Exhibit 99.5

 

REDWOOD AND COREVEST UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

On October 14, 2019, Redwood Trust, Inc. and its wholly-owned subsidiary RWT Holdings, Inc. (“Redwood” or the “Company”), entered into an equity interests purchase agreement with CF CoreVest Parent I LLC, CF CoreVest Parent II LLC and CoreVest Management Partners LLC (collectively, the “Sellers”), and members of the CoreVest management team, pursuant to which Redwood acquired a 100% equity interest in CF CoreVest Holdings I LLC, CF CoreVest Holdings II LLC and several of its affiliates (“CoreVest”), including the promote interests in CF CoreVest UST Asset Investor I LLC and CF CoreVest UB Asset Investor II LLC (the “Acquisition”). The Acquisition included CoreVest’s operating platform and a portfolio of business purpose loans and securities, a significant portion of which Redwood will hold for investment in its investment portfolio. The aggregate consideration paid by Redwood was $492 million, subject to a customary post-closing reconciliation, including a net book value adjustment. The consideration consisted of $482 million, payable in cash, and approximately $10 million of Redwood shares issued to the CoreVest management team. Based on the terms of the equity interest purchase agreement, we determined that the $10 million of shares should be accounted for as compensation expense for post-combination services, and therefore, it is not included in the GAAP purchase price allocated to the assets and liabilities acquired.

 

The following presents the unaudited pro forma condensed combined balance sheets of Redwood and CoreVest, giving effect to the Acquisition and related financing, as described below, as if it had been consummated on September 30, 2019, and includes all adjustments that give effect to events that are directly attributable to the Acquisition and are factually supportable. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2019 and for the year ended December 31, 2018 present the historical consolidated statements of operations of Redwood and CoreVest, giving effect to the Acquisition as if it had been consummated on January 1, 2018, the beginning of the earliest period presented. The unaudited pro forma condensed combined statements of operations presented include all adjustments that give effect to events that are directly attributable to the Acquisition, are expected to have a continuing impact, and are factually supportable.

 

The historical consolidated financial statements of CoreVest have been adjusted to reflect certain reclassifications and accounting treatment conforming adjustments in order to conform with Redwood’s financial statement presentation. For a description of these adjustments, see Note 3 to the unaudited pro forma condensed combined financial statements. The accounting policies of both Redwood and CoreVest are in the process of being reviewed. Upon completion of such review, additional conforming adjustments or financial statement reclassification may be determined.

 

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting and in accordance with Regulation S-X Article 11, which gives effect to the Acquisition under Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations, with Redwood considered as the accounting acquirer and CoreVest as the accounting acquiree. Accordingly, consideration paid by the Company to complete the Acquisition will be allocated to identifiable assets and liabilities of CoreVest based on their estimated fair values as of the closing date of the Acquisition.

 

The unaudited pro forma condensed combined financial statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies that may result from the Acquisition. In addition, the unaudited pro forma condensed combined statements of operations exclude non-recurring items that are directly attributable to the Acquisition and incurred by Redwood or CoreVest as those costs are not expected to have a continuing impact.

 

 1 

 

 

REDWOOD TRUST, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2019

 

       Condensed as            
   Redwood   Adjusted
CoreVest
   Proforma   See  Proforma 
(In Thousands, except Share Data)  Historical   (See Note 3)   Adjustments   Note 2  Combined 
ASSETS                       
Residential loans, held-for-sale, at fair value  $925,887   $-   $-      $925,887 
Residential loans, held-for-investment, at fair value   7,755,916    -    -       7,755,916 
Business purpose residential loans, at fair value   336,035    2,581,765    -       2,917,800 
Multifamily loans, held-for-investment, at fair value   3,791,622    -    -       3,791,622 
Real estate securities, at fair value   1,285,426    -    -       1,285,426 
Other investments   347,707    -    -       347,707 
Cash and cash equivalents   394,628    19,811    -   (A)   414,439 
Restricted cash   111,518    70,143    -       181,661 
Goodwill and intangible assets   49,121    874    133,634   (B)   183,629 
Accrued interest receivable   57,464    13,577    -       71,041 
Derivative assets   43,649    -    -       43,649 
Other assets   377,310    15,825    -       393,135 
Total Assets  $15,476,283   $2,701,995   $133,634      $18,311,912 
LIABILITIES AND EQUITY                       
Liabilities                       
Short-term debt, net  $1,980,817   $623,091    $482,311   (A)  $3,086,219 
Accrued interest payable   46,881    7,190    -       54,071 
Derivative liabilities   234,011    -    -       234,011 
Accrued expenses and other liabilities   129,742    79,684    -       209,426 
Asset-backed securities issued, at fair value   8,346,051    1,643,353    -       9,989,404 
Long-term debt, net   2,953,722    -    -       2,953,722 
Total liabilities   13,691,224    2,353,318   482,311       16,526,853 
Equity                       
Common stock, par value $0.01 per share, 270,000,000 shares authorized; 112,689,991 issued and outstanding   1,121    -    -       1,121 
Additional paid-in capital   2,244,834    348,677    (348,677)  (C)   2,244,834 
Accumulated other comprehensive income   38,124    -    -       38,124 
Cumulative earnings   1,529,981    -    -       1,529,981 
Cumulative distributions to stockholders   (2,029,001)   -    -       (2,029,001)
Total equity   1,785,059    348,677    (348,677)      1,785,059 
Total Liabilities and Equity  $15,476,283   $2,701,995   $133,634      $18,311,912 

 

See accompanying notes to unaudited pro forma condensed combined financial statements, which are an integral part of these statements.

 

 2 

 

 

REDWOOD TRUST, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

 

       Condensed as            
   Redwood   Adjusted
CoreVest
   Proforma   See  Proforma 
(In Thousands, except Share Data)  Historical   (See Note 3)   Adjustments   Note 2  Combined 
Interest Income                       
Residential loans  $230,308   $-   $-      $230,308 
Business purpose residential loans   12,231    98,507    -       110,738 
Multifamily loans   94,134    -    -       94,134 
Real estate securities   72,514    -    -       72,514 
Other interest income   20,513    -    -       20,513 
Total interest income   429,700    98,507    -       528,207 
Interest Expense                       
Short-term debt   (70,732)   (18,699)   (12,661)  (D)   (102,092)
Asset-backed securities issued   (196,473)   (44,463)   -       (240,936)
Long-term debt   (64,895)   -    -       (64,895)
Total interest expense   (332,100)   (63,162)   (12,661)      (407,923)
Net Interest Income   97,600    35,345    (12,661)      120,284 
Non-interest Income                       
Mortgage banking activities, net   40,984    29,699    -       70,683 
Investment fair value changes, net   34,741    245    -       34,986 
Other income, net   12,794    -    -      12,794
Realized gains, net   18,227    -    -       18,227 
Total non-interest income, net   106,746    29,944    -      136,690 
Operating expenses   (76,229)   (22,253)   (1,951)  (E)   (100,433)
Other expenses   (4,975)       (7,879)  (F)   (12,854)
Net Income before Provision for Income Taxes   123,142    43,036    (22,491)      143,687 
Provision for income taxes   (3,102)   -    (178  (G)   (3,280)
Net Income  $120,040   $43,036   $(22,669)     $140,407 
                        
Basic earnings per common share  $1.20         -      $1.40 
Diluted earnings per common share  $1.09         -      $1.23 
Basic weighted average shares outstanding   97,214,064         294,130   (H)   97,508,194 
Diluted weighted average shares outstanding   131,202,689         294,130   (H)   131,496,819 

 

See accompanying notes to unaudited pro forma condensed combined financial statements, which are an integral part of these statements.

 

 3 

 

 

REDWOOD TRUST, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2018

 

       Condensed as            
   Redwood   Adjusted
CoreVest
   Proforma   See  Proforma 
(In Thousands, except Share Data)  Historical   (See Note 3)   Adjustments   Note 2  Combined 
Interest Income                       
Residential loans  $239,818   $-   $-       $239,818 
Business purpose residential loans   4,333    90,757    -       95,090 
Multifamily loans   21,322    -    -       21,322 
Real estate securities   105,078    -    -       105,078 
Other interest income   8,166    -    -       8,166 
Total interest income   378,717    90,757    -       469,474 
Interest Expense                       
Short-term debt   (58,917)   (12,936)   (16,881)  (D)   (88,734)
Asset-backed securities issued   (99,429)   (36,376)   -       (135,805)
Long-term debt   (80,693)   -    -       (80,693)
Total interest expense   (239,039)   (49,312)   (16,881)      (305,232)
Net Interest Income   139,678    41,445    (16,881)      164,242 
Non-interest Income                       
Mortgage banking activities, net   59,566    28,890    -       88,456 
Investment fair value changes, net   (25,689)   (16,154)   -       (41,843)
Other income, net   12,874    -    -     12,874 
Realized gains/(loss), net   27,041    -    -       27,041 
Total non-interest income, net   73,792    12,736    -      86,528 
Operating expenses   (82,782)   (22,797)   (4,847)  (E)   (110,426)
Other expenses   -   -   (10,505)  (F)   (10,505)
Net Income before Provision for Income Taxes   130,688    31,384    (32,233)      129,839 
Provision for income taxes   (11,088)   -    1,474   (G)   (9,614)
Net Income  $119,600   $31,384   $(30,759)     $120,225 
                        
Basic earnings per common share  $1.47   $-    -      $1.47 
Diluted earnings per common share  $1.34   $-    -      $1.34 
Basic weighted average shares outstanding   78,724,912    -    -   (H)   78,724,912 
Diluted weighted average shares outstanding   110,027,770    -    -   (H)   110,027,770 

 

See accompanying notes to unaudited pro forma condensed combined financial statements, which are an integral part of these statements.

 

 4 

 

 

Redwood Trust, Inc.

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

(Unaudited)

 

1.        Basis of Presentation

 

The unaudited pro forma condensed combined financial information has been prepared in accordance with S-X Article 11, which gives effect to the Acquisition under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”) using the acquisition method of accounting for the Acquisition involving Redwood and CoreVest, with Redwood as the acquirer. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position had the Acquisition been consummated at September 30, 2019 or the results of operations had the Acquisition been consummated at January 1, 2018, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities.

 

Under the acquisition method of accounting, the assets and liabilities of CoreVest will be recorded at the respective fair values on the Acquisition date. The fair value on the Acquisition date represents management’s best estimates based on available information and facts and circumstances in existence on the Acquisition date. The pro forma allocation of purchase price reflected in the unaudited pro forma condensed combined financial information is preliminary and subject to adjustment. Adjustments may include, but not be limited to, changes in (i) the underlying values of assets and liabilities if market conditions differ from current assumptions; or (ii) if information unknown as of the completion of the Acquisition becomes known.

 

The accounting policies of both Redwood and CoreVest are in the process of being reviewed. Upon completion of such review, additional conforming adjustments or financial statement reclassification may be determined.

 

The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the preliminary valuation of the net assets acquired, including intangibles and goodwill. The actual net assets acquired on October 15, 2019, their fair values, and the resulting goodwill will differ from the amounts presented in these pro forma financials. The valuation of the assets and liabilities in these unaudited pro forma condensed combined financial statements is based upon a GAAP purchase price of approximately $482 million, which excludes approximately $10 million in stock-based consideration that is treated as compensation under GAAP.

 

Redwood’s and CoreVest’s fiscal years end on December 31.

 

2.        Pro Forma Adjustments

 

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

 

The unaudited pro forma condensed combined financial statements reflect the following adjustments:

 

 5 

 

 

Balance Sheet

(In Thousands, except Useful Life)  

 

(A) Adjustments to Cash and cash equivalents    
To reflect total cash consideration paid on the Closing Date for the Acquisition.  $(482,311)
To reflect the proceeds from additional short-term borrowings of $482 million incurred near Acquisition.  $482,311 
    - 
      
(B) Adjustments to Goodwill and intangible assets     
To reflect the removal of CoreVest's historical goodwill.  $(874)
To reflect the excess purchase price over the fair value of the assets acquired and liabilities assumed, which has not been allocated.  $78,008 
To reflect the adjustment to record the fair value of identifiable intangible assets and related amortization expense adjustments. See below for amortization schedule.  $56,500 
   $133,634 

 

   Fair Value   Average
Remaining
Useful Life
(years)
  Pro Forma
Amortization Expense
(Year Ended
December 31, 2018)
   Pro Forma
Amortization Expense
(Nine Months Ended
September 30, 2019)
 
Borrower network  $45,300   7 years  $6,472   $4,854 
Trade name   2,800   3 years   933    700 
Non-competition agreements   6,600   3 years   2,200    1,650 
Developed technology   1,800   2 years   900    675 
Total  $56,500      $10,505   $7,879 
                   
Increase to pro forma intangibles and amortization expense  $56,500      $10,505   $7,879 

 

(C) Adjustments to Stockholders' equity balances    
To reflect the elimination of CoreVest's historical members' equity balances.  $(348,677)

 

 6 

 

 

Statement of Operations

(In Thousands, except Share Data)

 

   Nine Months Ended   Year Ended 
   September 30,   December 31, 
   2019   2018 
(D) Interest expense on short-term debt financing          
To reflect interest expense on short-term borrowings of $482 million at an interest rate of 3.5%, which represents the approximate average borrowing rate on our short-term loan warehouse lines as of September 30, 2019. Cash used to fund the Acquisition was generated through additional short-term borrowings incurred near the Acquisition. The pro forma statements of operations reflect these incremental borrowings occurring on January 1, 2018 and remaining outstanding during 2018 and the nine months ended September 30, 2019.  $(12,661)  $(16,881)
           
(E) Adjustments to Operating expenses          
To reflect the elimination of Redwood's transaction-related expenses that are included in historical Operating expenses. CoreVest did not incur any transaction-related expenses.  $1,684   $- 
To reflect $10 million of Redwood Trust shares granted to CoreVest executive management as consideration for the acquisition. Based on the terms of the Purchase Agreement, we determined that the consideration should be accounted for as compensation expense for post-combination services. The grant-date value of the shares granted is recognized on a straight-line basis into Operating expenses over the two-year vesting period.  $(3,635)  $(4,847)
   $(1,951)  $(4,847)
           
(F) Adjustments to Other expenses          
To reflect amortization expense adjustments based on fair value estimates for acquired intangibles. Refer to adjustment (B) for further details.  $(7,879)  $(10,505)
           
(G) Adjustments to Provision for income taxes          
In calculating the pro forma tax provision adjustment for the periods ended December 31, 2018 and September 30, 2019, we applied the federal statutory tax rate of 21% to the GAAP income or loss that would have been earned at our taxable subsidiaries during these periods. We generally do not book material tax provisions associated with income generated at our REIT, so no tax provision was recorded against income that would have been earned at our REIT for either period. Additionally, due to our significant state net operating loss carryforwards and the corresponding valuation allowance, no state tax provisions were recorded against any of the pro forma income.  $(178)  $1,474 
           
(H) Adjustments to basic and diluted weighted average shares outstanding          
To reflect the assumed vesting on January 1, 2019 of 50% of the 588,260 restricted Redwood Trust restricted shares granted to CoreVest executive management as consideration for the acquisition, assuming the acquisition was consummated on January 1, 2018. These restricted shares vest over a two-year period.   294,130    - 

 

 7 

 

 

3.        Reclassifications and Accounting Treatment Conforming Adjustments on the Condensed Historical Presentation for the CoreVest Balance Sheet and Statement of Operations

 

The accounting policies of both Redwood and CoreVest are in the process of being reviewed. Certain accounting policies have been conformed and certain financial statement line items included in CoreVest’s historical presentation have been reclassified to corresponding line items as included in Redwood’s historical presentation for the purpose of preparing the unaudited pro forma condensed combined balance sheet and statements of operations as follows:

 

 8 

 

 

Pro Forma Reclassifications and Accounting Treatment Conforming Adjustments

on CoreVest Condensed Historical Balance Sheet

As of September 30, 2019  

 

(In Thousands, except Share Data)  Condensed
Historical CF
CoreVest
Holdings I LLC
   Condensed
Historical CF
CoreVest
Holdings II LLC
   Eliminations   Condensed
Historical
CoreVest
Combined
   Reclassification
Adjustments
   See
Notes
   Accounting
Treatment
Conforming
Adjustments
   See
Notes
   Condensed As
Adjusted
CoreVest
Combined
 
ASSETS                                             
Loans held for investment, at fair value  $2,205,575   $376,190   $-   $2,581,765   $-        $-        $2,581,765 
Cash   19,663    148    -    19,811    -         -         19,811 
Restricted cash   52,238    17,905    -    70,143    -         -         70,143 
Goodwill and intangible assets   -    -    -    -    874    1    -         874 
Accrued interest receivable   -    -    -    -    13,577    2    -         13,577 
Receivables   22,033    1,826    -    23,859    (23,859)   2    -         - 
Related party receivable   220    -    (220)   -    -         -         - 
Real estate owned   2,916    -    -    2,916    (2,916)   3    -         - 
Other assets, net   2,039    40    -    2,079    12,324    1,2,3    1,422    4    15,825 
Total Assets  $2,304,684   $396,109   $(220)  $2,700,573   $-        $1,422        $2,701,995 
                                              
LIABILITIES AND EQUITY                                             
Liabilities                                             
Secured financing facilities, at fair value  $623,091   $-   $-   $623,091   $(623,091)   7    -        $- 
Secured notes, at fair value   1,310,995    332,358    -    1,643,353    (1,643,353)   8    -         - 
Short-term debt, net   -    -    -    -    623,091    7    -         623,091 
Accrued interest payable   -    -    -    -    7,190    5    -         7,190 
Accounts payable and accrued expenses   18,171    1,926    -    20,097    (20,097)   5,6    -         - 
Related Party Payable   -    220    (220)   -    -         -         - 
Borrower Deposits   3,339    -    -    3,339    (3,339)   6    -         - 
Accrued expenses and other liabilities   -    -    -    -    78,262    6    1,422    4    79,684 
Asset-backed securities issued, at fair value   -    -    -    -    1,643,353    8    -         1,643,353 
Other liabilities   44,112    17,904    -    62,016    (62,016)   6    -         - 
Total liabilities   1,999,708    352,408    (220)   2,351,896    -         1,422         2,353,318 
Equity                                             
Member's equity  $302,922   $43,701   $-   $346,623   $(346,623)   9   $-        $- 
Noncontrolling interest   2,054    -    -    2,054    (2,054)   9    -        - 
Additional paid-in capital   -    -    -    -    348,677    9    -         348,677 
Accumulated other comprehensive income   -    -    -    -    -        -         - 
Cumulative earnings   -    -    -    -    -        -         - 
Cumulative distributions to stockholders   -    -    -    -    -        -         - 
Total equity   304,976    43,701    -    348,677    -         -         348,677 
Total Liabilities and Equity  $2,304,684   $396,109   $(220)  $2,700,573   $-        $1,422        $2,701,995 

 

 9 

 

 

Pro Forma Reclassifications and Accounting Treatment Conforming Adjustments

on CoreVest Condensed Historical Statement of Operations

For the Nine Months Ended September 30, 2019

 

(In Thousands, except Share Data)  Condensed
Historical CF
CoreVest
Holdings I LLC
   Condensed
Historical CF
CoreVest
Holdings II LLC
   Intercompany
Eliminations
   Condensed
Historical
CoreVest
Combined
   Reclassification
Adjustments
   See
Notes
   Accounting
Treatment
Conforming
Adjustments
   See
Notes
   Condensed
As Adjusted
CoreVest
Combined
 
Revenue                                             
Interest income  $79,249   $17,854   $-   $97,103   $5,423    10   $(4,019)   11   $98,507 
Other interest income   -    -    -    -    -         -         - 
Total interest income   79,249    17,854    -    97,103    5,423         (4,019)        98,507 
Interest Expense                                           - 
Short-term debt   -    -    -    -    (18,699)   12    -    -    (18,699)
Asset-backed securities issued   -    -    -    -    (44,463)   12    -         (44,463)
Interest expense   (52,913)   (10,249)   -    (63,162)   63,162    12    -         - 
Net Interest Income   26,336    7,605    -    33,941    5,423         (4,019)        35,345 
Origination fees   15,203    -    -    15,203    (15,203)   13    -         - 
Asset management fees   962    -    (962)   -    -         -         - 
Other fees   3,730    2,628    -    6,358    (6,358)   10,13    -         - 
Total revenue   46,231    10,233    (962)   55,502    (16,138)        (4,019)        35,345 
Expenses                                           
Operating expenses   -     -    -    -    22,253     16    -         22,253  
Salaries and employee benefits   12,563    -    -    12,563    (12,563)   16    -         - 
Management fees   -    962    (962)   -    -         -         - 
Loan servicing   3,039    980    -    4,019    -         (4,019)   11    - 
General and administrative   9,479    211    -    9,690    (9,690)   16    -         - 
Total expenses   25,081    2,153    (962)   26,272    -         (4,019)        22,253 
Other income (expense)                                             
Mortgage banking activities, net   -    -    -    -    29,699    13    -         29,699 
Investment fair value changes, net   -    -    -    -    245    14    -         245 
Net realized gain on sales of loans   1,769    -    -    1,769    (1,769)   13    -         - 
Net realized gain on sales of real estate owned   24    -    -    24    (24)   14    -         - 
Net realized gain on sales of securities   1,254    -    -    1,254    (1,254)   14    -         - 
Net derivative loss on non-designated hedges   (15,647)   -    -    (15,647)   15,647    13    -         - 
Net unrealized gain (loss)   28,972    (2,566)   -    26,406    (26,406)   13,14    -         - 
Total other income (expense)   16,372    (2,566)   -    13,806    16,138         -         29,944 
                                              
Net Income  $37,522   $5,514   $-   $43,036   $-        $-        $43,036 
Net income attributable to noncontrolling interest  $2,054   $-    -    2,054    (2,054)   15    -         - 
Net income attributable to members  $35,468   $5,514   $-   $40,982   $2,054    15   $-        $43,036 

 

 10 

 

 

Pro Forma Reclassifications and Accounting Treatment Conforming Adjustments

on CoreVest Condensed Historical Statement of Operations

For the Year Ended December 31, 2018  

  

(In Thousands, except Share Data)  Condensed
Historical CF
CoreVest
Holdings I LLC
   Condensed
Historical CF
CoreVest
Holdings II LLC
   Intercompany
Eliminations
   Condensed
Historical
CoreVest
Combined
   Reclassification
Adjustments
   See
Notes
   Accounting
Treatment
Conforming
Adjustments
   See
Notes
   Condensed As
Adjusted
CoreVest
Combined
 
Revenue                                             
Interest income  $53,451   $32,275        $85,726   $9,877    10   $(4,846)   11   $90,757 
Other interest income   -    -         -    -         -         - 
Total interest income   53,451    32,275    -    85,726    9,877         (4,846)        90,757 
Interest Expense                                             
Short-term debt   -    -    -    -    (12,936)   12    -         (12,936)
Asset-backed securities issued   -    -    -    -    (36,376)   12    -         (36,376)
Interest expense   (31,821)   (17,491)   -    (49,312)   49,312    12    -         - 
Net Interest Income   21,630    14,784    -    36,414    9,877         (4,846)        41,445 
Origination fees   10,916    -    -    10,916    (10,916)   13    -         - 
Asset management fees   3,812    -    (3,812)   -    -         -         - 
Other fees   3,669    7,290    -    10,959    (10,959)   10,13    -         - 
Total revenue   40,027    22,074    (3,812)   58,289    (11,998)        (4,846)        41,445 
Expenses                                             
Operating expenses   -    -    -    -    22,797    16    -         22,797 
Salaries and employee benefits   13,796    -    -    13,796    (13,796)   16    -         - 
Management fees   -    3,812    (3,812)   -    -         -         - 
Loan servicing   3,292    1,554    -    4,846    -         (4,846)   11    - 
General and administrative   8,197    804    -    9,001    (9,001)   16            - 
Total expenses   25,285    6,170    (3,812)   27,643    -         (4,846)        22,797 
Other income (expense)                                             
Mortgage banking activities, net   -    -    -    -    28,890    13    -         28,890 
Investment fair value changes, net   -    -    -    -    (16,154)   14    -         (16,154)
Realized gains on sales of loans   984    -    -    984    (984)   13    -         - 
Loss on sales of real estate owned   (138)   -    -    (138)   138    14    -         - 
Loss on derivatives   (2,016)   -    -    (2,016)   2,016    13    -         - 
Net unrealized gain (loss)   13,182    (11,274)   -    1,908    (1,908)   13,14    -         - 
Total other income (expense)   12,012    (11,274)   -    738    11,998         -         12,736 
                                              
Net Income  $26,754   $4,630   $-   $31,384   $-        $-        $31,384 
Net income attributable to noncontrolling interest  $692   $-   $-   $692   $(692)   15    -        $- 
Net income attributable to members  $26,062   $4,630   $-   $30,692   $692    15   $-        $31,384 

 

 11 

 

 

Notes to Reclassifications and Accounting Treatment Conforming Adjustments on the Condensed Historical Presentation for the CoreVest Balance Sheet and Statement of Operations:

 

Balance Sheet

(In Thousands)    

 

   Reclassification
Adjustments
   Accounting
Treatment
Conforming
Adjustments
 
1 Adjustments to Goodwill           
To reclassify goodwill from Other assets to Goodwill and intangible assets to conform to Redwood's balance sheet.  $874       
            
2 Adjustments to Receivables           
To reclassify a portion of Receivables to Other assets to conform to Redwood's balance sheet.  $(10,282)      
To reclassify the balance of Receivables to Accrued interest receivable to conform to Redwood's balance sheet.  $(13,577)      
   $(23,859)      
            
3 Adjustment to Real estate owned           
To reclassify REO balance to Other assets to conform to conform to Redwood's balance sheet.  $(2,916)      
            
4 Adoption of ASC 842 Lease Standard           
To retrospectively adopt the new ASC 842 lease standard for CoreVest as of January 1, 2019 to conform to Redwood's adoption of the accounting standard.     $ 1,422  
            
5 Adjustment to Accounts payable and accrued expenses           
To reclassify accrued interest expense from Accounts payable and accrued expenses to Accrued interest payable to conform to Redwood's balance sheet.  $(7,190)      
            
6 Adjustment to Accrued expenses and other liabilities           
To reclassify certain balances to Accrued expenses and other liabilities to conform to Redwood's balance sheet. See below for the adjustments by CoreVest financial statement line item:  $78,262       
Accounts payable and accrued expenses  $(12,907)      
Borrower deposits   (3,339)      
Other liabilities   (62,016)      
Total adjustments to Accrued expenses and other liabilities  $(78,262)      
            
7 Adjustment to Secured financing facilities, at fair value           
To reclassify Secured financing facilities, at fair value to Short-term debt to conform to Redwood's balance sheet.  $(623,091)      
            
8 Adjustment to Secured notes, at fair value           
To reclassify Secured notes, at fair value to Asset-backed securities issued, at fair value to conform to Redwood's balance sheet.  $(1,643,353)      
            
9 Adjustment to Equity           
To reclassify Member's equity to Additional paid-in capital to conform to Redwood's balance sheet.  $(346,623)      
To reclassify Noncontrolling interest to Additional paid-in capital to conform to Redwood's balance sheet.  $(2,054)      
   $(348,677)      

 

 12 

 

 

Statement of Operations

(In Thousands)      

 

    Nine Months Ended     Year Ended  
    September 30,     December 31,  
    2019     2018  
10 Adjustments to Interest income on Business purpose residential loans                
To reclassify a portion of Other fees for yield maintenance fees received to Interest income on Business purpose residential loans to conform to Redwood's statement of operations.   $ 5,423     $ 9,877  
                 
11 Accounting treatment conforming adjustments to Interest income on Business purpose residential loans                
To reclassify certain financing-related costs included in Operating expenses to Interest income on Business purpose residential loans to conform to Redwood's accounting treatment of financing costs on securitized loans accounted for under the collateralized finance entity (CFE) election.   $ (4,019 )   $ (4,846 )
                 
12 Reclassify adjustments to Interest expense                
To reclassify Interest expense separately into Short-term debt interest expense line item to conform to Redwood's statement of operations.   $ (18,699 )   $ (12,936 )
To reclassify Interest expense separately into Asset-backed securities issued interest expense line item to conform to Redwood's statement of operations.   $ (44,463 )   $ (36,376 )
    $ (63,162 )   $ (49,312 )
                 
13 Adjustments to Mortgage banking activities, net                
To reclassify certain balances into Mortgage banking activities, net to conform to Redwood's statement of operations. See below for the adjustments by CoreVest financial statement line item:   $ 29,699     $ 28,890  
Origination fees   $ (15,203 )   $ (10,916 )
Other fees     (936 )     (1,082 )
Gain on sales of loans     (1,769 )     (984 )
Net derivative loss on non-designated hedges     15,647       2,016  
Net unrealized gain (loss)     (27,438 )     (17,924 )
Total adjustments into Mortgage banking activities, net   $ (29,699 )   $ (28,890 )
                 
14 Adjustments to Investment fair value changes, net                
To reclassify certain balances into Investment fair value changes, net to conform to Redwood's statement of operations. See below for the adjustments by CoreVest financial statement line item:   $ 245     $ (16,154 )
Gain (loss) on sales of real estate owned   $ (24 )   $ 138  
Gain on sales of securities     (1,254 )     -  
Net unrealized gain (loss)     1,033       16,016  
Total adjustments into Investment fair value changes, net   $ (245 )   $ 16,154  
                 
15 Adjustments to Net income attributable to noncontrolling interest                
To reflect the elimination of net income attributable to noncontrolling interest holders based on Redwood's purchase of the noncontrolling interest in CoreVest as of the acquisition date.   $ (2,054 )   $ (692 )
                 
16 Adjustments to Expenses            
To reclassify certain balances into Operating expenses to conform to Redwood's statement of operations. See below for the adjustments by CoreVest financial statement line item:   $ 22,253   $ 22,797
Salaries and employee benefits   $ (12,563 )   $ (13,796 )
General and administrative     (9,690 )     (9,001 )
    $ (22,253 )   $ (22,797 )

 

 13 

 

 

4.        Preliminary Purchase Price

 

The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by Redwood in the Acquisition, reconciled to the amount of consideration transferred:

 

(In Thousands)    
     
Total purchase price  $482,311 
Fair value of assets acquired(1):     
Business purpose residential loans, at fair value   2,581,765 
Cash and cash equivalents   19,811 
Restricted cash   70,143 
Other assets   29,402 
Intangible assets   56,500 
Goodwill   78,008 
Total assets acquired   2,835,629 
Fair value of liabilities assumed(1):     
Asset-backed securities issued, at fair value   (1,643,353)
Short-term debt, net   (623,091)
Accrued expenses and other liabilities   (86,874)
Total liabilities assumed   (2,353,318)
Fair value of net assets acquired  $482,311 

 

(1) Amounts presented above are as of September 30, 2019. The fair value of assets acquired and liabilities assumed on the Acquisition date, and the resulting goodwill, will differ from these amounts. 

 

 14