Redwood Trust Reports First Quarter 2017 Results

REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

First

Fourth

Third

Second

First

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

Quarter

Quarter

Quarter

Quarter

Quarter

2017

2016

2016

2016

2016

Interest income

$

55

$

56

$

61

$

67

$

62

Interest expense

(21)

(21)

(22)

(22)

(24)

Net interest income

34

36

39

44

38

Reversal of provision for loan losses

—

—

1

7

—

Net interest income after provision

34

36

40

51

38

Non-interest income

Mortgage banking activities, net

18

14

10

8

7

MSR income, net

2

2

4

3

6

Investment fair value changes, net

2

(10)

12

(11)

(20)

Other income

1

2

2

2

1

Realized gains, net

6

2

7

10

10

Total non-interest income, net

28

10

34

11

4

Operating expenses

(18)

(18)

(20)

(20)

(30)

Provision for income taxes

(6)

(2)

(1)

—

—

Net income

$

37

$

25

$

53

$

41

$

12

Weighted average diluted shares (thousands) ⁽²⁾

97,946

85,838

97,832

97,762

77,138

Diluted earnings per share

$

0.43

$

0.31

$

0.58

$

0.48

$

0.15

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 first quarter of 2017 and the fourth, third, and second quarters of 2016, 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 March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016 were 77,039, 76,835, 76,682, and 76,935, respectively.

REDWOOD TRUST, INC.

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

Three Months Ended

($ in millions, except per share data)

March 31, 2017

December 31, 2016

GAAP net income

$

37

$

25

Adjustments:

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

(10)

35

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

1

(34)

Income taxes associated with core earnings adjustments ⁽⁴⁾

1

1

Total adjustments

(8)

2

Non-GAAP core earnings

$

30

$

27

GAAP net income per diluted common share

$

0.43

$

0.31

Non-GAAP core earnings per diluted common share ⁽⁵⁾

$

0.36

$

0.33

⁽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.

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 first quarter Redwood Review.

⁽³⁾

Adjustments eliminate 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. Details on the components of investment fair value changes, net, are included in the Financial Insights section of the first quarter Redwood Review.

⁽⁴⁾

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.

⁽⁵⁾

Consistent with the calculation of net income per diluted common share for GAAP purposes, non-GAAP 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 first quarter Redwood Review.

REDWOOD TRUST, INC.

Consolidated Balance Sheets ⁽¹⁾

31-Mar

31-Dec

30-Sep

30-Jun

31-Mar

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

2017

2016

2016

2016

2016

Residential loans

$

3,472

$

3,888

$

4,311

$

4,040

$

3,715

Real estate securities

1,166

1,018

937

884

920

Commercial loans

3

3

30

325

364

Mortgage servicing rights

111

119

106

110

127

Cash and cash equivalents

222

213

221

217

305

Other assets

241

243

267

322

296

Total assets

$

5,214

$

5,483

$

5,873

$

5,898

$

5,727

Short-term debt

$

564

$

792

$

1,117

$

1,059

$

804

Other liabilities

135

148

185

202

195

Asset-backed securities issued, net

728

773

820

860

958

Long-term debt, net

2,621

2,621

2,620

2,684

2,683

Total liabilities

4,049

4,334

4,742

4,805

4,641

Stockholders' equity

1,166

1,149

1,130

1,093

1,086

Total liabilities and equity

$

5,214

$

5,483

$

5,873

$

5,898

$

5,727

Shares outstanding at period end (thousands)

77,039

76,835

76,682

76,935

76,627

GAAP book value per share

$

15.13

$

14.96

$

14.74

$

14.20

$

14.17

⁽¹⁾

Certain totals may not foot due to rounding.