FOR IMMEDIATE RELEASE
CONTACTS:       Mike McMahon
Redwood Trust, Inc.
 (415) 384-3805
Thursday, February 25, 2010
  
 
Martin S. Hughes
 
(415) 389-7373
 
REDWOOD TRUST REPORTS FOURTH QUARTER 2009 RESULTS
 
MILL VALLEY, CA – February 25, 2010 – Redwood Trust, Inc. (NYSE:RWT) today reported net income for the fourth quarter of 2009 of $40 million, or $0.51 per share. This compares to net income of $27 million, or $0.34 per share, for the third quarter of 2009, and a net loss of $116 million, or $3.46 per share, for the fourth quarter of 2008.
 
For 2009, Redwood reported net income of $39 million, or $0.55 per share.  This compares to a net loss of $444 million, or $13.46 per share, in 2008. 
 
Redwood also reported that it incurred an estimated taxable loss of $34 million, or $0.44 per share, during the fourth quarter of 2009.  This compares to an estimated taxable loss of $23 million, or $0.30 per share, for the third quarter of 2009, and a taxable loss of $13 million, or $0.39 per share, for the fourth quarter of 2008.
 
For 2009, Redwood estimated that it incurred a taxable loss of $83 million, or $1.12 per share.  This compares to taxable income of $19 million, or $0.58 per share, in 2008. 
 
GAAP book value at year end was $12.50 per share, an increase of $0.82 per share, or 7%, from the end of the third quarter of 2009, and management’s estimate of non-GAAP economic value increased to $13.03 per share, up $0.75 per share, or 6%, from the end of the third quarter of 2009.
 
During the fourth quarter of 2009, Redwood acquired $68 million of residential securities, sold $66 million of securities, and ended the quarter with a securities portfolio of $781 million, up from $751 million at the end of the third quarter of 2009. Redwood ended the fourth quarter with $243 million of cash.
 
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 Annual Report on Form 10-K for the year ended December 31, 2009 which was filed today with the Securities and Exchange Commission.  Redwood’s Form 10-K is available on its website at www.redwoodtrust.com.
 
The accounting concepts and disclosures relating to Redwood’s financial statements are complex. Today, The Redwood Review was released covering the fourth quarter of 2009. The Redwood Review is an additional publication that provides information about Redwood. The Redwood Review is available 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, 2009, 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.
 
1
 
REDWOOD TRUST, INC.

Consolidated Income Statements
  
Fourth
    
Third
    
Second
    
First
    
Fourth
  
($ in millions, except share data)
  
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
   
2009
    
2009
    
2009
    
2009
    
2008
  
                               
Interest income
   $ 62     $ 70     $ 74     $ 82     $ 123  
Interest expense
     (21 )     (25 )     (39 )     (47 )     (99 )
Net interest income
     41       45       35       35       24  
Provision for loan losses
     (9 )     (10 )     (15 )     (15 )     (19 )
Market valuation adjustments, net
     (4 )     (11 )     (29 )     (44 )     (111 )
Net interest income (loss) after provision and
     28       24       (9 )     (24 )     (106 )
market valuation adjustments
                                        
Operating expenses
     (11 )     (15 )     (10 )     (11 )     (14 )
Realized gains, net
     20       18       25       -       6  
Benefit from (provision for) income taxes
     3       -       1       -       (4 )
Net income (loss)
     40       27       7       (35 )     (118 )
Less: Net (loss) income attributable to noncontrolling interest
     -       -       -       -       (2 )
GAAP net income (loss)
   $ 40     $ 27     $ 7     $ (35 )   $ (116 )
                                         
                                         
Average diluted shares (thousands)
     78,101       78,223       66,446       53,632       33,366  
Diluted earnings (loss) per share
   $ 0.51     $ 0.34     $ 0.10     $ (0.65 )   $ (3.46 )
Regular dividends declared per common share
   $ 0.25     $ 0.25     $ 0.25     $ 0.25     $ 0.75  
 
2

REDWOOD TRUST, INC.

Consolidated Income Statements
  
Twelve Months Ended
  
($ in millions, except share data)
  
December 31,
  
   
2009
    
2008
  
             
Interest income
   $ 288     $ 568  
Interest expense
     (132 )     (417 )
Net interest income
     156       151  
Provision for loan losses
     (49 )     (55 )
Market valuation adjustments, net
     (88 )     (493 )
Net interest income (loss) after provision and
     19       (397 )
market valuation adjustments
                
Operating expenses
     (47 )     (61 )
Realized gains, net
     63       9  
Benefit from income taxes
     4       3  
Net income (loss)
     39       (446 )
Less: Net (loss) income attributable to noncontrolling interest
     -       (2 )
GAAP net income (loss)
   $ 39     $ (444 )
                 
Average diluted shares (thousands)
     68,991       33,023  
Diluted earnings (loss) per share
   $ 0.55     $ (13.46 )
Regular dividends declared per common share
   $ 1.00     $ 3.00  
 
3

REDWOOD TRUST, INC.

Consolidated Balance Sheets
  
31-Dec
    
30-Sep
    
30-Jun
    
31-Mar
    
31-Dec
  
($ in millions, except share data)
  
2009
    
2009
    
2009
    
2009
    
2008
  
                               
Real estate loans
   $ 3,740     $ 3,831     $ 3,966     $ 4,541     $ 4,659  
Real estate securities, at fair value:
                                        
Trading securities
     278       275       253       264       340  
Available-for-sale securities
     810       787       551       255       233  
Other investments
     20       29       47       62       78  
Cash and cash equivalents
     243       217       337       333       126  
Other assets
     162       146       131       126       146  
Total Assets
   $ 5,253     $ 5,285     $ 5,285     $ 5,581     $ 5,582  
                                         
Short-term debt
   $ -     $ -     $ -     $ -     $ -  
Other liabilities
     181       203       185       198       252  
Asset-backed securities issued - Sequoia entities
     3,645       3,728       3,843       4,418       4,508  
Asset-backed securities issued - Acacia entities
     298       288       287       291       347  
Long-term debt
     140       140       150       150       150  
Total liabilities
     4,264       4,359       4,465       5,057       5,257  
                                         
Stockholders’ equity
     972       907       802       506       302  
Noncontrolling interest
     17       19       18       18       23  
Total equity
     989       926       820       524       325  
                                         
Total Liabilities and Equity
   $ 5,253     $ 5,285     $ 5,285     $ 5,581     $ 5,582  
                                         
Shares outstanding at period end (thousands)
     77,737       77,669       77,503       60,228       33,471  
GAAP book value per share
   $ 12.50     $ 11.68     $ 10.35     $ 8.40     $ 9.02  
 
4
 
REDWOOD TRUST, INC.

Consolidating Income Statement
                              
Three Months Ended December 31, 2009
                              
($ in millions)
        
The
    
Securitization
    
Intercompany
    
Redwood
  
   
Redwood
    
Fund
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 19     $ 1     $ 38     $ -     $ 58  
Net discount (premium) amortization
     6       1       (3 )     -       4  
Total interest income
     25       2       35       -       62  
Management fees
     1       -       -       (1 )     -  
Interest expense
     (1 )     -       (20 )     -       (21 )
Net interest income
     25       2       15       (1 )     41  
Provision for loan losses
     -       -       (9 )     -       (9 )
Market valuation adjustments, net
     (2 )     (1 )     (1 )     -       (4 )
Net interest income after provision
     23       1       5       (1 )     28  
and market valuation adjustments
                                        
Operating expenses
     (11 )     (1 )     -       1       (11 )
Realized gains, net
     20       -       -       -       20  
Income from the Fund and Securitization Entities
     5       -       -       (5 )     -  
Noncontrolling interest
     -       -       -       -       -  
Benefit from income taxes
     3       -       -       -       3  
Net income
   $ 40     $ -     $ 5     $ (5 )   $ 40  
 
Consolidating Income Statement
                              
Year Ended December 31, 2009
                              
($ in millions)
        
The
    
Securitization
    
Intercompany
    
Redwood
  
   
Redwood
    
Fund
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 85     $ -     $ 194     $ (1 )   $ 278  
Net discount (premium) amortization
     13       8       (11 )     -       10  
Total interest income
     98       8       183       (1 )     288  
Management fees
     3       -       -       (3 )     -  
Interest expense
     (5 )     -       (130 )     3       (132 )
Net interest income
     96       8       53       (1 )     156  
Provision for loan losses
     -       -       (49 )     -       (49 )
Market valuation adjustments, net
     (69 )     (7 )     (12 )     -       (88 )
Net interest (loss) income after provision
     27       1       (8 )     (1 )     19  
and market valuation adjustments
                                        
Operating expenses
     (46 )     (1 )     (1 )     1       (47 )
Realized gains, net
     44       -       19       -       63  
Income from the Fund and Securitization Entities
     10       -       -       (10 )     -  
Noncontrolling interest
     -       -       -       -       -  
Benefit from income taxes
     4       -       -       -       4  
Net income
   $ 39     $ -     $ 10     $ (10 )   $ 39  
 
5
 
REDWOOD TRUST, INC.

Consolidating Balance Sheet
                              
December 31, 2009
                              
($ in millions)
        
The
    
Securitization
    
Intercompany
    
Redwood
  
   
Redwood
    
Fund
    
Entities
    
Adjustments
    
Consolidated
  
                               
Real estate loans
   $ 3     $ -     $ 3,737     $ -     $ 3,740  
Real estate securities, at fair value:
                                        
Trading securities
     8       -       270       -       278  
Available-for-sale securities
     773       37       -       -       810  
Other investments
     -       -       20       -       20  
Cash and cash equivalents
     243       -       -       -       243  
Investment in the Fund
     22       -       -       (22 )     -  
Investment in Securitization Entities
     75       -       -       (75 )     -  
Total earning assets
     1,124       37       4,027       (97 )     5,091  
Other assets
     21       5       136       -       162  
Total Assets
   $ 1,145     $ 42     $ 4,163     $ (97 )   $ 5,253  
                                         
Short-term debt
   $ -     $ -     $ -     $ -     $ -  
Other liabilities
     33       3       145       -       181  
Asset-backed securities issued
     -       -       3,943       -       3,943  
Long-term debt
     140       -       -       -       140  
Total liabilities
     173       3       4,088       -       4,264  
                                         
Stockholders’ equity
     972       22       75       (97 )     972  
Noncontrolling interest
     -       17       -       -       17  
Total equity
     972       39       75       (97 )     989  
                                         
Total Liabilities and Equity
   $ 1,145     $ 42     $ 4,163     $ (97 )   $ 5,253  
 
6
 
REDWOOD TRUST, INC.

GAAP / Tax Differences
                  
Three Months Ended December 31, 2009
                  
(In Millions, Except per Share Data)
    
 
Tax
  
GAAP
  
Differences
  
Interest income
   $ 39     $ 62     $ (23 )
Interest expense
     (1 )     (21 )     20  
Net Interest Income
     38       41       (3 )
Provision for loan losses
     -       (9 )     9  
Realized credit losses
     (54 )     -       (54 )
Market valuation adjustments, net
     -       (4 )     4  
Operating expenses
     (18 )     (11 )     (7 )
Realized gains, net
     -       20       (20 )
Benefit from income taxes
     -       3       (3 )
Less: Net loss attributable to noncontrolling interest
     -       -       -  
Net (Loss) Income
   $ (34 )   $ 40     $ (74 )
                         
Estimated income (loss) per share
   $ (0.44 )   $ 0.51     $ (0.95 )
 
GAAP / Tax Differences
                        
Three Months Ended September 30, 2009
                        
(In Millions, Except per Share Data)
    
 
Tax
  
GAAP
  
Differences
  
Interest income
   $ 54     $ 70     $ (16 )
Interest expense
     (1 )     (25 )     24  
Net Interest Income
     53       45       8  
Provision for loan losses
     -       (10 )     10  
Realized credit losses
     (67 )     -       (67 )
Market valuation adjustments, net
     -       (11 )     11  
Operating expenses
     (16 )     (15 )     (1 )
Realized gains, net
     7       18       (11 )
Benefit from income taxes
     -       -       -  
Less: Net loss attributable to noncontrolling interest
     -       -       -  
Net (Loss) Income
   $ (23 )   $ 27     $ (50 )
                         
Estimated income (loss) per share
   $ (0.30 )   $ 0.34     $ (0.64 )
 
GAAP / Tax Differences
                        
Three Months Ended December 31, 2008
                        
(In Millions, Except per Share Data)
    
 
Tax
  
GAAP
  
Differences
  
Interest income
   $ 44     $ 123     $ (79 )
Interest expense
     (4 )     (99 )     95  
Net Interest Income
     40       24       16  
Provision for loan losses
     -       (19 )     19  
Realized credit losses
     (40 )     -       (40 )
Market valuation adjustments, net
     -       (111 )     111  
Operating expenses
     (13 )     (14 )     1  
Realized gains, net
     -       6       (6 )
Provision for income taxes
     -       (4 )     4  
Less: Net loss attributable to noncontrolling interest
     -       (2 )     2  
Net Loss
   $ (13 )   $ (116 )   $ 103  
                         
Estimated loss per share
   $ (0.39 )   $ (3.46 )   $ 3.07  
 
7
 
REDWOOD TRUST, INC.

GAAP / Tax Differences
                  
Year Ended December 31, 2009
                  
(In Millions, Except per Share Data)
      
   
Tax
    
GAAP
    
Differences
  
Interest income
   $ 193     $ 288     $ (95 )
Interest expense
     (5 )     (132 )     127  
Net Interest Income
     188       156       32  
Provision for loan losses
     -       (49 )     49  
Realized credit losses
     (224 )     -       (224 )
Market valuation adjustments, net
     -       (88 )     88  
Operating expenses
     (54 )     (47 )     (7 )
Realized gains, net
     7       63       (56 )
Benefit from income taxes
     -       4       (4 )
Less: Net loss attributable to noncontrolling interest
     -       -       -  
Net (Loss) Income
   $ (83 )   $ 39     $ (122 )
                         
Estimated income (loss) per share
   $ (1.12 )   $ 0.55     $ (1.67 )

GAAP / Tax Differences
                  
Year Ended December 31, 2008
                  
(In Millions, Except per Share Data)
      
   
Tax
    
GAAP
    
Differences
  
Interest income
   $ 202     $ 568     $ (366 )
Interest expense
     (8 )     (417 )     409  
Net Interest Income
     194       151       43  
Provision for loan losses
     -       (55 )     55  
Realized credit losses
     (117 )     -       (117 )
Market valuation adjustments, net
     -       (493 )     493  
Operating expenses
     (58 )     (61 )     3  
Realized gains, net
     -       9       (9 )
Benefit from income taxes
     -       3       (3 )
Less: Net loss attributable to noncontrolling interest
     -       (2 )     2  
Net Income (Loss)
   $ 19     $ (444 )   $ 463  
                         
Estimated income (loss) per share
   $ 0.58     $ (13.46 )   $ 14.04  
 
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, 2009
  
                 
Management's
  
   
GAAP
            
Estimate of Non-GAAP
  
   
As Reported
    
Adjustments
      
Economic Value
  
Cash and cash equivalents
   $ 243     $         $ 243  
Real estate securities at Redwood
                          
   Residential
     771                 771  
   Commercial
     9                 9  
   CDO
     1                 1  
Subtotal real estate securities
     781                 781  
Investments in the Fund
     22                 22  
Investments in Sequoia entities
     72       (29 )   (a)     43  
Investments in Acacia entities (b)
     3                 3  
Total cash, securities and investments
     1,121                 1,092  
Long-term debt
     (140 )     71  
 (c)
     (69 )
Other assets/liabilities, net (d)
     (9 )               (9 )
Stockholders' Equity
   $ 972               $ 1,014  
Book Value Per Share
   $ 12.50               $ 13.03  
 
(a) Our investments in Sequoia entities consist predominately of AAA-rated interest-only securities, and to a smaller extent, senior and subordinate securities issued by Sequoia entities. We calculated the $43 million estimate of economic value for these securities using the same valuation process that we follow to fair value our other real estate securities. In contrast, the $72 million of GAAP carrying value of these investments represents the difference between the assets and liabilities owned by the Sequoia entities.

(b) The fair value of our investments in Acacia entities was $3 million and the GAAP carrying value was $3 million. These investments consist of equity and securities in the Acacia entities we sponsor, which have minimal value, as well as management fees we receive from Acacia entities. We valued the management fees at $3 million.

 (c) At December 31, 2009, we had $140 million of long-term debt outstanding at an interest rate of LIBOR plus 225 basis points due in 2037. We calculated the $69 million estimate of economic value of this debt using the same valuation process used to fair value our other financial assets and liabilities.

(d) Other assets/liabilities, net are comprised of $3 million of real estate loans, $6 million of accrued interest receivable, and $15 million of other assets, less dividends payable of $19 million and accrued interest and other liabilities of $14 million.
 
9

REDWOOD TRUST, INC.

Sources and Uses of Cash*
      
(In Millions)
      
   
Three Months Ended
  
   
December 31, 2009
  
Beginning cash balance
   $ 217  
Business cash flow:
        
  Cash flow from investments
     68  
  Asset management fees
     1  
  Operating expenses
     (11 )
  Interest expense on long-term debt
     (1 )
Total business cash flow
     57  
Other sources and uses:
        
  Proceeds from asset sales
     66  
  Changes in working capital
     (9 )
  Acquisitions
     (68 )
  Dividends
     (20 )
Net other uses
     (31 )
Net sources of cash
     26  
Ending cash balance
   $ 243  
 
*The sources and uses of cash in the table above are derived from our GAAP Consolidated Statements of Cash Flow by aggregating and netting cash flow in a manner consistent with the way management analyzes it. This table excludes the gross cash flow generated by our Sequoia and Acacia securitization entities and the Fund (cash flow that is not available to Redwood), but does include the cash flow distributed to Redwood as a result of our investments in these entities. The beginning and ending cash balances presented in the table above are GAAP amounts.
 
10