Redwood Trust Reports First Quarter 2013 Results

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

First

Fourth

Third

Second

First

($ in millions, except share data)

Quarter

Quarter

Quarter

Quarter

Quarter

2013

2012

2012

2012

2012

Interest income

$

54

$

53

$

60

$

60

$

59

Interest expense

(18)

(33)

(28)

(29)

(31)

Net interest income ⁽²⁾

35

20

31

31

28

(Provision for) reversal of provision for loan losses

(2)

(3)

(1)

1

-

Other market valuation adjustments, net

2

(1)

(3)

(5)

(1)

Net interest income after provision and other market valuation adjustments

35

16

27

27

27

Mortgage banking activities, net

44

24

17

2

4

Operating expenses 

(20)

(18)

(17)

(15)

(15)

Realized gains, net ⁽²⁾

12

20

14

7

14

Provision for income taxes

(11)

-

(1)

(1)

-

Net Income Attributable to Redwood Trust, Inc.

$

61

$

42

$

40

$

20

$

30

Average diluted shares (thousands)

87,345

82,498

80,764

78,815

79,892

Diluted earnings per share

$

0.69

$

0.50

$

0.48

$

0.24

$

0.37

Regular dividends declared per common share

$

0.28

$

0.25

$

0.25

$

0.25

$

0.25

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

(2) See the Non-GAAP presentation of fourth quarter 2012 consolidated GAAP income on page 3 for a review of the way management analyzes Redwood's fourth quarter 2012 net income and the manner in which management compares the components of fourth quarter 2012 net income to the components of first quarter 2013 net income.

REDWOOD TRUST, INC.

During the fourth quarter of 2012, Redwood sold its remaining investment interests in nine legacy Acacia entities and ten legacy Sequoia entities. The sale of Redwood's interests in these legacy entities triggered a derecognition of their underlying assets and liabilities for financial reporting purposes and resulted in a $4 million net, non-recurring increase to fourth quarter 2012 earnings. The $4 million net, non-recurring increase is not reflected as a simple line item in Redwood's fourth quarter GAAP income statement. Instead, it is expressed as an $11 million decrease to net interest income, reflecting the accelerated recognition of deferred hedging costs relating to Acacia entities, and a $15 million realized gain upon deconsolidation. The $15 million gain primarily reflects the proceeds received on the sale of the interests in these legacy entities, as well as recovery of excess loan loss reserves related to legacy Sequoia entities that Redwood was required to record in past periods under GAAP.

The table below sets forth the components of Redwood's first quarter 2013 and fourth quarter 2012 net income, as reported under GAAP, together with a non-GAAP presentation of the components of Redwood's fourth quarter 2012 net income. The non-GAAP presentation reflects a reclassification adjustment which, overall, does not impact reported net income under GAAP, but which we believe is useful for investors because it reflects the impact of the deconsolidation of the legacy Acacia and Sequoia entities in a manner consistent with the way management analyzes Redwood's fourth quarter 2012 results of operations and the manner in which management compares the components of fourth quarter 2012 net income to the components of first quarter 2013 net income.

Components of Consolidated Income ⁽¹⁾

($ in millions)

Three Months Ended

December 31, 2012

March 31, 2013

Redwood

Reclassification

(Non-GAAP)

Redwood

As Reported

Adjustment ⁽²⁾

As Adjusted

As Reported

Net interest income

$

20

$

11

$

31

$

35

Provision for loan losses

(3)

-

(3)

(2)

Other market valuation adjustments, net

(1)

-

(1)

2

Mortgage banking activities, net

24

-

24

44

Operating expenses

(18)

-

(18)

(20)

Total realized gains, net: ⁽³⁾

Realized gains on sales, net

5

-

5

12

Realized gain on deconsolidation

15

(11)

4

-

Provision for income taxes

-

-

-

(11)

Net Income

$

42

$

-

$

42

$

61

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

(2) The Reclassification Adjustment column shows a reclassification adjustment related to the deconsolidation of certain legacy Acacia and Sequoia entities that impacts items reported under GAAP, but which, overall, does not impact reported net income: Net interest income is increased by $11 million to address the non-recurring decrease to net interest income resulting from accelerated recognition of $11 million of deferred hedging costs relating to Acacia entities upon deconsolidation of these entities; and Realized gain on deconsolidation is decreased by $11 million to reflect that the deconsolidation of these Sequoia and Acacia entities resulted in a non-recurring net increase to earnings of only $4 million.

(3) Total realized gains, net were $20 million as reported under GAAP for the three months ended December 31, 2012.

REDWOOD TRUST, INC.

Consolidated Balance Sheets ⁽¹⁾

31-Mar

31-Dec

30-Sep

30-Jun

31-Mar

($ in millions, except share data)

2013

2012

2012

2012

2012

Residential loans

$

2,965

$

2,836

$

3,495

$

3,472

$

3,651

Commercial loans

401

313

298

259

190

Real estate securities

1,231

1,109

1,313

1,311

1,262

Cash and cash equivalents

79

81

39

70

150

Other assets

121

106

152

134

119

Total Assets

$

4,797

$

4,444

$

5,297

$

5,246

$

5,372

Short-term debt 

$

721

$

552

$

522

$

455

$

441

Other liabilities

80

83

156

136

126

Asset-backed securities issued

2,365

2,529

3,429

3,564

3,704

Long-term debt 

444

140

140

140

140

Total liabilities  

3,609

3,304

4,247

4,295

4,410

Stockholders' equity 

1,188

1,140

1,050

951

962

Total Liabilities and Equity

$

4,797

$

4,444

$

5,297

$

5,246

$

5,372

Shares outstanding at period end (thousands)

81,706

81,716

81,526

79,263

78,756

GAAP book value per share

$

14.54

$

13.95

$

12.88

$

12.00

$

12.22

(1) Certain totals may not foot due to rounding. See notes to consolidating balance sheet on page 6.

REDWOOD TRUST, INC.

The following tables show the estimated effect that Redwood (Parent) and our Consolidated Sequoia Entities had on GAAP income for the three months ended March 31, 2013.

Consolidating Income Statement ⁽¹⁾

Three Months Ended March 31, 2013

($ in millions)

 Redwood 

 Consolidated 

 Redwood 

     (Parent) ⁽²⁾

 Sequoia Entities 

Consolidated

Interest income

$

34

$

12

$

45

Net discount (premium) amortization

9

(2)

8

Total interest income

43

10

54

Interest expense

(11)

(7)

(18)

Net interest income

32

3

35

Provision for loan losses

(1)

(1)

(2)

Other market valuation adjustments, net

1

-

2

Net interest income after provision and other market valuation adjustments

33

2

35

Mortgage banking activities, net

44

-

44

Operating expenses

(20)

-

(20)

Realized gains, net

12

-

12

Provision for income taxes

(11)

-

(11)

Net Income

$

59

$

2

$

61

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

(2) The interest income and interest expense related to the residential resecuritization we engaged in during the third quarter of 2011 and the commercial securitization we engaged in during the fourth quarter of 2012 are included in Redwood (Parent).

REDWOOD TRUST, INC.

We present this table to highlight the effect that Redwood (Parent) and our Consolidated Sequoia Entities had on our GAAP balance sheet at March 31, 2013. 

Consolidating Balance Sheet ⁽¹⁾

March 31, 2013

($ in millions)

 Redwood 

 Consolidated 

 Redwood 

    (Parent) ⁽²⁾

 Sequoia Entities 

 Consolidated 

Residential loans

$

832

$

2,133

$

2,965

Commercial loans

401

-

401

Real estate securities

1,231

-

1,231

Cash and cash equivalents

79

-

79

Total earning assets

2,544

2,133

4,677

Other assets

110

10

121

Total Assets

$

2,653

$

2,144

$

4,797

Short-term debt

$

721

$

-

$

721

Other liabilities

78

2

80

Asset-backed securities issued

309

2,056

2,365

Long-term debt 

444

-

444

Total liabilities

1,552

2,057

3,609

Stockholders' equity

1,101

86

1,188

Total Liabilities and Equity

$

2,653

$

2,144

$

4,797

(1) Certain totals may not foot due to rounding. Certain Sequoia securitization entities, the residential resecuritization we engaged in during the third quarter of 2011, and the commercial securitization we engaged in during the fourth quarter of 2012 are treated as secured borrowing transactions for GAAP and we are required under GAAP to consolidate the assets and liabilities of these securitization entities. The securitized assets and liabilities are legally not ours, and we own only the securities and interests that we acquired from these entities. The liabilities of these entities are obligations payable only from the cash flow generated by their securitized assets.

(2) The consolidating balance sheet presents the assets and liabilities of the residential resecuritization we engaged in during the third quarter of 2011 under Redwood (Parent), although these assets and liabilities are owned by the residential resecuritization entity and are legally not ours and we own only the securities and interests that we acquired from the residential resecuritization entity. At March 31, 2013, the residential resecuritization accounted for $317 million of real estate securities and other assets and $149 million of asset-backed securities issued and other liabilities.

The consolidating balance sheet presents the assets and liabilities of the commercial securitization we engaged in during the fourth quarter of 2012 under Redwood (Parent), although these assets and liabilities are owned by the commercial securitization entity and are legally not ours and we own only the securities and interests that we acquired from the commercial securitization entity. At March 31, 2013, the commercial securitization accounted for $277 million of commercial loans and other assets and $160 million of asset-backed securities issued and other liabilities.