UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ
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|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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|
For the quarterly period ended: September 30, 2005 |
OR |
|
o
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|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number: 1-13759
REDWOOD TRUST, INC.
(Exact name of Registrant as specified in its Charter)
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|
Maryland |
|
68-0329422 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
One Belvedere Place, Suite 300
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|
94941 |
Mill Valley, California
|
|
(Zip Code) |
(Address of principal executive offices)
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|
(415) 389-7373
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all documents and reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes
þ No o
Indicate the number of shares outstanding of each of the
issuers classes of stock, as of the last practicable date.
|
|
Common Stock ($0.01 par value per share) |
24,825,475 as of November 3, 2005 |
REDWOOD TRUST, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
|
|
Item 1. |
FINANCIAL STATEMENTS |
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
(In thousands, except share data) |
|
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
Residential real estate loans
|
|
$ |
16,341,180 |
|
|
$ |
22,208,417 |
|
Residential home equity lines of credit
|
|
|
215,137 |
|
|
|
296,348 |
|
Residential loan credit-enhancement securities
|
|
|
664,801 |
|
|
|
561,658 |
|
Commercial real estate loans
|
|
|
56,102 |
|
|
|
54,479 |
|
Commercial loan credit-enhancement securities
|
|
|
43,540 |
|
|
|
14,498 |
|
Securities portfolio
|
|
|
1,783,429 |
|
|
|
1,380,077 |
|
Cash and cash equivalents
|
|
|
163,160 |
|
|
|
57,246 |
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
|
|
19,267,349 |
|
|
|
24,572,723 |
|
Restricted cash
|
|
|
58,796 |
|
|
|
36,038 |
|
Accrued interest receivable
|
|
|
79,958 |
|
|
|
72,459 |
|
Interest rate agreements
|
|
|
25,422 |
|
|
|
16,144 |
|
Principal receivable
|
|
|
1,529 |
|
|
|
2,653 |
|
Deferred tax asset
|
|
|
7,679 |
|
|
|
10,572 |
|
Deferred asset-backed security issuance costs
|
|
|
56,391 |
|
|
|
60,993 |
|
Other assets
|
|
|
8,850 |
|
|
|
6,483 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
19,505,974 |
|
|
$ |
24,778,065 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
LIABILITIES
|
|
|
|
|
|
|
|
|
Redwood debt
|
|
$ |
161,739 |
|
|
$ |
203,281 |
|
Asset-backed securities issued
|
|
|
18,237,792 |
|
|
|
23,630,162 |
|
Accrued interest payable
|
|
|
42,205 |
|
|
|
35,064 |
|
Interest rate agreements
|
|
|
356 |
|
|
|
1,124 |
|
Accrued expenses and other liabilities
|
|
|
30,482 |
|
|
|
28,095 |
|
Dividends payable
|
|
|
17,335 |
|
|
|
16,183 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
18,489,909 |
|
|
|
23,913,909 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
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|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share,
50,000,000 shares authorized; 24,764,404 and 24,153,576
issued and outstanding
|
|
|
248 |
|
|
|
242 |
|
Additional paid-in capital
|
|
|
808,107 |
|
|
|
773,222 |
|
Accumulated other comprehensive income
|
|
|
117,043 |
|
|
|
105,357 |
|
Cumulative earnings
|
|
|
638,983 |
|
|
|
481,607 |
|
Cumulative distributions to stockholders
|
|
|
(548,316 |
) |
|
|
(496,272 |
) |
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,016,065 |
|
|
|
864,156 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
19,505,974 |
|
|
$ |
24,778,065 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
(In thousands, except share data) |
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
$ |
190,599 |
|
|
$ |
149,238 |
|
|
$ |
589,032 |
|
|
$ |
361,688 |
|
Residential home equity lines of credit
|
|
|
2,206 |
|
|
|
1,882 |
|
|
|
7,101 |
|
|
|
2,685 |
|
Residential loan credit-enhancement securities
|
|
|
24,368 |
|
|
|
16,007 |
|
|
|
63,431 |
|
|
|
47,617 |
|
Commercial real estate loans
|
|
|
1,209 |
|
|
|
1,038 |
|
|
|
3,819 |
|
|
|
2,607 |
|
Commercial loan credit-enhancement securities
|
|
|
453 |
|
|
|
346 |
|
|
|
1,690 |
|
|
|
442 |
|
Securities portfolio
|
|
|
22,926 |
|
|
|
12,932 |
|
|
|
60,356 |
|
|
|
32,992 |
|
Cash and cash equivalents
|
|
|
990 |
|
|
|
175 |
|
|
|
2,374 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income before provision for credit losses
|
|
|
242,751 |
|
|
|
181,618 |
|
|
|
727,803 |
|
|
|
448,445 |
|
Reversal of (provision for) credit losses
|
|
|
805 |
|
|
|
(1,528 |
) |
|
|
1,307 |
|
|
|
(5,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
243,556 |
|
|
|
180,090 |
|
|
|
729,110 |
|
|
|
442,906 |
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redwood debt
|
|
|
(3,845 |
) |
|
|
(2,312 |
) |
|
|
(8,398 |
) |
|
|
(7,373 |
) |
Asset-backed securities issued
|
|
|
(192,841 |
) |
|
|
(112,499 |
) |
|
|
(559,435 |
) |
|
|
(277,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(196,686 |
) |
|
|
(114,811 |
) |
|
|
(567,833 |
) |
|
|
(284,747 |
) |
Net Interest Income
|
|
|
46,870 |
|
|
|
65,279 |
|
|
|
161,277 |
|
|
|
158,159 |
|
Operating expenses
|
|
|
(11,194 |
) |
|
|
(8,561 |
) |
|
|
(33,450 |
) |
|
|
(27,048 |
) |
Net recognized gains and valuation adjustments
|
|
|
24,916 |
|
|
|
20,586 |
|
|
|
42,973 |
|
|
|
50,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes
|
|
|
60,592 |
|
|
|
77,304 |
|
|
|
170,800 |
|
|
|
181,392 |
|
Provision for income taxes
|
|
|
(4,693 |
) |
|
|
(4,962 |
) |
|
|
(13,424 |
) |
|
|
(3,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
55,899 |
|
|
$ |
72,342 |
|
|
$ |
157,376 |
|
|
$ |
178,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
$ |
2.26 |
|
|
$ |
3.30 |
|
|
$ |
6.41 |
|
|
$ |
8.62 |
|
Diluted Earnings Per Share:
|
|
$ |
2.21 |
|
|
$ |
3.18 |
|
|
$ |
6.26 |
|
|
$ |
8.29 |
|
Regular dividends declared per common share
|
|
$ |
0.70 |
|
|
$ |
0.67 |
|
|
$ |
2.10 |
|
|
$ |
2.01 |
|
Special dividends declared per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends declared per common share
|
|
$ |
0.70 |
|
|
$ |
0.67 |
|
|
$ |
2.10 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
24,712,536 |
|
|
|
21,952,606 |
|
|
|
24,554,475 |
|
|
|
20,674,396 |
|
Diluted weighted average shares outstanding
|
|
|
25,314,315 |
|
|
|
22,728,369 |
|
|
|
25,159,619 |
|
|
|
21,486,208 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
(In thousands) |
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
55,899 |
|
|
$ |
72,342 |
|
|
$ |
157,376 |
|
|
$ |
178,221 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on available-for-sale securities (AFS)
|
|
|
(16,200 |
) |
|
|
14,562 |
|
|
|
34,578 |
|
|
|
44,244 |
|
|
Reclassification adjustment for net (gains) included in net
income
|
|
|
(18,137 |
) |
|
|
(15,198 |
) |
|
|
(31,100 |
) |
|
|
(36,026 |
) |
|
Net unrealized gains (losses) on cash flow hedges
|
|
|
13,891 |
|
|
|
(13,772 |
) |
|
|
7,901 |
|
|
|
5,768 |
|
|
Reclassification of net realized cash flow hedge losses
(gains) to interest expense on asset-backed securities
issued
|
|
|
109 |
|
|
|
(361 |
) |
|
|
307 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
(20,337 |
) |
|
|
(14,769 |
) |
|
|
11,686 |
|
|
|
14,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$ |
35,562 |
|
|
$ |
57,573 |
|
|
$ |
169,062 |
|
|
$ |
192,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
For the Nine Months Ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
Other | |
|
|
|
Cumulative | |
|
|
|
|
| |
|
Paid-In | |
|
Comprehensive | |
|
Cumulative | |
|
Distributions to | |
|
|
(In thousands, except share data) |
|
Shares | |
|
Amount | |
|
Capital | |
|
Income | |
|
Earnings | |
|
Stockholders | |
|
Total | |
(Unaudited) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
December 31, 2004
|
|
|
24,153,576 |
|
|
$ |
242 |
|
|
$ |
773,222 |
|
|
$ |
105,357 |
|
|
$ |
481,607 |
|
|
$ |
(496,272 |
) |
|
$ |
864,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,376 |
|
|
|
|
|
|
|
157,376 |
|
|
|
Net unrealized gain on assets AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,478 |
|
|
|
|
|
|
|
|
|
|
|
3,478 |
|
|
|
Net unrealized (loss) on interest rate agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,208 |
|
|
|
|
|
|
|
|
|
|
|
8,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,062 |
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secondary Offerings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Reinvestment & Stock Purchase Plans
|
|
|
582,250 |
|
|
|
5 |
|
|
|
31,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,299 |
|
|
|
Employee Option & Stock Plans
|
|
|
19,969 |
|
|
|
1 |
|
|
|
1,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,460 |
|
|
|
Restricted Stock & Stock DERs
|
|
|
8,609 |
|
|
|
|
|
|
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,132 |
|
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,044 |
) |
|
|
(52,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
24,764,404 |
|
|
$ |
248 |
|
|
$ |
808,107 |
|
|
$ |
117,043 |
|
|
$ |
638,983 |
|
|
$ |
(548,316 |
) |
|
$ |
1,016,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
Other | |
|
|
|
Cumulative | |
|
|
|
|
| |
|
Paid-In | |
|
Comprehensive | |
|
Cumulative | |
|
Distributions to | |
|
|
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Income | |
|
Earnings | |
|
Stockholders | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
December 31, 2003
|
|
|
19,062,983 |
|
|
$ |
191 |
|
|
$ |
517,826 |
|
|
$ |
82,179 |
|
|
$ |
248,972 |
|
|
$ |
(295,840 |
) |
|
$ |
553,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,221 |
|
|
|
|
|
|
|
178,221 |
|
|
|
Net unrealized gain on assets AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,218 |
|
|
|
|
|
|
|
|
|
|
|
8,218 |
|
|
|
Net unrealized gain on interest rate agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,055 |
|
|
|
|
|
|
|
|
|
|
|
6,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,494 |
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secondary Offerings
|
|
|
2,350,000 |
|
|
|
24 |
|
|
|
116,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,620 |
|
|
|
Dividend Reinvestment & Stock Purchase Plans
|
|
|
1,545,840 |
|
|
|
15 |
|
|
|
81,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,527 |
|
|
|
Employee Option & Stock Plans
|
|
|
278,895 |
|
|
|
3 |
|
|
|
4,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,051 |
|
|
|
Restricted Stock & Stock DERs
|
|
|
107,978 |
|
|
|
|
|
|
|
7,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,162 |
|
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,341 |
) |
|
|
(53,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004
|
|
|
23,345,696 |
|
|
$ |
233 |
|
|
$ |
727,144 |
|
|
$ |
96,452 |
|
|
$ |
427,193 |
|
|
$ |
(349,181 |
) |
|
$ |
901,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
6
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30, | |
|
|
| |
(In thousands) |
|
2005 | |
|
2004 | |
(Unaudited) |
|
| |
|
| |
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
157,376 |
|
|
$ |
178,221 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Net amortization of premiums, discounts, and debt issuance costs
|
|
|
(61,045 |
) |
|
|
(63,570 |
) |
|
Depreciation and amortization of non-financial assets
|
|
|
622 |
|
|
|
411 |
|
|
(Reversal of) provision for credit losses
|
|
|
(1,307 |
) |
|
|
5,539 |
|
|
Non-cash stock compensation
|
|
|
2,132 |
|
|
|
7,163 |
|
|
Net recognized gains and valuation adjustments
|
|
|
(42,973 |
) |
|
|
(50,281 |
) |
|
Principal payments on real estate loans held-for-sale
|
|
|
18,283 |
|
|
|
30 |
|
|
Net sales of real estate loans held-for-sale
|
|
|
277,667 |
|
|
|
2,339 |
|
|
Purchases of real estate loans held-for-sale
|
|
|
(82,977 |
) |
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(7,499 |
) |
|
|
(22,254 |
) |
|
Principal receivable
|
|
|
1,124 |
|
|
|
12,434 |
|
|
Deferred income taxes
|
|
|
2,893 |
|
|
|
(9,112 |
) |
|
Other assets
|
|
|
377 |
|
|
|
(1,779 |
) |
|
Accrued interest payable
|
|
|
7,141 |
|
|
|
11,991 |
|
|
Accrued expenses and other liabilities
|
|
|
2,387 |
|
|
|
11,368 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
274,201 |
|
|
|
82,500 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchases of real estate loans held-for-investment
|
|
|
(1,529,338 |
) |
|
|
(8,275,424 |
) |
|
Proceeds from sales of real estate loans held-for-investment
|
|
|
|
|
|
|
112,811 |
|
|
Principal payments on real estate loans held-for-investment
|
|
|
7,230,178 |
|
|
|
2,483,075 |
|
|
Purchases of real estate securities available-for-sale
|
|
|
(757,870 |
) |
|
|
(625,595 |
) |
|
Proceeds from sales of real estate securities available-for-sale
|
|
|
141,442 |
|
|
|
30,891 |
|
|
Principal payments on real estate securities available-for-sale
|
|
|
153,755 |
|
|
|
164,824 |
|
|
Net (increase) decrease in restricted cash
|
|
|
(22,758 |
) |
|
|
(23,098 |
) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
5,215,409 |
|
|
|
(6,132,516 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Net borrowings on Redwood debt
|
|
|
(41,542 |
) |
|
|
9,859 |
|
|
Proceeds from issuance of asset-backed securities
|
|
|
1,998,008 |
|
|
|
8,438,368 |
|
|
Deferred asset-backed security issuance costs
|
|
|
(11,259 |
) |
|
|
(26,229 |
) |
|
Repayments on asset-backed securities
|
|
|
(7,307,909 |
) |
|
|
(2,507,237 |
) |
|
Net (purchases) proceeds of interest rate agreements
|
|
|
(2,860 |
) |
|
|
686 |
|
|
Net proceeds from issuance of common stock
|
|
|
32,758 |
|
|
|
202,197 |
|
|
Dividends paid
|
|
|
(50,892 |
) |
|
|
(50,089 |
) |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(5,383,696 |
) |
|
|
6,067,555 |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
105,914 |
|
|
|
17,539 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
57,246 |
|
|
|
58,467 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
163,160 |
|
|
$ |
76,006 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
560,692 |
|
|
$ |
272,756 |
|
|
Cash paid for taxes
|
|
$ |
8,765 |
|
|
$ |
9,145 |
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
Dividends declared but not paid
|
|
$ |
17,335 |
|
|
$ |
15,642 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
7
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Redwood Trust, Inc., together with its subsidiaries (Redwood),
invests in, credit-enhances, and securitizes residential and
commercial real estate loans and securities. Our primary
business is credit-enhancing high-quality jumbo residential real
estate loans nationwide. We also invest in securities that
represent interests in pools of diverse types of real estate
loans, including commercial real estate loans, home equity line
of credit loans (HELOCs), real estate collateralized debt
obligations (CDOs), and other real estate assets. We have
elected to have Redwood Trust, Inc. taxed as a Real Estate
Investment Trust (REIT).
Redwood acquires credit-enhancement securities (CES) from
residential real estate loan securitizations and, to a lesser
extent, from commercial real estate loan securitizations. Our
residential loan CES portfolio consists of non-rated, B-rated,
and BB-rated securities from residential real estate loan
securitizations. Our commercial loan CES are all non-rated,
first-loss commercial mortgagebacked (CMBS) securities.
|
|
|
Sequoia Residential Mortgage Loan Securitizations |
We acquire residential real estate loans from third party
originators for the Sequoia securitization program we sponsor.
We then sell these loans to Sequoia entities that finance their
purchases through the issuance of asset-backed securities (ABS).
Most Sequoia ABS are sold to third parties other than Redwood or
Acacia. Certain CES and portions of the interest-only securities
(IO securities) created by these securitizations are sold to
Redwood. Many of these CES (generally the BB-rated securities)
are subsequently sold by Redwood to the Acacia CDO
securitization program that Redwood sponsors (see below).
Redwood may also acquire other ABS issued by Sequoia entities
for re-sale to the Acacia CDO program. Redwoods on-going
investment in Sequoia securities is small relative to the size
of each Sequoia entity, and Redwoods maximum loss is
limited to its investment in these Sequoia securities (expect
for loan repurchase obligations that may arise in certain
limited situations).
We acquire various investment grade and non-investment grade
residential and commercial real estate securities from third
parties and Sequoia for re-sale to the Acacia CDO
securitizations we sponsor. We sell securities to Acacia
securitization entities that issue ABS. Redwood typically
acquires for its own portfolio the securities issued from Acacia
entities that bear the first-loss and second-loss credit risk of
the Acacia assets. Similar to the Sequoia transactions,
Redwoods on-going investment in these securities is small
relative to the size of each Acacia entity, and Redwoods
maximum loss is limited to its investments in these securities.
|
|
NOTE 2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accompanying consolidated financial statements are
unaudited. The unaudited interim consolidated financial
statements have been prepared on the same basis as the annual
consolidated financial statements and, in our opinion, reflect
all adjustments necessary for a fair statement of our financial
position, results of operations, and cash flows. These
consolidated financial statements and notes thereto should be
read in conjunction with our audited consolidated financial
statements included in the Redwoods Annual Report on
Form 10-K for the year ended December 31, 2004. The
results for the three and nine months ended September 30,
2005 are not necessarily indicative of the expected results
8
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
for the year ending December 31, 2005. Certain amounts for
prior periods have been reclassified to conform to the
September 30, 2005 presentation.
The September 30, 2005 and December 31, 2004
consolidated financial statements include the accounts of
Redwood and its wholly-owned subsidiaries, Sequoia Mortgage
Funding Corporation, Acacia CDO 1, LTD through Acacia
CDO 8, LTD and RWT Holdings, Inc. (Holdings), and
Holdings wholly-owned subsidiaries, including Sequoia
Residential Funding, Inc. and Madrona LLC. For financial
reporting purposes, references to Sequoia mean Sequoia Mortgage
Funding Corporation and Sequoia Residential Funding, Inc.
References to Acacia mean all of the aforementioned Acacia CDO
entities. References to the Redwood REIT mean Redwood exclusive
of its taxable subsidiaries. The taxable subsidiaries of Redwood
are Holdings and Holdings wholly owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated.
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of
America (GAAP) requires us to make estimates and
assumptions. These include fair value of certain assets, amount
and timing of credit losses, prepayment assumptions, and other
items that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements and the
reported amounts of certain revenues and expenses during the
reported period. Our estimates are inherently subjective in
nature and actual results could differ from those estimates.
|
|
|
Sequoia and Acacia Securitizations |
Redwood treats the securitizations it sponsors as financings
under the provisions of Financial Accounting Statement
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
(FAS 140) as we have retained effective control over
these loans and securities. Control is maintained through our
active management of the assets in the securitization entity,
our retained asset transfer discretion, our ability to direct
certain servicing decisions, or a combination of the foregoing.
Accordingly, the underlying loans owned by the Sequoia entities
are shown on our Consolidated Balance Sheets under residential
real estate loans and the Sequoia ABS issued to third parties
are shown on our Consolidated Balance Sheets under ABS issued.
Assets owned by the Acacia entities are shown on our
Consolidated Balance Sheets either in our securities portfolio
(residential real estate backed securities rated BBB and above,
commercial real estate securities, CDO, and REIT corporate debt)
or our residential loan credit-enhancement securities (lower
rated residential real estate securities). ABS issued by the
Acacia entities are shown on our Consolidated Balance Sheets as
ABS issued. In our Consolidated Statements of Income, we record
interest income on the loans and securities and interest expense
on the ABS issued. Any Sequoia ABS (CES, investment grade, or
interest-only) acquired by Redwood or Acacia from Sequoia
entities and any Acacia ABS acquired by Redwood for its own
portfolio are eliminated in consolidation and thus are not shown
on our Consolidated Balance Sheets.
Earning assets (as consolidated for GAAP purposes) consist
primarily of residential and commercial real estate loans and
securities. Coupon interest is recognized as revenue when earned
according to the terms of the loans and securities and when, in
our opinion, it is collectible. Purchase discounts and premiums
related to earning assets are amortized into interest income
over their estimated lives, considering the actual and future
estimated prepayments of the earning assets using the interest
9
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
method (i.e., using an effective yield method). Gains or losses
on the sale of earning assets are based on the specific
identification method.
|
|
|
Residential and Commercial Real Estate Loans:
Held-for-Investment |
Real estate loans held-for-investment are carried at their
unpaid principal balances adjusted for net unamortized premiums
or discounts and net of any allowance for credit losses. The
majority of consolidated residential real estate loans are
classified as held-for-investment because the consolidated
securitization entities that own these assets have the ability
and intent to hold these loans to maturity. We may sell real
estate loans from time to time to third-parties other than the
securitization entities we sponsor.
Pursuant to Financial Accounting Statement No. 91,
Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases
(FAS 91), we use the interest method to determine an
effective yield and amortize the premium or discount on loans.
For loans acquired prior to July 1, 2004, we use coupon
interest rates as they change over time and anticipated
principal prepayments to determine an effective yield to
amortize the premium or discount. For loans acquired after
July 1, 2004, we use the initial coupon interest rate of
the loans (without regard to future changes in the underlying
indices) and anticipated prepayments to calculate an effective
yield to amortize the premium or discount.
Commercial real estate loans for which we have the ability and
intent to hold to maturity are classified as held-for-investment
and are carried at their unpaid balances adjusted for
unamortized premium discounts and net of any allowance for
credit losses.
|
|
|
Residential and Commercial Real Estate Loans:
Held-for-Sale |
Residential and commercial real estate loans that we are
marketing for sale are classified as real estate loans
held-for-sale. These are carried at the lower of cost or market
value on a loan-by-loan basis. Any market valuation adjustments
on these loans are recognized in net recognized gains and
valuation adjustments in our Consolidated Statements of Income.
|
|
|
Residential and Commercial Loan Credit-Enhancement and
Securities Portfolio Securities: Available-for-Sale |
These securities are classified as available-for-sale
(AFS) and are carried at their estimated fair values.
Cumulative unrealized gains and losses are reported as a
component of accumulated other comprehensive income in our
Consolidated Statements of Stockholders Equity.
When recognizing revenue on AFS securities, we employ the
interest method to account for purchase premiums, discounts, and
fees associated with these securities. For securities rated AAA
or AA, we use the interest method as prescribed under
FAS 91, while for securities rated A or lower we use the
interest method as prescribed under the Emerging Issues Task
Force of the Financial Accounting Standards Board 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets (EITF 99-20). The use of these methods requires
us to project cash flows over the remaining life of each asset.
These projections include assumptions about interest rates,
prepayment rates, the timing and amount of credit losses, and
other factors. We review and make adjustments to our cash flow
projections on an ongoing basis and monitor these projections
based on input and analyses received from external sources,
internal models, and our own judgment and experience. There can
be no assurance that our assumptions used to estimate future
cash flows or the current periods yield for each asset
would not change in the near term.
10
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Redwood monitors its available-for-sale securities for
other-than-temporary impairment. We use the guidelines
prescribed under EITF 99-20, Financial Accounting Statement
No. 115, Accounting for Certain Investments in Debt and
Equity Securities (FAS 115), and Staff Accounting
Bulletin No. 5(m), Other-Than-Temporary Impairment
for Certain Investments in Debt and Equity Securities
(SAB 5(m)). Any other-than-temporary impairments are
reported under net recognized gains and losses and valuation
adjustments in our Consolidated Statements of Income.
For consolidated residential loans, HELOC loans, and commercial
real estate loans held-for-investment, we establish and maintain
credit reserves based on estimates of credit losses inherent in
these loan portfolios as of the balance sheet date. To calculate
the credit reserve, we assess inherent losses by determining
loss factors (defaults, the timing of defaults, and loss
severities upon defaults) that can be specifically applied to
each of the consolidated loans, loan pools, or individual loans.
We follow the guidelines of Staff Accounting
Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation (SAB 102), and Financial
Accounting Statement No. 5, Accounting for Contingencies
(FAS 5), in setting credit reserves for our residential
and commercial loans.
The following factors are considered and applied in such
determinations:
|
|
|
|
|
On-going analyses of the pool of loans including,
but not limited to, the age of loans, underwriting standards,
business climate, economic conditions, geographical
considerations, and other observable data |
|
|
|
Historical loss rates and past performance of similar loans |
|
|
|
Relevant environmental factors |
|
|
|
Relevant market research and publicly available third-party
reference loss rates |
|
|
|
Trends in delinquencies and charge-offs |
|
|
|
Effects of changes in credit concentrations |
|
|
|
Prepayment assumptions |
Once we determine applicable default amounts, the timing of the
defaults, and severities of losses upon the defaults, we
estimate expected losses for each pool of loans over its
expected life. We then estimate the timing of these losses and
the losses probable to occur over an effective loss confirmation
period. This period is defined as the range of time between the
probable occurrence of a credit loss (such as the initial
deterioration of the borrowers financial condition) and
the confirmation of that loss (the actual impairment or
charge-off of the loan). The losses expected to occur within the
effective loss confirmation period are the basis of our credit
reserves because we believe those losses exist as of the
reported date of the financial statements. We re-evaluate the
level of our credit reserves on at least a quarterly basis, and
we record provision, charge-offs, and recoveries monthly.
Additionally, if a loan becomes real estate owned (REO) or
is reclassified as held-for-sale, valuations specific to that
loan also include analyses of the underlying collateral.
The credit reserve for credit losses for the commercial real
estate loan portfolio includes detailed analyses of each loan
and the underlying property. The following factors are
considered and applied in such determinations:
|
|
|
|
|
On-going analyses of each individual loan including,
but not limited to, the age of loans, underwriting standards,
business climate, economic conditions, geographical
considerations, and other observable data |
11
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
On-going evaluations of fair values of collateral using current
appraisals and other valuations |
|
|
|
Discounted cash flow analyses |
|
|
|
Perfection of security interest |
|
|
|
Borrowers ability to meet obligations |
We follow the guidelines of Financial Accounting Statement
No. 114, Accounting by Creditors for Impairment of a
Loan (FAS 114), in determining impairment on commercial
real estate loans. We had no impaired commercial loans as of
September 30, 2005 or December 31, 2004.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less.
Restricted cash includes principal and interest payments from
real estate loans and securities owned by consolidated
securitization entities that are collateral for or payable to
owners of ABS issued by those entities, cash pledged as
collateral on interest rate agreements, and cash held back from
borrowers until certain loan agreement requirements are met.
Corresponding liabilities for cash held back from borrowers are
included in accrued expenses and other liabilities on our
Consolidated Balance Sheets.
Net deferred tax assets represent the net benefit of net
operating loss carry forwards, real estate asset basis
differences, and recognized tax gains on whole loan
securitizations that will be recognized under GAAP through the
financial statements in future periods.
|
|
|
Deferred Asset-Backed Securities Issuance Costs |
Deferred ABS issuance costs are costs associated with the
issuance of ABS from securitization entities we sponsor. These
costs typically include underwriting, rating agency, legal,
accounting, and other fees. Deferred ABS issuance costs are
reported on our Consolidated Balance Sheets as deferred charges
and are amortized as an adjustment to consolidated interest
expense using the interest method based on the actual and
estimated repayment schedules of the related ABS issued under
the principles prescribed in APB 21, Interest on
Receivables and Payables.
Other assets on our Consolidated Balance Sheets include REO,
fixed assets, prepaid interest, and other prepaid expenses. REO
is reported at the lower of cost or market value.
|
|
|
Accrued Interest Receivable and Principal Receivable |
Accrued interest receivable and principal receivable represents
principal and interest that is due and payable to us.
12
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
We enter into interest rate agreements to help manage out
interest rate risks. See Note 5 for a detailed
discussion on interest rate agreements. We report our interest
rate agreements at fair value. Those with a positive value to us
are reported as an asset. Those with a negative value to us are
reported as a liability.
We take certain risks inherent in financial institutions,
including, but not limited to, credit risk, liquidity risk,
interest rate risk, prepayment risk, market value risk,
reinvestment risk, and capital risk. In addition, there are
several other risks and uncertainties specific to our business.
We seek to actively manage these risks and uncertainties while
also providing our stockholders with an appropriate rate of
return in light of these risks and uncertainties. There can be
no assurance that risks and uncertainties are adequately
provided for in our financial statements.
Redwood debt is short-term debt collateralized by loans and
securities held temporarily for future sale to securitization
entities. We carry this debt on our balance sheet at its unpaid
principal balance. Redwood currently does not have any long-term
debt; all debt matures within one year.
|
|
|
Asset-Backed Securities Issued |
The majority of our consolidated liabilities reported on our
Consolidated Balance Sheets represent ABS issued by
bankruptcy-remote securitization entities sponsored by Redwood.
These ABS issued are carried at their unpaid principal balances
net of any unamortized discount or premium. Our exposure to loss
from consolidated securitization entities (such as Sequoia and
Acacia) is limited (except, in some circumstances, for limited
loan repurchase obligations) to our net investment in securities
we have acquired from these entities. As required by the
governing documents related to each series of ABS, Sequoia and
Acacia assets are held in the custody of trustees. Trustees
collect principal and interest payments (less servicing and
related fees) from the assets and make corresponding principal
and interest payments to the issued ABS. ABS obligations are
payable solely from the assets of these entities and are
non-recourse to Redwood.
Accrued interest payable represents interest due and payable on
Redwood debt and ABS issued. It is generally paid within the
next month with the exception of interest due on Acacia ABS
which is settled quarterly instead of monthly.
|
|
|
Accrued Expenses and Other Liabilities |
Accrued expenses and other liabilities on our Consolidated
Balance Sheets include cash held back from borrowers, accrued
employee bonuses, executive deferred compensation, dividend
equivalent rights (DERs) payable, excise and income taxes, and
accrued legal, accounting, consultants and other miscellaneous
expenses.
13
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Dividends payable reflect the regular dividend of $0.70 per
share declared by our Board of Directors payable on
October 21, 2005 to stockholders of record as of
September 30, 2005.
We have elected to be taxed as a REIT under the Internal Revenue
Code and the corresponding provisions of state law. In order to
qualify as a REIT, we must distribute at least 90% of our annual
REIT taxable income (this does not include taxable income
retained in our taxable subsidiaries) to stockholders within the
time frame set forth in the tax rules and we must meet certain
other requirements. If these requirements are met, we generally
will not be subject to Federal or state income taxation at the
corporate level with respect to the REIT taxable income we
distribute to our stockholders. We may retain up to 10% of our
REIT taxable income and pay corporate income taxes on this
retained income while continuing to maintain our REIT status.
The taxable income of Holdings and its subsidiaries is not
included in REIT taxable income, and is subject to state and
Federal income taxes at the applicable statutory rates. Deferred
income taxes, to the extent they exist, reflect estimated future
tax effects of temporary differences between the amounts of
taxes recorded for financial reporting purposes and amounts
actually payable currently as measured by tax laws and
regulations.
We have recorded a provision for income taxes in our
Consolidated Statements of Income based upon our estimated
liability for Federal and state income tax purposes. These tax
liabilities arise from estimated taxable earnings in taxable
subsidiaries and from the planned retention of a portion of our
estimated REIT taxable income. See Note 8 for
further discussion on income taxes.
Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed by dividing
net income by the weighted average number of common shares and
potential common shares outstanding during the period. Potential
common shares outstanding are calculated using the treasury
stock method, which assumes that all dilutive common stock
equivalents are exercised and the funds generated by the
exercises are used to buy back outstanding common stock at the
average market price of the common stock during the reporting
period.
Pursuant to EITF 03-6, Participating Securities and the
Two Class Method under FASB No. 128
(EITF 03-6), it was determined that there was no
allocation of income for our outstanding stock options, which
accrue dividend equivalent rights, as they were antidilutive
during the three and nine months ended September 30, 2005
and 2004. There were no other participating securities, as
defined by EITF 03-6 during these periods.
14
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table provides reconciliation of denominators of
the basic and diluted net income per share computations.
|
|
|
Basic and Diluted Net Income Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands, except share data) |
|
| |
|
| |
|
| |
|
| |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the
period
|
|
|
24,712,536 |
|
|
|
21,952,606 |
|
|
|
24,554,475 |
|
|
|
20,674,396 |
|
Net effect of dilutive stock options
|
|
|
601,779 |
|
|
|
775,763 |
|
|
|
605,144 |
|
|
|
811,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
25,314,315 |
|
|
|
22,728,369 |
|
|
|
25,159,619 |
|
|
|
21,486,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
2.26 |
|
|
$ |
3.30 |
|
|
$ |
6.41 |
|
|
$ |
8.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
2.21 |
|
|
$ |
3.18 |
|
|
$ |
6.26 |
|
|
$ |
8.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2005 and 2004, the
number of common shares that were anti-dilutive totaled 368,522
and 24,198, respectively. For the nine months ended
September 30, 2005 and 2004, the number of common shares
that were anti-dilutive totaled 167,622 and 20,238, respectively.
|
|
|
Other Comprehensive
Income |
Current period net unrealized gains and losses on residential
and commercial loan CES, securities portfolio
available-for-sale, and interest rate agreements classified as
cash flow hedges are reported as components of other
comprehensive income on our Consolidated Statements of
Comprehensive Income.
As of September 30, 2005 and December 31, 2004, we had
one stock-based employee compensation plan and one employee
stock purchase plan. These plans are described more fully in
Note 10. In accordance with the guidance of
Financial Accounting Statement No. 148, Accounting for
Stock Based Compensation Transition and Disclosure,
an amendment for FASB Statement No. 123, (FAS 148)
we elected to prospectively apply the fair value method of
accounting for stock-based awards issued subsequent to
December 31, 2002.
We continue to account for all stock-based compensation awards
issued prior to December 31, 2002 under the recognition and
measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), and related
interpretations. Under these provisions, when we granted
stock-based compensation awards we did not include any
stock-based employee compensation cost in net income, as all
awards granted under the plan had an exercise price equal to the
fair market value of
15
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
the underlying common stock on the date of grant. Had Redwood
applied Financial Accounting Statement No. 123,
Accounting for Stock-Based Compensation (FAS 123) to
options granted prior to 2003, net income and net income per
share would have been the pro-forma amounts indicated below:
|
|
|
Pro-Forma Net Income Under
FAS 123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands, except share data) |
|
| |
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
55,899 |
|
|
$ |
72,342 |
|
|
$ |
157,376 |
|
|
$ |
178,221 |
|
Add: Dividend equivalent right operating expenses under
APB 25
|
|
|
2,029 |
|
|
|
1,953 |
|
|
|
5,587 |
|
|
|
7,547 |
|
Add: Stock option operating (income) expenses under APB 25
|
|
|
(16 |
) |
|
|
213 |
|
|
|
(98 |
) |
|
|
1,021 |
|
Deduct: Stock-based employee compensation expense determined
under fair value based method for awards granted prior to
January 1, 2003
|
|
|
(201 |
) |
|
|
(256 |
) |
|
|
(671 |
) |
|
|
(848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
57,711 |
|
|
$ |
74,252 |
|
|
$ |
162,194 |
|
|
$ |
185,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
2.26 |
|
|
$ |
3.30 |
|
|
$ |
6.41 |
|
|
$ |
8.62 |
|
|
Basic pro forma
|
|
$ |
2.34 |
|
|
$ |
3.38 |
|
|
$ |
6.61 |
|
|
$ |
8.99 |
|
|
Diluted as reported
|
|
$ |
2.21 |
|
|
$ |
3.18 |
|
|
$ |
6.26 |
|
|
$ |
8.29 |
|
|
Diluted pro forma
|
|
$ |
2.28 |
|
|
$ |
3.27 |
|
|
$ |
6.45 |
|
|
$ |
8.65 |
|
The Black-Scholes option-pricing model was used in determining
fair values of option grants accounted for under FAS 123.
The model requires the use of assumptions such as strike price,
expected life, risk free rate of return, and stock price
volatility. These options are generally granted over the course
of the calendar year. Some of the options granted during the
nine months ended September 30, 2005 and the three and nine
months ended September 30, 2004 had dividend equivalent rights,
and, accordingly, the assumed dividend yield was zero. Other
options granted during the first nine months of 2005 and 2004
had no DERs and the assumed dividend yield was 10%. See
Note 10 for a further discussion of options. The
following table describes the weighted average of assumptions
used for calculating the value of options granted in the three
months and nine months ended September 30, 2005 and 2004.
|
|
|
Weighted Average Assumptions used for Valuation of Options
under FAS 123 Granted during period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Stock Price Volatility
|
|
|
|
|
|
|
22.00% |
|
|
|
26.41% |
|
|
|
22.00% |
|
Risk free rate of return (5 yr Treasury Rate)
|
|
|
|
|
|
|
3.45% |
|
|
|
4.07% |
|
|
|
3.30% |
|
Dividend Yield Assumptions
|
|
|
|
|
|
|
0.00% |
|
|
|
4.45% |
|
|
|
4.87% |
|
16
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
Recent Accounting Pronouncements |
The EITF released EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). For investments that meet the
scope of this pronouncement, EITF 03-1 provides application
guidance to determine when an investment is considered impaired,
whether that impairment is other-than-temporary, and the
measurement of impairment. The guidance also includes accounting
considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments. In general,
EITF 03-1 states that if the fair value of an
applicable investment is lower than its book value, it is
considered impaired. This impairment is considered
other-than-temporary unless the investor has the ability and
intent to hold the investment for a reasonable period of time
sufficient for a forecasted recovery of the value of the asset.
Certain disclosure requirements of this pronouncement are
currently in effect and are presented in Note 3. The
recognition and measurement guidance of this pronouncement will
become effective at a later date to be determined. Accordingly,
we continue to evaluate other than temporary impairments as
prescribed under EITF 99-20, FAS 115, and
SAB 5(m).
In December 2004, a revised version of the original FAS 123
was issued. Financial Accounting Statement No. 123R,
Share-Based Payment (FAS 123R), supersedes
Accounting Principles Board No. 25, Accounting for Stock
Issued to Employees (APB 25). This Statement requires
that the cost resulting from all share-based payment
transactions be recognized in the financial statements. This
Statement establishes fair value as the measurement objective in
accounting for share-based payment arrangements and all
transactions with employees, except for equity instruments held
by employee stock ownership plans. Effective January 1,
2003 and in accordance with the transitional guidance of
FAS 148, we elected to prospectively apply the fair value
method of accounting for stock-based awards granted subsequent
to December 31, 2002. In accordance with the implementation
time frame established by the Securities and Exchange Commission
in April 2005, we plan to adopt FAS 123R as of
January 1, 2006. We are still in the process of evaluating
the impact of FAS 123R.
As of September 30, 2005 and December 31, 2004, our
reported earning assets (owned by us or by consolidated
securitization entities) consisted of investments in
adjustable-rate, hybrid, and fixed-rate residential and
commercial real estate loans and securities and home equity
lines of credit. Hybrid loans have an initial fixed coupon rate
for three to ten years followed by periodic (usually annual or
semi-annual) adjustments. The original maturity of the majority
of our residential real estate loans and residential real estate
securities is usually twenty-five to thirty years. The original
maturity of our commercial real estate loans and commercial real
estate securities is generally up to ten years. The original
maturity of our home equity lines of credit is ten years. The
actual amount of principal outstanding is subject to change
based on the prepayments of the underlying loans.
For the three months ended September 30, 2005 and 2004, the
average consolidated balance of earning assets was
$20.1 billion and $22.5 billion, respectively. For the
nine months ended September 30, 2005 and 2004, the average
consolidated balance of earning assets was $22.2 billion
and $20.3 billion, respectively.
|
|
|
Residential Real Estate Loans |
We acquire residential real estate loans from third party
originators for sale to securitization entities sponsored by us
under our Sequoia program. We sell these loans to Sequoia
securitization entities, which, in turn, issue ABS (that are
shown as liabilities on our Consolidated Balance Sheets). The
17
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
following table presents the carrying value of consolidated real
estate loans as September 30, 2005 and December 31,
2004.
|
|
|
Residential Real Estate Loans Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Held-for- |
|
Held-for- | |
|
|
|
Held-for- | |
|
Held-for- | |
|
|
|
|
Sale |
|
Investment | |
|
Total | |
|
Sale | |
|
Investment | |
|
Total | |
(In thousands) |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Current face
|
|
$ |
|
|
|
$ |
16,176,357 |
|
|
$ |
16,176,357 |
|
|
$ |
2,365 |
|
|
$ |
22,021,523 |
|
|
$ |
22,023,888 |
|
Unamortized Premium
|
|
|
|
|
|
|
185,814 |
|
|
|
185,814 |
|
|
|
32 |
|
|
|
207,575 |
|
|
|
207,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
|
|
|
|
16,362,171 |
|
|
|
16,362,171 |
|
|
|
2,397 |
|
|
|
22,229,098 |
|
|
|
22,231,495 |
|
Lower of cost-or- market adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375 |
) |
|
|
|
|
|
|
(375 |
) |
Reserve for Credit Losses
|
|
|
|
|
|
|
(20,991 |
) |
|
|
(20,991 |
) |
|
|
|
|
|
|
(22,703 |
) |
|
|
(22,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
$ |
|
|
|
$ |
16,341,180 |
|
|
$ |
16,341,180 |
|
|
$ |
2,022 |
|
|
$ |
22,206,395 |
|
|
$ |
22,208,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment are primarily residential real estate
loans sold to securitization entities and are consolidated on
our Consolidated Balance Sheets. Loans acquired for future sale
to sponsored securitization entities are also classified as
held-for-investment. Loans held-for-sale are those we anticipate
selling to third parties other than Redwood-sponsored
securitization entities and are reported at the lower of cost or
market value.
Our goal is to sell all of the residential real estate loans we
acquire to securitization entities that finance their purchases
of loans from us through the issuance of ABS. During the period
we accumulate loans for securitization, we fund these loans with
equity and with short-term borrowings sourced through various
whole loan-financing facilities available to us.
We may exercise our right to call ABS issued by entities
sponsored by us and subsequently sell the loans to third
parties. If these transactions are not completed within a
reporting period, we reclassify held-for-investment loans to
held-for-sale loans once we determine which loans will be sold
to third parties. To the extent these transactions are completed
within a reporting period, the sale of loans is reported as a
sale of loans held-for-investment in our Statements of Cash
Flows.
18
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table provides detail of the activity of our
residential real estate loan held-for-sale and
held-for-investment portfolios for the three and nine months
ended September 30, 2005 and 2004.
|
|
|
Residential Real Estate Loans Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Residential Real Estate Loans at beginning of period
|
|
$ |
19,383,193 |
|
|
$ |
19,915,575 |
|
|
$ |
22,208,417 |
|
|
$ |
16,239,160 |
|
Acquisitions
|
|
|
332,049 |
|
|
|
2,898,165 |
|
|
|
1,591,238 |
|
|
|
7,923,314 |
|
Sales (other than to consolidated ABS trusts)
|
|
|
(263,079 |
) |
|
|
(112,811 |
) |
|
|
(266,457 |
) |
|
|
(112,811 |
) |
Principal repayments
|
|
|
(3,096,721 |
) |
|
|
(1,144,320 |
) |
|
|
(7,161,015 |
) |
|
|
(2,463,802 |
) |
Transfers to REO
|
|
|
(1,880 |
) |
|
|
|
|
|
|
(3,089 |
) |
|
|
|
|
Net discount (premium) amortization
|
|
|
(13,479 |
) |
|
|
2,078 |
|
|
|
(29,452 |
) |
|
|
(23,430 |
) |
Reversal of (provision for) credit losses
|
|
|
1,315 |
|
|
|
(1,264 |
) |
|
|
1,502 |
|
|
|
(5,008 |
) |
Net recognized gains (losses) and valuation adjustments
|
|
|
(218 |
) |
|
|
489 |
|
|
|
36 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate Loans at end of period
|
|
$ |
16,341,180 |
|
|
$ |
21,557,912 |
|
|
$ |
16,341,180 |
|
|
$ |
21,557,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents information regarding residential real
estate loans pledged under our borrowing agreements.
|
|
|
Residential Real Estate Loans as Collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Face | |
|
Carrying | |
|
Face | |
|
Carrying | |
|
|
Value | |
|
Value | |
|
Value | |
|
Value | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Unpledged
|
|
$ |
16,680 |
|
|
$ |
16,760 |
|
|
$ |
3,618 |
|
|
$ |
3,288 |
|
Pledged for Redwood debt
|
|
|
|
|
|
|
|
|
|
|
188,707 |
|
|
|
190,207 |
|
Owned by securitization entities, financed through the issuance
of ABS
|
|
|
16,159,677 |
|
|
|
16,324,420 |
|
|
|
21,831,563 |
|
|
|
22,014,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$ |
16,176,357 |
|
|
$ |
16,341,180 |
|
|
$ |
22,023,888 |
|
|
$ |
22,208,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Home Equity Lines of Credit (HELOCs) |
There were no HELOC purchases during the three months ended
September 30, 2005 and $0.1 million during the nine
months ended September 30, 2005. We acquired
$335 million HELOCs during the nine months ended
September 30, 2004. Our goal is to sell the HELOCs we
accumulate to securitization entities that raise the proceeds
necessary through the issuance of ABS. As of September 30,
2005 and December 31, 2004, substantially all consolidated
HELOCs were owned by a securitization entity; the balance was
funded with equity. There were no sales during these periods to
19
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
unrelated third parties. These HELOCs are all indexed to the
prime rate. The table below represents the carrying value of
consolidated HELOCs.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
Held-for- | |
|
Held-for- | |
|
|
Investment | |
|
Investment | |
(In thousands) |
|
| |
|
| |
Current face
|
|
$ |
210,476 |
|
|
$ |
288,954 |
|
Unamortized premium
|
|
|
5,699 |
|
|
|
8,087 |
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
216,175 |
|
|
|
297,041 |
|
Reserve for credit losses
|
|
|
(1,038 |
) |
|
|
(693 |
) |
|
|
|
|
|
|
|
Carrying value
|
|
$ |
215,137 |
|
|
$ |
296,348 |
|
|
|
|
|
|
|
|
|
|
|
Residential Loan Credit-Enhancement Securities |
The residential loan credit-enhancement securities shown on our
Consolidated Balance Sheets include non-rated, B-rated, and
BB-rated securities acquired from securitizations sponsored by
others. Our residential loan CES provided some level of
credit enhancement on $179 billion and $126 billion
high-quality residential real estate loans securitized by
entities not sponsored by us as of September 30, 2005 and
December 31, 2004, respectively.
|
|
|
Residential Loan CES Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
Securities | |
|
Securities | |
|
|
Available-for-Sale | |
|
Available-for-Sale | |
(In thousands) |
|
| |
|
| |
Current face
|
|
$ |
1,052,813 |
|
|
$ |
933,772 |
|
Unamortized discount
|
|
|
(89,429 |
) |
|
|
(108,141 |
) |
Portion of discount designated as credit protection
|
|
|
(382,862 |
) |
|
|
(342,706 |
) |
|
|
|
|
|
|
|
Amortized cost
|
|
|
580,522 |
|
|
|
482,925 |
|
Gross unrealized gains
|
|
|
91,949 |
|
|
|
84,390 |
|
Gross unrealized losses
|
|
|
(7,670 |
) |
|
|
(5,657 |
) |
|
|
|
|
|
|
|
Carrying value
|
|
$ |
664,801 |
|
|
$ |
561,658 |
|
|
|
|
|
|
|
|
As a result of the concentrated credit risk associated with
residential loan CES, we are generally able to acquire these
securities at a discount to their face (principal) value. A
portion of this discount is designated as credit protection and
the remainder is accreted into income over the remaining life of
the security.
The amount of designated credit protection equals the amount of
credit losses within the underlying loan pool that we expect to
incur over the life of the loans. This estimate is determined
based upon various factors affecting these assets, including
economic conditions, characteristics of the underlying loans,
delinquency status, past performance of similar loans, and
external credit protection. We use a variety of internal and
external credit risk cash flow modeling and portfolio analytical
tools to assist in our assessments. Quarterly, we complete our
assessments on each individual underlying loan pool and
determine the appropriate level of credit protection required
for each security we own. The designated credit protection is
specific to each residential loan CES.
20
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table presents the changes in our unamortized
discount and the portion of the discount designated as credit
protection for the three and nine months ended
September 30, 2005 and 2004.
|
|
|
Residential Loan CES Unamortized Discount and
Designated Credit Protection |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Beginning balance of unamortized discount
|
|
$ |
96,488 |
|
|
$ |
121,808 |
|
|
$ |
108,141 |
|
|
$ |
123,329 |
|
Amortization of discount
|
|
|
(11,193 |
) |
|
|
(8,181 |
) |
|
|
(27,695 |
) |
|
|
(25,666 |
) |
Calls, sales, and other
|
|
|
(14,153 |
) |
|
|
(16,560 |
) |
|
|
(29,695 |
) |
|
|
(39,977 |
) |
Re-designation of credit protection to discount
|
|
|
19,242 |
|
|
|
5,733 |
|
|
|
44,015 |
|
|
|
34,163 |
|
Acquisitions
|
|
|
(955 |
) |
|
|
6,567 |
|
|
|
(5,337 |
) |
|
|
17,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of unamortized discount
|
|
$ |
89,429 |
|
|
$ |
109,367 |
|
|
$ |
89,429 |
|
|
$ |
109,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance of designated credit protection
|
|
$ |
404,180 |
|
|
$ |
235,535 |
|
|
$ |
342,706 |
|
|
$ |
200,970 |
|
Realized credit losses
|
|
|
(1,502 |
) |
|
|
(534 |
) |
|
|
(3,303 |
) |
|
|
(2,343 |
) |
Calls, sales, and other
|
|
|
(33,420 |
) |
|
|
(3,830 |
) |
|
|
(44,768 |
) |
|
|
(10,430 |
) |
Re-designation of credit protection to discount
|
|
|
(19,242 |
) |
|
|
(5,733 |
) |
|
|
(44,015 |
) |
|
|
(34,163 |
) |
Acquisitions
|
|
|
32,846 |
|
|
|
73,487 |
|
|
|
132,242 |
|
|
|
144,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of designated credit protection
|
|
$ |
382,862 |
|
|
$ |
298,925 |
|
|
$ |
382,862 |
|
|
$ |
298,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yields recognized for GAAP for each security vary as a function
of credit results, prepayment rates, and, for our variable rate
securities, interest rates. If estimated future credit losses
exceed our prior expectations, credit losses occur more quickly
than expected, or prepayments occur more slowly than expected
(meaning the present value of projected cash flows is less than
previously expected), the yield over the remaining life of the
security may be adjusted downward. If estimated future credit
losses are less than our prior estimate, credit losses occur
later than expected, or prepayment rates are faster than
expected (meaning the present value of projected cash flows is
greater then previously expected), the yield over the remaining
life of the security may be adjusted upwards over time.
For three months ended September 30, 2005, we did not
recognize any other-than-temporary impairments
(EITF 99-20). For the nine months ended September 30,
2005, we recognized losses due to other-than-temporary
impairments of $0.1 million. For the three and nine months
ended September 30, 2004, we recognized losses due to
other-than-temporary impairments of $0.1 million and
$3.3 million, respectively. These recognized losses are
included in net recognized gains and valuation adjustments in
our Consolidated Statements of Income.
Gross unrealized gains and losses represent the difference
between the net amortized cost and the fair value of individual
securities. Gross unrealized losses represent a decline in
market value for securities not deemed impaired for GAAP. The
following table shows the gross unrealized losses, fair value,
and length of time that securities have been in a continuous
unrealized loss position of all consolidated residential
loan CES as of September 30, 2005. These unrealized
losses are not consid-
21
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
ered to be other-than-temporary impairments because these losses
are not due to adverse changes in credit or prepayment speeds
and we have the intent and ability to hold these securities for
a period sufficient for these securities to potentially recover
their values.
|
|
|
Residential Loan CES with Unrealized Losses as of
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
(Losses) | |
|
Value | |
|
(Losses) | |
|
Value | |
|
(Losses) | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential loan credit- enhancement securities
|
|
$ |
132,941 |
|
|
$ |
(7,422 |
) |
|
$ |
2,978 |
|
|
$ |
(248 |
) |
|
$ |
135,919 |
|
|
$ |
(7,670 |
) |
The following table provides detail of the activity in our
residential CES portfolio for the three and nine months ended
September 30, 2005 and 2004.
|
|
|
Residential Loan CES Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Residential CES at beginning of period
|
|
$ |
706,195 |
|
|
$ |
442,239 |
|
|
$ |
561,658 |
|
|
$ |
378,727 |
|
Acquisitions
|
|
|
57,481 |
|
|
|
82,918 |
|
|
|
213,139 |
|
|
|
195,553 |
|
Sales (other than to consolidated ABS trusts)
|
|
|
(98,775 |
) |
|
|
|
|
|
|
(126,068 |
) |
|
|
(22,416 |
) |
Principal repayments (including calls)
|
|
|
(18,403 |
) |
|
|
(44,822 |
) |
|
|
(62,735 |
) |
|
|
(126,459 |
) |
Discount amortization
|
|
|
11,193 |
|
|
|
8,181 |
|
|
|
27,695 |
|
|
|
25,666 |
|
Net unrealized balance sheet gains (losses)
|
|
|
(18,848 |
) |
|
|
(12,097 |
) |
|
|
5,545 |
|
|
|
(4,758 |
) |
Net recognized gains and valuation adjustments
|
|
|
25,958 |
|
|
|
20,390 |
|
|
|
45,567 |
|
|
|
50,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Loan CES at end of period
|
|
$ |
664,801 |
|
|
$ |
496,809 |
|
|
$ |
664,801 |
|
|
$ |
496,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $18 million and $63 million of principal pay
downs in the three and nine months ended September 30,
2005, $5 million and $28 million, respectively,
represented calls of the securities in accordance with the
original issue provisions of individual securitization entities.
Of the $45 million and $126 million of principal pay
downs in the three and nine months ended September 30,
2004, $32 million and $80 million, respectively,
represented calls of securities.
22
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
We generally fund the first-loss and second-loss interests of
residential CES with equity capital. We generally sell the
third-loss interests (and some of the second-loss interests) of
the residential loan CES we acquire to securitization
entities (Acacia) that re-securitize these assets by issuing
ABS. Prior to sale to Acacia, we may fund some of the securities
acquired on a temporary basis with short-term borrowings through
various financing facilities available to us (see
Note 6). The table below presents information
regarding our residential CES pledged under borrowing agreements
and securitizations.
|
|
|
Residential Loan CES as Collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
September 30, 2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Unpledged
|
|
$ |
336,067 |
|
|
$ |
350,756 |
|
Pledged for Redwood debt
|
|
|
2,406 |
|
|
|
|
|
Owned by securitization entities, financed through issuance of
ABS
|
|
|
326,328 |
|
|
|
210,902 |
|
|
|
|
|
|
|
|
Total Carrying Value
|
|
$ |
664,801 |
|
|
$ |
561,658 |
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate Loans |
Commercial real estate loans represent first or second lien
interests in multifamily, office, retail, and industrial
properties. Commercial real estate loans held-for-investment may
represent junior participations in first lien interests where we
provide credit enhancement to a senior interest.
|
|
|
Commercial Real Estate Loans Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Held- |
|
Held-for- | |
|
|
|
Held- |
|
Held-for- | |
|
|
|
|
for-Sale |
|
Investment | |
|
Total | |
|
for-Sale |
|
Investment | |
|
Total | |
(In thousands) |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
Current face
|
|
$ |
|
|
|
$ |
66,348 |
|
|
$ |
66,348 |
|
|
$ |
|
|
|
$ |
65,598 |
|
|
$ |
65,598 |
|
Unamortized (discount) premium
|
|
|
|
|
|
|
(2,105 |
) |
|
|
(2,105 |
) |
|
|
|
|
|
|
(2,478 |
) |
|
|
(2,478 |
) |
Portion of discount designated as credit protection
|
|
|
|
|
|
|
(8,141 |
) |
|
|
(8,141 |
) |
|
|
|
|
|
|
(8,141 |
) |
|
|
(8,141 |
) |
Lower of cost-or-market adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
$ |
|
|
|
$ |
56,102 |
|
|
$ |
56,102 |
|
|
$ |
|
|
|
$ |
54,479 |
|
|
$ |
54,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table provides detail of the activity of our
commercial real estate loan portfolio for the three and nine
months ended September 30, 2005 and 2004.
|
|
|
Commercial Real Estate Loans Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Commercial real estate loans at beginning of period
|
|
$ |
41,794 |
|
|
$ |
33,546 |
|
|
$ |
54,479 |
|
|
$ |
22,419 |
|
Acquisitions
|
|
|
14,219 |
|
|
|
|
|
|
|
20,951 |
|
|
|
17,066 |
|
Principal capitalized (payments)
|
|
|
158 |
|
|
|
(29 |
) |
|
|
(8,878 |
) |
|
|
(3,307 |
) |
Net premium amortization
|
|
|
(69 |
) |
|
|
(128 |
) |
|
|
(198 |
) |
|
|
(352 |
) |
Reversal of provisions for credit losses
|
|
|
|
|
|
|
|
|
|
|
185 |
|
|
|
|
|
Sales (other than to consolidated ABS trusts)
|
|
|
(17 |
) |
|
|
|
|
|
|
(11,209 |
) |
|
|
(2,339 |
) |
Net recognized gains (losses) and valuation adjustments
|
|
|
17 |
|
|
|
|
|
|
|
772 |
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans at end of period
|
|
$ |
56,102 |
|
|
$ |
33,389 |
|
|
$ |
56,102 |
|
|
$ |
33,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our goal is to finance our commercial real estate loans with
equity or to sell them to securitization entities sponsored by
us. During the accumulation of these loans prior to sale to
Acacia, we may fund some of the loans with short-term borrowings
through various financing facilities available to us. The table
below presents information regarding our commercial real estate
loans pledged under borrowing agreements.
|
|
|
Commercial Real Estate Loans as Collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Face | |
|
Carrying | |
|
Face | |
|
Carrying | |
|
|
Value | |
|
Value | |
|
Value | |
|
Value | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Unpledged
|
|
$ |
15,591 |
|
|
$ |
7,192 |
|
|
$ |
40,868 |
|
|
$ |
32,119 |
|
Pledged for Redwood debt
|
|
|
14,401 |
|
|
|
14,206 |
|
|
|
|
|
|
|
|
|
Owned by securitization entities, financed through issuance of
ABS
|
|
|
36,356 |
|
|
|
34,704 |
|
|
|
24,730 |
|
|
|
22,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value
|
|
$ |
66,348 |
|
|
$ |
56,102 |
|
|
$ |
65,598 |
|
|
$ |
54,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The commercial loan CES shown on our Consolidated Balance
Sheets include non-rated securities acquired from
securitizations sponsored by others and a re-REMIC that is a
resecuritization of several first and second loss securities of
other CMBS. Our commercial loan CES provided some level of
credit enhancement on $21 billion and $6 billion
high-quality commercial real estate loans securitized by
entities not sponsored by us as of September 30, 2005 and
December 31, 2004, respectively. In addition, the
underlying loans in the re-REMIC included in this portfolio
totaled $18 billion and $20 billion at
September 30, 2005 and December 31, 2004, respectively.
24
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
Commercial Loan CES Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
Securities | |
|
Securities | |
|
|
Available-for-Sale | |
|
Available-for-Sale | |
(In thousands) |
|
| |
|
| |
Current face
|
|
$ |
138,530 |
|
|
$ |
45,639 |
|
Unamortized premium
|
|
|
41,127 |
|
|
|
12,883 |
|
Portion of discount designated as credit protection
|
|
|
(138,530 |
) |
|
|
(45,639 |
) |
|
|
|
|
|
|
|
Amortized cost
|
|
|
41,127 |
|
|
|
12,883 |
|
Gross unrealized gains
|
|
|
3,264 |
|
|
|
1,615 |
|
Gross unrealized losses
|
|
|
(851 |
) |
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$ |
43,540 |
|
|
$ |
14,498 |
|
|
|
|
|
|
|
|
As a result of the concentrated credit risk associated with
commercial loan CES, we generally are able to acquire these
securities at a discount to their face (principal) value. A
portion of this discount is designated as credit protection and
the remainder is accreted into income or expense over the
remaining life of the security.
The amount of designated credit protection equals the amount of
credit losses within the underlying loan pool that we expect to
incur over the life of the loans. This estimate is determined
based upon various factors affecting these assets, including
economic conditions, characteristics of the underlying loans,
delinquency status, past performance of similar loans, and
external credit protection. We use a variety of internal and
external credit risk cash flow modeling and portfolio analytical
tools to assist in our assessments. Quarterly, we complete our
assessments on each individual underlying loan pool and
determine the appropriate level of credit protection required
for each security we own. The designated credit protection is
specific to each commercial loan CES.
The following table presents the changes in our unamortized
premium and the portion of the discount designated as credit
protection for the three and nine months ended
September 30, 2005 and 2004.
|
|
|
Commercial Loan CES Unamortized Discount and
Designated Credit Protection |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Beginning balance of unamortized (premium) discount
|
|
$ |
(24,847 |
) |
|
$ |
(2,084 |
) |
|
$ |
(12,883 |
) |
|
$ |
|
|
Amortization of premium (discount)
|
|
|
902 |
|
|
|
(60 |
) |
|
|
1,657 |
|
|
|
(18 |
) |
Calls, sales, and other
|
|
|
|
|
|
|
85 |
|
|
|
151 |
|
|
|
12 |
|
Re-designation of credit protection to discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
(17,182 |
) |
|
|
(6,397 |
) |
|
|
(30,052 |
) |
|
|
(8,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of unamortized premium
|
|
$ |
(41,127 |
) |
|
$ |
(8,456 |
) |
|
$ |
(41,127 |
) |
|
$ |
(8,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance of designated credit protection
|
|
$ |
87,210 |
|
|
$ |
8,175 |
|
|
$ |
45,639 |
|
|
$ |
|
|
Realized credit losses
|
|
|
(3 |
) |
|
|
|
|
|
|
(1,464 |
) |
|
|
|
|
Calls, sales and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-designation of credit protection to discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
51,323 |
|
|
|
18,755 |
|
|
|
94,355 |
|
|
|
26,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of designated credit protection
|
|
$ |
138,530 |
|
|
$ |
26,930 |
|
|
$ |
138,530 |
|
|
$ |
26,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Yields recognized for GAAP purposes for each security vary as a
function of credit results, prepayment rates, and (for our
variable rate securities) interest rates. If estimated future
credit losses exceed our prior expectations, credit losses occur
more quickly than expected, or prepayments occur more slowly
than expected, the yield over the remaining life of the security
may be adjusted downward. If estimated future credit losses are
less than our prior estimate, credit losses occur later than
expected, or prepayment rates are faster than expected, the
yield over the remaining life of the security may be adjusted
upwards over time.
For the three months ended September 30, 2005 and for the
three and nine months ended September 30, 2004, we did not
recognize losses due to other-than-temporary impairment. For the
nine months ended September 30, 2005, we recognized losses
due to other-than-temporary impairments of $0.2 million.
Gross unrealized gains and losses represent the difference
between the net amortized cost and the fair value of individual
securities. Gross unrealized losses represent a decline in
market value for securities not deemed impaired for GAAP
purposes. The following table shows the gross unrealized losses,
fair value, and length of time that securities have been in a
continuous unrealized loss position of all consolidated
commercial loan CES as of September 30, 2005. These
unrealized losses are not considered to be other-than-temporary
impairments because these losses are not due to adverse changes
in credit or prepayment speeds and we have the intent and
ability to hold these securities for a period sufficient for
these securities to potentially recover their value.
|
|
|
Commercial Loan CES with Unrealized Losses as of
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or More |
|
Total | |
|
|
| |
|
|
|
| |
|
|
Fair | |
|
Unrealized | |
|
Fair |
|
Unrealized |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
(Losses) | |
|
Value |
|
(Losses) |
|
Value | |
|
(Losses) | |
(In thousands) |
|
| |
|
| |
|
|
|
|
|
| |
|
| |
Commercial Loan CES
|
|
$ |
3,407 |
|
|
$ |
(851 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,407 |
|
|
$ |
(851 |
) |
The following table provides detail of the activity in our
commercial loan CES portfolio for the three and nine months
ended September 30, 2005 and 2004.
|
|
|
Commercial Loan CES Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Commercial Loan CES at beginning of period
|
|
$ |
29,397 |
|
|
$ |
2,094 |
|
|
$ |
14,498 |
|
|
$ |
|
|
Acquisitions
|
|
|
17,182 |
|
|
|
6,311 |
|
|
|
30,052 |
|
|
|
8,438 |
|
Sales (other than to consolidated ABS trusts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments (including calls)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net discount (premium) amortization
|
|
|
(902 |
) |
|
|
60 |
|
|
|
(1,657 |
) |
|
|
18 |
|
Net unrealized balance sheet gains (losses)
|
|
|
(2,136 |
) |
|
|
677 |
|
|
|
799 |
|
|
|
686 |
|
Net recognized gains and valuation adjustments
|
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loan CES at end of period
|
|
$ |
43,541 |
|
|
$ |
9,142 |
|
|
$ |
43,541 |
|
|
$ |
9,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We generally fund the commercial loan CES with equity
capital. There were no commercial loan CES pledged as
collateral at September 30, 2005 or December 31, 2004.
26
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Securities portfolio assets represent investment-grade security
interests in prime residential loans, sub-prime residential
loans, commercial real estate loans, second lien residential
loans, CDOs, and REIT corporate debt securities. Also
included in this portfolio are below investment-grade commercial
mortgage backed securities (except for non-rated securities
shown under commercial CES), securities backed by manufactured
housing loans, REIT corporate debt, and various real estate
interests in CDOs sponsored by others.
|
|
|
Securities Portfolio Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
Securities | |
|
Securities | |
|
|
Available-for-Sale | |
|
Available-for-Sale | |
(In thousands) |
|
| |
|
| |
Current face
|
|
$ |
1,818,295 |
|
|
$ |
1,378,924 |
|
Unamortized discount
|
|
|
(69,105 |
) |
|
|
(41,125 |
) |
Unamortized premium
|
|
|
4,310 |
|
|
|
5,548 |
|
Unamortized premium interest-only certificates
|
|
|
17,747 |
|
|
|
21,682 |
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
1,771,247 |
|
|
|
1,365,029 |
|
Gross unrealized gains
|
|
|
21,127 |
|
|
|
20,159 |
|
Gross unrealized losses
|
|
|
(8,945 |
) |
|
|
(5,111 |
) |
|
|
|
|
|
|
|
Carrying value
|
|
$ |
1,783,429 |
|
|
$ |
1,380,077 |
|
|
|
|
|
|
|
|
Other-than-temporary impairments (EITF 99-20) for the three
and nine months ended September 30, 2005 totaled
$1.2 million and $3.1 million, respectively.
Other-than-temporary impairments totaled $0.3 million and
$1.5 million for the three and nine months ended
September 30, 2004, respectively. These
other-than-temporary impairments are included as part of net
recognized gains and valuation adjustments in our Consolidated
Statements of Income.
Gross unrealized gains and losses represent the difference
between the net amortized cost and the fair value of individual
securities. Gross unrealized losses represent a temporary
decline in market values. The following table shows the gross
unrealized losses, fair value, and length of time that
securities have been in a continuous unrealized loss position of
all securities portfolio securities as of September 30,
2005. These unrealized losses are not considered to be
other-than-temporary impairments because these losses are not
due to adverse changes in credit or prepayment speeds, and we
have the intent and ability to hold these securities for a
period sufficient for these securities to potentially recover
their values.
|
|
|
Securities Portfolio with Unrealized Losses as of
September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
|
Value | |
|
(Losses) | |
|
Value | |
|
(Losses) | |
|
Value | |
|
(Losses) | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Securities portfolio
|
|
$ |
477,696 |
|
|
$ |
(5,630 |
) |
|
$ |
118,064 |
|
|
$ |
(3,315 |
) |
|
$ |
595,760 |
|
|
$ |
(8,945 |
) |
27
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The table below provides detail of the activity in our
securities portfolio for the three and nine months ended
September 30, 2005 and 2004.
|
|
|
Securities Portfolio Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Securities Portfolio at beginning of period
|
|
$ |
1,648,838 |
|
|
$ |
1,093,374 |
|
|
$ |
1,380,077 |
|
|
$ |
844,714 |
|
Acquisitions
|
|
|
190,160 |
|
|
|
144,753 |
|
|
|
514,679 |
|
|
|
421,604 |
|
Sales (other than to consolidated ABS trusts)
|
|
|
|
|
|
|
|
|
|
|
(15,374 |
) |
|
|
(8,475 |
) |
Principal repayments
|
|
|
(41,618 |
) |
|
|
(18,489 |
) |
|
|
(91,020 |
) |
|
|
(38,365 |
) |
Net discount (premium) amortization
|
|
|
566 |
|
|
|
(146 |
) |
|
|
832 |
|
|
|
(1,293 |
) |
Net unrealized balance sheet gains (losses)
|
|
|
(13,569 |
) |
|
|
10,784 |
|
|
|
(3,081 |
) |
|
|
12,289 |
|
Net recognized gains (losses) and valuation adjustments
|
|
|
(948 |
) |
|
|
(340 |
) |
|
|
(2,684 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Portfolio at end of period
|
|
$ |
1,783,429 |
|
|
$ |
1,229,936 |
|
|
$ |
1,783,429 |
|
|
$ |
1,229,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information on the types of
securities consolidated on our balance sheets as of
September 30, 2005 and December 31, 2004.
|
|
|
Securities Portfolio Asset Types |
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Commercial real estate
|
|
$ |
310,907 |
|
|
$ |
228,643 |
|
Residential prime
|
|
|
647,781 |
|
|
|
400,047 |
|
Residential sub prime
|
|
|
477,266 |
|
|
|
428,610 |
|
Residential second lien
|
|
|
118,409 |
|
|
|
131,197 |
|
Manufactured housing
|
|
|
14,695 |
|
|
|
14,016 |
|
REIT Corporate debt
|
|
|
63,381 |
|
|
|
64,479 |
|
Real estate CDOs
|
|
|
150,990 |
|
|
|
113,085 |
|
|
|
|
|
|
|
|
Total securities portfolio
|
|
$ |
1,783,429 |
|
|
$ |
1,380,077 |
|
|
|
|
|
|
|
|
At September 30, 2005, non-investment grade securities
totaled $172 million, including commercial real estate
securities ($146 million), manufactured housing securities
($6 million), and real estate CDOs ($20 million). At
December 31, 2004, non-investment grade securities in this
portfolio totaled $87 million, including commercial real
estate securities ($70 million), REIT corporate debt
($8 million), manufactured housing securities
($6 million), and real estate CDOs ($3 million).
28
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The bulk of the securities we acquire are subsequently sold to
securitization entities (Acacia) that finance their purchases
through resecuritization (the issuance of ABS). While we are
accumulating securities prior to resecuritization, we may
finance some of these securities with short-term borrowings
through various financing facilities. The table below presents
information regarding our consolidated securities portfolio
securities pledged under borrowing agreements and
securitizations.
|
|
|
Securities Portfolio as Collateral |
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Unpledged
|
|
$ |
90,169 |
|
|
$ |
93,472 |
|
Pledged for Redwood debt
|
|
|
144,432 |
|
|
|
21,283 |
|
Owned by securitization entities, financed through the issuance
of ABS
|
|
|
1,548,828 |
|
|
|
1,265,322 |
|
|
|
|
|
|
|
|
Total Carrying Value
|
|
$ |
1,783,429 |
|
|
$ |
1,380,077 |
|
|
|
|
|
|
|
|
|
|
|
Net Recognized Gains and Valuation Adjustments |
Fluctuations in the market value of certain of our real estate
loan and security assets and interest rate agreements may also
affect our net income. The table below describes the various
components of our net recognized gains and valuation adjustments
reported in income during the three and nine months ended
September 30, 2005 and 2004.
|
|
|
Net Recognized Gains and Valuation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Realized gains on calls:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loan CES
|
|
$ |
2,704 |
|
|
$ |
20,472 |
|
|
$ |
14,643 |
|
|
$ |
47,534 |
|
|
Securities portfolio
|
|
|
210 |
|
|
|
|
|
|
|
240 |
|
|
|
|
|
Realized gains (losses) on sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
|
(218 |
) |
|
|
489 |
|
|
|
36 |
|
|
|
489 |
|
|
Commercial real estate loans
|
|
|
17 |
|
|
|
|
|
|
|
772 |
|
|
|
(23 |
) |
|
Residential loan CES
|
|
|
23,254 |
|
|
|
|
|
|
|
30,979 |
|
|
|
6,242 |
|
|
Securities portfolio
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
1,007 |
|
Valuation adjustments impairment (EITF 99-20
and others):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loan CES
|
|
|
|
|
|
|
(82 |
) |
|
|
(55 |
) |
|
|
(3,281 |
) |
|
Securities portfolio
|
|
|
(1,158 |
) |
|
|
(340 |
) |
|
|
(3,053 |
) |
|
|
(1,545 |
) |
|
Commercial loan CES
|
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
|
|
Lower-of-cost-or-market (LOCOM) valuation adjustments on
real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75 |
) |
Gains (losses) on interest rate agreements
|
|
|
107 |
|
|
|
47 |
|
|
|
(567 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized gains and valuation adjustments
|
|
$ |
24,916 |
|
|
$ |
20,586 |
|
|
$ |
42,973 |
|
|
$ |
50,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
NOTE 4. |
RESERVES FOR CREDIT LOSSES |
We establish and maintain credit reserves that we believe
represent probable credit losses in our consolidated residential
and commercial real estate loans held for investment as of the
date of the financial statements. The reserves for credit losses
are reflected as a component of residential and commercial real
estate loans on our Consolidated Balance Sheets. The following
table summarizes the activity in reserves for credit losses for
the three and nine months ended September 30, 2005 and 2004.
Delinquencies in our consolidated residential real estate loan
portfolio were $23 million and $13 million,
respectively, as of September 30, 2005 and
December 31, 2004. Delinquencies include loans delinquent
more than 90 days, in bankruptcy, in foreclosure, and REO.
As a percentage of our residential real estate loan portfolio,
delinquencies remained at low levels relative to residential
real estate loans in the U.S. and stood at 0.14% and 0.06% of
our current loan balances as of September 30, 2005 and
December 31, 2004, respectively. Our residential loan
servicers advance payment on delinquent loans to the extent they
deem them recoverable. The following table summarizes the
activity in reserves for credit losses for our consolidated
residential real estate loans for the three and nine months
ended September 30, 2005 and 2004.
|
|
|
Residential Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Balance at beginning of period
|
|
$ |
22,396 |
|
|
$ |
20,080 |
|
|
$ |
22,703 |
|
|
$ |
16,336 |
|
(Reversal of) provision for credit losses
|
|
|
(1,315 |
) |
|
|
1,264 |
|
|
|
(1,502 |
) |
|
|
5,008 |
|
Charge-offs
|
|
|
(90 |
) |
|
|
|
|
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
20,991 |
|
|
$ |
21,344 |
|
|
$ |
20,991 |
|
|
$ |
21,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies in our HELOC portfolio totaled $1.0 million,
or 0.48% of the outstanding balance as of September 30,
2005, and totaled $0.3 million, or 0.10% of the outstanding
balance as of December 31, 2004. The following table
summarizes the activity in reserves for credit losses for our
HELOCs for the three and nine months ended September 30,
2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Balance at beginning of period
|
|
$ |
563 |
|
|
$ |
267 |
|
|
$ |
693 |
|
|
$ |
|
|
Provision for credit losses
|
|
|
510 |
|
|
|
264 |
|
|
|
380 |
|
|
|
531 |
|
Charge-offs
|
|
|
(35 |
) |
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
1,038 |
|
|
$ |
531 |
|
|
$ |
1,038 |
|
|
$ |
531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
We had no delinquent or impaired commercial real estate loans as
of September 30, 2005 and December 31, 2004. The
following table summarizes the activity in reserves for credit
losses for our commercial real estate loans for the three and
nine months ended September 30, 2005 and 2004.
|
|
|
Commercial Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
|
|
| |
|
| |
|
| |
Balance at beginning of period
|
|
$ |
|
|
|
$ |
500 |
|
|
$ |
500 |
|
|
$ |
500 |
|
(Reversal of) credit losses
|
|
|
|
|
|
|
|
|
|
|
(185 |
) |
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
(315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
|
|
|
$ |
500 |
|
|
$ |
|
|
|
$ |
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5. |
INTEREST RATE AGREEMENTS |
We maintain an overall interest rate risk management strategy
that incorporates the use of derivative interest rate agreements
for a variety of reasons, including minimizing significant
fluctuations in earnings or market values on certain assets or
liabilities that may be caused by interest rate volatility.
Interest rate agreements we use as part of our interest rate
risk management strategy may include interest rate options,
swaps, options on swaps, futures contracts, options on futures
contracts, and options on forward purchases.
On the date an interest rate agreement is entered into, we
designate the interest rate agreement as (1) a hedge of the
fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (2) a
hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or
liability (cash flow hedge), or (3) held for trading
(trading instrument). We currently have elected cash flow
hedging treatment for certain interest rate agreements and treat
other interest rate agreements as trading instruments.
In a cash flow hedge, the effective portion of the change in the
fair value of the hedging derivative is recorded in accumulated
other comprehensive income and is subsequently reclassified into
earnings when the hedging relationship is terminated. The
ineffective portion of the hedging derivative is recognized
immediately in earnings.
If we do not elect hedge accounting treatment (i.e., we
designate the interest rate agreement as a trading
instrument) changes in the market value of the interest
rate agreement and all associated income and expenses are
reported through earnings through net recognized gains and
valuation adjustments.
We report our interest rate agreements at fair value as
determined using third-party models and confirmed by Wall Street
dealers. As of September 30, 2005, the net fair value of
our interest rate agreements was $25.1 million. As of
December 31, 2004, the net fair value of interest rate
agreements was $15.0 million. Our total unrealized gain
included in accumulated other comprehensive income on interest
rate agreements was $18.2 million at September 30,
2005 and $10.0 million at December 31, 2004.
31
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table shows the aggregate fair value of our
interest rate agreements as of September 30, 2005 and
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Fair | |
|
Notional | |
|
Credit | |
|
Fair | |
|
Notional | |
|
Credit | |
|
|
Value | |
|
Amount | |
|
Exposure | |
|
Value | |
|
Amount | |
|
Exposure | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Trading Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps purchased
|
|
$ |
1,529 |
|
|
$ |
116,400 |
|
|
|
|
|
|
$ |
1,861 |
|
|
$ |
105,400 |
|
|
$ |
|
|
Interest rate caps sold
|
|
|
(81 |
) |
|
|
(65,000 |
) |
|
|
|
|
|
|
(440 |
) |
|
|
(65,000 |
) |
|
|
|
|
Interest rate corridors purchased
|
|
|
|
|
|
|
1,124,217 |
|
|
|
|
|
|
|
63 |
|
|
|
1,340,331 |
|
|
|
|
|
Interest rate swaps
|
|
|
229 |
|
|
|
57,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
23,389 |
|
|
|
6,898,984 |
|
|
|
|
|
|
|
13,536 |
|
|
|
11,081,719 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Rate Agreements
|
|
$ |
25,066 |
|
|
$ |
8,132,001 |
|
|
|
|
|
|
$ |
15,020 |
|
|
$ |
12,462,450 |
|
|
$ |
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We incur credit risk to the extent that the counterparties to
the interest rate agreements do not perform their obligations
under the interest rate agreements. If one of the counterparties
does not perform, we may not receive the cash to which we would
otherwise be entitled under the interest rate agreement. In
order to mitigate this risk, we only enter into interest rate
agreements that are either a) transacted on a national
exchange or b) transacted with counterparties that are
either i) designated by the U.S. Department of
Treasury as a primary government dealer, ii) affiliates of
primary government dealers, or iii) rated BBB or higher.
Furthermore, we generally enter into interest rate agreements
with several different counterparties in order to diversify our
credit risk exposure.
Certain of our interest rate agreements accounted for as cash
flow hedges may be terminated prior to the completion of the
forecasted transactions. In these cases, since the forecasted
transaction is still likely to occur, the net gain or loss on
the interest rate agreement remains in accumulated other
comprehensive income, and will be reclassified from accumulated
other comprehensive income to our Consolidated Statements of
Income during the period the forecasted transaction occurs. Of
the $18.2 million in accumulated other comprehensive income
at September 30, 2005, $1.2 million was associated
with cash flow hedges that were terminated and $0.5 million
of this amount will be recognized as interest expense on our
Consolidated Statements of Income in the next twelve months. In
the case when the hedge is terminated and the forecasted
transaction is not expected to occur, we would immediately
recognize the gain or loss through our Consolidated Statements
of Income; there were no such instances in the three and nine
months ended September 30, 2005 and 2004.
To the extent our interest rate agreements accounted as cash
flow hedges are ineffective the net ineffective portion is
recorded as an interest expense. We use the dollar-offset method
to determine the amount of ineffectiveness recorded in the
Consolidated Statements of Income. We anticipate having
32
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
some ineffectiveness in our hedging program, as not all terms of
our hedges and not all terms of our hedged items match
perfectly. For both the three and nine months ended
September 30, 2005, the amount of ineffectiveness was
$0.1 million. For the three and nine months ended
September 30, 2004, the amount of such ineffectiveness was
$0.3 million and $0.6 million of expense, respectively.
The following table depicts the interest income
(expense) and net recognized gains (losses) and valuation
adjustments activity for the three and nine months ended
September 30, 2005 and 2004 for our interest rate
agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Realized net gains (losses) reclassified from other
comprehensive income
|
|
$ |
(109 |
) |
|
$ |
361 |
|
|
$ |
(307 |
) |
|
$ |
(287 |
) |
Realized net (losses) due to net ineffective portion of hedges
|
|
|
(49 |
) |
|
|
(269 |
) |
|
|
(93 |
) |
|
|
(632 |
) |
Net cash receipt (payment) on Interest Rate Swaps
|
|
|
782 |
|
|
|
(2,981 |
) |
|
|
3,369 |
|
|
|
(12,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
624 |
|
|
$ |
(2,889 |
) |
|
$ |
2,969 |
|
|
$ |
(13,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recognized Gains (Losses) and Valuation
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net gains (losses) on trading instruments
|
|
$ |
107 |
|
|
$ |
47 |
|
|
$ |
(567 |
) |
|
$ |
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
We will discontinue hedge accounting when (1) we determine
that the derivative is no longer expected to be effective in
offsetting changes in the fair value or cash flows of the
designated hedged item; (2) the derivative expires or is
sold, terminated, or exercised; (3) the derivative is
de-designated as a fair value or cash flow hedge; or (4) it
is probable that the forecasted transaction will not occur by
the end of the originally specified time period.
Redwood debt is currently all short-term debt. We generally
enter into repurchase agreements, bank borrowings, and other
forms of collateralized short-term borrowings (short-term debt)
to finance assets under accumulation for future sale to
securitization entities. We also have $60 million
unsecuritized lines of credit available from two banks and have
a commercial paper facility (discussed below). The table below
summarizes Redwood debt by collateral type as of
September 30, 2005 and December 31, 2004.
33
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
|
Weighted | |
|
|
|
|
Average | |
|
Average | |
|
|
|
Average | |
|
Average | |
|
|
Amount | |
|
Interest | |
|
Days Until | |
|
Amount | |
|
Interest | |
|
Days Until | |
|
|
Borrowed | |
|
Rate | |
|
Maturity | |
|
Borrowed | |
|
Rate | |
|
Maturity | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential real estate loan collateral
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
181,999 |
|
|
|
2.92 |
% |
|
|
126 |
|
Residential loan CES collateral
|
|
|
2,410 |
|
|
|
4.27 |
% |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loan collateral
|
|
|
14,247 |
|
|
|
5.32 |
% |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loan CES collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities portfolio collateral
|
|
|
145,082 |
|
|
|
4.28 |
% |
|
|
75 |
|
|
|
21,282 |
|
|
|
4.05 |
% |
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Redwood debt
|
|
$ |
161,739 |
|
|
|
4.37 |
% |
|
|
75 |
|
|
$ |
203,281 |
|
|
|
3.03 |
% |
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2005, the
average balance of Redwood debt was $298 million and
$264 million with a weighted-average interest cost of 5.16%
and 4.24%, respectively. For the three and nine months ended
September 30, 2004, the average balance of Redwood debt was
$405 million and $464 million with a weighted average
cost of 2.29% and 2.12%, respectively. At September 30,
2005 and December 31, 2004, accrued interest payable on
Redwood debt was $0.1 million and $0.1 million,
respectively.
As of September 30, 2005 and December 31, 2004,
Redwood debt had the following remaining maturities.
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Within 30 days
|
|
$ |
|
|
|
$ |
868 |
|
31 to 90 days
|
|
|
161,739 |
|
|
|
115,841 |
|
Over 90 days
|
|
|
|
|
|
|
86,572 |
|
|
|
|
|
|
|
|
Total Redwood debt
|
|
$ |
161,739 |
|
|
$ |
203,281 |
|
|
|
|
|
|
|
|
In March 2005, we formed Madrona Residential Funding, LLC
(Madrona), a special purpose entity and wholly owned
subsidiary of RWT Holdings. Madrona gives us the flexibility to
access the capital markets and issue short-term debt instruments
to finance the accumulation of loans prior to sale to sponsored
securitization entities. Madrona is designed to fund residential
loans accumulated for eventual sale to our Sequoia
securitization program by issuing A1+/ P1 rated commercial
paper. Madrona was established to accumulate up to
$1.5 billion of loans (although the current authorization
is for $300 million) and can warehouse each loan up to
270 days. There are specific eligibility requirements for
financing loans in this facility that are similar to our
existing financing facilities with several banks and large
investment banking firms. There is a credit reserve account for
approximately 70 basis points that will serve as
credit-enhancement to the commercial paper investors. In
addition, we issued $5.4 million of a BBB-rated Madrona ABS
to provide further credit support. This facility has a
three-year term. During the third quarter of 2005 Madrona issued
commercial paper which was purchased by Redwood. As of
September 30, 2005 there was no commercial paper issuance
outstanding.
We have uncommitted facilities available with several banks and
major investment banking firms for financing residential and
commercial real estate securities and loans. The table below
summarizes the outstanding balances as of September 30,
2005 and December 31, 2004 by collateral type.
34
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
|
|
Number | |
|
|
|
|
of | |
|
|
|
|
Facilities | |
|
Outstanding | |
|
Limit | |
|
Maturity | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Facilities by Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
4 |
|
|
$ |
|
|
|
$ |
1,800,000 |
|
|
|
10/05-9/06 |
|
Real Estate Securities
|
|
|
2 |
|
|
|
161,739 |
|
|
|
360,000 |
|
|
|
3/06-8/06 |
|
Unsecured Line of Credit
|
|
|
2 |
|
|
|
|
|
|
|
60,000 |
|
|
|
10/05-8/06 |
|
Madrona Commercial Paper Facility
|
|
|
1 |
|
|
|
|
|
|
|
300,000 |
|
|
|
4/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
9 |
|
|
$ |
161,739 |
|
|
$ |
2,520,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
Number | |
|
|
|
|
of | |
|
|
|
|
Facilities | |
|
Outstanding | |
|
Limit | |
|
Maturity | |
|
|
| |
|
| |
|
| |
|
| |
Facilities by Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
4 |
|
|
$ |
181,999 |
|
|
$ |
1,600,000 |
|
|
|
3/05-10/05 |
|
Real Estate Securities
|
|
|
3 |
|
|
|
21,282 |
|
|
|
410,000 |
|
|
|
3/05-8/05 |
|
Unsecured Line of Credit
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Madrona Commercial Paper Facility
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
7 |
|
|
$ |
203,281 |
|
|
$ |
2,010,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under these facilities generally bear interest based
on a specified margin over the one-month LIBOR interest rate. We
continue to be in compliance with all of our debt covenants for
all of our borrowing arrangements and credit facilities.
Covenants associated with our debt generally relate to our
tangible net worth, liquidity reserves, and leverage
requirements. We have not had, nor do we currently anticipate
having, any problems in meeting these covenants. It is our
intention to renew committed and uncommitted facilities as
needed, as well as pursue additional facilities and other types
of financing.
|
|
NOTE 7. |
ASSET-BACKED SECURITIES ISSUED |
Securitization entities sponsored by us issue ABS to raise the
funds to acquire assets from us and others. Each series of asset
ABS consists of various classes that pay interest at variable
and fixed rates. The bulk of the ABS is indexed to one-, three-
or six-month LIBOR. A lesser amount of the ABS are fixed for a
term and then will adjust to a LIBOR rate (hybrid ABS) or are
fixed for their entire term. Some of the ABS Interest-Only
(IO) securities issued have a fixed spread, while others
earn a coupon based on the spread between collateral owned by
and the ABS issued by a securitized entity. The maturity of each
class is directly affected by the rate of principal prepayments
on the assets of the issuing entity. Each series is also subject
to redemption (call) according to the specific terms of the
respective governing documents. As a result, the actual maturity
of any class of ABS is likely to occur earlier than its stated
maturity.
35
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The components of ABS issued by consolidated securitization
entities as of September 30, 2005 and December 31,
2004, along with other selected information, are summarized in
the table below.
|
|
|
Asset-Backed Securities Issued |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
(In thousands) |
|
| |
|
| |
Sequoia ABS issued certificates with principal value
|
|
|
$15,901,546 |
|
|
|
$21,681,229 |
|
Sequoia ABS issued interest-only certificates
|
|
|
163,332 |
|
|
|
210,385 |
|
Acacia ABS issued
|
|
|
2,138,200 |
|
|
|
1,691,592 |
|
Commercial ABS issued
|
|
|
4,250 |
|
|
|
9,523 |
|
Madrona ABS issued
|
|
|
5,400 |
|
|
|
|
|
Unamortized premium on ABS
|
|
|
25,064 |
|
|
|
37,433 |
|
|
|
|
|
|
|
|
|
Total consolidated ABS issued
|
|
|
$18,237,792 |
|
|
|
$23,630,162 |
|
|
|
|
|
|
|
|
|
Range of weighted average interest rates, by series
Sequoia
|
|
|
3.63% to 5.64% |
|
|
|
2.22% to 5.54% |
|
|
Stated Sequoia maturities
|
|
|
2007-2039 |
|
|
|
2007-2035 |
|
|
Number of Sequoia series
|
|
|
42 |
|
|
|
39 |
|
|
Range of weighted average interest rates, by series
Acacia
|
|
|
4.03%-4.72% |
|
|
|
2.69%-3.35% |
|
|
Stated Acacia maturities
|
|
|
2018-2045 |
|
|
|
2018-2040 |
|
|
Number of Acacia series
|
|
|
8 |
|
|
|
6 |
|
|
Weighted average interest rates Commercial
|
|
|
12.00% |
|
|
|
9.08% |
|
|
Stated commercial maturities
|
|
|
2009 |
|
|
|
2005 and 2009 |
|
|
Number of commercial series
|
|
|
1 |
|
|
|
2 |
|
The following table summarizes the accrued interest payable on
ABS issued as of September 30, 2005 and December 31,
2004.
|
|
|
Accrued Interest Payable on Asset-Backed Securities
Issued |
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Sequoia
|
|
$ |
28,207 |
|
|
$ |
28,879 |
|
Acacia
|
|
|
13,279 |
|
|
|
6,025 |
|
Commercial
|
|
|
43 |
|
|
|
65 |
|
|
|
|
|
|
|
|
Total accrued interest payable on ABS issued
|
|
$ |
41,529 |
|
|
$ |
34,969 |
|
|
|
|
|
|
|
|
The ABS issued by securitization entities sponsored by us are
collateralized by residential and commercial real estate loans
and securities. The ABS collateralized by residential real
estate loans (and some residential securities) are typically
securitized through entities with the brand name Sequoia.
Residential real estate loan collateral consists primarily of
adjustable-rate and hybrid, conventional, 25-or 30-year
residential real estate loans secured by first liens on one- to
four-family residential properties. HELOC collateral consists of
adjustable-rate first and second lien residential loans with a
ten-year revolving period and a maturity from origination of ten
years. The ABS issued that are collateralized by residential and
commercial real estate securities and commercial real estate
loans are typically issued
36
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
through entities with the brand name Acacia. Other ABS
collateralized by commercial loans are issued on an individual
basis. For financial reporting purposes the assets and
liabilities of these entities are consolidated on our balance
sheets.
During the three and nine months ended September 30, 2005,
Sequoia entities issued $0.3 billion and $1.5 billion,
respectively, of Sequoia ABS to fund Sequoias acquisitions
of residential real estate loans from us. During the three and
nine months ended September 30, 2004, Sequoia entities
issued $2.7 billion and $7.5 billion, respectively.
During the three and nine months ended September 30, 2005,
Sequoia did not issue any ABS secured by interest-only
certificates that we had retained from prior Sequoia
securitizations. During the three and nine months ended
September 30, 2004, Sequoia entities issued $0 and
$0.2 billion of ABS secured by interest-only securities we
had retained, respectively.
During both the three and nine months ended September 30,
2005 and 2004, Acacia entities issued $300 and $600 million
of Acacia ABS, respectively.
During the nine months ended September 30, 2005, we issued
$4.3 million of commercial ABS, and paid off commercial ABS
in full of $9.5 million. No commercial ABS issuances or
payoffs occurred during the three months ended
September 30, 2005 and during the three and nine months
ended September 30, 2004.
The carrying value components of the collateral for ABS issued
and outstanding as of September 30, 2005 and
December 31, 2004 are summarized in the table below:
|
|
|
Collateral for Asset-Backed Securities Issued |
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Residential real estate loans
|
|
$ |
16,324,420 |
|
|
$ |
22,014,922 |
|
Residential home equity lines of credit
|
|
|
215,010 |
|
|
|
296,348 |
|
Residential loan CES
|
|
|
326,328 |
|
|
|
210,902 |
|
Commercial real estate loans
|
|
|
34,704 |
|
|
|
22,360 |
|
Securities portfolio securities
|
|
|
1,548,828 |
|
|
|
1,265,322 |
|
Real estate owned (REO)
|
|
|
2,438 |
|
|
|
|
|
Restricted cash owned by consolidated securitization entities
|
|
|
56,696 |
|
|
|
35,740 |
|
Accrued interest receivable
|
|
|
75,580 |
|
|
|
65,951 |
|
|
|
|
|
|
|
|
Total collateral for ABS issued
|
|
$ |
18,584,004 |
|
|
$ |
23,911,545 |
|
|
|
|
|
|
|
|
As a REIT, Redwood can deduct dividends paid from REIT taxable
income, and thus effectively reduce or eliminate corporate-level
income taxes. However, a REIT can retain up to 10% of its REIT
taxable income and still maintain its REIT status. We currently
plan to retain up to 10% of our 2005 REIT ordinary taxable
income and we will be subject to corporate level income taxes on
this retained income for the 2005 calendar tax year.
Our Federal tax provision for corporate income tax for the REIT
for the three and nine months ended September 30, 2005 was
$0.9 million and $3.4 million, respectively. The
Federal provision was $1.2 million and $3.8 million
for the three and nine months ended September 30, 2004,
respectively. This Federal provision is estimated based on the
amount of anticipated REIT ordinary income to be permanently
retained for each year.
37
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Holdings, Redwoods taxable subsidiary, is subject to
corporate income taxes on its taxable income. Our current
Federal tax provision for corporate income tax for Holdings for
the three and nine months ended September 30, 2005, was
$2.7 million and $3.7 million, respectively. Our
current Federal tax provision for corporate income tax for
Holdings for both the three and nine months ended
September 30, 2004, was $4.8 million. Federal
NOLs were fully utilized during the year ended
December 31, 2004.
The Redwood and Holdings combined current unitary state
provision for corporate income taxes for the three and nine
months ended September 30, 2005 was $2.0 million and
$3.5 million, respectively. The Redwood and Holdings
current combined unitary state tax provision for the three and
nine months ended September 30, 2004 was $2.9 million
and $3.7 million, respectively. Holdings state
NOLs were $10.7 million at September 30, 2005
and December 31, 2004. These state NOLs will expire between
2005 and 2012 if not utilized.
Holdings recorded a net deferred tax benefit for the three
months ended September 30, 2005 of $0.9 million and a
deferred tax provision of $2.9 million for the nine months
ended September 30, 2005. Deferred tax provisions are
attributable to securitization gain temporary differences
between GAAP and tax accounting treatments and the utilization
of prior period deferred tax assets. For the three and nine
months ended September 30, 2004, Holdings recognized
deferred tax benefits of $3.9 million and
$9.1 million, respectively.
As a result of current and deferred tax provisions, we
recognized a total net tax provision of $4.7 million and
$13.4 million for the three and nine months ended
September 30, 2005, respectively. We recognized a total net
tax provision of $5.0 million and $3.2 million for the
three and nine months ended September 30, 2004,
respectively.
The following table summarizes the tax provisions for Redwood
REIT and Holdings for the three and nine months ended
September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Current Tax Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redwood REIT Federal
|
|
$ |
864 |
|
|
$ |
1,167 |
|
|
$ |
3,364 |
|
|
$ |
3,791 |
|
|
Holdings Federal
|
|
|
2,673 |
|
|
|
4,800 |
|
|
|
3,683 |
|
|
|
4,800 |
|
|
State
|
|
|
2,014 |
|
|
|
2,927 |
|
|
|
3,484 |
|
|
|
3,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
5,551 |
|
|
|
8,894 |
|
|
|
10,531 |
|
|
|
12,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision/(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redwood REIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
(858 |
) |
|
|
(3,932 |
) |
|
|
2,893 |
|
|
|
(9,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax (benefit) provision
|
|
|
(858 |
) |
|
|
(3,932 |
) |
|
|
2,893 |
|
|
|
(9,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income tax
|
|
$ |
4,693 |
|
|
$ |
4,962 |
|
|
$ |
13,424 |
|
|
$ |
3,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
As of September 30, 2005 and December 31, 2004,
Holdings had the following deferred tax asset and liability
balances.
|
|
|
Deferred Tax Assets/(Liabilities) |
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Net operating loss carry forward Federal
|
|
$ |
|
|
|
$ |
|
|
Net operating loss carry forward State
|
|
|
763 |
|
|
|
721 |
|
Real estate assets
|
|
|
2,734 |
|
|
|
315 |
|
Gains from Sequoia securitizations
|
|
|
4,182 |
|
|
|
9,536 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$ |
7,679 |
|
|
|
10,572 |
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefited deferred tax assets
|
|
$ |
7,679 |
|
|
$ |
10,572 |
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
7,679 |
|
|
$ |
10,572 |
|
|
|
|
|
|
|
|
Under the Internal Revenue Code, a dividend declared by a REIT
in October, November, or December of a calendar year and payable
to stockholders of record as of a specified date in such year
will be deemed to have been paid by the REIT and received by the
stockholders on the last day of that calendar year, provided the
dividend is actually paid before February 1st of the
following calendar year, and provided that the REIT has any
remaining undistributed REIT taxable income on the record date.
Therefore, the regular dividends declared in the fourth quarter
of 2004 that were paid in January 2005 are considered taxable
income to stockholders in 2004 (the year declared).
Similar to 2004, our 2005 dividend distributions declared before
December 31, 2005 and distributed on or before
January 31, 2006, are expected to be less than 85% of our
estimated 2005 REIT taxable income. This will result in a 4%
excise tax provision on the shortfall. Thus, for the three and
nine months ended September 30, 2005, we provided for
excise tax of $0.3 million and $0.9 million,
respectively, which is reflected as a component of operating
expenses on our Consolidated Statements of Income. For the three
and nine months ended September 30, 2004, excise tax
totaled $0.3 million and $0.8 million, respectively.
As of September 30, 2005 and December 31, 2004,
accrued excise tax payable was $0.9 million and
$0.5 million, respectively, and was reflected as a
component of accrued expenses and other liabilities on our
Consolidated Balance Sheets.
|
|
NOTE 9. |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
We estimate the fair value of our financial instruments using
available market information and other appropriate valuation
methodologies. These fair value estimates generally incorporate
discounted future cash flows at current market discount rates
for comparable investments. We validate our fair value estimates
on a quarterly basis by obtaining fair value estimates from
dealers who make a market in these financial instruments. We
believe the estimates we use reasonably reflect the values we
may be able to receive should we choose to sell them. Many
factors must be considered in order to estimate market values,
including, but not limited to interest rates, prepayment rates,
amount and timing of credit losses, supply and demand,
liquidity, and other market factors. Accordingly, our estimates
are inherently subjective in nature and involve uncertainty and
judgment to interpret relevant market and other data. Amounts
realized in actual sales may differ from the fair values
presented.
39
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table presents the carrying values and estimated
fair values of our financial instruments as of
September 30, 2005 and December 31, 2004.
|
|
|
Fair Value of Financial Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Carrying | |
|
|
|
Carrying | |
|
|
|
|
Value | |
|
Fair Value | |
|
Value | |
|
Fair Value | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Assets |
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans: held-for-investment
|
|
$ |
16,341,180 |
|
|
$ |
16,266,463 |
|
|
$ |
22,206,395 |
|
|
$ |
22,395,296 |
|
|
Residential real estate loans: held-for-sale
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,022 |
|
|
$ |
2,022 |
|
|
HELOC: held-for-investment
|
|
$ |
215,137 |
|
|
$ |
216,791 |
|
|
$ |
296,348 |
|
|
$ |
297,623 |
|
|
Commercial real estate loans: held-for-investment
|
|
$ |
56,102 |
|
|
$ |
57,327 |
|
|
$ |
54,479 |
|
|
$ |
55,258 |
|
Real Estate Loan Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loan credit-enhancement securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
|
|
$ |
664,801 |
|
|
$ |
664,801 |
|
|
$ |
561,658 |
|
|
$ |
561,658 |
|
|
Commercial loan credit-enhancement securities, available-for-sale
|
|
$ |
43,540 |
|
|
$ |
43,540 |
|
|
$ |
14,498 |
|
|
$ |
14,498 |
|
|
Securities portfolio: available-for-sale
|
|
$ |
1,783,429 |
|
|
$ |
1,783,429 |
|
|
$ |
1,380,077 |
|
|
$ |
1,380,077 |
|
Interest Rate Agreements
|
|
$ |
25,066 |
|
|
$ |
25,066 |
|
|
$ |
15,020 |
|
|
$ |
15,020 |
|
Cash and Cash Equivalents
|
|
$ |
163,160 |
|
|
$ |
163,160 |
|
|
$ |
57,246 |
|
|
$ |
57,246 |
|
Restricted Cash
|
|
$ |
58,796 |
|
|
$ |
58,796 |
|
|
$ |
36,038 |
|
|
$ |
36,038 |
|
|
Liabilities |
Redwood debt
|
|
$ |
161,739 |
|
|
$ |
161,739 |
|
|
$ |
203,281 |
|
|
$ |
203,281 |
|
ABS issued
|
|
$ |
18,237,792 |
|
|
$ |
18,233,496 |
|
|
$ |
23,630,162 |
|
|
$ |
23,701,977 |
|
Methodologies we use to estimate fair market values for various
asset types are described below.
|
|
|
|
|
Residential and HELOC loans fair values are determined by
available market quotes and discounted cash flow analyses and
are confirmed by third party/dealer pricing indications. |
|
|
|
Commercial loans fair values are determined by appraisals on
underlying collateral and discounted cash flow analyses. |
|
|
|
|
|
Residential credit enhancement portfolio and securities
portfolio fair values are determined by discounted cash flow
analyses and other valuation techniques using market pricing
assumptions confirmed by third party dealer pricing indications. |
40
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
Interest rate agreements |
|
|
|
|
|
Fair values on interest rate agreements are determined by third
party vendor modeling software and from valuations provided by
dealers active in the derivatives markets. |
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
Includes cash on hand and highly liquid investments with
original maturities of three months or less. Fair values equal
carrying values. |
|
|
|
|
|
Includes interest earning cash balances in ABS entities for the
purpose of distribution to bondholders and reinvestment. Due to
the short-term nature of the restrictions, fair values equal
carrying values. |
|
|
|
|
|
All Redwood debt is adjustable and matures within one year; fair
values equal face values. |
|
|
|
|
|
Asset-backed securities issued |
|
|
|
|
|
Fair values are determined by discounted cash flow analyses and
other valuations techniques confirmed by third party dealer
pricing indications. |
|
|
NOTE 10. |
STOCKHOLDERS EQUITY |
In March 2004, we amended the previously approved 2002 Redwood
Trust, Inc. Incentive Stock Plan (the Plan) for executive
officers, employees, and non-employee directors. This amendment
was approved by our stockholders in May 2004. The Plan
authorizes our Board of Directors (or a committee appointed by
our Board of Directors) to grant incentive stock options as
defined under Section 422 of the Code (ISOs), options not
so qualified (NQSOs), deferred stock, restricted stock,
performance shares, stock appreciation rights, limited stock
appreciation rights (awards), and dividend equivalent rights
(DERs) to eligible recipients other than non-employee directors.
ISOs and NQSOs awarded to employees have a maximum term of
ten-years and generally vest ratably over a four-year period.
NQSOs awarded to non-employee directors have a maximum term of
ten years and generally vest immediately or ratably over a
three- or four-year period. Non-employee directors are
automatically provided annual awards under the Plan. The Plan
has been designed to permit the Compensation Committee of our
Board of Directors to grant and certify awards that qualify as
performance-based and otherwise satisfy the requirements of
Section 162(m) of the Code; however, not all awards may so
qualify. As of September 30, 2005 and December 31,
2004, 453,053 and 614,608 shares of common stock,
respectively, were available for grant.
Of the total shares of common stock available for grant, no more
than 963,637 shares of common stock are cumulatively
available for grant as ISOs. As of September 30, 2005 and
December 31, 2004, 551,697 ISOs had been granted. The
exercise price for ISOs granted under the Plan may not be less
than the fair market value of shares of common stock at the time
the ISO is granted.
41
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Redwood has granted stock options that accrue and pay stock or
cash DERs. Stock DERs represent shares of stock that are
issuable when the holders exercise the underlying stock options,
the amount of which is based on prior dividends paid per share
on common stock and the market value of the stock on the various
dividend payable dates. All stock options with stock DERs issued
before January 1, 2003 are considered variable stock awards
under the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25). As of September 30, 2005, 5,411 options
remained that are considered variable stock awards. For the
three and nine months ended September 30, 2005, we
recognized variable stock option income of $16,000 and $98,000,
respectively, on these stock options. For the three and nine
months ended September 30, 2004, we recognized variable
stock option expense of $0.2 million and $1.0 million,
respectively on these stock options. In addition, we expense the
stock DERs on these options. Options granted since
January 1, 2003 that provide for stock DERs are accounted
for under the provision of FAS 123 and are not considered
variable stock options. Cash DERs per applicable option are cash
payments made that are equal to the dividends paid in common
stock per share. For options granted prior to January 1,
2003 that provide for cash DERs, we expense the cash DERs
on these options. Stock options granted since January 1,
2003 that provide for cash DERs are accounted for when the
provisions of FAS 123; thus, there are no DER expenses
associated with these options as future DERs were included
in the valuation of the stock options at the grant date. These
expenses are included in operating expenses in our Consolidated
Statements of Income. Options with cash DERs are participating
securities under EITF 03-6 and were determined to be
antidilutive in all reported periods. For the three and nine
months ended September 30, 2005, we accrued cash and stock
DER expenses of $2.0 million and $5.6 million,
respectively. For the three and nine months ended
September 30, 2004, we accrued cash and stock DER expenses
of $2.0 million and $7.5 million, respectively.
As of September 30, 2005 and December 31, 2004, there
were 389,787 and 387,404 unexercised options with stock DERs,
respectively. As of September 30, 2005 and
December 31, 2004, there were 1,155,715 and 1,176,010
unexercised options with cash DERs, respectively. As of
September 30, 2005 and December 31, 2004, there were
57,622 and 61,050 unexercised options with no DERs, respectively.
42
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
A summary of the status of the Plan and changes during the three
and nine months ended September 30, 2005 and 2004 are
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
|
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
Stock Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at beginning of period
|
|
|
1,602,040 |
|
|
$ |
31.71 |
|
|
|
1,656,998 |
|
|
$ |
28.71 |
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
54.87 |
|
|
|
Options exercised
|
|
|
(3,525 |
) |
|
|
36.86 |
|
|
|
(128,473 |
) |
|
|
14.00 |
|
|
|
Options forfeited
|
|
|
(494 |
) |
|
|
31.84 |
|
|
|
(6,370 |
) |
|
|
39.72 |
|
|
Stock dividend equivalent rights earned
|
|
|
5,103 |
|
|
|
|
|
|
|
3,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at end of period
|
|
|
1,603,124 |
|
|
$ |
31.59 |
|
|
|
1,528,947 |
|
|
$ |
29.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at period-end
|
|
|
1,197,548 |
|
|
$ |
27.40 |
|
|
|
1,064,329 |
|
|
$ |
25.90 |
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
|
|
|
|
$ |
54.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
|
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
Stock Options Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at beginning of period
|
|
|
1,624,465 |
|
|
$ |
31.77 |
|
|
|
1,935,599 |
|
|
$ |
26.48 |
|
|
|
Options granted
|
|
|
3,601 |
|
|
|
51.70 |
|
|
|
49,698 |
|
|
|
55.00 |
|
|
|
Options exercised
|
|
|
(26,070 |
) |
|
|
21.33 |
|
|
|
(455,556 |
) |
|
|
17.00 |
|
|
|
Options forfeited
|
|
|
(13,853 |
) |
|
|
43.22 |
|
|
|
(16,054 |
) |
|
|
34.76 |
|
|
Stock dividend equivalent rights earned
|
|
|
14,981 |
|
|
|
|
|
|
|
15,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at end of period
|
|
|
1,603,124 |
|
|
$ |
31.59 |
|
|
|
1,528,947 |
|
|
$ |
29.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at period-end
|
|
|
1,197,548 |
|
|
$ |
27.40 |
|
|
|
1,064,329 |
|
|
$ |
25.90 |
|
Weighted average fair value of options granted during the period
|
|
$ |
51.70 |
|
|
|
|
|
|
$ |
55.00 |
|
|
|
|
|
43
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at September 30, 2005.
|
|
|
Stock Options Exercise Prices As of
September 30,2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
Range of | |
|
|
|
Weighted-Average | |
|
|
|
|
Exercise | |
|
Number | |
|
Remaining | |
|
Weighted-Average | |
|
Number | |
|
Weighted-Average | |
Prices | |
|
Outstanding | |
|
Contractual Life | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 0 to $10 |
|
|
|
49,180 |
|
|
|
7.98 |
|
|
$ |
|
|
|
|
18,635 |
|
|
$ |
|
|
|
$10 to $20 |
|
|
|
355,846 |
|
|
|
3.93 |
|
|
|
12.74 |
|
|
|
355,846 |
|
|
|
12.74 |
|
|
$20 to $30 |
|
|
|
462,269 |
|
|
|
5.14 |
|
|
|
24.28 |
|
|
|
364,310 |
|
|
|
23.64 |
|
|
$30 to $40 |
|
|
|
267,060 |
|
|
|
1.66 |
|
|
|
37.47 |
|
|
|
259,427 |
|
|
|
37.50 |
|
|
$40 to $50 |
|
|
|
98,247 |
|
|
|
2.96 |
|
|
|
45.49 |
|
|
|
97,185 |
|
|
|
45.52 |
|
|
$50 to $60 |
|
|
|
369,721 |
|
|
|
8.40 |
|
|
|
55.08 |
|
|
|
101,344 |
|
|
|
53.98 |
|
|
$60 to $63 |
|
|
|
801 |
|
|
|
6.87 |
|
|
|
62.54 |
|
|
|
801 |
|
|
|
62.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0 to $63 |
|
|
|
1,603,124 |
|
|
|
|
|
|
|
|
|
|
|
1,197,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005 and December 31, 2004, 3,299
and 5,912 shares, respectively, of restricted stock were
outstanding. For the three and nine months ended
September 30, 2005 and 2004, we did not grant any shares of
restricted stock to employees. No restrictions lapsed during the
three months ended September 30, 2005. During the nine
months ended September 30, 2005, restrictions on 1,750 of
these shares lapsed. During the three and nine months ended
September 30, 2004, restrictions on 1,750 and 5,250 of
these shares lapsed, respectively. Restrictions on the remaining
shares of outstanding restricted stock lapse through
January 1, 2009.
|
|
|
Restricted Stock Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Restricted stock outstanding at the beginning of period
|
|
|
3,616 |
|
|
|
6,324 |
|
|
|
5,912 |
|
|
|
10,003 |
|
Restricted stock granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock for which restrictions lapsed
|
|
|
|
|
|
|
(1,750 |
) |
|
|
(1,750 |
) |
|
|
(5,250 |
) |
Restricted stock forfeited
|
|
|
(317 |
) |
|
|
|
|
|
|
(863 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding at end of period
|
|
|
3,299 |
|
|
|
4,574 |
|
|
|
3,299 |
|
|
|
4,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The Incentive Stock Plan allows for the granting of Deferred
Stock Units (DSUs). These are discussed below under Executive
Deferred Compensation Plan.
|
|
|
Executive Deferred Compensation Plan |
In May 2002, our Board of Directors approved the 2002 Redwood
Trust, Inc. Executive Deferred Compensation Plan (EDCP). The
EDCP allows eligible employees and directors to defer portions
of current salary and certain other forms of compensation.
Redwood may match some deferrals up to certain levels.
Compensation deferred under the EDCP are assets of Redwood and
subject to the claims of the general creditors of Redwood. For
the three and nine months ended September 30, 2005,
deferrals of $0.1 million and $0.8 million,
respectively, were made under the EDCP. For the three and nine
months ended September 30, 2004, deferrals of
$0.2 million and $0.8 million were made, respectively.
The EDCP allows for the investment of deferrals in either an
interest crediting account or deferred stock units. The rate of
accrual in the interest crediting account is set forth in the
EDCP. For deferrals prior to July 1, 2004, the accrual rate
is based on a calculation of the marginal rate of return on our
portfolio of earning assets. This accrual rate will continue for
these deferred amounts through July 1, 2007 and then will
be based on references to publicly traded mutual funds or the
applicable federal rate (AFR). For deferrals after July 1,
2004, the accrual rate is based on references to publicly traded
mutual funds or the AFR. For the three and nine months ended
September 30, 2005, accrued interest of $0.3 million
and $1.0 million was credited to participants under the
Plan, respectively. For the three and nine months ended
September 30, 2004, accrued interest credited totaled
$0.2 million and $0.8 million, respectively.
Withdrawals of $0 and $0.2 million were made during the
three and nine months ended September 30, 2005,
respectively. Withdrawals of $13,000 were made during the three
and nine months ended September 30, 2004.
The following table provides detail on changes in
participants accounts in the EDCP for the three and nine
months ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Cash Accounts Transfer in of participants payroll
deductions from the EDCP
|
|
$ |
83 |
|
|
$ |
159 |
|
|
$ |
786 |
|
|
$ |
833 |
|
Accrued interest earned in EDCP
|
|
|
265 |
|
|
|
221 |
|
|
|
959 |
|
|
|
778 |
|
Participant withdrawals
|
|
|
|
|
|
|
(13 |
) |
|
|
(225 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in participants equity
|
|
$ |
348 |
|
|
$ |
367 |
|
|
$ |
1,520 |
|
|
$ |
1,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
6,100 |
|
|
$ |
3,865 |
|
|
$ |
4,928 |
|
|
$ |
2,634 |
|
Balance at end of period
|
|
$ |
6,448 |
|
|
$ |
4,232 |
|
|
$ |
6,448 |
|
|
$ |
4,232 |
|
45
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table provides detail on the financial position of
the EDCP at September 30, 2005 and December 31, 2004.
|
|
|
Net Assets Available for EDCP Participant Benefits |
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Cash Accounts
|
|
|
|
|
|
|
|
|
Participants payroll deductions receivable
|
|
$ |
3,877 |
|
|
$ |
3,286 |
|
Accrued interest receivable
|
|
|
2,571 |
|
|
|
1,642 |
|
|
|
|
|
|
|
|
Net assets available for participant benefits
|
|
$ |
6,448 |
|
|
$ |
4,928 |
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2005,
10,000 and 44,564 Deferred Stock Units (DSUs), respectively,
were granted through deferrals under the Plan, which represented
a value of $0.5 million and $2.4 million at the time
of the grants, respectively. Forfeitures totaled
$0.1 million during the nine months ended
September 30, 2005. There were no forfeitures during the
three months ended September 30, 2005. No such grants were
awarded or forfeitures occurred during the three and nine months
ended September 30, 2004. The tables below provide
summaries of the balance and activities of the DSUs in the
EDCP.
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Value of DSUs at Grant
|
|
$ |
7,031 |
|
|
$ |
4,656 |
|
Participant forfeitures
|
|
|
(110 |
) |
|
|
|
|
Change in Value at Period End since Grant
|
|
|
(367 |
) |
|
|
1,066 |
|
|
|
|
|
|
|
|
Value of DSUs at Period End
|
|
$ |
6,554 |
|
|
$ |
5,722 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Stock Units Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Units | |
|
Value | |
|
Units | |
|
Value | |
(In thousands, except unit amounts) |
|
| |
|
| |
|
| |
|
| |
Balance at Beginning of Period
|
|
|
124,836 |
|
|
$ |
6,442 |
|
|
|
25,417 |
|
|
$ |
1,415 |
|
Transfer in of DSUs (value of grants)
|
|
|
10,000 |
|
|
|
508 |
|
|
|
|
|
|
|
|
|
Change in Valuation during Period
|
|
|
|
|
|
|
(396 |
) |
|
|
|
|
|
|
172 |
|
Participant forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Number/ Value of DSUs
|
|
|
10,000 |
|
|
|
112 |
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Period
|
|
|
134,836 |
|
|
$ |
6,554 |
|
|
|
25,417 |
|
|
$ |
1,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
Deferred Stock Units Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Units | |
|
Value | |
|
Units | |
|
Value | |
(In thousands, except unit amounts) |
|
| |
|
| |
|
| |
|
| |
Balance at Beginning of Period
|
|
|
92,161 |
|
|
$ |
5,722 |
|
|
|
25,417 |
|
|
$ |
1,292 |
|
Transfer in of DSUs (value of grants)
|
|
|
44,564 |
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
Change in Valuation during Period
|
|
|
|
|
|
|
(1,433 |
) |
|
|
|
|
|
|
295 |
|
Participant forfeitures
|
|
|
(1,889 |
) |
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Number/ Value of DSUs
|
|
|
42,675 |
|
|
|
832 |
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Period
|
|
|
134,836 |
|
|
$ |
6,554 |
|
|
|
25,417 |
|
|
$ |
1,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
In May 2002, our stockholders approved the 2002 Redwood Trust,
Inc. Employee Stock Purchase Plan (ESPP), effective July 1,
2002. The purpose of the ESPP is to give our employees an
opportunity to acquire an equity interest in Redwood through the
purchase of shares of common stock at a discount. The ESPP
allows eligible employees to have up to 15% of their annual
gross compensation (including base salary, bonus, and cash DERs,
and subject to certain other limitations) withheld to purchase
common stock at 85% of its market value. The maximum gross
compensation any participant can contribute to the ESPP in any
calendar quarter is $6,250. Market value as defined under the
ESPP is the lesser of the closing market price of the common
stock as of the start of an offering period in the ESPP or the
closing market price on the quarterly purchase date. The
offering period starts on January 1st of each calendar
year and consists of four quarterly purchase periods.
The ESPP allows a maximum of 100,000 shares of common stock
to be purchased. As of September 30, 2005,
22,083 shares have been purchased. For the three and nine
months ended September 30, 2005, employees acquired an
aggregate of 1,539 and 4,040 shares of common stock,
respectively, at an average purchase price of $41.32 and
$42.77 per share, respectively. For the three and nine
months ended September 30, 2004, employees acquired an
aggregate of 1,243 and 3,644, shares, at an average price of
$43.53 and $43.36 per share, respectively. As of
September 30, 2005 and December 31, 2004, there
remained a negligible amount of uninvested employee
contributions in the ESPP.
|
|
|
Employee Stock Purchase Plan (ESPP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Balance at beginning of period
|
|
$ |
6 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
1 |
|
Transfer in of participants payroll deductions from the
ESPP
|
|
|
68 |
|
|
|
54 |
|
|
|
179 |
|
|
|
158 |
|
Cost of common stock issued to participants under the terms of
the ESPP
|
|
|
(64 |
) |
|
|
(54 |
) |
|
|
(172 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in participants equity
|
|
|
4 |
|
|
|
0 |
|
|
|
7 |
|
|
|
1 |
|
Balance at end of period
|
|
$ |
10 |
|
|
$ |
2 |
|
|
$ |
10 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Our Board of Directors has approved the repurchase of a total of
7,455,000 shares of our common stock. A total of
6,455,000 shares were repurchased in 1998 and 1999. As of
September 30, 2005 and December 31, 2004, there
remained 1,000,000 shares available under the authorization
for repurchase. Repurchased shares have been returned to the
status of authorized but unissued shares of common stock.
|
|
|
Direct Stock Purchase and Dividend Reinvestment
Plan |
For the three and nine months ended September 30, 2005, we
issued 112,694 and 582,250 shares of common stock,
respectively, through our Direct Stock Purchase and Dividend
Reinvestment Plan for net proceeds of $5.7 million and
$31.3 million, respectively. For the three and nine months
ended September 30, 2004, we issued 601,750 and
1,545,840 shares for total proceeds of $33.7 million
and $81.5 million, respectively.
For the three and nine months ended September 30, 2005, we
did not undertake any secondary equity offerings. For the three
months ended September 30, 2004, we completed one secondary
equity offering and issued 1.2 million shares for net
proceeds of $65 million. For the nine months ended
September 30, 2004, we completed two secondary equity
offerings and issued 2.4 million shares for net proceeds of
$117 million.
|
|
|
Accumulated Other Comprehensive Income |
Certain assets are marked to market through accumulated other
comprehensive income on our Consolidated Balance Sheets; these
adjustments affect our book value but not our net income. As of
September 30, 2005 and December 31, 2004, we reported
net accumulated other comprehensive income of
$117.0 million and $105.4 million, respectively.
Changes in this account reflect increases or decreases in the
fair value of our earning assets or interest rate agreements
during the period, and also reflect changes due to calls of our
securities, write downs to fair value of a portion of our
securities, premium or discount amortization of our securities,
and amortization of realized gains or losses on our interest
rate agreements.
The following table provides reconciliation of accumulated other
comprehensive income as of September 30, 2005 and
December 31, 2004.
|
|
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
Net unrealized gains on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Residential loan CES
|
|
$ |
84,279 |
|
|
$ |
78,733 |
|
|
Commercial loan CES
|
|
|
2,413 |
|
|
|
1,615 |
|
|
Securities portfolio
|
|
|
12,182 |
|
|
|
15,048 |
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$ |
98,874 |
|
|
$ |
95,396 |
|
Net unrealized gains (losses) on interest rate agreements:
|
|
|
|
|
|
|
|
|
|
Interest rate agreements accounted for as cash flow hedges
|
|
|
18,169 |
|
|
|
9,961 |
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$ |
117,043 |
|
|
$ |
105,357 |
|
|
|
|
|
|
|
|
48
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
NOTE 11. |
COMMITMENTS AND CONTINGENCIES |
As of September 30, 2005, we were obligated under
non-cancelable operating leases with expiration dates through
2013 for $6.2 million. The majority of the future lease
payments are related to the operating lease for our executive
offices to which we relocated in 2003 and signed a ten year
lease. Also included in the future lease commitments below are
future lease payments through May 2006 for our former executive
offices in Mill Valley that we vacated in 2003. Remaining
payments related to this lease are $0.1 million in 2005 and
$0.2 million in 2006. This office space is currently being
subleased through May 2006. The anticipated sublease payments
are not included in the table below.
|
|
|
Future Lease Commitments By Year |
|
|
|
|
|
|
|
September 30, | |
|
|
2005 | |
(In thousands) |
|
| |
2005 (fourth quarter)
|
|
$ |
371 |
|
2006
|
|
|
996 |
|
2007
|
|
|
695 |
|
2008
|
|
|
702 |
|
2009
|
|
|
718 |
|
2010 and thereafter
|
|
|
2,705 |
|
|
|
|
|
Total
|
|
$ |
6,187 |
|
|
|
|
|
As of September 30, 2005, there were no pending legal
proceedings to which we were a party or to which any of our
property was subject.
The table below shows our commitments to purchase loans and
securities as of September 30, 2005. The loan purchase
commitments represent derivative instruments under
FAS No. 149 amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(FAS No. 149). The fair value of these commitments
was negligible as of September 30, 2005.
|
|
|
|
|
|
|
September 30, | |
|
|
2005 | |
(In thousands) |
|
| |
Residential real estate loans
|
|
$ |
1,076 |
|
Residential loan CES
|
|
|
|
|
Securities portfolio securities
|
|
|
3,355 |
|
|
|
|
|
Total
|
|
$ |
4,431 |
|
|
|
|
|
|
|
NOTE 12. |
RECENT DEVELOPMENTS |
This Note provides information on activity during the fourth
quarter of 2005, through November 3, 2005.
49
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
In the fourth quarter through November 3, we committed to sell
$77 million market value residential CES for anticipated GAAP
gains of $9 million and estimated taxable gains of $5 million.
These were all second-loss securities, primarily rated single-B.
During October 2005, residential CES with a principal value of
$7 million were called, generating estimated gains of $3 million
for GAAP purposes and $2 million for tax purposes.
In the fourth quarter through November 3, 2005, we committed to
acquire $7 million residential CES and $4 million commercial
CES. We also committed to buy $29 million residential real
estate securities, $16 million residential real estate loans,
$21 million commercial real estate securities, and
$4 million commercial real estate loans as inventory assets
for future securitization.
In October, prepayment rates for loans underlying our
residential CES and interest-only securities remained at or near
third quarter speeds.
To recycle and redeploy capital, during the fourth quarter we
exercised our option to call the Acacia 1 CDO transaction that
we sponsored in 2002. We plan to sell or re-securitize the
Acacia 1 collateral.
50
|
|
Item 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY STATEMENT
This Form 10-Q contains forward-looking statements within
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements that are not historical in
nature, including the words anticipated,
estimated, should, expect,
believe, intend, and similar
expressions, are intended to identify forward-looking
statements. 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, 2004 under the caption Risk
Factors. Other risks, uncertainties, and factors that
could cause actual results to differ materially from those
projected are detailed from time to time in reports filed by us
with the Securities and Exchange Commission (SEC), including
Forms 10-K and 8-K.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events, or otherwise. In light of these
risks, uncertainties, and assumptions, the forward-looking
events mentioned, discussed in, or incorporated by reference
into this Form 10-Q might not occur. Accordingly, our
actual results may differ from our current expectations,
estimates, and projections.
Important factors that may impact our actual results include
changes in interest rates and market values; changes in
prepayment rates; general economic conditions, particularly as
they affect the price of earning assets and the credit status of
borrowers; the level of liquidity in the capital markets as it
affects our ability to finance our real estate asset portfolio;
and other factors not presently identified. This Form 10-Q
contains statistics and other data that in some cases have been
obtained from, or compiled from information made available by,
servicers and other third-party service providers.
SUMMARY AND OUTLOOK
Redwood Trust, Inc. is a financial institution located in Mill
Valley, California. We invest in, credit-enhance, and securitize
residential and commercial real estate loans and securities.
Our primary source of revenue is interest income from the real
estate securities we own. This interest income consists of the
monthly loan payments made by homeowners (and to a lesser
degree, commercial property owners) on the real estate loans
that underlie these securities. In addition, from time to time
we earn call income (a form of gain-on-sale income) from
residential credit-enhancement securities (CES) and realize
gains or losses from the sale of assets.
The residential real estate loan portfolio consolidated on
Redwoods balance sheet includes all of the residential
loans that we own temporarily prior to sale to a securitization
plus loans that are consolidated onto our balance sheet from ABS
securitization entities that have been sponsored by us.
Securitizations by sponsored entities are structured for
Redwoods Consolidated Balance Sheets as financings under
Generally Accepted Accounting Principles (GAAP) and are not
accounted for as sales for GAAP reporting purposes
the underlying assets and liabilities are consolidated on
Redwoods balance sheets and associated income and expense
are consolidated in Redwoods income statements. The
consolidated residential real estate loan portfolio generally
consists of prime quality residential loans that
generally have high-quality characteristics such as relatively
low loan-to-value ratios and borrowers with relatively high
credit scores (in each case relative to U.S. residential
real estate loans as a whole). The majority of these loans are
jumbo loans that had loan balances at origination that exceeded
the loan limits imposed on Fannie Mae and Freddie Mac, so they
were not eligible at origination for purchase or
credit-enhancement by these government-sponsored enterprises.
Better than expected credit results on the loans we credit
enhance has been the primary driver of our continued strong
earnings results. Housing prices continue to increase, which
reduces our risk of
51
credit loss in the future for our existing assets. Our portfolio
of assets as a whole has the ability to generate attractive
earnings, cash flows, and dividends in the future, assuming real
estate credit losses do not increase materially. Delinquencies
on loans in our portfolio remain at historically low levels and
credit losses continue to be less than one basis point (0.01%)
of our credit-enhanced loans on an annual basis.
Recent changes in interest rates have resulted in a flatter
yield curve, causing faster prepayments for adjustable-rate
residential loans and a reduced supply of new adjustable-rate
loan originations (as homeowners are opting for hybrid-rate and
fixed-rate loans). In addition, new forms of adjustable-rate
mortgages (negative amortization, option ARMs, and
Moving Treasury Average ARMs) have increased their share of the
ARM market, and have increased prepayment rates on the ARM loans
we credit-enhance due to ARM-to-ARM refinancing and other
factors. These faster prepayment patterns affect both the
residential ARM loans securitized via the Sequoia program and
our portfolio of securities backed by ARM loans purchased from
other securitization entities not sponsored by us. Overall, we
believe we benefit over time from faster prepayment rates on our
net ARM loans and securities.
Faster prepayments for the residential ARM loans consolidated
from Sequoia entities have adversely affected our near-term
results of operations. Prepayment rates for these loans averaged
17% conditional prepayment rate (CPR) in 2004, 25% CPR in
the first quarter of 2005, 39% CPR in the second quarter of
2005, 51% CPR in the third quarter of 2005, and 49% CPR in
October 2005. Our net effective premium for GAAP purposes for
the $16 billion of loans consolidated on our Consolidated
Balance Sheets from Sequoia securitization entities (including
HELOCs) was $22 million at September 30, 2005. Our
effective net price for these Sequoia ARM loans for GAAP
purposes was 100.13% of principal value, and consists of
unamortized purchase premium ($191 million) and deferred
ABS issuance costs ($41 million) offset by premiums
received from the sale of ABS at a premium ($25 million),
premium received from the sale of interest-only ABS
($163 million), and credit reserves ($22 million).
Although our effective net premium for GAAP purposes for these
loans is low, changes in prepayment rates on these loans can
create volatility in our quarterly GAAP net income results
because GAAP treatment is not necessarily parallel for the
amortization of these largely offsetting premium and discount
balances. In addition to increasing premium amortization
expenses, the faster Sequoia ARM prepayment rates reduce our
overall investment in our older, more profitable Sequoia
transactions, thus lowering our overall earnings.
Our net effective discount on all consolidated residential and
commercial real estate loans and securities (ARM, fixed, and
hybrid) is $590 million, or $24 per share outstanding
at September 30, 2005. The net effective discount on
commercial real estate assets is $140 million ($6 per
share). The net effective discount on residential real estate
assets is $450 million ($18 per share outstanding at
September 30, 2005). The net effective commercial and
residential discount consists of purchase premiums
($255 million) and deferred ABS issuance costs
($56 million), less purchase discounts currently being
amortized into income ($161 million), purchase discounts
not currently being amortized into income because it is
designated as credit reserve ($552 million), premiums
received from the sale of ABS at a premium ($25 million),
and premiums received from the sale of interest-only ABS
($163 million). We will realize this $590 million net
discount as income over time to the extent it is not diminished
by credit losses. In addition to the cash net interest income we
earn, the realization of this discount as income over the next 5
to 7 years could (in the absence of an increase in credit
losses) result in attractive earnings and dividends for
stockholders. With faster prepayments we will realize this
income more quickly.
During the third quarter of 2005, we sold a portion of our
residential loan CES and we have completed the sale of
additional securities in the fourth quarter of 2005. These sales
were completed primarily as a means to increase our cash
balances now so we will be prepared to capitalize on future
investment opportunities, which we think may improve over the
next few years if real estate or capital markets come under
stress. As a result of these sales, we anticipate ending this
year with reduced credit risks, an even stronger balance sheet,
and significant levels of excess capital (uninvested cash).
52
Thus, our on-going earnings will likely be reduced (relative to
what they would have been otherwise) during the period this cash
remains uninvested.
Our commercial real estate and CDO businesses continue to
develop, diversifying our opportunities for growth as well as
diversifying our risks.
In our view, the long-term outlook for our business is good. We
believe our existing assets can generate attractive returns and
special dividends for stockholders over the next few years if
credit losses remain at current low levels. If the environment
becomes more difficult, we believe we are well prepared with a
strong balance sheet and cash to invest. We will maintain our
disciplined investment process, and we will continue to acquire
only those assets that we believe will generate attractive
long-term cash flows for the benefit of our stockholders.
Our GAAP earnings totaled $56 million ($2.21 per
share) for the third quarter of 2005, a decrease from the
$72 million ($3.18 per share) we earned for the third
quarter of 2004. Our earnings totaled $157 million
($6.26 per share) for the first nine months of 2005 and
$178 million ($8.29 per share) for the first nine
months of 2004. Our earnings are still at a level that we
consider attractive. Our GAAP return on equity was 22% for both
the third quarter and the first nine months of 2005.
Our results for the third quarter of 2005 were not as strong as
the extraordinary results we achieved during the third quarter
of 2004. Lower earnings resulted from a lower yield on our
portfolio of residential credit-enhancement securities (the
older, higher-yielding securities have prepaid, been called, or
sold), a reduction in net interest income from consolidated
residential loans and matched ABS issued due in part to
increased ARM prepayment rates, and high levels of uninvested
cash. These factors were partially offset by an increase in
income realized as the result of calls and sales.
Premium amortization expense on our consolidated residential
whole loans was $15.6 million greater during the third
quarter of 2005 than in the third quarter of 2004 as a result of
faster prepayments and a one-time cumulative adjustment of
$4.1 million to premium amortization expense which
effectively increased our reported earnings in the third quarter
of 2004.
For loans acquired prior to July 1, 2004, when amortizing
the purchase premiums under Financial Accounting Statement
No. 91 Originating or Acquiring Loans and Initial Direct
Cost of Leases (FAS 91), we use the interest method to
determine an effective yield and amortize the premium or
discount on loans assuming changes in interest rates. As a
result, during periods of rising short-term rates our effective
yields on these loans increase, and the amount of premium we
amortize in the period prior to the coupon rate readjustments is
generally lower than it will be in later periods for each pool
of loans. For loans acquired after July 1, 2004, we
determine an effective yield under FAS 91 using the initial
coupon interest rate of the loans (without regard to future
changes in the interest rates and underlying indices) as well as
anticipated prepayment rates. For these residential loans,
higher coupon interest rates will increase net realized yields
when the coupon readjusts. Periodic premium amortization
expenses will not be reduced as a result of coupon interest rate
increases. For these loans, as a result, premium amortization
expenses will be higher (relative to the older loans) in a
period of rising interest rates.
In the third quarter of 2004 we made a one-time adjustment of
$4.1 million to premium amortization expense as a result of
some technical errors discovered with respect to the application
of FAS 91. This adjustment was not deemed material. It did,
however, increase our earnings for that period, and in contrast
to comparisons with results for the third quarter of 2005.
Redwood has elected to be taxed as a REIT. As such, we are not
required to pay corporate income taxes on the REIT taxable
income that we distribute to stockholders as dividends. We are
required to distribute to stockholders as dividends at least 90%
of the REIT taxable income (our taxable income excluding income
earned in non-REIT taxable subsidiaries) that we earn. Through
September 30, 2005, we continued to satisfy our dividend
distribution requirements as a REIT. Our regular quarterly
dividend during the first three quarters of 2005 was
$0.70 per share.
53
Estimated total taxable income, estimated core taxable income,
and estimated REIT taxable income are not GAAP performance
measures but are important measures as they are the basis of our
required minimum dividend distributions to stockholders. A
reconciliation of these measures to the most comparable GAAP
measure appears in Table 18 below. Our GAAP income is
reduced by credit provision expenses provided for credit losses
while taxable income is reduced by credit losses only when they
are realized. Additionally, unrealized market price valuation
adjustments for GAAP purposes are generally not included in
taxable income, and certain compensation-related items are
treated differently for GAAP and tax purposes (both in terms of
timing and also total expenses over time). Most of the
securitizations we sponsor are treated as sales of assets for
tax purposes but are treated as a financing for GAAP purposes.
Securitizations we sponsor generally create a realized gain or
loss for tax purposes (generally a component of the taxable
income we earn in our taxable subsidiaries) but no such gain or
loss for GAAP purposes. Essentially, when we recognize gains on
securitizations that we sponsor, we accelerate for tax purposes
income that we will recognize for GAAP purposes over time in the
form of the net interest income from residential real estate
loans and associated ABS issued.
For the third quarter of 2005, we earned an estimated
$55 million ($2.23 per share) total taxable income
(pre-tax income as calculated for tax purposes), of which an
estimated $47 million ($1.91 per share) was real
estate investment trust (REIT) taxable income. For the
third quarter of 2004, we earned an estimated $59 million
($2.53 per share) of total taxable income, of which an estimated
$49 million ($2.10 per share) was REIT taxable income.
For the nine months ending September 30, 2005, we earned an
estimated $142 million ($5.78 per share) total taxable
income, of which an estimated $132 million ($5.34 per
share) was REIT taxable income. For the nine months ended
September 30, 2004, we earned an estimated
$182 million total taxable income ($8.45 per share),
of which $152 million ($7.05 per share) was REIT
taxable income.
Taxable income before calls, sales, and deductions for stock
options (estimated core taxable income) was $41 million
($1.66 per share) and $33 million ($1.41 per
share) for the three months ended September 30, 2005 and
2004, respectively. Estimated core taxable income was
$105 million ($4.27 per share) and $122 million
($5.73 per share) for the nine months ended
September 30, 2005 and 2004, respectively.
We currently project that the first three regular quarterly
dividends we declared in 2005 consisted of REIT taxable income
earned in 2004 ($37 million) plus a portion of REIT taxable
income earned in 2005 ($15 million). Based on our estimates
of REIT taxable income during the first nine months of 2005, we
entered the fourth quarter of 2005 with $107 million of
undistributed 2005 REIT taxable income ($4.31 per share
outstanding at September 30, 2005). Assuming we follow our
past practice with respect to declaring a special dividend (and
it is our current plan to do so), the amount of REIT taxable
income potentially available for a year-end 2005 special
dividend would equal:
|
|
|
(a) 90% of 2005 ordinary REIT income ($3.65 per share
outstanding as of September 30, 2005 that has been earned
plus any fourth quarter ordinary REIT taxable income), plus |
|
|
(b) 100% of capital gains REIT income ($0.66 per share
outstanding as of September 30, 2005 that has been earned
plus any fourth quarter capital gains REIT income), less |
|
|
(c) the fourth quarter 2005 regular dividend, less |
|
|
(d) 2 to 3 quarters of regular dividends deferred into
2006, and |
|
|
(e) as adjusted for any stock issuance during the fourth
quarter. |
Income from call and sales activity is long-term capital gain
income for tax purposes. Our tax-paying stockholders may benefit
to the degree they can take advantage of the lower tax rate on
our distributions of capital gains versus ordinary income. We
provide information annually on the tax characteristics of our
dividends and this information is also posted on our website at
www.redwoodtrust.com.
We currently face, and expect to continue to face, increased
competition, higher acquisition pricing, and a reduced supply of
high-quality residential credit-enhancement acquisition and loan
securitization opportunities. There are fewer high-quality fixed
rate, hybrid rate, and ARM securitizations as the
54
quantity of new originations of quality jumbo loans has
decreased and as banks and other financial institutions have
increased their purchases of residential real estate loans (and
continue to hold these loans unsecuritized). There is an
abundance of capital in and demand for assets from banks, hedge
funds, mortgage REITs, and other investors, resulting in higher
prices for the assets in which we invest. This has increased the
value of many of our existing portfolio assets and continues to
make the acquisition of attractive new high-quality assets more
challenging.
The existing market conditions of reduced high-quality supply,
increased competition, and high acquisition prices may continue,
although there are signs that the level of speculation in
housing and related capital markets may be easing. We have sold
assets to build a relatively large balance of uninvested cash as
we believe acquisition opportunities may improve over the next
two years. While we carry this excess cash, our overall risk
levels will be reduced, however absent major credit losses our
on-going earnings also will be reduced relative to what they
would have been otherwise. During the period we are seeking to
maintain excess cash levels for future opportunities, we will
likely significantly reduce our rate of new asset acquisitions.
After taking into consideration our internal risk-based capital
guidelines that suggest how much capital we need to support our
assets and operations, we had $250 million excess capital
(unutilized cash) at September 30, 2005. As we measure it
internally, our capital was 69% utilized at September 30,
2005. As we move forward, this amount will be reduced by
dividends and asset acquisitions and will be increased by cash
flows earned, asset pay downs, asset sales, and proceeds from
equity issuance.
We may continue to issue new equity in this environment, most
likely through our direct stock purchase and dividend
reinvestment plan. By issuing new shares, we can maintain our
desired level of excess cash while also taking advantage of the
attractive asset acquisition opportunities that still exist
today, maintaining a strong presence in our markets, and serving
our customers needs. If our share price were to drop to a
level below our reported book value (approximately $41 per
share at September 30, 2005), we would be less likely to
issue new shares unless there was a compelling reason to do so.
At a reasonable discount to this value, we would consider stock
repurchases while also being mindful of our desire to maintain
cash balances.
In this environment of reduced stock prices for mortgage REITs
and other specialty finance companies, it may make sense for us
to consider undertaking corporate transactions such as an
acquisition or equity investment, either to further the
development of our businesses or to gain cheap assets.
In general in the past, the real estate loans on which we have
taken first-loss credit risk have been high-quality loans
relative to U.S. real estate loans as a whole. In the
future, we may credit-enhance and/or securitize other credit
grades of residential loans (near-prime, Alt-A, sub-prime,
etc.), especially if prices for these assets dropped
significantly as a result of a stressed real estate credit and
capital markets liquidity environment. In such an environment,
we may also acquire distressed assets with high levels of
delinquencies and credit losses if we believe we can evaluate
and invest in these assets to the benefit of our stockholders.
In addition, we may invest in distressed commercial real estate
and CDO assets.
In general, our hurdle rate for new acquisitions is 14% internal
rate of return, We will not buy an asset unless we believe there
is a high likelihood that the asset will produce cash flows that
discount back to a 14% cash-on-cash return per-overhead and
pre-tax (making what we believe to be relatively conservative
assumptions about credit losses, prepayments, etc.). If we can
achieve this minimum hurdle rate for all of our assets and we
are fully invested, we estimate we can earn a 10% to 11% return
on equity on average over time and generate sufficient cash to
support our regular dividend rate.
55
RESULTS OF OPERATIONS
|
|
|
Acquisitions, Securitizations, Sales, and Calls |
During the third quarter of 2005, we acquired $332 million
adjustable-rate and hybrid residential real estate loans for our
residential conduits Sequoia securitization program, loan
sales to Sequoia entities totaled $327 million, and Sequoia
entities created and issued $327 million ABS. For the first
nine months of 2005, residential real estate loan acquisitions
totaled $1.6 billion, sales to Sequoia entities totaled
$1.5 billion, and Sequoia entities issued $1.5 billion
ABS. All these securitizations are sales for legal and tax
purposes but are treated as financings under GAAP. Accordingly,
in our GAAP financial statements, we consolidate the assets and
liabilities of the Sequoia entities and record interest income
on the loans sold to securitization entities and interest
expense on ABS issued by securitization entities. At
September 30, 2005, our loans held for future sale to
Sequoia were $17 million; these loans are classified as
held-for-investment for GAAP purposes as Sequoia has the intent
to hold them to maturity.
During the third quarter of 2005, we acquired $57 million
residential loan CES. During the first nine months of 2005,
we acquired $213 million residential loan CES. The
loans underlying the CES we acquired during the third quarter of
2005 were generally consistent with our usual high-quality
standards. The average FICO score was 735 and the average
loan-to-value (LTV) was 69%. The geographic distribution was 49%
in California, with Florida, Virginia, New Jersey, Illinois, and
New York together representing a total of 20% of the total (and
no other state representing more than 2% of the loans). The
property types for these loans were 89% primary residence, 9%
second homes, and 2% investment properties. These loans had an
average loan balance of $445,000. Increasingly, we are
credit-enhancing loans that have balances that are lower than
the jumbo loan balance limit imposed on Fannie Mae and Freddie
Mac these lower-balance loans were 17% of the loans
we credit-enhanced in the third quarter. Loans with balances
over $1 million represented 5% of the dollar balance. Loan
types credit-enhanced in the third quarter included 27% hybrid,
46% fixed, and 27% adjustable-rate. A total of 19% of newly
credit-enhanced loans were interest-only, negative amortization,
or similar type loans where a fully amortizing loan payment is
not required. We consider these types of loans to be prime loans
when there is a significant down payment made and the borrower
is strong and not over-leveraged.
We acquired $14 million commercial real estate loans during
the third quarter of 2005 and $21 million during the nine
months ended September 30, 2005. We had no sales of
commercial real estate loans during the third quarter of 2005.
We sold $11 million during the first nine months of 2005.
We did not acquire or sell commercial real estate loans during
the three months ended September 30, 2004. We acquired
$17 million commercial real estate loans during the nine
months ended September 30, 2004 and sold $2 million
during this period.
During the third quarter of 2005, we acquired $17 million
commercial loan CES, and during the first nine months of
2005 we acquired $30 million commercial loan CES. No
commercial loan CES were sold during these periods.
We acquired $190 million of other residential and
commercial real estate securities during the third quarter of
2005 for our Acacia CDO securitization program. During the first
nine months of 2005, we acquired $515 million of these
securities for our Acacia CDO securitization program. We sold
$244 million of securities to Acacia entities during the
third quarter of 2005; total securities sales to Acacia entities
for the first nine months of 2005 were $516 million. We
finished the third quarter with securities of $268 million
held for future sale to future Acacias. Acacia entities issued
$300 million CDO ABS during the third quarter of 2005, and
$600 million during the nine months ended
September 30, 2005. All of the assets and liabilities of
Acacia entities are consolidated onto our Consolidated Balance
Sheets.
In the third quarter of 2005, we had calls of our residential
CES of $5 million principal value for GAAP gains of
$3 million and taxable gains of $2 million. For the
first nine months of 2005, we had $28 million principal
value of calls, generating GAAP call income gains of
$15 million and taxable income gains of $11 million.
The principal value of residential CES currently callable at
September 30,
56
2005 was $7 million. A substantial portion of our GAAP and
taxable income in 2003 and 2004 came from gains from calls and
gains from sales of residential CES. Returns from these sources
are highly variable and not predictable. As we started 2005 with
a smaller amount of securities that are callable, we expect call
income in 2005 to be at significantly lower levels than achieved
in the past two years.
Occasionally, we sell loans and securities from our portfolio.
Sales generate one-time gains (or losses), which add to
(subtract from) reported GAAP earnings, taxable earnings, and
perhaps our total future required dividend payments. Asset sales
and calls may adversely impact our future earnings, as the lost
ongoing income from these high-yield securities is often higher
than the yield generated by new assets we may acquire. In the
third quarter of 2005, we sold $362 million market value
residential real estate and residential and commercial
securities and loans, generating GAAP gains of $23 million
and taxable gains of $15 million. During the first nine
months, sales of securities and loans of $419 million
market value generated GAAP gains of $32 million and
taxable gains of $21 million. We have continued to sell
assets during the fourth quarter of 2005.
Net income decreased to $56 million in the third quarter of
2005 compared to $72 million in the third quarter of 2004.
This decrease was primarily the result of a decline in net
interest income. Higher premium amortization expense on our
residential real estate loans (due to faster prepayments) and
lower yields on our residential loan CES portfolio on newer
assets (relative to the older assets that were called or sold),
less efficient capital utilization (we operated with more
uninvested cash in 2005 than in 2004), and an increase operating
expenses (as we continue to scale up, professionalize, and
diversify our operations). Earnings in the third quarter of 2004
were positively affected by a one-time adjustment to premium
amortization expense of $4.1 million. For similar reasons
(and including a one-time tax benefit of $5.2 million
recorded for GAAP purposes in the second quarter of 2004),
earnings in the first nine months of 2005 decreased to
$157 million from the $178 million earned during the
first nine months of 2004.
Taxable net income totaled $55 million in the third quarter
of 2005 and $142 million for the first nine months of 2005.
These were both decreases from the $59 million earned in
the third quarter of 2004 and $182 million earned in the
first nine months of 2004. The decrease was caused primarily by
a drop in taxable gains from calls and asset sales, fewer IO
securities owned (we have not been acquiring the IO securities
created by the securitization entities sponsored by us, and the
older IO securities we own are paying down), and higher
operating expenses. As discussed more fully below, operating
expenses increased primarily as a result of additional staff and
systems, and increased accounting, consultant, and other costs
relating to the enhancement of our internal controls.
We provide for income taxes for GAAP purposes based on our
estimates of our taxable income, the amount of taxable income we
currently plan to permanently retain, and the amount of taxable
income we estimate to be earned at our taxable subsidiaries. In
the first nine months of 2004, we benefited from Federal and
state net operating loss carry forwards and did not have any
current tax provisions for income generated at our taxable REIT
subsidiaries. During 2005, by contrast, our tax provision under
GAAP benefited only slightly from some remaining state net
operating losses. In addition, in the first nine months of 2004,
we recognized a one-time deferred tax asset, thus recognizing
the future value of remaining net operating losses at that time.
In addition, in prior years, we generated taxable gains-on-sales
from our securitization activities at the taxable subsidiaries.
Gains on these activities were much lower in 2005 due to
decreased volumes and a significant decrease in the gains
generated by each securitization. Since these securitizations
were treated as financings under GAAP, deferred tax assets were
created. A portion of these deferred tax assets was expensed in
the 2005 periods.
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands, except share data) |
|
| |
|
| |
|
| |
|
| |
Total interest income
|
|
$ |
243,556 |
|
|
$ |
180,090 |
|
|
$ |
729,110 |
|
|
$ |
442,906 |
|
Total interest expense
|
|
|
(196,686 |
) |
|
|
(114,811 |
) |
|
|
(567,833 |
) |
|
|
(284,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
46,870 |
|
|
|
65,279 |
|
|
|
161,277 |
|
|
|
158,159 |
|
Operating expenses
|
|
|
(11,194 |
) |
|
|
(8,561 |
) |
|
|
(33,450 |
) |
|
|
(27,048 |
) |
Net recognized gains and valuation adjustments
|
|
|
24,916 |
|
|
|
20,586 |
|
|
|
42,973 |
|
|
|
50,281 |
|
Provision for income taxes
|
|
|
(4,693 |
) |
|
|
(4,962 |
) |
|
|
(13,424 |
) |
|
|
(3,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
55,899 |
|
|
$ |
72,342 |
|
|
$ |
157,376 |
|
|
$ |
178,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Common Shares
|
|
|
25,314,315 |
|
|
|
22,728,369 |
|
|
|
25,159,619 |
|
|
|
21,486,208 |
|
Net income per share
|
|
$ |
2.21 |
|
|
$ |
3.18 |
|
|
$ |
6.26 |
|
|
$ |
8.29 |
|
Total interest income consists of interest earned on
consolidated earning assets, plus income from amortization of
discount for assets acquired at prices below principal value,
less expenses for amortization of premium for assets acquired at
prices above principal value, less credit provision expenses.
|
|
|
Table 2 Interest Income and
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
245,735 |
|
|
$ |
171,804 |
|
|
$ |
731,361 |
|
|
$ |
446,827 |
|
Discount amortization
|
|
|
12,714 |
|
|
|
9,012 |
|
|
|
30,425 |
|
|
|
26,925 |
|
Premium amortization
|
|
|
(15,698 |
) |
|
|
802 |
|
|
|
(33,983 |
) |
|
|
(25,307 |
) |
Reversal of (provision for) credit losses
|
|
|
805 |
|
|
|
(1,528 |
) |
|
|
1,307 |
|
|
|
(5,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
243,556 |
|
|
$ |
180,090 |
|
|
$ |
729,110 |
|
|
$ |
442,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$ |
20,085,393 |
|
|
$ |
22,460,500 |
|
|
$ |
22,230,168 |
|
|
$ |
20,308,547 |
|
Yield as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4.89 |
% |
|
|
3.07 |
% |
|
|
4.38 |
% |
|
|
2.94 |
% |
Discount amortization
|
|
|
0.25 |
% |
|
|
0.16 |
% |
|
|
0.18 |
% |
|
|
0.18 |
% |
Premium amortization
|
|
|
(0.31 |
)% |
|
|
0.01 |
% |
|
|
(0.20 |
)% |
|
|
(0.17 |
)% |
Reversal of (provision for) credit losses
|
|
|
0.02 |
% |
|
|
(0.03 |
)% |
|
|
0.01 |
% |
|
|
(0.04 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on earning assets
|
|
|
4.85 |
% |
|
|
3.21 |
% |
|
|
4.37 |
% |
|
|
2.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2005 as compared
to the same period in 2004, interest income increased primarily
due to an overall increase in yield caused by an increase in
short-term interest rates. A majority of the assets are
adjustable-rate residential real estate loans, and yields on
these assets increase as short-term interest rates rise as has
occurred over the past twelve months. Total consolidated earning
assets balance decreased during the third quarter of 2005 as
compared to the third quarter of 2005 primarily as a result of
decreased sponsorship of securitizations of residential real
estate loans over the past twelve months from the nine months
ended September 30, 2004. For the
58
nine months ended September 30, 2005, the increase in
interest income was due to both higher interest rates and a
larger average balance of earning assets.
The table below presents the contribution to interest income and
yield from each of our portfolios. Further discussions of
changes in yields and balances are presented below by portfolio.
|
|
|
Table 3 Interest Income and
Yield by Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 | |
|
Three Months Ended September 30, 2004 | |
|
|
| |
|
| |
|
|
|
|
Percent of | |
|
|
|
|
|
Percent of | |
|
|
|
|
|
|
Total | |
|
|
|
|
|
Total | |
|
|
|
|
Interest | |
|
Interest | |
|
Average | |
|
|
|
Interest | |
|
Interest | |
|
Average | |
|
|
(Dollars in |
|
Income | |
|
Income | |
|
Balance | |
|
Yield | |
|
Income | |
|
Income | |
|
Balance | |
|
Yield | |
thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential real estate loans, net of provision for credit losses
|
|
$ |
191,914 |
|
|
|
78.80 |
% |
|
$ |
17,373,023 |
|
|
|
4.42 |
% |
|
$ |
147,974 |
|
|
|
82.16 |
% |
|
$ |
20,484,287 |
|
|
|
2.89 |
% |
HELOCs, net of provision for credit losses
|
|
|
1,696 |
|
|
|
0.70 |
% |
|
|
224,884 |
|
|
|
3.02 |
% |
|
|
1,618 |
|
|
|
0.90 |
% |
|
|
323,100 |
|
|
|
2.00 |
% |
Residential loan credit-enhancement securities
|
|
|
24,368 |
|
|
|
10.00 |
% |
|
|
585,663 |
|
|
|
16.64 |
% |
|
|
16,007 |
|
|
|
8.89 |
% |
|
|
368,887 |
|
|
|
17.36 |
% |
Commercial loans, net of provision for credit losses
|
|
|
1,209 |
|
|
|
0.50 |
% |
|
|
47,703 |
|
|
|
10.14 |
% |
|
|
1,038 |
|
|
|
0.58 |
% |
|
|
33,461 |
|
|
|
12.40 |
% |
Commercial loan credit-enhancement securities
|
|
|
453 |
|
|
|
0.19 |
% |
|
|
32,192 |
|
|
|
5.63 |
% |
|
|
346 |
|
|
|
0.19 |
% |
|
|
7,372 |
|
|
|
18.80 |
% |
Securities portfolio
|
|
|
22,926 |
|
|
|
9.41 |
% |
|
|
1,687,506 |
|
|
|
5.43 |
% |
|
|
12,932 |
|
|
|
7.18 |
% |
|
|
1,141,456 |
|
|
|
4.53 |
% |
Cash and cash equivalents
|
|
|
990 |
|
|
|
0.40 |
% |
|
|
134,422 |
|
|
|
2.95 |
% |
|
|
175 |
|
|
|
0.10 |
% |
|
|
101,937 |
|
|
|
0.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
243,556 |
|
|
|
100.00 |
% |
|
$ |
20,085,393 |
|
|
|
4.85 |
% |
|
$ |
180,090 |
|
|
|
100.00 |
% |
|
$ |
22,460,500 |
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 | |
|
Nine Months Ended September 30, 2004 | |
|
|
| |
|
| |
|
|
|
|
Percent of | |
|
|
|
|
|
Percent of | |
|
|
|
|
|
|
Total | |
|
|
|
|
|
Total | |
|
|
|
|
Interest | |
|
Interest | |
|
Average | |
|
|
|
Interest | |
|
Interest | |
|
Average | |
|
|
|
|
Income | |
|
Income | |
|
Balance | |
|
Yield | |
|
Income | |
|
Income | |
|
Balance | |
|
Yield | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential real estate loans, net of provision for credit losses
|
|
$ |
590,534 |
|
|
|
80.99 |
% |
|
$ |
19,673,866 |
|
|
|
4.00 |
% |
|
$ |
356,680 |
|
|
|
80.53 |
% |
|
$ |
18,724,707 |
|
|
|
2.54 |
% |
HELOCs, net of provision for credit losses
|
|
|
6,721 |
|
|
|
0.92 |
% |
|
|
255,626 |
|
|
|
3.51 |
% |
|
|
2,154 |
|
|
|
0.49 |
% |
|
|
149,686 |
|
|
|
1.92 |
% |
Residential loan credit-enhancement securities
|
|
|
63,431 |
|
|
|
8.70 |
% |
|
|
543,516 |
|
|
|
15.56 |
% |
|
|
47,617 |
|
|
|
10.75 |
% |
|
|
324,563 |
|
|
|
19.56 |
% |
Commercial loans, net of provision for credit losses
|
|
|
4,004 |
|
|
|
0.55 |
% |
|
|
49,635 |
|
|
|
10.76 |
% |
|
|
2,607 |
|
|
|
0.59 |
% |
|
|
27,324 |
|
|
|
12.72 |
% |
Commercial loan credit-enhancement securities
|
|
|
1,690 |
|
|
|
0.23 |
% |
|
|
25,558 |
|
|
|
8.82 |
% |
|
|
442 |
|
|
|
0.10 |
% |
|
|
3,389 |
|
|
|
17.37 |
% |
Securities portfolio
|
|
|
60,356 |
|
|
|
8.28 |
% |
|
|
1,553,993 |
|
|
|
5.18 |
% |
|
|
32,992 |
|
|
|
7.45 |
% |
|
|
994,139 |
|
|
|
4.42 |
% |
Cash and cash equivalents
|
|
|
2,374 |
|
|
|
0.33 |
% |
|
|
127,974 |
|
|
|
2.47 |
% |
|
|
414 |
|
|
|
0.09 |
% |
|
|
84,739 |
|
|
|
0.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
729,110 |
|
|
|
100.00 |
% |
|
$ |
22,230,168 |
|
|
|
4.37 |
% |
|
$ |
442,906 |
|
|
|
100.00 |
% |
|
$ |
20,308,547 |
|
|
|
2.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The table below details our interest income by portfolio as a
result of changes in consolidated asset balances
(volume) and yield (rate) for the three
and nine months ended September 30, 2005 as compared to the
three and nine months ended September 30, 2004.
Table
4 Volume and Rate Changes for
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Income | |
|
|
|
|
Three Months Ended | |
|
Change in Interest Income | |
|
|
September 30, 2005 Versus | |
|
Nine Months Ended September 30, | |
|
|
September 30, 2004 | |
|
2005 Versus September 30, 2004 | |
|
|
| |
|
| |
|
|
|
|
Total | |
|
|
|
Total | |
|
|
Volume | |
|
Rate | |
|
Change | |
|
Volume | |
|
Rate | |
|
Change | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential real estate loans, net of provisions for credit
losses
|
|
$ |
(22,475 |
) |
|
$ |
66,415 |
|
|
$ |
43,940 |
|
|
$ |
18,080 |
|
|
$ |
215,774 |
|
|
$ |
233,854 |
|
HELOCs, net provision for credit losses
|
|
|
(492 |
) |
|
|
570 |
|
|
|
78 |
|
|
|
1,524 |
|
|
|
3,043 |
|
|
|
4,567 |
|
Residential loan credit-enhancement securities
|
|
|
9,406 |
|
|
|
(1,045 |
) |
|
|
8,361 |
|
|
|
32,123 |
|
|
|
(16,309 |
) |
|
|
15,814 |
|
Commercial loans, net of provision for credit losses
|
|
|
441 |
|
|
|
(270 |
) |
|
|
171 |
|
|
|
2,129 |
|
|
|
(732 |
) |
|
|
1,397 |
|
Commercial loan credit-enhancement securities
|
|
|
1,165 |
|
|
|
(1,058 |
) |
|
|
107 |
|
|
|
2,888 |
|
|
|
(1,640 |
) |
|
|
1,248 |
|
Securities portfolio
|
|
|
6,186 |
|
|
|
3,808 |
|
|
|
9,994 |
|
|
|
18,580 |
|
|
|
8,784 |
|
|
|
27,364 |
|
Cash and cash equivalents
|
|
|
56 |
|
|
|
759 |
|
|
|
815 |
|
|
|
211 |
|
|
|
1,749 |
|
|
|
1,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
(5,713 |
) |
|
$ |
69,179 |
|
|
$ |
63,466 |
|
|
$ |
75,535 |
|
|
$ |
210,669 |
|
|
$ |
286,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume change is the change in average portfolio balance
between periods multiplied by the rate earned in the earlier
period. Rate change is the change in rate between periods
multiplied by the average portfolio balance in the prior period.
Interest income changes that result from changes in both rate
and volume were allocated to the rate change amounts shown in
the table.
A discussion of the changes in total income, average balances,
and yields for each of our portfolios is provided below.
|
|
|
Table 5 Consolidated
Residential Real Estate Loans Interest Income and
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
204,078 |
|
|
$ |
147,160 |
|
|
$ |
618,484 |
|
|
$ |
385,118 |
|
Net (premium) discount amortization
|
|
|
(13,479 |
) |
|
|
2,078 |
|
|
|
(29,452 |
) |
|
|
(23,430 |
) |
Reversal of (provision for) credit losses
|
|
|
1,315 |
|
|
|
(1,264 |
) |
|
|
1,502 |
|
|
|
(5,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
191,914 |
|
|
$ |
147,974 |
|
|
$ |
590,534 |
|
|
$ |
356,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average consolidated residential real estate loans
|
|
$ |
17,373,023 |
|
|
$ |
20,484,287 |
|
|
$ |
19,673,866 |
|
|
$ |
18,724,707 |
|
Yields as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4.70 |
% |
|
|
2.87 |
% |
|
|
4.19 |
% |
|
|
2.74 |
% |
Net (premium) discount amortization
|
|
|
(0.31 |
)% |
|
|
0.04 |
% |
|
|
(0.20 |
)% |
|
|
(0.16 |
)% |
Reversal of (provision for) credit losses
|
|
|
0.03 |
% |
|
|
(0.02 |
)% |
|
|
0.01 |
% |
|
|
(0.04 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
4.42 |
% |
|
|
2.89 |
% |
|
|
4.00 |
% |
|
|
2.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
61
During 2005, as compared to 2004, interest income on residential
real estate loans increased primarily as a result of higher
yields. Yields on these residential real estate loans are
increasing as short-term interest rates are rising as most of
these loans have coupon rates that adjust monthly or every six
months based on one -or six-month LIBOR interest rate. Higher
average balances contributed to the increase in interest income
during the nine months of 2005 as compared to the first nine
months of 2004; however, average balances had a dampening effect
in the third quarter of 2005 as compared to a year earlier as
the level of new loans added to this consolidated portfolio was
less than the level of prepayments over the last twelve months.
Premium amortization expense (as a percentage of average loan
balances) during 2005 increased from the same periods in 2004.
Amortization expense results from the application of
FAS 91. In applying the interest method under FAS 91,
we make certain elections to determine an effective yield to
amortize the premium. For loans acquired prior to July 1,
2004, in our effective yield calculations we use coupon interest
rates as they change over time as well as anticipated principal
prepayments (actual and projected). Thus, rising rates will
cause an increase in effective yield for these adjustable rate
residential loans, as the coupon rate is rising or will reset at
a higher rate in the near term. For this lag before the reset,
the amount of premium expense is generally lower in order to
increase the current effective yield to current market levels
yield (all other factors being equal). For loans acquired after
July 1, 2004, we determine an effective yield under
FAS 91 using the initial coupon interest rate of the loans
(without regard to future changes in the interest rates and
underlying indices) as well as anticipated prepayment rates. For
these residential loans, higher coupon interest rates will
increase net realized yields when the coupon actually
re-adjusts. Periodic premium amortization expenses will not be
reduced in the short-term in anticipation of coupon interest
rate increases. As a result, these loans premium amortization
expenses will be higher (relative to the older loans) in a
period of rising interest rates. As of September 30, 2005,
loans acquired before July 1, 2004 had a principal value of
$11.68 billion and an amortized cost basis of
$11.82 billion. Loans acquired after July 1, 2004 had
a principal value of $4.50 billion and an amortized cost
basis of $4.54 billion.
|
|
|
Table 6 Residential
HELOC Interest Income and Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
3,165 |
|
|
$ |
2,954 |
|
|
$ |
9,489 |
|
|
$ |
4,007 |
|
Net premium amortization
|
|
|
(959 |
) |
|
|
(1,072 |
) |
|
|
(2,388 |
) |
|
|
(1,322 |
) |
Provision for credit losses
|
|
|
(510 |
) |
|
|
(264 |
) |
|
|
(380 |
) |
|
|
(531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
1,696 |
|
|
$ |
1,618 |
|
|
$ |
6,721 |
|
|
$ |
2,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of HELOCs
|
|
$ |
224,884 |
|
|
$ |
323,100 |
|
|
$ |
255,626 |
|
|
$ |
149,686 |
|
Yields as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5.64 |
% |
|
|
3.66 |
% |
|
|
4.96 |
% |
|
|
3.57 |
% |
Net premium amortization
|
|
|
(1.71 |
)% |
|
|
(1.33 |
)% |
|
|
(1.25 |
)% |
|
|
(1.18 |
)% |
Provision for credit losses
|
|
|
(0.91 |
)% |
|
|
(0.33 |
)% |
|
|
(0.20 |
)% |
|
|
(0.47 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
3.02 |
% |
|
|
2.00 |
% |
|
|
3.51 |
% |
|
|
1.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our return on the HELOC-backed securities we acquired from
securitization of HELOCs we sponsored may be materially reduced
if prepayment rates (net of draws) on these loans are faster
than we originally anticipated. Cumulative prepayments through
September 30, 2005 were at a CPR of 28%, which was slightly
faster than we originally anticipated.
62
|
|
|
Table 7 Residential
Loan Credit-Enhancement Securities Interest
Income and Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
13,175 |
|
|
$ |
7,826 |
|
|
$ |
35,736 |
|
|
$ |
21,951 |
|
Net discount amortization
|
|
|
11,193 |
|
|
|
8,181 |
|
|
|
27,695 |
|
|
|
25,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
24,368 |
|
|
$ |
16,007 |
|
|
$ |
63,431 |
|
|
$ |
47,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average residential loan credit-enhancement securities
|
|
$ |
585,663 |
|
|
$ |
368,887 |
|
|
$ |
543,516 |
|
|
$ |
324,563 |
|
Yield as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9.00 |
% |
|
|
8.49 |
% |
|
|
8.77 |
% |
|
|
9.02 |
% |
Net discount amortization
|
|
|
7.64 |
% |
|
|
8.87 |
% |
|
|
6.79 |
% |
|
|
10.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
16.64 |
% |
|
|
17.36 |
% |
|
|
15.56 |
% |
|
|
19.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized from residential loan CES during
the three and nine months ended September 30, 2005
increased as compared to the same periods in 2004, primarily due
to growth in our portfolio over the past year, partially offset
by the lower yield on the residential CES portfolio which
decreased during the 2005 periods as compared to the 2004
periods. This is the result of the more seasoned, higher
yielding assets (higher yielding as a result of several years of
strong credit performance and favorable prepayments) being
called or sold within the last year. In addition, any newer CES
generally have lower yields because we do not expect the same
strong credit performance or favorable prepayment patterns to
repeat themselves.
The yields we currently recognize on recently acquired CES (both
residential and commercial) may be less than the yields we will
actually realize over the lives of these CES. To determine
yields on CES, we make assumptions regarding loan losses and
prepayments. Since the market generally has a wide range for
these assumptions (and not a specific estimate), we apply
assumptions within a range that generally result in yields on
these assets in early periods of ownership that are lower than
what we might realize over the life of the assets. Specifically,
the initial yield we book on certain CES may be lower than the
market mid-range expectation of performance (and below our
hurdle rate of 14%). We review the actual performance of each
CES and the markets and our renewed range of expectations
every quarter. We adjust the yield of the assets as a result of
the appropriate and supportable changes in assumptions. In
addition, if credit performance is better than the original
range of expectations, and/or prepayment behavior is favorable
relative to initial estimates, the yields on these CES over the
remaining lives may be significantly higher then we recorded in
the first several quarters of ownership. In many cases, the
yield we recognize in any period may prove to be too high or too
low, as the actual yield we realize over the life of each of the
CES will be dependent upon the actual receipt (both timing and
amounts) of cash. Cumulatively, the cash we receive over the
life of an asset will be accounted for as either a return of our
initial investment or as income. The timing of the recognition
of income is based on our estimates and assumptions of future
amounts and timing of credit losses and prepayments and may be
inexact.
The determination of the yield is a function of the assumptions
used to project the cash flows on each security. One assumption
is the estimated credit losses. The amount of credit losses we
assume for each security is the amount of designated credit
reserve we have for that asset. If our expectations change, we
will change the amount of credit losses anticipated and this
will impact the effective yield over the remaining life. Our
designation of the level of credit reserve is based on many
factors, including the credit rating agencies
determination of required credit-enhancement levels. As our
securities season and loan pools have specific default and loss
experience, our assumptions will change. While we use the
markets range of expectations, our designated credit
reserve and projected timing of losses are subjective in nature.
63
In the third quarter of 2005 and also thus far in the fourth
quarter of 2005, we have been selling many of our single B-rated
residential loan CES. The restructuring of our balance sheet in
this way reflects our belief that now is a good time to reduce
overall risk levels and raise cash for future investment
opportunities. By retaining most our first-loss (non-rated) CES,
we are retaining most of the upside potential within our
residential portfolios should credit losses continue to be low.
These sales are generating gains that will be distributed to our
stockholders. We generally are not reinvesting cash at this
time. As a result we will likely have a smaller portfolio of
residential CES and higher cash balances until our investment
strategy changes.
We believe the risk/reward ratio offered by our recent CES
acquisitions is attractive for stockholders. Nevertheless, we
believe these new securities are unlikely to generate over their
lives the level of interest and call income generated by our
older portfolio assets unless the market environment going
forward proves to be as attractive (i.e., very fast prepayments
and very low credit losses) as over the last several years. We
expect that our rate of new asset acquisitions will slow.
|
|
|
Table 8 Commercial Real
Estate Loans Interest Income and Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
1,278 |
|
|
$ |
1,166 |
|
|
$ |
4,017 |
|
|
$ |
2,959 |
|
Net premium amortization
|
|
|
(69 |
) |
|
|
(128 |
) |
|
|
(198 |
) |
|
|
(352 |
) |
Reversal of credit losses
|
|
|
|
|
|
|
|
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
1,209 |
|
|
$ |
1,038 |
|
|
$ |
4,004 |
|
|
$ |
2,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets
|
|
$ |
47,703 |
|
|
$ |
33,461 |
|
|
$ |
49,635 |
|
|
$ |
27,324 |
|
Yield as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10.72 |
% |
|
|
13.93 |
% |
|
|
10.79 |
% |
|
|
14.44 |
% |
Net premium amortization
|
|
|
(0.58 |
)% |
|
|
(1.53 |
)% |
|
|
(0.53 |
)% |
|
|
(1.72 |
)% |
Reversal of credit losses
|
|
|
|
|
|
|
|
|
|
|
0.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
10.14 |
% |
|
|
12.40 |
% |
|
|
10.76 |
% |
|
|
12.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The interest income earned on our commercial real estate loan
portfolio increased in the three and nine months ended
September 30, 2005 from the same periods in 2004 primarily
due to the growth in our commercial loan portfolio. This
increase was partially offset by lower yield assumptions for
newer commercial loans. During the first nine months of 2005, we
reversed a portion of the credit reserve based on our positive
assessment of one loan in the portfolio and reclassified the
loan from held-for-investment to held-for-sale in anticipation
of a sale, which occurred in the second quarter of 2005.
64
|
|
|
Table 9 Commercial
Loan Credit-Enhancement Securities Interest Income and
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
1,355 |
|
|
$ |
286 |
|
|
$ |
3,347 |
|
|
$ |
424 |
|
Net (premium) discount amortization
|
|
|
(902 |
) |
|
|
60 |
|
|
|
(1,657 |
) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
453 |
|
|
$ |
346 |
|
|
$ |
1,690 |
|
|
$ |
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average residential loan credit-enhancement securities
|
|
$ |
32,192 |
|
|
$ |
7,372 |
|
|
$ |
25,558 |
|
|
$ |
3,389 |
|
Yield as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16.84 |
% |
|
|
15.53 |
% |
|
|
17.46 |
% |
|
|
16.65 |
% |
Net discount (premium) amortization
|
|
|
(11.21 |
)% |
|
|
3.27 |
% |
|
|
(8.64 |
)% |
|
|
0.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
5.63 |
% |
|
|
18.80 |
% |
|
|
8.82 |
% |
|
|
17.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized from commercial loan CES during
the three and nine months ended September 30, 2005
increased as compared to the same periods in 2004 primarily due
to the growth in this portfolio.
As discussed above, the yields we recognize on recently acquired
CES (both residential and commercial) may be less than the
yields we will actually realize over the lives of these assets.
For commercial loan CES, prepayment assumptions generally
have less of an impact on the yield because as commercial loans
underlying CMBS generally have contractual provisions that make
prepayments less likely than residential loans. The timing of
the recognition of income is based on our estimates and
assumption of future amounts and timing of credit losses and
prepayments.
|
|
|
Table 10 Consolidated
Securities Portfolio Interest Income and
Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
21,697 |
|
|
$ |
12,235 |
|
|
$ |
57,918 |
|
|
$ |
31,951 |
|
Discount amortization
|
|
|
1,277 |
|
|
|
831 |
|
|
|
2,730 |
|
|
|
1,285 |
|
Premium amortization
|
|
|
(48 |
) |
|
|
(134 |
) |
|
|
(292 |
) |
|
|
(244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
22,926 |
|
|
$ |
12,932 |
|
|
$ |
60,356 |
|
|
$ |
32,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average securities portfolio balance
|
|
$ |
1,687,506 |
|
|
$ |
1,141,456 |
|
|
$ |
1,553,993 |
|
|
$ |
994,139 |
|
Yield as a result of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5.14 |
% |
|
|
4.29 |
% |
|
|
4.98 |
% |
|
|
4.28 |
% |
Discount amortization
|
|
|
0.30 |
% |
|
|
0.29 |
% |
|
|
0.23 |
% |
|
|
0.17 |
% |
Premium amortization
|
|
|
(0.01 |
)% |
|
|
(0.05 |
)% |
|
|
(0.03 |
)% |
|
|
(0.03 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
5.43 |
% |
|
|
4.53 |
% |
|
|
5.18 |
% |
|
|
4.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income increased from the 2004 periods to the
2005 periods for the securities portfolio as the total size of
the portfolio grew and as yields increased over these periods as
the coupon rates on adjustable-rate loan securities (which
comprise over half of the portfolio) adjusted upward with the
increase in short-term interest rates over the past year.
Interest income includes cash interest payments we receive on
the securities in this portfolio, including the net interest
earned on IO securities and less certain underlying due
diligence expenses associated with the purchase of certain
securities.
65
Consolidated interest expense consists of interest payments on
Redwood debt and ABS issued, plus the amortization of deferred
ABS issuance costs and expenses related to certain interest rate
agreements less the amortization of ABS premiums. These ABS
premiums are created when interest-only and other ABS are issued
at prices greater than principal value.
Total consolidated interest expense increased in 2005 from 2004
due to higher cost of funds as a result of an increase in
short-term interest rates and a larger balance of consolidated
ABS issued. Furthermore, interest expense associated with
interest-only and Sequoia ABS issued at a premium were not
reduced this quarter in an amount commensurate with the increase
in prepayments on the underlying Sequoia loans due to timing
differences on the nature of the ABS outstanding.
|
|
|
Table 11 Total Interest
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest expense on Redwood debt
|
|
$ |
3,845 |
|
|
$ |
2,312 |
|
|
$ |
8,398 |
|
|
$ |
7,373 |
|
Interest expense on ABS
|
|
|
192,841 |
|
|
|
112,499 |
|
|
|
559,435 |
|
|
|
277,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$ |
196,686 |
|
|
$ |
114,811 |
|
|
$ |
567,833 |
|
|
$ |
284,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Redwood debt balance
|
|
$ |
297,788 |
|
|
$ |
404,589 |
|
|
$ |
264,024 |
|
|
$ |
463,700 |
|
Average ABS issued balance
|
|
|
19,542,413 |
|
|
|
21,606,164 |
|
|
|
21,630,747 |
|
|
|
19,426,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total obligations
|
|
$ |
19,840,201 |
|
|
$ |
22,010,753 |
|
|
$ |
21,894,771 |
|
|
$ |
19,890,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of funds of Redwood debt
|
|
|
5.16 |
% |
|
|
2.29 |
% |
|
|
4.24 |
% |
|
|
2.12 |
% |
Cost of funds of ABS issued
|
|
|
3.95 |
% |
|
|
2.08 |
% |
|
|
3.45 |
% |
|
|
1.90 |
% |
Cost of funds of total obligations
|
|
|
3.97 |
% |
|
|
2.09 |
% |
|
|
3.46 |
% |
|
|
1.91 |
% |
For purposes of calculating the weighted average borrowing costs
of ABS issued, we include the amortization of the deferred ABS
issuance costs with interest expense. We include the average
deferred ABS issuance costs in the average balances below.
|
|
|
Table 12 Average Balances of
Asset-Backed Securities Issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(In thousands) |
|
| |
|
| |
|
| |
|
| |
Sequoia
|
|
$ |
17,453,727 |
|
|
$ |
20,278,819 |
|
|
$ |
19,727,546 |
|
|
$ |
18,356,063 |
|
Acacia
|
|
|
2,142,869 |
|
|
|
1,377,574 |
|
|
|
1,956,423 |
|
|
|
1,115,171 |
|
Commercial
|
|
|
4,231 |
|
|
|
5,416 |
|
|
|
7,086 |
|
|
|
5,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of ABS issued
|
|
$ |
19,600,827 |
|
|
$ |
21,661,809 |
|
|
$ |
21,691,055 |
|
|
$ |
19,476,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average deferred ABS issuance costs
|
|
|
(58,414 |
) |
|
|
(55,645 |
) |
|
|
(60,308 |
) |
|
|
(49,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of ABS issued, net
|
|
$ |
19,542,413 |
|
|
$ |
21,606,164 |
|
|
$ |
21,630,747 |
|
|
$ |
19,426,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The table below details interest expense on debt and
consolidated ABS issued as a result of changes in consolidated
balances (volume) and cost of funds
(rate) for the three and nine months ended
September 30, 2005 as compared to the three and nine months
ended September 30, 2004.
|
|
|
Table
13 Volume and Rate Changes for
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Expense | |
|
Change in Interest Expense | |
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, 2005 Versus | |
|
September 30, 2005 Versus | |
|
|
September 30, 2004 | |
|
September 30, 2004 | |
|
|
| |
|
| |
|
|
|
|
Total | |
|
|
|
Total | |
|
|
Volume | |
|
Rate | |
|
Change | |
|
Volume | |
|
Rate | |
|
Change | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense on Redwood debt
|
|
$ |
(610 |
) |
|
$ |
2,143 |
|
|
$ |
1,533 |
|
|
$ |
(3,175 |
) |
|
$ |
4,200 |
|
|
$ |
1,025 |
|
Interest expense on ABS
|
|
|
(10,746 |
) |
|
|
91,088 |
|
|
|
80,342 |
|
|
|
31,467 |
|
|
|
250,594 |
|
|
|
282,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$ |
(11,356 |
) |
|
$ |
93,231 |
|
|
$ |
81,875 |
|
|
$ |
28,292 |
|
|
$ |
254,794 |
|
|
$ |
283,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume change is the change in average balance of obligations
between periods multiplied by the rate paid in the earlier
period. Rate change is the change in rate between periods
multiplied by the average outstanding obligations in the current
period. Interest expense changes that resulted from changes in
both rate and volume were allocated to the rate change amounts
shown in the table.
Details of the change in cost of funds of debt and cost of funds
on ABS issued are provided below.
|
|
|
Table
14 Cost of Funds of Redwood
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
Interest expense on Redwood debt
|
|
$ |
3,845 |
|
|
$ |
2,312 |
|
|
$ |
8,398 |
|
|
$ |
7,373 |
|
Average Redwood debt balance
|
|
$ |
297,788 |
|
|
$ |
404,589 |
|
|
$ |
264,024 |
|
|
$ |
463,700 |
|
Cost of funds of Redwood debt
|
|
|
|