<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-26436
REDWOOD TRUST, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 68-0329422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
591 REDWOOD HIGHWAY, SUITE 3100
MILL VALLEY, CALIFORNIA 94941
(Address of principal executive offices) (Zip Code)
(415) 389-7373
(Registrant's 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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the last practicable date.
Class B Preferred Stock ($.01 par value) 909,518 as of August 10, 1998
Common Stock ($.01 par value) 13,768,056 as of August 10, 1998
================================================================================
<PAGE> 2
REDWOOD TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997..........3
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and June 30, 1997.......................................4
Consolidated Statements of Stockholders' Equity for the three and six
months ended June 30, 1998..................................................5
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 1998 and June 30, 1997.......................................6
Notes to Consolidated Financial Statements..................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................66
Item 2. Changes in Securities...........................................................66
Item 3. Defaults Upon Senior Securities.................................................66
Item 4. Submission of Matters to a Vote of Security Holders.............................66
Item 5. Other Information...............................................................67
Item 6. Exhibits and Reports on Form 8-K................................................67
SIGNATURES ..............................................................................68
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Mortgage assets:
Mortgage loans, net $ 2,223,348 $ 1,551,826
Mortgage securities, net 1,570,842 1,814,796
----------- -----------
3,794,190 3,366,622
Cash and cash equivalents:
Unrestricted 11,354 24,892
Restricted 21,560 24,657
----------- -----------
32,914 49,549
Accrued interest receivable 21,554 23,119
Interest rate agreements 2,418 2,100
Investment in RWT Holdings, Inc. 9,319 --
Due from RWT Holdings, Inc. 831 --
Other assets 5,701 2,807
----------- -----------
$ 3,866,927 $ 3,444,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term debt $ 1,936,158 $ 1,914,525
Long-term debt, net 1,593,344 1,172,801
Accrued interest payable 13,675 14,476
Accrued expenses and other liabilities 2,192 2,172
Dividends payable 687 5,686
----------- -----------
3,546,056 3,109,660
----------- -----------
Commitments and contingencies (See Note 12)
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01 per share; Class B 9.74% Cumulative
Convertible 909,518 shares authorized, issued and outstanding
($28,882 aggregate liquidation preference) 26,736 26,736
Common stock, par value $0.01 per share;
49,090,482 shares authorized;
14,078,933 and 14,284,657 issued and outstanding 141 143
Additional paid-in capital 320,687 324,555
Accumulated other comprehensive income (18,017) (10,071)
Dividends in excess of net income (8,676) (6,826)
----------- -----------
320,871 334,537
----------- -----------
$ 3,866,927 $ 3,444,197
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage loans $ 29,905 $ 13,020 $ 55,715 $ 22,875
Mortgage securities 23,423 36,223 51,090 64,774
Cash and investments 455 266 839 428
------------ ----------- ------------ -----------
53,783 49,509 107,644 88,077
INTEREST EXPENSE
Short-term debt 33,282 38,958 61,285 67,858
Long-term debt 16,887 -- 34,981 --
------------ ----------- ------------ -----------
50,169 38,958 96,266 67,858
Net interest rate agreements expense 1,624 839 3,002 1,434
------------ ----------- ------------ -----------
NET INTEREST INCOME 1,990 9,712 8,376 18,785
Provision for credit losses 763 776 1,364 1,471
------------ ----------- ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,227 8,936 7,012 17,314
Equity in earnings of RWT Holdings, Inc. (581) -- (581) --
Write-down of mortgage securities -- -- (729) --
Net gain on sale transactions -- -- 6 --
Other income 139 -- 139 --
------------ ----------- ------------ -----------
NET REVENUES 785 8,936 5,847 17,314
Operating expenses 589 1,215 2,514 2,382
------------ ----------- ------------ -----------
NET INCOME 196 7,721 3,333 14,932
Less cash dividends on Class B preferred stock 687 687 1,374 1,442
------------ ----------- ------------ -----------
NET INCOME(LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (491) $ 7,034 $ 1,959 $ 13,490
============ =========== ============ ===========
NET INCOME(LOSS) PER SHARE
Basic $ (0.03) $ 0.54 $ 0.14 $ 1.10
Diluted $ (0.03) $ 0.52 $ 0.14 $ 1.05
Weighted average shares of common stock and
common stock equivalents:
Basic 14,106,828 12,997,566 14,115,342 12,305,215
Diluted 14,255,858 13,470,930 14,368,616 12,800,960
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Class B Accumulated
Preferred stock Common stock Additional other Dividends in
------------------------------------------- paid-in comprehensive excess of
Shares Amount Shares Amount capital income net income Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 909,518 $26,736 14,284,657 $ 143 $ 324,555 $(10,071) $(6,826) $ 334,537
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- -- -- 3,137 3,137
Net unrealized loss on
assets available-for-sale -- -- -- -- -- (3,014) -- (3,014)
---------
Total comprehensive income -- -- -- -- -- -- -- 123
Repurchase of common stock -- -- (214,100) (2) (4,273) -- -- (4,275)
Dividends declared:
Class B preferred -- -- -- -- -- -- (687) (687)
Common -- -- -- -- -- -- -- 0
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 909,518 $26,736 14,070,557 $ 141 $ 320,282 $(13,085) $(4,376) $ 329,698
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- -- -- 196 196
Net unrealized loss on
assets available-for-sale -- -- -- -- -- (4,932) -- (4,932)
---------
Total comprehensive income -- -- -- -- -- -- -- (4,736)
Issuance of common stock -- -- 68,676 1 1,587 -- -- 1,588
Repurchase of common stock -- -- (60,300) (1) (1,182) -- -- (1,183)
Dividends declared:
Class B preferred -- -- -- -- -- -- (687) (687)
Common -- -- -- -- -- -- (3,809) (3,809)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 909,518 $26,736 14,078,933 $ 141 $ 320,687 $(18,017) $(8,676) $ 320,871
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 196 $ 7,721 $ 3,333 $ 14,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of mortgage asset premium and discount, net 11,020 5,109 19,178 8,927
Amortization of deferred bond issuance costs 523 -- 925 --
Amortization of long-term debt premium (413) -- (657) --
Depreciation and amortization 60 29 112 55
Amortization of interest rate agreements 1,525 756 2,867 1,067
Provision for credit losses on mortgage assets 763 776 1,364 1,471
Equity in earnings of RWT Holdings, Inc. 581 -- 581 --
Write-down of mortgage securities -- -- 729 --
Net gain on sale transactions -- -- (6) --
(Increase) decrease in accrued interest receivable 2,332 (6,567) 1,565 (10,281)
(Increase) decrease in other assets (2,235) (930) (3,006) 266
Increase (decrease) in accrued interest payable 1,463 3,191 (801) 4,093
Increase in accrued expenses and other liabilities 395 481 20 982
--------- --------- --------- -----------
Net cash provided by operating activities 16,210 10,566 26,204 21,512
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted cash 4,174 -- 3,097 --
Investment in RWT Holdings, Inc., net of dividends received -- -- (9,900) --
Advances to RWT Holdings, Inc., net of cash payments (831) -- (831) --
Purchases of mortgage loans (525,510) (470,474) (967,472) (721,339)
Purchases of mortgage securities (69,326) (492,416) (231,167) (868,626)
Proceeds from sales of mortgage securities -- -- 9,296 --
Principal payments on mortgage loans 169,766 64,283 288,472 109,529
Principal payments on mortgage securities 255,526 135,662 442,931 263,778
Purchases of interest rate agreements (1,127) (5,110) (2,024) (7,101)
--------- --------- --------- -----------
Net cash used in investing activities (167,328) (768,055) (467,598) (1,223,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments on) short-term debt (351,860) 729,505 21,633 1,149,681
Proceeds from issuance of long-term debt 635,193 -- 635,193 --
Repayments on long-term debt (123,238) -- (214,918) --
Net proceeds from issuance of common stock 1,588 52,323 1,588 84,090
Repurchases of common stock (1,183) -- (5,458) --
Dividends paid (4,496) (7,899) (10,182) (13,167)
--------- --------- --------- -----------
Net cash provided by financing activities 156,004 773,929 427,856 1,220,604
Net increase (decrease) in cash and cash equivalents 4,886 16,440 (13,538) 18,357
Cash and cash equivalents at beginning of period 6,468 12,985 24,892 11,068
--------- --------- --------- -----------
Cash and cash equivalents at end of period $ 11,354 $ 29,425 $ 11,354 $ 29,425
========= ========= ========= ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 48,818 $ 35,923 $ 97,237 $ 63,991
========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1. THE COMPANY
Redwood Trust, Inc. ("Redwood Trust") was incorporated in Maryland on April 11,
1994 and commenced operations on August 19, 1994. During 1997, Redwood Trust
formed Sequoia Mortgage Funding Corporation ("Sequoia"), a special-purpose
finance subsidiary. Redwood Trust acquired an equity interest in RWT Holdings,
Inc. ("RWT Holdings"), a non-REIT, taxable affiliate of Redwood Trust, during
the first quarter of 1998. For financial reporting purposes, references to the
"Company" mean Redwood Trust, Sequoia and the equity interest in RWT Holdings.
The Company acquires and manages real estate mortgage assets ("Mortgage Assets")
which may be acquired as whole loans ("Mortgage Loans") or as mortgage
securities representing interests in or obligations backed by pools of mortgage
loans ("Mortgage Securities"). The Company currently acquires Mortgage Assets
that are secured by single-family real estate properties throughout the United
States. The Company utilizes both debt and equity to finance its acquisitions.
The Company may also use other securitization techniques to enhance the value
and liquidity of the Company's Mortgage Assets and may sell Mortgage Assets from
time to time.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Redwood Trust and
Sequoia. Substantially all of the assets of Sequoia are pledged or subordinated
to support long-term debt in the form of collateralized mortgage bonds
("Long-Term Debt") and are not available for the satisfaction of general claims
of the Company. The Company's exposure to loss on the assets pledged as
collateral is limited to its net investment, as the Long-Term Debt is
non-recourse to the Company. All significant inter-company balances and
transactions with Sequoia have been eliminated in the consolidation of the
Company.
During March 1998, the Company acquired an equity interest in RWT Holdings,
which acquires, accumulates and sells Mortgage Loans. The Company owns all of
the preferred stock and has a non-voting, 99% economic interest in RWT Holdings.
As the Company does not own the voting common stock of RWT Holdings or control
RWT Holdings, its investment in RWT Holdings is accounted for under the equity
method. Under this method, original equity investments in RWT Holdings are
recorded at cost and adjusted by the Company's share of earnings or losses and
decreased by dividends received.
Certain amounts for prior periods have been reclassified to conform with the
1998 presentation.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code (the "Code") and the corresponding provisions of
State law. In order to qualify as a REIT, the Company must annually distribute
at least 95% of its taxable income to shareholders and meet certain other
requirements. If these requirements are met, the Company generally will not be
subject to Federal or state income taxation at the corporate level with respect
to the taxable income it distributes to its shareholders. Because the Company
believes it meets the REIT requirements and also intends to distribute all of
its taxable income, no provision has been made for income taxes in the
accompanying consolidated financial statements.
7
<PAGE> 8
MORTGAGE ASSETS
The Company's Mortgage Assets consist of Mortgage Securities and Mortgage Loans.
Interest income is accrued based on the outstanding principal amount of the
Mortgage Assets and their contractual terms. Discounts and premiums relating to
Mortgage Assets are amortized into interest income over the lives of the
Mortgage Assets using methods that approximate the effective yield method. Gains
or losses on the sale of Mortgage Assets are based on the specific
identification method.
Mortgage Loans
Mortgage Loans are carried at their unpaid principal balance, net of unamortized
discount or premium and specific credit reserves established for such assets.
Mortgage Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires the Company to
classify its Mortgage Securities as either trading investments,
available-for-sale investments or held-to-maturity investments. Although the
Company generally intends to hold most of its Mortgage Securities until
maturity, it may, from time to time, sell any of its Mortgage Securities as part
of its overall management of its balance sheet. Accordingly, to maintain
flexibility, the Company currently classifies all of its Mortgage Securities as
available-for-sale. All assets classified as available-for-sale are reported at
fair value. Current period unrealized gains and losses are excluded from net
income and reported as a component of Comprehensive Income in stockholders'
equity with cumulative unrealized gains and losses classified as Accumulated
Other Comprehensive Income in stockholders' equity.
Unrealized losses on Mortgage Securities that are considered
other-than-temporary, as measured by the amount of decline in fair value
attributable to factors other-than-temporary, are recognized in income and the
carrying value of the Mortgage Security is adjusted. Other-than-temporary
unrealized losses are based on management's assessment of various factors
affecting the expected cash flow from the Mortgage Securities, including an
other-than-temporary deterioration of the credit quality of the underlying
mortgages and/or the credit protection available to the related mortgage pool
and a significant change in the prepayment characteristics of the underlying
collateral.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less. The carrying amount of cash
equivalents approximates their fair value.
INTEREST RATE AGREEMENTS
The Company utilizes various types of Interest Rate Agreements to hedge the
interest rate and liquidity risks inherent in its investment and financing
strategies.
SFAS No. 119, Disclosure about Derivative Financial Instruments, requires the
Company to provide certain disclosures concerning its derivative instruments
according to a set of prescribed guidelines. The nature of the Company's
investment and financing strategies exposes the Company to interest rate risk.
As part of its asset/liability management activities, the Company uses interest
rate options, interest rate swaps and interest rate futures (collectively
"Interest Rate Agreements") to hedge exposures or modify the interest rate
characteristics of related balance sheet items. Currently, the Company enters
into all Interest Rate Agreements as hedges. Under the Company's hedging policy,
a specific portfolio of assets and liabilities with similar economic
characteristics such as a low life strike, variable interest rate based on a
market-sensitive index, similar expected prepayment rate behavior and similar
periodic caps, is identified. The hedge instruments are chosen as the ones
probable of substantially reducing the interest rate risk being hedged, and a
high degree of correlation is maintained on an on-going basis. These hedge
instruments are intended to reduce the interest rate risk being hedged by
providing income to offset potential reduced net interest income or by
protecting against market value fluctuations on the
8
<PAGE> 9
hedged assets or liabilities under certain interest rate scenarios. The Company
periodically evaluates the effectiveness of these hedges under various interest
rate scenarios.
Interest Rate Agreements that are hedging available-for-sale Mortgage Securities
are carried at fair value with unrealized gains and losses reported as a
component of Accumulated Other Comprehensive Income in stockholders' equity,
consistent with the reporting of unrealized gains and losses on the related
securities. Similarly, Interest Rate Agreements that are used to hedge Mortgage
Loans, Short-Term Debt or Long-Term Debt are carried at amortized cost.
Net premiums on interest rate option agreements are amortized as a component of
net interest income over the effective period of the interest rate option using
the effective interest method. The income and/or expense related to interest
rate option and swap agreements is recognized on an accrual basis. Realized
gains and losses from the settlement or early termination of Interest Rate
Agreements are deferred and amortized into net interest income over the
remaining term of the original Interest Rate Agreement, or, if shorter, over the
remaining term of the associated hedged asset or liability, as adjusted for
estimated future principal repayments. In the event that a hedged asset or
liability is sold or extinguished, any related hedging gains or losses would be
recognized as an adjustment to the gain or loss on the disposition of the
related asset or liability.
Unrealized losses on Interest Rate Agreements that are considered
other-than-temporary are recognized in income and the carrying value of the
Interest Rate Agreement is adjusted. The other-than-temporary decline is
measured as the amount of the decline in fair value attributable to factors that
are other-than-temporary. Other-than-temporary unrealized losses are based on
management's assessment of various factors affecting the Interest Rate
Agreements, for example, a serious deterioration of the ability of the
counterparty to perform under the terms of the Interest Rate Agreement.
DEBT
Short-Term and Long-Term Debt are carried at their unpaid principal balances,
net of any unamortized discount or premium and any unamortized deferred bond
issuance costs. The amortization of any discount or premium is recognized as an
adjustment to interest expense using the effective interest method based on the
maturity schedule of the related borrowings. Bond issuance costs incurred in
connection with the issuance of Long-Term Debt are deferred and amortized over
the estimated lives of the Long-Term Debt using the interest method adjusted for
the effects of prepayments.
NET INCOME PER SHARE
Net income per share for the three and six months ended June 30, 1998 and 1997
is shown in accordance with SFAS No. 128, Earnings Per Share, which was
effective for fiscal years ended after December 15, 1997 and requires
restatement of prior period earnings per share ("EPS"). Basic net income per
share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the diluted net income available to
common stockholders by the weighted average number of common shares and common
equivalent shares outstanding during the period. The common equivalent shares
are calculated using the treasury stock method, which assumes that all dilutive
common stock equivalents are exercised and the funds generated by the exercise
are used to buy back outstanding common stock at the average market price during
the reporting period.
The following tables provide reconciliations of the numerators and denominators
of the basic and diluted net income per share computations for the three and six
months ended June 30, 1998 and 1997.
9
<PAGE> 10
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings per share--
Net income $ 196 $ 7,721 $ 3,333 $ 14,932
Cash dividends on Class B preferred stock (687) (687) (1,374) (1,442)
------------ ------------ ------------ ------------
Basic and Diluted EPS - Income available
to common stockholders (491) 7,034 1,959 13,490
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per share--
Weighted average number of common shares
outstanding during the period 14,106,828 12,997,566 14,115,342 12,305,215
Net effect of dilutive stock options 149,030 291,228 253,274 274,793
Net effect of dilutive stock warrants(a) 0 182,137 0 220,952
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-- 14,255,858 13,470,930 14,368,616 12,800,960
============ ============ ============ ============
Net earnings per share--basic $ (0.03) $ 0.54 $ 0.14 $ 1.10
============ ============ ============ ============
Net earnings per share--diluted $ (0.03) $ 0.52 $ 0.14 $ 1.05
============ ============ ============ ============
</TABLE>
(a) The Stock warrants expired on December 31, 1997.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires the Company to classify
items of "other comprehensive income", such as unrealized gains and losses on
assets available-for-sale, by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. In accordance with SFAS No. 130, current period unrealized gains and
losses on assets available-for-sale are reported as a component of Comprehensive
Income on the Statement of Stockholders' Equity with cumulative unrealized gains
and losses classified as Accumulated Other Comprehensive Income in stockholders'
equity. As of June 30, 1998 and December 31, 1997, the only component of
Accumulated Other Comprehensive Income was unrealized gains and losses on assets
available-for-sale.
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates. The primary estimates inherent in the
accompanying consolidated financial statements are discussed below.
Fair Value. The Company uses estimates in establishing fair value for its assets
available-for-sale. Management bases its fair value estimates primarily on third
party bid price indications, such as bid indications provided by dealers who
make markets in these assets and asset valuations made by collateralized
lenders, when such indications are available. Estimates of fair value for all
remaining assets available-for-sale are based primarily on management's
judgment. However, the fair value reported reflects estimates and may not
necessarily be indicative of the amounts the Company could realize in a current
market exchange. The fair value of all on- and off-balance sheet financial
instruments is presented in Notes 3, 6 and 10.
Allowance for Credit Losses. An allowance for credit losses is maintained at a
level deemed appropriate by management to provide for known, future losses as
well as unidentified potential losses in its Mortgage Asset portfolio. The
allowance is based upon management's assessment of various factors affecting its
Mortgage
10
<PAGE> 11
Assets, including current and projected economic conditions, delinquency status
and credit protection. In determining the allowance for credit losses, the
Company's credit exposure is considered based on its credit risk position in the
mortgage pool. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which they
become known. The reserve is increased by provisions, which are charged to
income from operations. When a loan or portions of a loan are determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance. The Company's
actual credit losses may differ from those estimates used to establish the
allowance. Summary information regarding the Allowance for Credit Losses is
presented in Note 4.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities,
superseding and amending a number of existing standards. SFAS No. 133
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities measured at fair value. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. The impact on the Company of adopting SFAS No. 133 has not yet
been determined.
NOTE 3. MORTGAGE ASSETS
At June 30, 1998, Mortgage Assets consisted of the following:
<TABLE>
<CAPTION>
MORTGAGE SECURITIES
----------------------- MORTGAGE
(IN THOUSANDS) AGENCY NON-AGENCY LOANS TOTAL
-------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Assets, Gross $ 765,424 $ 788,772 $ 2,191,767 $ 3,745,963
Unamortized Discount (155) (10,495) 0 (10,650)
Unamortized Premium 26,293 13,205 35,660 75,158
--------- --------- ----------- -----------
Amortized Cost 791,562 791,482 2,227,427 3,810,471
Allowance for Credit Losses 0 (1,705) (4,079) (5,784)
Gross Unrealized Gains 711 1,118 0 1,829
Gross Unrealized Losses (8,552) (3,774) 0 (12,326)
--------- --------- ----------- -----------
Carrying Value $ 783,721 $ 787,121 $ 2,223,348 $ 3,794,190
========= ========= =========== ===========
</TABLE>
At December 31, 1997, Mortgage Assets consisted of the following:
<TABLE>
<CAPTION>
MORTGAGE SECURITIES
----------------------- MORTGAGE
(IN THOUSANDS) AGENCY NON-AGENCY LOANS TOTAL
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage Assets, Gross $ 953,937 $ 825,438 $ 1,519,837 $ 3,299,212
Unamortized Discount (174) (12,268) 0 (12,442)
Unamortized Premium 32,722 18,606 34,844 86,172
--------- --------- ----------- -----------
Amortized Cost 986,485 831,776 1,554,681 3,372,942
Allowance for Credit Losses 0 (2,076) (2,855) (4,931)
Gross Unrealized Gains 2,598 3,984 0 6,582
Gross Unrealized Losses (4,286) (3,685) 0 (7,971)
--------- --------- ----------- -----------
Carrying Value $ 984,797 $ 829,999 $ 1,551,826 $ 3,366,622
========= ========= =========== ===========
</TABLE>
11
<PAGE> 12
At June 30, 1998 and December 31, 1997, all investments in Mortgage Assets
consisted of interests in adjustable-rate mortgages or hybrid mortgages on
residential properties. The hybrid mortgages have an initial fixed coupon rate
of five to seven years followed by annual adjustments. Agency Mortgage
Securities ("Agency Securities") represent securitized interests in pools of
adjustable-rate mortgages from the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. The Agency Securities are guaranteed
as to principal and interest by these United States government-sponsored
entities. The original maturity of the majority of the Mortgage Assets is thirty
years; the actual maturity is subject to change based on the prepayments of the
underlying mortgage loans.
At June 30, 1998 and December 31, 1997, the average annualized effective yield
after taking into account the amortization expense due to prepayments on the
Mortgage Assets was 6.35% and 6.86%, respectively, based on the amortized cost
of the assets. The coupons on 69% of the adjustable-rate mortgage securities and
loans owned by the Company are limited by periodic caps (generally interest rate
adjustments are limited to no more than 1% every six months or 2% every year)
with the other 31% not limited by such periodic caps. Most of the coupons on the
adjustable-rate mortgage securities and loans owned by the Company are limited
by lifetime caps. At June 30, 1998 and December 31, 1997, the weighted average
lifetime cap was 12.10% and 12.08%, respectively.
During the first quarter of 1998, the Company sold Mortgage Securities with a
carrying value of $9.3 million. Proceeds and realized gains and losses on the
sales of Mortgage Securities for the three and six months ended June 30, 1998
are presented below. No such sales occurred for the three and six months ended
June 30, 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
<S> <C> <C>
Proceeds from sales of available-for-sale securities $0 $9,295
Available-for-sale securities gains $0 $ 6
Available-for-sale securities losses 0 0
-- ------
Net gain on sales of available-for-sale securities $0 $ 6
== ======
</TABLE>
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
The following table summarizes Allowance for Credit Losses activity for the
three and six months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,484 $ 2,833 $ 4,931 $ 2,180
Provision for credit losses 763 776 1,364 1,471
Charge-offs (463) (29) (511) (71)
------- ------- ------- -------
Balance at end of period $ 5,784 $ 3,580 $ 5,784 $ 3,580
======= ======= ======= =======
</TABLE>
The Allowance for Credit Losses is classified on the Consolidated Balance Sheets
as a component of Mortgage Assets.
NOTE 5. COLLATERAL FOR LONG-TERM DEBT
The Company has pledged collateral in order to secure the Long-Term Debt issued
in the form of collateralized mortgage bonds ("Bond Collateral"). This Bond
Collateral consists primarily of adjustable-rate and hybrid, conventional,
30-year mortgage loans secured by first liens on one- to four-family residential
properties. All Bond Collateral is pledged to secure repayment of the related
Long-Term Debt obligation. All principal and
12
<PAGE> 13
interest (less servicing and related fees) on the Bond Collateral is remitted to
a trustee and is available for payment on the Long-Term Debt obligation. The
Company's exposure to loss on the Bond Collateral is limited to its net
investment, as the Long-Term Debt is non-recourse to the Company. The Company
may also be exposed to losses from prepayments of the underlying loans to the
extent that the unamortized net premium on the loans exceeds the net unamortized
premium on the Long-Term Debt net of deferred bond issuance costs related to the
issuance of the Long-Term Debt.
The components of the Bond Collateral at June 30, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Mortgage loans $1,620,655 $1,191,487
Restricted cash and cash equivalents 21,560 24,657
Accrued interest receivable 6,612 7,401
---------- ----------
$1,648,827 $1,223,545
========== ==========
</TABLE>
For presentation purposes, the various components of the Bond Collateral
summarized above are reflected in their corresponding line items on the
Consolidated Balance Sheets.
NOTE 6. INTEREST RATE AGREEMENTS
The amortized cost and carrying value of the Company's Interest Rate Agreements
at June 30, 1998 and December 31, 1997 are summarized as follows:
<TABLE>
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Amortized Cost $ 9,938 $ 10,781
Gross Unrealized Gains 568 650
Gross Unrealized Losses (8,088) (9,331)
------- --------
Carrying Value $ 2,418 $ 2,100
======= ========
</TABLE>
The following table summarizes the aggregate notional amounts of all of the
Company's Interest Rate Agreements as well as the credit exposure related to
these instruments at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS CREDIT EXPOSURE (A)
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Interest Rate Options $4,742,700 $4,862,200 $ 0 $ 0
Interest Rate Swaps 535,000 473,000 10,134 12,392
Interest Rate Futures 482,600 58,000 3,519 46
---------- ---------- ------- -------
Total $5,760,300 $5,393,200 $13,653 $12,438
========== ========== ======= =======
</TABLE>
(a) Reflects the fair market value of all cash and collateral of the Company
held by counterparties.
Interest Rate Options, which include caps, floors, corridors, options on futures
and swaption collars (collectively, "Options"), are agreements which transfer,
modify or reduce interest rate risk in exchange for the payment of a premium
when the contract is initiated. Interest rate cap agreements provide cash flows
to the Company to the extent that a specific interest rate index exceeds a fixed
rate. Conversely, interest rate floor agreements produce cash flows to the
Company to the extent that the referenced interest rate index falls below the
agreed upon fixed rate. Corridors will cause the Company to incur a gain (loss)
to the extent that the yield of the specified index is below (above) the strike
rate at the time of the option expiration. The maximum gain or loss on a
corridor is established at the time of the transaction by establishing minimum
and maximum index rates. The Company will
13
<PAGE> 14
receive cash on the options on futures if the futures price exceeds (is below)
the call (put) option strike price at the expiration of the option. Swaption
collars will cause the Company to incur a gain (loss) should the index rate be
below (above) the strike rate as of the expiration date. The Company's credit
risk on the Options is limited to the amortized cost of the Options agreements.
Interest Rate Swaps ("Swaps") are agreements in which a series of interest rate
flows are exchanged over a prescribed period. The notional amount on which the
interest payments are based is not exchanged. Most of the Company's Swaps
involve the exchange of either fixed interest payments for floating interest
payments or the exchange of one floating interest payment for another floating
interest payment based on a different index. Most of the Swaps require that the
Company provide collateral, such as Mortgage Securities, to the counterparty.
Should the counterparty fail to return the collateral, the Company would be at
risk for the fair market value of that asset.
Interest Rate Futures ("Futures") are contracts for the delivery of securities
or cash in which the seller agrees to deliver on a specified future date, a
specified instrument (or the cash equivalent), at a specified price or yield.
Under these agreements, if the Company has sold (bought) the futures, the
Company will generally receive additional cash flows if interest rates rise
(fall). Conversely, the Company will generally pay additional cash flows if
interest rates fall (rise).
In general, the Company has incurred 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, the Company would not receive the cash to which it would otherwise be
entitled under the Interest Rate Agreement. In order to mitigate this risk, the
Company has only entered 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 the Treasury as a "primary
government dealer", ii) affiliates of "primary government dealers", or iii)
rated single A or higher. Furthermore, the Company has entered into Interest
Rate Agreements with several different counterparties in order to reduce the
risk of credit exposure to any one counterparty.
NOTE 7. INVESTMENT IN RWT HOLDINGS, INC.
The Company is entitled to 99% of the earnings or losses of RWT Holdings through
its ownership of all of the non-voting preferred stock of RWT Holdings. As such,
the Company records its investment in RWT Holdings using the equity method.
Under this method, original equity investments in RWT Holdings are recorded at
cost and adjusted by the Company's share of earnings or losses and decreased by
dividends received.
The Company incurs some of the operating expenses of RWT Holdings, including
personnel and related expenses, subject to full reimbursement by RWT Holdings.
As of June 30, 1998, amounts due to the Company from RWT Holdings for operating
expenses totaled $691,618.
RWT Holdings is a co-borrower under some of the Company's Short-Term Debt
agreements subject to the Company continuing to remain jointly and severally
liable for repayment. Accordingly, RWT Holdings pays the Company credit support
fees on borrowings subject to this arrangement. At June 30, 1998, amounts due to
the Company from RWT Holdings for credit support fees totaled $138,966.
Under a revolving credit facility arrangement, the Company may advance funds to
RWT Holdings in order to finance Mortgage Loan acquisitions. Such advances bear
interest at a rate of 3.5% over the London Interbank Offered Rate ("LIBOR"). At
June 30, 1998, there were no outstanding advances to RWT Holdings.
14
<PAGE> 15
Summarized financial information for RWT Holdings is presented below.
(IN THOUSANDS) BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
ASSETS
Cash and cash equivalents $ 10,216
Accrued interest receivable 16
Other assets 53
========
$ 10,285
========
LIABILITIES
Due to Redwood Trust, Inc. $ 831
Accrued expenses and other liabilities 41
--------
872
--------
STOCKHOLDERS' EQUITY
Preferred stock 9,900
Common stock --
Additional paid-in capital 100
Retained earnings (587)
--------
9,413
========
$ 10,285
========
</TABLE>
(IN THOUSANDS) STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, 1998
-------------
<S> <C>
INTEREST INCOME:
Mortgage loans $ 2,779
Cash and investments 57
-------
2,836
INTEREST EXPENSE:
Short-term debt 2,503
Credit support fees 139
Advances from Redwood Trust, Inc. 15
-------
2,657
-------
NET INTEREST INCOME 179
Net gain on sale transactions 22
-------
NET REVENUES 201
Operating expenses 788
=======
NET INCOME (LOSS) $ (587)
=======
</TABLE>
NOTE 8. SHORT-TERM DEBT
The Company has entered into reverse repurchase agreements and other forms of
collateralized short-term borrowings (collectively, "Short-Term Debt") to
finance acquisitions of a portion of its Mortgage Assets. This Short-Term Debt
is collateralized by a portion of the Company's Mortgage Assets.
At June 30, 1998, the Company had $1.9 billion of Short-Term Debt outstanding
with a weighted average borrowing rate of 5.88% and a weighted average remaining
maturity of 52 days. This debt was collateralized with $2.0 billion of Mortgage
Assets. At December 31, 1997, the Company had $1.9 billion of Short-Term Debt
outstanding with a weighted average borrowing rate of 6.00% and a weighted
average remaining maturity of 64 days. This debt was collateralized with $2.0
billion of Mortgage Assets.
15
<PAGE> 16
At June 30, 1998 and December 31, 1997, the Short-Term Debt had the following
remaining maturities:
<TABLE>
<CAPTION>
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Within 30 days $1,241,991 $ 823,545
30 to 90 days 403,931 533,543
Over 90 days 290,236 557,437
---------- ----------
Total Short-Term Debt $1,936,158 $1,914,525
========== ==========
</TABLE>
For the three and six months ended June 30, 1998, the average balance of
Short-Term Debt was $2.3 billion and $2.1 billion with a weighted average
interest cost of 5.88% and 5.83%, respectively. For the three and six months
ended June 30, 1997, the average balance of Short-Term Debt was $2.7 billion and
$2.4 billion with a weighted average interest cost of 5.86% and 5.75%,
respectively. The maximum balance outstanding during the six months ended June
30, 1998 and 1997 was $2.5 billion and $3.1 billion, respectively.
NOTE 9. LONG-TERM DEBT
Long-Term Debt in the form of collateralized mortgage bonds is secured by a
pledge of Bond Collateral. As required by the indentures relating to the
Long-Term Debt, the Bond Collateral is held in the custody of trustees. The
trustees collect principal and interest payments on the Bond Collateral and make
corresponding principal and interest payments on the Long-Term Debt. The
obligations under the Long-Term Debt are payable solely from the Bond Collateral
and are otherwise non-recourse to the Company.
Each series of Long-Term Debt consists of various classes of bonds at variable
rates of interest. The maturity of each class is directly affected by the rate
of principal prepayments on the related Bond Collateral. Each series is also
subject to redemption according to the specific terms of the respective
indentures. As a result, the actual maturity of any class of a Long-Term Debt
series is likely to occur earlier than its stated maturity.
The components of the Long-Term Debt at June 30, 1998 and December 31, 1997
along with selected other information are summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
----------- -----------
<S> <C> <C>
Long-Term Debt $ 1,591,079 $ 1,170,709
Unamortized premium on Long-Term Debt 6,970 5,795
Deferred bond issuance costs (4,705) (3,703)
----------- -----------
Total Long-Term Debt $ 1,593,344 $ 1,172,801
=========== ===========
Range of weighted-average interest rates, by series 6.04% to 6.61% 6.06% to 6.50%
Stated maturities 2017 - 2029 2024 - 2029
Number of series 3 2
</TABLE>
For the three and six months ended June 30, 1998, the average effective interest
cost for Long-Term Debt, as adjusted for the amortization of bond premium,
deferred bond issuance costs and other related expenses, was 6.45% and 6.44%,
respectively. At June 30, 1998 and December 31, 1997, interest payable on
Long-Term Debt was $5.4 million and $2.6 million, respectively, and is reflected
as a component of Accrued Interest Payable on the Consolidated Balance Sheets.
No such Long-Term Debt was outstanding during the three and six months ended
June 30, 1997.
16
<PAGE> 17
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at June 30, 1998 and December 31, 1997. SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced liquidation sale.
<TABLE>
<CAPTION>
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Assets
Mortgage Loans $2,223,348 $2,219,772 $1,551,826 $1,552,585
Mortgage Securities $1,570,842 $1,570,842 $1,814,796 $1,814,796
Interest Rate Agreements $2,418 ($123) $2,100 $1,522
Liabilities
Long-Term Debt $1,593,344 $1,591,961 $1,172,801 $1,172,938
</TABLE>
The carrying amounts of all other balance sheet accounts as reflected in the
financial statements approximate fair value because of the short-term nature of
these accounts.
NOTE 11. STOCKHOLDERS' EQUITY
CLASS B 9.74% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On August 8, 1996, the Company issued 1,006,250 shares of Class B Preferred
Stock ("Preferred Stock"). Each share of the Preferred Stock is convertible at
the option of the holder at any time into one share of Common Stock. After
September 30, 1999, the Company can either redeem or, under certain
circumstances, cause a conversion of the Preferred Stock. The Preferred Stock
pays a dividend equal to the greater of (i) $0.755 per quarter or (ii) an amount
equal to the quarterly dividend declared on the number of shares of the Common
Stock into which the Preferred Stock is convertible. The Preferred Stock ranks
senior to the Company's Common Stock as to the payment of dividends and
liquidation rights. The liquidation preference entitles the holders of the
Preferred Stock to receive $31.00 per share plus any accrued dividends before
any distribution is made on the Common Stock.
As of June 30, 1998 and December 31, 1997, 96,732 shares of the Preferred Stock
have been converted into 96,732 shares of the Company's Common Stock. At June
30, 1998 and December 31, 1997, there were 909,518 shares of the Preferred Stock
outstanding.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan for executive officers, employees
and non-employee directors (the "Plan"). The Plan authorizes the Board of
Directors (or a committee appointed by the 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 and limited stock appreciation
rights ("Awards") and dividend equivalent rights ("DERs") to such eligible
recipients other than non-employee directors. Non-employee directors are
automatically provided annual grants of NQSOs with DERs pursuant to a formula
under the Plan.
The number of shares of Common Stock available under the Plan for options and
Awards, subject to certain anti-dilution provisions, is 15% of the Company's
total outstanding shares of Common Stock. At June 30, 1998 and December 31,
1997, 846,781 and 1,158,404 shares of Common Stock, respectively, were available
for grant. Of the shares of Common Stock available for grant, no more than
500,000 shares of Common Stock shall be cumulatively available for grant as
ISOs. At June 30, 1998 and December 31, 1997, 369,315 and 354,265 ISOs had been
granted, respectively. 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. All stock options granted under the Plan
17
<PAGE> 18
vest no earlier than ratably over a four year period from the date of grant and
expire within ten years after the date of grant.
The Company's Plan permits certain stock options granted under the plan to
accrue stock DERs. For the three and six months ended June 30, 1998, the stock
DERs accrued on NQSOs that had a stock DER feature resulted in charges to
operating expenses of $1,994 and $55,222, respectively. For the three and six
months ended June 30, 1997, the stock DERs accrued on NQSOs that had a stock DER
feature resulted in charges to operating expenses of $122,944 and $246,803,
respectively. Stock DERs represent shares of stock which are issuable to holders
of stock options when the holders exercise the underlying stock options. The
number of stock DER shares accrued is based on the level of the Company's
dividends and on the price of the stock on the related dividend payment date.
A summary of the status of the Company's Plan for the three and six months ended
June 30 is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES PRICE SHARES PRICE
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period 1,127,345 $ 27.31 840,644 $ 29.79
Options granted 68,670 $ 22.20 352,952 $ 20.59
Options exercised -- -- -- --
DERs earned 25 0 2,444 0
--------- ---------
Outstanding options at end of period 1,196,040 $ 27.01 1,196,040 $ 27.01
========= =========
</TABLE>
STOCK PURCHASE WARRANTS
The Warrants expired on December 31, 1997. Each Warrant entitled the holder to
purchase 1.000667 shares of the Company's Common Stock at an exercise price of
$15.00 per share.
STOCK REPURCHASES
During 1997, the Company's Board of Directors approved the repurchase of up to
1,455,000 shares of the the Company's Common Stock. Pursuant to this repurchase
program, the Company repurchased 60,300 and 274,400 shares of its Common Stock
for $1.2 million and $5.4 million during the three and six months ended June 30,
1998, respectively. The repurchased shares have been returned to the Company's
authorized but unissued shares of Common Stock. At June 30, 1998, 340,600 shares
of Common Stock were available for repurchase.
DIVIDENDS
As of June 30, 1998, the Company had declared the following dividends:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
TOTAL --------------------------
DECLARATION RECORD PAYABLE DIVIDENDS CLASS B COMMON
DATE DATE DATE (IN THOUSANDS) PREFERRED STOCK STOCK
----------- ------ ------- -------------- --------------- ------
<S> <C> <C> <C> <C> <C>
6/4/98 6/30/98 7/21/98 $687 $0.755 -
4/27/98 5/7/98 5/21/98 $3,809 - $0.270
3/11/98 3/31/98 4/21/98 $687 $0.755 -
12/12/97 12/31/97 1/21/98 $5,686 $0.755 $0.350
9/8/97 9/30/97 10/21/97 $9,433 $0.755 $0.600
6/12/97 6/30/97 7/21/97 $8,638 $0.755 $0.600
3/5/97 3/31/97 4/21/97 $7,899 $0.755 $0.600
</TABLE>
Under the Internal Revenue Code of 1986, a dividend declared by a REIT in
October, November or December of a calendar year and payable to shareholders of
record as of a specified date in such month, will be deemed to have
18
<PAGE> 19
been paid by the Company and received by the shareholders on the last day of
that calendar year, provided the dividend is actually paid before February 1st
of the following calendar year. Therefore, the dividend declared in December
1997 which was paid in January 1998 is considered taxable income to shareholders
in the year declared. The Company's dividends are not eligible for the dividends
received deduction for corporations.
NOTE 12. COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company had entered into commitments to purchase $529.4
million of Mortgage Assets and $156,750 of Interest Rate Agreements for
settlement in July 1998.
At June 30, 1998, the Company is obligated under non-cancelable operating leases
with expiration dates through 2001. The future minimum lease payments under
these non-cancelable leases are as follows: 1998 - $99,416; 1999 through 2000 -
$198,832; 2001 - $66,277.
NOTE 13. SUBSEQUENT EVENTS
On July 27, 1998, the Company declared a $0.01 cash dividend per common share
for the second quarter of 1998 payable on August 21, 1998 to common shareholders
of record on August 6, 1998.
On August 6, 1998, the Company declared a $0.755 cash dividend per preferred
share for the third quarter of 1998 payable on October 21, 1998 to preferred
shareholders of record on September 30, 1998.
During July 1998, pursuant to its stock repurchase program (see Note 11), the
Company repurchased 340,600 shares of the Company's Common Stock for $5.9
million. On August 6, 1998, the Company's Board of Directors authorized the
repurchase of additional shares of its Common Stock pursuant to its stock
repurchase program. The maximum number of additional shares authorized for
repurchase under this new program is 2,000,000. On August 10, 1998, the Company
entered into a commitment to repurchase 800,000 shares of the Company's Common
Stock for $12 million with a settlement date of August 13, 1998.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes.
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: Statements in this discussion regarding Redwood Trust, Inc.
(the "Company") and its business which are not historical facts are
"forward-looking statements" that involve risks and uncertainties. For a
discussion of such risks and uncertainties, which could cause actual
results to differ from those contained in the forward-looking
statements, see "Risk Factors" commencing on Page 27 of the Company's
1997 Annual Report.
COMPANY OVERVIEW
The Company is a mortgage finance company providing capital market
funding to the high quality segments of the mortgage market.
The Company consists of a real estate investment trust and consolidated
subsidiaries ("Redwood REIT") and a preferred stock equity interest in
RWT Holdings, Inc. ("Holdings"), a non-consolidated affiliate.
Redwood REIT, through its portfolio operations, is primarily engaged in
mortgage spread lending. Portfolio operations earn net income to the
extent that the interest earned from the mortgage portfolio exceeds the
cost of borrowed funds, hedging, credit loss expenses and operating
expenses. Under Federal tax elections, Redwood REIT pays no corporate
income tax provided it distributes at least 95% of its taxable income as
dividends over time and meets certain other federal REIT qualifying
conditions.
Redwood REIT owns both mortgage loans and mortgage securities. The loans
are high-quality single family residential mortgage loans. The mortgage
securities represent interests in securitized pools of residential
mortgage loans. Most of the mortgage securities in the Redwood REIT's
portfolio have substantial forms of protection from credit risk and are
rated "AAA" or "AA". Redwood REIT funds its portfolio with its equity
and with debt. Redwood REIT's borrowings consist of both short-term
recourse debt and long-term non-recourse debt.
Holdings acquires and accumulates mortgage loans for sale to Redwood
REIT, to other investors, or into mortgage securitizations. Holdings'
operations earn net income to the extent that gains on loans sold, fee
income generated, and net interest income earned on loans held for sale
exceed operating expenses and taxes.
Due to the start-up nature of its activities, Holdings is expected to
report a significant loss for 1998. Holdings started operations on March
31, 1998 when Redwood REIT transferred certain of its mortgage
acquisition operations to the new entity. Holdings plans to expand these
operations while starting related new businesses. Redwood Financial
Services ("RFS"), a unit of Holdings, started operations on July 1,
1998. RFS acquires, accumulates and securitizes seasoned mortgage loans.
RFS is expected to have over 20 employees by year-end 1998.
The Company, through its acquisition of Holdings' non-voting preferred
stock, currently owns a 99% economic interest in Holdings. Thus 99% of
any income or loss at Holdings will increase or reduce the Company's
reported net income. Generally, Holdings' earnings or losses will not
change the Company's taxable income, or the amount the Company pays in
dividends to its shareholders, except to the extent that Holdings pays a
dividend to the Company.
20
<PAGE> 21
RESULTS OF OPERATIONS
Mortgage Portfolio Operations
- -----------------------------
In the second quarter of 1998, the net increase in the amortized cost of Redwood
REIT's mortgage asset portfolio was $158.1 million, or 4.3%. The mortgage asset
portfolio grew from $3.65 billion to $3.81 billion. This growth was the net
result of $594.8 million of acquisitions, $425.3 million of principal
repayments, $11.0 million of net premium amortization, and $0.5 million of
realized credit losses.
In the second quarter of 1998, Redwood REIT acquired $594.8 million of mortgage
assets, including $525.5 million of mortgage loans and $69.3 million of mortgage
securities. Hybrid mortgage loans ("Hybrids") represented $524.1 million of the
mortgage assets acquired and adjustable-rate mortgages ("ARMs") represented the
other $70.7 million. Hybrids have a fixed-rate coupon for three to ten years and
an adjustable-rate coupon thereafter. ARMS have an adjustable-rate coupon that
adjusts to market conditions at least once per year.
In the second quarter of 1998, Redwood REIT received $425.3 million of mortgage
principal repayments. Principal repayments on mortgage loans consist of
scheduled principal payments and unscheduled principal prepayments. Scheduled
principal repayments are the payments calculated to fully amortize a loan at its
scheduled maturity date. Unscheduled principal prepayments typically occur when
a homeowner pays off their loan either because they sell their home or they
refinance their mortgage at a lower rate. Some mortgage securities owned by
Redwood REIT are subject to call provisions and some receive a greater than
pro-rata share of principal repayments generated by the underlying mortgage
pool. Thus, for securities, the total amount of mortgage principal repayment
each month can exceed the level of prepayments and scheduled repayments on the
underlying loans.
One common measure of principal prepayments is the conditional prepayment rate
("CPR"). The CPR measures how much principal prepaid in a period, expressed as a
percentage of the remaining, unamortized principal balance at the beginning of
that period. This percentage is stated as an annualized number. The average CPR
for Redwood REIT's mortgage loans and the mortgage pools underlying its mortgage
securities was 34% in the second quarter of 1998.
In line with industry trends, prepayments reached record levels in April and
May, then declined slightly in June. The average CPRs were 35% in April, 34% in
May and 32% in June. Based on preliminary results, Redwood REIT believes that
July 1998 average CPRs were near June levels. Higher levels of prepayments tend
to reduce Redwood REIT's earnings due to increased purchase premium amortization
expense.
In the second quarter of 1997, the net increase in the amortized cost of Redwood
REIT's mortgage asset portfolio was $757.8 million, or 29.1%. The mortgage asset
portfolio grew from $2.61 billion to $3.36 billion. This growth was the net
result of $962.9 million of acquisitions, $199.9 million of principal
repayments, $5.1 million of net premium amortization, and less than $0.1 million
of realized credit losses.
In the second quarter of 1997, Redwood REIT acquired $962.9 million of mortgage
assets, including $470.5 million of mortgage loans and $492.4 million of
mortgage securities. All mortgage assets acquired were ARMs. Second quarter 1997
CPRs were 23%.
In the first half of 1998, the amortized cost of Redwood REIT's mortgage asset
portfolio increased $0.44 billion, or 13.0%, from $3.37 billion to $3.81
billion. During this period, Redwood REIT acquired $1.20 billion of mortgage
assets, received $731.4 million of mortgage principal repayments, amortized
$19.2 million of net premium, and sold $9.3 million of mortgage assets. Redwood
REIT also took a $0.7 million write-down on mortgage securities and realized
credit losses of $0.5 million.
In the first half of 1998, or mortgage assets acquired, mortgage loans totaled
$0.97 billion and mortgage securities totaled $0.23 billion. Hybrids represented
$0.82 billion of mortgage assets acquired and ARMs represented the other $0.38
billion. First half 1998 CPRs were 30%.
21
<PAGE> 22
In the first half of 1997, the amortized cost of Redwood REIT's mortgage asset
portfolio increased $1.21 billion, or 56.0% from $2.16 billion to $3.36 billion.
During this period Redwood REIT acquired $1.59 billion of mortgage assets,
received $373.3 million of mortgage principal repayments, and amortized $8.9
million of net premium. Redwood REIT also realized credit losses of less than
$0.1 million.
In the first half of 1997, mortgage loans totaled $0.72 billion and mortgage
securities totaled $0.87 billion of total mortgage assets acquired. ARMs
represented $1.52 billion of mortgage assets acquired and Hybrids represented
the other $0.07 billion. First half 1997 CPRs were 23%.
In the third quarter of 1998, through August 10, 1998, Redwood REIT had acquired
or committed to acquire $660.8 million of mortgage assets, including $584.3
million of Hybrid loans and $76.5 million of adjustable-rate mortgage
securities.
Interest Income
Total interest income is the sum of mortgage coupon income, premium amortization
expense, discount amortization income, and interest earned on cash balances.
Second quarter 1998 total interest income equaled $53.8 million, an 8.6%
increase from the $49.5 million earned in the second quarter of 1997. The net
increase of $4.3 million was the result of a $10.0 million increase in coupon
interest income, $0.2 million increase in interest income on cash balances, and
a $5.9 million increase in net premium amortization expense. Earning asset yield
decreased to 6.10% in second quarter of 1998 from 6.86% in the second quarter of
1997.
Second quarter 1998 coupon interest income of $64.3 million increased 18.4% from
the second quarter of 1997 primarily because the average earning asset balance
increased 22.0%. The average mortgage coupon rate decreased from 7.74% to 7.52%.
The average mortgage coupon rate was lower because the mortgage index levels
were lower in the 1998 period than in the 1997 period and because the mix of
assets changed (i.e. assets with higher coupons prepaid and were replaced with
lower coupon mortgage assets, such as Hybrids).
Second quarter 1998 net premium amortization expense of $11.0 million increased
by 115.7% compared to the second quarter 1997 expense because mortgage asset
principal prepayment rates were faster in the second quarter of 1998. Mortgage
asset prepayments, as measured by CPRs, increased from 23% to 34% from the
second quarter of 1997 to the second quarter of 1998. Prepayments reduced
mortgage coupon yield by 1.26% in the second quarter of 1998 and 0.71% in the
second quarter of 1997.
First half 1998 total interest income equaled $107.6 million, a 22.2% increase
from the $88.1 million earned in the first half of 1997. The net increase of
$19.5 million was the result of a $29.4 million increase in coupon interest
income, a $10.2 million increase in premium amortization expense, a $0.1 million
decrease in discount amortization income and a $0.4 million increase in interest
income on cash balances. Earning asset yield declined from 6.86% in the first
half of 1997 to 6.29% in the first half of 1998.
First half 1998 coupon interest income of $126.0 million increased 30.4% from
the first half of 1997 primarily because the average earning asset balance
increased 33.2%. The average mortgage coupon rate decreased from 7.72% to 7.58%
because the mortgage index levels were lower and because the mix of assets
changed toward lower coupon assets.
First half 1998 net premium amortization expense of $19.2 million increased by
114.8% compared to the first half 1997 expense because mortgage loan prepayment
rates were faster in the first half of 1998. Redwood REIT's Mortgage asset
prepayments, as measured by CPRs, increased from 23% to 30% from the first half
of 1997 to the first half of 1998. Prepayments reduced mortgage coupon yield by
1.13% in the first half of 1998 and 0.70% in the first half of 1997.
22
<PAGE> 23
Interest Expense
Interest expense is the cash expense paid on short-term and long-term debt plus
the amortization expense of deferred bond issuance costs and other related
expenses. In addition, when Redwood REIT sells a debt obligation at a price
greater or less than the principal value of the debt, the debt issuance premium
or discount is amortized into income as the debt principal balance amortizes
over time. The amortization of debt issuance premium reduces interest expense
(increases earnings) and the amortization of debt issuance discount increases
interest expense (reduces earnings).
Second quarter 1998 interest expense of $50.2 million was $11.2 million, or
28.8%, greater than the $39.0 million expense in the second quarter of 1997.
Average borrowings increased $0.65 billion, or 24.5%, from $2.66 billion to
$3.31 billion.
The total cost of borrowings increased from 5.86% to 6.06% due to the issuance
of long-term debt in the second half of 1997. Second quarter 1998 average
short-term borrowings decreased to $2.26 billion from $2.66 billion in the
second quarter of 1997. The cost of funds on this debt increased slightly, from
5.86% to 5.88% in the period to period comparison, as short-term interest rates
and the mix of assets pledged against these borrowings remained relatively
unchanged. Average long-term borrowings increased from zero to $1.05 billion.
The cost of funds on this long-term debt was 6.45% in the second quarter of
1998.
First half 1998 interest expense of $96.3 million was $28.4 million, or 41.9%,
greater than the $67.9 million expense in the first half of 1997. Average
borrowings increased $0.83 billion, or 35.2%, from $2.36 billion to $3.19
billion.
The total cost of borrowings increased from 5.75% to 6.04% from the first half
of 1997 to the first half 1998. First half 19989 average short-term borrowings
decreased to $2.10 billion from $2.36 billion in the first half of 1997. The
cost of funds on this debt increased from 5.75% to 5.83% as more loans rather
than securities were pledged against these borrowings and short-term interest
rates increased slightly. Average long-term borrowings increased from zero to
$1.09 billion in the first half of 1998. The cost of funds on long-term debt was
6.44% in the first half of 1998.
Interest Rate Agreements Expense
Second quarter 1998 net interest rate agreements expense was $1.6 million.
Interest rate agreement expense was $0.8 million in the second quarter of 1997.
The higher level of expense during the second quarter of 1998 as compared to
second quarter of 1997 was due to an increase in the number effective interest
rate agreements. On an annualized basis, net interest rate agreements expense
was 0.19% and 0.13% of average borrowings in the second quarter of 1998 and
second quarter of 1997, respectively.
In the first halves of 1998 and 1997, net interest rate agreements expense was
$3.0 million and $1.4 million, respectively. The higher level of expense in the
first half of 1998 was due to an increase in the number of effective interest
rate agreements during that period. On an annualized basis, year to date net
interest rate agreements expense was 0.19% and 0.12% of average borrowings in
1998 and 1997, respectively.
For additional detail, see "Note 6. Interest Rate Agreements" in the Notes to
the Consolidated Financial Statements.
Net Interest Income
Net interest income is total interest income less interest expense and net
interest rate agreement expense. Interest rate spread is the spread between the
yield on earning assets and the cost of funds and hedging. Interest rate margin
is annualized net interest income divided by the average daily balance of
earning assets.
23
<PAGE> 24
In the second quarter of 1998, net interest income was $2.0 million, 80% lower
than the $9.7 million reported in the second quarter of 1997. As discussed
above, interest income increased $4.3 million and interest expense increased
$11.2 million. Interest rate agreements expense also increased $0.8 million.
In the second quarter of 1998, the net interest rate spread was negative 0.15%
compared to 0.87% in the second quarter of 1997. The lower net interest rate
spread was the combined result of accelerated mortgage prepayments and Redwood
REIT's issuance of long-term debt. Second quarter 1998 net interest margin was
0.22% compared to 1.31% in the second quarter 1997.
Net interest income would have been higher if Redwood REIT had chosen to fully
utilize its capital and if, as a result, it had acquired additional positive
spread mortgage assets. Since mid-1997, Redwood REIT has generally limited the
growth of its balance sheet due to unfavorable mortgage market pricing. The
average capital utilization in the second quarter of 1998 was 79% versus 96% in
the second quarter of 1997.
In the first half 1998, net interest income was $8.4 million, 55.4% lower than
the $18.8 million reported in the first half of 1997. As discussed above,
interest income increased $19.6 million and interest expense increased $28.4
million. Interest rate agreements expense also increased $1.6 million.
In the first half of 1998, the net interest rate spread was 0.06% compared to
0.99% in the first half of 1997. Lower net interest rate spread was the combined
result of accelerated mortgage prepayments and Redwood REIT's issuance of
long-term debt. First half 1998 net interest margin was 0.47% compared to 1.42%
in the first half of 1997. The average capital utilization in the first half of
1998 was 78% versus 97% in the first half of 1997.
Please see "Interest Income" and "Interest Expense" and "Interest Rate
Agreements" above for a discussion of the individual components of net interest
income.
Credit Provision Expense
It is Redwood REIT's policy to set aside annual credit provisions for mortgage
loans and lower-rated mortgage securities on an ongoing basis in order build a
reserve for potential future credit losses. In the second quarter of 1997 and
1998, the annualized rate of provision was 0.16% of the average mortgage loan
balance. Redwood REIT built up a credit reserve for its lower-rated mortgage
securities by taking credit provisions through September 1997. Since that time,
Redwood REIT has reduced the risk of loss on its mortgage securities by
re-securitizing portions of that portfolio and has not added to its mortgage
securities credit reserve.
The $0.8 million total credit provisions in the second quarter of 1998 were
similar to the level of provisions taken in the second quarter of 1997. A $0.4
million higher provision taken for a higher average mortgage loan balance was
offset by the reduction of the provision taken for mortgage securities from $0.4
million to zero.
Compared to the first half of 1997, credit provisions in the first half of 1998
decreased $0.1 million, from $1.5 million to $1.4 million. Credit provisions on
mortgage loans were $0.9 million higher due to higher mortgage loan balances
while credit provisions on mortgage securities went from $1.0 million to zero.
Write-down of Mortgage Securities
There were no write-downs of mortgage securities in the second quarter of 1998
or the first half of 1997.
Redwood REIT wrote-down all of its interest only mortgage securities ("IOs") to
their estimated market value in the first quarter of 1998. This write-down
reduced GAAP income $0.7 million but did not effect taxable income.
Gain or Loss on Sale Transactions
Redwood REIT did not sell mortgage assets or hedges in the second quarter of
1998 or in the first half of 1997.
24
<PAGE> 25
Redwood REIT sold $9.3 million of mortgage securities during the first half of
1998 resulting in a gain on sale of $6,000.
Other Income
Beginning in the second quarter of 1998, Redwood REIT agreed to provide credit
support to Holdings by acting as co-borrower on some of Holdings' short-term
debt agreements. Accordingly, Holdings pays Redwood REIT credit support fees on
borrowings subject to this arrangement. In the second quarter of 1998, Redwood
REIT earned $0.1 million from Holdings in credit support fees. The maximum
balance supported by Redwood REIT during the second quarter of 1998 was $367.1
million and the balance at June 30, 1998 was zero. No such fee was received
prior to this quarter.
Operating Expenses
When compared to the second quarter of 1997, second quarter 1998 operating
expenses at Redwood REIT decreased from $1.2 million to $0.6 million. This was
primarily the result of the transfer of certain Redwood REIT operations
(representing $0.7 million of expense in the second quarter of 1998) to
Holdings.
After giving effect to this transfer, the number of employees at Redwood REIT
still increased over the past year. Lower bonus and dividend-equivalent right
("DER") accruals offset the extra expense of these employees.
For similar reasons, first half 1998 operating expenses at Redwood REIT
increased $0.1 million to $2.5 million from $2.4 million in the first half of
1997.
Net Income at Redwood REIT
In the second quarter of 1998, Redwood REIT net income was $0.8 million, $6.9
million less than the $7.7 million reported in the same quarter one year ago. As
discussed above, faster prepayments, the issuance of long-term debt, and the
effects of under-utilizing the balance sheet were the primary reasons for the
decline.
For similar reasons, as discussed above, first half of 1998 Redwood REIT net
income of $3.9 million was $11.0 million less than the $14.9 million reported in
the same period one year ago.
Equity in Earnings of Holdings
The Company recognizes income from its investment in Holdings using the equity
method of accounting. The Company's share of Holdings' net income appears as a
single line item on the Company's income statement as "Equity in Earnings of RWT
Holdings, Inc."
There were no operations for Holdings prior to the second quarter of 1998.
Holdings started and ended the second quarter of 1998 with no mortgage assets.
During the second quarter of 1998, Holdings acquired $531.0 million of mortgage
loans, had $5.6 million of principal repayments, and sold $525.4 million of
mortgage loans. All of these loans were sold to Redwood REIT.
Holdings had $2.8 million of interest income, $2.5 million of interest expense,
$0.1 million in credit support fees payable to Redwood REIT, and net interest
income of $0.2 million. Gain on sale income was less than $0.1 million. Holdings
had $0.8 million of operating expenses. Holdings' net loss was $0.6 million.
In the second quarter and for the first half of 1998, the Company recognized a
net loss equal to $0.6 million, or 99% of Holdings' net loss.
The Company expects Holdings' operating expenses will grow significantly in the
second half of 1998 as a result of its start-up operations. Holdings' net loss
rate is expected to increase in the second half of 1998.
25
<PAGE> 26
Please see "Investment in Holdings" in the Financial Condition section below and
"Note 7: Investment in RWT Holdings, Inc." in the Notes to the Consolidated
Financial Statements for additional information on Holdings.
Net Income before Preferred Dividends
Redwood REIT's net income of $0.8 million and the Company's $0.6 million share
of the loss at Holdings resulted in total net income available to common and
preferred shareholders of $0.2 million for the second quarter of 1998. This was
97.5% lower than the $7.7 million earned in the second quarter of 1997. As
discussed above, the primary reasons were the faster rate of prepayments, the
issuance of long-term debt, and an under-utilized balance sheet. As a result,
return on total average equity dropped from 10.53% to 0.23% in the quarter to
quarter comparison.
For similar reasons, first half of 1998 net income available to common and
preferred shareholders was $3.3 million, 77.7% lower than the $14.9 million
reported in the first half of 1997. The return on total average equity (common
plus preferred) decreased from 11.26% to 1.95%.
Preferred Dividends
The Company's Class B 9.74% Cumulative Convertible Preferred Stock ("Preferred
Stock") was issued in the third quarter of 1996. The quarterly preferred
dividend equals the greater of the common stock dividend or $0.755 per share.
Each share of Preferred Stock is convertible at the option of the holder at any
time into one share of common stock. After September 1999, Redwood REIT has the
option to: i) force the conversion of each share of Preferred Stock into one
share of common stock if the price of the common stock exceeds $31.00, or ii) to
redeem the Preferred Stock at $31.00 per share plus any accrued dividends.
There were 909,518 preferred shares outstanding at June 30, 1997 and at June 30,
1998 with a total book value of $26.7 million. Preferred dividends were $0.7
million in each of these periods.
Preferred dividends were $1.37 million in the first half of 1998 and $1.44
million in the first half of 1997. The first half 1998 preferred dividend was
lower because preferred shareholders converted 96,732 shares of Preferred Stock
into common stock in the first half of 1997.
Net Income Available to Common Shareholders
In the second quarter of 1998, net income available to common shareholders after
the payment of preferred dividends decreased to negative $0.5 million from $7.0
million in the second quarter of 1997 for reasons discussed above. From the
second quarter of 1997 to the second quarter of 1998, return on average common
equity decreased from 10.65% to negative 0.62%.
In the first half of 1998, net income available to common shareholders decreased
to $2.0 million, 85.5% less than the $13.5 million reported in the first half of
1997. Return on average common equity decreased from 11.43% to 1.24%
Diluted Earnings Per Share
Second quarter 1998 diluted earnings per share decreased to negative $0.03 per
share from $0.52 per share in the second quarter of 1997. The average number of
diluted common shares outstanding increased by 5.8%, from 13.5 million to 14.3
million, and net income available to common shareholders decreased from $7.0
million to negative $0.5 million.
First half 1998 diluted earnings per share decreased 86.7% to $0.14 from $1.05
reported in the first half of 1997. The average number of diluted common shares
outstanding increased by 12.2%, from 12.8 million to 14.4 million, and net
income available to common shareholders decreased from $13.5 million to $2.0
million.
26
<PAGE> 27
Taxable Income
As a REIT, the Company is required to distribute dividends equal to at least 95%
of its taxable income. To the extent that it pays dividends, such income is
generally not taxed at the corporate level.
In any given period, taxable income can be greater or less than GAAP net income
(a "GAAP/Tax Difference") because of differences in the GAAP and tax accounting
rules. Important GAAP/Tax Differences arise for the Company when it accounts
for: i) its investment and earnings in Holdings, ii) non-qualified stock options
("NQSOs") granted under its Stock Option Plan, iii) credit losses on mortgage
assets, iv) amortization of mortgage acquisition premium or discount, v)
write-down of mortgage securities, and vi) certain long-term financing
arrangements. Other important GAAP/Tax differences exist as well.
For taxable income purposes, the Company recognizes no income or loss from its
investment in Holdings unless Holdings pays a dividend to the Company. For GAAP
accounting, however, the Company's pro-rata share of any after-tax profit or
loss at Holdings is recognized as profit or loss at the Company, regardless of
the level of dividend, if any, declared by Holdings. During the second quarter
of 1998, the Company recognized $0.6 million of the loss at Holdings in its GAAP
income statement, but recognized no taxable income or loss from Holdings as
Holdings did not declare a dividend. There were no GAAP/Tax Differences from
this source in prior periods as Holdings commenced operations in the second
quarter of 1998. This GAAP/Tax Difference may increase in the second half of
1998 as the Company expects Holdings will report a substantial operating loss
during this period. The Company does not expect Holdings to pay a dividend
during this period.
The exercise of NQSOs creates a GAAP/Tax Difference in the Company's income. For
taxable income purposes only, when NQSOs are exercised, the Company recognizes
an expense equal to the difference between the fair market value of the stock at
the time of exercise and the exercise price paid. Although this is a
non-operating, non-cash expense, such expenses arising from the future exercise
of options will lower the Company's taxable income, and thus its dividend, in
the quarters when NQSOs are exercised. If all vested NQSOs were exercised as of
June 30, 1998, the additional associated tax expense for the second quarter
would have been $0.4 million. The potential taxable expense associated with
NQSOs could increase significantly as more options vest or if the price of the
Company's publicly-traded stock increases. Taxable expenses associated with the
exercise of NQSOs were zero in the second quarter of 1998 and the first half of
1998. This expense was $0.2 million in the second quarter of 1997 and the first
half of 1997. For additional detail on NQSOs, see "Note 11. Stockholders' Equity
- - Stock Option Plan" in the Notes to the Consolidated Financial Statements.
When accounting for credit losses, Redwood REIT reduces GAAP net income based on
potential future losses on its mortgage assets. Tax accounting, on the other
hand, requires Redwood REIT to reduce taxable income only as actual credit
losses are incurred. In any given period, actual credit losses could be
significantly different than the GAAP credit loss provision. GAAP credit
provisions exceeded actual credit losses deductible from taxable income by $0.3
million in the second quarter of 1998 and $0.8 million in the second quarter of
1997. In the first half of 1998 and 1997, GAAP credit provisions exceeded actual
credit losses by $0.9 million and $1.4 million, respectively.
In the second quarter of 1998, taxable income before preferred dividends was
$0.8 million. This exceeded GAAP income by $0.6 million due to the $0.6 million
equity in the loss at Holdings, a $0.3 million credit expense difference, and
negative $0.3 million of other expense differences.
In the second quarter of 1997, taxable income before preferred dividends of $8.3
million exceeded GAAP income by $0.6 million due to an $0.8 million credit
expense difference and negative $0.2 million of other expense differences.
In the first half of 1998, taxable income before preferred dividends of $5.4
million exceeded GAAP income by $2.0 million due to a $0.9 million credit
expense difference, a $0.7 million difference due to the write-down of
27
<PAGE> 28
mortgage securities, the $0.6 million of equity in the loss at Holdings, and a
negative $0.2 million of other expense differences.
In the first half of 1997, taxable income before preferred dividends of $16.2
million exceeded GAAP income by $1.3 million due to a $1.4 million credit
expense difference and negative $0.1 million of other expense differences.
Common Share Dividends
On July 27, 1998, the Company declared a $0.01 per share second quarter common
dividend that was equal to the taxable income per share entitled to a dividend
earned by the Company in that period. This dividend is payable on August 21,
1998 to shareholders of record as of August 6, 1998. This dividend is less than
the $0.60 dividend declared in the second quarter of 1997 due to a decline in
taxable income earned.
Total dividends for the first half of 1998 of $0.28 were lower than the $1.20
per share dividend declared in the first half of 1997 due to a decline in
taxable income earned.
Effective with the fourth quarter 1997 dividend, the Company's policy is to
declare a common dividend for each quarter that is equal to that quarter's
taxable income per common share entitled to a dividend. The first three
quarters' dividends will be declared after taxable income has been determined
for the quarter. The dividend declaration for the first, second and third
quarter dividends is expected to occur in the last week of April, July and
October, respectively. The fourth quarter's dividend will be declared in
December based on estimated fourth quarter taxable income and any other
adjustments necessary to comply with REIT dividend distribution rules. The
record and payable dates for dividends will be announced at the time the
dividends are declared.
The Company's common dividend is expected to vary from quarter to quarter, both
due to fluctuations in the Company's operating results and due to changes in
operating and non-operating items that impact taxable income.
FINANCIAL CONDITION
Mortgage Loans
From December 31, 1997 to June 30, 1998, Redwood REIT's mortgage loan portfolio
grew $672.7 million, or 43.3%, from $1.55 billion to $2.23 billion. At December
31, 1997, 96% of mortgage loans were ARMS and the remaining 4% were Hybrids. At
June 30, 1998, 62% of mortgage loans were ARMs and 38% were Hybrids.
At June 30, 1998, Redwood REIT owned 7,032 adjustable-rate, first-lien mortgage
loans on single-family residential properties with a principal value of $2.19
billion and an amortized cost of 101.63% of principal value. Redwood REIT
estimated that the bid-side market value of Redwood REIT's mortgage loan
portfolio at June 30, 1998 was approximately $2.22 billion. The estimated
unrealized market value loss in Redwood REIT's mortgage loan portfolio was $3.6
million after adjusting for the existing $4.1 million credit reserve.
As verified by its re-underwriting process, Redwood REIT believes that its
mortgage loans owned as of June 30, 1998 were generally originated to "A", or
"Prime" quality, underwriting standards. The average loan size was $312,000.
Loans with current balances less than $227,150 (the FNMA/FHLMC 1998 conventional
loan balance limit for most loans) made up 16% of the dollar balance of Redwood
REIT's mortgage loan portfolio, while loans with current balances in excess of
$500,000 made up 33%. Loans on owner-occupied houses made up 91% of the loan
portfolio. Second homes and investment properties represented 7% and 2% of the
portfolio, respectively. As of June 30, 1998, the average seasoning of the loan
portfolio was 15 months.
The average original loan-to-value ratios ("OLTV") for Redwood REIT's loan
portfolio was 76% as of June 30, 1998. At June 30, 1998, 31% of mortgage loans
had an OLTV in excess of 80%. Of these, 97% had either primary mortgage
insurance ("PMI") or additional collateral in the form of pledged accounts.
After giving effect to PMI and additional collateral, the average effective OLTV
was 67%.
28
<PAGE> 29
At June 30, 1998, 35% of the mortgage loans owned by Redwood REIT were on
properties located in California (18% in Northern California and 17%in Southern
California). Loans in Florida were 7%, loans in New York were 6%, and loans in
Georgia and Colorado were each 5% of the total. All other states were less than
5%.
At June 30, 1998, 21 mortgage loans were non-performing assets ("NPAs"), as they
were over 90 days delinquent, in bankruptcy, in foreclosure, or had become Real
Estate Owned ("REO"). The loan balance of these NPAs totaled $4.9 million, or
0.22% of the mortgage loan portfolio and 0.13% of total assets. Included in this
NPA balance was REO of $0.3 million resulting from the default of two loans.
Cumulatively through June 30, 1998, Redwood REIT had liquidated nine defaulted
mortgage loans: the average loss severity on those loans was 11%. In the second
quarter of 1998, actual credit losses realized on the Company's mortgage loans
were $0.1 million. On an annualized basis, credit losses in the second quarter
of 1998 represented 0.03% of the average portfolio balance. Total cumulative
losses on this portfolio have been $0.2 million through June 30, 1998.
Redwood REIT estimates its realized credit losses from all NPAs as of June 30,
1998 would be $0.5 million, $1.0 million, $1.5 million, or $2.0 million if all
such NPAs were to default rather than cure and the loss severity on these loans
was 10%, 20%, 30%, or 40%, respectively. The mortgage loan credit reserve as of
June 30, 1998 was $4.1 million. This reserve was 0.18% of mortgage loans as of
June 30, 1998. The analysis in this paragraph reviews the risk of loss from NPAs
as of June 30, 1998 only; it does not purport to analyze or measure credit
losses from additional NPAs that may arise after June 30, 1998.
At December 31, 1997, Redwood REIT owned 5,041 adjustable-rate, first-lien
mortgage loans on single-family residential properties with a principal value of
$1.52 billion and an amortized cost of $1.55 billion, or 102.29% of principal
value. Redwood REIT estimates that the bid-side market value of Redwood REIT's
mortgage loan portfolio at December 31, 1997 was approximately $1.55 billion.
The estimated unrealized market value loss in Redwood REIT's mortgage loan
portfolio was $2.0 million after adjusting for the existing $2.9 million credit
reserve.
At December 31, 1997, the average loan size was $301,000. Loans with current
balances less than $214,600 (the FNMA/FHLMC 1997 conventional loan balance limit
for most loans) made up 18% of the dollar balance of Redwood REIT's mortgage
loan portfolio while loans with current balances in excess of $500,000 made up
37%. Loans on owner-occupied houses made up 89% of the loan portfolio. Second
homes represented 8% and investment properties 3% of the portfolio. As of
December 31, 1997, the average seasoning of the loan portfolio was 18 months.
At December 31, 1997, 38% of loans had an OLTV in excess of 80%. Of these, 95%
had either primary mortgage insurance ("PMI") or additional collateral in the
form of pledged accounts. The average OLTV for Redwood REIT's loan portfolio was
78% as of December 31, 1997; after giving effect to PMI and additional
collateral, the average effective OLTV was 66%.
At December 31, 1997, 29% of the mortgage loans owned by Redwood REIT were on
properties located in California (11% in Northern California and 18% in Southern
California). Loans in Florida were 9% loans in New York were 7% and loans in
Georgia were 5% of the total. All other states were less than 5%.
At December 31, 1997, 17 mortgage loans were NPAs. The loan balance of these
NPAs totaled $3.9 million, or 0.25% of the mortgage loan portfolio and 0.11% of
total assets. Included in this NPA balance was REO of $0.7 million resulting
from the default of four loans.
At December 31, 1997, Redwood REIT estimated its realized credit losses from
NPAs at that time would be $0.4 million, $0.8 million, $1.2 million, or $1.6
million, if all of the NPAs defaulted rather than cured, and loss severity on
these loans was 10%, 20%, 30%, or 40%, respectively. The mortgage loan credit
reserve as of December 31, 1997 was $2.9 million. The analysis in this paragraph
reviews the risk of loss from NPAs as of
29
<PAGE> 30
December 31, 1997 only; it does not purport to analyze or measure credit losses
from additional NPAs that may arise after December 31, 1997.
Mortgage Securities
From December 31, 1997 to June 30, 1998, Redwood REIT's mortgage securities
portfolio decreased $235.2 million, or 12.9%, from $1.82 billion to $1.58
billion.
All of Redwood REIT's mortgage securities at December 31, 1997 and June 30, 1998
represented interests in pools of adjustable-rate mortgages on single-family
residential properties.
At June 30, 1998, the principal value of Redwood REIT's mortgage securities was
$1.55 billion and the amortized cost was $1.58 billion or 101.86% of principal
value. Redwood REIT estimates that the bid-side market value of Redwood REIT's
mortgage securities portfolio at June 30, 1998 was approximately $1.57 billion.
The estimated unrealized market value loss after taking into account the
existing credit reserve of $1.7 million was $10.5 million.
At June 30, 1998, 99.4% of Redwood REIT's mortgage securities had a credit
rating equivalent of "AAA" or "AA." Securities guaranteed by Fannie Mae or
Freddie Mac made up 50.0% of the mortgage securities portfolio. Non-agency
mortgage securities structured with large amounts of subordination or other
forms of third-party credit enhancement and rated "AAA" or "AA" made up 49.4% of
the mortgage securities portfolio. The book value of all of Redwood REIT's
interest only mortgage securities (all of which were rated "AAA") was $0.8
million at June 30, 1998. Based on information available as of June 30, 1998,
Redwood REIT had no reason to suspect that it would be likely to incur credit
losses in the foreseeable future from its mortgage securities rated "AAA" or
"AA."
The remaining 0.6% of the mortgage securities portfolio represented mortgage
equity interests created by Redwood REIT in its fourth quarter 1997 re-REMIC
transaction. These securities are subordinated to other securities issued from
the same pools and therefore are subject to leveraged credit risk with respect
to the underlying mortgages. At June 30, 1998, the re-REMIC mortgage equity
interests had a principal value of $19.3 million, an amortized cost before
credit reserve of $9.1 million, a credit reserve of $1.7 million, an amortized
cost after credit reserve of $6.4 million, and an estimated market value of $8.9
million. These securities are rated "B" or unrated.
Cumulatively, from the acquisition dates of these lower-rated mortgage
securities through June 30, 1998, 351 defaulted mortgage loans in the underlying
pools had been liquidated and the average loss severity on these loans was 21%.
In the second quarter of 1998, actual credit losses realized on the Company's
mortgage securities were $0.3 million. Total cumulative losses on Redwood REIT's
mortgage securities portfolio have been $0.5 million through June 30, 1998.
Redwood REIT estimates that if all the loans underlying mortgage equity
interests in the re-REMIC which were over 90 days delinquent, in foreclosure, in
bankruptcy, or REO as of June 30, 1998 were to default and have a loss severity
of 10%, 20%, 30%, or 40%, the realized credit losses for Redwood REIT would be
$0.4 million, $0.7 million, $0.9 million, or $1.4 million, respectively. Redwood
REIT's credit reserve for these assets at June 30, 1998 was $1.7 million. The
analysis in this paragraph reviews the risk of loss from seriously delinquent
loans underlying Redwood REIT's lower-rated mortgage securities as of June 30,
1998 only; it does not purport to analyze or measure credit losses from
additional serious delinquencies that may arise after June 30, 1998.
At December 31, 1997, the principal value of all of Redwood REIT's mortgage
securities was $1.78 billion and the amortized cost was $1.82 billion, or
102.19% of principal value. Redwood REIT estimated that the bid-side market
value of Redwood REIT's mortgage securities portfolio at December 31, 1997 was
approximately $1.81 billion. The estimated unrealized market value loss after
taking into account the existing credit reserve of $2.1 million was $1.4
million.
30
<PAGE> 31
At December 31, 1997, 99.5% of Redwood REIT's mortgage securities had a credit
rating equivalent of "AAA" or "AA." Securities guaranteed by Fannie Mae or
Freddie Mac made up 54.3%of the mortgage securities portfolio. Non-agency
mortgage securities structured with large amounts of subordination or other
forms of third-party credit enhancement and rated "AAA" or "AA" made up 45.2%of
the mortgage securities portfolio. The book value of all of Redwood REIT's
interest only mortgage securities was $1.8 million. Based on information
available as of December 31, 1997, Redwood REIT had no reason to suspect that it
would be likely to incur credit losses in the foreseeable future from its
mortgage securities rated "AAA" or "AA".
The remaining 0.5% of the mortgage securities portfolio represented the retained
mortgage equity interests in the re-REMIC discussed above. At December 31, 1997,
the re-REMIC mortgage equity interest had a principal value of $21 million, an
amortized cost before credit reserve of $9.1 million, a credit reserve of $2.1
million, and an estimated market value of $9.3 million. These securities were
rated "B" or unrated.
Redwood REIT estimated at December 31, 1997 that if all the loans underlying
mortgage equity interests in the re-REMIC which were over 90 days delinquent, in
foreclosure, in bankruptcy, or REO at that time were to default and have a loss
severity of 10%, 20%, 30%, or 40%, Redwood REIT's realized credit losses would
have been $0.4 million, $0.9 million, $1.2 million, or $1.8 million,
respectively. Redwood REIT's credit reserve for these assets at December 31,
1997, was $2.1 million. Cumulatively, from the acquisition dates of mortgage
securities rated below investment grade through December 31, 1997, 256 defaulted
mortgage loans in the underlying pools had been liquidated and the average loss
severity on these loans was 21%. The analysis in this paragraph reviews the risk
of loss from seriously delinquent loans underlying Redwood REIT's mortgage
securities as of December 31, 1997 only; it does not purport to analyze or
measure credit losses from additional serious delinquencies that may arise after
December 31, 1997.
Total Mortgage Asset Portfolio Characteristics
At June 30, 1998, 77.4% of Redwood REIT's total mortgage asset portfolio were
ARMs and 22.6% were Hybrids.
At June 30, 1998, 60.0% of the ARMs had coupon rate adjustments based on LIBOR
or CD indices and 38.4% had coupon adjustments based on U.S. Treasury indices.
ARMs with other indices were 1.6% of the total.
At June 30, 1998, the average term-to-next-coupon-adjustment was 56 months for
Hybrids and 4 months for ARMs. For all mortgage assets, the average
term-to-next-coupon adjustment was 15 months. For most mortgage assets, coupon
rate adjustments are based on the index level 30 to 75 days prior to the start
of a new coupon accrual period.
Potential coupon rate changes on ARMs can be limited by periodic and life caps.
At June 30, 1998, all of the ARMs a had a life cap and the average maximum life
cap rate was 12.09%. At June 30, 1998, periodic caps limited coupon changes to
2% annually for 60.6% of the ARMs and there were no periodic caps on 39.4% of
these ARMs.
At December 31, 1997, 98.4% of Redwood REIT's total mortgage asset portfolio
were and 1.6% were Hybrids.
At December 31, 1997, 56.0% of the ARMs had coupon rate adjustments based on
LIBOR or CD indices and 42.5% were based on U.S. Treasury indices. ARMs with
other indices made up 1.5% of the total.
At December 31, 1997, the average term-to-next-coupon-adjustment was 4 months
for the ARMs and 21 months for Hybrids.
At December 31, 1997, all of the ARMs had a life cap and the average maximum
life cap was 12.07%. At December 31, 1997, 66.7% of ARMs had periodic caps that
limited coupon changes to 2% annually and 33.3% of ARMs had no periodic caps.
31
<PAGE> 32
Interest Rate Agreements
At June 30, 1998, Redwood REIT owned $5.8 billion notional face of interest rate
agreements. These interest rate agreements had various start dates, maturity
dates, and interest rate protection features; see "Note 6, Interest Rate
Agreements" and Note 10, "Fair Value of Financial Instruments" in the Notes to
Consolidated Financial Statements for additional detail.
These agreements are designed to reduce Redwood REIT's interest rate and market
value fluctuation risk. They had a historical amortized cost basis of $9.9
million and an estimated bid-side market value of negative $0.1 million as of
June 30, 1998. The carrying value of these interest rate agreements on Redwood
REIT's balance sheet at June 30, 1998 was $2.4 million because some interest
rate agreements are presented at their cost basis, not their market value.
Market values were lower than amortized cost due to: i) declines in asset hedge
values (which generally have been offset by market value appreciation in the
associated mortgage assets), ii) a drop in interest rate volatility assumptions
in the marketplace for interest rate agreements, iii) a drop in interest rates,
iv) the effect of taking bid-ask spread mark-downs on new agreements, and v) the
timing mismatch of GAAP premium amortization methods for interest rate caps
versus the rate of actual economic decay in their market values. There can be no
assurance that the estimated market values could be realized in the event the
hedges are sold.
There is a risk that the counter-parties to Redwood REIT's interest rate
agreements will not be able to perform to the terms of these contracts. If this
were to happen, Redwood REIT's total accounting credit loss exposure would be
limited to its historical amortized cost basis in these assets (plus Redwood
REIT's cash and collateral held by the counter-parties), although the true
economic opportunity cost to Redwood REIT could be higher.
At December 31, 1997, Redwood REIT owned $5.3 billion notional face of interest
rate agreements. These agreements had a historical amortized cost basis of $10.8
million and an estimated bid-side market value of $1.5 million as of December
31, 1997. Market values had declined relative to book values for the same
reasons discussed above. The balance sheet carrying value of these interest rate
agreements at December 31, 1997 was $2.1 million.
Under certain circumstances, Redwood REIT may sell or mark-to-market its
interest rate agreements. Such circumstances may include a change in accounting
standards, a change in hedging strategy, a sale or prepayment of hedged assets,
a change in funding means or strategy, or other reasons. In this event, Redwood
REIT could report significant gains or losses for GAAP or tax purposes. Redwood
REIT may or may not be able to recognize any corresponding gains in the hedged
assets or liabilities at that time. For GAAP purposes, at June 30, 1998, the
estimated unrealized loss in Redwood REIT's interest rate agreements was $7.5
million.
Investment in Holdings
The Company carries its investment in Holdings at its original cost, plus its
share of any net income or loss, less any dividends received. The Company's
original investment in Holdings was $9.9 million. At June 30, 1998, its
cumulative equity in earnings of Holdings was negative $0.6 million. No
dividends have been received from Holdings. At June 30, 1998, the carrying value
of the Company's investment in Holdings was $9.3 million.
See "Equity in Earnings of Holdings" in the Results of Operations section above
and "Note 7: Investment in RWT Holdings, Inc." in the Notes to the Consolidated
Financial Statements for additional information.
Due from Holdings
At June 30, 1998, the Company had a $0.8 million receivable from Holdings.
See "Note 7: Investment in RWT Holdings, Inc." in the Notes to the Consolidated
Financial Statements for additional information.
32
<PAGE> 33
Borrowings
From December 31, 1997 to June 30, 1998, Redwood REIT's total borrowings
increased by $0.44 billion, or 14.3%, from $3.09 billion to $3.53 billion.
At June 30, 1998, Redwood REIT's borrowings consisted of $1.59 billion
non-recourse, floating-rate, amortizing, callable, long-term debt. Redwood REIT
pledged $1.62 billion of mortgage loans as collateral for this long-term debt.
The stated maturity on Redwood REIT's long-term debt ranged from 26 to 31 years.
The expected average life of the debt was three to six years, as the debt
generally pays down as the underlying mortgages pay down. The debt is callable
by Redwood REIT before its stated maturity date. At June 30, 1998, 7.2% of the
long-term debt had an interest rate tied to the Fed Funds rate, 32.5% had an
interest rate tied to the one-year Treasury rate, 20.5% had an interest rate
tied to one-month LIBOR, and 39.8% had a fixed interest rate through December
2002. The debt is primarily "AAA" rated and has a lifetime interest rate cap of
10% or 11%.
At June 30, 1998, the remaining mortgage assets, which had an estimated market
value of $2.17 billion, were available to collateralize Redwood REIT's
short-term debt. At June 30, 1998, Redwood REIT's borrowings consisted of $1.94
billion of short-term collateralized borrowings such as reverse repurchase
agreements, notes payable, and revolving lines of credit. At June 30, 1998, the
average term-to-maturity of Redwood REIT's short-term debt was 52 days and the
average term-to-next-rate-adjustment was 27 days. The
term-to-next-rate-adjustment was shorter than the term-to-maturity as some of
Redwood REIT's debt had a cost of funds that adjusted to market levels on a
monthly basis during the term of the debt.
In general, the cost of borrowings has been able to reset more quickly to
interest rate conditions than coupon rates on Redwood REIT's mortgages could
adjust to those same changes. Through its hedging program, Redwood REIT seeks to
mitigate the short-term impact that a large increase in interest rates could
have on its cost of funds and spread earnings.
At December 31, 1997, Redwood REIT's borrowings consisted of $1.17 billion
long-term debt. Redwood REIT pledged $1.19 billion of mortgage loans as
collateral for this long-term debt. The stated maturity on Redwood REIT's
long-term debt ranged from 26 to 31 years. At December 31, 1997, 13.9% of the
long-term debt had an interest rate tied to the Fed Funds rate, 49.7% had an
interest rate tied to the one-year Treasury rate, and 36.3% had an interest rate
tied to one-month LIBOR. The debt was "AAA" rated and had a lifetime interest
rate cap of 10%.
At December 31, 1997, the remaining mortgage assets, which had an estimated
market value of $2.18 billion, were available to collateralize Redwood REIT's
short-term debt. At December 31, 1997, Redwood REIT's short-term borrowings were
$1.91 billion. At December 31, 1997 the average term-to-maturity of Redwood
REIT's short-term debt was 64 days and the average term-to-next-rate-adjustment
was 31 days.
Cash Balances and Liquidity
At June 30, 1998, Redwood REIT estimated it had additional borrowing capacity in
excess of its then-current requirements of $145.3 million. In addition, Redwood
REIT had $11.4 million of unrestricted cash. The monthly principal and interest
payments received on the mortgages which serve as collateral to the long-term
debt are held in trust for the benefit of the long-term debt holders until the
bond payment date and are included in Redwood REIT's cash balances as
"restricted cash."
At December 31, 1997, Redwood REIT estimated it had additional borrowing
capacity in excess of its then-current requirements of $182.7 million. Redwood
REIT's unrestricted cash totaled $24.9 million.
Redwood REIT's liquidity status, borrowing capacity, and ability to roll over
its short-term debt as it matures depend on the market value, liquidity and
credit quality of its assets, the soundness and capitalization of its balance
sheet, the state of the collateralized lending market and other factors. If
Redwood REIT's liquidity or borrowing capacity were to become seriously
diminished, Redwood REIT would most likely seek to sell its
33
<PAGE> 34
mortgage assets (the sale of which, in such circumstances, might be difficult
and most likely would be at a loss). In order to avoid such an occurrence,
Redwood REIT seeks to maintain what it believes to be a prudent level of
capital, i.e., Redwood REIT restricts its asset growth according to its
Risk-Adjusted Capital Policy and thereby seeks to maintain adequate liquidity
and unused borrowing capacity.
Stockholders' Equity
Amortized Historical Cost of Equity
From December 31, 1997 to June 30, 1998, Redwood REIT's equity (on an amortized,
historical cost basis excluding unrealized market valuation adjustments included
in accumulated comprehensive income) decreased $5.7 million, from $344.6 million
to $338.9 million. This was the net effect of the Company's stock repurchases
which reduced equity in the first half of 1998 by $5.5 million, issuance of
stock through the Company's Dividend Reinvestment Program which increased equity
by $1.6 million, and total preferred and common dividends paid in excess of GAAP
earnings which reduced equity by $1.8 million.
In order to utilize excess capital and increase long-term shareholder value, the
Company's Board of Directors authorized a common stock repurchase program in
September 1997. In the second quarter of 1998, the Company repurchased 60,300
shares for $1.2 million. In the first half of 1998, the Company repurchased
274,400 shares for $5.5 million. The Company purchased 340,600 additional shares
in July, 1998. Through July 1998, the Company repurchased 1,455,000 shares,
equaling 9.8% of the common shares that were outstanding at the commencement of
the stock repurchase program. At the August 6, 1998 Board of Directors meeting,
the Company's management was authorized to repurchase up to 2,000,000 additional
shares. Through August 10, 1998, an additional 800,000 shares were repurchased
for $12.0 million.
Included in total equity is Preferred Stock of $26.7 million at both December
31, 1997 and June 30, 1998. Common equity totaled $317.9 million as of December
31, 1997 and decreased by the same $5.7 million as total equity to $312.2
million as of June 30, 1998.
Book value, or equity, per common share (on an amortized, historical cost basis
excluding unrealized market valuation adjustments included in accumulated
comprehensive income) decreased by 0.4% from $22.25 on December 31, 1997 to
$22.17 on June 30, 1998.
Reported Book Value of Equity
For balance sheet purposes, Redwood REIT carries its mortgage securities and
associated interest rate agreements at their estimated bid-side market value
(historical amortized cost less market valuation account) while loans,
liabilities and other interest rate agreements are carried at historical cost
without such a market value adjustment. The market valuation account calculated
in this manner (which is now reported in accumulated other comprehensive income)
was negative $10.1 million on December 31, 1997 and negative $18.0 million on
June 30, 1998. As a result of this accounting treatment, Redwood REIT's reported
equity base may fluctuate due to market conditions and other factors.
"Other comprehensive income" for Redwood REIT represents unrealized gain or loss
on mortgage securities and related interest rate agreements which are held by
Redwood REIT as available for sale. This account would also be used to report
such items as foreign currency translation adjustments and minimum pension
liability adjustments, if applicable. Prior to 1998, Redwood REIT tracked
unrealized gains and losses on certain assets in market valuation accounts and
reported them on its balance sheet as "net unrealized loss on assets available
for sale." Redwood REIT expects that the amount of accumulated other
comprehensive income will vary significantly over time. Under certain
circumstances, Redwood REIT may be required to realize through its income
statement some or all of the unrealized gains or losses shown in "accumulated
other comprehensive income" or the unrealized gains or losses on assets carried
at historical amortized cost.
Total reported equity decreased by $13.7 million, from $334.6 million as of
December 31, 1997 to $320.9 million as of June 30, 1998. The decline was due to
the decrease in the historical cost of equity as explained above and a decrease
in the reported market value of mortgage securities and associated hedges. As
Preferred Stock did not
34
<PAGE> 35
change during this time period, reported common equity also decreased by $13.7
million, from $307.8 million to $294.1 million.
Reported common equity per common share decreased from $21.55 as of December 31,
1997 to $20.89 as of June 30, 1998, primarily as a result of the mark-to-market
valuation adjustments. As of June 30, 1998, the reported mark-to-market
valuation adjustments totaled $1.28 per common share outstanding.
Total Mark-to-Market Value of Equity
In order to provide more information to its shareholders, the Company has also
calculated the "total mark-to-market value of equity." This generally represents
the equity value that would be reported if all the Company's assets, liabilities
and hedges were marked to market in a manner similar to the way in which
mortgage securities and associated hedges were marked to market to calculate
accumulated other comprehensive income. The total mark-to-market value of equity
is not a proxy for liquidation value. An actual liquidation would include other
costs not included in this estimate. Furthermore, there can be no assurances
that estimated market values reflect actual realizable valuations under
liquidation market conditions.
Incorporating bid-side market value estimates of all of its mortgage assets,
interest rate agreements and liabilities, the Company estimates that the total
mark-to-market value of its equity was $334.9 million as of December 31, 1997
and $316.5 million as of June 40, 1998. After adjusting for the redemption of
Preferred Stock, the estimated total mark-to-market value of common equity was
$306.8 million at December 31, 1997 and $288.3 million at June 30, 1998. The net
total mark-to-market value for Redwood REIT's balance sheet was $11.1 million
lower than amortized cost at December 31, 1997 and $23.8 million lower than
amortized cost at June 30, 1998. Between December 31, 1997 and June 30, 1998,
the estimated bid-side value of Redwood REIT's mortgage assets decreased due
primarily to faster prepayments. Its interest rate agreements also decreased in
value as discussed above.
The estimated total mark-to-market value per common share outstanding decreased
from $21.47 as of December 31, 1997 to $20.48 as of June 30, 1998. The total
estimated mark-to-market adjustment represented $1.69 per common share
outstanding at June 30, 1998.
RISK MANAGEMENT
Redwood REIT seeks to manage the potential credit, interest rate, prepayment,
liquidity, and other risks inherent in mortgage spread lending institutions in a
prudent manner designed to insure the longevity of Redwood REIT. At the same
time, Redwood REIT seeks to provide an opportunity for the Company's
shareholders to realize attractive total rates of return through long-term stock
ownership in the Company. While Redwood REIT does not seek to avoid risk, it
does seek, to the best of its ability, to: i) assume risks that can be
quantified from historical experience, ii) actively manage such risk, iii) earn
sufficient compensation to justify taking of such risks, and iv) maintain
capital levels consistent with the risks it does undertake.
Redwood REIT seeks to limit credit risk by maintaining what it believes to be
high-quality mortgage loan underwriting standards for loans retained in its
portfolio. Redwood REIT is a nationwide "A" (or "prime") quality lending
company: it currently acquires and owns first mortgages on single-family
residential properties which have been underwritten to the highest levels of
underwriting standards generally in use for these types of loans. Credit losses
from such mortgages tend to be cyclical. Redwood REIT expects that portfolio
credit losses will increase as its loans season and should the U.S. economy
deteriorate. Historically, however, the magnitude of credit loss incurred from
high-quality single-family mortgages during credit cycles has been contained
relative to credit losses arising from other forms of commercial, consumer and
residential mortgage lending.
Redwood REIT seeks to manage liquidity risk and short-term borrowing roll-over
risk (which could be caused by market value fluctuations of assets pledged as
collateral for short-term borrowings or by changes in lending markets) through:
i) maintaining what it believes to be a high-quality and liquid portfolio of
mortgage assets, ii) maintaining a hedging program utilizing interest rate
agreements designed to partially mitigate net changes in the market values of
its assets, iii) maintaining what it believes to be a prudent level of
capitalization (and therefore a
35
<PAGE> 36
prudent level of unused borrowing capacity), and iv) replacing a portion of its
short-term borrowings with long-term borrowings. Liquidity risks and short-term
borrowing roll-over risks cannot be completely eliminated unless Redwood REIT
can replace all of its short-term borrowings with long-term borrowings. At June
30, 1998, Redwood REIT remained exposed to such risk particularly in general
market environments of rapidly rising interest rates, market dislocation or
illiquidity.
Redwood REIT seeks to manage some of its interest rate risk through matching the
interest rate characteristics of its mortgages, its borrowings, and its hedges
to the degree that management believes is likely to be in the best interests of
the shareholders in the long-term. Redwood REIT does not seek to be perfectly
matched or to entirely eliminate interest rate risk.
Interest rate agreements are a form of interest rate insurance, or hedging,
which Redwood REIT utilizes to reduce the effects that large changes in interest
rates could have on its balance sheet and earnings. Redwood REIT seeks to hedge,
in part, the market value and earnings risks arising from its ARMs and Hybrids,
their associated liabilities, or both. Redwood REIT also may hedge the market
value of acquired mortgage loans prior to securitization, the anticipated
issuance of liabilities, or the premium amortization risk that may arise from
falling interest rates. Redwood REIT may use interest rate agreements for other
hedging purposes as well.
Through June 30, 1998, Redwood REIT generally has assumed some other types of
asset/liability mismatches as well, including some risk that the short-end of
the yield curve becomes "flatter" (i.e., the risk of six and twelve month
interest rates falling relative to one and three month interest rates) and some
"TED" spread risk (the risk of U.S. Treasury rates falling relative to LIBOR
rates). Certain other types of interest rate risks remain partially unhedged as
well. Management believes that the assumption of these risks, to the extent
undertaken by Redwood REIT, is more likely than not to result in higher earnings
for Redwood REIT in the long-term but also, from time to time, may cause
earnings volatility and opportunity cost from foregone growth potential.
Management believes that retained interest rate risks (to the extent they are
separate from liquidity and market value fluctuation risk) are unlikely to cause
a safety and soundness issue for Redwood REIT except in relatively extreme and
unlikely scenarios.
While Redwood REIT's mortgage portfolio has in the past consisted primarily of
ARMs, as of June 30, 1998 Hybrid loans had grown to 22.6% of the portfolio.
Hybrid loans have an initial fixed-rate coupon period ranging from three to ten
years. At that point, the Hybrid coupon will adjust to market conditions in a
manner similar to ARMs. Due to the fixed-rate coupon period, the challenges of
the managing the liquidity risk, short-term borrowing rollover risk, interest
rate risk and other asset/liability type risks of Hybrids are different from
those of ARMs. To date, Redwood REIT has sought to manage the risks of Hybrid
loans through the issuance of matching long-term amortizing debt with a
fixed-rate period similar to that of the coupons of Redwood REIT's Hybrids and
through the use of five-year Treasury futures and options on five-year Treasury
futures as hedges. Redwood REIT expects that its Hybrid hedging strategy will
evolve over time. Redwood REIT does not seek to hedge all of the risk of its
Hybrid loan portfolio, and there can be no assurance that Redwood REIT's efforts
to hedge Hybrids and associated liabilities will be beneficial to Redwood REIT.
Changes in principal repayment rates may be a source of earnings volatility for
Redwood REIT. If the rate of mortgage principal repayment of Redwood REIT's
mortgage assets is faster than expected, the rate at which Redwood REIT
amortizes its net premium balances as an expense will increase and earnings will
be reduced relative to what they would have been otherwise. In addition, faster
principal repayments may reduce Redwood REIT's net asset growth rate; net asset
growth is generally an important component of future earnings growth.
Higher-than-expected mortgage principal repayments may also reduce prospects for
Redwood REIT if the potential return characteristics of assets then available
for acquisition are less attractive than those of the existing assets held in
portfolio. Prepayment rates for mortgage loans increased during the most recent
quarters and prepayment rates may further increase in 1998. On the other hand,
slowing rates of mortgage principal repayment could exacerbate certain
liquidity, market value fluctuation, interest rate risks, and other risks,
particularly in a rising interest rate environment.
36
<PAGE> 37
While mortgage principal repayment rates are not highly predictable, management
believes the strongest influencing factors in the past have been the shape of
the yield curve and the absolute level of longer-term interest rates. As
longer-term rates drop, mortgage principal repayments have tended to increase,
particularly if longer-term rates drop relative to shorter-term interest rates.
In addition, management believes mortgage principal repayments have been
increasing on a secular trend basis due to structural and behavioral changes in
the mortgage origination market. In the first half of 1998, Redwood REIT
implemented some hedges which may tend to add to earnings during periods of
rapidly falling long-term interest rates. In general, however, Redwood REIT has
not sought to hedge mortgage principal repayment risk but rather has sought to
analyze, based on individual mortgage characteristics, the propensity of each
acquired mortgage or mortgage pool to experience accelerated principal repayment
rates and to adjust its acquisition price bid accordingly based on the level of
perceived downside (and upside) earnings risk. Redwood REIT has also been able
to effectively reduce the prepayment risk on some of its assets though the
issuance of amortizing long-term debt at a price above par.
At June 30, 1998, Redwood REIT's net unamortized effective premium was $9.4
million less than reported at December 31, 1997, primarily as a result of a net
premium amortization expense during the first half of 1998. As a percent of
common equity, net effective premium decreased from 22.5% to 19.9% over this
period.
As of June 30, 1998, Redwood REIT's net unamortized effective premium balance of
$62.2 million consisted of $75.2 million of purchase premium on mortgage assets,
$4.7 million of unamortized Deferred Bond Issuance Cost on long-term debt, $10.7
million of unamortized purchased discount on mortgage assets, and $7.0 million
of net unamortized premium on long-term debt (which, in effect, functions in a
similar manner to mortgage asset discounts).
As of December 31, 1997, Redwood REIT's net unamortized effective premium
balance of $71.6 million consisted of $86.2 million of purchase premium on
mortgage assets, $3.7 million of unamortized Deferred Bond Issuance Costs, $12.4
million of purchase discount on mortgage assets and $5.8 million of unamortized
premium on long-term debt.
The pricing of mortgage assets relative to the underlying risk in the assets,
and relative to levels at which Redwood REIT can issue long-term debt, has a
large effect on Redwood REIT's net asset growth and equity utilization, and
therefore on Redwood REIT's earnings growth. Asset growth will likely slow when
mortgage prices are high.
Through its Risk-Adjusted Capital Policy, Redwood REIT assigns a guideline
capital adequacy amount (expressed as a guideline equity-to-assets ratio) to
each of its mortgage assets. For short-term funded assets, this ratio will
fluctuate over time, based on changes in that asset's credit quality, liquidity
characteristics, potential for market value fluctuation, interest rate risk,
prepayment risk, and the over-collateralization requirements for that asset set
by Redwood REIT's collateralized short-term lenders. Capital requirements for
mortgage equity interests (assets funded with long-term debt) generally equal
Redwood REIT's net investment. The sum of the capital adequacy amounts for all
of Redwood REIT's mortgage assets is Redwood REIT's aggregate guideline capital
adequacy amount.
Since management believes that the bulk of the capital currently necessary to
manage Redwood REIT prudently is needed due to the liquidity and market value
fluctuation risks that arise from the utilization of short-term debt, the total
guideline equity-to-assets ratio capital amount has declined as Redwood REIT has
eliminated some of these short-term risks through the creation of mortgage
equity interests by issuing long-term debt.
Redwood REIT does not expect that its actual capital levels will always exceed
the guideline amount. Redwood REIT measures all of its mortgage assets funded
with short-term debt at estimated market value for the purpose of making
Risk-Adjusted Capital calculations. If interest rates were to rise in a
significant manner, Redwood REIT's capital guideline amount would rise (as the
potential interest rate risk of its mortgages would increase, at least on a
temporary basis, due to periodic and life caps and slowing prepayment rates)
while its actual capital levels as determined for the Risk-Adjusted Capital
Policy would likely fall as the market values of its mortgages, net of
mark-to-market gains on hedges, decreased (market value declines may be
temporary as well, as future coupon
37
<PAGE> 38
adjustments on ARMs may help to restore some of the lost market value). In this
circumstance, or any other circumstance in which Redwood REIT's actual capital
levels decreased below Redwood REIT's capital adequacy guideline amount, Redwood
REIT would generally cease the acquisition of new mortgage assets until capital
balance was restored. In certain cases prior to a planned equity offering or
other circumstances, the Board of Directors has authorized management to acquire
mortgage assets in a limited amount beyond the usual constraints of Redwood
REIT's Risk-Adjusted Capital Policy.
As expressed as an equity-to-assets ratio, Redwood REIT's average Risk-Adjusted
Capital Policy guideline capital amount decreased from 7.51% at December 31,
1997 to 6.48% at June 30, 1998 as a result of risk reduction stemming from the
issuance of long-term debt.
The actual average equity-to-asset ratio for Redwood REIT declined from 10.1% in
1997 to 9.3% in the second quarter of 1998. Redwood REIT's Risk Adjusted Capital
Policy's equity-to-asset ratio decreased from 9.1% in 1997 to 7.4% in the second
quarter of 1998. Since actual average equity-to-asset ratios have been higher
than the capital guideline ratios, Redwood REIT generally could have owned more
mortgage assets and still met its capital guidelines. Balance sheet capacity
utilization (the percentage of Redwood REIT's capital employed) is a key measure
of capital efficiency for Redwood REIT. Average balance sheet capacity
utilization has decreased since mid-1997 as Redwood REIT has generated excess
capital by creating mortgage equity interests and by slowing its pace of
mortgage acquisitions due to unfavorable mortgage acquisition pricing levels.
Average capacity utilization decreased to 79% in the second quarter of 1998 from
90% in all of 1997.
Beginning in mid-1997, strong demand for mortgage assets in an environment of
reduced supply led to increasing prices for mortgage loans and mortgage
securities. These rising prices together with the potential for increased
mortgage prepayment rates led Redwood REIT to reduce the rate at which it sought
to acquire new mortgage assets. Although this decision resulted in Redwood
REIT's balance sheet having excess capital in the latter part of 1997, and thus
far in 1998, management believed that refraining from committing significant
capital to the new mortgage acquisitions until mortgage prices adjusted
downwards would maximize long-term shareholder value. Although Redwood REIT
continued to avoid acquiring most types of adjustable-rate loans in the first
half of 1998, Redwood REIT started a Hybrid acquisition program.
Virtually all of Redwood REIT's assets and liabilities are financial in nature.
As a result, interest rates, changes in interest rates and other factors drive
Redwood REIT's performance far more than does inflation. Changes in interest
rates do not necessarily correlate with inflation rates or changes in inflation
rates. Redwood REIT's financial statements are prepared in accordance with
Generally Accepted Accounting Principles and Redwood REIT's dividends are
generally determined based on Redwood REIT's net income as calculated for tax
purposes; in each case, Redwood REIT's activities and balance sheet are measured
with reference to historical cost or fair market value without considering
inflation.
Year 2000 Issues
Certain computer programs and embedded logic devices that utilize two digits
rather than four to define the applicable year may fail to properly recognize
date sensitive information when the year changes to 2000 (the "Year 2000
Issue").
The Company is conducting a comprehensive review to determine if the Year 2000
Issue will affect its computer systems. The Company currently believes that it
does not face "legacy" computer systems and software issues because it commenced
operations within the past five years. Thus, the Company does not anticipate
incurring internal Year 2000 Issue costs that would be material to its financial
position, results of operations, or cash flows in future periods. There can be
no assurance, however, that the Company's lenders, custodians, loan servicers,
vendors, clients and other third party partners will resolve their own Year 2000
Issues in a timely manner, or that any failure by these other parties to resolve
such issues would not have an adverse effect on the Company's operations and
financial condition. The Company believes it is devoting the necessary resources
to address all of the Year 2000 Issues over which it has control.
38
<PAGE> 39
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 1
INCOME STATEMENT FOR THREE MONTHS ENDING
----------------------
(ALL DOLLARS IN THOUSANDS) JUN. 30, MAR. 31,
Mortgage Loans: 1998 1998
-------- --------
<S> <C> <C>
Coupon Income $ 33,523 $ 28,306
Amortization of Discount Balances 1 0
Amortization of Premium Balances (3,619) (2,496)
-------- --------
Interest Income: Mortgage Loans 29,905 25,810
Mortgage Securities:
Coupon Income 30,825 33,330
Amortization of Discount Balances 449 185
Amortization of Premium Balances (7,851) (5,848)
-------- --------
Interest Income: Mortgage Securities 23,423 27,667
Total Interest Income From Mortgage Assets 53,328 53,477
Interest Income: Cash Balances 455 384
-------- --------
Total Interest Income 53,783 53,861
Interest Expense on Short-Term Debt (33,282) (28,003)
Interest Expense on Long-Term Debt (16,887) (18,094)
-------- --------
Total Interest Expense (50,169) (46,097)
Interest Rate Agreement Expense (1,652) (1,426)
Interest Rate Agreement Income 28 48
-------- --------
Net Interest Rate Agreement Expense (1,624) (1,378)
Net Interest Income 1,991 6,386
Provision for Potential Credit Losses
Mortgage Loans (763) (601)
Mortgage Securities 0 0
-------- --------
Total Credit Provision (763) (601)
Write-down of Mortgage Securities 0 (729)
Gain (Loss) on Sale Transactions 0 6
Operating Expenses
Compensation and Benefits Expense (145) (1,048)
Dividend Equivalent Rights Expense (6) (195)
Other Operating Expenses (438) (682)
-------- --------
Total Operating Expenses (589) (1,925)
Other Income (Expenses) 139 0
Equity in earnings of RWT Holdings, Inc. (581) 0
Corporate Income Tax Expense 0 0
-------- --------
Net Income Before Preferred Dividends 196 3,137
Preferred Dividends (687) (687)
-------- --------
Net Income to Common Shareholders $ (491) $ 2,450
======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 196 $ 3,137
Mortgage Amortization Differences (268) 43
Credit Provisions less Actual Losses 299 552
Gain (Loss) on Sale Differences 15 0
Write-down of Mortgage Securities Differences 0 729
Equity in earnings of RWT Holdings, Inc., net of dividends paid to Redwood REIT 581 0
Operating Expense Differences 15 67
-------- --------
Taxable Income Before Preferred Dividend $ 838 $ 4,527
======== ========
</TABLE>
39
<PAGE> 40
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 1 (CONTINUED)
INCOME STATEMENT FOR THREE MONTHS ENDING
-----------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
Mortgage Loans: 1997 1997 1997 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Coupon Income $ 24,911 $ 21,432 $ 14,474 $ 10,784
Amortization of Discount Balances 0 1 8 11
Amortization of Premium Balances (2,088) (1,803) (1,462) (940)
-------- -------- -------- --------
Interest Income: Mortgage Loans 22,823 19,630 13,020 9,855
Mortgage Securities:
Coupon Income 36,595 41,124 39,879 31,440
Amortization of Discount Balances 258 375 409 261
Amortization of Premium Balances (6,091) (5,085) (4,065) (3,150)
-------- -------- -------- --------
Interest Income: Mortgage Securities 30,762 36,414 36,223 28,551
Total Interest Income From Mortgage Assets 53,585 56,044 49,243 38,406
Interest Income: Cash Balances 399 499 266 162
-------- -------- -------- --------
Total Interest Income 53,984 56,543 49,509 38,568
Interest Expense on Short-Term Debt (31,964) (40,318) (38,958) (28,900)
Interest Expense on Long-Term Debt (14,567) (5,570) 0 0
-------- -------- -------- --------
Total Interest Expense (46,531) (45,888) (38,958) (28,900)
Interest Rate Agreement Expense (1,281) (1,064) (912) (602)
Interest Rate Agreement Income 12 26 73 7
-------- -------- -------- --------
Net Interest Rate Agreement Expense (1,269) (1,038) (839) (595)
Net Interest Income 6,184 9,617 9,712 9,073
Provision for Potential Credit Losses
Mortgage Loans (1,516) (473) (299) (215)
Mortgage Securities 1,000 (470) (477) (480)
-------- -------- -------- --------
Total Credit Provision (516) (943) (776) (695)
Write-down of Mortgage Securities 0 0 0 0
Gain (Loss) on Sale Transactions 543 20 0 0
Operating Expenses
Compensation and Benefits Expense (413) (441) (516) (529)
Dividend Equivalent Rights Expense (145) (361) (358) (203)
Other Operating Expenses (570) (346) (341) (435)
-------- -------- -------- --------
Total Operating Expenses (1,128) (1,148) (1,215) (1,167)
Other Income (Expenses) 0 0 0 0
Equity in earnings of RWT Holdings, Inc. 0 0 0 0
Corporate Income Tax Expense 0 0 0 0
-------- -------- -------- --------
Net Income Before Preferred Dividends 5,083 7,546 7,721 7,211
Preferred Dividends (686) (687) (687) (755)
-------- -------- -------- --------
Net Income to Common Shareholders $ 4,397 $ 6,859 $ 7,034 $ 6,456
======== ======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 5,083 $ 7,546 $ 7,721 $ 7,211
Mortgage Amortization Differences 105 (95) (103) (87)
Credit Provisions less Actual Losses 475 875 747 653
Gain (Loss) on Sale Differences (190) 0 0 0
Write-down of Mortgage Securities Differences 0 0 0 0
Equity in earnings of RWT Holdings, Inc., net of dividends paid to Redwood REIT 0 0 0 0
Operating Expense Differences 113 (175) (50) 135
-------- -------- -------- --------
Taxable Income Before Preferred Dividend $ 5,586 $ 8,151 $ 8,315 $ 7,912
======== ======== ======== ========
</TABLE>
40
<PAGE> 41
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 1 (CONTINUED)
INCOME STATEMENT FOR YEAR ENDING
-----------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
Mortgage Loans: 1997 1996 1995 1994
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Coupon Income $ 71,601 $ 5,466 $ 379 $ 0
Amortization of Discount Balances 20 31 4 0
Amortization of Premium Balances (6,293) (313) (4) 0
--------- -------- -------- -------
Interest Income: Mortgage Loans 65,328 5,184 379 0
Mortgage Securities:
Coupon Income 149,038 66,131 14,759 1,102
Amortization of Discount Balances 1,303 879 915 101
Amortization of Premium Balances (18,391) (5,794) (559) (19)
--------- -------- -------- -------
Interest Income: Mortgage Securities 131,949 61,216 15,115 1,184
Total Interest Income From Mortgage Assets 197,277 66,400 15,494 1,184
Interest Income: Cash Balances 1,326 884 232 112
--------- -------- -------- -------
Total Interest Income 198,604 67,284 15,726 1,296
Interest Expense on Short-Term Debt (140,140) (49,191) (10,608) (760)
Interest Expense on Long-Term Debt (20,137) 0 0 0
--------- -------- -------- -------
Total Interest Expense (160,277) (49,191) (10,608) (760)
Interest Rate Agreement Expense (3,859) (1,159) (339) (8)
Interest Rate Agreement Income 118 1 0 0
--------- -------- -------- -------
Net Interest Rate Agreement Expense (3,741) (1,158) (339) (8)
Net Interest Income 34,586 16,935 4,779 528
Provision for Potential Credit Losses
Mortgage Loans (2,503) (348) (79) 0
Mortgage Securities (427) (1,348) (414) 0
--------- -------- -------- -------
Total Credit Provision (2,930) (1,696) (493) 0
Write-down of Mortgage Securities 0 0 0 0
Gain (Loss) on Sale Transactions 563 0 0 0
Operating Expenses
Compensation and Benefits Expense (1,899) (1,191) (463) (63)
Dividend Equivalent Rights Expense (1,067) (382) (54) 0
Other Operating Expenses (1,692) (981) (614) (83)
--------- -------- -------- -------
Total Operating Expenses (4,658) (2,554) (1,131) (146)
Other Income (Expenses) 0 0 0 0
Equity in earnings of RWT Holdings, Inc. 0 0 0 0
Corporate Income Tax Expense 0 0 0 0
--------- -------- -------- -------
Net Income Before Preferred Dividends 27,561 12,685 3,155 382
Preferred Dividends (2,815) (1,148) 0 0
--------- -------- -------- -------
Net Income to Common Shareholders $ 24,746 $ 11,537 $ 3,155 $ 382
========= ======== ======== =======
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 27,561 $ 12,685 $ 3,155 $ 382
Mortgage Amortization Differences (180) 449 175 (28)
Credit Provisions less Actual Losses 2,750 1,689 490 0
Gain (Loss) on Sale Differences (190) 0 (0) 0
Write-down of Mortgage Securities Differences 0 0 (0) 0
Equity in earnings of RWT Holdings, Inc., net of dividends paid to Redwood REIT 0 0 0 0
Operating Expense Differences 23 345 12 0
--------- -------- -------- -------
Taxable Income Before Preferred Dividend $ 29,964 $ 15,168 $ 3,832 $ 354
========= ======== ======== =======
</TABLE>
41
<PAGE> 42
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 AT
---------------------------
BALANCE SHEETS JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1998 1998
----------- -----------
<S> <C> <C>
Unrestricted Cash $ 11,354 $ 6,468
Restricted Cash 21,560 25,734
----------- -----------
Total Cash and Cash Equivalents 32,914 32,202
Mortgage Loans:
Principal Value 2,191,501 1,837,020
Unamortized Premium 35,660 37,943
Unamortized Discount 0 (27)
Real Estate Owned 266 497
Reserve For Credit Losses (4,079) (3,449)
Market Valuation Account 0 0
----------- -----------
Total Mortgage Loans 2,223,348 1,871,984
Mortgage Securities:
Principal Value 1,554,196 1,741,975
Unamortized Premium 39,498 47,105
Unamortized Discount (10,650) (12,104)
Reserve For Credit Losses (1,705) (2,035)
Market Valuation Account (10,497) (4,375)
----------- -----------
Total Mortgage Securities 1,570,842 1,770,566
Total Mortgage Assets 3,794,190 3,642,550
Interest Rate Agreements 9,938 10,337
Market Valuation Account (7,520) (8,710)
----------- -----------
Total Interest Rate Agreements 2,418 1,627
Accrued Interest Receivable 21,554 23,886
Investment in RWT Holdings, Inc. 9,319 9,900
Due from RWT Holdings, Inc. 831 0
Fixed Assets, Leasehold, Org. Costs 725 551
Prepaid Expenses and Other Receivables 4,976 2,975
----------- -----------
Other Assets 37,405 37,312
Total Assets $ 3,866,927 $ 3,713,691
=========== ===========
Short-Term Borrowings $ 1,936,158 $ 2,288,018
Long-Term Borrowings 1,593,344 1,081,279
Accrued Interest Payable 13,675 12,212
Accrued Expenses and Other Payables 2,192 1,797
Dividends Payable 687 687
----------- -----------
Total Liabilities 3,546,056 3,383,993
----------- -----------
Preferred Stock 26,736 26,736
Common Stock 141 141
Additional Paid-in Capital 320,687 320,282
Accumulated Other Comprehensive Income (18,017) (13,085)
Dividends in Excess of Net Income (8,676) (4,376)
----------- -----------
Total Stockholders' Equity 320,871 329,698
----------- -----------
Total Liabilities plus Stockholders' Equity $ 3,866,927 $ 3,713,691
=========== ===========
</TABLE>
42
<PAGE> 43
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 (CONTINUED) AT
-----------------------------------------------------------
BALANCE SHEETS DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Unrestricted Cash $ 24,892 $ 28,758 $ 29,425 $ 12,985
Restricted Cash 24,657 28,938 0 0
----------- ----------- ----------- -----------
Total Cash and Cash Equivalents 49,549 57,696 29,425 12,985
Mortgage Loans:
Principal Value 1,519,124 1,348,619 1,111,029 716,009
Unamortized Premium 34,844 30,852 25,442 15,951
Unamortized Discount 0 0 (123) (131)
Real Estate Owned 713 220 346 128
Reserve For Credit Losses (2,855) (1,363) (929) (630)
Market Valuation Account 0 0 0 (1,291)
----------- ----------- ----------- -----------
Total Mortgage Loans 1,551,826 1,378,328 1,135,765 730,035
Mortgage Securities:
Principal Value 1,779,375 2,010,374 2,179,186 1,839,720
Unamortized Premium 51,329 56,082 62,219 49,156
Unamortized Discount (12,442) (14,387) (14,968) (15,510)
Reserve For Credit Losses (2,076) (3,093) (2,651) (2,203)
Market Valuation Account (1,390) 10,619 3,603 3,516
----------- ----------- ----------- -----------
Total Mortgage Securities 1,814,796 2,059,595 2,227,389 1,874,679
Total Mortgage Assets 3,366,622 3,437,923 3,363,154 2,604,714
Interest Rate Agreements 10,781 11,708 12,233 7,879
Market Valuation Account (8,681) (8,782) (7,366) (2,106)
----------- ----------- ----------- -----------
Total Interest Rate Agreements 2,100 2,926 4,867 5,773
Accrued Interest Receivable 23,119 23,859 24,065 17,722
Investment in RWT Holdings, Inc. 0 0 0 0
Due from RWT Holdings, Inc. 0 0 0 0
Fixed Assets, Leasehold, Org. Costs 539 358 257 259
Prepaid Expenses and Other Receivables 2,268 2,490 2,738 1,611
----------- ----------- ----------- -----------
Other Assets 25,926 26,707 27,060 19,592
Total Assets $ 3,444,197 $ 3,525,252 $ 3,424,506 $ 2,643,064
=========== =========== =========== ===========
Short-Term Borrowings $ 1,914,525 $ 2,639,773 $ 3,102,784 $ 2,373,279
Long-Term Borrowings 1,172,801 497,367 0 0
Accrued Interest Payable 14,476 20,216 18,153 14,962
Accrued Expenses and Other Payables 2,172 2,129 1,743 1,262
Dividends Payable 5,686 9,433 8,638 7,899
----------- ----------- ----------- -----------
Total Liabilities 3,109,660 3,168,918 3,131,318 2,397,402
----------- ----------- ----------- -----------
Preferred Stock 26,736 26,733 26,733 29,383
Common Stock 143 146 133 119
Additional Paid-in Capital 324,555 333,841 274,420 219,461
Accumulated Other Comprehensive Income (10,071) 1,837 (3,762) 118
Dividends in Excess of Net Income (6,826) (6,223) (4,336) (3,419)
----------- ----------- ----------- -----------
Total Stockholders' Equity 334,537 356,334 293,188 245,662
----------- ----------- ----------- -----------
Total Liabilities plus Stockholders' Equity $ 3,444,197 $ 3,525,252 $ 3,424,506 $ 2,643,064
=========== =========== =========== ===========
</TABLE>
43
<PAGE> 44
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 2 (CONTINUED) AT
-------------------------------------------------------
BALANCE SHEETS DEC. 31, DEC. 31, DEC. 31, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1996 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Unrestricted Cash $ 24,892 $ 11,068 $ 4,825 $ 1,027
Restricted Cash 24,657 0 0 0
----------- ----------- --------- ---------
Total Cash and Cash Equivalents 49,549 11,068 4,825 1,027
Mortgage Loans:
Principal Value 1,519,124 514,837 26,411 0
Unamortized Premium 34,844 12,389 210 0
Unamortized Discount 0 (142) (172) 0
Real Estate Owned 713 196 0 0
Reserve For Credit Losses (2,855) (428) (79) 0
Market Valuation Account 0 (1,377) 80 0
----------- ----------- --------- ---------
Total Mortgage Loans 1,551,826 525,475 26,450 0
Mortgage Securities:
Principal Value 1,779,375 1,602,212 417,214 120,627
Unamortized Premium 51,329 41,928 9,433 828
Unamortized Discount (12,442) (15,951) (16,860) (1,320)
Reserve For Credit Losses (2,076) (1,752) (411) 0
Market Valuation Account (1,390) 1,516 (3,582) (2,658)
----------- ----------- --------- ---------
Total Mortgage Securities 1,814,796 1,627,953 405,794 117,477
Total Mortgage Assets 3,366,622 2,153,428 432,244 117,477
Interest Rate Agreements 10,781 6,200 2,521 1,791
Market Valuation Account (8,681) (3,599) (1,974) 101
----------- ----------- --------- ---------
Total Interest Rate Agreements 2,100 2,601 547 1,892
Accrued Interest Receivable 23,119 14,134 3,270 743
Investment in RWT Holdings, Inc. 0 0 0 0
Due from RWT Holdings, Inc. 0 0 0 0
Fixed Assets, Leasehold, Org. Costs 539 257 206 201
Prepaid Expenses and Other Receivables 2,268 2,709 465 188
----------- ----------- --------- ---------
Other Assets 25,926 17,100 3,941 1,132
Total Assets $ 3,444,197 $ 2,184,197 $ 441,557 $ 121,529
=========== =========== ========= =========
Short-Term Borrowings $ 1,914,525 $ 1,953,103 $ 370,316 $ 100,376
Long-Term Borrowings 1,172,801 0 0 0
Accrued Interest Payable 14,476 14,060 1,290 676
Accrued Expenses and Other Payables 2,172 761 227 29
Dividends Payable 5,686 5,268 1,434 167
----------- ----------- --------- ---------
Total Liabilities 3,109,660 1,973,192 373,267 101,248
----------- ----------- --------- ---------
Preferred Stock 26,736 29,579 0 22,785
Common Stock 143 110 55 2
Additional Paid-in Capital 324,555 187,507 73,895 19
Accumulated Other Comprehensive Income (10,071) (3,460) (5,476) (2,557)
Dividends in Excess of Net Income (6,826) (2,731) (184) 31
----------- ----------- --------- ---------
Total Stockholders' Equity 334,537 211,005 68,290 20,280
----------- ----------- --------- ---------
Total Liabilities plus Stockholders' Equity $ 3,444,197 $ 2,184,197 $ 441,557 $ 121,528
=========== =========== ========= =========
</TABLE>
44
<PAGE> 45
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 AT OR
MORTGAGE ASSET CHARACTERISTICS FOR THREE MONTHS ENDING
--------------------------------
(ALL DOLLARS IN THOUSANDS) JUN. 30, MAR. 31,
1998 1998
------------- -------------
<S> <C> <C>
Average Characteristics of Loans and Securities (Mortgage Assets) at End of Period
Single-Family Properties 100% 100%
Short-Term Adjustable Rate Mortgage Assets (Resets every 12 months or less) 77% 91%
Hybrid Loans (Fixed rate coupon for three to ten years) 23% 9%
First Lien 100% 100%
Average Credit Rating Equivalent AA+ AA+
Amortized Cost as % of Principal Value 101.72% 102.04%
Coupon Rate 7.42% 7.59%
Months to Next Coupon Adjustment (Short-Term Adjustable Rate Mortgage Assets) 4 4
Months to Next Coupon Adjustment (Hybrid Loans) 56 52
------------- -------------
Months to Next Coupon Adjustment (Total Mortgage Assets) 15 8
For Short-Term Adjustable Rate Mortgage Assets
Coupon Rate 7.59% 7.67%
Level of Index 5.61% 5.61%
Net Margin 1.98% 2.02%
Fully Indexed Coupon Rate 7.59% 7.63%
Coupon Rate Versus Fully-Indexed Rate 0.00% 0.04%
Net Life Cap 12.09% 12.09%
Percentage of Mortgage Assets by Credit Type, by Amortized Cost
Mortgage Loans 58.5% 51.3%
Mortgage Securities: AAA/AA 41.3% 48.4%
Mortgage Securities: A/BBB 0.0% 0.0%
Mortgage Securities: Below BBB 0.2% 0.3%
------------- -------------
Total Mortgage Assets (%) 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $ 3,810,471 $ 3,652,409
Percentage of Mortgage Assets by Index, Adjustment Frequency, and Annualized Periodic Cap,
By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 18.8% 20.2%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 16.2% 20.0%
6 Month LIBOR, adjusts every 6 months, no periodic cap 10.4% 11.6%
6 Month CD, adjusts every 6 months, 2% annualized periodic cap 0.9% 1.0%
6 Mo. Treasury, adjusts every 6 months, 2% annualized periodic cap 0.4% 0.5%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.4% 0.4%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.1% 1.3%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 21.5% 8.1%
12 Month Treasury, adjusts annually, 2% periodic cap 28.7% 35.2%
12 Month Treasury, adjusts annually, no periodic cap 0.3% 0.3%
Other 1.3% 1.4%
------------- -------------
Total Mortgage Assets (%) 100.0% 100.0%
Total Mortgage Assets (Principal Value) $ 3,745,963 $ 3,579,492
Net Mortgage Asset Growth
Mortgage Acquisitions $ 594,836 $ 603,803
Mortgage Principal Repayments (425,292) (306,112)
Amortization (11,020) (8,158)
Writedowns 0 (729)
Credit Losses (462) (49)
Sales 0 (9,289)
------------- -------------
Change in Mortgage Assets (Amortized Cost) $ 158,062 $ 279,466
</TABLE>
45
<PAGE> 46
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 (CONTINUED) AT OR
MORTGAGE ASSET CHARACTERISTICS FOR THREE MONTHS ENDING
-------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Characteristics of Loans and Securities (Mortgage Assets)
at End of Period
Single-Family Properties 100% 100% 100% 100%
Short-Term Adjustable Rate Mortgage Assets
(Resets every 12 months or less) 98% 98% 98% 98%
Hybrid Loans (Fixed rate coupon for three to ten years) 2% 2% 2% 2%
First Lien 100% 100% 100% 100%
Average Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 102.23% 102.16% 102.21% 101.94%
Coupon Rate 7.71% 7.75% 7.73% 7.70%
Months to Next Coupon Adjustment (Short-Term Adjustable Rate
Mortgage Assets) 4 4 4 5
Months to Next Coupon Adjustment (Hybrid Loans) 21 24 27 30
------------- ---------- ---------- ----------
Months to Next Coupon Adjustment (Total Mortgage Assets) 4 4 5 5
For Short-Term Adjustable Rate Mortgage Assets
Coupon Rate 7.73% 7.77% 7.75% 7.71%
Level of Index 5.68% 5.65% 5.77% 5.98%
Net Margin 2.05% 2.10% 2.15% 2.20%
Fully Indexed Coupon Rate 7.73% 7.75% 7.92% 8.18%
Coupon Rate Versus Fully-Indexed Rate 0.00% 0.02% -0.17% -0.47%
Net Life Cap 12.07% 12.01% 11.99% 11.88%
Percentage of Mortgage Assets by Credit Type, by Amortized Cost
Mortgage Loans 46.1% 40.2% 33.8% 28.1%
Mortgage Securities: AAA/AA 53.6% 58.2% 64.5% 69.8%
Mortgage Securities: A/BBB 0.0% 0.7% 0.8% 1.0%
Mortgage Securities: Below BBB 0.3% 0.9% 0.9% 1.1%
------------- ---------- ---------- ----------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $ 3,372,943 $3,431,760 $3,363,131 $2,605,323
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap, By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 20.2% 12.4% 8.9% 2.6%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 21.5% 26.2% 27.5% 32.4%
6 Month LIBOR, adjusts every 6 months, no periodic cap 11.2% 11.4% 7.4% 1.9%
6 Month CD, adjusts every 6 months, 2% annualized periodic cap 1.2% 1.3% 1.5% 1.9%
6 Mo. Treasury, adjusts every 6 months, 2% annualized periodic cap 0.6% 0.6% 0.6% 0.8%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.5% 0.5% 0.5% 0.7%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.6% 1.7% 1.8% 2.4%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 0.0% 0.0% 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic cap 41.6% 44.5% 50.3% 55.4%
12 Month Treasury, adjusts annually, no periodic cap 0.1% 0.1% 0.1% 0.1%
Other 1.5% 1.3% 1.4% 1.8%
------------- ---------- ---------- ----------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Principal Value) $ 3,299,212 $3,359,213 $3,290,562 $2,555,857
Net Mortgage Asset Growth
Mortgage Acquisitions $ 342,283 $ 369,463 $ 962,890 $ 627,075
Mortgage Principal Repayments (347,427) (252,398) (199,945) (173,362)
Amortization (7,921) (6,512) (5,109) (3,818)
Writedowns 0 0 0 0
Credit Losses (40) (68) (28) (41)
Sales (45,712) (41,856) 0 0
------------- ---------- ---------- ----------
Change in Mortgage Assets (Amortized Cost) $ (58,817) $ 68,629 $ 757,808 $ 449,854
</TABLE>
46
<PAGE> 47
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 3 (CONTINUED) AT OR
MORTGAGE ASSET CHARACTERISTICS FOR YEAR ENDING
---------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Average Characteristics of Loans and Securities (Mortgage Assets)
at End of Period
Single-Family Properties 100% 100% 100% 100%
Short-Term Adjustable Rate Mortgage Assets
(Resets every 12 months or less) 98% 100% 100% 100%
Hybrid Loans (Fixed rate coupon for three to ten years) 2% 0% 0% 0%
First Lien 100% 100% 100% 100%
Average Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 102.23% 101.81% 98.33% 99.59%
Coupon Rate 7.71% 7.75% 7.50% 6.00%
Months to Next Coupon Adjustment (Short-Term Adjustable
Rate Mortgage Assets) 4 5 3 3
Months to Next Coupon Adjustment (Hybrid Loans) 21 n/a n/a n/a
--------- ---------- -------- --------
Months to Next Coupon Adjustment (Total Mortgage Assets) 4 5 3 3
For Short-Term Adjustable Rate Mortgage Assets
Coupon Rate 7.73% 7.75% 7.50% 6.00%
Level of Index 5.68% 5.58% 5.44% 6.94%
Net Margin 2.05% 2.24% 2.08% 2.25%
Fully Indexed Coupon Rate 7.73% 7.82% 7.52% 9.19%
Coupon Rate Versus Fully-Indexed Rate 0.00% -0.07% -0.02% -3.19%
Net Life Cap 12.07% 11.73% 11.54% 11.48%
Percentage of Mortgage Assets by Credit Type, by Amortized Cost
Mortgage Loans 46.1% 24.5% 6.1% 0.0%
Mortgage Securities: AAA/AA 53.6% 73.0% 81.5% 92.9%
Mortgage Securities: A/BBB 0.0% 1.2% 5.8% 4.3%
Mortgage Securities: Below BBB 0.3% 1.3% 6.6% 2.8%
---------- ---------- -------- --------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $3,372,943 $2,155,469 $436,236 $120,135
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap, By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 20.2% 1.4% 7.6% 3.9%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 21.5% 36.2% 60.3% 78.3%
6 Month LIBOR, adjusts every 6 months, no periodic cap 11.2% 0.0% 0.0% 0.0%
6 Month CD, adjusts every 6 months, 2% annualized periodic cap 1.2% 2.5% 12.2% 17.8%
6 Mo. Treasury, adjusts every 6 months, 2% annualized periodic cap 0.6% 1.1% 0.0% 0.0%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.5% 0.9% 4.9% 0.0%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.6% 0.0% 0.0% 0.0%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 0.0% 0.0% 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic cap 41.6% 55.7% 12.3% 0.0%
12 Month Treasury, adjusts annually, no periodic cap 0.1% 0.0% 0.0% 0.0%
Other 1.5% 2.2% 2.7% 0.0%
---------- ---------- -------- --------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Principal Value) $3,299,212 $2,117,244 $443,625 $120,627
Net Mortgage Asset Growth
Mortgage Acquisitions $2,301,711 $1,982,864 $354,572 $121,297
Mortgage Principal Repayments (973,132) (258,424) (38,824) (1,244)
Amortization (23,361) (5,200) 357 82
Writedowns 0 0 0 0
Credit Losses (179) (7) (4) (0)
Sales (87,565) 0 0 0
---------- ---------- -------- --------
Change in Mortgage Assets (Amortized Cost) $1,217,474 $1,719,233 $316,101 $120,135
</TABLE>
47
<PAGE> 48
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
TABLE 4 AT
-------------------------
MORTGAGE LOAN SUMMARY JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1998 1998
---------- ----------
<S> <C> <C>
Number of Loans 7,032 5,939
Principal Value $2,191,767 $1,837,518
Amortized Cost 2,227,427 1,875,433
Reported Value (Net of Credit Reserve) 2,223,348 1,871,984
Estimated Bid-Side Market Value 2,219,772 1,872,775
Short-Term Adjustable Rate Loans (First reset in 12 months or less) 62% 82%
Hybrid Loans (First reset in more than 12 months) 38% 18%
Single-Family 100% 100%
"A" Quality Underwriting 100% 100%
First Lien 100% 100%
Primary Residence (Owner-Occupied) 91% 89%
Second Home 7% 8%
Investor Property 2% 3%
Average Loan Size $ 312 $ 309
Loan Balance (less than) Conventional Loan Balance Limit
($227,150 in 1998) 16% 19%
Loan Balance Greater Than $500,000 33% 36%
Original Loan-To-Value Ratio (LTV) 76% 77%
Original LTV (larger than) 80% 31% 35%
% of Original LTV (larger than) 80% with Primary Mortgage 97% 97%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 67% 67%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 2% 3%
1991 Origination * *
1992 1% 1%
1993 2% 2%
1994 6% 10%
1995 * 1%
1996 6% 8%
1997 52% 64%
1998 31% 11%
Average Seasoning in Months 15 16
Northern California 18% 13%
Southern California 17% 17%
Florida 7% 9%
New York 6% 7%
Georgia 5% 5%
Colorado 5% 4%
New Jersey 4% 4%
Texas 4% 4%
Connecticut 3% 4%
Illinois 3% 3%
Michigan 2% 2%
Massachusetts 2% 3%
Maryland 2% 3%
Other States 22% 22%
</TABLE>
*: less than 0.5%
48
<PAGE> 49
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 4 (CONTINUED) AT
--------------------------------------------------
MORTGAGE LOAN SUMMARY DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1997 1997 1997
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Number of Loans 5,041 4,651 3,983 2,795
Principal Value $1,519,837 $1,348,839 $1,111,376 $716,137
Amortized Cost 1,554,681 1,379,691 1,136,694 731,957
Reported Value (Net of Credit Reserve) 1,551,826 1,378,328 1,135,765 730,035
Estimated Bid-Side Market Value 1,552,586 1,379,166 1,136,004 729,561
Short-Term Adjustable Rate Loans (First reset in 12 months or less) 96% 96% 95% 92%
Hybrid Loans (First reset in more than 12 months) 4% 4% 5% 8%
Single-Family 100% 100% 100% 100%
"A" Quality Underwriting 100% 100% 100% 100%
First Lien 100% 100% 100% 100%
Primary Residence (Owner-Occupied) 89% 91% 92% 94%
Second Home 8% 7% 6% 4%
Investor Property 3% 2% 2% 2%
Average Loan Size $ 301 $ 290 $ 279 $ 256
Loan Balance (less than) Conventional Loan Balance Limit ($227,150 in 1998) 18% 19% 20% 20%
Loan Balance Greater Than $500,000 37% 33% 27% 14%
Original Loan-To-Value Ratio (LTV) 78% 77% 78% 74%
Original LTV (larger than) 80% 38% 35% 33% 24%
% of Original LTV (larger than) 80% with Primary Mortgage 95% 96% 94% 94%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 66% 66% 69% 68%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 4% 4% 6% 9%
1991 Origination * * 1% 1%
1992 1% 1% 2% 3%
1993 4% 4% 6% 9%
1994 13% 17% 23% 41%
1995 1% 2% 2% 4%
1996 11% 14% 18% 30%
1997 66% 58% 42% 2%
1998 0% 0% 0% 0%
Average Seasoning in Months 18 19 22 33
Northern California 11% 13% 13% 17%
Southern California 18% 19% 21% 24%
Florida 9% 9% 8% 5%
New York 7% 6% 5% 4%
Georgia 5% 4% 3% 2%
Colorado 4% 3% 3% 2%
New Jersey 4% 4% 4% 3%
Texas 4% 4% 4% 3%
Connecticut 4% 4% 4% 3%
Illinois 3% 3% 3% 4%
Michigan 2% 2% 2% 2%
Massachusetts 2% 2% 2% 3%
Maryland 3% 3% 4% 6%
Other States 24% 24% 24% 22%
</TABLE>
*: less than 0.5%
49
<PAGE> 50
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 4 (CONTINUED) AT
----------------------------------------
MORTGAGE LOAN SUMMARY DEC. 31, DEC. 31, DEC. 31, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1996 1995 1994
---------- -------- ------- ----
<S> <C> <C> <C> <C>
Number of Loans 5,041 2,172 109 0
Principal Value $1,519,837 $515,033 $26,411 $ 0
Amortized Cost 1,554,681 527,280 26,449 0
Reported Value (Net of Credit Reserve) 1,551,826 525,475 26,450 0
Estimated Bid-Side Market Value 1,552,586 525,475 26,450 0
Short-Term Adjustable Rate Loans (First reset in 12 months or less) 96% 100% 100% n/a
Hybrid Loans (First reset in more than 12 months) 4% 0% 0% n/a
Single-Family 100% 100% 100% n/a
"A" Quality Underwriting 100% 100% 100% n/a
First Lien 100% 100% 100% n/a
Primary Residence (Owner-Occupied) 89% 94% 100% n/a
Second Home 8% 4% 0% n/a
Investor Property 3% 2% 0% n/a
Average Loan Size $ 301 $ 237 $ 242 n/a
Loan Balance (less than) Conventional Loan Balance Limit ($227,150 in 1998) 18% 22% 11% n/a
Loan Balance Greater Than $500,000 37% 8% 13% n/a
Original Loan-To-Value Ratio (LTV) 78% 77% 76% n/a
Original LTV (larger than) 80% 38% 25% 26% n/a
% of Original LTV (larger than) 80% with Primary Mortgage 95% 97% 100% n/a
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 66% 73% 72% n/a
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 4% 13% 0% n/a
1991 Origination * 2% 0% n/a
1992 1% 4% 0% n/a
1993 4% 14% 0% n/a
1994 13% 52% 2% n/a
1995 1% 7% 98% n/a
1996 11% 8% 0% n/a
1997 66% 0% 0% n/a
1998 0% 0% 0% n/a
Average Seasoning in Months 18 37 4 n/a
Northern California 11% 18% 30% n/a
Southern California 18% 26% 44% n/a
Florida 9% 4% 1% n/a
New York 7% 3% 0% n/a
Georgia 5% 2% 1% n/a
Colorado 4% 1% 3% n/a
New Jersey 4% 3% 1% n/a
Texas 4% 2% 4% n/a
Connecticut 4% 3% 1% n/a
Illinois 3% 4% 0% n/a
Michigan 2% 1% 0% n/a
Massachusetts 2% 3% 2% n/a
Maryland 3% 8% 2% n/a
Other States 24% 22% 11% n/a
</TABLE>
*: less than 0.5%
50
<PAGE> 51
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR THREE MONTHS ENDING
----------------------
AND INTEREST RATE MARGIN JUN. 30, MAR. 31,
1998 1998
------ ------
<S> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.52% 7.65%
Amortized Cost as % of Principal Value 101.98% 102.21%
Coupon Yield on Amortized Cost 7.37% 7.49%
Effect of Premium/Discount Amortization -1.26% -0.99%
Mortgage Yield 6.11% 6.50%
Cash Yield 5.23% 5.51%
------
Earning Asset Yield (Mortgages plus Cash) 6.10% 6.49%
Cost of Funds of Short-Term Borrowings 5.88% 5.77%
Cost of Funds of Long-Term Borrowings 6.45% 6.44%
------ ------
Total Cost of Funds 6.06% 6.01%
Cost of Hedging (as % of Borrowings) 0.19% 0.18%
Interest Rate Spread -0.15% 0.30%
Net Interest Margin (Net Interest Income/Assets) 0.22% 0.75%
Net Interest Income/Average Equity 2.33% 7.45%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.08% 0.07%
Credit Provisions as a % of Equity 0.89% 0.70%
Operating Expenses to Average Assets 0.06% 0.22%
Operating Expenses to Average Equity 0.69% 2.24%
Efficiency Ratio (Op. Exp./Net Int. Income) 29.65% 30.14%
Combined Entity includes Redwood REIT and RWT Holdings, Inc.
Combined Entity Total Operating Expenses $ 1,379 $ 1,925
Combined Entity Operating Expenses to Average Assets 0.14% 0.22%
Combined Entity Operating Expenses to Average Equity 1.62% 2.24%
Combined Entity Efficiency Ratio (Op. Exp./Net Int. Income) 59.71% 30.14%
GAAP Return on Total Equity 0.23% 3.66%
GAAP Return on Common Equity -0.62% 3.10%
Taxable Income Return on Total Equity 0.98% 5.28%
Taxable Income Return on Common Equity 0.19% 4.86%
GAAP Return on Average Assets before Preferred Dividends 0.02% 0.37%
GAAP Return on Average Assets after Preferred Dividends -0.05% 0.29%
PRINCIPAL PAYDOWN AND PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 34% 26%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities and Mortgage Loans 50% 38%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 28% 22%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Loans 37% 32%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 40% 29%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities 64% 44%
</TABLE>
51
<PAGE> 52
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 (CONTINUED)
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR THREE MONTHS ENDING
---------------------------------------------------
AND INTEREST RATE MARGIN DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.70% 7.77% 7.74% 7.70%
Amortized Cost as % of Principal Value 102.20% 102.22% 102.15% 101.84%
Coupon Yield on Amortized Cost 7.53% 7.60% 7.57% 7.56%
Effect of Premium/Discount Amortization -0.98% -0.79% -0.71% -0.68%
Mortgage Yield 6.55% 6.81% 6.86% 6.88%
Cash Yield 5.59% 5.60% 5.52% 5.33%
------ ------ ------ ------
Earning Asset Yield (Mortgages plus Cash) 6.54% 6.80% 6.86% 6.87%
Cost of Funds of Short-Term Borrowings 5.96% 5.98% 5.86% 5.62%
Cost of Funds of Long-Term Borrowings 6.40% 6.28% n/a n/a
------ ------ ------ ------
Total Cost of Funds 6.09% 6.02% 5.86% 5.62%
Cost of Hedging (as % of Borrowings) 0.17% 0.14% 0.13% 0.12%
Interest Rate Spread 0.28% 0.64% 0.87% 1.13%
Net Interest Margin (Net Interest Income/Assets) 0.72% 1.12% 1.31% 1.57%
Net Interest Income/Average Equity 7.06% 11.13% 13.25% 15.30%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.06% 0.11% 0.10% 0.12%
Credit Provisions as a % of Equity 0.59% 1.09% 1.06% 1.17%
Operating Expenses to Average Assets 0.13% 0.13% 0.16% 0.20%
Operating Expenses to Average Equity 1.29% 1.33% 1.66% 1.97%
Efficiency Ratio (Op. Exp./Net Int. Income) 18.25% 11.93% 12.51% 12.86%
Combined Entity includes Redwood REIT and RWT Holdings, Inc.
Combined Entity Total Operating Expenses $ 1,128 $ 1,148 $ 1,215 $ 1,167
Combined Entity Operating Expenses to Average Assets 0.13% 0.13% 0.16% 0.20%
Combined Entity Operating Expenses to Average Equity 1.29% 1.33% 1.66% 1.97%
Combined Entity Efficiency Ratio (Op. Exp./Net Int. Income) 18.25% 11.93% 12.51% 12.86%
GAAP Return on Total Equity 5.80% 8.73% 10.53% 12.16%
GAAP Return on Common Equity 5.43% 8.60% 10.65% 12.44%
Taxable Income Return on Total Equity 6.38% 9.43% 11.34% 13.34%
Taxable Income Return on Common Equity 6.06% 9.36% 11.55% 13.79%
GAAP Return on Average Assets before Preferred Dividends 0.59% 0.88% 1.04% 1.25%
GAAP Return on Average Assets after Preferred Dividends 0.51% 0.80% 0.95% 1.12%
PRINCIPAL PAYDOWN AND PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 27% 24% 23% 24%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities and Mortgage Loans 43% 31% 28% 32%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 24% 23% 28% 24%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Loans 29% 29% 35% 32%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 30% 25% 22% 23%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities 53% 33% 26% 31%
</TABLE>
52
<PAGE> 53
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 (CONTINUED)
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR YEAR ENDING
--------------------------------------------------
AND INTEREST RATE MARGIN DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.72% 7.55% 7.16% 6.09%
Amortized Cost as % of Principal Value 102.13% 100.68% 99.02% 100.02%
Coupon Yield on Amortized Cost 7.56% 7.50% 7.23% 6.09%
Effect of Premium/Discount Amortization -0.81% -0.55% 0.17% 0.45%
Mortgage Yield 6.75% 6.95% 7.40% 6.54%
Cash Yield 5.53% 5.51% 5.43% 4.73%
Earning Asset Yield (Mortgages plus Cash) 6.74% 6.93% 7.36% 6.33%
Cost of Funds of Short-Term Borrowings 5.86% 5.71% 6.06% 5.55%
Cost of Funds of Long-Term Borrowings 6.31% n/a n/a n/a
------ ------ ------ ------
Total Cost of Funds 5.92% 5.71% 6.06% 5.55%
Cost of Hedging (as % of Borrowings) 0.14% 0.13% 0.19% 0.06%
Interest Rate Spread 0.68% 1.09% 1.11% 0.72%
Net Interest Margin (Net Interest Income/Assets) 1.14% 1.69% 2.17% 2.50%
Net Interest Income/Average Equity 11.27% 12.90% 11.03% 7.27%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.10% 0.17% 0.22% 0.00%
Credit Provisions as a % of Equity 0.95% 1.29% 1.14% 0.00%
Operating Expenses to Average Assets 0.15% 0.26% 0.51% 0.69%
Operating Expenses to Average Equity 1.52% 1.94% 2.61% 2.01%
Efficiency Ratio (Op. Exp./Net Int. Income) 13.47% 15.08% 23.66% 27.73%
Combined Entity includes Redwood REIT and RWT Holdings, Inc.
Combined Entity Total Operating Expenses $ 4,658 $ 2,554 $ 1,131 $ 146
Combined Entity Operating Expenses to Average Assets 0.15% 0.26% 0.51% 0.69%
Combined Entity Operating Expenses to Average Equity 1.52% 1.94% 2.61% 2.01%
Combined Entity Efficiency Ratio (Op. Exp./Net Int. Income) 13.47% 15.08% 23.66% 27.73%
GAAP Return on Total Equity 8.98% 9.66% 7.28% 5.25%
GAAP Return on Common Equity 8.87% 9.61% 7.28% 5.25%
Taxable Income Return on Total Equity 9.76% 11.55% 8.84% 4.86%
Taxable Income Return on Common Equity 9.73% 11.68% 8.84% 4.86%
GAAP Return on Average Assets before Preferred Dividends 0.91% 1.27% 1.43% 1.81%
GAAP Return on Average Assets after Preferred Dividends 0.81% 1.15% 1.43% 1.81%
PRINCIPAL PAYDOWN AND PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 25% 25% 19% 9%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities and Mortgage Loans 34% 27% 18% 7%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 24% 26% 5% n/a
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Loans 31% 35% 6% n/a
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 25% 24% 19% 9%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities 36% 27% 19% 2%
</TABLE>
53
<PAGE> 54
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
----------------------------
(ALL DOLLARS IN THOUSANDS) JUN. 30, MAR. 31,
1998 1998
----------- -----------
<S> <C> <C>
Cash $ 34,833 $ 27,907
Mortgage Loans 1,867,851 1,546,869
Mortgage Securities 1,622,388 1,745,368
Credit Reserve (5,677) (5,126)
Market Valuation Adjustment, Mortgage Assets (4,401) (4,272)
Interest Rate Agreements 9,995 10,394
Market Valuation Adjustment, Interest Rate Agreements (8,246) (8,863)
Other Assets 136,765 98,835
----------- -----------
Total Assets 3,653,508 3,411,112
----------- -----------
Short-Term Borrowings 2,263,697 1,942,426
Long-Term Borrowings 1,047,828 1,124,190
Other Liabilities 13,464 14,602
----------- -----------
Total Liabilities 3,324,989 3,081,218
----------- -----------
Preferred Stock 26,736 26,736
Common Stock 321,266 321,420
Market Valuation Adjustment (12,647) (13,136)
Retained Earnings, after Dividend (6,836) (5,127)
----------- -----------
Stockholders' Equity $ 328,519 $ 329,894
=========== ===========
Amortized Cost of Total Assets $ 3,666,155 $ 3,424,247
Equity, before Market Valuation Adjustments 341,166 343,029
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 54.9% 67.9%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 9.3% 11.3%
Long-Term Borrowings: Federal Funds, 10% cap 3.2% 4.2%
Long-Term Borrowings: 1 Year Treasury, 10% cap 14.7% 16.6%
Long-Term Borrowings: Fixed Rate until December 2002 18.0% 0.0%
----------- -----------
Total Borrowings % 100.0% 100.0%
Total Borrowings $ $ 3,529,502 $ 3,369,297
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 11,354 $ 6,468
Estimated Borrowing Capacity 145,285 174,702
----------- -----------
Total Liquidity $ 156,639 $ 181,170
Total Liquidity as Percent of Short-Term Borrowings 8% 8%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 75,158 $ 85,048
Unamortized Discount of Mortgage Assets (10,651) (12,131)
Unamortized Deferred Bond Issuance Costs of Long-Term Debt 4,704 3,300
Net Unamortized Premium of Long-Term Debt (net of DBIC) (6,970) (5,551)
----------- -----------
Net Unamortized Premium $ 62,242 $ 70,666
Net Unamortized Premium as % of Equity (before Market Value Adjustments) 18.4% 20.6%
Net Unamortized Premium as % of Common Equity (before Mrkt Val. Adjustments) 19.9% 22.4%
Net Unamortized Premium as Percent of Assets (Amortized Cost) 1.6% 1.9%
</TABLE>
54
<PAGE> 55
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 (CONTINUED) AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
--------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 28,592 $ 35,647 $ 19,307 $ 12,147
Mortgage Loans 1,360,029 1,155,099 758,445 574,781
Mortgage Securities 1,914,118 2,136,442 2,111,832 1,658,629
Credit Reserve (4,679) (3,873) (3,083) (2,394)
Market Valuation Adjustment, Mortgage Assets 5,937 6,072 1,913 1,022
Interest Rate Agreements 11,207 11,943 11,185 6,899
Market Valuation Adjustment, Interest Rate Agreements (8,792) (8,640) (4,576) (4,004)
Other Assets 117,643 85,689 75,928 58,856
----------- ----------- ----------- -----------
Total Assets 3,424,055 3,418,379 2,970,951 2,305,936
----------- ----------- ----------- -----------
Short-Term Borrowings 2,144,794 2,695,438 2,659,914 2,056,051
Long-Term Borrowings 910,870 355,028 0 0
Other Liabilities 20,912 24,714 20,530 15,691
----------- ----------- ----------- -----------
Total Liabilities 3,076,576 3,075,181 2,680,444 2,071,742
----------- ----------- ----------- -----------
Preferred Stock 26,733 26,733 28,946 29,545
Common Stock 328,384 321,492 265,561 208,426
Market Valuation Adjustment (2,855) (2,568) (2,663) (2,982)
Retained Earnings, after Dividend (4,783) (2,458) (1,337) (795)
----------- ----------- ----------- -----------
Stockholders' Equity $ 347,479 $ 343,199 $ 290,507 $ 234,194
=========== =========== =========== ===========
Amortized Cost of Total Assets $ 3,426,910 $ 3,420,947 $ 2,973,614 $ 2,308,918
Equity, before Market Valuation Adjustments 350,334 345,767 293,170 237,176
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 62.0% 84.1% 100.0% 100.0%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 13.8% 9.9% 0.0% 0.0%
Long-Term Borrowings: Federal Funds, 10% cap 5.3% 6.0% 0.0% 0.0%
Long-Term Borrowings: 1 Year Treasury, 10% cap 18.9% 0.0% 0.0% 0.0%
Long-Term Borrowings: Fixed Rate until December 2002 0.0% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Total Borrowings % 100.0% 100.0% 100.0% 100.0%
Total Borrowings $ $ 3,087,326 $ 3,137,140 $ 3,102,784 $ 2,373,279
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 24,893 $ 28,758 $ 29,425 $ 12,985
Estimated Borrowing Capacity 182,713 206,442 160,338 140,561
----------- ----------- ----------- -----------
Total Liquidity $ 207,606 $ 235,200 $ 189,763 $ 153,546
Total Liquidity as Percent of Short-Term Borrowings 11% 9% 6% 6%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 86,173 $ 86,934 $ 87,661 $ 65,107
Unamortized Discount of Mortgage Assets (12,442) (14,387) (15,091) (15,641)
Unamortized Deferred Bond Issuance Costs of Long-Term Debt 3,703 1,492 0 0
Net Unamortized Premium of Long-Term Debt (net of DBIC) (5,795) 0 0 0
----------- ----------- ----------- -----------
Net Unamortized Premium $ 71,639 $ 74,039 $ 72,569 $ 49,466
Net Unamortized Premium as % of Equity
(before Market Value Adjustments) 20.8% 20.9% 24.4% 20.1%
Net Unamortized Premium as % of Common Equity
(before Mrkt Val. Adjustments) 22.5% 22.6% 26.9% 22.9%
Net Unamortized Premium as Percent of Assets (Amortized Cost) 2.1% 2.1% 2.1% 1.9%
</TABLE>
55
<PAGE> 56
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 (CONTINUED) AT OR
AVERAGE DAILY BALANCE SHEET FOR YEAR ENDING
----------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Cash $ 24,001 $ 16,016 $ 4,272 $ 6,627
Mortgage Loans 964,768 77,215 5,006 0
Mortgage Securities 1,956,452 877,907 204,284 50,080
Credit Reserve (3,514) (1,262) (92) 0
Market Valuation Adjustment, Mortgage Assets (1,134) (2,347) (78) (583)
Interest Rate Agreements 10,325 3,280 2,039 759
Market Valuation Adjustment, Interest Rate Agreements (2,482) (1,948) (1,046) 31
Other Assets 84,693 26,606 5,107 948
----------- ----------- --------- ---------
Total Assets 3,033,108 995,467 219,492 57,862
----------- ----------- --------- ---------
Short-Term Borrowings 2,390,132 861,316 174,926 37,910
Long-Term Borrowings 319,076 0 0 0
Other Liabilities 20,488 7,131 2,342 367
----------- ----------- --------- ---------
Total Liabilities 2,729,696 868,447 177,268 38,277
----------- ----------- --------- ---------
Preferred Stock 27,978 11,274 0 0
Common Stock 281,405 120,436 43,390 20,941
Market Valuation Adjustment (3,617) (4,295) (1,124) (552)
Retained Earnings, after Dividend (2,354) (395) (42) (804)
----------- ----------- --------- ---------
Stockholders' Equity $ 303,412 $ 127,020 $ 42,224 $ 19,585
=========== =========== ========= =========
Amortized Cost of Total Assets $ 3,036,725 $ 999,762 $ 220,616 $ 58,414
Equity, before Market Valuation Adjustments 307,029 131,315 43,349 20,137
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 62.0% 100.0% 100.0% 100.0%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 13.8% 0.0% 0.0% 0.0%
Long-Term Borrowings: Federal Funds, 10% cap 5.3% 0.0% 0.0% 0.0%
Long-Term Borrowings: 1 Year Treasury, 10% cap 18.9% 0.0% 0.0% 0.0%
Long-Term Borrowings: Fixed Rate until December 2002 0.0% 0.0% 0.0% 0.0%
----------- ----------- --------- ---------
Total Borrowings % 100.0% 100.0% 100.0% 100.0%
Total Borrowings $ $ 3,087,326 $ 1,953,103 $ 370,316 $ 100,376
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 24,893 $ 11,068 $ 4,825 $ 1,027
Estimated Borrowing Capacity 182,713 123,995 38,698 11,907
----------- ----------- --------- ---------
Total Liquidity $ 207,606 $ 135,063 $ 43,523 $ 12,934
Total Liquidity as Percent of Short-Term Borrowings 11% 7% 12% 13%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 86,173 $ 54,318 $ 9,644 $ 827
Unamortized Discount of Mortgage Assets (12,442) (16,093) (17,032) (1,320)
Unamortized Deferred Bond Issuance Costs of Long-Term Debt 3,703 0 0 0
Net Unamortized Premium of Long-Term Debt (5,795) 0 0 0
----------- ----------- --------- ---------
Net Unamortized Premium $ 71,639 $ 38,225 $ (7,389) $ (493)
Net Unamortized Premium as % of Equity
(before Market Value Adjustments) 20.8% 17.8% -10.0% -2.2%
Net Unamoritized Premium as % of Common Equity
(before Mrkt Val. Adjustments) 22.5% 20.7% -10.0% -2.2%
Net Unamortized Premium as Percent of Assets (Amortized Cost) 2.1% 1.7% -1.7% -0.4%
</TABLE>
56
<PAGE> 57
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 AT OR
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE/REALIZABLE VALUE FOR THREE MONTHS ENDING
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------------
JUN. 30, MAR. 31,
1998 1998
----------- ----------
<S> <C> <C>
Cash $ 32,914 $ 32,202
Mortgage Loans 2,219,772 1,872,775
Mortgage Securities 1,570,842 1,770,566
Interest Rate Agreements (123) 2,584
Other Assets 36,476 36,521
Short-Term Borrowings 1,936,158 2,288,018
Long-Term Borrowings 1,591,961 1,080,530
Other Liabilities 15,255 13,288
----------- ----------
"Mark-To-Market" of Total Equity 316,507 332,812
Liquidation Cost of Preferred Equity 28,195 28,195
----------- ----------
"Mark-To-Market" of Common Equity $ 288,312 $ 304,617
"Mark-To-Market" of Common Equity/Common Share Outstanding $ 20.48 $ 21.65
Reported Common Equity Per Common Share Outstanding $ 20.89 $ 21.53
Historical Cost of Common Equity Per Common Share Outstanding $ 22.17 $ 22.46
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 9.3% 10.0%
Average Risk-Adjusted Capital Guideline 7.4% 7.8%
Average Balance Sheet Capacity Utilization 79% 77%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 8.30% 8.88%
Ending Risk-Adjusted Capital Guideline 6.48% 7.59%
Excess Capital $ 64,465 $ 49,552
Estimated Asset Growth Potential (same asset mix and funding) $ 1,007,936 $ 560,440
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $ 3,800,803 $4,185,088
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 19.9% 22.1%
Mortgage Securities Rated "AAA" or "AA" 26.3% 28.0%
Mortgage Securities Rated "A" or below 0.0% 0.0%
Mortgage Loans 12.6% 18.2%
----------- ----------
Equity Investment in Assets with Short-Term Funding 58.8% 68.3%
Equity Investment in Assets with Long-Term, Non-Recourse Funding
(Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 2.9% 2.8%
Mortgage Loans 17.8% 14.1%
----------- ----------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 20.7% 16.9%
Excess Capital 20.5% 14.8%
----------- ----------
Total Market-Value of Capital % 100.0% 100.0%
Total Capital Available per Risk-Adjusted Capital Policy $ 314,679 $ 331,548
Capital Utilization at Period-End 80% 85%
Capital Utilization at Period-End assuming all Mortgage
Loans use Long-Term, Non-Recourse Funding 73% 76%
</TABLE>
57
<PAGE> 58
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE/REALIZABLE VALUE FOR THREE MONTHS ENDING
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------------------------------------------------------
DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 49,549 $ 57,696 $ 29,425 $ 12,985
Mortgage Loans 1,552,586 1,379,166 1,136,004 729,561
Mortgage Securities 1,814,796 2,059,595 2,227,389 1,874,679
Interest Rate Agreements 1,522 2,169 4,206 5,773
Other Assets 25,156 26,048 25,857 19,291
Short-Term Borrowings 1,914,525 2,639,773 3,102,784 2,373,279
Long-Term Borrowings 1,172,938 497,465 0 0
Other Liabilities 21,201 30,628 27,515 23,411
---------- ---------- ----------- -----------
"Mark-To-Market" of Total Equity 334,945 356,808 292,582 245,598
Liquidation Cost of Preferred Equity 28,195 28,195 28,195 30,989
---------- ---------- ----------- -----------
"Mark-To-Market" of Common Equity $ 306,750 $ 328,613 $ 264,387 $ 214,610
"Mark-To-Market" of Common Equity/Common Share Outstanding $ 21.47 $ 22.54 $ 19.95 $ 18.03
Reported Common Equity Per Common Share Outstanding $ 21.55 $ 22.61 $ 20.11 $ 18.17
Historical Cost of Common Equity Per Common Share Outstanding $ 22.25 $ 22.49 $ 20.39 $ 18.16
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 10.2% 10.1% 9.9% 10.3%
Average Risk-Adjusted Capital Guideline 8.1% 9.0% 9.5% 10.1%
Average Balance Sheet Capacity Utilization 79% 89% 96% 98%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 9.71% 10.12% 8.55% 9.28%
Ending Risk-Adjusted Capital Guideline 7.51% 8.59% 9.41% 10.09%
Excess Capital $ 76,589 $ 53,027 $ (27,047) $ (20,519)
Estimated Asset Growth Potential (same asset mix and funding) $1,037,376 $ 551,347 $ (563,228) $ (267,698)
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $4,791,828 $5,209,015 $ 3,461,784 $ 3,450,901
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 24.0% 25.7% 35.7% 37.0%
Mortgage Securities Rated "AAA" or "AA" 27.6% 28.6% 36.3% 37.1%
Mortgage Securities Rated "A" or below 0.0% 5.9% 6.4% 7.6%
Mortgage Loans 8.2% 17.9% 30.8% 26.6%
---------- ---------- ----------- -----------
Equity Investment in Assets with Short-Term Funding 59.8% 78.1% 109.2% 108.3%
Equity Investment in Assets with Long-Term, Non-Recourse Funding
(Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 2.7% 0.0% 0.0% 0.0%
Mortgage Loans 14.7% 7.1% 0.0% 0.0%
---------- ---------- ----------- -----------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 17.4% 7.1% 0.0% 0.0%
Excess Capital 22.8% 14.9% -9.2% -8.3%
---------- ---------- ----------- -----------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0%
Total Capital Available per Risk-Adjusted Capital Policy $ 335,345 $ 355,797 $ 294,952 $ 246,109
Capital Utilization at Period-End 77% 85% 109% 108%
Capital Utilization at Period-End assuming all Mortgage
Loans use Long-Term, Non-Recourse Funding 73% 76% 94% 95%
</TABLE>
58
<PAGE> 59
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE/REALIZABLE VALUE FOR YEAR ENDING
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Cash $ 49,549 $ 11,068 $ 4,825 $ 1,027
Mortgage Loans 1,552,586 525,475 26,450 0
Mortgage Securities 1,814,796 1,627,953 405,794 117,477
Interest Rate Agreements 1,522 2,601 547 1,892
Other Assets 25,156 16,778 3,671 888
Short-Term Borrowings 1,914,525 1,953,103 370,316 100,376
Long-Term Borrowings 1,172,938 0 0 0
Other Liabilities 21,201 19,531 2,829 872
---------- ----------- ---------- ---------
"Mark-To-Market" of Total Equity 334,945 211,241 68,142 20,036
Liquidation Cost of Preferred Equity 28,195 31,194 0 0
---------- ----------- ---------- ---------
"Mark-To-Market" of Common Equity $ 306,750 $ 180,047 $ 68,142 $ 20,036
"Mark-To-Market" of Common Equity/Common Share Outstanding $ 21.47 $ 16.37 $ 12.35 $ 10.69
Reported Common Equity Per Common Share Outstanding $ 21.55 $ 16.50 $ 12.38 $ 10.82
Historical Cost of Common Equity Per Common Share Outstanding $ 22.25 $ 16.81 $ 13.37 $ 12.18
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 10.1% 13.1% 19.6% 34.5%
Average Risk-Adjusted Capital Guideline 9.1% 10.9% 13.4% 10.6%
Average Balance Sheet Capacity Utilization 90% 83% 68% 31%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 9.71% 9.66% 15.47% 16.69%
Ending Risk-Adjusted Capital Guideline 7.51% 9.97% 12.59% 10.84%
Excess Capital $ 76,589 $ (7,835) $ 12,117 $ 6,600
Estimated Asset Growth Potential (same asset mix and funding) $1,037,376 $ 254,662 $ 104,902 $215,757
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $4,791,828 $ 3,970,772 $1,340,981 $799,596
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 24.0% 39.3% 29.3% 33.1%
Mortgage Securities Rated "AAA" or "AA" 27.6% 32.6% 22.7% 18.9%
Mortgage Securities Rated "A" or below 0.0% 8.9% 26.7% 14.8%
Mortgage Loans 8.2% 22.9% 3.5% 0.0%
---------- ----------- ---------- ---------
Equity Investment in Assets with Short-Term Funding 59.8% 103.7% 82.2% 66.9%
Equity Investment in Assets with Long-Term, Non-Recourse Funding
(Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 2.7% 0.0% 0.0% 0.0%
Mortgage Loans 14.7% 0.0% 0.0% 0.0%
---------- ----------- ---------- ---------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 17.4% 0.0% 0.0% 0.0%
Excess Capital 22.8% -3.7% 17.8% 33.1%
---------- ----------- ---------- ---------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0%
Total Capital Available per Risk-Adjusted Capital Policy $ 334,945 $ 211,241 $ 68,142 $ 20,036
Capital Utilization at Period-End 77% 104% 82% 67%
Capital Utilization at Period-End assuming all Mortgage
Loans use Long-Term, Non-Recourse Funding 73% 92% 80% 67%
</TABLE>
59
<PAGE> 60
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR THREE MONTHS ENDING
-------------------
(ALL DOLLARS IN THOUSANDS) JUN. 30, MAR. 31,
1998 1998
------ ------
<S> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 763 $ 601
Actual Losses During Period 133 7
Cumulative Actual Losses 216 83
Mortgage Loan Credit Reserve at End of Period 4,079 3,450
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans 0.16% 0.16%
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans at Period End 0.18% 0.18%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures,
Bankruptcies, and REO
Number of Loans 21 19
Non-Performing Assets Loan Balance $4,947 $4,358
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.22% 0.23%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.13% 0.12%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 82% 79%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 9 7
Average Loss Severity Experience (Cumulative) 11% 6%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future) Non-Performing Mortgage Loans Default:
At 10% Loss Severity $ 504 $ 444
At 20% Loss Severity 1,009 888
At 30% Loss Severity 1,513 1,331
At 40% Loss Severity 2,017 1,775
Mortgage Loan Credit Reserve at End of Period 4,079 3,450
MORTGAGE SECURITIES
Credit Provision During Period $ 0 $ 0
Actual Losses During Period 331 42
Cumulative Actual Losses 487 156
Mortgage Securities Credit Reserve at End of Period 1,703 2,033
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated less than BBB 0.0% 0.0%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated less than BBB at End of Period 18.7% 22.3%
Amortized Cost of Mortgage Securities Rated less than BBB
at End of Period $9,116 $9,137
Credit Experience of Loans in Pools Underlying Mortgage Securities
Rated less than BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 351 284
Average Loss Severity Experience (Cumulative) 21% 21%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future)
Seriously Delinquent Loans in Mortgage Pools
Underlying less than BBB Rated Securities Default:
At 10% Loss Severity $ 429 $ 480
At 20% Loss Severity 712 951
At 30% Loss Severity 910 1,170
At 40% Loss Severity 1,385 1,824
Mortgage Securities Credit Reserve at End of Period 1,703 2,033
</TABLE>
60
<PAGE> 61
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 (CONTINUED) AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR THREE MONTHS ENDING
--------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 1,516 $ 473 $ 299 $ 215
Actual Losses During Period 23 40 0 13
Cumulative Actual Losses 76 53 13 13
Mortgage Loan Credit Reserve at End of Period 2,855 1,363 929 630
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans 0.45% 0.16% 0.16% 0.15%
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans at Period End 0.18% 0.10% 0.08% 0.09%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures, Bankruptcies,
and REO
Number of Loans 17 13 12 6
Non-Performing Assets Loan Balance $ 3,903 $ 2,792 $ 2,366 $ 1,220
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.25% 0.20% 0.21% 0.17%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.11% 0.08% 0.07% 0.05%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 73% 49% 39% 52%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 6 4 1 1
Average Loss Severity Experience (Cumulative) 7% 6% 7% 7%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future)
Non-Performing Mortgage Loans Default:
At 10% Loss Severity $ 396 $ 283 $ 241 $ 124
At 20% Loss Severity 793 567 481 248
At 30% Loss Severity 1,189 850 722 372
At 40% Loss Severity 1,586 1,133 962 496
Mortgage Loan Credit Reserve at End of Period 2,855 1,363 929 630
MORTGAGE SECURITIES
Credit Provision During Period $(1,000) $ 470 $ 477 $ 480
Actual Losses During Period 17 28 29 29
Cumulative Actual Losses 113 97 69 40
Mortgage Securities Credit Reserve at End of Period 2,076 3,093 2,651 2,203
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated less than BBB -20.9% 6.4% 6.6% 6.6%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated less than BBB at End of Period 22.8% 10.6% 9.1% 7.6%
Amortized Cost of Mortgage Securities Rated less than BBB
at End of Period $ 9,109 $29,189 $29,113 $28,955
Credit Experience of Loans in Pools Underlying Mortgage Securities
Rated less than BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 256 182 137 90
Average Loss Severity Experience (Cumulative) 21% 23% 24% 25%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future)
Seriously Delinquent Loans in Mortgage Pools Underlying less than BBB
Rated Securities Default:
At 10% Loss Severity $ 389 $ 724 $ 109 $ 80
At 20% Loss Severity 894 2,286 1,488 792
At 30% Loss Severity 1,163 3,789 3,702 2,845
At 40% Loss Severity 1,825 6,437 6,410 5,103
Mortgage Securities Credit Reserve at End of Period 2,076 3,093 2,651 2,203
</TABLE>
61
<PAGE> 62
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 8 (CONTINUED) AT OR
CREDIT PROVISIONS AND CREDIT RESERVES FOR YEAR ENDING
-------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
------ ------- ------- ------
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $2,503 $ 349 $ 79 $ 0
Actual Losses During Period 76 0 0 0
Cumulative Actual Losses 76 0 0 0
Mortgage Loan Credit Reserve at End of Period 2,855 428 79 0
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans 0.26% 0.45% 1.58% n/a
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans at Period End 0.18% 0.08% 0.30% n/a
Non-Performing Assets: 90+ Days Delinquent, Foreclosures,
Bankruptcies, and REO
Number of Loans 17 7 0 0
Non-Performing Assets Loan Balance $3,903 $ 1,249 $ 0 $ 0
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.25% 0.24% 0.00% 0.00%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.11% 0.06% 0.00% 0.00%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 73% 34% n/a n/a
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 6 0 0 0
Average Loss Severity Experience (Cumulative) 7% 0% 0% 0%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future) Non-Performing Mortgage Loans Default:
At 10% Loss Severity $ 396 $ 127 $ 0 $ 0
At 20% Loss Severity 793 253 0 0
At 30% Loss Severity 1,189 380 0 0
At 40% Loss Severity 1,586 506 0 0
Mortgage Loan Credit Reserve at End of Period 2,855 428 79 0
MORTGAGE SECURITIES
Credit Provision During Period $ 427 $ 1,348 $ 414 $ 0
Actual Losses During Period 104 7 4 0
Cumulative Actual Losses 113 11 4 0
Mortgage Securities Credit Reserve at End of Period 2,076 1,752 411 0
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated less than BBB 1.7% 4.7% 2.9% 0.0%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated less than BBB at End of Period 22.8% 6.1% 1.4% 0.0%
Amortized Cost of Mortgage Securities Rated less than
BBB at End of Period $9,109 $28,935 $28,869 $3,376
Credit Experience of Loans in Pools Underlying Mortgage
Securities Rated less than BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 256 59 2 0
Average Loss Severity Experience (Cumulative) 21% 27% 9% 0%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future) Seriously Delinquent Loans in
Mortgage Pools Underlying less than BBB
Rated Securities Default:
At 10% Loss Severity $ 389 $ 63 $ 15 $ 0
At 20% Loss Severity 894 608 29 0
At 30% Loss Severity 1,163 2,040 103 0
At 40% Loss Severity 1,825 3,647 768 0
Mortgage Securities Credit Reserve at End of Period 2,076 1,752 411 0
</TABLE>
62
<PAGE> 63
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 9 AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
-----------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUN. 30, MAR. 31,
1998 1998
------------ -----------
<S> <C> <C>
Common Shares Outstanding at Period End 14,078,933 14,070,557
Shares Outstanding and Receiving Dividends at Period End
Common (RWT) 13,768,056 14,107,100
Class A Preferred (converted 9/95) 0 0
Class B Preferred (RTW-PB) 909,518 909,518
------------ -----------
Total 14,677,574 15,016,618
Common Dividend Declared $ 0.010 $ 0.270
Class A Preferred Dividend Declared n/a n/a
Class B Preferred Dividends Declared $ 0.755 $ 0.755
Common Dividend Total $ 138 $ 3,809
Class A Preferred Dividend Total 0 0
Class B Preferred Dividends Total 687 687
------------ -----------
Total Dividend $ 825 $ 4,496
Taxable Income Earned $ 838 $ 4,527
Dividend Pay-Out Ratio for Period 98% 99%
Cumulative Dividend Pay-Out Ratio 102% 102%
Warrants Outstanding at Period End (expired 12/31/97) 0 0
Average Shares Outstanding During Period
Common 14,106,828 14,123,951
Class A Preferred 0 0
Class B Preferred 909,518 909,518
------------ -----------
Total 15,016,346 15,033,469
Calculation of "Diluted" Common Shares
Average Common Shares 14,106,828 14,123,951
Potential Dilution Due to Warrants 0 0
Potential Dilution Due to Options 149,030 110,474
------------ -----------
Total Average "Diluted" Common Shares 14,255,858 14,234,425
Net Income to Common Shareholders $ (491) $ 2,450
Total Average "Diluted" Common Shares 14,255,858 14,234,425
Earnings Per Share ("Diluted") $ (0.03) $ 0.17
Earnings Per Share ("Basic") $ (0.03) $ 0.17
Per Share Ratios (Average Common and Preferred Shares
Outstanding)
Average Total Assets $ 244.14 $ 227.77
Average Total Equity $ 22.72 $ 22.82
Net Interest Income $ 0.13 $ 0.43
Credit Expenses $ 0.05 $ 0.04
Operating Expenses $ 0.04 $ 0.13
Gain/(Loss) on Sale $ 0.00 $ 0.00
Writedowns $ 0.00 $ 0.05
Other Expenses (Income) $ (0.01) $ 0.00
Equity in Earnings of RWT Holdings, Inc. $ 0.04 $ 0.00
Net Income $ 0.01 $ 0.21
</TABLE>
63
<PAGE> 64
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 9 (CONTINUED) AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
-----------------------------------------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Common Shares Outstanding at Period End 14,284,657 14,576,477 13,251,847 11,905,957
Shares Outstanding and Receiving Dividends at Period End
Common (RWT) 14,284,657 14,576,477 13,251,847 11,905,957
Class A Preferred (converted 9/95) 0 0 0 0
Class B Preferred (RTW-PB) 909,518 909,518 909,518 999,638
----------- ----------- ----------- -----------
Total 15,194,175 15,485,995 14,161,365 12,905,595
Common Dividend Declared $ 0.350 $ 0.600 $ 0.600 $ 0.600
Class A Preferred Dividend Declared n/a n/a n/a n/a
Class B Preferred Dividends Declared $ 0.755 $ 0.755 $ 0.755 $ 0.755
Common Dividend Total $ 5,000 $ 8,746 $ 7,951 $ 7,144
Class A Preferred Dividend Total 0 0 0 0
Class B Preferred Dividends Total 686 687 687 755
----------- ----------- ----------- -----------
Total Dividend $ 5,686 $ 9,433 $ 8,638 $ 7,899
Taxable Income Earned $ 5,586 $ 8,151 $ 8,315 $ 7,912
Dividend Pay-Out Ratio for Period 102% 116% 104% 100%
Cumulative Dividend Pay-Out Ratio 103% 103% 100% 98%
Warrants Outstanding at Period End (expired 12/31/97) 0 149,466 236,297 272,304
Average Shares Outstanding During Period
Common 14,375,992 14,316,678 12,997,566 11,605,171
Class A Preferred 0 0 0 0
Class B Preferred 909,518 909,518 990,725 1,005,515
----------- ----------- ----------- -----------
Total 15,285,510 15,226,196 13,988,291 12,610,686
Calculation of "Diluted" Common Shares
Average Common Shares 14,375,992 14,316,678 12,997,566 11,605,171
Potential Dilution Due to Warrants 57,139 130,489 182,137 258,422
Potential Dilution Due to Options 99,383 177,434 291,227 253,274
----------- ----------- ----------- -----------
Total Average "Diluted" Common Shares 14,532,514 14,624,601 13,470,930 12,116,867
Net Income to Common Shareholders $ 4,397 $ 6,859 $ 7,034 $ 6,456
Total Average "Diluted" Common Shares 14,532,514 14,624,601 13,470,930 12,116,867
----------- ----------- ----------- -----------
Earnings Per Share ("Diluted") $ 0.30 $ 0.47 $ 0.52 $ 0.53
Earnings Per Share ("Basic") $ 0.31 $ 0.48 $ 0.54 $ 0.56
Per Share Ratios (Average Common and Preferred Shares
Outstanding)
Average Total Assets $ 224.19 $ 224.68 $ 212.58 $ 183.09
Average Total Equity $ 22.92 $ 22.71 $ 20.96 $ 18.81
Net Interest Income $ 0.40 $ 0.63 $ 0.70 $ 0.72
Credit Expenses $ 0.03 $ 0.06 $ 0.06 $ 0.06
Operating Expenses $ 0.07 $ 0.07 $ 0.09 $ 0.09
Gain/(Loss) on Sale $ 0.03 $ 0.00 $ 0.00 $ 0.00
Writedowns $ 0.00 $ 0.00 $ 0.00 $ 0.00
Other Expenses (Income) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Equity in Earnings of RWT Holdings, Inc. $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income $ 0.33 $ 0.50 $ 0.55 $ 0.57
</TABLE>
64
<PAGE> 65
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 9 (CONTINUED) AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR YEAR ENDING
---------------------------------------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
----------- ----------- ---------- ----------
<S> <C> <C> <C>
Common Shares Outstanding at Period End 14,284,657 10,996,572 5,517,299 1,874,395
Shares Outstanding and Receiving Dividends at Period End
Common (RWT) 14,284,657 10,996,572 5,517,299 208,332
Class A Preferred (converted 9/95) 0 0 0 1,666,063
Class B Preferred (RTW-PB) 909,518 1,006,250 0 0
----------- ----------- ---------- ----------
Total 15,194,175 12,002,822 5,517,299 1,874,395
Common Dividend Declared $ 2.150 $ 1.670 $ 0.460 n/a
Class A Preferred Dividend Declared n/a n/a $ 0.500 $ 0.250
Class B Preferred Dividends Declared $ 3.020 $ 1.141 n/a n/a
Common Dividend Total $ 28,840 $ 14,084 $ 2,537 $ 0
Class A Preferred Dividend Total 0 0 833 350
Class B Preferred Dividends Total 2,815 1,148 0 0
----------- ----------- ---------- ----------
Total Dividend $ 31,655 $ 15,232 $ 3,370 $ 350
Taxable Income Earned $ 29,964 $ 15,168 $ 3,832 $ 353
Dividend Pay-Out Ratio for Period 106% 100% 88% 99%
Cumulative Dividend Pay-Out Ratio 103% 98% 89% 99%
Warrants Outstanding at Period End (expired 12/31/97) 0 412,894 1,665,063 1,666,063
Average Shares Outstanding During Period
Common 13,334,163 7,950,175 2,487,857 208,332
Class A Preferred 0 0 826,185 1,467,748
Class B Preferred 953,435 382,155 0 0
----------- ----------- ---------- ----------
Total 14,287,598 8,332,330 3,314,042 1,676,080
Calculation of "Diluted" Common Shares
Average Common Shares 13,334,163 7,950,175 3,314,042 1,676,080
Potential Dilution Due to Warrants 191,513 618,618 221,112 240,766
Potential Dilution Due to Options 154,734 175,391 168,649 0
----------- ----------- ---------- ----------
Total Average "Diluted" Common Shares 13,680,410 8,744,184 3,703,803 1,916,846
Net Income to Common Shareholders $ 24,746 $ 11,537 $ 3,155 $ 382
Total Average "Diluted" Common Shares 13,680,410 8,744,184 3,703,803 1,916,846
----------- ----------- ---------- ----------
Earnings Per Share ("Diluted") $ 1.81 $ 1.32 $ 0.85 $ 0.20
Earnings Per Share ("Basic") $ 1.86 $ 1.45 $ 0.95 $ 0.23
Per Share Ratios (Average Common and Preferred Shares
Outstanding)
Average Total Assets $ 212.54 $ 119.99 $ 66.57 $ 34.85
Average Total Equity $ 21.49 $ 15.76 $ 13.08 $ 12.01
Net Interest Income $ 2.42 $ 2.03 $ 1.44 $ 0.32
Credit Expenses $ 0.21 $ 0.20 $ 0.15 $ 0.00
Operating Expenses $ 0.32 $ 0.31 $ 0.34 $ 0.09
Gain/(Loss) on Sale $ 0.04 $ 0.00 $ 0.00 $ 0.00
Writedowns $ 0.04 $ 0.00 $ 0.00 $ 0.00
Other Expenses (Income) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Equity in Earnings of RWT Holdings, Inc. $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income $ 1.93 $ 1.52 $ 0.95 $ 0.23
</TABLE>
65
<PAGE> 66
PART II OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 1998, there were no pending legal proceedings to which the
Company as a party or of which any of its property was subject.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on June
4, 1998.
(b) The following matters were voted on at the Annual Meeting:
<TABLE>
<CAPTION>
Votes
--------------------------------
For Withheld Excepted
---------- -------- --------
<S> <C> <C> <C>
1. Election of Directors
Frederick H. Borden 11,072,640 925,927 2,250
Nello Gonfiantini 11,069,787 928,780 5,103
Mariann Byerwalter 11,063,862 934,705 11,028
</TABLE>
The following Directors' terms of office continue after the
meeting:
Thomas C. Brown
George E. Bull
Dan A. Emmett
Thomas F. Farb
Douglas B. Hansen
Charles J. Toeniskoetter
<TABLE>
<CAPTION>
Votes
------------------------------
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
2. Ratification of technical amendments
to the Company's charter 11,892,173 76,771 29,622
</TABLE>
<TABLE>
<CAPTION>
Votes
------------------------------
For Against Abstain
--------- ------- -------
<S> <C> <C> <C>
3. Ratification of Coopers & Lybrand L.L.P.
as the Company's independent
public accountants for the fiscal
year ending December 31, 1998 11,981,482 5,742 11,342
</TABLE>
66
<PAGE> 67
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 to Part I - Computation of Earnings Per
Share for the three and six months ended June 30, 1998
and June 30, 1997.
Exhibit 27 - Financial Data Schedule
(b) Reports
None
67
<PAGE> 68
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD TRUST, INC.
Dated: August 10, 1998 By:/s/ Douglas B. Hansen
---------------------
Douglas B. Hansen
President and Chief Financial Officer
(authorized officer of registrant)
Dated: August 10, 1998 By: /s/ Vickie L. Rath
------------------
Vickie L. Rath
Vice President, Treasurer and Controller
(principal accounting officer)
68
<PAGE> 69
REDWOOD TRUST, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<S> <C> <C>
11.1 Computations of Earnings per Share ..................70
27 Financial Data Schedule .............................72
</TABLE>
<PAGE> 1
EXHIBIT 11.1
REDWOOD TRUST, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
BASIC:
Average common shares outstanding ............................. 14,106,828 14,115,342
------------ -----------
Total 14,106,828 14,115,342
============ ===========
Net Income $ (491,212) $ 1,959,171
============ ===========
Per Share Amount $ (0.03) $ 0.14
============ ===========
DILUTED:
Average common shares outstanding ............................. 14,106,828 14,115,342
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ... 149,030 253,274
------------ -----------
Total 14,255,858 14,368,616
============ ===========
Net Income $ (491,212) $ 1,959,171
============ ===========
Per Share Amount $ (0.03) $ 0.14
============ ===========
</TABLE>
70
<PAGE> 2
EXHIBIT 11.1
REDWOOD TRUST, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
<S> <C> <C>
BASIC:
Average common shares outstanding ............................... 12,997,566 12,305,215
------------- -------------
Total 12,997,566 12,305,215
=========== ===========
Net Income $ 7,034,308 $13,490,546
=========== ===========
Per Share Amount $ 0.54 $ 1.10
=========== ===========
DILUTED:
Average common shares outstanding................................ 12,997,566 12,305,215
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ..... 291,228 274,793
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method ..... 182,137 220,952
------------- -------------
Total 13,470,930 12,800,960
=========== ===========
Net Income $ 7,034,308 $13,490,546
=========== ===========
Per Share Amount $ 0.52 $ 1.05
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1,000
<CASH> 32,914
<SECURITIES> 3,796,608
<RECEIVABLES> 21,554
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,866,927
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,866,927
<CURRENT-LIABILITIES> 1,952,712
<BONDS> 1,593,344
0
26,736
<COMMON> 320,828
<OTHER-SE> (26,693)
<TOTAL-LIABILITY-AND-EQUITY> 3,866,927
<SALES> 0
<TOTAL-REVENUES> 53,783
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,655
<LOSS-PROVISION> 763
<INTEREST-EXPENSE> 50,169
<INCOME-PRETAX> 196
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
