FOR IMMEDIATE RELEASE
CONTACTS:  Mike McMahon
Redwood Trust, Inc.
(415) 384-3805
Wednesday, August 4, 2010
  
 
Diane Merdian
 
(415) 380-2331

REDWOOD TRUST REPORTS SECOND QUARTER 2010 RESULTS

MILL VALLEY, CA – August 4, 2010 – Redwood Trust, Inc. (NYSE:RWT) today reported net income for the second quarter of 2010 of $29 million, or $0.35 per fully diluted share. This compares to net income of $47 million, or $0.58 per fully diluted share, for the first quarter of 2010, and net income of $7 million, or $0.10 per fully diluted share, for the second quarter of 2009.

Redwood also reported an estimated taxable loss of $3 million, or $0.03 per share, during the second quarter of 2010.  This compares to estimated taxable income of $1 million, or $0.01 per share, for the first quarter of 2010, and a taxable loss of $12 million, or $0.16 per share, for the second quarter of 2009.
 
At June 30, 2010, GAAP book value was $12.71 per share, a decrease of $0.13 per share from March 31, 2010, and management’s estimate of non-GAAP economic value was $13.37 per share, an increase of $0.05 per share from March 31, 2010.

During the second quarter of 2010, Redwood acquired $23 million of residential securities and sold $116 million of securities.   Redwood ended the quarter with a total securities portfolio of $734 million, down from $840 million at the beginning of the quarter, and with $288 million of cash and cash equivalents.

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

The accounting concepts and disclosures relating to Redwood’s financial statements are complex. The Redwood Review is an additional publication that provides information about Redwood. Today, The Redwood Review was released covering the second quarter of 2010 and is available on our website.
 
Cautionary Statement:  This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2009, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the Securities and Exchange Commission (SEC), including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

1
 
REDWOOD TRUST, INC.
 

Consolidated Income Statements
Second
    
First
    
Fourth
    
Third
    
Second
  
($ in millions, except share data)
Quarter
    
Quarter
    
Quarter
    
Quarter
    
Quarter
  
 
2010
    
2010
    
2009
    
2009
    
2009
  
                               
Interest income
   $ 56     $ 58     $ 62     $ 70     $ 74  
Interest expense
     (21 )     (18 )     (21 )     (25 )     (39 )
Net interest income
     35       40       41       45       35  
Provision for loan losses
     (4 )     (9 )     (9 )     (10 )     (15 )
Market valuation adjustments, net
     (7 )     (11 )     (4 )     (11 )     (29 )
Net interest income (loss) after provision and
     24       20       28       24       (9 )
market valuation adjustments
                                        
Operating expenses
     (11 )     (17 )     (11 )     (15 )     (10 )
Realized gains, net
     16       44       20       18       25  
Benefit from income taxes
     -       -       3       -       1  
Net income
     29       47       40       27       7  
Less: Net income attributable to noncontrolling interest
     -       -       -       -       -  
GAAP net income
   $ 29     $ 47     $ 40     $ 27     $ 7  
                                         
Average diluted shares (thousands)
     78,852       78,542       78,101       78,223       66,446  
Diluted earnings per share
   $ 0.35     $ 0.58     $ 0.51     $ 0.34     $ 0.10  
Regular dividends declared per common share
   $ 0.25     $ 0.25     $ 0.25     $ 0.25     $ 0.25  
 
2
 
REDWOOD TRUST, INC.
 

Consolidated Income Statement
Six Months Ended
  
($ in millions, except share data)
June 30,
  
 
2010
    
2009
  
             
Interest income
   $ 115     $ 156  
Interest expense
     (39 )     (87 )
Net interest income
     76       69  
Provision for loan losses
     (14 )     (31 )
Market valuation adjustments, net
     (18 )     (72 )
Net interest loss after provision and
     44       (34 )
market valuation adjustments
                
Operating expenses
     (29 )     (22 )
Realized gains, net
     60       26  
Benefit from income taxes
     -       1  
Net income (loss)
     75       (29 )
Less: Net (loss) income attributable to noncontrolling interest
     -       (1 )
GAAP net income (loss)
   $ 75     $ (28 )
                 
Average diluted shares (thousands)
     78,662       59,138  
Diluted earnings (loss) per share
   $ 0.94     $ (0.48 )
Regular dividends declared per common share
   $ 0.50     $ 0.50  
 
3
 
REDWOOD TRUST, INC.
 
 
Consolidated Balance Sheets
30-Jun
    
31-Mar
    
31-Dec
    
30-Sep
    
30-Jun
  
($ in millions, except share data)
2010
    
2010
    
2009
    
2009
    
2009
  
                               
Real estate loans
   $ 3,810     $ 3,662     $ 3,740     $ 3,831     $ 3,966  
Real estate securities, at fair value:
                                        
Trading securities
     276       289       278       275       253  
Available-for-sale securities
     741       847       810       787       551  
Other investments
     4       11       20       29       47  
Cash and cash equivalents
     288       242       243       217       337  
Other assets
     100       144       162       146       131  
Total Assets
   $ 5,219     $ 5,195     $ 5,253     $ 5,285     $ 5,285  
                                         
Short-term debt
   $ -     $ -     $ -     $ -     $ -  
Other liabilities
     142       207       181       203       185  
Asset-backed securities issued - Sequoia entities
     3,681       3,557       3,645       3,728       3,843  
Asset-backed securities issued - Acacia entities
     253       280       298       288       287  
Long-term debt
     140       140       140       140       150  
Total liabilities
     4,216       4,184       4,264       4,359       4,465  
                                         
Stockholders’ equity
     991       998       972       907       802  
Noncontrolling interest
     12       13       17       19       18  
Total equity
     1,003       1,011       989       926       820  
                                         
Total Liabilities and Equity
   $ 5,219     $ 5,195     $ 5,253     $ 5,285     $ 5,285  
                                         
Shares outstanding at period end (thousands)
     77,908       77,751       77,737       77,669       77,503  
GAAP book value per share
   $ 12.71     $ 12.84     $ 12.50     $ 11.68     $ 10.35  
 
4
 
REDWOOD TRUST, INC.
 

Consolidating Income Statement
                              
Three Months Ended June 30, 2010
              
Other
              
($ in millions)
  
Redwood
    
2010
    
Consolidated
    
Intercompany
    
Redwood
  
   
Parent
    
Sequoia
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 16     $ 1     $ 30     $ -     $ 47  
Net discount (premium) amortization
     10       -       (1 )     -       9  
Total interest income
     26       1       29       -       56  
Management fees
     -       -       -       -       -  
Interest expense
     (2 )     (1 )     (18 )     -       (21 )
Net interest income
     24       -       11       -       35  
Provision for loan losses
     -       -       (4 )     -       (4 )
Market valuation adjustments, net
     (4 )     -       (3 )     -       (7 )
Net interest income after provision
     20       -       4       -       24  
and market valuation adjustments
                                        
Operating expenses
     (11 )     -       -       -       (11 )
Realized gains, net
     16       -       -       -       16  
Income from Other Consolidated Entities
     4       -       -       (4 )     -  
Noncontrolling interest
     -       -       -       -       -  
Benefit from income taxes
     -       -       -       -       -  
Net income
   $ 29     $ -     $ 4     $ (4 )   $ 29  
 
 
 
Consolidating Income Statement
                              
Six Months Ended June 30, 2010
              
Other
              
($ in millions)
  
Redwood
    
2010
    
Consolidated
    
Intercompany
    
Redwood
  
   
Parent
    
Sequoia
    
Entities
    
Adjustments
    
Consolidated
  
                               
Interest income
   $ 33     $ 1     $ 63     $ 1     $ 98  
Net discount (premium) amortization
     19       -       (2 )     -       17  
Total interest income
     52       1       61       1       115  
Management fees
     1       -       -       (1 )     -  
Interest expense
     (3 )     (1 )     (35 )     -       (39 )
Net interest income
     50       -       26       -       76  
Provision for loan losses
     -       -       (14 )     -       (14 )
Market valuation adjustments, net
     (7 )     -       (12 )     -       (19 )
Net interest income after provision
     43       -       -       -       43  
and market valuation adjustments
                                        
Operating expenses
     (28 )     -       -       -       (28 )
Realized gains, net
     54       -       6       -       60  
Income from Other Consolidated Entities
     6       -       -       (6 )     -  
Noncontrolling interest
     -       -       -       -       -  
Benefit from income taxes
     -       -       -       -       -  
Net income
   $ 75     $ -     $ 6     $ (6 )   $ 75  
 
5

REDWOOD TRUST, INC.
 
 
Consolidating Balance Sheet
                              
June 30, 2010
              
Other
              
($ in millions)
  
Redwood
    
2010
    
Consolidated
    
Intercompany
    
Redwood
  
   
Parent
    
Sequoia
    
Entities
    
Adjustments
    
Consolidated
  
                               
Real estate loans
   $ 3     $ 226     $ 3,581     $ -     $ 3,810  
Real estate securities, at fair value:
                                        
Trading securities
     18       -       258       -       276  
Available-for-sale securities
     716       -       52       (27 )     741  
Other investments
     -       -       4       -       4  
Cash and cash equivalents
     288       -       -       -       288  
Investment in 2010 Sequoia
     28       -       -       (28 )     -  
Investment in Other Consolidated Entities
     91       -       -       (91 )     -  
Total earning assets
     1,144       226       3,895       (146 )     5,119  
Other assets
     41       3       56       -       100  
Total Assets
   $ 1,185     $ 229     $ 3,951     $ (146 )   $ 5,219  
                                         
Short-term debt
   $ -     $ -     $ -     $ -     $ -  
Other liabilities
     54       1       87       -       142  
Asset-backed securities issued
     -       200       3,761       (27 )     3,934  
Long-term debt
     140       -       -       -       140  
Total liabilities
     194       201       3,848       (27 )     4,216  
                                         
Stockholders’ equity
     991       28       91       (119 )     991  
Noncontrolling interest
     -       -       12       -       12  
Total equity
     991       28       103       (119 )     1,003  
                                         
Total Liabilities and Equity
   $ 1,185     $ 229     $ 3,951     $ (146 )   $ 5,219  

6
 
REDWOOD TRUST, INC.
 
 
Tax / GAAP Differences
                
Three Months Ended June 30, 2010*
                
(In Millions, Except per Share Data)
                
 
Tax
    
GAAP
    
Differences
  
Interest income
 $ 34     $ 56     $ (22 )
Interest expense
   (3 )     (21 )     18  
Net Interest Income
   31       35       (4 )
Provision for loan losses
   -       (4 )     4  
Realized credit losses
   (24 )     -       (24 )
Market valuation adjustments, net
   -       (7 )     7  
Operating expenses
   (10 )     (11 )     1  
Realized gains, net
   -       16       (16 )
Benefit from income taxes
   -       -       -  
Less: Net loss attributable to noncontrolling interest
   -       -       -  
Net (Loss) Income
 $ (3 )   $ 29     $ (32 )
                       
Estimated (loss) income per share
 $ (0.03 )   $ 0.35     $ (0.38 )
 
* Reconciliation of GAAP income for prior quarters is provided in filings for those quarters.
 
7
 
REDWOOD TRUST, INC.
 
 
Tax / GAAP Differences
                
Six Months Ended June 30, 2010*
                
(In Millions, Except per Share Data)
                
 
Tax
    
GAAP
    
Differences
  
Interest income
 $ 72     $ 115     $ (43 )
Interest expense
   (3 )     (39 )     36  
Net Interest Income
   69       76       (7 )
Provision for loan losses
   -       (14 )     14  
Realized credit losses
   (49 )     -       (49 )
Market valuation adjustments, net
   -       (18 )     18  
Operating expenses
   (21 )     (29 )     8  
Realized gains, net
   -       60       (60 )
Benefit from income taxes
   -       -       -  
Less: Net loss attributable to noncontrolling interest
   -       -       -  
Net (Loss) Income
 $ (1 )   $ 75     $ (76 )
                       
Estimated (loss) income per share
 $ (0.02 )   $ 0.94     $ (0.96 )
 
* Reconciliation of GAAP income for prior quarters is provided in filings for those quarters.
 
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)
   
June 30, 2010
  
               
Management's
  
   
GAAP
          
Estimate of Non-GAAP
  
   
As Reported
    
Adjustments
    
Economic Value
  
Cash and cash equivalents
   $ 288     $       $ 288  
Real estate securities at Redwood
                        
Residential
     725               725  
Commercial
     8               8  
CDO
     1               1  
Subtotal real estate securities
     734               734  
Investments in the Fund
     15               15  
Investments in Sequoia entities
     101       (25 ) (a)     76  
Investments in Acacia entities (b)
     3       (2 )     1  
Total cash, securities and investments
     1,141               1,114  
Long-term debt
     (140 )     78   (c)     (62 )
Other assets/liabilities, net (d)
     (10 )             (10 )
Stockholders' Equity
   $ 991             $ 1,042  
                         
Book Value Per Share
   $ 12.71             $ 13.37  

(a) Our investments in Sequoia entities consist of interest-only securities and senior and subordinate securities issued by Sequoia entities. We calculated the $76 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 $101 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 $3 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 June 30, 2010, we had $140 million of long-term debt outstanding with a stated interest rate of LIBOR plus 225 basis points due in 2037. During the first six months of 2010, through interest rate hedging arrangements, we effectively fixed the interest rate on this long-term debt at 6.75%. We calculated the $62 million estimate of non-GAAP economic value of this long-term debt based on its stated interest rate using the same valuation process used to fair value our other financial assets and liabilities. As a result of declining interest rates during the second quarter of 2010, the fair value of the interest rate hedges related to this long-term debt declined by $20 million, as reflected in shareholders' equity on our balance sheet.

(d) Other assets/liabilities, net are comprised of $3 million of real estate loans, $4 million of accrued interest receivable, and $37 million of other assets, less dividends payable of $19 million and accrued interest and other liabilities of $35 million (which includes $1 million for pending acquisitions).

* This table presents supplemental components of book value at June 30, 2010, 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 non-GAAP estimated economic value is calculated using bid-side asset marks (or estimated bid-side values) and offer-side marks for our financial liabilities (or estimated offered-side values), as required to determine fair value under GAAP. For additional information to consider when reviewing this table, please see “Factors Affecting Management’s Estimate of Economic Value” in our Quarterly Report on Form 10-Q for the three months ended June 30, 2010.

9
 
REDWOOD TRUST, INC.

 
Sources and Uses of Cash*
            
(In Millions)
            
   
Three Months Ended
  
   
June 30, 2010
    
March 31, 2010
  
Beginning cash balance
   $ 242     $ 243  
Business cash flow:
                
Cash flow from investments (including sales proceeds)
     177       193  
Asset management fees
     -       -  
Operating expenses
     (10 )     (15 )
Interest expense on long-term debt
     (1 )     (1 )
Total business cash flow
     166       177  
Other sources and uses:
                
Investment in 2010 Sequoia
     (28 )     0  
Changes in working capital
     3       (2 )
Acquisitions**
     (55 )     (156 )
Derivative margins posted, net
     (20 )     0  
Dividends
     (20 )     (20 )
Net other uses
     (120 )     (178 )
                 
Net sources (uses) of cash
     46       (1 )
Ending cash balance
   $ 288     $ 242  

* 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.

** Total acquisitions in the second quarter of 2010 were $23 million, $1 million which are not reflected in this table because they did not settle until early July. Also, $33 million of acquisitions made in the first quarter that did not settle until early April are reflected in this table.
 
10