FOR IMMEDIATE RELEASE
                                           CONTACTS:         Mike McMahon
Redwood Trust, Inc.
                       (415) 384-3805
Wednesday, August 5, 2009
  
 
                    Martin S. Hughes
 
                                                   (415) 389-7373
 
REDWOOD TRUST REPORTS SECOND QUARTER 2009 RESULTS

MILL VALLEY, CA – August 5, 2009 – Redwood Trust, Inc. (NYSE:RWT) today reported net income for the second quarter of 2009 of $7 million, or $0.10 per share. This compares to a net loss of $35 million, or $0.65 per share, for the first quarter of 2009, and a net loss of $46 million, or $1.40 per share, for the second quarter of 2008.

Redwood estimated that it incurred a taxable loss of $12 million, or $0.16 per share, during the second quarter of 2009.  This compares to an estimated taxable loss of $14 million, or $0.22 per share, for the first quarter of 2009, and estimated taxable income of $4 million, or $0.11 per share, for the second quarter of 2008.
 
Key metrics are highlighted below:
 
 
·
Investment cash flow increased to $64 million, up from $57 million in the first quarter of 2009, and business cash flow after operating and interest expenses increased to $55 million, compared to $45 million in the prior quarter;

 
·
GAAP book value per share at the end of the second quarter was $10.35 per share, an increase of $1.95 or 23%, from the end of the first quarter, and economic book value per share increased to $11.30, up $1.29 or 13%, from the end of the prior quarter; and

 
·
$341 million was invested during the second quarter and an additional $158 million was invested in July, primarily in selected seasoned senior RMBS, bringing total capital invested thus far in 2009 to $597 million.

Please see the tables that follow for reconciliations between GAAP and non-GAAP metrics.   Additional information on Redwood’s business and financial results and on non-GAAP metrics is available in its Quarterly Report on Form 10-Q for the three months ended June 30, 2009 which was filed today with the Securities and Exchange Commission.  The Form 10-Q is available on Redwood’s website at www.redwoodtrust.com.

The accounting concepts and disclosures relating to our financial statements are complex. Today, the company also released the Redwood Review covering the second quarter of 2009. The Redwood Review is an additional publication that provides information about the company. The Redwood Review is available on the company’s website at www.redwoodtrust.com.
 
Cautionary Statement:  This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2008, and in our Quarterly Report on Form 10-Q for the three months ended June 30, 2009, in each case under the caption under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the Securities and Exchange Commission (SEC), including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
 
Important factors, among others, that may affect our actual results include: changes in interest rates; changes in mortgage prepayment rates; the timing of credit losses within our portfolio; our exposure to adjustable-rate and negative amortization mortgage loans; the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers; the concentration of the credit risks we are exposed to; the ability of counterparties to satisfy their obligations to us; legislative and regulatory actions affecting the mortgage industry or our business; the availability of high quality assets for purchase at attractive prices; declines in home prices and commercial real estate prices; increases in mortgage payment delinquencies; changes in the level of liquidity in the capital markets which may adversely affect our ability to finance our real estate asset portfolio; changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades of securities, and increases in the supply of real estate securities available-for-sale, each of which may adversely affect the values of securities we own; the extent of changes in the values of securities we own and the impact of adjustments reflecting those changes on our income statement and balance sheet, including our stockholders’ equity; our ability to maintain the positive stockholders’ equity necessary to enable us to pay the dividends required to maintain our status as a real estate investment trust for tax purposes; our ability to generate the amount of cash flow we expect from our investment portfolio; changes in our investment, financing, and hedging strategies and the new risks that those changes may expose us to; changes in the competitive landscape within our industry, including changes that may affect our ability to retain or attract personnel; our failure to manage various operational risks associated with our business; our failure to maintain appropriate internal controls over financial reporting; our failure to properly administer and manage our securitization entities; risks we may be exposed to if we expand our business activities, such as risks relating to significantly increasing our direct holdings of loans; limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940; our ability to successfully invest our cash available for investment and raise additional capital to fund our investing activity; and other factors not presently identified.

2
 
REDWOOD TRUST, INC.
 
 
Consolidated Income Statement
  
Second
    
First
    
Fourth
    
Third
    
Second
  
($ in millions, except share data)
  
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
   
2009
    
2009
    
2008
    
2008
    
2008
  
                               
Interest income
   $ 74     $ 82     $ 123     $ 131     $ 137  
Interest expense
     (39 )     (48 )     (99 )     (92 )     (98 )
Net interest income
     35       34       24       39       39  
Provision for loan losses
     (15 )     (16 )     (19 )     (18 )     (10 )
Market valuation adjustments, net
     (29 )     (43 )     (111 )     (127 )     (60 )
Net interest loss after provision and
     (9 )     (25 )     (106 )     (106 )     (31 )
market valuation adjustments
                                        
Operating expenses
     (11 )     (11 )     (14 )     (17 )     (15 )
Realized gains, net
     26       -       6       -       3  
Benefit from (provision for) income taxes
     1       -       (4 )     10       (1 )
Net income (loss)
     7       (36 )     (118 )     (113 )     (44 )
Less: Net (loss) income attributable to noncontrolling interest
     -       (1 )     (2 )     (2 )     2  
GAAP net income (loss)
   $ 7     $ (35 )   $ (116 )   $ (111 )   $ (46 )
 
 
                                        
Average diluted shares (thousands)
     66,446       53,632       33,366       33,334       32,871  
GAAP earnings (loss) per share (diluted)
   $ 0.10     $ (0.65 )   $ (3.46 )   $ (3.34 )   $ (1.40 )
Regular dividends declared per common share
   $ 0.25     $ 0.25     $ 0.75     $ 0.75     $ 0.75  
 
3
 
REDWOOD TRUST, INC.
 
 
Consolidated Income Statement
  
Six Months Ended
  
($ in millions, except share data)
  
June 30,
  
   
2009
    
2008
  
             
Interest income
   $ 156     $ 313  
Interest expense
     (87 )     (225 )
Net interest income
     69       88  
Provision for loan losses
     (31 )     (18 )
Market valuation adjustments, net
     (72 )     (254 )
Net interest loss after provision and
     (34 )     (184 )
market valuation adjustments
                
Operating expenses
     (22 )     (31 )
Realized gains, net
     26       3  
Benefit from (provision for) income taxes
     1       (3 )
Net loss
     (29 )     (215 )
Less: Net (loss) income attributable to noncontrolling interest
     (1 )     2  
GAAP net loss
   $ (28 )   $ (217 )
 
 
                
Average diluted shares (thousands)
     59,138       32,691  
GAAP earnings (loss) per share (diluted)
   $ (0.48 )   $ (6.65 )
Regular dividends declared per common share   $ 0.50     $ 1.50  
 
4
 
REDWOOD TRUST, INC.
 
 
Consolidated Balance Sheet
  
30-Jun
    
31-Mar
    
31-Dec
    
30-Sep
    
30-Jun
  
($ in millions, except share data)
  
2009
    
2009
    
2008
    
2008
    
2008
  
                               
Real estate loans
   $ 3,966     $ 4,541     $ 4,659     $ 6,101     $ 6,377  
Real estate securities, at fair value:
                                        
Trading securities
     253       264       340       574       841  
Available-for-sale securities
     551       255       233       288       400  
Other investments
     47       62       78       79       79  
Cash and cash equivalents
     337       333       126       177       148  
Other assets
     131       126       146       155       201  
Total Assets
   $ 5,285     $ 5,581     $ 5,582     $ 7,374     $ 8,046  
                                         
Short-term debt
   $ -     $ -     $ -     $ 7     $ 9  
Other liabilities
     185       198       252       167       166  
Asset-backed securities issued - Sequoia
     3,843       4,418       4,508       5,930       6,175  
Asset-backed securities issued - Acacia
     287       291       347       673       935  
Long-term debt
     150       150       150       150       150  
Total liabilities
     4,465       5,057       5,257       6,927       7,435  
                                         
Stockholders’ equity
     802       506       302       412       564  
Noncontrolling interest
     18       18       23       35       47  
Total equity
     820       524       325       447       611  
                                         
Total Liabilities and Equity
   $ 5,285     $ 5,581     $ 5,582     $ 7,374     $ 8,046  
 
 
                                        
Shares outstanding at period end (thousands)
     77,503       60,228       33,471       33,238       33,184  
GAAP book value per share
   $ 10.35     $ 8.40     $ 9.02     $ 12.40     $ 17.00  
 
5
 
REDWOOD TRUST, INC.
 
 
Consolidating Income Statement
                                
Three Months Ended June 30, 2009
                                
($ in millions)
        
The
                
Intercompany
    
Redwood
  
   
Redwood
    
Fund
    
Sequoia
    
Acacia
    
Adjustments
    
Consolidated
  
                                     
Interest income
   $ 18     $ 1     $ 34     $ 22     $ (1 )   $ 74  
Net discount (premium) amortization
     3     $ 1       (4 )     -       -     $ -  
Total interest income
     21       2       30       22       (1 )     74  
Management fees
     1     $ -       -       -       (1 )     -  
Interest expense
     (2 )   $ -       (23 )     (16 )     2       (39 )
Net interest income
   $ 20     $ 2     $ 7     $ 6     $ -     $ 35  
Provision for loan losses
     -       -       (15 )     -       -       (15 )
Market valuation adjustments, net
     (32 )     (1 )     (1 )     5       -       (29 )
Net interest (loss) income after provision
     (12 )     1       (9 )     11       -       (9 )
and market valuation adjustments
                                                
Operating expenses
     (11 )     -       -       -       -       (11 )
Realized gains, net
     7       -       19       -       -       26  
Income from the Fund, Sequoia, and Acacia
     22       -       -       -       (22 )     -  
Noncontrolling interest
     -       -       -       -       -       -  
Benefit from (provision for) income taxes
     1       -       -       -       -       1  
Net income (loss)
   $ 7     $ 1     $ 10     $ 11     $ (22 )   $ 7  
 
 
Consolidating Income Statement
                                
Six Months Ended June 30, 2009
                                
($ in millions)
        
The
                
Intercompany
    
Redwood
  
   
Redwood
    
Fund
    
Sequoia
    
Acacia
    
Adjustments
    
Consolidated
  
                                     
Interest income
   $ 43     $ 4       68       45       -     $ 160  
Net discount (premium) amortization
     (1 )     1       (4 )     -       -       (4 )
Total interest income
     42       5       64       45       -       156  
Management fees
     2     $ -       -       -       (2 )     -  
Interest expense
     (3 )   $ -       (48 )     (37 )     1       (87 )
Net interest income
   $ 41     $ 5     $ 16     $ 8     $ (1 )   $ 69  
Provision for loan losses
     -       -       (31 )     -       -       (31 )
Market valuation adjustments, net
     (58 )     (5 )     (2 )     (7 )     -       (72 )
Net interest (loss) income after provision
     (17 )     -       (17 )     1       (1 )     (34 )
and market valuation adjustments
                                                
Operating expenses
     (22 )     -       -       -       -       (22 )
Realized gains, net
     7       -       19       -       -       26  
Income from the Fund, Sequoia, and Acacia
     3       -       -       -       (3 )     -  
Noncontrolling interest
     -       1       -       -       -       1  
Benefit from (provision for) income taxes
     1       -       -       -       -       1  
Net (loss) income
   $ (28 )   $ 1     $ 2     $ 1     $ (4 )   $ (28 )
 
6
 
REDWOOD TRUST, INC.
 
 
Consolidating Balance Sheet
                                    
June 30, 2009
                                    
($ in millions)
        
The
                
Intercompany
    
Redwood
  
   
Redwood
    
Fund
    
Sequoia
    
Acacia
    
Adjustments
    
Consolidated
  
                                     
Real estate loans
   $ 3     $ -     $ 3,955     $ 8     $ -     $ 3,966  
Real estate securities, at fair value:
                                                
Trading securities
     4       -       -       249       -       253  
Available-for-sale securities
     513       38       -       55       (55 )     551  
Other investments
     -       -       -       47       -       47  
Cash and cash equivalents
     337       -       -       -       -       337  
Investment in the Fund
     22       -       -       -       (22 )     -  
Investment in Sequoia
     82       -       -       -       (82 )     -  
Investment in Acacia
     4       -       -       -       (4 )     -  
Total earning assets
     965       38       3,955       359       (163 )     5,154  
Other assets
     22       4       27       78       -       131  
Total Assets
   $ 987     $ 42     $ 3,982     $ 437     $ (163 )   $ 5,285  
                                                 
Short-term debt
   $ -     $ -     $ -     $ -     $ -     $ -  
Other liabilities
     35       2       2       146       -       185  
Asset-backed securities issued - Sequoia
     -       -       3,898       -       (55 )     3,843  
Asset-backed securities issued - Acacia
     -       -       -       287       -       287  
Long-term debt
     150       -       -       -       -       150  
Total liabilities
     185       2       3,900       433       (55 )     4,465  
                                                 
Stockholders’ equity
     802       22       82       4       (108 )     802  
Noncontrolling interest
     -       18       -       -       -       18  
Total equity
     802       40       82       4       (108 )     820  
                                                 
Total Liabilities and Equity
   $ 987     $ 42     $ 3,982     $ 437     $ (163 )   $ 5,285  
 
7
 
REDWOOD TRUST, INC.
 
 
GAAP and Taxable (Loss) Income Differences
  
Second
    
First
    
Fourth
    
Third
    
Second
  
($ in millions, except share data)
  
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
   
2009
    
2009
    
2008
    
2008
    
2008
  
                               
GAAP net income (loss)
   $ 7     $ (35 )   $ (116 )   $ (111 )   $ (46 )
Difference in taxable (loss) income calculations
                                        
Amortization and credit losses
     (41 )     (22 )     (1 )     (7 )     (10 )
Operating expenses
     1       -       (1 )     3       1  
Realized gains, net
     -       -       (5 )     -       (3 )
Market valuation adjustments, net
     22       43       111       127       61  
Provision for income taxes
     (1 )     -       4       (10 )     1  
Total differences in GAAP and taxable (loss) income
     (19 )     21       108       113       50  
                                         
Taxable (loss) income
   $ (12 )   $ (14 )   $ (8 )   $ 2     $ 4  
                                         
Taxable (loss) income per share
   $ (0.16 )   $ (0.22 )   $ (0.25 )   $ 0.07     $ 0.11  
 
8
 
REDWOOD TRUST, INC.
 
 
GAAP and Taxable (Loss) Income Differences
  
Six Months Ending
  
($ in millions, except share data)
  
June 30,
  
   
2009
    
2008
  
             
GAAP net loss
   $ (28 )   $ (217 )
Difference in taxable (loss) income calculations
                
Amortization and credit losses
     (63 )     (9 )
Operating expenses
     1       2  
Realized gains, net
     -       (3 )
Market valuation adjustments, net
     65       254  
Provision for income taxes
     (1 )     3  
Total differences in GAAP and taxable (loss) income
     2       247  
                 
Taxable (loss) income
   $ (26 )   $ 30  
                 
Taxable (loss) income per share
   $ (0.38 )   $ 0.72  
 
9
 
REDWOOD TRUST, INC.

Book Value Per Share
 
The following supplemental non-GAAP components of book value addresses our assets and liabilities at June 30, 2009, as reported under GAAP and as estimated by us using fair values for our investments. We show our investments in the Fund and the Sequoia and Acacia entities as separate line items to highlight our specific ownership interests, as the underlying assets and liabilities of these entities are legally not ours. Our estimated economic value is calculated using bid-side asset marks and offer-side marks for our financial liabilities, as required to determine fair value under GAAP. This method of calculating economic value more closely represents liquidation value and does not represent the higher amount we would have to pay at the offered-side to replace our existing assets. For additional information to consider when reviewing the following supplemental non-GAAP components of book value, please see “Factors Affecting Management’s Estimate of Economic Value” in our Quarterly Report on Form 10-Q for the period ending June 30, 2009.
 
 
 
June 30, 2009
  
                 
Management's
  
   
 
            
Estimate of
  
(In Millions, Except per Share Data)
  
As Reported(GAAP)
  
Adjustments
      
Economic
Value
  
Cash and cash equivalents
   $ 337     $          $ 337  
Real estate securities at Redwood
                          
Residential
     499                 499  
Commercial
     16                 16  
CDO
     2                 2  
Subtotal real estate securities
     517                 517  
Investments in the Fund
     22  
 
         22  
Investments in Sequoia
     82       (26 )  (a)     56  
Investments in Acacia
     4       1    (b)     5  
Total securities and investments
     625                 600  
Long-term debt
     (150 )     99    (c)     (51 )
Other assets/liabilities, net (d)
     (10 )               (10 )
Stockholders' Equity
   $ 802               $ 876  
Book Value Per Share
   $ 10.35               $ 11.30  
 
 
(a) Our Sequoia investments consist of senior and subordinate securities and interest-only securities issued by Sequoia entities. We calculated the $56 million estimate of economic value for these securities using the same valuation process that we followed to fair value our other real estate securities. In contrast, the $82 million of GAAP carrying value of these investments represents the difference between residential real estate loans owned by the Sequoia entities and the asset-backed securities (ABS) issued by these entities to third-party investors. Under GAAP, we account for these loans and ABS issued at cost.

(b) Our $5 million estimate of economic value represents the fair value of our investment in ABS issued by Acacia using the same valuation process we followed to value our other real estate securities, plus the net present value of projected cash flows from our Acacia management fees. In contrast, the $4 million of GAAP carrying value of these investments represents the difference between real estate securities owned by the Acacia entities and the ABS issued by these entities to third-party investors. Under GAAP, we account for these securities and ABS issued at fair value.

(c) As of June 30, 2009, we had $150 million of 30-year long-term debt that matures in 2037 at an interest rate of LIBOR plus 225 basis points. Under GAAP, this debt is carried at cost. Economic value can be difficult to estimate due to a generally inactive trading market for this debt. In July 2009, we repurchased $10 million of this debt at a market price equal to 34% of face value and utilized this price to calculate our $51 million estimate of economic value.

(d) Other assets/liabilities, net are comprised of $3 million of real estate loans, $2 million of deferred taxes, $7 million of accrued interest receivable, and $13 million of other assets, less dividends payable of $19 million and accrued interest and other liabilities of $16 million.

10
 
REDWOOD TRUST, INC.

Sources and Uses of Cash

Our quarterly sources and uses of our cash is one of the financial metrics on which we focus. Therefore, as a supplement to the Consolidated Statement of Cash Flows in our Quarterly Report on Form 10-Q for the period ending June 30, 2009 we show in the table below (i) the beginning cash balance at March 31, 2009 and the ending cash balance at June 30, 2009, which are GAAP amounts, and (ii) the components of sources and uses of cash organized in a manner consistent with the way management analyzes them. The presentation of our sources and uses of cash for the second quarter of 2009 is derived by aggregating and netting all items within our GAAP Consolidated Statement of Cash Flows that were attributable to the second quarter of 2009.
 
 
   
Three Months Ended
  
(In Millions)
  
June 30, 2009
  
Beginning Cash Balance at 3/31/09
   $ 333  
Business cash flows:
        
Cash flow from investments
     64  
Asset management fees
     1  
Operating expenses
     (8 )
Interest expense on long-term debt
     (2 )
Total Business Cash Flows
     55  
Other sources and uses:
        
Proceeds from asset sales
     57  
Proceeds from equity issuance
     238  
Changes in working capital
     4  
Acquisitions
     (334 )
Dividends paid
     (16 )
Total Other Uses
     (51 )
         
Net Sources of Cash
     4  
Ending Cash Balance at 6/30/09
   $ 337  
 
11