Redwood Trust Reports Second Quarter 2010 Results

REDWOOD TRUST, INC.

Consolidated Income Statements

Second

First

Fourth

Third

Second

($ in millions, except share data)

Quarter

Quarter

Quarter

Quarter

Quarter

2010

2010

2009

2009

2009

Interest income

$

56

$

58

$

62

$

70

$

74

Interest expense

(21)

(18)

(21)

(25)

(39)

Net interest income

35

40

41

45

35

Provision for loan losses

(4)

(9)

(9)

(10)

(15)

Market valuation adjustments, net

(7)

(11)

(4)

(11)

(29)

Net interest income (loss) after provision and

24

20

28

24

(9)

market valuation adjustments

Operating expenses

(11)

(17)

(11)

(15)

(10)

Realized gains, net

16

44

20

18

25

Benefit from income taxes

-

-

3

-

1

Net income

29

47

40

27

7

Less: Net income attributable to
noncontrolling interest

-

-

-

-

-

GAAP net income

$

29

$

47

$

40

$

27

$

7

Average diluted shares (thousands)

78,852

78,542

78,101

78,223

66,446

Diluted earnings per share

$

$0.35

$

0.58

$

0.51

$

0.34

$

0.10

Regular dividends declared per common share

$

0.25

$

0.25

$

0.25

$

0.25

$

0.25

REDWOOD TRUST, INC.

Consolidated Income Statement

Six Months Ended

($ in millions, except share data)

June 30,

2010

2009

Interest income

$

115

$

156

Interest expense

(39)

(87)

Net interest income

76

69

Provision for loan losses

(14)

(31)

Market valuation adjustments, net

(18)

(72)

Net interest loss after provision and

44

(34)

market valuation adjustments

Operating expenses

(29)

(22)

Realized gains, net

60

26

Benefit from income taxes

-

1

Net income (loss)

75

(29)

Less: Net (loss) income attributable to noncontrolling interest

-

(1)

GAAP net income (loss)

$

75

$

(28)

Average diluted shares (thousands)

78,662

59,138

Diluted earnings (loss) per share

$

0.94

$

(0.48)

Regular dividends declared per common share

$

0.50

$

0.50

REDWOOD TRUST, INC.

Consolidated Balance Sheets

30-Jun

31-Mar

31-Dec

30-Sep

30-Jun

($ in millions, except share data)

2010

2010

2009

2009

2009

Real estate loans

$

3,810

$

3,662

$

3,740

$

3,831

$

3,966

Real estate securities, at fair value:

Trading securities

276

289

278

275

253

Available-for-sale securities

741

847

810

787

551

Other investments

4

11

20

29

47

Cash and cash equivalents

288

242

243

217

337

Other assets

100

144

162

146

131

Total Assets

$

5,219

$

5,195

$

5,253

$

5,285

$

5,285

Short-term debt

$

-

$

-

$

-

$

-

$

-

Other liabilities

142

207

181

203

185

Asset-backed securities issued - Sequoia entities

3,681

3,557

3,645

3,728

3,843

Asset-backed securities issued - Acacia entities

253

280

298

288

287

Long-term debt

140

140

140

140

150

Total liabilities  

4,216

4,184

4,264

4,359

4,465

Stockholders’ equity

991

998

972

907

802

Noncontrolling interest

12

13

17

19

18

Total equity

1,003

1,011

989

926

820

Total Liabilities and Equity

$

5,219

$

5,195

$

5,253

$

5,285

$

5,285

Shares outstanding at period end (thousands)

77,908

77,751

77,737

77,669

77,503

GAAP book value per share

$

12.71

$

12.84

$

12.50

$

11.68

$

10.35

REDWOOD TRUST, INC.

Consolidating Income Statement

Three Months Ended June 30, 2010

Other

($ in millions)

Redwood

2010

Consolidated

Intercompany

Redwood

Parent

Sequoia

Entities

Adjustments

Consolidated

Interest income

$

16

$

1

$

30

$

-

$

47

Net discount (premium) amortization

10

-

(1)

-

9

Total interest income

26

1

29

-

56

Management fees

-

-

-

-

-

Interest expense

(2)

(1)

(18)

-

(21)

Net interest income

24

-

11

-

35

Provision for loan losses

-

-

(4)

-

(4)

Market valuation adjustments, net

(4)

-

(3)

-

(7)

Net interest income after provision

20

-

4

-

24

and market valuation adjustments

Operating expenses

(11)

-

-

-

(11)

Realized gains, net

16

-

-

-

16

Income from Other Consolidated Entities

4

-

-

(4)

-

Noncontrolling interest

-

-

-

-

-

Benefit from income taxes

-

-

-

-

-

Net income

$

29

$

-

$

4

$

(4)

$

29

Consolidating Income Statement

Six Months Ended June 30, 2010

Other

($ in millions)

Redwood

2010

Consolidated

Intercompany

Redwood

Parent

Sequoia

Entities

Adjustments

Consolidated

Interest income

$

33

$

1

$

63

$

1

$

98

Net discount (premium) amortization

19

-

(2)

-

17

Total interest income

52

1

61

1

115

Management fees

1

-

-

(1)

-

Interest expense

(3)

(1)

(35)

-

(39)

Net interest income

50

-

26

-

76

Provision for loan losses

-

-

(14)

-

(14)

Market valuation adjustments, net

(7)

-

(12)

-

(19)

Net interest income after provision

43

-

-

-

43

and market valuation adjustments

Operating expenses

(28)

-

-

-

(28)

Realized gains, net

54

-

6

-

60

Income from Other Consolidated Entities

6

-

-

(6)

-

Noncontrolling interest

-

-

-

-

-

Benefit from income taxes

-

-

-

-

-

Net income

$

75

$

-

$

6

$

(6)

$

75

REDWOOD TRUST, INC.

Consolidating Balance Sheet

June 30, 2010

Other

($ in millions)

Redwood

2010

Consolidated

Intercompany

Redwood

Parent

Sequoia

Entities

Adjustments

Consolidated

Real estate loans

$

3

$

226

$

3,581

$

-

$

3,810

Real estate securities, at fair value:

Trading securities

18

-

258

-

276

Available-for-sale securities

716

-

52

(27)

741

Other investments

-

-

4

-

4

Cash and cash equivalents

288

-

-

-

288

Investment in 2010 Sequoia

28

-

-

(28)

-

Investment in Other Consolidated Entities

91

-

-

(91)

-

Total earning assets

1,144

226

3,895

(146)

5,119

Other assets

41

3

56

-

100

Total Assets

$

1,185

$

229

$

3,951

$

(146)

$

5,219

Short-term debt

$

-

$

-

$

-

$

-

$

-

Other liabilities

54

1

87

-

142

Asset-backed securities issued

-

200

3,761

(27)

3,934

Long-term debt

140

-

-

-

140

Total liabilities

194

201

3,848

(27)

4,216

Stockholders’ equity

991

28

91

(119)

991

Noncontrolling interest

-

-

12

-

12

Total equity

991

28

103

(119)

1,003

Total Liabilities and Equity

$

1,185

$

229

$

3,951

$

(146)

$

5,219

REDWOOD TRUST, INC.

Tax / GAAP Differences

Three Months Ended June 30, 2010*

(In Millions, Except per Share Data)

Tax

GAAP

Differences

Interest income

$

34

$

56

$

(22)

Interest expense

(3)

(21)

18

Net Interest Income

31

35

(4)

Provision for loan losses

-

(4)

4

Realized credit losses

(24)

-

(24)

Market valuation adjustments, net

-

(7)

7

Operating expenses

(10)

(11)

1

Realized gains, net

-

16

(16)

Benefit from income taxes

-

-

-

Less: Net loss attributable to noncontrolling interest

-

-

-

Net (Loss) Income

$

(3)

$

29

$

(32)

Estimated (loss) income per share

$

(0.03)

$

0.35

$

(0.38)

* Reconciliation of GAAP income for prior quarters is provided in filings for those quarters.

REDWOOD TRUST, INC.

Tax / GAAP Differences

Six Months Ended June 30, 2010*

(In Millions, Except per Share Data)

Tax

GAAP

Differences

Interest income

$

72

$

115

$

(43)

Interest expense

(3)

(39)

36

Net Interest Income

69

76

(7)

Provision for loan losses

-

(14)

14

Realized credit losses

(49)

-

(49)

Market valuation adjustments, net

-

(18)

18

Operating expenses

(21)

(29)

8

Realized gains, net

-

60

(60)

Benefit from income taxes

-

-

-

Less: Net loss attributable to noncontrolling interest

-

-

-

Net (Loss) Income

$

(1)

$

75

$

(76)

Estimated (loss) income per share

$

(0.02)

$

0.94

$

(0.96)

* Reconciliation of GAAP income for prior quarters is provided in filings for those quarters.

 REDWOOD TRUST, INC

Book Value Per Share and Management's Estimate of Non-GAAP Economic Value Per Share*

(In Millions, Except per Share Data)

June 30, 2010

Management's

GAAP

Estimate of
Non-GAAP

As Reported

Adjustments

Economic
Value

Cash and cash equivalents

$

288

$

$

288

Real estate securities at Redwood

    Residential

725

725

    Commercial

8

8

    CDO

1

1

Subtotal real estate securities

734

734

Investments in the Fund

15

15

Investments in Sequoia entities

101

(25)

(a)

76

Investments in Acacia entities (b)

3

(2)

1

Total cash, securities and investments

1,141

1,114

Long-term debt

(140)

78

(c)

(62)

Other assets/liabilities, net (d)

(10)

(10)

Stockholders' Equity

$

991

$

1,042

Book Value Per Share

$

12.71

$

13.37

(a) Our investments in Sequoia entities consist of interest-only securities and senior and
subordinate securities issued by Sequoia entities. We calculated the $76 million estimate of non-
GAAP economic value for these securities using the same valuation process that we follow to fair
value our other real estate securities. In contrast, the $101 million GAAP carrying value of these
investments represents the difference between the assets and liabilities owned by the Sequoia
entities.

(b)  The GAAP carrying value of our investments in Acacia entities was $3 million and
management's estimate of the non-GAAP economic value of those investments was $1 million,
which primarily reflects the present value of the management fees we expect to earn from these
entities. The equity interests and securities we own in the Acacia entities have minimal value.

(c) At June 30, 2010, we had $140 million of long-term debt outstanding with a stated interest
rate of LIBOR plus 225 basis points due in 2037.  During the first six months of 2010, through
interest rate hedging arrangements, we effectively fixed the interest rate on this long-term debt at
6.75%.  We calculated the $62 million estimate of non-GAAP economic value of this long-term
debt based on its stated interest rate using the same valuation process used to fair value our  
other financial assets and liabilities.  As a result of declining interest rates during the second
quarter of 2010, the fair  value of the interest rate hedges related to this long-term debt declined
by $20 million, as reflected in shareholders'  equity on our balance sheet.  

(d) Other assets/liabilities, net are comprised of $3 million of real estate loans, $4 million of
accrued interest receivable, and $37 million of other assets, less dividends payable of $19 million
and accrued interest and other liabilities of  $35 million (which includes $1 million for pending
acquisitions).

* This table presents supplemental components of book value at June 30, 2010, as reported
under GAAP and as  estimated by us using fair values for our investments. We show our
investments in the Fund, and the Sequoia and  Acacia entities as separate line items to highlight
our specific ownership interests, as the underlying assets and liabilities  of these entities are
legally not ours. Our non-GAAP estimated economic value is calculated using bid-side asset
marks  (or estimated bid-side values) and offer-side marks for our financial liabilities (or
estimated offered-side values), as  required to determine fair value under GAAP.   For additional
information to consider when reviewing this table, please  see “Factors Affecting Management’s
Estimate of Economic Value” in our Quarterly Report on Form 10-Q for the three  months ended
June 30, 2010.  

 REDWOOD TRUST, INC.

Sources and Uses of Cash*

(In Millions)

Three Months Ended

June 30, 2010

March 31, 2010

Beginning cash balance

$

242

$

243

Business cash flow:

Cash flow from investments (including sales proceeds)

177

193

Asset management fees

-

-

Operating expenses

(10)

(15)

Interest expense on long-term debt

(1)

(1)

Total business cash flow

166

177

Other sources and uses:

Investment in 2010 Sequoia

(28)

0

Changes in working capital

3

(2)

Acquisitions**

(55)

(156)

Derivative margins posted, net

(20)

0

Dividends