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Redwood Trust Reports Third Quarter 2010 Results

Wednesday, November 03, 2010

MILL VALLEY, Calif., Nov. 3, 2010 /PRNewswire-FirstCall/ -- Redwood Trust, Inc. (NYSE: RWT) today reported net income for the third quarter of 2010 of $20 million, or $0.25 per fully diluted share. This compares to net income of $29 million, or $0.35 per fully diluted share, for the second quarter of 2010, and net income of $27 million, or $0.34 per fully diluted share, for the third quarter of 2009.

Redwood also reported an estimated taxable loss of $9 million, or $0.11 per share, during the third quarter of 2010.  This compares to estimated taxable loss of $3 million, or $0.03 per share, for the second quarter of 2010, and a taxable loss of $23 million, or $0.30 per share, for the third quarter of 2009.  

At September 30, 2010, GAAP book value was $13.02 per share, an increase of $0.31 per share from June 30, 2010, and management's estimate of non-GAAP economic value was $13.73 per share, an increase of $0.36 per share from June 30, 2010.

During the third quarter of 2010, Redwood acquired $50 million of residential securities.   Redwood ended the quarter with a total securities portfolio of $797 million, up from $734 million at the beginning of the quarter, and with $189 million of cash and cash equivalents.

Please see the tables that follow for reconciliations between GAAP and non-GAAP metrics.   Additional information on Redwood's business, financial results, and on non-GAAP metrics is available in Redwood's Quarterly Report on Form 10-Q for the three months ended September 30, 2010, which was filed today with the Securities and Exchange Commission, and is also available on Redwood's website at www.redwoodtrust.com.

The accounting concepts and disclosures relating to Redwood's financial statements are complex. The Redwood Review is an additional publication that provides information about Redwood. Today, The Redwood Review was released covering the third quarter of 2010 and is available on our website.

Cautionary Statement:  This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "expect," "believe," "intend," "seek," "plan" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2009, under the caption "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the Securities and Exchange Commission (SEC), including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

REDWOOD TRUST, INC.
















































Consolidated Income Statements


Third


Second


First


Fourth


Third

($ in millions, except share data)


Quarter


Quarter


Quarter


Quarter


Quarter



2010


2010


2010


2009


2009

















Interest income


$

59


$

56


$

58


$

62


$

70

Interest expense



(24)



(21)



(18)



(21)



(25)

Net interest income



35



35



40



41



45

Provision for loan losses



(2)



(4)



(9)



(9)



(10)

Market valuation adjustments, net



(2)



(7)



(11)



(4)



(11)

Net interest income after provision and



31



24



20



28



24

market valuation adjustments
















Operating expenses



(12)



(11)



(17)



(11)



(15)

Realized gains, net



2



16



44



20



18

Benefit from income taxes



-



-



-



3



-

Net income



21



29



47



40



27

Less: Net income attributable to noncontrolling interest



1



-



-



-



-

GAAP Net Income


$

20


$

29


$

47


$

40


$

27

































Average diluted shares (thousands)



78,961



78,852



78,542



78,101



78,059

Diluted earnings per share


$

0.25


$

0.35


$

0.58


$

0.51


$

0.34

Regular dividends declared per common share


$

0.25


$

0.25


$

0.25


$

0.25


$

0.25



REDWOOD TRUST, INC.





















Consolidated Income Statements


Nine Months Ended

($ in millions, except share data)


September 30,



2010


2009








Interest income


$

174


$

226

Interest expense



(63)



(112)

Net interest income



111



114

Provision for loan losses



(16)



(41)

Market valuation adjustments, net



(20)



(83)

Net interest income (loss) after provision and



75



(10)

market valuation adjustments







Operating expenses



(41)



(36)

Realized gains, net



62



44

Benefit from income taxes



-



1

Net income (loss)



96



(1)

Less: Net income attributable to noncontrolling interest



1



-

GAAP Net Income (Loss)


$

95


$

(1)















Average diluted shares (thousands)



78,764



65,363

Diluted earnings (loss) per share


$

1.18


$

(0.02)

Regular dividends declared per common share


$

0.75


$

0.75



REDWOOD TRUST, INC.
















































Consolidated Balance Sheets


30-Sep


30-Jun


31-Mar


31-Dec


30-Sep

($ in millions, except share data)


2010


2010


2010


2009


2009

















Real estate loans


$

3,752


$

3,810


$

3,662


$

3,740


$

3,831

Real estate securities, at fair value:
















Trading securities



310



276



289



278



275

Available-for-sale securities



798



741



847



810



787

Other investments



-



4



11



20



29

Cash and cash equivalents



189



288



242



243



217

Other assets



113



100



144



162



146

Total Assets


$

5,162


$

5,219


$

5,195


$

5,253


$

5,285

















Short-term debt


$

-


$

-


$

-


$

-


$

-

Other liabilities



163



142



207



181



203

Asset-backed securities issued - Sequoia entities



3,568



3,681



3,557



3,645



3,728

Asset-backed securities issued - Acacia entities



264



253



280



298



288

Long-term debt



140



140



140



140



140

Total liabilities  



4,135



4,216



4,184



4,264



4,359

















Stockholders’ equity



1,016



991



998



972



907

Noncontrolling interest



11



12



13



17



19

Total equity



1,027



1,003



1,011



989



926

















Total Liabilities and Equity


$

5,162


$

5,219


$

5,195


$

5,253


$

5,285

































Shares outstanding at period end (thousands)



77,984



77,908



77,751



77,737



77,669

GAAP book value per share


$

13.02


$

12.71


$

12.84


$

12.50


$

11.68



REDWOOD TRUST, INC.



















































Consolidating Income Statement

















Three Months Ended September 30, 2010








Other








($ in millions)


Redwood


2010


Consolidated



Intercompany


Redwood



(Parent)


Sequoia


Entities



Adjustments


Consolidated


















Interest income


$

17


$

2


$

30



$

-


$

49

Net discount amortization



10



-



-




-



10

Total interest income



27



2



30




-



59

Interest expense



(3)



(1)



(20)




-



(24)

Net interest income



24



1



10




-



35

Provision for loan losses



-



-



(2)




-



(2)

Market valuation adjustments, net



-



-



(2)




-



(2)

Net interest income after provision



24



1



6




-



31

and market valuation adjustments

















Operating expenses



(12)



-



-




-



(12)

Realized gains on sales and calls, net



2



-



-




-



2

Income from 2010 Sequoia



1



-



-




(1)



-

Income from Other Consolidated Entities



5



-



-




(5)



-

Noncontrolling interest



-



-



(1)




-



(1)

Provision for income taxes



-



-



-




-



-

Net Income


$

20


$

1


$

5



$

(6)


$

20




















































Consolidating Income Statement

















Nine Months Ended September 30, 2010








Other








($ in millions)


Redwood


2010


Consolidated



Intercompany


Redwood



(Parent)


Sequoia


Entities



Adjustments


Consolidated


















Interest income


$

50


$

3


$

93



$

-


$

146

Net discount (premium) amortization



29



1



(2)




-



28

Total interest income



79



4



91




-



174

Interest expense



(6)



(3)



(54)




-



(63)

Net interest income



73



1



37




-



111

Provision for loan losses



-



-



(16)




-



(16)

Market valuation adjustments, net



(7)



-



(13)




-



(20)

Net interest income after provision



66



1



8




-



75

and market valuation adjustments

















Operating expenses



(40)



-



(1)




-



(41)

Realized gains on sales and calls, net



55



-



7




-



62

Income from 2010 Sequoia



1



-



-




(1)



-

Income from Other Consolidated Entities



13



-



-




(13)



-

Noncontrolling interest



-



-



(1)




-



(1)

Provision for income taxes



-



-



-




-



-

Net Income


$

95


$

1


$

13



$

(14)


$

95



REDWOOD TRUST, INC.


































Consolidating Balance Sheet

















September 30, 2010








Other








($ in millions)


Redwood


2010


Consolidated


Intercompany


Redwood



(Parent)


Sequoia


Entities


Adjustments


Consolidated


















Real estate loans


$

64


$

193


$

3,495



$

-


$

3,752

Real estate securities, at fair value:

















Trading securities



23



-



287




-



310

Available-for-sale securities



774



-



24




-



798

Other investments



-



-



-




-



-

Cash and cash equivalents



189



-



-




-



189

Investment in 2010 Sequoia



26



-



-




(26)



-

Investment in Other Consolidated Entities



89



-



-




(89)



-

Total earning assets



1,165



193



3,806




(115)



5,049

Other assets



59



2



52




-



113

Total Assets


$

1,224


$

195


$

3,858



$

(115)


$

5,162


















Short-term debt


$

-


$

-


$

-



$

-


$

-

Other liabilities



68



1



94




-



163

Asset-backed securities issued



-



168



3,664




-



3,832

Long-term debt



140



-



-




-



140

Total liabilities



208



169



3,758




-



4,135


















Stockholders’ equity



1,016



26



89




(115)



1,016

Noncontrolling interest



-



-



11




-



11

Total equity



1,016



26



100




(115)



1,027


















Total Liabilities and Equity


$

1,224


$

195


$

3,858



$

(115)


$

5,162



REDWOOD TRUST, INC.




















Tax / GAAP Differences










Three Months Ended September 30, 2010*










($ in millions, except per share data)





Tax


GAAP


Differences

Interest income


$

37


$

59


$

(22)

Interest expense



(3)



(24)



21

Net Interest Income



34



35



(1)

Provision for loan losses



-



(2)



2

Realized credit losses



(31)



-



(31)

Market valuation adjustments, net



-



(2)



2

Operating expenses



(12)



(12)



-

Realized gains on sales and calls, net



-



2



(2)

Provision for income taxes



-



-



-

Less: Net income attributable to noncontrolling interest



-



1



(1)

Net (Loss) Income


$

(9)


$

20


$

(29)











Estimated (loss) income per share


$

(0.11)


$

0.25


$

(0.36)











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



REDWOOD TRUST, INC.




















Tax / GAAP Differences










Nine Months Ended September 30, 2010*










($ in millions, except per share data)





Tax


GAAP


Differences

Interest income


$

108


$

174


$

(66)

Interest expense



(6)



(63)



57

Net Interest Income



102



111



(9)

Provision for loan losses



-



(16)



16

Realized credit losses



(80)



-



(80)

Market valuation adjustments, net



-



(20)



20

Operating expenses



(32)



(41)



9

Realized gains on sales and calls, net



-



62



(62)

Provision for income taxes



-



-



-

Less: Net income attributable to noncontrolling interest



-



1



(1)

Net (Loss) Income


$

(10)


$

95


$

(105)











Estimated (loss) income per share


$

(0.13)


$

1.18


$

(1.31)











* Reconciliation of taxable income to 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)
























September 30, 2010




















Management's




GAAP




Estimate of Non-GAAP




As Reported


Adjustments


Economic Value


Cash and cash equivalents


$

189


$



$

189


Real estate loans at Redwood



64






64


Real estate securities at Redwood











    Residential



788






788


    Commercial



8






8


    CDO



1






1


Subtotal real estate securities



797






797


Investments in the Fund



14






14


Investments in Sequoia entities



97



(19)

(a)


78


Investments in Acacia entities



4



(3)

(b)


1


Other assets (d)



59






59


Total assets



1,224






1,202













Long-term debt



(140)



77

(c)


(63)


Other liabilities (d)



(68)






(68)


Stockholders' Equity


$

1,016





$

1,071













Book Value Per Share


$

13.02





$

13.73
























(a) Our investments in Sequoia entities consist of interest-only securities and senior and subordinate securities issued by Sequoia entities. We calculated the $78 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 $97 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 $4 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 September 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 half of 2010, through interest rate hedging arrangements, we effectively fixed the interest rate on this long-term debt at 6.75% (excluding issuance costs). We calculated the $63 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 third quarter of 2010, the fair value of the interest rate hedges related to this long-term debt declined by $11 million, and is reflected in shareholders’ equity on our balance sheet.


(d) Other assets are comprised of $4 million of accrued interest receivable and $55 million of other assets. Other liabilities are comprised of dividends payable of $19 million and accrued interest and other liabilities of $49 million.


* This table presents supplemental components of book value at September 30, 2010, as reported under GAAP and as estimated by us using fair values for our investments and long-term debt. 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 September 30, 2010.  



 REDWOOD TRUST, INC.












Sources and Uses of Cash (a)







($ in millions)









Three Months Ended



September 30, 2010


June 30, 2010

Beginning cash balance


$

288


$

242

Sources of cash







Securities at Redwood - principal and interest







Residential senior



36



42

Residential Re-REMIC



2



2

Residential subordinate



9



8

Commercial and CDO



2



1

Securities at Redwood - sales



-



116

Investments in Consolidated Entities



11



8

Total sources of cash



60



177








Uses of cash







Acquisitions of loans



(62)



-

Acquisitions of securities (b)



(48)



(55)

Investment in 2010 Sequoia



-



(28)

Cash operating expenses



(9)



(10)

Interest expense on long-term debt



(2)



(1)

Derivative margin posted



(17)



(20)

Dividends



(20)



(20)

Changes in working capital



(1)



3

Total uses of cash



(159)



(131)








Net (uses) sources of cash



(99)



46

Ending Cash Balance


$

189


$

288















(a) The sources and uses of cash in the table above are derived from our GAAP Consolidated Statements of Cash Flow by aggregating and netting cash flow in a manner consistent with the way management analyzes it. This table excludes the gross cash flow generated by our Sequoia and Acacia securitization entities and the Fund (cash flow that is not available to Redwood), but does include the cash flow distributed to Redwood as a result of our investments in these entities. The beginning and ending cash balances presented in the table above are GAAP amounts.

(b) Total acquisitions in the third quarter of 2010 were $50 million, $3 million which are not reflected in this table because they did not settle until early October. Also, $1 million of acquisitions made in the second quarter that did not settle until early July are reflected in this table.



SOURCE Redwood Trust, Inc.

Contact: Diane Merdian, +1-415-380-2331, or Mike McMahon, +1-415-384-3805, both of Redwood Trust, Inc.

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