FOR IMMEDIATE RELEASE
CONTACTS:  Diane Merdian
Redwood Trust, Inc.
(415) 380-2331
Thursday, February 24, 2011
  
 
Mike McMahon
 
(415) 384-3805

REDWOOD TRUST REPORTS FOURTH QUARTER 2010 RESULTS
 
MILL VALLEY, CA – February 24, 2011 – Redwood Trust, Inc. (NYSE:RWT) today reported net income for the fourth quarter of 2010 of $15 million, or $0.18 per fully diluted share. This compares to net income of $20 million, or $0.25 per fully diluted share, for the third quarter of 2010, and net income of $40 million, or $0.51 per fully diluted share, for the fourth quarter of 2009.
 
Redwood also reported an estimated taxable loss of $6 million, or $0.07 per share, during the fourth quarter of 2010.  This compares to an estimated taxable loss of $9 million, or $0.11 per share, for the third quarter of 2010, and a taxable loss of $35 million, or $0.44 per share, for the fourth quarter of 2009.
 
At December 31, 2010, GAAP book value was $13.63 per share, an increase of $0.61 per share from September 30, 2010, and management’s estimate of non-GAAP economic value was $14.31 per share, an increase of $0.58 per share from September 30, 2010.
 
During the fourth quarter of 2010, Redwood acquired $195 million of residential mortgage loans, originated $30 million of commercial loans, and acquired $26 million of residential securities.  At December 31, 2010, cash and cash equivalents totaled $47 million.
 
Please see the tables that follow for reconciliations between GAAP and non-GAAP metrics.   Additional information on Redwood’s business, financial results, and on non-GAAP metrics is available in The Redwood Review, which is available on Redwood’s website at www.redwoodtrust.com, and in Redwood’s most recent Annual Report on Form 10-K, which is filed with the Securities and Exchange Commission, and which is also available on Redwood’s website at www.redwoodtrust.com.
 
The accounting concepts and disclosures relating to Redwood’s financial statements are complex. The Redwood Review is an additional publication that provides information about Redwood. Today, The Redwood Review was released covering the fourth quarter of 2010 and is available on our website.
 
Cautionary Statement:  This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our most recent Annual Report on Form 10-K under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the Securities and Exchange Commission (SEC), including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 
1
 

REDWOOD TRUST, INC.

Consolidated Income Statements
  
Fourth
    
Third
    
Second
    
First
    
Fourth
  
($ in millions, except share data)
  
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
 
  
2010
    
2010
    
2010
    
2010
    
2009
  
                               
Interest income
   $ 56     $ 59     $ 56     $ 59     $ 62  
Interest expense
     (22 )     (24 )     (21 )     (18 )     (21 )
Net interest income
     34       35       35       41       41  
Provision for loan losses
     (8 )     (2 )     (4 )     (10 )     (9 )
Market valuation adjustments, net
     -       (2 )     (7 )     (11 )     (4 )
Net interest income after provision and market valuation adjustments
     26       31       24       20       28  
Operating expenses
     (13 )     (12 )     (11 )     (18 )     (11 )
Realized gains on sales and calls, net
     2       2       16       44       20  
Benefit from income taxes
     -       -       -       -       3  
Net income
     15       21       29       46       40  
Less: Net income attributable to noncontrolling interest
     -       1       -       -       -  
GAAP Net Income
   $ 15     $ 20     $ 29     $ 46     $ 40  
                                         
Average diluted shares (thousands)
     78,944       78,961       78,852       78,542       78,101  
Diluted earnings per share
   $ 0.18     $ 0.25     $ 0.35     $ 0.58     $ 0.51  
Regular dividends declared per common share
   $ 0.25     $ 0.25     $ 0.25     $ 0.25     $ 0.25  

 
2
 

REDWOOD TRUST, INC.

Consolidated Income Statements
  
Twelve Months Ended
  
($ in millions, except share data)
  
December 31,
  
 
  
2010
    
2009
  
             
Interest income
   $ 230     $ 288  
Interest expense
     (85 )     (132 )
Net interest income
     145       156  
Provision for loan losses
     (24 )     (49 )
Market valuation adjustments, net
     (20 )     (88 )
Net interest income after provision and market valuation adjustments
     101       19  
Operating expenses
     (54 )     (47 )
Realized gains on sales and calls, net
     64       63  
Benefit from income taxes
     -       4  
Net income
     111       39  
Less: Net income attributable to noncontrolling interest
     1       -  
GAAP Net Income
   $ 110     $ 39  
                 
Average diluted shares (thousands)
     78,811       68,991  
Diluted earnings per share
   $ 1.36     $ 0.55  
Regular dividends declared per common share
   $ 1.00     $ 1.00  

 
3
 

REDWOOD TRUST, INC.

Consolidated Balance Sheets
  
31-Dec
    
30-Sep
    
30-Jun
    
31-Mar
    
31-Dec
  
($ in millions, except share data)
  
2010
    
2010
    
2010
    
2010
    
2009
  
                               
Real estate loans
   $ 3,847     $ 3,752     $ 3,810     $ 3,662     $ 3,740  
Real estate securities, at fair value:
                                        
Trading securities
     330       310       276       289       278  
Available-for-sale securities
     825       798       741       847       810  
Other investments
     -       -       4       11       20  
Cash and cash equivalents
     47       189       288       242       243  
Other assets
     95       113       100       144       162  
Total Assets
   $ 5,144     $ 5,162     $ 5,219     $ 5,195     $ 5,253  
                                         
Short-term debt
   $ 44     $ -     $ -     $ -     $ -  
Other liabilities
     123       163       142       207       181  
Asset-backed securities issued - Sequoia entities
     3,458       3,568       3,681       3,557       3,645  
Asset-backed securities issued - Acacia entities
     303       264       253       280       298  
Long-term debt
     140       140       140       140       140  
Total liabilities
     4,068       4,135       4,216       4,184       4,264  
                                         
Stockholders’ equity
     1,065       1,016       991       998       972  
Noncontrolling interest
     11       11       12       13       17  
Total equity
     1,076       1,027       1,003       1,011       989  
                                         
Total Liabilities and Equity
   $ 5,144     $ 5,162     $ 5,219     $ 5,195     $ 5,253  
                                         
Shares outstanding at period end (thousands)
     78,125       77,984       77,908       77,751       77,737  
GAAP book value per share
   $ 13.63     $ 13.02     $ 12.71     $ 12.84     $ 12.50  

 
4
 

REDWOOD TRUST, INC.
 
Consolidating Income Statement
                              
Three Months Ended December 31, 2010
              
Other
              
($ in millions)
  
Redwood
    
New
    
Consolidated
    
Intercompany
    
Redwood
  
 
  
(Parent)
    
Sequoia
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 16     $ 2     $ 27     $ -     $ 45  
Net discount (premium) amortization
     12       -       (1 )     -       11  
Total interest income
     28       2       26       -       56  
Interest expense
     (3 )     (1 )     (18 )     -       (22 )
Net interest income
     25       1       8       -       34  
Provision for loan losses
     -       -       (8 )     -       (8 )
Market valuation adjustments, net
     2       -       (2 )     -       -  
Net interest income after provision and market valuation adjustments
     27       1       (2 )     -       26  
Operating expenses
     (13 )     -       -       -       (13 )
Realized gains on sales and calls, net
     1       -       1       -       2  
Income from New Sequoia
     1       -       -       (1 )     -  
Loss from Other Consolidated Entities
     (1 )     -       -       1       -  
Net Income (Loss)
   $ 15     $ 1     $ (1 )   $ -     $ 15  

Consolidating Income Statement
                              
Twelve Months Ended December 31, 2010
              
Other
              
($ in millions)
  
Redwood
    
New
    
Consolidated
    
Intercompany
    
Redwood
  
 
  
(Parent)
    
Sequoia
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 66     $ 5     $ 120     $ -     $ 191  
Net discount (premium) amortization
     41       1       (3 )     -       39  
Total interest income
     107       6       117       -       230  
Interest expense
     (8 )     (5 )     (72 )     -       (85 )
Net interest income
     99       1       45       -       145  
Provision for loan losses
     -       -       (24 )     -       (24 )
Market valuation adjustments, net
     (4 )     -       (16 )     -       (20 )
Net interest income after provision and market valuation adjustments
     95       1       5       -       101  
Operating expenses
     (53 )     -       (1 )     -       (54 )
Realized gains on sales and calls, net
     56       -       8       -       64  
Income from New Sequoia
     1       -       -       (1 )     -  
Income from Other Consolidated Entities
     11       -       -       (11 )     -  
Noncontrolling interest
     -       -       (1 )     -       (1 )
Net Income
   $ 110     $ 1     $ 11     $ (12 )   $ 110  

 
5
 

REDWOOD TRUST, INC.
 
Consolidating Balance Sheet
                              
December 31, 2010
              
Other
              
($ in millions)
  
Redwood
    
New Sequoia
    
Consolidated
    
Intercompany
    
Redwood
  
 
  
(Parent)
          
Entities
    
Adjustments
    
Consolidated
  
                               
Real estate loans
   $ 285     $ 145     $ 3,417     $ -     $ 3,847  
Real estate securities, at fair value:
                                        
Trading securities
     21       -       309       -       330  
Available-for-sale securities
     802       -       23       -       825  
Other investments
     -       -       -       -       -  
Cash and cash equivalents
     47       -       -       -       47  
Investment in New Sequoia
     24       -       -       (24 )     -  
Investment in Other Consolidated Entities
     81       -       -       (81 )     -  
Total earning assets
     1,260       145       3,749       (105 )     5,049  
Other assets
     35       2       58       -       95  
Total Assets
   $ 1,295     $ 147     $ 3,807     $ (105 )   $ 5,144  
                                         
Short-term debt
   $ 44     $ -     $ -     $ -     $ 44  
Other liabilities
     46       -       77       -       123  
Asset-backed securities issued
     -       123       3,638       -       3,761  
Long-term debt
     140       -       -       -       140  
Total liabilities
     230       123       3,715       -       4,068  
                                         
Stockholders’ equity
     1,065       24       81       (105 )     1,065  
Noncontrolling interest
     -       -       11       -       11  
Total equity
     1,065       24       92       (105 )     1,076  
                                         
Total Liabilities and Equity
   $ 1,295     $ 147     $ 3,807     $ (105 )   $ 5,144  

 
6
 

REDWOOD TRUST, INC.

Tax / GAAP Differences
Three Months Ended December 31, 2010
($ in millions, except per share data)
 
    Tax     GAAP     Differences  
Interest income
   $ 28     $ 56     $ (28 )
Interest expense
     (2 )     (22 )     20  
Net Interest Income
     26       34       (8 )
Provision for loan losses
     -       (8 )     8  
Realized credit losses
     (20 )     -       (20 )
Market valuation adjustments, net
     -       -       -  
Operating expenses
     (12 )     (13 )     1  
Realized gains on sales and calls, net
     -       2       (2 )
Provision for income taxes
     -       -       -  
Less: Net income attributable to noncontrolling interest
     -       -       -  
Net (Loss) Income
   $ (6 )   $ 15     $ (21 )
                         
Estimated (loss) income per share
   $ (0.07 )   $ 0.19     $ (0.26 )

 
7
 

REDWOOD TRUST, INC.

Tax / GAAP Differences
Twelve Months Ended December 31, 2010
($ in millions, except per share data)
 
   
Tax
    
GAAP
    
Differences
  
Interest income
   $ 137     $ 230     $ (93 )
Interest expense
     (9 )     (85 )     76  
Net Interest Income
     128       145       (17 )
Provision for loan losses
     -       (24 )     24  
Realized credit losses
     (100 )     -       (100 )
Market valuation adjustments, net
     -       (20 )     20  
Operating expenses
     (44 )     (54 )     10  
Realized gains on sales and calls, net
     -       64       (64 )
Provision for income taxes
     -       -       -  
Less: Net income attributable to noncontrolling interest
     -       1       (1 )
Net (Loss) Income
   $ (16 )   $ 110     $ (126 )
                         
Estimated (loss) income per share
   $ (0.20 )   $ 1.36     $ (1.56 )

 
8
 

REDWOOD TRUST, INC.

Book Value Per Share and Management’s Estimate of Non-GAAP Economic Value Per Share*
($ in millions, except per share data)

    
December 31, 2010
  
               
Management’s
  
   
GAAP
          
Estimate of Non-GAAP
  
   
As Reported
    
Adjustments
    
Economic Value
  
Cash and cash equivalents
   $ 47     $       $ 47  
                         
Real estate loans at Redwood
                        
Residential
     255               255  
Commercial
     30               30  
Subtotal real estate loans
     285               285  
Real estate securities at Redwood
                        
Residential
     814               814  
Commercial
     8               8  
CDO
     1               1  
Subtotal real estate securities
     823               823  
Investments in the Fund
     14               14  
Investments in Sequoia entities
     87       (9 )(a)     78  
Investments in Acacia entities
     4       (3 )(b)     1  
Other assets (d)
     35               35  
Total assets
     1,295               1,283  
                         
Short-term debt
     (44 )             (44 )
Long-term debt
     (140 )     65 (c)     (75 )
Other liabilities (d)
     (46 )             (46 )
Stockholders' Equity
   $ 1,065             $ 1,118  
Book Value Per Share
   $ 13.63             $ 14.31  
 
(a) Our investments in Sequoia entities consist of interest-only securities and senior and subordinate securities issued by Sequoia entities. We calculated the $78 million estimate of non-GAAP economic value for these securities using the same valuation process that we follow to fair value our other real estate securities. In contrast, the $87 million GAAP carrying value of these investments represents the difference between the assets and liabilities owned by the Sequoia entities.
 
(b) The GAAP carrying value of our investments in Acacia entities was $4 million and management’s estimate of the non-GAAP economic value of those investments was $1 million, which primarily reflects the present value of the management fees we expect to earn from these entities. The equity interests and securities we own in the Acacia entities have minimal value.
 
(c) At December 31, 2010, we had $140 million of long-term debt outstanding with a stated interest rate of LIBOR plus 225 basis points due in 2037. During the first half of 2010, through interest rate hedging arrangements, we effectively fixed the interest rate on this long-term debt at 6.75% (excluding issuance costs). We calculated the $75 million estimate of non-GAAP economic value of this long-term debt based on its stated interest rate using the same valuation process used to fair value our other financial assets and liabilities.
 
(d) Other assets are comprised of $5 million of accrued interest receivable and $30 million of other assets. Other liabilities are comprised of dividends payable of $20 million and accrued interest and other liabilities of $26 million.
 
* This table presents supplemental components of book value at December 31, 2010, as reported under GAAP and as estimated by us using fair values for our investments and long-term debt. We show our investments in the Fund, and the Sequoia and Acacia entities as separate line items to highlight our specific ownership interests, as the underlying assets and liabilities of these entities are legally not ours. Our non-GAAP estimated economic value is calculated using bid-side asset marks (or estimated bid-side values) and offer-side marks for our financial liabilities (or estimated offered-side values), as required to determine fair value under GAAP. For additional information to consider when reviewing this table, please see “Factors Affecting Management’s Estimate of Economic Value” in our most recent Annual Report on Form 10-K.

 
9
 

REDWOOD TRUST, INC.
 
Sources and Uses of Cash (a)
      
($ in millions)
      
   
Three Months Ended
  
    
December 31, 2010
    
September 30, 2010
  
Beginning cash balance
   $ 189     $ 288  
Sources of cash
                
Loans at Redwood
     6       -  
Securities at Redwood - principal and interest
                
Residential senior
     42       36  
Residential Re-REMIC
     2       2  
Residential subordinate
     8       9  
Commercial and CDO
     1       2  
Securities at Redwood - sales
     -       -  
Investments in Consolidated Entities
     11       11  
Short-term debt financing
     44       -  
Derivative margin returned, net
     26       -  
Changes in working capital
     3       -  
Total sources of cash
     143       60  
                 
Uses of cash
                
Acquisitions of residential loans
     (195 )     (62 )
Origination of commercial loans
     (30 )     -  
Acquisitions of securities (b)
     (29 )     (48 )
Cash operating expenses
     (9 )     (9 )
Interest expense on long-term debt
     (2 )     (2 )
Derivative margin posted, net
     -       (17 )
Dividends
     (20 )     (20 )
Changes in working capital
     -       (1 )
Total uses of cash
     (285 )     (159 )
                 
Net uses of cash
     (142 )     (99 )
Ending Cash Balance
   $ 47     $ 189  
 
(a) The sources and uses of cash in the table above are derived from our GAAP Consolidated Statements of Cash Flows by aggregating and netting cash flow in a manner consistent with the way management analyzes it. This table excludes the gross cash flow generated by our Sequoia and Acacia securitization entities and the Fund (cash flow that is not available to Redwood), but does include the cash flow distributed to Redwood as a result of our investments in these entities. The beginning and ending cash balances presented in the table above are GAAP amounts.
 
(b) Total acquisitions of securities in the fourth quarter of 2010 were $26 million. Securities acquisitions of $3 million made in the third quarter that did not settle until early October are also reflected in this table.
 
 
10