<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: MARCH 31, 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 ($.01 par value) 909,518 as of May 11, 1998
Common Stock ($.01 par value) 14,107,100 as of May 11, 1998
================================================================================
<PAGE> 2
REDWOOD TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1998 and December 31, 1997................ 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and March 31, 1997............................................ 4
Consolidated Statements of Stockholders' Equity for the three months
ended March 31, 1998............................................................... 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and March 31, 1997............................................ 6
Notes to Consolidated Financial Statements......................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 63
Item 2. Changes in Securities................................................................... 63
Item 3. Defaults Upon Senior Securities......................................................... 63
Item 4. Submission of Matters to a Vote of Security Holders..................................... 63
Item 5. Other Information....................................................................... 63
Item 6. Exhibits and Reports on Form 8-K........................................................ 63
SIGNATURES .......................................................................................... 64
</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>
March 31, 1998 December 31, 1997
ASSETS -------------- -----------------
(Unaudited)
<S> <C> <C>
Mortgage assets:
Mortgage loans, net $ 1,871,984 $ 1,551,826
Mortgage securities, net 1,770,566 1,814,796
----------- -----------
3,642,550 3,366,622
Cash and cash equivalents:
Unrestricted 6,468 24,892
Restricted 25,734 24,657
----------- -----------
32,202 49,549
Accrued interest receivable 23,886 23,119
Interest rate agreements 1,627 2,100
Investment in RWT Holdings, Inc. 9,900 --
Other assets 3,526 2,807
----------- -----------
$ 3,713,691 $ 3,444,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term debt $ 2,288,018 $ 1,914,525
Long-term debt, net 1,081,279 1,172,801
Accrued interest payable 12,212 14,476
Accrued expenses and other liabilities 1,797 2,172
Dividends payable 687 5,686
----------- -----------
3,383,993 3,109,660
----------- -----------
Commitments and contingencies (See Note 11)
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 and 48,993,750 shares authorized;
14,070,557 and 14,284,657 issued and outstanding 141 143
Additional paid-in capital 320,282 324,555
Accumulated other comprehensive income (13,085) (10,071)
Dividends in excess of net income (4,376) (6,826)
----------- -----------
329,698 334,537
----------- -----------
$ 3,713,691 $ 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 March 31,
1998 1997
------------ ------------
<S> <C> <C>
INTEREST INCOME
Mortgage loans $ 25,810 $ 9,855
Mortgage securities 27,667 28,551
Cash and investments 384 162
------------ ------------
53,861 38,568
INTEREST EXPENSE
Short-term debt 28,003 28,900
Long-term debt 18,094 --
------------ ------------
46,097 28,900
Net interest rate agreements expense 1,378 595
------------ ------------
NET INTEREST INCOME 6,386 9,073
Provision for credit losses 601 695
Equity in earnings of RWT Holdings, Inc. -- --
Write-down of mortgage securities 729 --
Net (gain)/loss on sale transactions (6) --
Operating expenses 1,925 1,167
------------ ------------
NET INCOME 3,137 7,211
------------ ------------
Less cash dividends on Class B preferred stock 687 755
------------ ------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 2,450 $ 6,456
============ ============
NET INCOME PER SHARE
Basic $ 0.17 $ 0.56
Diluted $ 0.17 $ 0.53
Weighted average shares of common stock and common stock equivalents:
Basic 14,123,951 11,605,171
Diluted 14,234,425 12,116,867
</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
For the three months ended March 31, 1998
(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
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- -- 3,137 3,137
Net unrealized loss on
assets available-for-sale -- -- -- -- -- (3,014) -- (3,014)
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
===================================================================================================================================
</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
March 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,137 $ 7,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of mortgage asset premium and discount, net 8,158 3,818
Amortization of deferred bond issuance costs 402 --
Amortization of long-term debt premium (244) --
Depreciation and amortization 52 26
Provision for credit losses on mortgage assets 601 695
Amortization of interest rate agreements 1,341 311
Net (gain)/loss on sale transactions (6) --
Write-down of mortgage securities 729 --
Increase in accrued interest receivable (767) (3,714)
(Increase) decrease in other assets (771) 1,196
Increase (decrease) in accrued interest payable (2,264) 902
Increase (decrease) in accrued expenses and other (375) 501
--------- ---------
Net cash provided by operating activities 9,993 10,946
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted cash (1,077) --
Investment in RWT Holdings, Inc. (9,900) --
Purchases of mortgage loans (441,960) (250,865)
Purchases of mortgage securities (161,842) (376,210)
Proceeds from sales of mortgage securities 9,295 --
Principal payments on mortgage loans 118,707 45,247
Principal payments on mortgage securities 187,405 128,115
Purchases of interest rate agreements (897) (1,991)
--------- ---------
Net cash used in investing activities (300,269) (455,704)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 373,493 420,176
Repayments on long-term borrowings (91,680) --
Net proceeds from issuance of common stock -- 31,767
Repurchases of common stock (4,275) --
Dividends paid (5,686) (5,268)
--------- ---------
Net cash provided by financing activities 271,852 446,675
Net increase (decrease) in cash and cash equivalents (18,424) 1,917
Cash and cash equivalents at beginning of period 24,892 11,068
--------- ---------
Cash and cash equivalents at end of period $ 6,468 $ 12,985
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 48,419 $ 28,068
========= =========
</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
MARCH 31, 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. RWT Holdings, Inc. ("RWT Holdings"), a non-REIT, taxable
affiliate of Redwood Trust, was established during the first quarter of 1998.
Redwood Trust, Sequoia and RWT Holdings (collectively, the "Company") acquire
and manage 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 intercompany balances and
transactions with Sequoia have been eliminated in consolidation of Redwood
Trust.
During March, 1998, the Company formed RWT Holdings, through which a portion of
the Company's Mortgage Loan acquisition and finance activities will be
conducted. Redwood Trust owns all of the preferred stock and has a non-voting,
99% economic interest in RWT Holdings. As Redwood Trust does not own the voting
common stock of RWT Holdings or control RWT Holdings, it's 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 Redwood
Trust's share of earnings or losses and decreased by dividends received.
For financial reporting purposes, references to "Redwood Trust" mean Redwood
Trust and Sequoia; while references to the "Company" mean Redwood Trust, Sequoia
and RWT Holdings. Certain amounts for prior periods have been reclassified to
conform with the 1998 presentation.
INCOME TAXES
Redwood Trust 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, Redwood Trust must annually distribute
at least 95% of its taxable income to shareholders and meet certain other
requirements. If these requirements are met, Redwood Trust 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 Redwood Trust
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, as Redwood Trust believes it has
met the prescribed distribution requirements.
7
<PAGE> 8
MORTGAGE ASSETS
Redwood Trust'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 Redwood Trust to
classify its Mortgage Securities as either trading investments,
available-for-sale investments or held-to-maturity investments. Although Redwood
Trust 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,
Redwood Trust 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
Redwood Trust 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
Redwood Trust to provide certain disclosures concerning its derivative
instruments according to a set of prescribed guidelines. The nature of Redwood
Trust's investment and financing strategies exposes Redwood Trust to interest
rate risk. As part of its asset/liability management activities, Redwood Trust
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, Redwood
Trust enters into all Interest Rate Agreements as hedges. Under Redwood Trust'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. Redwood
Trust 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 months ended March 31, 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 months
ended March 31, 1998 and 1997.
9
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
INCOME SHARES PER-SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) (NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------------
<S> <C> <C> <C>
Net Income $ 3,137
Cash dividends on Class B preferred stock (687)
---------------------------------------
Basic EPS - Income available to common stockholders 2,450 14,123,951 $ 0.17
---------------------------------------
Effect of dilutive securities -
Stock options 110,474
=======================================
Diluted EPS - Income available to common stockholders $ 2,450 14,234,425 $ 0.17
=======================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
INCOME SHARES PER-SHARE
(IN THOUSANDS, EXCEPT SHARE DATA) (NUMERATOR) (DENOMINATOR) AMOUNT
--------------------------------------
<S> <C> <C> <C>
Net Income $ 7,211
Cash dividends on Class B preferred stock (755)
---------------------------------------
Basic EPS - Income available to common stockholders 6,456 11,605,171 $ 0.56
---------------------------------------
Effect of dilutive securities -
Stock options 253,274
Stock warrants (a) 258,422
=======================================
Diluted EPS - Income available to common stockholders $ 6,456 12,116,867 $ 0.53
=======================================
</TABLE>
(a) The Stock warrants expired on December 31, 1997.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires Redwood Trust to classify
items of "other comprehensive income", such as unrealized gains and losses on
assets available-for-sale and foreign currency translation adjustments, 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 March 31,
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. Redwood Trust 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
10
<PAGE> 11
indicative of the amounts Redwood Trust 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 9.
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 Assets, including current and projected economic conditions,
delinquency status and credit protection. In determining the allowance for
credit losses, Redwood Trust'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
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. Redwood Trust'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.
NOTE 3. MORTGAGE ASSETS
At March 31, 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 $ 869,153 $ 872,822 $ 1,837,517 $ 3,579,492
Unamortized Discount (168) (11,936) (27) (12,131)
Unamortized Premium 30,045 17,060 37,943 85,048
--------------------------------------------------------------
Amortized Cost 899,030 877,946 1,875,433 3,652,409
Allowance for Credit Losses 0 (2,035) (3,449) (5,484)
Gross Unrealized Gains 1,554 2,498 0 4,052
Gross Unrealized Losses (5,522) (2,905) 0 (8,427)
--------------------------------------------------------------
Carrying Value $ 895,062 $ 875,504 $ 1,871,984 $ 3,642,550
==============================================================
</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>
At March 31, 1998 and December 31, 1997, all investments in Mortgage Assets
consisted of interests in adjustable-rate mortgages or hybrid adjustable-rate
mortgages on residential properties. The hybrid adjustable-rate mortgages have
an initial fixed coupon rate of five years followed by annual adjustments.
Agency Mortgage Securities ("Agency Securities") represent securitized interests
in pools of adjustable-rate mortgages from the
11
<PAGE> 12
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 March 31, 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 6.33% and 6.86%, respectively, based on the amortized cost
of the assets. The coupons on 68% of the adjustable-rate mortgage securities and
loans owned by Redwood Trust 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 32% not limited by such periodic caps. Most of the coupons
on the adjustable-rate mortgage securities and loans owned by Redwood Trust are
limited by lifetime caps. At March 31, 1998 and December 31, 1997, the weighted
average lifetime cap was 12.12% and 12.08%, respectively.
During the first quarter of 1998, Redwood Trust 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 months ended March 31, 1998 are
presented below. No such sales occurred for the three months ended March 31,
1997.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998
------
<S> <C>
Proceeds from sales of available-for-sale securities $9,295
Available-for-sale securities gains $ 6
Available-for-sale securities losses 0
------
Net gain on sales of available-for-sale securities $ 6
======
</TABLE>
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
The following table summarizes Allowance for Credit Losses activity for the
three months ended March 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
Balance at January 1 $ 4,931 $ 2,180
Provision for credit losses 601 695
Charge-offs (48) (42)
======= =======
Balance at March 31 $ 5,484 $ 2,833
======= =======
</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
Redwood Trust 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, 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 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. Redwood Trust's exposure to loss
on the Bond Collateral is limited to its net investment, as the Long-Term Debt
is non-recourse to Redwood Trust. Redwood Trust 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.
12
<PAGE> 13
The components of the Bond Collateral at March 31, 1998 and December 31, 1997
are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Mortgage loans $1,095,859 $1,191,487
Restricted cash and cash equivalents 25,734 24,657
Accrued interest receivable 6,796 7,401
---------- ----------
$1,128,389 $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 Redwood Trust's Interest Rate
Agreements at March 31, 1998 and December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Amortized Cost $ 10,337 $ 10,781
Gross Unrealized Gains 339 650
Gross Unrealized Losses (9,049) (9,331)
-------- --------
Carrying Value $ 1,627 $ 2,100
======== ========
</TABLE>
The following table summarizes the aggregate notional amounts of all of Redwood
Trust's Interest Rate Agreements as well as the credit exposure related to these
instruments at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS CREDIT EXPOSURE (a)
(IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Options $4,775,100 $4,862,200 $ 0 $ 0
Interest Rate Swaps 595,000 473,000 11,979 12,392
Interest Rate Futures 61,000 58,000 0 46
--------------------------------------- ---------------------------------------
Total $5,431,100 $5,393,200 $ 11,701 $ 12,438
======================================= =======================================
</TABLE>
(a) Reflects the fair market value of all cash and collateral of Redwood Trust
held by counterparties.
Interest Rate Options, which include caps, floors, collars, options on swaps 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 Redwood Trust to the extent that a specific interest rate index exceeds a
fixed rate. Conversely, interest rate floor agreements produce cash flows to
Redwood Trust to the extent that the referenced interest rate index falls below
the agreed upon fixed rate. Interest rate collar agreements consist of the
purchase of a cap agreement subsidized by the sale of a floor agreement, thus
incorporating both of the above mentioned types of cash flows. Swaption collars
will cause Redwood Trust to incur a gain (loss) should interest rates fall
(rise) sharply as of the expiration date of the option. Redwood Trust will
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. Redwood
Trust'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 Redwood Trust's Swaps
involve the exchange of either fixed interest payments for floating interest
payments or
13
<PAGE> 14
the exchange of one floating interest payment for another floating interest
payment based on a different index. Most of the Swaps require that Redwood Trust
provide collateral in the form of Mortgage Assets to the counterparty. Should
the counterparty fail to return the collateral, Redwood Trust 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 Redwood Trust has sold (bought) the futures, Redwood
Trust will generally receive additional cash flows if interest rates rise
(fall). Conversely, Redwood Trust will generally pay additional cash flows if
interest rates fall (rise).
In general, Redwood Trust 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, Redwood Trust would not receive the cash to which it would otherwise be
entitled under the Interest Rate Agreement. In order to mitigate this risk,
Redwood Trust 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, Redwood Trust 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. SHORT-TERM DEBT
Redwood Trust 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 Redwood Trust's Mortgage Assets.
At March 31, 1998, Redwood Trust had $2.3 billion of Short-Term Debt outstanding
with a weighted average borrowing rate of 5.89% and a weighted average remaining
maturity of 65 days. This debt was collateralized with $2.4 billion of Mortgage
Assets. At December 31, 1997, Redwood Trust 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.
At March 31, 1998 and December 31, 1997, the Short-Term Debt had the following
remaining maturities:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Within 30 days $1,264,488 $ 823,545
30 to 90 days 399,020 533,543
Over 90 days 624,510 557,437
---------- ----------
Total Short-Term Debt $2,288,018 $1,914,525
========== ==========
</TABLE>
For the three months ended March 31, 1998 and 1997, the average balance of
Short-Term Debt was $1.9 billion and $2.1 billion with a weighted average
interest cost of 5.77% and 5.62%, respectively. The maximum balance outstanding
during the three months ended March 31, 1998 and 1997 was $2.3 billion and $2.4
billion, respectively.
NOTE 8. LONG-TERM DEBT
During 1997, Redwood Trust issued $1.28 billion of Long-Term Debt in the form of
collateralized mortgage bonds. The Long-Term Debt was issued by two business
trusts established by the Redwood Trust's wholly-owned subsidiary, Sequoia. Each
series of Long-Term Debt consists of two classes of bonds at variable rates of
interest. Payments received on the Bond Collateral are used to make 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 Redwood Trust. The
maturity of each class is directly affected by the rate of principal prepayments
on the related
14
<PAGE> 15
Bond Collateral. The Long-Term Debt is also subject to redemptions according to
the specific terms of the individual indentures as defined in the corresponding
prospectus. As a result, the actual maturity of any class of this series of
Long-Term Debt is likely to occur earlier than its stated maturity.
The components of the Long-Term Debt at March 31, 1998 and December 31, 1997
along with selected other information are summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Long-Term Debt $ 1,079,028 $ 1,170,709
Unamortized premium on Long-Term Debt 5,551 5,795
Deferred bond issuance costs (3,300) (3,703)
----------- -----------
Total Long-Term Debt $ 1,081,279 $ 1,172,801
=========== ===========
Range of coupons on bonds 6.02% to 6.49% 6.06% to 6.50%
Stated maturities 2024 - 2029 2024 - 2029
</TABLE>
For the three months ended March 31, 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 6.44%. Cash paid for
interest on Long-Term Debt for the three months ended March 31, 1998 totaled
$18.0 million.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Redwood Trust's financial instruments at March 31, 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) MARCH 31, 1998 DECEMBER 31, 1997
------------------------------ ------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Assets
Mortgage Loans $1,871,984 $1,872,774 $1,551,826 $1,552,585
Mortgage Securities $1,770,566 $1,770,566 $1,814,796 $1,814,796
Interest Rate Agreements $ 1,627 $ 2,584 $ 2,100 $ 1,522
Liabilities
Long-Term Debt $1,081,279 $1,080,530 $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 10. STOCKHOLDERS' EQUITY
CLASS B 9.74% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On August 8, 1996, Redwood Trust 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, Redwood Trust 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 Redwood Trust'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.
15
<PAGE> 16
As of March 31, 1998 and December 31, 1997, 96,732 shares of the Preferred Stock
have been converted into 96,732 shares of the Redwood Trust's Common Stock. At
March 31, 1998 and December 31, 1997, there were 909,518 shares of the Preferred
Stock outstanding.
STOCK OPTION PLAN
Redwood Trust 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 Redwood Trust's
total outstanding shares of Common Stock. At March 31, 1998 and December 31,
1997, 839,588 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 March 31, 1998 and December 31, 1997, 360,265 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 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.
Redwood Trust's Plan permits certain stock options granted under the plan to
accrue stock DERs. For the three months ended March 31, 1998 and 1997, the stock
DERs accrued on NQSOs that had a stock DER feature resulted in charges to
operating expenses of $53,228 and $123,859, 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
are based on the level of Redwood Trust's dividends and on the price of the
stock on the related dividend payment date.
A summary of the status of Redwood Trust's Plan for the three months ended March
31 is presented below.
<TABLE>
<CAPTION>
1998
----------------------------
WEIGHTED
AVERAGE
EXERCISE
(IN THOUSANDS, EXCEPT SHARE DATA) SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding options at beginning of period 840,644 $ 29.79
Options granted 284,282 $ 20.20
Options exercised -- --
Dividend equivalent rights earned 2,419 0.00
---------
Outstanding options at end of period 1,127,345 $ 27.31
=========
</TABLE>
STOCK PURCHASE WARRANTS
The Warrants expired on December 31, 1997. Each Warrant entitled the holder to
purchase 1.000667 shares of the Redwood Trust's Common Stock at an exercise
price of $15.00 per share.
STOCK REPURCHASES
During 1997, Redwood Trust's Board of Directors approved the repurchase of up
to 1,455,000 shares of the Redwood Trust's Common Stock. Pursuant to this
repurchase program, Redwood Trust repurchased 214,100 shares of its Common Stock
for $4.3 million during the three months ended March 31, 1998. During the year
ended December 31, 1997, Redwood Trust repurchased 840,000 shares of its Common
Stock for $23.1 million. The repurchased shares have been returned to Redwood
Trust's authorized but unissued shares of Common Stock.
16
<PAGE> 17
DIVIDENDS
As of March 31, 1998, Redwood Trust had declared the following dividends:
<TABLE>
<CAPTION>
TOTAL DIVIDENDS PER SHARE
--------------------------------
DECLARATION RECORD PAYABLE DIVIDENDS CLASS B COMMON
DATE DATE DATE (IN THOUSANDS) PREFERRED STOCK STOCK
---- ---- ---- -------------- --------------- -----
<S> <C> <C> <C> <C> <C>
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 been paid by
Redwood Trust 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. Redwood Trust's dividends are not eligible for the dividends
received deduction for corporations.
NOTE 11. COMMITMENTS AND CONTINGENCIES
At March 31, 1998, the Company had entered into commitments to purchase $114.5
million of Mortgage Assets for settlement in April 1998. The majority of these
commitments relate to acquisitions made by RWT Holdings.
At March 31, 1998, Redwood Trust 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 - $149,124; 1999 through
2000 - $198,832; 2001 - $66,277.
NOTE 12. SUBSEQUENT EVENT
On April 27, 1998, Redwood Trust declared a $0.27 cash dividend per common share
for the first quarter of 1998 payable on May 21, 1998 to common shareholders of
record on May 7, 1998.
17
<PAGE> 18
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
Redwood Trust, Inc. is a financial institution specializing in the
single-family residential mortgage spread lending business. The Company
earns net income primarily to the extent that the interest income it
earns from its mortgage loans and securities exceeds the cost of
borrowed funds, hedging, credit loss expenses and operating expenses.
The Company seeks to earn net interest income from first-lien
single-family residential mortgage loans and securities underwritten to
"A" or "prime" quality standards. The Company believes its primary
competitors in the "A" quality mortgage spread lending business are
banks, savings and loans, insurance companies, the two
government-sponsored mortgage entities ("GSEs": Fannie Mae and Freddie
Mac) and other mortgage Real Estate Investment Trusts ("REITs").
The Company has chosen to pursue a wholesale strategy (such as is
employed by the GSEs) rather than a retail strategy (such as is
employed by most banks and savings and loans). Like the GSEs, the
Company does not originate loans directly but rather acquires loans
from mortgage origination companies and from the secondary mortgage
market. Like the GSEs, the Company out-sources the servicing of its
mortgage loans and sources its borrowings on a wholesale basis in the
capital markets rather than seeking retail deposits through a branch
banking system. The Company believes that its wholesale strategy allows
the Company to operate in a highly efficient manner while remaining
focused on its core spread lending business.
Over the past year, the Company has moved a long way towards
transforming itself from a spread lending company managing mortgage
securities funded with short-term debt to a spread lending company
managing high-quality single-family mortgage loans funded with
long-term debt. The impact of this transition on the Company's results
is discussed below.
The Company has elected to be considered a REIT with respect to Federal
and state income taxes. This election generally allows the Company to
avoid paying corporate income tax so long as it distributes at least
95% of its taxable income as dividends and meets the other REIT
requirements.
RESULTS OF OPERATIONS
Mortgage Asset Acquisitions
Through March 31, 1998, all mortgage loans acquired have been
high-quality, adjustable-rate, first-lien mortgages on single-family
residential properties ("ARMs"). All mortgage securities acquired have
represented securitized interests in pools of ARMs.
In the first quarter of 1998, the Company acquired $604 million of
mortgage assets, including $442 million of mortgage loans and $162
million in mortgage securities. Mortgage loans with a first reset
within twelve months represented $150 million of acquired mortgage
loans while hybrid mortgage loans, with a first reset after twelve
18
<PAGE> 19
months, represented the other $292 million. Overall, the percentage of
mortgage loans acquired by the Company was 73% of mortgage assets
acquired by the Company in the first quarter of 1998.
In the fourth quarter of 1997, the Company acquired $342 million in
mortgage assets, including $275 million in mortgage loans and $67
million in mortgage securities.
In the first quarter of 1997, the Company acquired $627 million of
mortgage assets, including $251 million of mortgage loans and $376
million of mortgage securities.
In the second quarter of 1998, through May 8, 1998, the Company
purchased or committed to purchase $397 million of mortgage assets.
Mortgage loans represent $384 million of this total and high-quality
mortgage securities represent $13 million. Hybrid loans represent $383
million of mortgage loan purchases or purchase commitments.
Principal Repayments
The Company received $306 million of mortgage principal repayments in
the first quarter of 1998. The Company received principal repayments of
$347 million in the fourth quarter of 1997 and $173 million in the
first quarter of 1997.
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 the Company 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 principal balance
at the beginning of that period. This percentage is stated as an
annualized number. The average CPR for the Company's mortgage loans and
the mortgages contained in the pools underlying its mortgage securities
was 26% in the first quarter of 1998 versus 27% in the fourth quarter
of 1997 and 24% in the first quarter of 1997. Historically, annual
average CPRs on the Company's mortgage assets have increased from 19%
in 1995 to 25% in both 1996 and 1997.
Prepayments on the Company's mortgage loans, including the mortgage
loans underlying the mortgage securities owned by the Company,
accelerated significantly in March compared to the levels experienced
in January and February. The average CPRs were 26% in January, 23% in
February and 29% in March. Based on preliminary results, the Company
believes that the April 1998 average CPRs will be higher than March
levels. This level of prepayments will tend to reduce the Company's
earnings in the second quarter.
Total principal repayments as a percent of the average principal
balance were 38% in the first quarter of 1998 versus 43% in the fourth
quarter of 1997 and 32% in the first quarter of 1997.
Net Asset Growth
In the first quarter of 1998, the Company acquired $604 million of
mortgage assets, received mortgage principal repayments of $306
million, sold mortgage securities of $9 million, had net premium
amortization of $8 million, wrote-down interest-only mortgage
securities by $0.7 million and had realized credit losses of $0.05
million. The net increase in mortgage assets was $279 million, or 8.3%.
19
<PAGE> 20
In the fourth quarter of 1997, the Company acquired $342 million of
mortgage assets, received mortgage principal repayments of $347
million, sold mortgage securities of $46 million, had net premium
amortization of $8 million and had credit losses of $0.04 million. The
net decline in mortgage assets was $59 million, or 1.7%.
In the first quarter of 1997, the Company acquired $627 million of
mortgage assets, received mortgage principal repayments of $173
million, sold no mortgage securities, had net premium amortization of
$4 million and had credit losses of $0.04 million. Mortgage assets grew
by $450 million, or 20.9%.
Mortgage Equity Interests
The Company defines a mortgage equity interest as the ownership of the
equity portion of a mortgage spread lending "subsidiary trust" wherein:
i) the assets of the trust are funded with long-term debt or similar
instruments, ii) the debt and other liabilities of the trust are
non-recourse to the Company, and iii) liquidity risk is essentially
eliminated. Mortgage equity interests can be created through
transactions structured as collateralized mortgage bonds,
collateralized bond obligations, REMICs, FASITs and other means. The
assets of the trust can be mortgage loans or mortgage securities.
The Company created no new mortgage equity interests in the first
quarter of 1998. However, the Company expects to utilize its mortgage
loans currently funded with short-term borrowings to create mortgage
equity interests during the remainder of 1998.
At March 31, 1998, the Company's investment in mortgage equity
interests totaled $56 million. The Company employed nearly 17% of its
equity base in mortgage equity interests at that time.
Interest Income
Total interest income is the sum of the income the Company earns on the
principal value of its mortgage assets, the amortization of premium and
discount and the interest earned on cash balances.
First quarter 1998 total interest income equaled $53.9 million, a 0.2%
decrease from the $54.0 million posted in the fourth quarter of 1997.
The decrease was the combined effect of a 0.6% quarter-to-quarter
increase in average mortgage assets held by the Company (from $3.27 to
$3.29 billion) and a 0.05% decline in mortgage asset yield (from 6.55%
to 6.50%). Mortgage asset yield is the amount of annualized total
interest income earned on mortgage assets divided by the average daily
balance of mortgage assets' amortized cost. An increase in the net
amortization expense accounted for 0.01% of the mortgage asset yield's
decline, while a reduction in mortgage coupon yield accounted for the
remaining 0.04%.
Compared to the first quarter of 1997, first quarter 1998 total
interest income increased 39.7%, from $38.6 million to $53.9 million.
This increase was driven by a 47.4% increase in average mortgage assets
(from $2.23 billion to $3.29 billion) and a 0.38% decline in mortgage
asset yield (from 6.88% to 6.50%). The net amortization of premium
increased to $8.2 million in the first quarter of 1998 from $3.8
million in the first quarter of 1997. This increase was driven
primarily by the increase in principal repayments on mortgage assets,
in conjunction with a higher premium basis on the mortgage portfolio.
An increase in the net premium amortization expense accounted for 0.31%
of the decline in mortgage asset yield, while a reduction in the
mortgage coupon yield accounted for the remaining 0.07% of the decline.
Earning asset yield, which includes the yield on cash as well as
mortgage assets, was approximately equal to the mortgage yield in each
of these quarters. The earning asset yield was 6.49% in the first
quarter of 1998, 6.54% in the fourth quarter of 1997 and 6.87% in the
first quarter of 1997.
Interest Expense
Interest expense is the cash expense paid on short-term and long-term
debt plus the net amortization expense or income of deferred bond
issuance costs, premiums and other related expenses.
20
<PAGE> 21
First quarter 1998 interest expense of $46.1 million fell $0.4 million
from $46.5 million posted in the fourth quarter of 1997. This was the
net effect of a $3.9 million decrease in short-term interest expense
and a $3.5 million increase in long-term interest expense.
Interest expense on short-term debt fell due to a decline in average
short-term borrowings and a decline in the number of days in the
quarter from 92 to 90 (the seasonal "day count" effect on short-term
debt). Short-term interest expense is calculated on a daily basis, thus
fewer days result in lower interest expense. Compared to the fourth
quarter of 1997, first quarter 1998 interest expense on long-term debt
rose because the average long-term debt balance rose from $0.9 billion
to $1.1 billion and the long-term borrowings cost of funds increased
from 6.40% to 6.44%. In the first quarter of 1998, the Company's total
cost of funds was 6.01%, or 0.08% less than the cost of funds in the
fourth quarter of 1997.
Compared to the first quarter of 1997, first quarter 1998 interest
expense increased 59.5%, to $46.1 million from $28.9 million. A $0.9
million decrease in interest expense on short-term debt was the net
result of a $114 million decrease in average short-term borrowings,
partially offset by a 0.15% rise in the average short-term cost of
funds due to higher interest rates. There was no long-term debt
outstanding in the first quarter of 1997. Compared to the first quarter
of 1997, the Company's first quarter 1998 total cost of funds increased
0.39%, from 5.62% to 6.01%.
Interest Rate Agreements Expense
Interest rate agreements are a form of interest rate insurance, or
hedging, which the Company utilizes to reduce the effects that large
changes in interest rates could have on its balance sheet and earnings.
The Company seeks to hedge, in part, the market value and earnings
risks arising from the life caps, periodic caps and the fixed-coupon
period to the next adjustment date for its adjustable-rate mortgage
assets. The Company also may hedge: i) the market value of acquired
mortgage loans prior to securitization into a mortgage equity interest,
ii) the anticipated issuance of liabilities, iii) premium amortization
risk that may arise from falling interest rates, and iv) risk arising
from any hybrid or fixed-rate mortgages which are funded short-term.
The Company may use interest rate agreements for other hedging purposes
as well.
First quarter 1998 net interest rate agreements expense was $1.4
million. Interest rate agreement expense was $1.3 million and $0.6
million in the fourth and first quarters of 1997, respectively. The
higher level of expense over the past two quarters compared to the
year-ago quarter is due to an increase in the number of interest rate
agreements which were effective during these later periods.
Annualized net interest rate agreements expense was 0.18%, 0.17% and
0.12% of average borrowings in the first quarter of 1998 and the fourth
and first quarters of 1997, respectively.
The Company constantly evaluates the cost and effectiveness of various
hedging strategies designed to mitigate selected portions of risk
associated with its business operations. Recently, the Company
developed a modified hedging system which it believes may provide
improved protection against certain risks at a reduced cost. This
system will be implemented over time. The Company does not seek to
hedge or eliminate all risks associated with its business. 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.
Compared to the fourth quarter of 1997, first quarter 1998 net interest
income increased $0.2 million, or 3.3%, from $6.2 million to $6.4
million. This was the net effect of a 0.6% increase in average mortgage
assets and an improvement in the Company's interest rate spread from
0.28% to 0.30%. A 0.08% reduction in the Company's
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cost of funds, net of a 0.05% decline in earning asset yield and a
0.01% increase in hedging expense, accounted for this change in spread.
Similarly, the net interest rate margin increased from 0.72% in the
fourth quarter of 1997 to 0.75% in the first quarter of 1998.
Compared to the same quarter one year ago, first quarter 1998 net
interest income was down 29.6%, from $9.1 to $6.4 million. The negative
effect of a 0.83% decrease in the Company's interest rate spread was
only partially offset by the 47.4% increase in average mortgage assets
in the quarter-to-quarter comparison. The Company's interest rate
spread in the same quarter one year ago was 1.13%. The lower spread in
the first quarter 1998 is attributable to a 0.38% drop in the earning
asset yield, a 0.39% increase in cost of funds and a 0.06% increase in
hedging costs. The net interest rate margin decreased from 1.57% in the
first quarter of 1997 to 0.75% in the first quarter of 1998.
Please see "Interest Income" and "Interest Expense" above for a
discussion of the factors that resulted in narrower interest rate
spreads and margins over these periods.
Credit Provision Expense and Actual Credit Losses
The Company establishes credit provisions against its mortgage assets
in order build a reserve for potential future credit losses.
Compared to the fourth quarter of 1997, first quarter 1998 total credit
provisions on its mortgage loans and mortgage securities increased $0.1
million, from $0.5 million to $0.6 million. This was due to the
increased size of the mortgage loan portfolio in the first quarter of
1998 versus the fourth quarter of 1997.
Compared to the first quarter of 1997, first quarter 1998 total credit
provisions were down $0.1 million, from $0.7 million. A $0.4 million
increase in reserves taken due to a higher average mortgage loan
balance was more than offset by a $0.5 million reduction in provisions
taken on mortgage securities. The Company has not increased its credit
reserve on its mortgage securities over the past two quarters because
it believes that the existing level of reserves on mortgage securities
are adequate at this time.
The Company's current policy is to set aside annual credit provisions
for mortgage loans on an on-going basis equaling 0.10% to 0.20% of its
mortgage loan portfolio. In the first quarter of 1997, the annualized
rate of provision was 0.16% of the average mortgage loan balance. In
prior years, the annual provisions taken were greater than 0.20% of the
loan portfolio as the Company sought to establish a higher base level
of credit reserves.
Actual credit losses realized were $49,000 in the first quarter of
1998. Actual credit losses were $40,000 and $42,000 in the fourth and
first quarter of 1997, respectively. Total cumulative actual credit
losses from the Company's mortgage assets through March 31, 1998 have
been $239,000.
Credit provisions reduce net income and earnings per share but only
actual credit losses are deducted when calculating taxable income.
Dividends from a REIT are based on taxable income, so future dividends
levels will be influenced by the rate of actual realized credit loss
rather than the rate of credit provisioning. Thus, the Company's
current credit reserve will not serve to insulate the Company's
dividends from the effects of future actual realized credit losses.
Write-down of Mortgage Securities
The Company wrote-down all of its interest-only mortgage securities
("IOs") to their estimated market value in the first quarter of 1998
based on its conservative estimate of future CPRs. This write-down
reduced GAAP income $0.7 million but did not effect taxable income. The
write-down caused a $0.05 per share difference between reported diluted
earnings per share and core earnings per share in the first quarter of
1998. At March 31, 1998, the remaining book value of all of the
Company's IOs was $1.0 million.
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Gain or Loss on Sale Transactions
The Company sold $9.3 million of mortgage securities during the first
quarter of 1998 resulting in a gain on sale of $6,000. In the fourth
quarter of 1997, the Company sold $46 million of securities as part of
its re-REMIC transaction resulting in a $0.5 million gain. There were
no gains or losses reported in the first quarter of 1997.
Operating Expenses
Compared to the fourth quarter of 1997, first quarter 1998 operating
expenses increased $0.8 million, from $1.1 million to $1.9 million.
This growth was driven primarily by a $0.7 million increase in
compensation and benefits expense (related primarily to an increase in
the number of employees) and a $0.1 million increase in other operating
expenses. Compared to the first quarter of 1997, total operating
expenses in the first quarter of 1998 were up $0.8 million due to a
$0.5 million increase in compensation and benefits and a $0.3 million
increase in other expenses.
When compared to the fourth quarter of 1997, first quarter 1998
operating expenses increased from 0.13% to 0.22% of average assets and
from 1.29% to 2.24% of average equity. The efficiency ratio, which
compares operating expenses to net interest income, increased from
18.25% to 30.14%.
Compared to first quarter 1997 expenses, first quarter 1998 operating
expenses as a percent of average assets increased from 0.20% to 0.22%.
When measured as a percent of average equity, operating expenses
increased from 1.97% to 2.24%. The efficiency ratio increased from
12.86% to 30.14%. Increases in efficiency ratios were due to both
falling net interest income and rising expenses.
As of March 31, 1998, the Company had 19 employees compared to 15 and
11 employees at December 31, 1997 and March 31, 1997, respectively. The
Company is pursuing a number of higher value-added capital deployment
and diversification strategies that will require additional staff. Such
strategies include acquiring an increasing percentage of mortgage
loans, developing alternative sources for acquiring mortgage assets,
providing a greater degree of service to its mortgage loan origination
customers and utilizing an increased percentage of long-term debt
financing. The Company believes its investment in people will position
the Company for growth and produce significant net returns to
shareholders in the future. The Company intends to further increase its
staff during the remainder of 1998.
The Company has adopted a Stock Option Plan for executive officers,
employees and non-employee directors. At March 31, 1998, there were
1,127,345 stock options outstanding of which 875,796 had current pay
dividend equivalent rights ("DERs") attached, 209,465 had stock DERs
attached and 42,084 had no DERs attached. A portion of the DER payments
are subject to minimum dividend or vesting requirements, or both.
Holders of DERs are generally eligible to receive all types of
distributions made to common shareholders, including any non-cash or
return of capital distributions. To the extent options have been
granted with current pay DERs attached, GAAP and taxable income will
recognize the expense as cash payments accrue to the holders of the
underlying option. To the extent options have been granted with stock
DERs, there will be a non-cash charge to operating expenses for GAAP
for the value of the DERs which accrue. There is no expense recognized
for taxable income for stock DERs until the underlying option is
exercised. In addition, for taxable income purposes only, when
non-qualified stock options ("NQSO") are exercised, the Company will
recognize an expense equal to the difference between the fair market
value of the stock and the exercise price paid. Although this is a
non-operating, non-cash expense, such expenses arising from the future
exercise of options will the 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 March 31, 1998, the additional
associated tax expense for the first quarter would have been $0.5
million. For additional detail, see "Note 10. Stockholders Equity -
Stock Option Plan" in the Notes to the Consolidated Financial
Statements.
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RWT Holdings, Inc.
In March 1998, the Company purchased the preferred stock of RWT
Holdings, representing a 99% economic interest in this taxable
affiliate. RWT Holdings was formed to assist the Company in the
creation of certain types of mortgage equity interests and generally to
provide increased flexibility to the Company in carrying out its
business strategy as a REIT-qualifying mortgage investor. In the period
ending March 31, 1998, RWT Holdings had no operations or earnings. RWT
Holdings' future earnings will be recognized using the equity method of
accounting and the net income of RWT Holdings will appear as a single
line-item on the Company's income statement. Please see "Investment in
RWT Holdings" in the Financial Condition section below and the notes to
the consolidated financial statements for additional information on RWT
Holdings.
Net Income before Preferred Dividends
Net income before preferred dividends was $3.1 million in the first
quarter of 1998. Compared to the fourth quarter of 1997, total net
income available to common and preferred shareholders decreased by
38.3% from $5.1 million. Return on average assets dropped 0.22%, from
0.59% to 0.37%, due primarily to the write-down of all of the Company's
IOs and the increase in operating expenses discussed above. A drop in
average capital utilization, from 79% to 77%, offset the benefit of a
0.02% increase in interest rate spread. The return on total average
equity (common plus preferred) decreased from 5.80% to 3.66%.
First quarter 1998 total net income available to common and preferred
shareholders declined 56.5% compared to the $7.2 million posted in the
same quarter one year ago. Return on average assets dropped 0.88% to
0.37% due to the IO write-down, higher operating expenses, the 0.83%
narrower spread and a 21% decline in average capital utilization from
98% to 77%. The return on total average equity (common plus preferred)
fell from 12.16% to 3.66%.
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, the Company has the right 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.
Preferred dividends were $0.7 million in the first quarter of 1998.
This is the same level of dividends in the fourth quarter of 1997
because there were no conversions of preferred stock into common stock
in the first quarter of 1998. The first quarter 1998 preferred dividend
was less than the $0.8 million dividend in the first quarter of 1997
because shareholders have converted 90,120 shares into common stock
since March 31, 1997. There were 909,518 preferred shares outstanding
at March 31, 1998 and at December 31, 1997.
Net Income Available to Common Shareholders
From the fourth quarter of 1997 to the first quarter of 1998, net
income available to common shareholders decreased by 44.3%, from $4.40
million to $2.45 million, for reasons discussed above. Over the same
period, average common equity decreased by 2.3%, from $323.6 million to
$316.3 million, due to Company stock repurchases. Return on average
common equity decreased from 5.43% to 3.10%.
Compared to the first quarter of 1997, net income available to common
shareholders in the first quarter of 1998 decreased by 62.1%, from
$6.46 million to $2.45 million. Over the same period, average common
equity increased by 52.3%, from $207.6 million to $316.3 million, as a
result of two equity offerings. Return on average common equity
decreased from 12.44% to 3.10%.
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Diluted Earnings Per Share
From the fourth quarter of 1997 to the first quarter of 1998, diluted
earnings per share fell by 43.3%, from $0.30 to $0.17. The average
number of diluted common shares outstanding decreased by 2.1% and net
income available to common shareholders decreased by 44.3%.
Compared to the first quarter of 1997 diluted earnings fell 67.9%, from
$0.53 per share to $0.17 per share. The average number of diluted
common shares outstanding increased by 17.5% from 12.1 million shares
and net income available to common shareholders decreased by 62.1%.
Taxable Income
As a REIT, the Company is required to distribute as dividends over time
at least 95% of its taxable income. Taxable income can vary from GAAP
income due to a variety of reasons, such as differences in credit
expenses (actual credit losses are deducted from taxable income rather
than credit provisions), premium and discount amortization,
write-downs, accounting for stock options as well as other differences.
Taxable income in the first quarter of 1998 exceeded GAAP income by
$1.4 million due to a $0.6 million credit expense difference, the $0.7
million write-down of mortgage assets and $0.1 million of other expense
differences.
Taxable income in the fourth quarter of 1997 exceeded GAAP income by
$0.5 million primarily due to a $0.5 million credit expense difference.
A $0.2 million loss on sale difference was offset by a combined $0.2
million difference in mortgage amortization and operating expenses.
Taxable income in the first quarter of 1997 exceeded GAAP income by
$0.7 million primarily due to a $0.7 million credit expense difference.
Common Share Dividends
Historically, dividends per common share have exceeded GAAP earnings
per common share primarily because taxable income has exceeded GAAP
income.
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. In
order to implement this policy, starting in 1998, 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 fourth
week of April, July and October, respectively. The record and payable
dates will be announced at the time the dividend is declared. The
fourth quarter's dividend will be declared in December based on
estimated fourth quarter taxable income in order to comply with REIT
dividend distribution rules.
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 other operating and non-operating items that
impact taxable income.
On April 27, 1998, the Company declared a $0.27 per share first quarter
common dividend that was equal to its taxable income per share entitled
to a dividend. The dividend for the first quarter of 1998 is payable on
May 21, 1998. This is a 20.6% decrease in the dividend from the $0.34
per share dividend in the fourth quarter of 1997. The first quarter
1998 dividend was 55.0% less than the $0.60 dividend for the first
quarter of 1997.
Other Comprehensive Income
Starting in 1998, the Company is required to report "other
comprehensive income." The Company tracks its unrealized gains and
losses on mortgage securities and other assets available for sale in
market valuation accounts
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and reports them on its balance sheet as "accumulated other
comprehensive income." Please see the discussion of "accumulated other
comprehensive income" in the Financial Condition section, below.
FINANCIAL CONDITION
Mortgage Loans
From December 31, 1997, to March 31, 1998, the Company's mortgage loan
portfolio grew $320 million, or 20.6%. Measured as a percentage of the
Company's mortgage assets, mortgage loans totaled 51.3% at the end of
the first quarter of 1998, up from 46.1% at year-end 1997. The Company
currently expects mortgage loans as a percent of mortgage assets to
increase in the future as it continues to execute its whole loan
acquisition strategy.
At March 31, 1998, the Company owned 5,939 adjustable-rate, first-lien
mortgage loans on single-family residential properties with a principal
value of $1.84 billion and an amortized cost of $1.88 billion. The
Company estimates that the bid-side market value of the Company's
mortgage loan portfolio at March 31, 1998 was approximately $1.87
billion. Hybrid loans - adjustable rate loans with first adjustment
periods longer than one year - were 18% of mortgage loans.
As verified by its re-underwriting process, the Company believes that
its mortgage loans owned as of March 31, 1998 were generally originated
to "A", or "Prime" quality, underwriting standards. The average loan
size was $309,000. Loans with current balances less than $227,150 (the
FNMA/FHLMC 1998 conventional loan balance limit for most loans) made up
19% of the dollar balance of the Company's mortgage loan portfolio,
while loans with current balances in excess of $500,000 made up 36%.
Loans on owner-occupied houses made up 89% of the loan portfolio.
Second homes and investment properties represented 8% and 3% of the
portfolio, respectively. As of March 31, 1998, the average seasoning of
the loan portfolio was 16 months.
At March 31, 1998, 35% of loans had original loan-to-value ratios
("OLTV") in excess of 80%. Of these, 97% had either primary mortgage
insurance ("PMI") or additional collateral in the form of pledged
accounts. The average OLTV for the Company's loan portfolio was 77% as
of March 31, 1998. After giving effect to PMI and additional
collateral, the average effective LTV was 67%.
At March 31, 1998, 30% of the mortgage loans owned by the Company were
on properties located in California (13% in Northern California and 17%
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 March 31, 1998, 19 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 $4.36 million, or 0.23% of the mortgage loan
portfolio and 0.12% of total assets. Included in this NPA balance was
REO of $0.50 million resulting from the default of three loans.
If all of the NPAs as of March 31, 1998 were to default rather than
cure, and the loss severity experienced on these loans was 10%, 20%,
30%, or 40%, the Company estimates its realized credit losses from
these assets would be $0.4 million, $0.9 million, $1.3 million or $1.8
million, respectively. The mortgage loan credit reserve as of March 31,
1998 was $3.45 million. This reserve was 0.18% of mortgage loans as of
March 31, 1998. Cumulatively through March 31, 1998, the Company had
liquidated seven defaulted mortgage loans: the average loss severity on
those loans was 6%. The analysis in this paragraph reviews the risk of
loss from NPAs as of March 31, 1998 only; it does not purport to
analyze or measure credit losses from additional NPAs that may arise
after March 31, 1998.
At December 31, 1997, the Company 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. The Company estimates that the bid-side market value of the
Company's mortgage loan portfolio at December 31, 1997 was
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approximately $1.55 billion. Hybrid loans with first adjustment periods
longer than one year were 4% of mortgage loans.
As of 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
the Company'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 original loan-to-value ratios
("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 original LTV for the Company's loan portfolio was
78% as of December 31, 1997; after giving effect to PMI and additional
collateral, the average effective LTV was 66%.
At December 31, 1997, 29% of the mortgage loans owned by the Company
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 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 $3.90 million, or 0.25% of the mortgage loan
portfolio and 0.11% of total assets. Included in this NPA balance was
REO of $0.71 million resulting from the default of 4 loans.
If all of the NPAs as of December 31, 1997 defaulted rather than cured,
and the loss severity experienced on these loans would have been 10%,
20%, 30%, or 40%, the Company estimated at that time that its realized
credit losses from these assets would have be $0.4 million, $0.8
million, $1.2 million or $1.6 million, respectively. The mortgage loan
credit reserve as of December 31, 1997 was $2.85 million. The analysis
in this paragraph reviews the risk of loss from NPAs as of 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 March 31, 1998, the Company's portfolio of
mortgage securities decreased by 2.4%. Mortgage securities declined as
a percentage of total mortgage assets from 53.9% to 48.7%. All of the
Company's mortgage securities represent interests in pools of
adjustable rate, first lien mortgages on single-family residential
properties.
At March 31, 1998, the principal value of the Company's mortgage
securities was $1.74 billion and the amortized cost was $1.78 billion.
The Company estimates that the bid-side market value of the Company's
mortgage securities portfolio at March 31, 1998 was approximately $1.77
billion.
At March 31, 1998, 99.5% of the Company's mortgage securities had a
credit rating equivalent of "AAA" or "AA." The remaining 0.5%
represented mortgage equity interests created by the Company in its
fourth quarter 1997 re-REMIC transaction. Securities guaranteed by
Fannie Mae or Freddie Mac made up 50.6% 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 48.9% of the mortgage securities portfolio.
Based on information available as of March 31, 1998, the Company had no
reason to suspect that it would be likely to incur credit losses in the
foreseeable future from is mortgage securities rated "AAA" or "AA".
The Company has taken and expects to continue to take credit losses on
the mortgage equity interests in the re-REMIC. Although the loans in
the mortgage pools underlying the securities in the re-REMIC were, for
the most part, originated to "A" quality standards, these securities
are subordinated to other securities issued from the same
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pools and therefore are subject to leveraged credit risk with respect
to the underlying mortgages. At March 31, 1998, the re-REMIC mortgage
equity interests had a principal value of $20.8 million, an amortized
cost before credit reserve of $9.1 million and an estimated market
value of $9.2 million. If all the underlying loans were to default, the
maximum loss the Company could incur would be $9.1 million and the
maximum impact to reported earnings, after taking into account the
credit reserve of $2.0 million, would be $7.1 million.
The Company 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 March 31, 1998 were to default
and have a loss severity of 10%, 20%, 30%, or 40%, realized credit
losses for the Company would be $0.5 million, $1.0 million, $1.2
million or $1.8 million, respectively. The Company's credit reserve for
these assets at March 31, 1998 was $2.0 million. Cumulatively, from the
acquisition dates of these mortgage securities through March 31, 1998,
284 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 the Company's mortgage securities as of
March 31, 1998 only; it does not purport to analyze or measure credit
losses from additional serious delinquencies that may arise after March
31, 1998.
At December 31, 1997, the principal value of all of the Company's
mortgage securities was $1.78 billion and the amortized cost was $1.82
billion. The Company estimated that the bid-side market value of the
Company's mortgage securities portfolio at December 31, 1997 was
approximately $1.81 billion.
At December 31, 1997, 99.5% of the Company's mortgage securities had a
credit rating equivalent of "AAA" or "AA.". The remaining 0.5%
represented the retained mortgage equity interests in the re-REMIC
discussed above. 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. Based on information
available as of December 31, 1997, the Company 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".
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 and an estimated market value of $9.3 million.
The Company 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%, the
Company's realized credit losses would have been $0.4 million, $0.9
million, $1.2 million or $1.8 million, respectively. The Company'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 the Company's mortgage securities as of December 31, 1998
only; it does not purport to analyze or measure credit losses from
additional serious delinquencies that may arise after December 31,
1998.
Total Mortgage Asset Portfolio Characteristics
At March 31, 1998, the average credit rating equivalent of all of the
Company's mortgage assets (loans plus securities) was "AA+", with
mortgage loans (the bulk of the value which would be rated "AAA" if
securitized and rated) representing 51.3% of the total mortgage asset
portfolio, "AAA" and "AA" mortgage securities representing 48.4% and
mortgage securities rated "A" or lower representing 0.3%.
At March 31, 1998, all mortgage assets had adjustable-rate features,
i.e., the interest rate coupon on the mortgage loans (or the underlying
mortgage loans in the case of mortgage securities) resets periodically
after the initial fixed-rate period ends.
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At March 31, 1998, 32.6% of the Company's mortgage assets had coupon
rate adjustments every six months based on the six-month LIBOR or CD
index and 20.2% had monthly adjustments based on the one-month LIBOR
index. Mortgage assets with annual coupon adjustments based on the
six-month or one-year U.S. Treasury index were 36.4% of the portfolio.
Hybrid mortgages, which have annual coupon adjustment based on the
one-year Treasury index after an initial fixed period in excess of one
year, represented 9.4%. Mortgage assets with other indices made up 1.4%
of the total. At March 31, 1998, the average
term-to-next-coupon-adjustment was 52 months for all hybrid loans and 4
months for the short-term ARMs. Overall, for all mortgage assets, the
average term to next coupon adjustment was 8 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. At March 31,
1998, the average coupon rate accruing on mortgage assets was 7.59%.
The average level of the short-term interest rate indices which
determine coupon adjustments was 5.59%. Since the average net margin
was 2.06%, the highest potential average mortgage coupon rate (the
fully indexed rate) at that time was 7.65%. The actual coupon rate was
lower than the fully indexed rate by 0.06%.
Potential coupon rate changes can be limited by periodic and life caps.
At March 31, 1998, all of the Company's assets had a life cap and the
average mortgage asset maximum life cap rate was 12.12%. At March 31,
1998, periodic caps limited coupon changes to 2% annually for 67.5% of
mortgage assets and there were no periodic caps on 32.5% of mortgage
assets.
At December 31, 1997, the average credit rating equivalent of all of
the Company's mortgage assets (loans plus securities) was "AA+", with
mortgage loans (the bulk of the value which would be rated "AAA" if
securitized and rated) representing 46.1% of the total mortgage asset
portfolio, "AAA" and "AA" rated mortgage securities representing 53.6%
and mortgage securities rated "A" or lower representing 0.3%.
At December 31, 1997, all mortgage assets consisted of either
short-term or hybrid adjustable-rate mortgages.
At December 31, 1997, 33.9% of the Company's mortgage assets had coupon
rate adjustments every six months based on the six-month LIBOR or CD
index and 20.2% had monthly adjustments based on the one-month LIBOR
index. Mortgage assets with annual coupon adjustments based on the
six-month or one-year U.S. Treasury index were 42.8% of the portfolio.
Hybrid mortgages that have more than one year before their first reset
and that will have annual coupon adjustments based on the one-year
Treasury index after the initial fixed period represented 1.6%.
Mortgage assets 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 all mortgage assets and 21 months for hybrid loans. The
average coupon rate accruing on mortgage assets was 7.71%. The average
level of the short-term interest rate indices which determine coupon
adjustments was 5.68%. Since the average net margin was 2.06%, the
highest potential average mortgage coupon rate (the fully indexed rate)
at that time was 7.74%. The actual coupon rate was lower than the fully
indexed rate by 0.03%.
At December 31, 1997, all of the Company's assets had a life cap and
the average mortgage asset lifetime maximum cap rate was 12.08%. At
December 31, 1997, periodic caps limited coupon changes to 2% annually
for 68.0% of mortgage assets and there were no periodic caps on 32.0%
of mortgage assets.
Allocation of Equity to Mortgage Assets
The Company assigns a capital requirement to each mortgage asset
through its Risk-Adjusted Capital Policy process. Allocations are based
on the perceived risk characteristics of each asset and its associated
borrowings and hedges. At March 31, 1998, 49.8% of the Company's
Risk-Adjusted Capital was allocated to "AAA" and "AA" rated mortgage
securities funded short-term, 16.8% was allocated to mortgage equity
interests (the equity portion of the two Sequoia Trusts and the
re-REMIC) and 18.1% was allocated to mortgage loans funded short-term.
The remainder of the Company's equity capital, 15.3% of the total, was
not being utilized.
The Company generally acquires mortgage loans it expects to convert
into one or more mortgage equity interests through the issuance of
collateralized long-term debt or similar instruments. Pending such
conversion, these loans are funded with short-term debt.
29
<PAGE> 30
If all mortgage loans had been converted into mortgage equity interests
at March 31, 1998, the capital allocated to these loans would have been
lower. On a pro forma basis, assuming full conversion, the Company's
Risk-Adjusted Capital would be allocated 49.8% to "AAA" and "AA" rated
mortgage securities funded short-term and 26.2% to mortgage equity
interests. The remaining 24.0% of capital would have been unutilized.
At December 31, 1997, 51.7% of the Company's Risk-Adjusted Capital was
allocated to "AAA" and "AA" rated mortgage securities funded
short-term, 17.4% was allocated to mortgage equity interests (the
equity portion of the two Sequoia Trusts and the re-REMIC) and 8.2% was
allocated to mortgage loans which were funded short-term at that time.
The remainder of the Company's equity capital, 22.7% of the total, was
not being utilized.
Interest Rate Agreements
At March 31, 1998, the Company owned $5.4 billion notional face of
interest rate agreements, principally caps and swaps. These interest
rate agreements had various start dates, maturity dates, and interest
rate protection features; see Note 6, "Interest Rate Agreements" and
Note 9, "Fair Value of Financial Instruments" in the Notes to
Consolidated Financial Statements for additional detail.
These agreements are designed to reduce the Company's interest rate and
market value fluctuation risk. They had a historical amortized cost
basis of $10.3 million and an estimated bid-side market value of $2.6
million as of March 31, 1998. Market values were lower than amortized
cost due to: i) a drop in interest rate volatility assumptions in the
marketplace for interest rate agreements, ii) a drop in interest rates,
iii) the effect of taking bid-ask spread mark-downs on new agreements,
and iv) the timing mismatch of GAAP premium amortization methods for
interest rate caps versus the rate of actual economic decay in their
market values. Interest rate agreements hedging mortgage loans are
carried on the balance sheet at historical amortized cost, and as a
result, changes in market values of these interest rate agreements are
not shown in the valuation account. Market value fluctuations for
interest rate agreements hedging mortgage securities are reflected in
the Company's interest rate agreement market valuation account and thus
as a part of accumulated comprehensive income.
There is a risk that the counter-parties to the Company's interest rate
agreements will not be able to perform to the terms of these contracts.
If this were to happen, the Company's total accounting credit loss
exposure would be limited to its historical amortized cost basis in
these assets (plus the Company's cash and collateral held by the
counter-parties), although the true economic opportunity cost to the
Company could be higher. Through March 31, 1998, each of the
counter-parties to the Company's interest rate agreements had a credit
rating of at least "A".
At December 31, 1997, the Company owned $5.3 billion notional face of
interest rate agreements, principally caps and swaps. 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 for the
same reasons mentioned above for March 31, 1998 values.
Investment in RWT Holdings, Inc.
RWT Holdings, Inc. is a newly formed, taxable affiliate incorporated in
the state of Delaware. On March 31, 1998 the Company purchased $9.9
million of the preferred stock of RWT Holdings. See "RWT Holdings,
Inc." in the Results of Operations section above and the Notes to the
Consolidated Financial Statements for additional information.
Borrowings, Cash Balances and Liquidity
At March 31, 1998, the Company's borrowings consisted of $2.3 billion
of short-term collateralized borrowings such as reverse repurchase
agreements, notes payable, and revolving lines of credit ("short-term
debt") and $1.1 billion non-recourse, floating rate, amortizing
long-term debt ("long-term debt"). The long-term debt was issued in the
second half of 1997 as collateralized mortgage bonds through the
Company's Sequoia program. The funds
30
<PAGE> 31
raised in the long-term debt offerings were used to reduce short-term
debt. Long-term debt at March 31, 1998 represented 32.1% of total debt.
At March 31, 1998, the Company's short-term debt totaled $2.3 billion
with a weighted average cost of funds of 5.89% as compared to $1.9
billion with a weighted average cost of funds of 6.00% at December 31,
1997. Long-term debt totaled $1.1 billion at March 31, 1998 with a
weighted average all-in cost of funds of 6.49%. At December 31, 1997,
the balance totaled $1.2 billion at a cost of 6.48%
As the Company reduces liquidity risks on its balance sheet by issuing
long-term debt, it is able to use a greater amount of leverage under
its Risk-Adjusted Capital Policy. The Company's equity-to-asset ratio
decreased from 10.0% at December 31, 1997 to 9.2% at March 31, 1998, as
the Company resumed net asset growth and began to take advantage of its
increased ability to leverage its balance sheet. See "Stockholders'
Equity, Capital Efficiency and Capital Adequacy" below.
At March 31, 1998, $1.1 billion of the Company's mortgage assets were
pledged as collateral for the Company's long-term debt. The remaining
mortgage assets, which had a market value of $2.5 billion, were
available to collateralize the Company's short-term debt. The Company
estimates it had additional borrowing capacity in excess of its current
requirements of $174.7 million at the quarter's end. In addition, the
Company had $6.5 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 the Company's cash balances as "restricted cash."
At December 31, 1997, the Company's borrowings consisted of $1.9
billion of short-term collateralized borrowings and $1.2 billion of
non-recourse, floating rate, amortizing, long-term debt. Long-term debt
at year-end represented 38.0% of total debt. The Company estimated it
had additional borrowing capacity at that time of $182.7 million and
unrestricted cash of $24.9 million.
The Company'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 the Company's balance sheet, the state of the
collateralized lending market and other factors. If the Company's
liquidity or borrowing capacity were to become seriously diminished,
the Company would most likely seek to sell its 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, the
Company seeks to maintain what it believes to be a prudent level of
capital, i.e., the Company restricts its asset growth according to its
Risk-Adjusted Capital Policy and thereby seeks to maintain adequate
unused borrowing capacity.
At March 31, 1998 and December 31, 1997, the average term-to-maturity
of the Company's short-term debt was 65 days and 64 days and the
average term-to-next-rate-adjustment was 33 days and 31 days,
respectively. The term-to-next-rate-adjustment was shorter than the
term-to-maturity as some of the Company's debt had a cost of funds that
adjusted to market levels on a monthly or daily basis during the term
of the debt. In general, the cost of short-term borrowings has been
able to reset more quickly to interest rate conditions than coupon
rates on the Company's mortgages could adjust to those same changes.
Through its hedging program, the Company 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 March 31, 1998, the stated maturity on the Company'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 the Company before its
stated maturity date. The interest rate on the long-term debt resets
monthly. At March 31, 1998, 13% of the long-term debt had an interest
rate tied to the daily average Fed Funds rate, 52% had an interest rate
tied to a moving average of the one-year Treasury rate and 35% had an
interest rate tied to one-month LIBOR. The debt is "AAA" rated,
adjustable-rate, amortizes at approximately the same rate as the
collateral and has a lifetime interest rate cap of 10%.
31
<PAGE> 32
Stockholders' Equity, Capital Efficiency and Capital Adequacy
Book value, or equity, per common share (excluding the unrealized
market valuation adjustments included in accumulated comprehensive
income) increased by 0.9% from $22.25 on December 31, 1997 to $22.46 on
March 31, 1998. Book value, or equity, per common share (excluding the
market valuation account) increased by 0.94% from $22.25 on December
31, 1997 to $22.46 on March 31, 1998.
From December 31, 1997 to March 31, 1998, the Company's equity
(excluding accumulated comprehensive income) decreased $1.8 million,
from $344.6 million to $342.8 million. This was the net effect of the
Company's Stock Repurchase Program which reduced equity in the first
quarter of 1998 by $4.2 million and the timing of the Company's
dividend payment which increased equity by $2.4 million at March 31,
1998 (equity was increased by GAAP income but not yet reduced by the
first quarter dividend to common shareholders which was declared in
April 1998).
For balance sheet purposes, the Company carries its mortgage securities
and associated interest rate agreements at their estimated bid-side
market value (historical amortized cost less market valuation account).
The total market valuation account for the Company (which is now
reported in accumulated other comprehensive income) was negative $10.1
million on December 31, 1997 and negative $13.1 million on March 31,
1998. As a result of this accounting treatment, the Company's reported
equity base may fluctuate due to market conditions and other factors.
Mortgage loans, associated interest rate agreements and all other
assets and liabilities were carried on the Company's balance sheet at
March 31, 1998 at amortized cost.
The Company estimated that the bid-side market value of all of its
assets less the cost of paying off all of its obligations (including
its preferred stock), was approximately $306.8 million at December 31,
1997 and $304.6 million at March 31, 1998. Actual realizable value may
be less than the estimated bid-side market value should the Company
actually seek to sell its assets. The net total "mark-to-market" value
for the Company's balance sheet was $11.1 million lower than amortized
cost at December 31, 1997 and $11.4 million lower than amortized cost
at March 31, 1998. Between December 31, 1997 and March 31, 1998, the
liquidation value of the Company's mortgage assets and interest rate
agreements decreased due to faster prepayments.
Through its Risk-Adjusted Capital Policy, the Company 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 the Company's
collateralized short-term lenders. Capital requirements for mortgage
equity interests generally equal the Company's net investment. The sum
of the capital adequacy amounts for all of the Company's mortgage
assets is the Company's aggregate guideline capital adequacy amount.
Since management believes that the bulk of the capital currently
necessary to manage the Company prudently is needed due to the
liquidity and market value fluctuation risks that arise from the
utilization of short-term debt, the total guideline capital amount has
declined as the Company has eliminated some of these short-term risks
through the creation of mortgage equity interests.
The Company does not expect that its actual capital levels will always
exceed the guideline amount. The Company 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, the Company'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) 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, fell (market
value declines may be temporary as well, as future coupon adjustments
may help to restore some of the lost market value). In this
circumstance, or any other circumstance in which the Company's actual
capital levels fell below the Company's capital adequacy guideline
amount, the Company would cease the acquisition of new mortgage assets
until capital balance was restored. In certain cases prior to a planned
equity offering or other
32
<PAGE> 33
circumstances, the Board of Directors has authorized management to
acquire mortgage assets in a limited amount beyond the usual
constraints of the Company's Risk-Adjusted Capital Policy.
As expressed as an equity-to-assets ratio, the Company's average
Risk-Adjusted Capital Policy guideline capital amount increased from
7.51% at December 31, 1997 to 7.59% at March 31, 1998. This amount will
decrease when the Company completes a planned securitization of part of
its mortgage loans and creates a mortgage equity interest.
The actual average equity-to-asset ratio for the Company declined from
10.2% at the end of 1997 to 10.0% in the first quarter of 1998. Since
actual equity-to-asset ratios have generally been higher than the
capital guideline ratios since the Company's inception in 1994, the
Company generally could have owned more mortgage assets and still met
its capital guidelines. Balance sheet capacity utilization (the
percentage of the Company's capital employed in the mortgage spread
lending business as opposed to being unutilized) is a key measure of
capital efficiency for the Company. Average balance sheet capacity
utilization has decreased since mid-1997 as the Company has generated
excess capital by creating mortgage equity interests and also decided
to slow its pace of mortgage acquisitions due to unfavorable mortgage
acquisition pricing levels. Average capacity utilization decreased to
77% in the first quarter of 1998 from 90% in all of 1997.
Beginning in September 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 the Company to
reduce the rate at which it sought to acquire new mortgage assets.
Although this decision resulted in the Company's balance sheet having
excess capital in the latter part of 1997, 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 the Company continued to avoid
acquiring most types of adjustable-rate loans in the first quarter of
1998, the Company started a 5/1 hybrid loan acquisition program.
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 first quarter of 1998, the
Company repurchased 214,100 shares for $4.2 million. The Company's
average equity-to-assets ratio declined as shares have been repurchased
and the Company's average assets have remained stable. The Company is
presently authorized to repurchase up to 400,900 additional shares.
Accumulated Other Comprehensive Income
Other comprehensive income is the Company's unrealized gain or loss on
assets which are held 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.
In the past, the Company has tracked unrealized gains and losses in
market valuation accounts and reported them on its balance sheet as
"net unrealized loss on assets available for sale."
Accumulated other comprehensive income was a negative $13.1 million at
March 31, 1998, a decline of $3.0 million from the negative $10.1
million reported as of December 31, 1997.
The Company expects that the amount of accumulated other comprehensive
income will vary significantly over time.
Risk Management
The Company 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 the Company while, at the same time, seeking to provide an
opportunity for shareholders to realize attractive total rates of
return through long-term stock ownership in the Company. While the
Company does not seek to avoid risk, it does seek,
33
<PAGE> 34
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.
The Company seeks to limit credit risk by maintaining what it believes
to be high-quality mortgage loan underwriting standards. The Company 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. Historically,
however, the magnitude of credit loss incurred from high-quality
single-family mortgages during historical credit cycles has been
contained relative to credit losses arising from other forms of
commercial, consumer and residential mortgage lending.
The Company 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 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 the Company can replace all of
its short-term borrowings with long-term borrowings. At March 31, 1998,
the Company remained exposed to such risk particularly in general
market environments of rapidly rising interest rates, market
dislocation or illiquidity.
The Company seeks to manage some of its interest rate risk through
matching the interest rate characteristics of its mortgages and its
borrowings to the degree that management believes is likely to be in
the best interests of the shareholders in the long-term.
The Company does not seek to be perfectly matched or to entirely
eliminate interest rate risk. Through March 31, 1998, the Company has
paired adjustable-rate mortgages with variable-rate liabilities. The
Company has generally maintained borrowings which adjust to market
conditions several months faster than its assets. For larger interest
rate increases, the potential short-term negative earnings impact
resulting from this short-term mismatch should be partially mitigated
by the Company's interest rate agreements. In addition, since the
Company's adjustable-rate earning assets have exceeded its liabilities
through March 31, 1998, the longer-term impact of an increase in
short-term interest rates may be positive after a lag period (once the
coupon rate on the assets has fully adjusted to the rate increase).
Conversely, while the short-term earnings effect of a decline in
short-term interest rates may be positive, the longer-run effect after
a lag period may be a decline in earnings relative to what they
otherwise would have been after the coupon rates on the assets have
adjusted downwards.
Through March 31, 1998, the Company 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, as the percentage of
the Company's assets which adjust off of Treasury rates exceeds the
percentage of the Company's liabilities which adjust off of Treasury
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 the Company, is more likely than not
to result in higher earnings for the Company 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 the Company except in relatively extreme and
unlikely scenarios.
Changes in principal repayment rates may be a source of earnings
volatility for the Company. If the rate of mortgage principal repayment
of the Company's mortgage assets is faster than expected, the rate at
which the Company 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 the
Company's net
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<PAGE> 35
asset growth rate; net asset growth is generally an important component
of future earnings growth. Prospects for the Company may also be
reduced by higher than expected mortgage principal repayments 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 adjustable-rate mortgages increased
during the most recent quarters and such prepayment rates may further
increase in 1998. Slowing rates of mortgage principal repayment could
exacerbate certain liquidity, market value fluctuation, and interest
rate risks in a rising interest rate environment.
While adjustable-rate 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,
adjustable-rate mortgage principal repayments have tended to increase,
particularly if longer-term rates drop relative to shorter-term
interest rates. In addition, management believes adjustable-rate
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 quarter of 1998 the Company did
implement some hedges which may tend to add to earnings during times of
accelerating prepayments. In general, however, the Company 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. The Company has also been able to effectively
reduce the prepayment risk on some of its assets though the issuance of
amortizing long-term debt with at a price above par.
The pricing of mortgage assets relative to the underlying risk in the
assets, and relative to levels at which the Company can issue long-term
debt, has a large effect on the Company's net asset growth and equity
utilization, and therefore on the Company's earnings growth. Higher
mortgage prices on an absolute basis or on a relative basis as compared
to debt markets will slow growth. The Company cannot hedge earnings
volatility that may arise from this source.
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates, changes in interest rates and
other factors drive the Company's performance far more than does
inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. The Company's financial
statements are prepared in accordance with Generally Accepted
Accounting Principles and the Company's dividends are generally
determined based on the Company's net income as calculated for tax
purposes; in each case, the Company's activities and balance sheet are
measured with reference to historical cost or fair market value without
considering inflation.
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<PAGE> 36
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 1
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THREE
MONTHS ENDING FOR THREE MONTHS ENDING
------------- ---------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Coupon Income $ 28,306 $ 24,911 $ 21,432 $ 14,474 $ 10,784
Amortization of Discount Balances 0 0 1 8 11
Amortization of Premium Balances (2,496) (2,088) (1,803) (1,462) (940)
-------- -------- -------- -------- --------
Interest Income: Mortgage Loans 25,810 22,823 19,630 13,020 9,855
Mortgage Securities:
Coupon Income 33,330 36,595 41,124 39,879 31,440
Amortization of Discount Balances 185 258 375 409 261
Amortization of Premium Balances (5,848) (6,091) (5,085) (4,065) (3,150)
-------- -------- -------- -------- --------
Interest Income: Mortgage Securities 27,667 30,762 36,414 36,223 28,551
Total Interest Income From Mortgage Assets 53,477 53,585 56,044 49,243 38,406
Interest Income: Cash Balances 384 399 499 266 162
-------- -------- -------- -------- --------
Total Interest Income 53,861 53,984 56,543 49,509 38,568
Interest Expense on Short-Term Debt (28,003) (31,964) (40,318) (38,958) (28,900)
Interest Expense on Long-Term Debt (18,094) (14,567) (5,570) 0 0
-------- -------- -------- -------- --------
Total Interest Expense (46,097) (46,531) (45,888) (38,958) (28,900)
Interest Rate Agreement Expense (1,426) (1,281) (1,064) (912) (602)
Interest Rate Agreement Income 48 12 26 73 7
-------- -------- -------- -------- --------
Net Interest Rate Agreement Expense (1,378) (1,269) (1,038) (839) (595)
Net Interest Income 6,386 6,184 9,617 9,712 9,073
Provision for Potential Credit Losses
Mortgage Loans (601) (1,516) (473) (299) (215)
Mortgage Securities 0 1,000 (470) (477) (480)
-------- -------- -------- -------- --------
Total Credit Provision (601) (516) (943) (776) (695)
Write-down of Mortgage Securities (729) 0 0 0 0
Gain (Loss) on Sale Transactions 6 543 20 0 0
Operating Expenses
Compensation and Benefits Expense (1,048) (413) (441) (516) (529)
Dividend Equivalent Rights Expense (195) (145) (361) (358) (203)
Other Operating Expenses (682) (570) (346) (341) (435)
-------- -------- -------- -------- --------
Total Operating Expenses (1,925) (1,128) (1,148) (1,215) (1,167)
Other Income (Expenses) 0 0 0 0 0
Equity in earnings of RWT Holdings, Inc. 0 0 0 0 0
Corporate Income Tax Expense 0 0 0 0 0
-------- -------- -------- -------- --------
Net Income Before Preferred Dividends 3,137 5,083 7,546 7,721 7,211
Preferred Dividends (687) (686) (687) (687) (755)
-------- -------- -------- -------- --------
Net Income to Common Shareholders $ 2,450 $ 4,397 $ 6,859 $ 7,034 $ 6,456
======== ======== ======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 3,137 $ 5,083 $ 7,546 $ 7,721 $ 7,211
Mortgage Amortization Differences 43 105 (95) (103) (87)
Credit Provisions less Actual Losses 552 475 875 747 653
Gain (Loss) on Sale Differences 0 (190) 0 0 0
Write-down of Mortgage Securities Differences 729 0 0 0 0
Operating Expense Differences 67 113 (175) (50) 135
-------- -------- -------- -------- --------
Taxable Income Before Preferred Dividend $ 4,527 $ 5,586 $ 8,151 $ 8,315 $ 7,912
======== ======== ======== ======== ========
</TABLE>
36
<PAGE> 37
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 1 (CONTINUED)
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THREE MONTHS ENDING
--------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1996 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage Loans:
Coupon Income $ 2,582 $ 1,656 $ 749 $ 479
Amortization of Discount Balances 11 7 11 2
Amortization of Premium Balances (189) (62) (43) (19)
-------- -------- -------- --------
Interest Income: Mortgage Loans 2,404 1,601 717 462
Mortgage Securities:
Coupon Income 25,292 18,901 12,973 8,965
Amortization of Discount Balances 206 264 234 175
Amortization of Premium Balances (2,236) (1,645) (1,225) (688)
-------- -------- -------- --------
Interest Income: Mortgage Securities 23,262 17,520 11,982 8,452
Total Interest Income From Mortgage Assets 25,666 19,121 12,699 8,914
Interest Income: Cash Balances 215 250 202 217
-------- -------- -------- --------
Total Interest Income 25,881 19,371 12,901 9,131
Interest Expense on Short-Term Debt (19,467) (14,447) (9,075) (6,202)
Interest Expense on Long-Term Debt 0 0 0 0
-------- -------- -------- --------
Total Interest Expense (19,467) (14,447) (9,075) (6,202)
Interest Rate Agreement Expense (403) (350) (255) (151)
Interest Rate Agreement Income 1 0 0 0
-------- -------- -------- --------
Net Interest Rate Agreement Expense (402) (350) (255) (151)
Net Interest Income 6,012 4,574 3,571 2,778
Provision for Potential Credit Losses
Mortgage Loans (35) (178) (140) 5
Mortgage Securities (337) (338) (337) (336)
-------- -------- -------- --------
Total Credit Provision (372) (516) (477) (331)
Write-down of Mortgage Securities 0 0 0 0
Gain (Loss) on Sale Transactions 0 0 0 0
Operating Expenses
Compensation and Benefits Expense (343) (309) (305) (234)
Dividend Equivalent Rights Expense (137) (81) (79) (85)
Other Operating Expenses (316) (281) (210) (174)
-------- -------- -------- --------
Total Operating Expenses (796) (671) (594) (493)
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 4,844 3,387 2,500 1,954
Preferred Dividends (760) (388) -- --
-------- -------- -------- --------
Net Income to Common Shareholders $ 4,084 $ 2,999 $ 2,500 $ 1,954
======== ======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 4,844 $ 3,387 $ 2,500 $ 1,954
Mortgage Amortization Differences 131 61 82 175
Credit Provisions less Actual Losses 365 516 477 331
Gain (Loss) on Sale Differences 0 0 0 0
Write-down of Mortgage Securities Differences 0 0 0 0
Operating Expense Differences 89 84 83 89
-------- -------- -------- --------
Taxable Income Before Preferred Dividend $ 5,429 $ 4,048 $ 3,142 $ 2,549
======== ======== ======== ========
</TABLE>
37
<PAGE> 38
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 1 (CONTINUED)
<TABLE>
<CAPTION>
INCOME STATEMENT 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:
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
Operating Expense Differences 23 345 12 0
--------- --------- --------- ---------
Taxable Income Before Preferred Dividend $ 29,964 $ 15,168 $ 3,832 $ 354
========= ========= ========= =========
</TABLE>
38
<PAGE> 39
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 2
<TABLE>
<CAPTION>
BALANCE SHEETS AT AT
----------- --------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Unrestricted Cash $ 6,468 $ 24,892 $ 28,758 $ 29,425 $ 12,985
Restricted Cash 25,734 24,657 28,938 0 0
----------- ----------- ----------- ----------- -----------
Total Cash and Cash Equivalents 32,202 49,549 57,696 29,425 12,985
Mortgage Loans:
Principal Value 1,837,020 1,519,124 1,348,619 1,111,029 716,009
Unamortized Premium 37,943 34,844 30,852 25,442 15,951
Unamortized Discount (27) 0 0 (123) (131)
Real Estate Owned 497 713 220 346 128
Reserve For Credit Losses (3,449) (2,855) (1,363) (929) (630)
Market Valuation Account 0 0 0 0 (1,291)
----------- ----------- ----------- ----------- -----------
Total Mortgage Loans 1,871,984 1,551,826 1,378,328 1,135,765 730,035
Mortgage Securities:
Principal Value 1,741,975 1,779,375 2,010,374 2,179,186 1,839,720
Unamortized Premium 47,105 51,329 56,082 62,219 49,156
Unamortized Discount (12,104) (12,442) (14,387) (14,968) (15,510)
Reserve For Credit Losses (2,035) (2,076) (3,093) (2,651) (2,203)
Market Valuation Account (4,375) (1,390) 10,619 3,603 3,516
----------- ----------- ----------- ----------- -----------
Total Mortgage Securities 1,770,566 1,814,796 2,059,595 2,227,389 1,874,679
Total Mortgage Assets 3,642,550 3,366,622 3,437,923 3,363,154 2,604,714
Interest Rate Agreements 10,337 10,781 11,708 12,233 7,879
Market Valuation Account (8,710) (8,681) (8,782) (7,366) (2,106)
----------- ----------- ----------- ----------- -----------
Total Interest Rate Agreements 1,627 2,100 2,926 4,867 5,773
Accrued Interest Receivable 23,886 23,119 23,859 24,065 17,722
Investment in RWT Holdings, Inc. 9,900 0 0 0 0
Fixed Assets, Leasehold, Org. Costs 551 539 358 257 259
Prepaid Expenses and Other Receivables 2,975 2,268 2,490 2,738 1,611
----------- ----------- ----------- ----------- -----------
Other Assets 37,312 25,926 26,707 27,060 19,592
Total Assets $ 3,713,691 $ 3,444,197 $ 3,525,252 $ 3,424,506 $ 2,643,064
=========== =========== =========== =========== ===========
Short-Term Borrowings $ 2,288,018 $ 1,914,525 $ 2,639,773 $ 3,102,784 $ 2,373,279
Long-Term Borrowings 1,081,279 1,172,801 497,367 0 0
Accrued Interest Payable 12,212 14,476 20,216 18,153 14,962
Accrued Expenses and Other Payables 1,797 2,172 2,129 1,743 1,262
Dividends Payable 687 5,686 9,433 8,638 7,899
----------- ----------- ----------- ----------- -----------
Total Liabilities 3,383,993 3,109,660 3,168,918 3,131,318 2,397,402
----------- ----------- ----------- ----------- -----------
Preferred Stock 26,736 26,736 26,733 26,733 29,383
Common Stock 141 143 146 133 119
Additional Paid-in Capital 320,282 324,555 333,841 274,420 219,461
Accumulated Other Comprehensive Income (13,085) (10,071) 1,837 (3,762) 118
Dividends in Excess of Net Income (4,376) (6,826) (6,223) (4,336) (3,419)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity 329,698 334,537 356,334 293,188 245,662
----------- ----------- ----------- ----------- -----------
Total Liabilities plus Stockholders' Equity $ 3,713,691 $ 3,444,197 $ 3,525,252 $ 3,424,506 $ 2,643,064
=========== =========== =========== =========== ===========
</TABLE>
39
<PAGE> 40
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 2 (CONTINUED)
<TABLE>
<CAPTION>
BALANCE SHEETS AT
--------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1996 1996 1996 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Unrestricted Cash $ 11,068 $ 14,599 $ 10,407 $ 9,705
Restricted Cash 0 0 0 0
----------- ----------- ----------- -----------
Total Cash and Cash Equivalents 11,068 14,599 10,407 9,705
Mortgage Loans:
Principal Value 514,837 126,426 69,154 24,831
Unamortized Premium 12,389 1,535 686 191
Unamortized Discount (142) (153) (160) (171)
Real Estate Owned 196 0 0 0
Reserve For Credit Losses (428) (393) (214) (74)
Market Valuation Account (1,377) 279 200 84
----------- ----------- ----------- -----------
Total Mortgage Loans 525,475 127,694 69,666 24,861
Mortgage Securities:
Principal Value 1,602,212 1,234,636 936,611 548,976
Unamortized Premium 41,928 31,072 22,004 12,599
Unamortized Discount (15,951) (16,185) (16,448) (16,683)
Reserve For Credit Losses (1,752) (1,421) (1,084) (747)
Market Valuation Account 1,516 74 (3,269) (3,847)
----------- ----------- ----------- -----------
Total Mortgage Securities 1,627,953 1,248,176 937,814 540,298
Total Mortgage Assets 2,153,428 1,375,870 1,007,480 565,159
Interest Rate Agreements 6,200 3,286 2,835 2,534
Market Valuation Account (3,599) (2,413) (1,484) (1,301)
----------- ----------- ----------- -----------
Total Interest Rate Agreements 2,601 873 1,351 1,233
Accrued Interest Receivable 14,134 10,781 7,292 4,496
Investment in RWT Holdings, Inc. 0 0 0 0
Fixed Assets, Leasehold, Org. Costs 257 265 233 198
Prepaid Expenses and Other Receivables 2,709 1,090 1,567 522
----------- ----------- ----------- -----------
Other Assets 17,100 12,136 9,092 5,216
Total Assets $ 2,184,197 $ 1,403,478 $ 1,028,330 $ 581,313
=========== =========== =========== ===========
Short-Term Borrowings $ 1,953,103 $ 1,225,094 $ 896,214 $ 508,721
Long-Term Borrowings 0 0 0 0
Accrued Interest Payable 14,060 10,379 4,052 1,616
Accrued Expenses and Other Payables 761 472 361 290
Dividends Payable 5,268 4,016 3,408 2,540
----------- ----------- ----------- -----------
Total Liabilities 1,973,192 1,239,961 904,035 513,167
----------- ----------- ----------- -----------
Preferred Stock 29,579 29,712 0 0
Common Stock 110 91 85 55
Additional Paid-in Capital 187,507 138,081 130,441 73,926
Accumulated Other Comprehensive Income (3,460) (2,060) (4,553) (5,065)
Dividends in Excess of Net Income (2,731) (2,307) (1,678) (770)
----------- ----------- ----------- -----------
Total Stockholders' Equity 211,005 163,517 124,295 68,146
----------- ----------- ----------- -----------
Total Liabilities plus Stockholders' Equity $ 2,184,197 $ 1,403,478 $ 1,028,330 $ 581,313
=========== =========== =========== ===========
</TABLE>
40
<PAGE> 41
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 2 (CONTINUED)
<TABLE>
<CAPTION>
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
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>
41
<PAGE> 42
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 3
<TABLE>
<CAPTION>
FOR THREE AT OR
MORTGAGE ASSET CHARACTERISTICS MONTHS ENDING FOR THREE MONTHS ENDING
------------- -------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average Characteristics of Loans and Securities (Mortgage Assets) at End of Period
Single-Family Properties 100% 100% 100% 100% 100%
Short-Term Adjustable Rate (Next reset in 12 months or less) 91% 98% 98% 98% 98%
Hybrid Adjustable Rate (Next reset in more than 12 months) 9% 2% 2% 2% 2%
First Lien 100% 100% 100% 100% 100%
Average Credit Rating Equivalent AA+ AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 102.04% 102.23% 102.16% 102.21% 101.94%
Coupon Rate 7.59% 7.71% 7.75% 7.73% 7.70%
Months to Next Coupon Adjustment (Short-Term Adjustable Rate) 4 4 4 4 5
Months to Next Coupon Adjustment (Hybrid Adjustable Rate) 52 21 24 27 30
---------- ------------- ---------- ---------- ----------
Months to Next Coupon Adjustment (Total Adjustable Rate) 8 4 4 5 5
Level of Index 5.59% 5.68% 5.65% 5.77% 5.98%
Net Margin 2.06% 2.06% 2.11% 2.15% 2.21%
Fully Indexed Coupon Rate 7.65% 7.74% 7.76% 7.92% 8.19%
Coupon Versus Fully-Indexed Rate -0.06% -0.03% -0.01% -0.19% -0.49%
Net Life Cap 12.12% 12.08% 12.03% 12.01% 11.91%
Percentage of Mortgage Assets by Credit Type, by Amortized Cost
Mortgage Loans 51.3% 46.1% 40.2% 33.8% 28.1%
Mortgage Securities: AAA/AA 48.4% 53.6% 58.2% 64.5% 69.8%
Mortgage Securities: A/BBB 0.0% 0.0% 0.7% 0.8% 1.0%
Mortgage Securities: Below BBB 0.3% 0.3% 0.9% 0.9% 1.1%
----------- ----------- ----------- ----------- -----------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $3,652,409 $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% 20.2% 12.4% 8.9% 2.6%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 20.0% 21.5% 26.2% 27.5% 32.4%
6 Month LIBOR, adjusts every 6 months, no periodic cap 11.6% 11.2% 11.4% 7.4% 1.9%
6 Month CD, adjusts every 6 months, 2% annualized
periodic cap 1.0% 1.2% 1.3% 1.5% 1.9%
6 Mo. Treasury, adjusts every 6 months, 2% annualized
periodic cap 0.5% 0.6% 0.6% 0.6% 0.8%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.4% 0.5% 0.5% 0.5% 0.7%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.3% 1.6% 1.7% 1.8% 2.4%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 8.1% 0.0% 0.0% 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic cap 35.2% 41.6% 44.5% 50.3% 55.4%
12 Month Treasury, adjusts annually, no periodic cap 0.3% 0.1% 0.1% 0.1% 0.1%
Other 1.4% 1.5% 1.3% 1.4% 1.8%
---------- ------------- ---------- ---------- ----------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Principal Value) $3,579,492 $3,299,212 $3,359,213 $3,290,562 $2,555,857
Net Mortgage Asset Growth
Mortgage Acquisitions $ 603,803 $ 342,283 $ 369,463 $ 962,890 $ 627,075
Mortgage Principal Repayments (306,112) (347,427) (252,398) (199,945) (173,362)
Amortization (8,158) (7,921) (6,512) (5,109) (3,818)
Writedowns (729) 0 0 0 0
Credit Losses (49) (40) (68) (28) (41)
Sales (9,289) (45,712) (41,856) 1 0
---------- ------------- ---------- ---------- ----------
Change in Mortgage Assets (Amortized Cost) $ 279,466 $ (58,817) $ 68,629 $ 757,808 $ 449,854
</TABLE>
42
<PAGE> 43
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,
1996 1996 1996 1996
---------- ---------- ---------- ----------
<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 (Next reset in 12 months or less) 100% 100% 100% 100%
Hybrid Adjustable Rate (Next reset in more than 12 months) 0% 0% 0% 0%
First Lien 100% 100% 100% 100%
Average Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 101.81% 101.20% 100.60% 99.29%
Coupon Rate 7.75% 7.55% 7.42% 7.59%
Months to Next Coupon Adjustment (Short-Term Adjustable Rate) 5 4 4 3
Months to Next Coupon Adjustment (Hybrid Adjustable Rate) n/a n/a n/a n/a
---------- ---------- ---------- ----------
Months to Next Coupon Adjustment (Total Adjustable Rate) 5 4 4 3
Level of Index 5.58% 5.70% 5.72% 5.47%
Net Margin 2.24% 2.21% 2.21% 2.11%
Fully Indexed Coupon Rate 7.82% 7.91% 7.93% 7.58%
Coupon Versus Fully-Indexed Rate -0.07% -0.36% -0.51% 0.01%
Net Life Cap 11.73% 11.69% 11.71% 11.53%
Percentage of Mortgage Assets by Credit Type, by Amortized Cost
Mortgage Loans 24.5% 9.3% 6.9% 4.4%
Mortgage Securities: AAA/AA 73.0% 86.8% 87.7% 86.1%
Mortgage Securities: A/BBB 1.2% 1.8% 2.5% 4.6%
Mortgage Securities: Below BBB 1.3% 2.1% 2.9% 4.9%
---------- ---------- ---------- ----------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $2,155,469 $1,377,331 $1,011,847 $ 569,743
Percentage of Mortgage Assets by Index, Adjustment Frequency, and Annualized Periodic Cap, By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 1.4% 2.3% 3.3% 6.6%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 36.2% 45.9% 54.4% 63.2%
6 Month LIBOR, adjusts every 6 months, no periodic cap 0.0% 0.0% 0.0% 0.0%
6 Month CD, adjusts every 6 months, 2% annualized periodic cap 2.5% 2.4% 3.3% 8.7%
6 Mo. Treasury, adjusts every 6 months, 2% annualized periodic cap 1.1% 1.7% 2.4% 0.0%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.9% 1.3% 1.9% 3.6%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 0.0% 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 55.7% 45.0% 32.8% 14.6%
12 Month Treasury, adjusts annually, no periodic cap 0.0% 0.0% 0.0% 0.0%
Other 2.2% 1.4% 1.9% 3.3%
---------- ---------- ---------- ----------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Principal Value) $2,117,244 $1,361,062 $1,005,764 $ 573,807
Net Mortgage Asset Growth
Mortgage Acquisitions $ 875,968 $ 443,860 $ 496,184 $ 166,852
Mortgage Principal Repayments (95,610) (76,942) (53,058) (32,814)
Amortization (2,213) (1,434) (1,022) (531)
Writedowns 0 0 0 0
Credit Losses (7) 0 0 0
Sales (0) (1) 1 (0)
---------- ---------- ---------- ----------
Change in Mortgage Assets (Amortized Cost) $ 778,138 $ 365,484 $ 442,104 $ 133,507
</TABLE>
43
<PAGE> 44
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 (Next reset in 12 months or less) 98% 100% 100% 100%
Hybrid Adjustable Rate (Next reset in more than 12 months) 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) 4 5 3 3
Months to Next Coupon Adjustment (Hybrid Adjustable Rate) 21 n/a n/a n/a
---------- ---------- ---------- ----------
Months to Next Coupon Adjustment (Total Adjustable Rate) 4 5 3 3
Level of Index 5.68% 5.58% 5.44% 6.94%
Net Margin 2.06% 2.24% 2.08% 2.25%
Fully Indexed Coupon Rate 7.74% 7.82% 7.52% 9.19%
Coupon Versus Fully-Indexed Rate -0.03% -0.07% -0.02% -3.19%
Net Life Cap 12.08% 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>
44
<PAGE> 45
<TABLE>
<CAPTION>
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 4 AT AT
MORTGAGE LOAN SUMMARY ---------- -------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of Loans 5,939 5,041 4,651 3,983 2,795
Principal Value $1,837,518 $1,519,837 $1,348,839 $1,111,376 $ 716,137
Amortized Cost 1,875,433 1,554,681 1,379,691 1,136,694 731,957
Reported Value (Net of Credit Reserve) 1,871,984 1,551,826 1,378,328 1,135,765 730,035
Estimated Bid-Side Market Value 1,872,775 1,552,586 1,379,166 1,136,004 729,561
Short-Term Adjustable Rate (Next reset in 12 months or less) 82% 96% 96% 95% 92%
Hybrid Adjustable Rate (Next reset in more than 12 months) 18% 4% 4% 5% 8%
Single-Family 100% 100% 100% 100% 100%
"A" Quality Underwriting 100% 100% 100% 100% 100%
First Lien 100% 100% 100% 100% 100%
Primary Residence (Owner-Occupied) 89% 89% 91% 92% 94%
Second Home 8% 8% 7% 6% 4%
Investor Property 3% 3% 2% 2% 2%
Average Loan Size $ 309 $ 301 $ 290 $ 279 $ 256
Loan Balance < Conventional Loan Balance Limit ($227,150 in 1998) 19% 18% 19% 20% 20%
Loan Balance Greater Than $500,000 36% 37% 33% 27% 14%
Original Loan-To-Value Ratio (LTV) 77% 78% 77% 78% 74%
Original LTV > 80% 35% 38% 35% 33% 24%
% of Original LTV > 80% with Primary Mortgage 97% 95% 96% 94% 94%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 67% 66% 66% 69% 68%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 3% 4% 4% 6% 9%
1991 Origination * * * 1% 1%
1992 1% 1% 1% 2% 3%
1993 2% 4% 4% 6% 9%
1994 10% 13% 17% 23% 41%
1995 1% 1% 2% 2% 4%
1996 8% 11% 14% 18% 30%
1997 64% 66% 58% 42% 2%
1998 11% 0% 0% 0% 0%
Average Seasoning in Months 16 18 19 22 33
Northern California 13% 11% 13% 13% 17%
Southern California 17% 18% 19% 21% 24%
Florida 9% 9% 9% 8% 5%
New York 7% 7% 6% 5% 4%
Georgia 5% 5% 4% 3% 2%
Colorado 4% 4% 3% 3% 2%
New Jersey 4% 4% 4% 4% 3%
Texas 4% 4% 4% 4% 3%
Connecticut 4% 4% 4% 4% 3%
Illinois 3% 3% 3% 3% 4%
Maryland 3% 3% 3% 4% 6%
Massachusetts 3% 2% 2% 2% 3%
Other States 24% 26% 26% 26% 24%
*: less than 0.5%
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 4 (CONTINUED) AT
MORTGAGE LOAN SUMMARY -----------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1996 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Number of Loans 2,172 478 257 101
Principal Value $515,033 $126,426 $ 69,154 $ 24,831
Amortized Cost 527,280 127,808 69,680 24,851
Reported Value (Net of Credit Reserve) 525,475 127,694 69,666 24,861
Estimated Bid-Side Market Value 525,475 127,694 69,666 24,861
Short-Term Adjustable Rate (Next reset in 12 months or less) 100% 100% 100% 100%
Hybrid Adjustable Rate (Next reset in more than 12 months) 0% 0% 0% 0%
Single-Family 100% 100% 100% 100%
"A" Quality Underwriting 100% 100% 100% 100%
First Lien 100% 100% 100% 100%
Primary Residence (Owner-Occupied) 94% 99% 99% 100%
Second Home 4% 1% 1% 0%
Investor Property 2% 0% 0% 0%
Average Loan Size $ 237 $ 264 $ 269 $ 246
Loan Balance < Conventional Loan Balance Limit ($227,150 in 1998) 22% 15% 13% 27%
Loan Balance Greater Than $500,000 8% 12% 13% 25%
Original Loan-To-Value Ratio (LTV) 77% 78% 76% 77%
Original LTV > 80% 25% 32% 23% 27%
% of Original LTV > 80% with Primary Mortgage 97% 100% 100% 100%
Insurance or Pledged Account Collateral
Effective Average Original LTV Including Primary 73% 73% 73% 73%
Mortgage Insurance or Pledged Account Collateral
1990 and Prior Years' Origination 13% 0% 0% 0%
1991 Origination 2% 0% 0% 0%
1992 4% 0% 0% 0%
1993 14% 7% 1% 0%
1994 52% 43% 2% 2%
1995 7% 32% 63% 98%
1996 8% 18% 34% 0%
1997 0% 0% 0% 0%
1998 0% 0% 0% 0%
Average Seasoning in Months 37 9 4 7
Northern California 18% 34% 30% 30%
Southern California 26% 51% 43% 46%
Florida 4% * 1% 1%
New York 3% * * 0%
Georgia 2% * 1% 1%
Colorado 1% 2% 3% 3%
New Jersey 3% * * 1%
Texas 2% 1% 1% 4%
Connecticut 3% 1% 1% 1%
Illinois 4% * 1% 0%
Maryland 8% * 1% 2%
Massachusetts 3% * 1% 2%
Other States 23% 11% 17% 9%
*: less than 0.5%
</TABLE>
46
<PAGE> 47
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 (Next reset in 12 months or less) 96% 100% 100% n/a
Hybrid Adjustable Rate (Next 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% 100F 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 < 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 > 80% 38% 25% 26% n/a
% of Original LTV > 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% 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
Maryland 3% 8% 2% n/a
Massachusetts 2% 3% 2% n/a
Other States 26% 22% 11% n/a
*: less than 0.5%
</TABLE>
47
<PAGE> 48
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 FOR THREE MONTHS ENDING
EARNING ASSET YIELD, INTEREST RATE SPREAD ------ -----------------------------------------
AND INTEREST RATE MARGIN MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.65% 7.70% 7.77% 7.74% 7.70%
Amortized Cost as % of Principal Value 102.21% 102.20% 102.22% 102.15% 101.84%
Coupon Yield on Amortized Cost 7.49% 7.53% 7.60% 7.57% 7.56%
Effect of Premium/Discount Amortization -0.99% -0.98% -0.79% -0.71% -0.68%
Mortgage Yield 6.50% 6.55% 6.81% 6.86% 6.88%
Cash Yield 5.51% 5.59% 5.60% 5.52% 5.33%
------ ------ ------ ------ ------
Earning Asset Yield (Mortgages plus Cash) 6.49% 6.54% 6.80% 6.86% 6.87%
Cost of Funds of Short-Term Borrowings 5.77% 5.96% 5.98% 5.86% 5.62%
Cost of Funds of Long-Term Borrowings 6.44% 6.40% 6.28% n/a n/a
------ ------ ------ ------ ------
Total Cost of Funds 6.01% 6.09% 6.02% 5.86% 5.62%
Cost of Hedging (as % of Borrowings) 0.18% 0.17% 0.14% 0.13% 0.12%
Interest Rate Spread 0.30% 0.28% 0.64% 0.87% 1.13%
Net Interest Margin (Net Interest Income/Assets) 0.75% 0.72% 1.12% 1.31% 1.57%
Net Interest Income/Average Equity 7.45% 7.06% 11.13% 13.25% 15.30%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.07% 0.06% 0.11% 0.10% 0.12%
Credit Provisions as a % of Equity 0.70% 0.59% 1.09% 1.06% 1.17%
Operating Expenses to Average Assets 0.22% 0.13% 0.13% 0.16% 0.20%
Operating Expenses to Average Equity 2.24% 1.29% 1.33% 1.66% 1.97%
Efficiency Ratio (Op. Exp./Net Int. Income) 30.14% 18.25% 11.93% 12.51% 12.86%
Average Assets Per Employee ($MM) $ 192 $ 242 $ 244 $ 257 $ 221
GAAP Return on Total Equity 3.66% 5.80% 8.73% 10.53% 12.16%
GAAP Return on Common Equity 3.10% 5.43% 8.60% 10.65% 12.44%
Taxable Income Return on Total Equity 5.28% 6.38% 9.43% 11.34% 13.34%
Taxable Income Return on Common Equity 4.86% 6.06% 9.36% 11.55% 13.79%
GAAP Return on Average Assets 0.37% 0.59% 0.88% 1.04% 1.25%
PRINCIPAL PAYDOWN AND PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 26% 27% 24% 23% 24%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities and Mortgage Loans 38% 43% 31% 28% 32%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 22% 24% 23% 28% 24%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Loans 32% 29% 29% 35% 32%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 29% 30% 25% 22% 23%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities 44% 53% 33% 26% 31%
</TABLE>
48
<PAGE> 49
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 5 (CONTINUED) FOR THREE MONTHS ENDING
EARNING ASSET YIELD, INTEREST RATE SPREAD ----------------------------------------
AND INTEREST RATE MARGIN DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1996 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.58% 7.52% 7.47% 7.73%
Amortized Cost as % of Principal Value 101.41% 100.98% 99.95% 98.85%
Coupon Yield on Amortized Cost 7.48% 7.44% 7.48% 7.82%
Effect of Premium/Discount Amortization -0.59% -0.52% -0.56% -0.44%
Mortgage Yield 6.89% 6.92% 6.92% 7.38%
Cash Yield 5.31% 5.30% 5.61% 5.93%
-------- -------- -------- --------
Earning Asset Yield (Mortgages plus Cash) 6.87% 6.90% 6.90% 7.34%
Cost of Funds of Short-Term Borrowings 5.76% 5.78% 5.57% 5.69%
Cost of Funds of Long-Term Borrowings n/a n/a n/a n/a
-------- -------- -------- --------
Total Cost of Funds 5.76% 5.78% 5.57% 5.69%
Cost of Hedging (as % of Borrowings) 0.12% 0.14% 0.16% 0.14%
Interest Rate Spread 0.99% 0.98% 1.17% 1.51%
Net Interest Margin (Net Interest Income/Assets) 1.55% 1.58% 1.85% 2.17%
Net Interest Income/Average Equity 13.01% 12.40% 12.14% 14.92%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.10% 0.18% 0.25% 0.26%
Credit Provisions as a % of Equity 0.81% 1.40% 1.62% 1.78%
Operating Expenses to Average Assets 0.21% 0.23% 0.31% 0.38%
Operating Expenses to Average Equity 1.72% 1.82% 2.02% 2.64%
Efficiency Ratio (Op. Exp./Net Int. Income) 13.23% 14.69% 16.63% 17.71%
Average Assets Per Employee ($MM) $ 155 $ 115 $ 84 $ 70
GAAP Return on Total Equity 10.48% 9.18% 8.50% 10.50%
GAAP Return on Common Equity 10.53% 9.06% 8.50% 10.50%
Taxable Income Return on Total Equity 11.75% 10.97% 10.69% 13.69%
Taxable Income Return on Common Equity 12.03% 11.06% 10.69% 13.69%
GAAP Return on Average Assets 1.25% 1.17% 1.30% 1.52%
PRINCIPAL PAYDOWN AND PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 23% 24% 29% 26%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities and Mortgage Loans 26% 28% 29% 27%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 32% 19% 28% 19%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Loans 42% 25% 37% 25%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 22% 24% 29% 26%
Annualized Principal Payment as % of Average Principal Balance of
Mortgage Securities 24% 28% 28% 27%
</TABLE>
49
<PAGE> 50
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%
Average Assets Per Employee ($MM) $ 242 $ 109 $ 39 $ 12
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 0.91% 1.27% 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>
50
<PAGE> 51
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 6 AT OR
AVERAGE DAILY BALANCE SHEET FOR THREE MONTHS ENDING
---------- ---------------------------------------------------
(ALL DOLLARS IN THOUSANDS) MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash $ 27,907 $ 28,592 $ 35,647 $ 19,307 $ 12,147
Mortgage Loans 1,546,869 1,360,029 1,155,099 758,445 574,781
Mortgage Securities 1,745,368 1,914,118 2,136,442 2,111,832 1,658,629
Credit Reserve (5,126) (4,679) (3,873) (3,083) (2,394)
Market Valuation Adjustment, Mortgage Assets (4,272) 5,937 6,072 1,913 1,022
Interest Rate Agreements 10,394 11,207 11,943 11,185 6,899
Market Valuation Adjustment, Interest Rate Agreements (8,863) (8,792) (8,640) (4,576) (4,004)
Other Assets 98,835 117,643 85,689 75,928 58,856
---------- ---------- ---------- ---------- ----------
Total Assets 3,411,112 3,424,055 3,418,379 2,970,951 2,305,936
---------- ---------- ---------- ---------- ----------
Short-Term Borrowings 1,942,426 2,144,794 2,695,438 2,659,914 2,056,051
Long-Term Borrowings 1,124,190 910,870 355,028 0 0
Other Liabilities 14,602 20,912 24,714 20,530 15,691
---------- ---------- ---------- ---------- ----------
Total Liabilities 3,081,218 3,076,576 3,075,181 2,680,444 2,071,742
---------- ---------- ---------- ---------- ----------
Preferred Stock 26,733 26,733 26,733 28,946 29,545
Common Stock 321,423 328,384 321,492 265,561 208,426
Market Valuation Adjustment (13,136) (2,855) (2,568) (2,663) (2,982)
Retained Earnings, after Dividend (5,127) (4,783) (2,458) (1,337) (795)
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 329,894 $ 347,479 $ 343,199 $ 290,507 $ 234,194
========== ========== ========== ========== ==========
Amortized Cost of Total Assets $3,424,247 $3,426,910 $3,420,947 $2,973,614 $2,308,918
Equity, before Market Valuation Adjustments 343,029 350,334 345,767 293,170 237,176
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 67.8% 62.0% 84.1% 100.0% 100.0%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 11.4% 13.8% 9.9% 0.0% 0.0%
Long-Term Borrowings: Federal Funds, 10% cap 4.2% 5.3% 6.0% 0.0% 0.0%
Long-Term Borrowings: 1 Year Treasury, 10% cap 16.6% 18.9% 0.0% 0.0% 0.0%
---------- ---------- ---------- ---------- ----------
Total Borrowings % 100.0% 100.0% 100.0% 100.0% 100.0%
Total Borrowings $ $3,369,297 $3,087,326 $3,137,140 $3,102,784 $2,373,279
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 6,468 $ 24,893 $ 28,758 $ 29,425 $ 12,985
Estimated Borrowing Capacity 174,702 182,713 206,442 160,338 140,561
---------- ---------- ---------- ---------- ----------
Total Liquidity $ 181,170 $ 207,606 $ 235,200 $ 189,763 $ 153,546
Total Liquidity as Percent of Short-Term Borrowings 8% 11% 9% 6% 6%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 85,048 $ 86,173 $ 86,934 $ 87,661 $ 65,107
Unamortized Discount of Mortgage Assets (12,131) (12,442) (14,387) (15,091) (15,641)
Unamortized Premium of Long-Term Debt (5,551) (5,795) 0 0 0
---------- ---------- ---------- ---------- ----------
Net Premium $ 67,366 $ 67,937 $ 72,548 $ 72,569 $ 49,466
Net Premium as % of Equity (before Market Value Adjustments) 19.7% 19.7% 20.5% 24.4% 20.1%
Net Premium as Percent of Assets (Amortized Cost) 1.8% 2.0% 2.1% 2.1% 1.9%
</TABLE>
51
<PAGE> 52
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,
1996 1996 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 16,137 $ 18,854 $ 14,402 $ 14,639
Mortgage Loans 143,368 93,991 45,313 25,279
Mortgage Securities 1,347,617 1,010,853 688,697 457,841
Credit Reserve (1,952) (1,491) (1,002) (594)
Market Valuation Adjustment, Mortgage Assets 603 (2,279) (3,865) (3,880)
Interest Rate Agreements 4,681 3,185 2,737 2,503
Market Valuation Adjustment, Interest Rate Agreements (3,513) (1,352) (1,080) (1,836)
Other Assets 41,430 30,129 21,566 13,094
----------- ----------- ----------- -----------
Total Assets 1,548,371 1,151,890 766,768 507,046
----------- ----------- ----------- -----------
Short-Term Borrowings 1,351,510 999,229 651,643 435,979
Long-Term Borrowings 0 0 0 0
Other Liabilities 14,898 8,728 2,472 2,324
----------- ----------- ----------- -----------
Total Liabilities 1,366,408 1,007,957 654,115 438,303
----------- ----------- ----------- -----------
Preferred Stock 29,671 15,179 0 0
Common Stock 156,594 132,924 117,695 73,998
Market Valuation Adjustment (2,910) (3,631) (4,945) (5,716)
Retained Earnings, after Dividend (1,392) (539) (97) 461
----------- ----------- ----------- -----------
Stockholders' Equity $ 181,963 $ 143,933 $ 112,653 $ 68,743
=========== =========== =========== ===========
Amortized Cost of Total Assets $ 1,551,281 $ 1,155,521 $ 771,713 $ 512,762
Equity, before Market Valuation Adjustments 184,873 147,564 117,598 74,459
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 100.0% 100.0% 100.0% 100.0%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 0.0% 0.0% 0.0% 0.0%
Long-Term Borrowings: Federal Funds, 10% cap 0.0% 0.0% 0.0% 0.0%
Long-Term Borrowings: 1 Year Treasury, 10% cap 0.0% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Total Borrowings % 100.0% 100.0% 100.0% 100.0%
Total Borrowings $ $ 1,953,103 $ 1,225,094 $ 896,214 $ 508,721
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 11,068 $ 14,599 $ 10,407 $ 9,705
Estimated Borrowing Capacity 123,995 99,126 69,581 29,153
----------- ----------- ----------- -----------
Total Liquidity $ 135,063 $ 113,725 $ 79,988 $ 38,858
Total Liquidity as Percent of Short-Term Borrowings 7% 9% 9% 8%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 54,318 $ 32,607 $ 22,690 $ 12,790
Unamortized Discount of Mortgage Assets (16,093) (16,338) (16,608) (16,854)
Unamortized Premium of Long-Term Debt 0 0 0 0
----------- ----------- ----------- -----------
Net Premium $ 38,225 $ 16,270 $ 6,082 $ (4,064)
Net Premium as % of Equity (before Market Value Adjustments) 17.8% 9.8% 4.7% -5.6%
Net Premium as Percent of Assets (Amortized Cost) 1.7% 1.2% 0.6% -0.7%
</TABLE>
52
<PAGE> 53
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%
----------- ----------- ----------- -----------
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 Premium of Long-Term Debt (5,795) 0 0 0
----------- ----------- ----------- -----------
Net Premium $ 67,937 $ 38,225 $ (7,389) $ (493)
Net Premium as % of Equity (before Market Value Adjustments) 19.7% 17.8% -10.0% -2.2%
Net Premium as Percent of Assets (Amortized Cost) 2.0% 1.7% -1.7% -0.4%
</TABLE>
53
<PAGE> 54
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 AT OR
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / FOR THREE MONTHS ENDING
---------- -------------------------------------------------
REALIZABLE VALUE MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1998 1997 1997 1997 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash $ 32,202 $ 49,549 $ 57,696 $ 29,425 $ 12,985
Mortgage Loans 1,872,775 1,552,586 1,379,166 1,136,004 729,561
Mortgage Securities 1,770,566 1,814,796 2,059,595 2,227,389 1,874,679
Interest Rate Agreements 2,584 1,522 2,169 4,206 5,773
Other Assets 36,522 25,156 26,048 25,857 19,291
Short-Term Borrowings 2,288,018 1,914,525 2,639,773 3,102,784 2,373,279
Long-Term Borrowings 1,080,530 1,172,938 497,465 0 0
Other Liabilities 13,288 21,201 30,628 27,515 23,411
---------- ---------- ---------- ---------- ----------
"Mark-To-Market" of Total Equity 332,812 334,945 356,808 292,582 245,598
Liquidation Cost of Preferred Equity 28,195 28,195 28,195 28,195 30,989
---------- ---------- ---------- ---------- ----------
"Mark-To-Market" of Common Equity $304,617 $306,750 $328,613 $264,387 $214,610
"Mark-To-Market" of Common Equity / Common Share Outstanding $ 21.65 $ 21.47 $ 22.54 $ 19.95 $ 18.03
Reported Common Equity Per Common Share Outstanding $ 21.53 $ 21.55 $ 22.61 $ 20.11 $ 18.17
Historical Cost of Common Equity Per Common Share Outstanding $ 22.46 $ 22.25 $ 22.49 $ 20.39 $ 18.16
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 10.0% 10.2% 10.1% 9.9% 10.3%
Average Risk-Adjusted Capital Guideline 7.8% 8.1% 9.0% 9.5% 10.1%
Average Balance Sheet Capacity Utilization 77% 79% 89% 96% 98%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 8.88% 9.71% 10.12% 8.55% 9.28%
Ending Risk-Adjusted Capital Guideline 7.59% 7.51% 8.59% 9.41% 10.09%
Excess Capital $ 50,814 $ 76,189 $ 54,038 $(29,417) $(21,029)
Estimated Asset Growth Potential (Same Asset Mix and Funding) $669,357 $1,013,956 $629,081 $(312,637) $(208,706)
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $4,386,544 $4,748,787 $5,373,637 $4,005,833 $3,589,525
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Invesments in Assets with Short-Term Funding
Agencies 22.0% 24.1% 26.2% 36.0% 37.1%
Mortgage Securities Rated "AAA" or "AA" 27.8% 27.6% 27.0% 36.6% 37.2%
Mortgage Securities Rated "A" or below 0.0% 0.0% 6.0% 6.4% 7.6%
Whole Loans 18.1% 8.2% 18.3% 31.1% 26.7%
---------- ---------- ---------- ---------- ----------
Equity Investment in Assets with Short-Term Funding 67.9% 59.9% 77.5% 110.1% 108.6%
Equity Investment in Assets with Long-Term, Non-Recourse Funding (Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 2.8% 2.7% 0.0% 0.0% 0.0%
Whole Loans 14.0% 14.7% 7.4% 0.0% 0.0%
---------- ---------- ---------- ---------- ----------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 16.8% 17.4% 7.4% 0.0% 0.0%
Excess Capital 15.3% 22.7% 15.1% -10.1% -8.6%
---------- ---------- ---------- ---------- ----------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0% 100.0%
Total Market-Value of Capital $ $332,812 $334,945 $356,808 $292,582 $245,598
Capital Utilization at Period-End 85% 77% 85% 110% 109%
Capital Utilization at Period-End assuming all Whole
Loans use Long-Term, Non-Recourse Funding 76% 73% 76% 95% 95%
</TABLE>
54
<PAGE> 55
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / FOR THREE MONTHS ENDING
------------------------------------------------------
REALIZABLE VALUE DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1996 1996 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 11,068 $ 14,599 $ 10,407 $ 9,705
Mortgage Loans 525,475 127,694 69,666 24,861
Mortgage Securities 1,627,953 1,248,176 937,814 540,298
Interest Rate Agreements 2,601 873 1,351 1,233
Other Assets 16,778 11,766 8,864 4,987
Short-Term Borrowings 1,953,103 1,225,094 896,214 508,721
Long-Term Borrowings 0 0 0 0
Other Liabilities 19,531 14,457 7,522 4,240
----------- ----------- ----------- -----------
"Mark-To-Market" of Total Equity 211,241 163,557 124,366 68,123
Liquidation Cost of Preferred Equity 31,194 31,194 0 0
----------- ----------- ----------- -----------
"Mark-To-Market" of Common Equity $ 180,047 $ 132,363 $ 124,366 $ 68,123
"Mark-To-Market" of Common Equity / Common Share Outstanding $ 16.37 $ 14.59 $ 14.60 $ 12.34
Reported Common Equity Per Common Share Outstanding $ 16.50 $ 14.75 $ 14.59 $ 12.34
Historical Cost of Common Equity Per Common Share Outstanding $ 16.81 $ 14.98 $ 15.12 $ 13.26
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 11.9% 12.8% 15.2% 14.5%
Average Risk-Adjusted Capital Guideline 10.2% 10.7% 11.4% 12.8%
Average Balance Sheet Capacity Utilization 86% 84% 75% 88%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 9.66% 11.65% 12.09% 11.72%
Ending Risk-Adjusted Capital Guideline 9.97% 10.32% 10.77% 11.72%
Excess Capital $ (6,798) $ 18,664 $ 13,566 $ 26
Estimated Asset Growth Potential (Same Asset Mix and Funding) $ (68,169) $ 180,836 $ 125,972 $ 227
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $ 3,181,906 $ 2,767,399 $ 2,155,950 $ 1,192,215
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Invesments in Assets with Short-Term Funding
Agencies 39.1% 48.0% 44.9% 36.0%
Mortgage Securities Rated "AAA" or "AA" 32.4% 22.2% 24.4% 33.6%
Mortgage Securities Rated "A" or below 8.9% 11.4% 14.8% 27.1%
Whole Loans 22.8% 7.0% 5.0% 3.3%
----------- ----------- ----------- -----------
Equity Investment in Assets with Short-Term Funding 103.2% 88.6% 89.1% 100.0%
Equity Investment in Assets with Long-Term, Non-Recourse Funding
(Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 0.0% 0.0% 0.0% 0.0%
Whole Loans 0.0% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 0.0% 0.0% 0.0% 0.0%
Excess Capital -3.2% 11.4% 10.9% 0.0%
----------- ----------- ----------- -----------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0%
Total Market-Value of Capital $ $ 211,241 $ 163,557 $ 124,366 $ 68,123
Capital Utilization at Period-End 103% 89% 89% 100%
Capital Utilization at Period-End assuming all Whole
Loans use Long-Term, Non-Recourse Funding 92% 85% 87% 98%
</TABLE>
55
<PAGE> 56
SUPPLEMENTAL HISTORICAL INFORMATION
<TABLE>
<CAPTION>
TABLE 7 (CONTINUED) AT OR
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / FOR YEAR ENDING
REALIZABLE VALUE ------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) 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 $ 76,189 $ (6,798) $ 12,028 $ 6,716
Estimated Asset Growth Potential (Same Asset Mix and Funding) $ 1,013,956 $ (68,169) $ 100,874 $ 65,519
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $ 4,748,787 $ 3,181,906 $ 1,325,602 $ 392,001
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 24.1% 39.1% 29.3% 33.0%
Mortgage Securities Rated "AAA" or "AA" 27.6% 32.4% 22.7% 18.8%
Mortgage Securities Rated "A" or below 0.0% 8.9% 26.8% 14.7%
Whole Loans 8.2% 22.8% 3.5% 0.0%
----------- ----------- ----------- -----------
Equity Investment in Assets with Short-Term Funding 59.9% 103.2% 82.3% 66.5%
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%
Whole 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 22.7% -3.2% 17.7% 33.5%
----------- ----------- ----------- -----------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0%
Total Market-Value of Capital $ $ 334,945 $ 211,241 $ 68,142 $ 20,036
Capital Utilization at Period-End 77% 103% 82% 66%
Capital Utilization at Period-End assuming all Whole
Loans use Long-Term, Non-Recourse Funding 73% 92% 81% 66%
</TABLE>
56
<PAGE> 57
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 8
CREDIT PROVISIONS AND CREDIT RESERVES
(ALL DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT OR
FOR THREE MONTHS ENDING
------- ------- ------- ------- -------
MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 601 $ 1,516 $ 473 $ 299 $ 215
Actual Losses During Period 7 23 40 0 13
Cumulative Actual Losses 83 76 53 13 13
Mortgage Loan Credit Reserve at End of Period 3,450 2,855 1,363 929 630
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans 0.16% 0.45% 0.16% 0.16% 0.15%
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans at Period End 0.18% 0.18% 0.10% 0.08% 0.09%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures, Bankruptcies, and REO
Number of Loans 19 17 13 12 6
Non-Performing Assets Loan Balance $ 4,358 $ 3,903 $ 2,792 $ 2,366 $ 1,220
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.23% 0.25% 0.20% 0.21% 0.17%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.12% 0.11% 0.08% 0.07% 0.05%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 79% 73% 49% 39% 52%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 7 6 4 1 1
Average Loss Severity Experience (Cumulative) 6% 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 $ 444 $ 396 $ 283 $ 241 $ 124
At 20% Loss Severity 888 793 567 481 248
At 30% Loss Severity 1,331 1,189 850 722 372
At 40% Loss Severity 1,775 1,586 1,133 962 496
Mortgage Loan Credit Reserve at End of Period $ 3,450 $ 2,855 $ 1,363 $ 929 $ 630
MORTGAGE SECURITIES
Credit Provision During Period $ -- $(1,000) $ 470 $ 477 $ 480
Actual Losses During Period 42 17 28 29 29
Cumulative Actual Losses 156 113 97 69 40
Mortgage Securities Credit Reserve at End of Period 2,033 2,076 3,093 2,651 2,203
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated < BBB 0.0% -20.9% 6.4% 6.6% 6.6%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated < BBB at End of Period 22.3% 22.8% 10.6% 9.1% 7.6%
Amortized Cost of Mortgage Securities Rated < BBB at End of Period $ 9,137 $ 9,109 $29,189 $29,113 $28,955
Credit Experience of Loans in Pools Underlying Mortgage Securities Rated
< BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 284 256 182 137 90
Average Loss Severity Experience (Cumulative) 21% 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
< BBB Rated Securities Default:
At 10% Loss Severity $ 480 $ 389 $ 724 $ 109 $ 80
At 20% Loss Severity 951 894 2,286 1,488 792
At 30% Loss Severity 1,170 1,163 3,789 3,702 2,845
At 40% Loss Severity 1,824 1,825 6,437 6,410 5,103
Mortgage Securities Credit Reserve at End of Period $ 2,033 $ 2,076 $ 3,093 $ 2,651 $ 2,203
</TABLE>
57
<PAGE> 58
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 8 (CONTINUED)
CREDIT PROVISIONS AND CREDIT RESERVES
(ALL DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT OR
FOR THREE MONTHS ENDING
-----------------------------------------
DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1996 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 35 $ 178 $ 140 $ (5)
Actual Losses During Period 0 0 0 0
Cumulative Actual Losses 0 0 0 0
Mortgage Loan Credit Reserve at End of Period 428 393 214 74
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans 0.10% 0.76% 1.23% -0.08%
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans at Period End 0.08% 0.31% 0.31% 0.30%
Non-Performing Assets: 90+ Days Delinquent, Foreclosures, Bankruptcies, and REO
Number of Loans 7 3 2 1
Non-Performing Assets Loan Balance $ 1,249 $ 404 $ 279 $ 190
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.24% 0.32% 0.40% 0.77%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.06% 0.03% 0.03% 0.03%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 34% 97% 77% 39%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 0 0 0 0
Average Loss Severity Experience (Cumulative) 0% 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 $ 127 $ 41 $ 28 $ 19
At 20% Loss Severity 253 82 56 39
At 30% Loss Severity 380 123 85 58
At 40% Loss Severity 506 164 113 77
Mortgage Loan Credit Reserve at End of Period $ 428 $ 393 $ 214 $ 74
MORTGAGE SECURITIES
Credit Provision During Period $ 337 $ 338 $ 337 $ 336
Actual Losses During Period 7 -- -- --
Cumulative Actual Losses 11 4 4 4
Mortgage Securities Credit Reserve at End of Period 1,752 1,421 1,084 747
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated < BBB 4.7% 4.7% 4.7% 4.7%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated < BBB at End of Period 6.1% 4.9% 3.8% 2.7%
Amortized Cost of Mortgage Securities Rated < BBB at End of Period $ 28,935 $ 28,906 $ 28,858 $ 28,051
Credit Experience of Loans in Pools Underlying Mortgage
Securities Rated < BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 59 28 15 4
Average Loss Severity Experience (Cumulative) 27% 22% 16% 10%
Scenario Analysis of Potential Credit Losses Over Next 12 Months If All Current
(But No Future) Seriously Delinquent Loans in Mortgage Pools Underlying
< BBB Rated Securities Default:
At 10% Loss Severity $ 63 $ 61 $ 40 $ 20
At 20% Loss Severity 608 123 91 39
At 30% Loss Severity 2,040 1,131 1,364 597
At 40% Loss Severity 3,647 3,041 3,148 2,162
Mortgage Securities Credit Reserve at End of Period $ 1,752 $ 1,421 $ 1,084 $ 747
</TABLE>
58
<PAGE> 59
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 8 (CONTINUED)
<TABLE>
<CAPTION>
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 --
Cumulative Actual Losses 113 11 4 --
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 < BBB 1.7% 4.7% 2.9% 0.0%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated < BBB at End of Period 22.8% 6.1% 1.4% 0.0%
Amortized Cost of Mortgage Securities Rated < BBB at End of Period $ 9,109 $28,935 $28,869 $ 3,376
Credit Experience of Loans in Pools Underlying Mortgage Securities
Rated <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 < 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>
59
<PAGE> 60
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 9
<TABLE>
<CAPTION>
AT OR
SHARES OUTSTANDING AND PER SHARE DATA FOR THREE MONTHS ENDING
----------- -----------------------------------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1998 1997 1997 1997 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shares Outstanding and Receiving Dividends at Period End
Common (RWT) 14,070,557 14,284,657 14,576,477 13,251,847 11,905,957
Class A Preferred (converted 9/95) 0 0 0 0 0
Class B Preferred (RTW-PB) 909,518 909,518 909,518 909,518 999,638
----------- ----------- ----------- ----------- -----------
Total 14,980,075 15,194,175 15,485,995 14,161,365 12,905,595
Common Dividend Declared $ 0.270 $ 0.350 $ 0.600 $ 0.600 $ 0.600
Class A Preferred Dividend Declared n/a n/a n/a n/a n/a
Class B Preferred Dividends Declared $ 0.755 $ 0.755 $ 0.755 $ 0.755 $ 0.755
Common Dividend Total $ 3,809 $ 5,000 $ 8,746 $ 7,951 $ 7,144
Class A Preferred Dividend Total 0 0 0 0 0
Class B Preferred Dividends Total 687 686 687 687 755
----------- ----------- ----------- ----------- -----------
Total Dividend $ 4,496 $ 5,686 $ 9,433 $ 8,638 $ 7,899
Taxable Income Earned $ 4,527 $ 5,586 $ 8,151 $ 8,315 $ 7,912
Dividend Pay-Out Ratio for Period 99% 102% 116% 104% 100%
Cumulative Dividend Pay-Out Ratio 102% 103% 103% 100% 98%
Warrants Outstanding at Period End (expired 12/31/97) 0 0 149,466 236,297 272,304
Average Shares Outstanding During Period
Common 14,123,951 14,375,992 14,316,678 12,997,566 11,605,171
Class A Preferred 0 0 0 0 0
Class B Preferred 909,518 909,518 909,518 990,725 1,005,515
----------- ----------- ----------- ----------- -----------
Total 15,033,469 15,285,510 15,226,196 13,988,291 12,610,686
Calculation of "Diluted" Common Shares
Average Common Shares 14,123,951 14,375,992 14,316,678 12,997,566 11,605,171
Potential Dilution Due to Warrants 0 57,139 130,489 182,137 258,422
Potential Dilution Due to Options 110,474 99,383 177,434 291,227 253,274
----------- ----------- ----------- ----------- -----------
Total Average "Diluted" Common Shares 14,234,425 14,532,514 14,624,601 13,470,930 12,116,867
Net Income to Common Shareholders $ 2,450 $ 4,397 $ 6,859 $ 7,034 $ 6,456
Total Average "Diluted" Common Shares 14,234,425 14,532,514 14,624,601 13,470,930 12,116,867
----------- ----------- ----------- ----------- -----------
Earnings Per Share ("Diluted") $ 0.17 $ 0.30 $ 0.47 $ 0.52 $ 0.53
Earnings Per Share ("Basic") $ 0.17 $ 0.31 $ 0.48 $ 0.54 $ 0.56
Per Share Ratios (Average Common and
Preferred Shares Outstanding)
Average Total Assets $ 227.77 $ 224.19 $ 224.68 $ 212.58 $ 183.09
Average Total Equity $ 22.82 $ 22.92 $ 22.71 $ 20.96 $ 18.81
Net Interest Income $ 0.43 $ 0.40 $ 0.63 $ 0.70 $ 0.72
Credit Expenses $ 0.04 $ 0.03 $ 0.06 $ 0.06 $ 0.06
Operating Expenses $ 0.13 $ 0.07 $ 0.07 $ 0.09 $ 0.09
Gain/(Loss) on Sale $ 0.00 $ 0.03 $ 0.00 $ 0.00 $ 0.00
Writedowns $ 0.05 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income $ 0.21 $ 0.33 $ 0.50 $ 0.55 $ 0.57
</TABLE>
60
<PAGE> 61
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 9 (CONTINUED)
<TABLE>
<CAPTION>
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,
1996 1996 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares Outstanding and Receiving Dividends at Period End
Common (RWT) 10,996,572 9,069,653 8,520,116 5,521,376
Class A Preferred (converted 9/95) 0 0 0 0
Class B Preferred (RTW-PB) 1,006,250 1,006,250 0 0
----------- ----------- ----------- -----------
Total 12,002,822 10,075,903 8,520,116 5,521,376
Common Dividend Declared $ 0.410 $ 0.400 $ 0.400 $ 0.460
Class A Preferred Dividend Declared n/a n/a n/a n/a
Class B Preferred Dividends Declared $ 0.755 $ 0.386 n/a n/a
Common Dividend Total $ 4,508 $ 3,628 $ 3,408 $ 2,540
Class A Preferred Dividend Total 0 0 0 0
Class B Preferred Dividends Total 760 388 0 0
----------- ----------- ----------- -----------
Total Dividend $ 5,268 $ 4,016 $ 3,408 $ 2,540
Taxable Income Earned $ 5,429 $ 4,048 $ 3,142 $ 2,549
Dividend Pay-Out Ratio for Period 97% 99% 108% 100%
Cumulative Dividend Pay-Out Ratio 98% 98% 98% 93%
Warrants Outstanding at Period End (expired 12/31/97) 412,894 1,076,431 1,563,957 1,665,063
Average Shares Outstanding During Period
Common 9,705,138 8,732,326 7,813,974 5,521,376
Class A Preferred 0 0 0 0
Class B Preferred 1,006,250 514,063 0 0
----------- ----------- ----------- -----------
Total 10,711,388 9,246,389 7,813,974 5,521,376
Calculation of "Diluted" Common Shares
Average Common Shares 9,705,138 8,732,326 7,813,974 5,521,376
Potential Dilution Due to Warrants 570,415 621,455 603,426 443,984
Potential Dilution Due to Options 176,919 162,393 182,832 164,227
----------- ----------- ----------- -----------
Total Average "Diluted" Common Shares 10,452,472 9,516,174 8,600,232 6,129,587
Net Income to Common Shareholders $ 4,084 $ 2,999 $ 2,500 $ 1,954
Total Average "Diluted" Common Shares 10,452,472 9,516,174 8,600,232 6,129,587
----------- ----------- ----------- -----------
Earnings Per Share ("Diluted") $ 0.39 $ 0.32 $ 0.29 $ 0.32
Earnings Per Share ("Basic") $ 0.42 $ 0.34 $ 0.32 $ 0.35
Per Share Ratios (Average Common and Preferred Shares Outstanding)
Average Total Assets $ 144.83 $ 124.97 $ 98.76 $ 92.87
Average Total Equity $ 17.26 $ 15.96 $ 15.05 $ 13.49
Net Interest Income $ 0.55 $ 0.50 $ 0.45 $ 0.50
Credit Expenses $ 0.03 $ 0.06 $ 0.06 $ 0.06
Operating Expenses $ 0.07 $ 0.07 $ 0.07 $ 0.09
Gain/(Loss) on Sale $ 0.00 $ 0.00 $ 0.00 $ 0.00
Writedowns $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income $ 0.45 $ 0.37 $ 0.32 $ 0.35
</TABLE>
61
<PAGE> 62
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> <C>
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 -- -- 826,185 1,467,748
Class B Preferred 953,435 382,155 -- --
----------- ----------- ----------- -----------
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
Net Income $ 1.93 $ 1.52 $ 0.95 $ 0.23
</TABLE>
62
<PAGE> 63
PART II OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 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
Not applicable
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 months ended March 31, 1998 and
March 31, 1997.
Exhibit 27 - Financial Data Schedule.
(b) Reports
No filings on Form 8-K were made.
63
<PAGE> 64
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: May 11, 1998 By:/s/ Douglas B. Hansen
-------------------------------------
Douglas B. Hansen
President and Chief Financial Officer
(authorized officer of registrant)
Dated: May 11, 1998 By:/s/ Vickie L. Rath
-------------------------------------
Vickie L. Rath
Vice President, Treasurer and Controller
(principal accounting officer)
64
<PAGE> 65
REDWOOD TRUST, INC.
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
- -------- ------------
<S> <C>
11.1 Computations of Earnings per Share............................ 66
27 Financial Data Schedule....................................... 67
</TABLE>
65
<PAGE> 1
EXHIBIT 11.1
REDWOOD TRUST, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
BASIC:
Average common shares outstanding ......................... 14,123,951 11,605,171
----------- -----------
Total 14,123,951 11,605,171
=========== ===========
Net Income $ 2,450,383 $ 6,456,238
=========== ===========
Per Share Amount $ 0.17 $ 0.56
=========== ===========
DILUTED:
Average common shares outstanding ......................... 14,123,951 11,605,171
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method 110,474 253,274
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method na 258,422
----------- -----------
Total 14,234,425 12,116,867
=========== ===========
Net Income $ 2,450,383 $ 6,456,238
=========== ===========
Per Share Amount $ 0.17 $ 0.53
=========== ===========
</TABLE>
66
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 32,202
<SECURITIES> 3,644,177
<RECEIVABLES> 23,886
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,713,691
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,713,691
<CURRENT-LIABILITIES> 2,302,714
<BONDS> 1,081,279
0
26,736
<COMMON> 320,423
<OTHER-SE> (17,461)
<TOTAL-LIABILITY-AND-EQUITY> 3,713,691
<SALES> 0
<TOTAL-REVENUES> 53,861
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,026
<LOSS-PROVISION> 601
<INTEREST-EXPENSE> 46,097
<INCOME-PRETAX> 3,137
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,137
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
