Redwood Trust Reports Third Quarter 2016 Results

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Third

Second

First

Fourth

Third

($ in millions, except share and per share data)

Quarter

Quarter

Quarter

Quarter

Quarter

2016

2016

2016

2015

2015

Interest income

$

61

$

67

$

62

$

69

$

63

Interest expense

(22)

(22)

(24)

(25)

(24)

Net interest income

39

44

38

44

40

Reversal of provision for loan losses

1

7

—

—

—

Net interest income after provision

40

51

38

44

40

Non-interest income (loss)

Mortgage banking activities, net

10

8

7

—

1

MSR income, net

4

3

6

3

4

Investment fair value changes, net

12

(11)

(20)

(4)

(14)

Other income

2

2

1

1

—

Realized gains, net

7

10

10

20

6

Total non-interest income (loss), net

34

11

4

20

(3)

Operating expenses

(20)

(20)

(30)

(23)

(24)

(Provision for) benefit from income taxes

(1)

—

—

—

7

Net income

$

53

$

41

$

12

$

41

$

19

Weighted average diluted shares (thousands) ⁽²⁾

97,832

97,762

77,138

103,377

85,075

Diluted earnings per share

$

0.58

$

0.48

$

0.15

$

0.46

$

0.22

Regular dividends declared per common share

$

0.28

$

0.28

$

0.28

$

0.28

$

0.28

(1)

Certain totals may not foot due to rounding.

(2)

In the third and second quarters of 2016 and the fourth quarter of 2015, weighted average diluted shares included shares from the assumed conversion of our convertible and/or exchangeable debt in accordance with GAAP diluted EPS provisions. Actual shares outstanding at September 30, 2016, June 30, 2016, and December 31, 2015 were 76,682, 76,935, and 78,163, respectively.

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

Nine Months Ended September 30,

($ in millions, except share and per share data)

2016

Interest income

$

190

$

191

Interest expense

(68)

(71)

Net interest income

122

120

Reversal of provision for loan losses

7

—

Net interest income after provision

129

120

Non-interest income

Mortgage banking activities, net

25

11

MSR income (loss), net

13

(7)

Investment fair value changes, net

(19)

(17)

Other income

4

2

Realized gains, net

26

16

Total non-interest income

49

6

Operating expenses

(71)

(75)

(Provision for) benefit from income taxes

(1)

10

Net income

$

106

$

61

Weighted average diluted shares (thousands)

97,992

85,339

Diluted earnings per share

$

1.23

$

0.69

Regular dividends declared per common share

$

0.84

$

0.84

(1) Certain totals may not foot due to rounding.

REDWOOD TRUST, INC.

Reconciliation of GAAP Net Income to Core Earnings ^{(1) (2)}

Three Months Ended

($ in millions, except per share data)

September 30, 2016

GAAP net income

$

53

$

41

Adjustments:

Eliminate mark-to-market changes on long-term investments and associated derivatives⁽³⁾

(20)

4

Eliminate restructuring and related charges⁽⁴⁾

—

—

Eliminate reversal of commercial loan loss reserve⁽⁵⁾

—

(5)

Income taxes associated with core earnings adjustments⁽⁶⁾

—

—

Total adjustments

(20)

(2)

Core earnings

$

33

$

40

GAAP net income per diluted common share

$

0.58

$

0.48

Core earnings per diluted common share⁽⁷⁾

$

0.39

$

0.47

(1)

Certain totals may not foot due to rounding.

(2)

Core earnings is a non-GAAP measure of Redwood's earnings and results of operations. Specifically, management defines core earnings as: GAAP net income adjusted to (i) eliminate the impact of quarterly mark-to-market changes on the fair value of our long-term investments (and associated derivatives) related to changes in benchmark interest rates and credit spreads and (ii) include the hypothetical income taxes associated with core earnings adjustments. In addition, Redwood's core earnings also exclude the impact of the restructuring and related charges associated with the recent restructuring of Redwood's conforming residential and commercial mortgage banking operations in the first quarter of 2016, as well as the release of commercial loan loss reserves in the second quarter of 2016 associated with the anticipated sale of our commercial mezzanine loans.

Management utilizes this core earnings measure internally as one way of analyzing Redwood's performance over multiple periods, as it believes it provides useful comparative results absent the impact of certain quarterly mark-to-market changes and other items that management believes are not reflective of core results. Core earnings should not be utilized in isolation, nor should it be considered as an alternative to GAAP net income or other measurements of results of operations computed in accordance with GAAP. A further discussion of core earnings is included in the third quarter Redwood Review.

(3)

Adjustment eliminates the mark-to-market changes on the fair value of loans held-for-investment, trading securities, other investments, and associated derivatives that are primarily related to changes in benchmark interest rates and credit spreads. More details on the components of investment fair value changes, net, are included in the Financial Insights section of the third quarter Redwood Review.

(4)

Adjustment eliminates operating expense charges from the restructuring of Redwood's conforming residential and commercial mortgage banking operations, which were announced during the first quarter of 2016, and related charges associated with the subsequent announcement of the departure of Redwood's President.

(5)

Adjustment eliminates the benefit to GAAP earnings from the release of $5 million of commercial loan loss reserves, which was associated with the anticipated sale of our commercial mezzanine loans.

(6)

We apply estimated effective tax rates to core earnings adjustments occurring within Redwood's taxable REIT subsidiaries to estimate the hypothetical income tax expense or benefit associated with those adjustments. For the three months ended September 30, 2016 and June 30, 2016, the core earnings adjustments we made to our reported results did not result in any associated hypothetical income tax adjustments.

(7)

Consistent with the calculation of net income per diluted common share for GAAP purposes, core earnings per diluted common share is calculated following the "two-class" method. Additional information on the calculation of core earnings using the "two-class" method can be found in Table 2 in the Financial Tables section of the Appendix to the third quarter Redwood Review.

REDWOOD TRUST, INC.

Consolidated Balance Sheets ⁽¹⁾

30-Sep

30-Jun

31-Mar

31-Dec

30-Sep

($ in millions, except share and per share data)

2016

2016

2016

2015

2015

Residential loans

$

4,311

$

4,040

$

3,715

$

3,929

$

4,037

Real estate securities

937

884

920

1,233

1,085

Commercial loans

30

325

364

403

468

Mortgage servicing rights

106

110

127

192

163

Cash and cash equivalents

221

217

305

220

235

Other assets

267

322

296

243

269

Total assets

$

5,873

$

5,898

$

5,727

$

6,220

6,257

Short-term debt

$

1,117

$

1,059

$

804

$

1,855

$

1,873

Other liabilities

185

202

195

142

189

Asset-backed securities issued, net

820

860

958

1,049

1,178

Long-term debt, net

2,620

2,684

2,683

2,028

1,811

Total liabilities

4,742

4,805

4,641

5,074

5,050

Stockholders' equity

1,130

1,093

1,086

1,146

1,207

Total liabilities and equity

$

5,873

$

5,898

$

5,727

$

6,220

$

6,257

Shares outstanding at period end (thousands)

76,682

76,935

76,627

78,163

82,125

GAAP book value per share

$

14.74

$

14.20

$

14.17

$

14.67

$

14.69

(1) Certain totals may not foot due to rounding.