other long-term debt (1) | | 9 |
| | 19 |
| | 19 |
| | 136 |
| | 183 |
|
Accrued interest payable | | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
Operating leases | | 2 |
| | 4 |
| | 3 |
| | 9 |
| | 18 |
|
Total Redwood Obligations and Commitments | | $ | 1,337 |
| | $ | 352 |
| | $ | 143 |
| | $ | 2,696 |
| | $ | 4,528 |
|
Obligations of Consolidated Entities for Financial Reporting Purposes | | | | | | | | | | |
Consolidated ABS (2) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,007 |
| | $ | 1,007 |
|
Anticipated interest payments on ABS (3) | | 28 |
| | 57 |
| | 55 |
| | 249 |
| | 389 |
|
Accrued interest payable | | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Total Obligations of Entities Consolidated for Financial Reporting Purposes | | 30 |
| | 57 |
| | 55 |
| | 1,256 |
| | 1,398 |
|
Total Consolidated Obligations and Commitments | | $ | 1,367 |
| | $ | 409 |
| | $ | 198 |
| | $ | 3,952 |
| | $ | 5,926 |
|
| |
(1) | Includes anticipated interest payments related to hedges. |
| |
(2) | All consolidated ABS issued are collateralized by real estate loans. Although the stated maturity is as shown, the ABS obligations will pay down as the principal balances of these real estate loans or securities pay down. The amount shown is the principal balance of the ABS issued and not necessarily the value reported in our consolidated financial statements. |
| |
(3) | The anticipated interest payments on consolidated ABS issued is calculated based on the contractual maturity of the ABS and therefore assumes no prepayments of the principal outstanding at September 30, 2017. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Note 2 — Basis of Presentation and Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q10-Q.
We have elected the fair value option of accounting for a significant portion of the assets and some of the liabilities on our balance sheet, and the majority of these assets and liabilities utilize Level 3 valuation inputs, which require a significant level of estimation uncertainty. See Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q, for additional information on our assets and liabilities accounted for at fair value at September 30, 2022, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations. See Note 5 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016. Management discusses2021, incorporated herein by reference, for the ongoing development and selection ofsame information on these critical accounting policies with the audit committee of the board of directors.
We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities increases or decreasesas of December 31, 2021. Periodic fluctuations in the values of these assets and liabilities are inherently volatile and thus can lead to significant period-to-period GAAP earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing ofvolatility.
Additional detail on our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements areis included in the"Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2021, under the heading "Critical Accounting Estimates."
Market Risks
MARKET AND OTHER RISKS
We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.
Other Risks
In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and in this Quarterly Report on Form 10-Q.2021.
NEW ACCOUNTING STANDARDS
A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2021, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2016.2021.
Item 4. Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
There have been no changes in our internal control over financial reporting during the third quarter of 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about December 23, 2009,For information on our legal proceedings, see Note 17 to the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaintFinancial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the Superior CourtFinancial Statements included in our Annual Report on Form 10-K for the State of Washington (case number 09-2-46348-4 SEA) against Redwood Trust, Inc., our subsidiary, Sequoia Residential Funding, Inc. (“SRF”), Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”) alleging that the FHLB-Seattle Defendants made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Seattle Certificate”) issued in the Sequoia Mortgage Trust 2005-4 securitization transaction (the “2005-4 RMBS”) and purchased by the FHLB-Seattle. Specifically, the complaint alleged that the alleged misstatements concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Seattle Certificate. The FHLB-Seattle alleges claimsyear ended December 31, 2021 under the Securities Act of Washington (Section 21.20.005, et seq.)heading “Loss Contingencies - Litigation, Claims and sought to rescind the purchase of the Seattle Certificate and to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received) as well as attorneys’ fees and costs. The Seattle Certificate was issued with an original principal amount of approximately $133 million, and, at September 30, 2017, the FHLB-Seattle has received approximately $125 million of principal and $11 million of interest payments in respect of the Seattle Certificate. As of September 30, 2017, the Seattle Certificate had a remaining outstanding principal amount of approximately $8 million. The matter was subsequently resolved and the claims were dismissed by the FHLB Seattle as to all the FHLB Seattle Defendants. At the time the Seattle Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.Demands.”
On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaint in the Superior Court for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”) alleging that the Schwab Defendants made false or misleading statements in offering materials for various residential mortgage-backed securities sold or issued by the Schwab Defendants. Schwab alleged only a claim for negligent misrepresentation under California state law against SRF and sought unspecified damages and attorneys’ fees and costs from SRF. Schwab claimed that SRF made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Schwab Certificate”) issued in the 2005-4 RMBS and purchased by Schwab. Specifically, the complaint alleged that the misstatements for the 2005-4 RMBS concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Schwab Certificate. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2017, approximately $14 million of principal and $1 million of interest payments have been made in respect of the Schwab Certificate. As of September 30, 2017, the Schwab Certificate had a remaining outstanding principal amount of approximately $1 million. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.
Through certain of our wholly-owned subsidiaries, we have in the past engaged in, and expect to continue to engage in, activities relating to the acquisition and securitization of residential mortgage loans. In addition, certain of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of this involvement in the securitization and CDO businesses, we could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions, or lawsuits, and governmental authorities could allege that we violated applicable law or regulation in the conduct of our business. As an example, in July 2016 we became aware of a complaint filed by the State of California on April 1, 2016 against Morgan Stanley & Co. and certain of its affiliates alleging, among other things, that there were misleading statements contained in offering materials for 28 different mortgage pass-through certificates purchased by various California investors, including various California public pension systems, from Morgan Stanley and alleging that Morgan Stanley made false or fraudulent claims in connection with the sale of those certificates. Of the 28 mortgage pass-through certificates that are the subject of the complaint, two are Sequoia mortgage pass-through certificates issued in 2004 and two are Sequoia mortgage pass-through certificates issued in 2007. With respect to each of those certificates our wholly-owned subsidiary, RWT Holdings, Inc., was the sponsor and our wholly-owned subsidiary, Sequoia Residential Funding, Inc., was the depositor. At the time these four Sequoia mortgage pass-through certificates were issued, Sequoia Residential Funding, Inc. and Redwood Trust agreed to indemnify the underwriters of these certificates for certain losses and expenses they might incur as a result of claims made against them relating to these certificates, including, without limitation, certain legal expenses. Regardless of the outcome of this litigation, we could incur a loss as a result of these indemnities.
In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. At September 30, 2017, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described above was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.
In the ordinary course of any litigation matter, including certain of the above-referenced matters, we have engaged and may continue to engage in formal or informal settlement communications with the plaintiffs or co-defendants. Settlement communications we have engaged in relating to certain of the above-referenced litigation matters are one of the factors that have resulted in our determination to establish the loss contingency reserves described above. We cannot be certain that any of these matters will be resolved through a settlement prior to trial and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.
Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the above-referenced litigation matters may be materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters, including in the event that any of these matters proceeds to trial and the plaintiff prevails. Other factors that could result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.
Item 1A. Risk Factors
Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and under Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. In addition, the following risk factor reflects recent developments.2021.
Risks Related to the Potential Elimination or Reduction of the Mortgage-Interest Tax Deduction
Proposed federal tax legislation that was released on November 2, 2017 by the Chair of the Ways and Means Committee of the U.S. House of Representatives would limit the personal income tax deduction of mortgage interest on newly originated residential mortgages in several ways. It is unclear whether this proposed tax reform proposal will be enacted into law as proposed, modified, or abandoned. Elimination of, or restrictions on, the mortgage-interest tax deduction could negatively affect the U.S. housing market, the market value of residential mortgage loans and residential mortgage-backed securities, and the volume of future originations of residential mortgage loans, particularly jumbo mortgage loans, all of which could negatively impact our business or financial results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2017,2022, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
In February 2016,July 2022, our Board of Directors authorized the repurchase of up to $125 million of common stock. This common stock repurchase authorization replaces the $100 million common stock repurchase authorization approved anby the Board of Directors in 2018, has no time limit and may be modified, suspended or discontinued at any time. The Board of Directors also continued its previous authorization for the repurchase of up to $100 million of our common stock and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced all previous share repurchase plans and has no expiration date.securities. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three and nine months ended September 30, 2017, there were no2022, we repurchased 3.4 million shares acquired under this authorization.of our common stock for a total cost of $24 million. At September 30, 2017, approximately $862022, $101 million of this current authorization remained available for the repurchase of shares of our common stock.stock and outstanding debt securities. During the nine months ended September 30, 2022, we repurchased 7.1 million shares of our common stock for a total cost of $56 million under our current and previously-approved Board of Director authorizations.
The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended September 30, 2017.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased or Acquired | | Average Price per Share Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs |
(In Thousands, except per Share Data) | | | | |
July 1, 2022 - July 31, 2022 | | — | | | $ | — | | | — | | | $ | — | |
August 1, 2022 - August 31, 2022 | | 1,126 | | | $ | 8.07 | | | 1,126 | | | $ | 115,907 | |
September 1, 2022 - September 30, 2022 | | 2,322 | | | $ | 6.30 | | | 2,322 | | | $ | 101,265 | |
Total | | 3,448 | | | $ | 6.88 | | | 3,448 | | | $ | 101,265 | |
|
| | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased or Acquired | | Average Price per Share Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs |
(In Thousands, except per Share Data) | | | | |
July 1, 2017 - July 31, 2017 | | — |
| (1 | ) | $ | 17.04 |
| | — |
| | $ | — |
|
August 1, 2017 - August 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
September 1, 2017 - September 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 86,109 |
|
Total | | — |
| | $ | 17.04 |
| | — |
| | $ | 86,109 |
|
| |
(1) | Represents fewer than 1,000 shares reacquired to satisfy tax withholding requirements related to the vesting of restricted shares. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Not Applicable
Item 5. Other Information
None.Effective November 2, 2022, our Board of Directors adopted Amended and Restated Bylaws of the Company in order to incorporate changes to the provisions in Article II of the Bylaws relating to annual meetings of stockholders. These changes include, among other things, updated provisions related to stockholder meetings held by phone, video, and remote communications, updated requirements related to the form of proxy cards and proxy solicitation by stockholders, updated information required to be included in a stockholder's notice of nomination of individuals for election as a director, and accompanying certifications to be made by the stockholder submitting such nomination, and clarify provisions relating to compliance with federal proxy rules, including Exchange Act Rule 14a-9, by stockholders submitting nominations.
The preceding summary of the amendment and restatement of the Bylaws of the Company is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws attached as Exhibit 3.2.1 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
On November 3, 2022, Redwood amended and restated its employment agreements with each of Christopher J. Abate (Redwood’s CEO), Dashiell I. Robinson (Redwood’s President), Brooke E. Carillo (Redwood’s CFO), Andrew P. Stone (Redwood’s Executive Vice President, Chief Legal Officer, and Secretary), and Sasha G. Macomber (Redwood’s Chief Human Resource Officer). These agreements were amended and restated to, among other things, update or clarify certain defined terms, update and clarify certain notice and cure terms, and update provisions related to arbitration and costs related to dispute resolution, as well as to reflect previously disclosed compensation terms applicable to these officers.
The preceding summary of the five amended and restated employment agreements is qualified in its entirety by reference to, and should be read in connection with, the complete copies of the amended and restated employment agreements attached as Exhibits 10.2, 10.3, 10.4, 10.5 and 10.6 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
Item 6. Exhibits
|
| | | | | | | |
Exhibit
Number | | Exhibit |
3.1 | | |
3.1.1 | | |
3.1.2 | | |
3.1.3 | | |
3.1.4 | | |
3.1.5 | | |
3.1.6 | | |
3.1.7 | | |
3.1.8 | | |
3.1.9 | | |
3.1.10 | | |
3.2.13.1.11 | | |
3.1.12 | | |
3.2.23.2.1 | | |
4.110.1* | | Indenture, dated March 6, 2013, between Redwood Trust, Inc.Third Amendment to Amended and Wilmington Trust, National Association,Restated Executive Deferred Compensation Plan, effected as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A, filed March 6, 2013).of August 25, 2022 (filed herewith) |
4.210.2* | | Second Supplemental Indenture,Seventh Amended and Restated Employment Agreement, dated August 18, 2017,as of November 3, 2022, by and between Redwood Trust, Inc.Christopher J. Abate and Wilmington Trust, National Association, as Trustee (including the form of 4.75% Convertible Senior Note due 2023) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed August 18, 2017).Registrant (filed herewith) |
10.1*10.3* | | |
10.4* | | |
10.2* | | |
10.5* | | |
10.310.6* | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
| | | | | | | | |
101Exhibit Number | | Exhibit |
101 | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017,2022, is filed in inline XBRL-formatted interactive data files:
(i) Consolidated Balance Sheets at September 30, 20172022 and December 31, 2016;
2021; (ii) Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 20172022 and 2016; 2021; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended September 30, 20172022 and 2016; 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 20172022 and 2016; 2021; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172022 and 2016;2021; and (vi) Notes to Consolidated Financial Statements.
|
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Indicates exhibits that include management contracts or compensatory plan or arrangements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | REDWOOD TRUST, INC. |
| | | |
Date: | November 4, 2022 | REDWOOD TRUST, INC. |
By: | | | |
Date: | November 7, 2017 | By: | /s/ Martin S. Hughes |
| | | Martin S. Hughes |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
Date: | November 7, 2017 | By: | /s/ Collin L. Cochrane |
| | | Collin L. Cochrane |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
Christopher J. Abate |
| | |
Exhibit
Number | | ExhibitChristopher J. Abate |
3.1 | | |
3.1.1 | | |
3.1.2 | | |
3.1.3 | | |
3.1.4 | | |
3.1.5 | | |
3.1.6 | | |
3.1.7 | | |
3.1.8 | | |
3.1.9 | | |
3.1.10 | | |
3.2.1 | | |
3.2.2 | | |
4.1 | | |
4.2 | | |
10.1* | | |
10.2* | | |
10.3 | | |
31.1 | | |
31.2 | | | (Principal Executive Officer) |
| | | |
Date: | November 4, 2022 | By: | /s/ Brooke E. Carillo |
| | | Brooke E. Carillo |
| | | Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | | | (Principal Financial Officer) |
32.2 | | | |
101Date: | November 4, 2022 | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, is filed in XBRL-formatted interactive data files:
(i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016;
(ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016;
(iii) Statements of Consolidated Comprehensive Income for the three and nine months ended September 30, 2017 and 2016;
(iv) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2017 and 2016;
(v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and
(vi) Notes to Consolidated Financial Statements. By: | /s/ Collin L. Cochrane |
| | | Collin L. Cochrane |
| | | Chief Accounting Officer |
| | | (Principal Accounting Officer) |
* Indicates exhibits that include management contracts or compensatory plan or arrangements.