XML 28 R11.htm IDEA: XBRL DOCUMENT
v3.22.2.2

Basis of Presentation | 9 Months Ended
--- | ---
Sep. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Basis of Presentation | Basis of Presentation The consolidated financial statements presented herein are at September 30, 2022 and December 31, 2021, and for the three and nine months ended September 30, 2022 and 2021. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at September 30, 2022 and results of operations for all periods presented. The results of operations for the three and nine months ended September 30, 2022 should not be construed as indicative of the results to be expected for the full year. Principles of Consolidation In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 ("Legacy Sequoia"), certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of CoreVest single-family rental and bridge loans ("CAFL") and an entity formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for certain entities we are exposed to financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. For financial reporting purposes, the underlying loans owned at the consolidated Legacy Sequoia, Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment, at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Consolidated Agency multifamily loans, at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEIs at the consolidated HEI securitization entity are shown under Home equity investments, at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, we record interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 15 for further discussion on ABS issued. We also consolidate two partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships. See Note 4 for further discussion on principles of consolidation. Use of Estimates The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material. Acquisitions Riverbend Funding, LLC On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Aggregate consideration for this acquisition included an initial cash payment of approximately $44 million (with a remaining estimated provisional purchase consideration payable subject to reconciliation and final settlement), and a potential earnout component to be paid contingent on Riverbend 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. Based on the terms of the merger agreement, we determined that the earnout component should be accounted for as contingent purchase consideration, which was valued at zero at the acquisition. We accounted for the acquisition of Riverbend under the acquisition method of accounting pursuant to ASC 805. We performed the purchase price allocation and recorded underlying assets acquired and liabilities assumed based on their estimated fair values using the information available as of each acquisition date, with the excess of the purchase price allocated to intangible assets and goodwill. Through September 30, 2022, there were no significant changes to our purchase price allocations, which are summarized in the following table. Table 2.1 - Purchase Price Allocation
(In Thousands) |  | Riverbend
Acquisition Date |  | July 1, 2022
Purchase price: |  |
Cash |  | $ | 44,126 |
Provisional consideration payable |  | 477 |
Contingent consideration, at fair value |  | — |
Total consideration |  | $ | 44,603 |
Allocated to: |  |
Business purpose loans, at fair value |  | $ | 59,748 |
Other investments |  | 2,443 |
Cash and cash equivalents |  | 3,490 |
Other assets |  | 13,306 |
Goodwill |  | 23,373 |
Intangible assets |  | 13,300 |
Total assets acquired |  | 115,660 |
Short-term debt, net |  | 67,423 |
Accrued expenses and other liabilities |  | 3,634 |
Total liabilities assumed |  | 71,057 |
Total net assets acquired |  | $ | 44,603 |
We recognized $1 million of acquisition costs related to our acquisition of Riverbend during the nine months ended September 30, 2022. These costs primarily related to accounting, consulting, and legal expenses and are included in our General and administrative expenses on our consolidated statements of income (loss). 5 Arches and CoreVest Refer to Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations. Intangible Assets and Goodwill In connection with the acquisition of Riverbend on July 1, 2022, and 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $13 million, $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2022. Table 2.2 – Intangible Assets – Activity
|  | Intangible Assets at Acquisition |  | Accumulated Amortization at September 30, 2022 |  | Carrying Value at September 30, 2022 |  | Weighted Average Amortization Period (in years)
(Dollars in Thousands) |  |  |  |
Borrower network |  | $ | 56,300 |  |  | $ | (19,537) |  |  | $ | 36,763 |  |  | 7
Broker network |  | 18,100 |  |  | (12,972) |  |  | 5,128 |  |  | 5
Non-compete agreements |  | 11,400 |  |  | (9,567) |  |  | 1,833 |  |  | 3
Tradenames |  | 4,400 |  |  | (3,994) |  |  | 406 |  |  | 3
Developed technology |  | 1,800 |  |  | (1,800) |  |  | — |  |  | 2
Loan administration fees on existing loan assets |  | 2,600 |  |  | (2,600) |  |  | — |  |  | 1
Total |  | $ | 94,600 |  |  | $ | (50,470) |  |  | $ | 44,130 |  |  | 6
All of our intangible assets are amortized on a straight-line basis. For the three and nine months ended September 30, 2022, we recorded intangible asset amortization expense of $4 million and $11 million, respectively. For the three and nine months ended September 30, 2021, we recorded intangible asset amortization expense of $4 million and $12 million, respectively. Estimated future amortization expense is summarized in the table below. Table 2.3 – Intangible Asset Amortization Expense by Year
(In Thousands) |  |  |  |  |  |  |  | September 30, 2022
2022 (3 months) |  |  |  |  |  |  |  | $ | 3,238 |
2023 |  |  |  |  |  |  |  | 12,430 |
2024 |  |  |  |  |  |  |  | 9,413 |
2025 |  |  |  |  |  |  |  | 8,426 |
2026 |  |  |  |  |  |  |  | 6,695 |
2027 and thereafter |  |  |  |  |  |  |  | 3,928 |
Total Future Intangible Asset Amortization |  |  |  |  |  |  |  | $ | 44,130 |
On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at September 30, 2022. We recorded total goodwill of $23 million during the three months ended September 30, 2022 as a result of the total consideration exceeding the fair value of the net assets acquired from Riverbend. The goodwill was attributed to the expected business synergies and expansion into new business purpose loan markets, as well as access to the knowledgeable and experienced workforce continuing to provide complementary sourcing of assets for the business. We expect $23 million of this goodwill to be deductible for tax purposes. For reporting purposes, we included the intangible assets and goodwill from these acquisitions within our Business Purpose Mortgage Banking segment. Table 2.4 – Goodwill - Activity
(In Thousands) |  | Riverbend
Beginning Balance |  | $ | — |
Goodwill recognized from acquisition |  | 23,373 |
Impairment |  | — |
Ending Balance |  | $ | 23,373 |
The potential liability resulting from the contingent consideration arrangement with Riverbend was recorded at its acquisition-date fair value of zero as part of the total consideration for the acquisition of Riverbend. At September 30, 2022, the estimated fair value of this contingent liability was zero on our consolidated balance sheets. Our contingent consideration liability is recorded at fair value and periodic changes in the estimated fair value are recorded through Other expenses on our consolidated statements of income (loss). During the period ended September 30, 2022, we did not record any contingent consideration income or expense related to our acquisition of Riverbend. See Note 17 for additional information on our contingent consideration liability. The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, as if the acquisition of Riverbend occurred as of January 1, 2021. These pro forma amounts have been adjusted to include the amortization of intangible assets for all periods. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisition had been completed as of January 1, 2021 and should not be taken as indicative of our future consolidated results of operations. During the period from July 1, 2022 to September 30, 2022, Riverbend had net interest income of $1 million, non-interest income of $0.5 million, and a net loss of $1 million, which included intangible asset amortization expense of 0.6 million. Table 2.5 – Unaudited Pro Forma Financial Information
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2022 |  | 2021 |  | 2022 |  | 2021
Supplementary pro forma information: |  |  |  |  |  |  |  |
Net interest income |  | $ | 34,935 |  |  | $ | 43,174 |  |  | $ | 132,475 |  |  | $ | 100,570 |
Non-interest (loss) income |  | (37,135) |  |  | 102,436 |  |  | (121,614) |  |  | 355,456 |
Net (loss) income |  | (50,411) |  |  | 89,923 |  |  | (117,090) |  |  | 278,134 |

X
- References No definition available. + Details
Name: | us-gaap_OrganizationConsolidationAndPresentationOfFinancialStatementsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for organization, consolidation and basis of presentation of financial statements disclosure. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -URI https://asc.fasb.org/topic&trid=2122149 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI https://asc.fasb.org/topic&trid=2197479 + Details
Name: | us-gaap_OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration