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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: SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER: 0-26436
REDWOOD TRUST, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 68-0329422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
591 REDWOOD HIGHWAY, SUITE 3100
MILL VALLEY, CALIFORNIA 94941
(Address of principal executive offices) (Zip Code)
(415) 389-7373
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the last practicable date.
<TABLE>
<S> <C>
Class B Preferred Stock ($.01 par value) 909,518 as of November 12, 1998
Common Stock ($.01 par value) 11,306,556 as of November 12, 1998
</TABLE>
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REDWOOD TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 ..... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 and September 30, 1997 ................................... 4
Consolidated Statements of Stockholders' Equity for the three and nine months
ended September 30, 1998 .................................................... 5
Consolidated Statements of Cash Flows for the three and nine months ended
September 30, 1998 and September 30, 1997 ................................... 6
Notes to Consolidated Financial Statements .................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................. 74
Item 2. Changes in Securities .............................................................. 74
Item 3. Defaults Upon Senior Securities .................................................... 74
Item 4. Submission of Matters to a Vote of Security Holders ................................ 74
Item 5. Other Information .................................................................. 74
Item 6. Exhibits and Reports on Form 8-K ................................................... 74
SIGNATURES ................................................................................. 75
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
REDWOOD TRUST, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS (Unaudited)
<S> <C> <C>
Mortgage assets:
Mortgage loans: held-for-sale $ 1,032,186 $ --
Mortgage loans: held-for-investment, net 1,248,678 1,551,826
Mortgage securities: trading 1,451,636 --
Mortgage securities: available-for-sale, net 8,066 1,814,796
----------- -----------
3,740,566 3,366,622
Cash and cash equivalents:
Unrestricted 3,811 24,892
Restricted 19,675 24,657
----------- -----------
23,486 49,549
Interest rate agreements 2,285 2,100
Accrued interest receivable 25,050 23,119
Investment in RWT Holdings, Inc. 7,744 --
Due from RWT Holdings, Inc. 776 --
Other assets 2,309 2,807
----------- -----------
$ 3,802,216 $ 3,444,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term debt $ 2,067,166 $ 1,914,525
Long-term debt, net 1,465,888 1,172,801
Accrued interest payable 9,152 14,476
Accrued expenses and other liabilities 1,781 2,172
Dividends payable 687 5,686
----------- -----------
3,544,674 3,109,660
----------- -----------
Commitments and contingencies (See Note 12)
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01 per share; Class B 9.74% Cumulative
Convertible 909,518 shares authorized, issued and outstanding
($28,882 aggregate liquidation preference) 26,736 26,736
Common stock, par value $0.01 per share;
49,090,482 shares authorized;
11,832,956 and 14,284,657 issued and outstanding 118 143
Additional paid-in capital 287,046 324,555
Accumulated other comprehensive income 321 (10,071)
Cumulative earnings (losses) (63) 43,783
Cumulative distributions to stockholders (56,616) (50,609)
----------- -----------
257,542 334,537
----------- -----------
$ 3,802,216 $ 3,444,197
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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REDWOOD TRUST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage loans: held-for-sale $ -- $ -- $ -- $ --
Mortgage loans: held-for-investment, net 37,594 19,630 93,308 42,505
Mortgage securities: trading 22,728 -- 22,864 --
Mortgage securities: available-for-sale, net 776 36,414 51,731 101,188
Cash and investments 460 499 1,298 927
------------ ------------ ------------ ------------
Total interest income 61,558 56,543 169,201 144,620
INTEREST EXPENSE
Short-term debt 31,528 40,318 92,812 108,176
Long-term debt 24,642 5,570 59,623 5,570
------------ ------------ ------------ ------------
Total interest expense 56,170 45,888 152,435 113,746
Net interest rate agreements expense 247 1,038 3,248 2,472
------------ ------------ ------------ ------------
NET INTEREST INCOME 5,141 9,617 13,518 28,402
Provision for credit losses (638) 943 726 2,414
Equity in (earnings) losses of RWT Holdings, Inc. 1,575 -- 2,156 --
Operating expenses 1,029 1,148 3,545 3,530
Other (income) expenses -- -- (139) --
------------ ------------ ------------ ------------
Income before unrealized and realized gains (losses)
on assets 3,175 7,526 7,230 22,458
Net unrealized and realized gains (losses) on assets (40,293) 20 (41,016) 20
------------ ------------ ------------ ------------
Income (loss) before preferred dividend and change in
accounting principle (37,118) 7,546 (33,786) 22,478
Less cash dividends on Class B preferred stock 687 687 2,060 2,129
------------ ------------ ------------ ------------
Income (loss) before change in accounting principle (37,805) 6,859 (35,846) 20,349
Cumulative transition effect of adopting SFAS No. 133
(See Note 2) (10,061) -- (10,061) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (47,866) $ 6,859 $ (45,907) $ 20,349
============ ============ ============ ============
EARNINGS PER SHARE:
Basic:
Income (loss) before change in accounting principle $ (2.85) $ 0.48 $ (2.59) $ 1.57
Cumulative transition effect of adopting SFAS No. 133 $ (0.76) $ -- $ (0.73) $ --
Net income (loss) $ (3.61) $ 0.48 $ (3.32) $ 1.57
Diluted:
Income (loss) before change in accounting principle $ (2.84) $ 0.47 $ (2.58) $ 1.52
Cumulative transition effect of adopting SFAS No. 133 $ (0.76) $ -- $ (0.72) $ --
Net income (loss) $ (3.60) $ 0.47 $ (3.30) $ 1.52
Weighted average shares of common stock and common stock
equivalents:
Basic 13,247,908 14,316,678 13,823,020 12,983,071
Diluted 13,311,528 14,624,601 13,915,644 13,416,032
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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REDWOOD TRUST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Class B
Preferred stock Common stock Additional
-------------------------------------------------------- paid-in
Shares Amount Shares Amount capital
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 909,518 $ 26,736 14,284,657 $ 143 $ 324,555
----------- ----------- ---------- ----------- -----------
Comprehensive income:
Income (loss) before preferred
dividend and change in
accounting principle -- -- -- -- --
Net unrealized loss on
assets available-for-sale -- -- -- -- --
Total comprehensive income -- -- -- -- --
Repurchase of common stock -- -- (214,100) (2) (4,273)
Dividends declared:
Class B preferred -- -- -- -- --
Common -- -- -- -- --
----------- ----------- ---------- ----------- -----------
Balance, March 31, 1998 909,518 $ 26,736 14,070,557 $ 141 $ 320,282
----------- ----------- ---------- ----------- -----------
Comprehensive income:
Income (loss) before preferred
dividend and change in
accounting principle -- -- -- -- --
Net unrealized loss on
assets available-for-sale -- -- -- -- --
Total comprehensive income -- -- -- -- --
Issuance of common stock -- -- 68,676 1 1,587
Repurchase of common stock -- -- (60,300) (1) (1,182)
Dividends declared:
Class B preferred -- -- -- -- --
Common -- -- -- -- --
----------- ----------- ---------- ----------- -----------
Balance, June 30, 1998 909,518 $ 26,736 14,078,933 $ 141 $ 320,687
----------- ----------- ---------- ----------- -----------
Comprehensive income:
Income (loss) before preferred
dividend and change in
accounting principle -- -- -- -- --
Reclassification adjustment due
to adopting SFAS No. 133 -- -- -- -- --
Net unrealized loss on
assets available-for-sale -- -- -- -- --
Total comprehensive income -- -- -- -- --
Cumulative transition effect
of adopting SFAS 133 -- -- -- -- --
Issuance of common stock -- -- 29,723 0 3
Repurchase of common stock -- -- (2,275,700) (23) (33,644)
Dividends declared:
Class B preferred -- -- -- -- --
Common -- -- -- -- --
----------- ----------- ---------- ----------- -----------
Balance, September 30, 1998 909,518 $ 26,736 11,832,956 $ 118 $ 287,046
----------- ----------- ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other Cumulative
comprehensive Cumulative distributions to
income earnings stockholders Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ (10,071) $ 43,783 $ (50,609) $ 334,537
----------- ----------- ----------- -----------
Comprehensive income:
Income (loss) before preferred
dividend and change in
accounting principle -- 3,137 -- 3,137
Net unrealized loss on
assets available-for-sale (3,014) -- -- (3,014)
-----------
Total comprehensive income -- -- -- 123
Repurchase of common stock -- -- -- (4,275)
Dividends declared:
Class B preferred -- -- (687) (687)
Common -- -- -- 0
----------- ----------- ----------- -----------
Balance, March 31, 1998 $ (13,085) $ 46,920 $ (51,296) $ 329,698
----------- ----------- ----------- -----------
Comprehensive income:
Income (loss) before preferred
dividend and change in
accounting principle -- 196 -- 196
Net unrealized loss on
assets available-for-sale (4,932) -- -- (4,932)
-----------
Total comprehensive income -- -- -- (4,736)
Issuance of common stock -- -- -- 1,588
Repurchase of common stock -- -- -- (1,183)
Dividends declared:
Class B preferred -- -- (687) (687)
Common -- -- (3,809) (3,809)
----------- ----------- ----------- -----------
Balance, June 30, 1998 $ (18,017) $ 47,116 $ (55,792) $ 320,871
----------- ----------- ----------- -----------
Comprehensive income:
Income (loss) before preferred
dividend and change in
accounting principle -- (37,118) -- (37,118)
Reclassification adjustment due
to adopting SFAS No. 133 19,457 -- -- 19,457
Net unrealized loss on
assets available-for-sale (1,119) -- -- (1,119)
-----------
Total comprehensive income -- -- -- (18,780)
Cumulative transition effect
of adopting SFAS 133 -- (10,061) -- (10,061)
Issuance of common stock -- -- -- 3
Repurchase of common stock -- -- -- (33,667)
Dividends declared:
Class B preferred -- -- (687) (687)
Common -- -- (137) (137)
----------- ----------- ----------- -----------
Balance, September 30, 1998 $ 321 $ (63) $ (56,616) $ 257,542
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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REDWOOD TRUST, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) available to common stockholders $ (47,866) $ 6,859 $ (45,907) $ 20,349
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,305 7,738 29,730 18,168
Provision for credit losses on mortgage assets (638) 943 726 2,033
Equity in earnings of RWT Holdings, Inc. 1,575 -- 2,156 --
Net unrealized and realized (gains) losses on assets 40,293 (20) 41,016 (20)
Cumulative effect of adopting SFAS No. 133 10,061 -- 10,061 --
(Increase) decrease in accrued interest receivable (3,496) 1,959 (1,931) (8,322)
(Increase) decrease in other assets 3,329 (1,606) 323 (1,340)
Increase (decrease) in accrued interest payable (4,523) 2,063 (5,324) 6,156
Increase in accrued expenses and other liabilities (411) 386 (391) 1,368
----------- ----------- ----------- -----------
Net cash provided by operating activities 5,629 18,322 30,459 38,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in restricted cash 1,885 (28,890) 4,982 (28,890)
Investment in RWT Holdings, Inc., net of dividends received -- -- (9,900) --
Advances to RWT Holdings, Inc., net of cash payments 55 -- (776) --
Purchases of mortgage loans (629,201) (326,300) (1,596,673) (1,047,639)
Purchases of mortgage securities (135,717) (43,163) (366,884) (911,789)
Proceeds from sales of mortgage loans 374,520 -- 374,520 --
Proceeds from sales of mortgage securities -- 42,023 9,296 42,023
Principal payments on mortgage loans 187,432 81,456 475,905 190,985
Principal payments on mortgage securities 227,287 170,942 670,218 434,720
Purchases of interest rate agreements (11,898) (596) (13,923) (7,697)
Proceeds from sales of interest rate agreements 2,769 -- 2,769 --
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 17,132 (104,528) (450,466) (1,328,287)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments on) short-term debt 131,008 (463,011) 152,641 686,670
Proceeds from issuance of long-term debt -- 532,628 635,192 532,628
Repayments on long-term debt (127,511) (35,488) (342,428) (35,488)
Net proceeds from issuance of common stock 3 70,438 1,591 154,528
Repurchases of common stock (33,667) (11,029) (39,125) (11,029)
Increase (decrease) in dividends payable - preferred -- -- -- (73)
Dividends paid on common stock (137) (7,951) (8,945) (19,603)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (30,304) 85,587 398,926 1,307,633
Net increase (decrease) in cash and cash equivalents (7,543) (619) (21,081) 17,738
Cash and cash equivalents at beginning of period 11,354 29,425 24,892 11,068
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,811 $ 28,806 $ 3,811 $ 28,806
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 60,693 $ 43,594 $ 157,759 $ 107,585
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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REDWOOD TRUST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. THE COMPANY
Redwood Trust, Inc. ("Redwood Trust") was incorporated in Maryland on April 11,
1994 and commenced operations on August 19, 1994. During 1997, Redwood Trust
formed Sequoia Mortgage Funding Corporation ("Sequoia"), a special-purpose
finance subsidiary. Redwood Trust acquired an equity interest in RWT Holdings,
Inc. ("RWT Holdings"), a taxable affiliate of Redwood Trust, during the first
quarter of 1998. For financial reporting purposes, references to the "Company"
mean Redwood Trust, Sequoia and the equity interest in RWT Holdings. The Company
acquires and manages real estate mortgage assets ("Mortgage Assets") which may
be acquired as whole loans ("Mortgage Loans") or as mortgage securities
representing interests in or obligations backed by pools of mortgage loans
("Mortgage Securities"). The Company currently acquires Mortgage Assets that are
secured by single-family or commercial real estate properties throughout the
United States. The Company utilizes both debt and equity to finance its
acquisitions. The Company may also use other securitization techniques to
enhance the value and liquidity of the Company's Mortgage Assets and may sell
Mortgage Assets from time to time.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Redwood Trust and
Sequoia. Substantially all of the assets of Sequoia are pledged or subordinated
to support long-term debt in the form of collateralized mortgage bonds
("Long-Term Debt") and are not available for the satisfaction of general claims
of the Company. The Company's exposure to loss on the assets pledged as
collateral is limited to its net investment, as the Long-Term Debt is
non-recourse to the Company. All significant inter-company balances and
transactions with Sequoia have been eliminated in the consolidation of the
Company.
During March 1998, the Company acquired an equity interest in RWT Holdings,
which acquires, accumulates and sells residential and commercial Mortgage Loans.
The Company owns all of the preferred stock and has a non-voting, 99% economic
interest in RWT Holdings. As the Company does not own the voting common stock of
RWT Holdings or control RWT Holdings, its investment in RWT Holdings is
accounted for under the equity method. Under this method, original equity
investments in RWT Holdings are recorded at cost and adjusted by the Company's
share of earnings or losses and decreased by dividends received.
Certain amounts for prior periods have been reclassified to conform with the
1998 presentation.
ADOPTION OF SFAS NO. 133
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, effective
July 1, 1998. In accordance with the transition provisions of SFAS No. 133, the
Company recorded a net-of-tax cumulative-effect-type transition adjustment of
$10.1 million (loss) in earnings to recognize at fair value the ineffective
portion of all interest rate agreements that were previously designated as part
of a hedging relationship.
The Company, upon its adoption of SFAS No. 133, also reclassified $1.53 billion
mortgage securities from available-for-sale to trading. This reclassification
resulted in an $11.9 million reclassification loss adjustment, which was
transferred from other comprehensive income to current earnings effective July
1, 1998. Under the
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provisions of SFAS No. 133, such a reclassification does not call into question
the Company's intent to hold current or future debt securities to their
maturity. Immediately after the adoption of SFAS No. 133 and the
reclassification, the Company currently elected to not seek hedge accounting for
any of the Company's interest rate agreements.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code (the "Code") and the corresponding provisions of
State law. In order to qualify as a REIT, the Company must annually distribute
at least 95% of its taxable income to shareholders and meet certain other
requirements. If these requirements are met, the Company generally will not be
subject to Federal or state income taxation at the corporate level with respect
to the taxable income it distributes to its shareholders. Because the Company
believes it meets the REIT requirements and also intends to distribute all of
its taxable income, no provision has been made for income taxes in the
accompanying consolidated financial statements.
MORTGAGE ASSETS
The Company's Mortgage Assets consist of Mortgage Loans and Mortgage Securities.
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: Held-for-Sale
At September 30, 1998, the Company elected to reclassify certain short-funded
Mortgage Loans from held-for-investment to held-for-sale. These Mortgage Loans
are carried at the lower of cost or market. Realized and unrealized gains and
losses on these loans are recognized in "Net Unrealized and Realized Gains
(Losses) on Assets" on the Consolidated Statements of Operations.
Mortgage Loans: Held-for-Investment
Mortgage Loans held-for-investment are carried at their unpaid principal
balance, net of unamortized discount or premium and specific credit reserves
established for such assets.
Mortgage Securities: Trading
Effective July 1, 1998, concurrent with the adoption of SFAS No. 133, the
Company elected to reclassify all of its short-funded Mortgage Securities from
available-for-sale to trading. These securities are carried at their estimated
fair market value. Realized and unrealized gains and losses on these securities
are recognized in "Net Unrealized and Realized Gains (Losses) on Assets" on the
Consolidated Statements of Operations.
Mortgage Securities: Available-for-Sale
Prior to the adoption of SFAS No. 133, the Company, in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities,
classified all of its Mortgage Securities as available-for-sale investments as
the Company, from time to time, sold some of its Mortgage Securities as part of
its overall management of its balance sheet. Effective July 1, 1998, the Company
reclassified all of its short-funded Mortgage Securities as trading investments,
while all equity-funded Mortgage Securities remained in the available-for-sale
classification. Accordingly, all Mortgage Securities classified as
available-for-sale are carried at estimated fair value. Current period
unrealized gains and losses are excluded from net income and reported as a
component of Other 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 classified as available-for-sale that
are considered 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
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<PAGE> 9
mortgages and/or the credit protection available to the related mortgage pool
and a significant change in the prepayment characteristics of the underlying
collateral.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less. The carrying amount of cash
equivalents approximates their fair value.
INTEREST RATE AGREEMENTS
The Company maintains an overall interest-rate risk-management strategy that
incorporates the use of derivative interest rate agreements to minimize
significant unplanned fluctuations in earnings that are caused by interest-rate
volatility. Interest rate agreements that are used as part of the Company's
interest-rate risk management strategy include interest rate options, swaps,
options on swaps, futures contracts, and options on futures contracts
(collectively "Interest Rate Agreements"). On the date an Interest Rate
Agreement is entered into, the Company designates the interest rate agreement as
(1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related
to a recognized asset or liability ("cash flow" hedge), or (3) held for trading
("trading" instruments). Concurrent with the adoption of SFAS No. 133, the
Company has elected to designate all of its existing Interest Rate Agreements as
trading instruments.
Net premiums on interest rate options 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
options and swaps are recognized on an accrual basis.
Interest Rate Agreements Classified as Trading
Interest Rate Agreements that are designated as trading are not linked to
specific assets and liabilities on the balance sheet or to a forecasted
transaction and, therefore, do not qualify for hedge accounting. Accordingly,
changes in the fair value of derivative trading instruments are reported in
current-period earnings in "Net Unrealized and Realized Gains (Losses) on
Assets" on the Consolidated Statements of Operations.
Interest Rate Agreements Classified as Hedges
Prior to the July 1, 1998 adoption of SFAS No. 133, the Company utilized 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, required the
Company to provide certain disclosures concerning its derivative instruments
according to a set of prescribed guidelines. The nature of the Company's
investment and financing strategies exposes the Company to interest rate risk.
As part of its asset/liability management activities, the Company used Interest
Rate Agreements to hedge exposures or modify the interest rate characteristics
of its balance sheet. Prior to the adoption of SFAS No. 133, under the Company's
hedging policy, a specific portfolio of assets and liabilities with similar
economic characteristics such as a low life strike, variable interest rate based
on a market-sensitive index, similar expected prepayment rate behavior and
similar periodic caps, was identified. The hedge instruments were chosen as the
ones probable of substantially reducing the interest rate risk being hedged, and
a high degree of correlation was maintained on an on-going basis. These hedge
instruments were 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 hedged assets or liabilities
under certain interest rate scenarios.
Prior to the adoption of SFAS No. 133, Interest Rate Agreements that were
hedging available-for-sale Mortgage Securities were 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 were used to hedge Mortgage Loans, Short-Term Debt or Long-Term
Debt were carried at amortized cost. Realized gains and losses from the
settlement or early termination of Interest Rate Agreements were deferred and
amortized into net interest income over the
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<PAGE> 10
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.
DEBT
Short-Term and Long-Term Debt are carried at their unpaid principal balances,
net of any unamortized discount or premium and any unamortized deferred bond
issuance costs. The amortization of any discount or premium is recognized as an
adjustment to interest expense using the effective interest method based on the
maturity schedule of the related borrowings. Bond issuance costs incurred in
connection with the issuance of Long-Term Debt are deferred and amortized over
the estimated lives of the Long-Term Debt using the interest method adjusted for
the effects of prepayments.
NET INCOME PER SHARE
Net income per share for the three and nine months ended September 30, 1998 and
1997 is shown in accordance with SFAS No. 128, Earnings Per Share, which was
effective for fiscal years ended after December 15, 1997 and requires
restatement of prior period earnings per share ("EPS"). Basic net income per
share is computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed by dividing the net income available to common
stockholders by the weighted average number of common shares and common
equivalent shares outstanding during the period. The common equivalent shares
are calculated using the treasury stock method, which assumes that all dilutive
common stock equivalents are exercised and the funds generated by the exercise
are used to buy back outstanding common stock at the average market price during
the reporting period.
The following tables provide reconciliations of the numerators and denominators
of the basic and diluted net income per share computations for the three and
nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings per share--
Income (loss) before preferred dividend and
change in accounting principle $ (37,118) $ 7,546 $ (33,786) $ 22,478
Cash dividends on Class B preferred stock (687) (687) (2,060) (2,129)
------------ ------------ ------------ ------------
Income (loss) before change in accounting principle (37,805) 6,859 (35,846) 20,349
Cumulative transition effect of adopting SFAS No. 133 (10,061) 0 (10,061) 0
------------ ------------ ------------ ------------
Basic and Diluted EPS - Income (loss) available
to common stockholders $ (47,866) $ 6,859 $ (45,907) $ 20,349
============ ============ ============ ============
DENOMINATOR:
Denominator for basic earnings per share--
Weighted average number of common shares
outstanding during the period 13,247,908 14,316,678 13,823,020 12,983,071
Net effect of dilutive stock options 63,620 177,434 92,624 243,410
Net effect of dilutive stock warrants (a) 0 130,489 0 189,551
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-- 13,311,528 14,624,601 13,915,644 13,416,032
============ ============ ============ ============
BASIC:
Income (loss) before change in accounting principle $ (2.85) $ 0.48 $ (2.59) $ 1.57
Cumulative transition effect of adopting SFAS No. 133 $ (0.76) $ 0.00 $ (0.73) $ 0.00
Net earnings per share $ (3.61) $ 0.48 $ (3.32) $ 1.57
DILUTED:
Income (loss) before change in accounting principle $ (2.84) $ 0.47 $ (2.58) $ 1.52
Cumulative transition effect of adopting SFAS No. 133 $ (0.76) $ 0.00 $ (0.72) $ 0.00
Net earnings per share $ (3.60) $ 0.47 $ (3.30) $ 1.52
</TABLE>
10
<PAGE> 11
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires the Company to classify
items of "other comprehensive income", such as unrealized gains and losses on
assets available-for-sale, by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. In accordance with SFAS No. 130, current period unrealized gains and
losses on assets available-for-sale are reported as a component of Comprehensive
Income on the Statement of Stockholders' Equity with cumulative unrealized gains
and losses classified as Accumulated Other Comprehensive Income in stockholders'
equity. As of September 30, 1998 and December 31, 1997, the only component of
Accumulated Other Comprehensive Income was unrealized gains and losses on assets
available-for-sale.
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Actual
results could differ from those estimates. The primary estimates inherent in the
accompanying consolidated financial statements are discussed below.
Fair Value. The Company uses estimates in establishing fair value for its assets
classified as trading, available-for-sale and held-for-sale. Management bases
its fair value estimates in part, 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.
Ultimately, all estimates of fair value for assets classified as trading,
available-for-sale and held-for-sale are based on management's judgment. The
fair value reported reflects estimates and may not necessarily be indicative of
the amounts the Company could realize in a current market exchange. The fair
value of all on- and off- balance sheet financial instruments is presented in
Notes 3, 6 and 10.
Allowance for Credit Losses. An allowance for credit losses is maintained at a
level deemed appropriate by management to provide for known, future losses as
well as unidentified potential losses in its Mortgage Asset portfolio. The
allowance is based upon management's assessment of various factors affecting its
Mortgage Assets, including current and projected economic conditions,
delinquency status and credit protection. In determining the allowance for
credit losses, the Company's credit exposure is considered based on its credit
risk position in the mortgage pool. These estimates are reviewed periodically
and, as adjustments become necessary, they are reported in earnings in the
periods in which they become known. The reserve is increased by provisions,
which are charged to income from operations. When a loan or portions of a loan
are determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance. The Company's actual credit losses may differ from those estimates
used to establish the allowance. Summary information regarding the Allowance for
Credit Losses is presented in Note 4.
11
<PAGE> 12
NOTE 3. MORTGAGE ASSETS
At September 30, 1998 and December 31, 1997 Mortgage Assets consisted of the
following:
Mortgage Loans: Held-for-Sale
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Mortgage Loans, Face $1,031,229 0
Unamortized Discount (1,369) 0
Unamortized Premium 2,326 0
------------------ ------------------
Carrying Value $1,032,186 0
================== ==================
</TABLE>
At September 30, 1998, the Company elected to reclassify certain short-funded
Mortgage Loans from held-for-investment to held-for-sale. These Mortgage Loans
are carried at the lower of cost or market. Accordingly, the Company recorded
these Mortgage Loans at their market value which was lower than cost. As a
result of this reclassification, the Company recognized a lower of cost or
market loss adjustment of $6.4 million which is reflected as a component of "Net
Unrealized and Realized Gains (Losses) on Assets" on the Consolidated Statements
of Operations.
Mortgage Loans: Held-for-Investment
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Mortgage Loans, Face $1,234,075 $1,519,837
Unamortized Discount 0 0
Unamortized Premium 17,993 34,844
------------------ ------------------
Amortized Cost 1,252,068 1,554,681
Allowance for Credit Losses (3,390) (2,855)
------------------ ------------------
Carrying Value $1,248,678 $1,551,826
================== ==================
</TABLE>
During the three months ended September 30, 1998, and prior to the
reclassification, the Company sold held-for-investment Mortgage Loans with an
amortized cost of $375.7 million. The net realized loss of $1.0 million on this
transaction is reflected as a component of "Net Unrealized and Realized Gains
(Losses) on Assets" on the Consolidated Statements of Operations.
Mortgage Securities: Trading
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------------------------- -----------------------------------------
(IN THOUSANDS) AGENCY NON-AGENCY TOTAL AGENCY NON-AGENCY TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Securities, Face $ 677,995 $ 764,579 $ 1,442,574 0 0 0
Unamortized Discount (5) (1,267) (1,272) 0 0 0
Unamortized Premium 6,949 3,385 10,334 0 0 0
=========== =========== =========== =========== =========== ===========
Carrying Value $ 684,939 $ 766,697 $ 1,451,636 0 0 0
=========== =========== =========== =========== =========== ===========
</TABLE>
Effective July 1, 1998, the Company elected to reclassify all of its
short-funded Mortgage Securities from available-for-sale to trading (see Note
2). As a result of this reclassification, the Company recognized an $11.9
million reclassification loss adjustment (gross gains of $0.4 million, gross
losses of $12.3 million), which was transferred from other comprehensive income
to current earnings effective July 1, 1998. Additionally, for the three months
ended September 30, 1998, the Company recognized a mark-to-market loss of
approximately $14.6 million on Mortgage Securities classified as trading. The
entire unrealized loss of $26.5 million is reflected as a
12
<PAGE> 13
component of "Net Unrealized and Realized Gains (Losses) on Assets" on the
Consolidated Statements of Operations.
Mortgage Securities: Available-for-Sale
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
--------------------------- -------------------------------------------
(IN THOUSANDS) NON-AGENCY TOTAL AGENCY NON-AGENCY TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage Securities, Face $ 18,209 $ 18,209 $ 953,937 $ 825,438 $ 1,779,375
Unamortized Discount (9,027) (9,027) (174) (12,268) (12,442)
Unamortized Premium 0 0 32,722 18,606 51,328
----------- ----------- ----------- ----------- -----------
Amortized Cost 9,182 9,182 986,485 831,776 1,818,261
Allowance for Credit Losses (1,436) (1,436) 0 (2,076) (2,076)
Gross Unrealized Gains 801 801 2,598 3,984 6,582
Gross Unrealized Losses (481) (481) (4,286) (3,685) (7,971)
=========== =========== =========== =========== ===========
Carrying Value $ 8,066 $ 8,066 $ 984,797 $ 829,999 $ 1,814,796
=========== =========== =========== =========== ===========
</TABLE>
During the first quarter of 1998, the Company sold for $9.3 million
available-for-sale Mortgage Securities with a carrying value of $9.3 million.
Net gains on sales for the three and nine months ended September 30, 1998
totaled $0 and $5,689 (gross gains of $5,689 and gross losses of $0). The net
realized gain of $5,689 for the nine months ended September 30, 1998 is
reflected as a component of "Net Unrealized and Realized Gains (Losses) on
Assets" on the Consolidated Statements of Operations.
Also during the first quarter of 1998, the Company recognized a $0.7 million
loss on the write-down of certain Mortgage Securities. The net realized loss of
$0.7 million for the nine months ended September 30, 1998 is reflected as a
component of "Net Unrealized and Realized Gains (Losses) on Assets" on the
Consolidated Statements of Operations.
At September 30, 1998 and December 31, 1997, all investments in Mortgage Assets
consisted of interests in adjustable-rate, hybrid or fixed-rate mortgages on
residential properties. The hybrid mortgages have an initial fixed coupon rate
of three to seven years followed by annual adjustments. Agency Mortgage
Securities ("Agency Securities") represent securitized interests in pools of
adjustable-rate mortgages from the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. The Agency Securities are guaranteed
as to principal and interest by these United States government-sponsored
entities. The original maturity of the majority of the Mortgage Assets is thirty
years; the actual maturity is subject to change based on the prepayments of the
underlying mortgage loans.
At September 30, 1998 and December 31, 1997, the average annualized effective
yield after taking into account the amortization expense due to prepayments on
the Mortgage Assets was 7.32% and 6.86%, respectively, based on the amortized
cost of the assets. The coupons on 79% of the mortgage securities and loans
owned by the Company are limited by periodic caps (generally interest rate
adjustments are limited to no more than 1% every six months or 2% every year)
while another 20% are not limited by such periodic caps. The coupons on the
remaining 1% of mortgage securities and loans owned by the Company are on
fixed-rate mortgages that do not adjust. Most of the coupons on the
adjustable-rate mortgage securities and loans owned by the Company are limited
by lifetime caps. At September 30, 1998 and December 31, 1997, the weighted
average lifetime cap was 11.74% and 12.08%, respectively.
13
<PAGE> 14
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
The following table summarizes Allowance for Credit Losses activity for the
three and nine months ended September 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,784 $ 3,580 $ 4,931 $ 2,180
Provision for credit losses (638) 943 726 2,414
Charge-offs (320) (67) (831) (138)
------- ------- ------- -------
Balance at end of period $ 4,826 $ 4,456 $ 4,826 $ 4,456
======= ======= ======= =======
</TABLE>
The Allowance for Credit Losses is classified on the Consolidated Balance Sheets
as a component of Mortgage Assets.
NOTE 5. COLLATERAL FOR LONG-TERM DEBT
The Company has pledged collateral in order to secure the Long-Term Debt issued
in the form of collateralized mortgage bonds ("Bond Collateral"). This Bond
Collateral consists primarily of adjustable-rate and hybrid, conventional,
30-year mortgage loans secured by first liens on one- to four-family residential
properties. All Bond Collateral is pledged to secure repayment of the related
Long-Term Debt obligation. All principal and interest (less servicing and
related fees) on the Bond Collateral is remitted to a trustee and is available
for payment on the Long-Term Debt obligation. The Company's exposure to loss on
the Bond Collateral is limited to its net investment, as the Long-Term Debt is
non-recourse to the Company.
The components of the Bond Collateral at September 30, 1998 and December 31,
1997 are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Mortgage loans $1,486,626 $1,191,487
Restricted cash and cash equivalents 19,675 24,657
Accrued interest receivable 8,846 7,401
========== ==========
$1,515,147 $1,223,545
========== ==========
</TABLE>
For presentation purposes, the various components of the Bond Collateral
summarized above are reflected in their corresponding line items on the
Consolidated Balance Sheets.
NOTE 6. INTEREST RATE AGREEMENTS
The amortized cost and carrying value of the Company's Interest Rate Agreements
at September 30, 1998 and December 31, 1997 are summarized as follows:
Interest Rate Agreements Classified as Trading:
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -------------------
<S> <C> <C>
Carrying Value $2,285 $0
=================== ===================
</TABLE>
14
<PAGE> 15
On July 1, 1998, as a result of adopting SFAS No. 133, the Company recorded a
net-of-tax cumulative-effect-type transition adjustment of $10.1 million loss in
earnings to recognize at fair value the ineffective portion of Interest Rate
Agreements that were previously designated as part of a hedging relationship
(see Note 2). This loss is reflected on the Consolidated Statements of
Operations as Cumulative Transition Effect of Adopting SFAS No. 133.
Approximately $7.6 million of this transition adjustment was transferred from
other comprehensive income to current earnings.
During the three months ended September 30, 1998, the Company recognized
unrealized mark-to-market gains of $2.5 million and realized losses of $8.9
million on interest rate agreements. The entire net loss of $6.4 million is
reflected as a component of "Net Unrealized and Realized Gains (Losses) on
Assets" on the Consolidated Statements of Operations.
Interest Rate Agreements Classified as Hedges:
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -------------------
<S> <C> <C>
Amortized Cost $0 $10,781
Gross Unrealized Gains 0 650
Gross Unrealized Losses 0 (9,331)
------------------- -------------------
Carrying Value $0 $ 2,100
=================== ===================
</TABLE>
The following table summarizes the aggregate notional amounts of all of the
Company's Interest Rate Agreements as well as the credit exposure related to
these instruments at September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS CREDIT EXPOSURE (a)
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Interest Rate Options $3,720,200 $4,862,200 $ 0 $ 0
Interest Rate Swaps 490,000 473,000 9,039 12,392
Interest Rate Futures 0 58,000 0 46
========== ========== ========== ==========
Total $4,210,200 $5,393,200 $ 9,039 $ 12,438
========== ========== ========== ==========
</TABLE>
(a) Reflects the fair market value of all cash and collateral of the Company
held by counterparties.
Interest Rate Options, which include caps, floors, call and put corridors,
options on futures and swaption collars (collectively, "Options"), are
agreements which transfer, modify or reduce interest rate risk in exchange for
the payment of a premium when the contract is initiated. Interest rate cap
agreements provide cash flows to the Company to the extent that a specific
interest rate index exceeds a fixed rate. Conversely, interest rate floor
agreements produce cash flows to the Company to the extent that the referenced
interest rate index falls below the agreed upon fixed rate. Call (put) corridors
will cause the Company to incur a gain (loss) to the extent that the yield of
the specified index is below (above) the strike rate at the time of the option
expiration. The maximum gain or loss on a call or put corridor is established at
the time of the transaction by establishing minimum and maximum index rates. The
Company 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.
Swaption collars will cause the Company to incur a gain (loss) should the index
rate be below (above) the strike rate as of the expiration date. The Company's
credit risk on the Options is limited to the carrying value of the Options
agreements.
Interest Rate Swaps ("Swaps") are agreements in which a series of interest rate
flows are exchanged over a prescribed period. The notional amount on which the
interest payments are based is not exchanged. Most of the Company's Swaps
involve the exchange of either fixed interest payments for floating interest
payments or the exchange of one floating interest payment for another floating
interest payment based on a different index. Most of the Swaps require that the
Company provide collateral, such as Mortgage Securities, to the counterparty.
15
<PAGE> 16
Should the counterparty fail to return the collateral, the Company would be at
risk for the fair market value of that asset.
Interest Rate Futures ("Futures") are contracts for the delivery of securities
or cash in which the seller agrees to deliver on a specified future date, a
specified instrument (or the cash equivalent), at a specified price or yield.
Under these agreements, if the Company has sold (bought) the futures, the
Company will generally receive additional cash flows if interest rates rise
(fall). Conversely, the Company will generally pay additional cash flows if
interest rates fall (rise).
In general, the Company has incurred credit risk to the extent that the
counterparties to the Interest Rate Agreements do not perform their obligations
under the Interest Rate Agreements. If one of the counterparties does not
perform, the Company would not receive the cash to which it would otherwise be
entitled under the Interest Rate Agreement. In order to mitigate this risk, the
Company has only entered into Interest Rate Agreements that are either a)
transacted on a national exchange or b) transacted with counterparties that are
either i) designated by the U.S. Department of the Treasury as a "primary
government dealer", ii) affiliates of "primary government dealers", or iii)
rated single A or higher. Furthermore, the Company has entered into Interest
Rate Agreements with several different counterparties in order to reduce the
risk of credit exposure to any one counterparty.
NOTE 7. INVESTMENT IN RWT HOLDINGS, INC.
RWT Holdings was incorporated in Delaware on February 13, 1998 and commenced
operations on April 1, 1998. RWT Holdings originates, acquires, accumulates and
sells residential and commercial real estate mortgage loans through the
operations of its three start-up businesses. Redwood Financial Services provides
mortgage loan portfolio management and disposition services to banks and
thrifts. Redwood Commercial Funding, Inc. originates and services high-quality,
small-balance commercial real estate mortgages. Redwood Residential Funding,
Inc. acquires, aggregates, and sells A-quality jumbo residential mortgages
through its wholesale correspondent operations.
The Company owns 100% of the non-voting preferred stock of RWT Holdings, which
represents a 99% equity interest. As such, the Company records its investment in
RWT Holdings using the equity method. Under this method, original equity
investments in RWT Holdings are recorded at cost and adjusted by the Company's
share of earnings or losses and decreased by dividends received.
The Company incurs some of the operating expenses of RWT Holdings, including
personnel and related expenses, subject to full reimbursement by RWT Holdings.
At September 30, 1998, amounts due to the Company from RWT Holdings for
operating expenses totaled $776,079.
RWT Holdings is authorized as a co-borrower under some of the Company's
Short-Term Debt agreements subject to the Company continuing to remain jointly
and severally liable for repayment. Accordingly, RWT Holdings pays the Company
credit support fees on borrowings subject to this arrangement. At September 30,
1998, there were no amounts due to the Company from RWT Holdings for credit
support fees.
Under a revolving credit facility arrangement, the Company may loan funds to RWT
Holdings on an unsecured basis. Such loans bear interest at a rate of 3.5% over
the London Interbank Offered Rate ("LIBOR"). At September 30, 1998, there were
no outstanding loans to RWT Holdings.
16
<PAGE> 17
Summarized financial information for RWT Holdings is presented below.
(IN THOUSANDS) CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
ASSETS (Unaudited)
<S> <C>
Cash and cash equivalents $ 8,367
Accrued interest receivable 21
Fixed assets and leasehold improvements 423
Other assets 31
=======
$ 8,842
=======
LIABILITIES
Due to Redwood Trust, Inc. $ 776
Accrued expenses 224
Other liabilities 20
-------
1,020
-------
STOCKHOLDERS' EQUITY
Preferred stock 9,900
Common stock --
Additional paid-in capital 100
Retained earnings (2,178)
-------
7,822
=======
$ 8,842
=======
</TABLE>
(IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
INTEREST INCOME:
Mortgage loans $ 0 $ 2,779
Cash and investments 131 188
------- -------
131 2,967
INTEREST EXPENSE:
Short-term debt 0 2,503
Credit support fees 0 139
Note from Redwood Trust, Inc. 0 15
------- -------
0 2,657
------- -------
NET INTEREST INCOME 131 310
Net gain on sale transactions 0 22
------- -------
NET REVENUES 131 332
Operating expenses 1,721 2,510
======= =======
NET INCOME (LOSS) $(1,590) $(2,178)
======= =======
</TABLE>
NOTE 8. SHORT-TERM DEBT
The Company has entered into reverse repurchase agreements and other forms of
collateralized short-term borrowings (collectively, "Short-Term Debt") to
finance acquisitions of a portion of its Mortgage Assets. This Short-Term Debt
is collateralized by a portion of the Company's Mortgage Assets.
At September 30, 1998, the Company had $2.1 billion of Short-Term Debt
outstanding with a weighted average borrowing rate of 5.74% and a weighted
average remaining maturity of 73 days. This debt was collateralized with $2.1
billion of Mortgage Assets. At December 31, 1997, the Company had $1.9 billion
of Short-Term Debt outstanding with a weighted average borrowing rate of 6.00%
and a weighted average remaining maturity of 64 days. This debt was
collateralized with $2.0 billion of Mortgage Assets.
17
<PAGE> 18
At September 30, 1998 and December 31, 1997, the Short-Term Debt had the
following remaining maturities:
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -------------------
<S> <C> <C>
Within 30 days $1,075,101 $ 823,545
30 to 90 days 218,997 533,543
Over 90 days 773,068 557,437
------------------- -------------------
Total Short-Term Debt $2,067,166 $1,914,525
=================== ===================
</TABLE>
The average balance of Short-Term Debt for both the three and nine months ended
September 30, 1998 was $2.1 billion with a weighted average interest cost of
5.93% and 5.86%, respectively. For the three and nine months ended September 30,
1997, the average balance of Short-Term Debt was $2.7 billion and $2.5 billion
with a weighted average interest cost of 5.98% and 5.83%, respectively. The
maximum balance outstanding during the nine months ended September 30, 1998 and
1997 was $2.5 billion and $3.1 billion, respectively.
NOTE 9. LONG-TERM DEBT
Long-Term Debt in the form of collateralized mortgage bonds is secured by a
pledge of Bond Collateral. As required by the indentures relating to the
Long-Term Debt, the Bond Collateral is held in the custody of trustees. The
trustees collect principal and interest payments on the Bond Collateral and make
corresponding principal and interest payments on the Long-Term Debt. The
obligations under the Long-Term Debt are payable solely from the Bond Collateral
and are otherwise non-recourse to the Company.
Each series of Long-Term Debt consists of various classes of bonds at variable
rates of interest. The maturity of each class is directly affected by the rate
of principal prepayments on the related Bond Collateral. Each series is also
subject to redemption according to the specific terms of the respective
indentures. As a result, the actual maturity of any class of a Long-Term Debt
series is likely to occur earlier than its stated maturity.
The components of the Long-Term Debt at September 30, 1998 and December 31, 1997
along with selected other information are summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
--------------------- ---------------------
<S> <C> <C>
Long-Term Debt $1,463,578 $1,170,709
Unamortized premium on Long-Term Debt 6,450 5,795
Deferred bond issuance costs (4,140) (3,703)
--------------------- ---------------------
Total Long-Term Debt $1,465,888 $1,172,801
===================== =====================
Range of weighted-average interest rates, by series 6.02% to 6.59% 6.06% to 6.50%
Stated maturities 2017 - 2029 2024 - 2029
Number of series 3 2
</TABLE>
For the three and nine months ended September 30, 1998, the average effective
interest cost for Long-Term Debt, as adjusted for the amortization of bond
premium, deferred bond issuance costs and other related expenses, was 6.46% and
6.44%, respectively. For the three and nine months ended September 30, 1997, the
average effective interest cost for Long-Term Debt, as adjusted for the
amortization of deferred bond issuance costs and other related expenses was
6.28% and 6.21%, respectively. At September 30, 1998 and December 31, 1997,
interest payable on Long-Term Debt was $4.9 million and $2.6 million,
respectively, and is reflected as a component of Accrued Interest Payable on the
Consolidated Balance Sheets.
18
<PAGE> 19
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values of
the Company's financial instruments at September 30, 1998 and December 31, 1997.
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced liquidation sale.
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets
Mortgage Loans: held-for-sale $1,032,186 $1,037,933 0 0
Mortgage Loans: held-for-investment $1,248,678 $1,245,805 $1,551,826 $1,552,585
Mortgage Securities: trading $1,451,636 $1,451,636 0 0
Mortgage Securities: available-for-sale $8,066 $8,066 $1,814,796 $1,814,796
Interest Rate Agreements $2,285 $2,285 $2,100 $1,522
Liabilities
Long-Term Debt $1,465,888 $1,464,947 $1,172,801 $1,172,938
</TABLE>
The carrying values of all other balance sheet accounts as reflected in the
financial statements approximate fair value because of the short-term nature of
these accounts.
NOTE 11. STOCKHOLDERS' EQUITY
CLASS B 9.74% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On August 8, 1996, the Company issued 1,006,250 shares of Class B Preferred
Stock ("Preferred Stock"). Each share of the Preferred Stock is convertible at
the option of the holder at any time into one share of Common Stock. After
September 30, 1999, the Company can either redeem or, under certain
circumstances, cause a conversion of the Preferred Stock. The Preferred Stock
pays a dividend equal to the greater of (i) $0.755 per quarter or (ii) an amount
equal to the quarterly dividend declared on the number of shares of the Common
Stock into which the Preferred Stock is convertible. The Preferred Stock ranks
senior to the Company's Common Stock as to the payment of dividends and
liquidation rights. The liquidation preference entitles the holders of the
Preferred Stock to receive $31.00 per share plus any accrued dividends before
any distribution is made on the Common Stock.
As of September 30, 1998 and December 31, 1997, 96,732 shares of the Preferred
Stock have been converted into 96,732 shares of the Company's Common Stock. At
September 30, 1998 and December 31, 1997, there were 909,518 shares of the
Preferred Stock outstanding.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan for executive officers, employees
and non-employee directors (the "Plan"). The Plan authorizes the Board of
Directors (or a committee appointed by the Board of Directors) to grant
"incentive stock options" as defined under Section 422 of the Code ("ISOs"),
options not so qualified ("NQSOs"), deferred stock, restricted stock,
performance shares, stock appreciation rights and limited stock appreciation
rights ("Awards") and dividend equivalent rights ("DERs") to such eligible
recipients other than non-employee directors. Non-employee directors are
automatically provided annual grants of NQSOs with DERs pursuant to a formula
under the Plan.
The number of shares of Common Stock available under the Plan for options and
Awards, subject to certain anti-dilution provisions, is 15% of the Company's
total outstanding shares of Common Stock. At September 30, 1998 and December 31,
1997, 628,286 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 September 30, 1998 and December 31, 1997, 379,315 and 354,265 ISOs had
been granted, respectively. The exercise price for ISOs granted under the Plan
may not be less than the
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<PAGE> 20
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.
The Company's Plan permits certain stock options granted under the plan to
accrue stock DERs. For the three and nine months ended September 30, 1998, the
stock DERs accrued on NQSOs that had a stock DER feature resulted in charges to
operating expenses of $0 and $55,222, respectively. For the three and nine
months ended September 30, 1997, the stock DERs accrued on NQSOs that had a
stock DER feature resulted in charges to operating expenses of $119,436 and
$366,239, respectively. Stock DERs represent shares of stock which are issuable
to holders of stock options when the holders exercise the underlying stock
options. The number of stock DER shares accrued is based on the level of the
Company's dividends and on the price of the stock on the related dividend
payment date.
A summary of the status of the Company's Plan for the three and nine months
ended September 30 is presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
--------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period 1,196,040 $ 27.01 840,644 $ 29.79
Options granted 218,495 $ 15.67 571,447 $ 18.71
Options exercised (29,723) $ 0.11 (29,723) $ 0.11
DERs earned 0 $ 0.00 2,444 $ 0.00
------------- -------------
Outstanding options at end of period 1,384,812 $ 25.81 1,384,812 $ 25.81
============= =============
</TABLE>
STOCK PURCHASE WARRANTS
The Warrants expired on December 31, 1997. Each Warrant entitled the holder to
purchase 1.000667 shares of the Company's Common Stock at an exercise price of
$15.00 per share.
STOCK REPURCHASES
On September 11, 1997, the Company's Board of Directors approved the repurchase
of up to 1,455,000 shares of the Company's Common Stock. On August 6, 1998, the
Board of Directors approved the repurchase of an additional 2,000,000 shares of
the Company's Common Stock. As of September 30, 1998 the Company had repurchased
3,390,100 shares of the Company's Common Stock pursuant to the repurchase
program. As of September 30, 1998, 64,900 shares of Common Stock were available
for repurchase.
DIVIDENDS
During the nine months ended September 30, 1998, the Company declared the
following dividends:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
TOTAL ---------------------------------------
DECLARATION RECORD PAYABLE DIVIDENDS CLASS B COMMON
DATE DATE DATE (IN THOUSANDS) PREFERRED STOCK STOCK
- ---------------- ------------- -------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
8/6/98 9/30/98 10/21/98 $ 687 $0.755 -
7/27/98 8/6/98 8/21/98 $ 138 - $0.010
6/4/98 6/30/98 7/21/98 $ 687 $0.755 -
4/27/98 5/7/98 5/21/98 $3,809 - $0.270
3/11/98 3/31/98 4/21/98 $ 687 $0.755 -
</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
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<PAGE> 21
been paid by the Company and received by the shareholders on the last day of
that calendar year, provided the dividend is actually paid before February 1st
of the following calendar year. Therefore, the dividend declared in December
1997 that was paid in January 1998 is considered taxable income to shareholders
in the year declared. The Company's dividends are not eligible for the dividends
received deduction for corporations.
NOTE 12. COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company had entered into commitments to sell $726.7
million in face value of hybrid Mortgage Loans for settlement in October and
November 1998.
At September 30, 1998, the Company is obligated under non-cancelable operating
leases with expiration dates through 2001. The future minimum lease payments
under these non-cancelable leases are as follows: 1998 - $63,794; 1999 through
2000 - $311,528; 2001 - $122,625.
NOTE 13. SUBSEQUENT EVENTS
On October 1, 1998, the Company's Board of Directors authorized the repurchase
of additional shares of its Common Stock pursuant to its stock repurchase
program. The maximum number of additional shares authorized for repurchase under
this new program is 2,000,000. During October 1998, pursuant to its stock
repurchase program (see Note 11), the Company repurchased 526,400 shares of the
Company's Common Stock for $7.1 million.
On October 26, 1998, RWT Holdings was capitalized with an additional $10 million
in cash which consisted of a $9.9 million contribution by the Company and a $0.1
million contribution by the common stockholders of RWT Holdings.
During October and November, the Company sold $666.8 million in face value of
hybrid Mortgage Loans resulting in a net gain of $4.6 million.
On November 9, 1998, the Company declared a $0.755 cash dividend per preferred
share for the fourth quarter of 1998 payable on January 21, 1999 to preferred
shareholders of record on December 31, 1998.
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<PAGE> 22
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 real estate finance company providing capital market
funding to the high quality segments of the residential and commercial mortgage
markets.
The Company consists of a real estate investment trust and consolidated
subsidiaries ("Redwood REIT") and a preferred stock equity interest in RWT
Holdings, Inc. ("Holdings"), a non-consolidated, taxable affiliate. References
to "the Company" exclude the operations and balance sheet of Holdings except to
the extent they are reflected on the one line item of the Company's income
statement and balance sheet related to its investment in Holdings.
Redwood REIT's business is mortgage portfolio spread lending. Portfolio
operations earn net income to the extent that the interest earned from the
mortgage portfolio exceeds the cost of borrowed funds, hedging, credit loss
expenses and operating expenses. With a REIT tax election, Redwood REIT pays no
corporate income tax to the extent it distributes its taxable income as
dividends and meets certain other federal REIT qualifying conditions.
Holdings originates, acquires, accumulates and sells residential and commercial
mortgage loans. Holdings' operations earn net income to the extent that gains on
loans sold, fee income generated, and net interest income earned on loans held
for sale exceed operating expenses, hedging expenses and taxes. Due to the
start-up nature of its activities, Holdings is expected to report a loss for
1998 and the first half of 1999.
In the third quarter of 1998, the Company adopted FAS 133 and moved to
mark-to-market and lower-of-cost or market accounting for many of its assets. As
discussed herein and in the Notes to the Consolidated Financial Statements, the
Company took a significant charge to earnings as a result of these changes in
accounting policies and methodologies. Most of this charge was a non-cash
accounting adjustment which has no direct effect on the Company's capital,
liquidity or cash flow.
FINANCIAL CONDITION
The Company's earning assets of $3.76 billion at September 30, 1998 and $3.42
billion at December 31, 1997 consisted of "A"-quality residential mortgage
loans, residential mortgage securities mostly rated AAA and AA, and cash. The
Company also has investments in net working capital, fixed assets and Holdings.
All these assets were funded with collateralized short-term debt, collateralized
long-term debt, and the Company's preferred and common equity.
Collateralized short-term debt is the least expensive form of financing for the
Company. Due to the necessity of rolling over this short-term debt on a frequent
basis, however, the use of this debt potentially subjects the Company to certain
liquidity risks. In particular, should the market value of pledged collateral
decline, the Company could be forced to advance funds or liquidate the
collateral. In addition, the availability, cost, and terms of short-term debt
can change over time. Such changes may effect the Company's liquidity reserve
and its
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<PAGE> 23
profitability. Due to potential liquidity risks, the Company generally seeks to
hold cash balances and some mortgage assets on an unleveraged basis as a
"liquidity capital cushion" available for delivery to meet potential margin
calls. As a result of this need to hold a cushion of liquidity, short-term debt
is relatively capital inefficient.
Over the last year, the Company has undertaken a program of replacing short-term
debt with long-term debt. While this increases the Company's cost of funds, it
reduces liquidity risk. At September 30, 1998, the majority of the debt utilized
by the Company was long-term debt (after giving effect to the reduction of
short-term debt that was accomplished in the fourth quarter following the
closing of $726.7 million of sale transactions committed to in the third
quarter). When issuing this long-term debt, the Company contributes mortgage
loans or securities to a trust that is separate from the Company. The trust
issues amortizing long-term debt (or its functional equivalent), thereby funding
these mortgage assets and replacing associated short-term debt. This long-term
debt is non-recourse to the Company. In many instances, the debt is callable by
the Company approximately two to six years from issue.
The Company typically retains an equity-like interest in the debt-issuance
trust; the Company generically calls these retained interests "mortgage equity
interests". Through the retention of these interests, the Company typically
continues to earn the spread income from the trust's assets and liabilities; the
Company also continues to assume much of the credit risk of the debt-issuance
trust's mortgages and some of the associated interest rate risk and prepayment
risk. Liquidity risk is generally eliminated for the Company. The Company's
total potential capital "at risk" in these trusts is generally limited to its
basis in its retained mortgage equity interests, which typically is equal to 1%
to 7% of the debt-issuance trust's assets. Although long-term debt financing is
costly, it is relatively capital efficient.
Depending on the structure of the debt-issuance transaction, the assets and
liabilities of trusts formed to issue long-term debt may be consolidated onto
the Company's balance sheet. This consolidation of non-recourse trusts increases
the apparent size of the Company's balance sheet and thus increases its apparent
leverage ratios.
The Company's balance sheet at September 30, 1998 consisted of $3.80 billion of
assets, $1.47 billion of long-term debt, $2.07 billion of short-term debt, and
$0.26 billion of equity. The equity-to-assets ratio on this basis was 6.77%.
After subtracting loans which the Company had committed to sell as of September
30, 1998 and short-term debt associated with these loans, the Company's
pro-forma balance sheet consisted of $3.08 billion of assets, $1.47 billion of
long-term debt, $1.34 billion of short-term debt, and $0.26 billion of equity.
The equity-to-assets ratio on this basis was 8.38%.
On an "at-risk" basis (i.e., after subtracting loan sale commitments and
de-consolidating the assets and liabilities of non-recourse debt-issuance
trusts), the Company's pro-forma balance sheet as of September 30, 1998 included
total assets of $1.60 billion, mortgage equity interests of $0.06 billion, no
long-term liabilities, short-term liabilities of $1.34 billion, and total equity
of $0.26 billion. The Company's effective equity-to-assets ratio as measured on
this basis was 16.04%.
MORTGAGE LOANS: SUMMARY
At September 30, 1998, the Company owned 7,299 residential mortgage loans with a
principal value of $2.27 billion. These loans were carried on the Company's
balance sheet at a net amount of $2.28 billion, or 100.7% of principal value.
The estimated bid-side market value of these loans was $2.28 billion, or 100.8%
of principal value.
At December 31, 1997, the Company owned 5,041 mortgage loans with a principal
value of $1.52 billion. These loans were carried on the Company's balance sheet
at a net amount of $1.55 billion, or 101.1% of principal value. The estimated
bid-side market value of these loans was $1.55 billion, or 101.2% of principal
value.
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<PAGE> 24
The Company acquired all of these loans from banks, thrifts, mortgage
origination companies or in the secondary market for mortgage loans. All of
these loans are first-lien residential loans that were originated with
"A"-quality loan standards.
During the third quarter of 1998, the Company's mortgage loan balance sheet
value increased from $2.22 billion to $2.28 billion. This was the net result of
loan acquisitions of $629.2 million, loan sales of $375.5 million, net premium
amortization of $3.0 million, a reversal of $0.6 million of net credit expenses,
principal repayments of $187.4 million, and mark-to-market adjustments of
negative $6.3 million.
From December 31, 1997 to September 30, 1998, the Company's reported mortgage
loan balance increased $729.0 million, from $1.55 billion to $2.28 billion. This
was the net result of loan acquisitions of $1.60 billion, loan sales of $375.5
million, net premium amortization of $9.1 million, net credit expenses of $0.6
million, principal repayments of $476.0 million, and mark-to-market adjustments
of negative $6.3 million.
Prior to September 30, 1998, the Company committed to sell $726.7 million in
principal value of Hybrid mortgage loans. Hybrid mortgage loans have an initial
fixed-rate coupon period ranging from three to ten years. After the fixed-rate
period, Hybrid loan coupons adjust to market conditions in a manner similar to
adjustable-rate mortgages ("ARMs").
Hybrid loans sales of $666.8 million (representing $726.7 million of sale
commitments adjusted for prepayments and loan transaction fall-out) were
completed in October and November of 1998, resulting in a realized gain-on-sale
of $4.6 million for the fourth quarter of 1998. The bulk of the proceeds from
these sales were used to retire short-term debt. At September 30, 1998, after
subtracting loans committed for sale, the Company owned $1.54 billion principal
value of mortgage loans carried on the balance sheet at $1.55 billion, or 100.9%
of principal value. The estimated bid-side market value of these loans was $
1.55 billion, or 100.7% of principal value.
MORTGAGE LOANS: FINANCING
At September 30, 1998, mortgage loans with a principal value of $1.47 billion
were owned by trusts, separate from the Company, formed to issue long-term debt
under the Company's "Sequoia" financing program. Associated long-term debt
totaled $1.47 billion. These assets and liabilities, although owned by these
trusts, were consolidated on the Company's balance sheet at September 30, 1998.
The Company's retained interests in these trusts (mortgage equity interests) had
a book value of $46.5 million at September 30, 1998. Mortgage equity interests
owned by the Company are funded with equity.
The remainder of the loan portfolio was financed with short-term debt and
equity. After giving effect to committed sales, the Company owned $67.3 million
principal value of loans that were not funded with long-term debt at September
30, 1998. The reported value of these assets was $66.6 million, or 98.9% of face
value. The estimated bid-side market value of these loans was $66.9 million, or
99.4% of principal value.
At December 31, 1997, mortgage loans with a principal value of $1.17 billion
were owned by trusts under the Sequoia long-term debt-financing program. The
Sequoia mortgage equity interests had a book value of $49.3 million at December
31, 1997. The remainder of the loan portfolio ($353.8 million of principal
value) was financed with short-term debt and equity.
MORTGAGE LOANS: INTEREST RATE CHARACTERISTICS
Of the $1.54 billion in principal value of loans the Company owned at September
30, 1998 (after giving effect to committed sales), $852.6 million principal
value (55.4%) were ARMs and $686.0 million principal value (44.6%) were Hybrid
mortgage loans.
Mortgage loans financed through Sequoia Mortgage Trust 1 and Sequoia Mortgage
Trust 2 totaled $854.7 million in principal value. The bulk of these loans were
ARMs; Hybrid loans represented $37.3 million, or 4.4%, of Trust 1 and 2 assets
as of September 30, 1998. The associated long-term debt is adjustable-rate; the
cost of funds adjusts with changes in one-month LIBOR, one-year Treasury, and
Fed Funds rates. Some of the interest rate risks of the loans (for instance, the
life cap) have effectively been passed on to the bondholders. The adjustment
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<PAGE> 25
frequency and indices of the loans and the debt do not match exactly, so the
cash flow spread the Company earns from this portfolio through its ownership of
the mortgage equity interests of these trusts may vary. In addition,
amortization expenses may vary and will tend to increase as prepayment rates
increase. These risks of spread variation should be offset to some degree by the
Company's hedging program.
Hybrid mortgage loans financed under Sequoia Mortgage Trust 3 totaled $616.6
million in principal value at September 30, 1998. The associated long-term debt
is fixed-rate for approximately the same period for which the loans are
fixed-rate. When the coupon rate on the mortgages becomes adjustable
(approximately December 2002), the cost of the long-term debt does as well. The
cash flow spread the Company earns from this portfolio should be relatively
constant through the fixed-rate period, although amortization expenses may vary.
Of the loans financed with short-term debt and not committed for sale as of
September 30, 1998, $35.2 million principal value had adjustable-rate coupons
adjusting to new coupon values every one, six or twelve months and $32.2 million
were Hybrids with remaining fixed-rate coupon periods of 1 to 7 years. The cost
of the associated short-term financing typically varies monthly as a function of
interest rates and market conditions. Until these loans are sold, the Company
retains interest-rate mismatch risk on these loans. These risks should be offset
to some degree by the Company's hedging program.
As of December 31, 1997, the majority of loans (96.4%) owned by the Company were
ARMs and the rest (3.6%) were Hybrids. Long-term issued debt through Sequoia
Mortgage Trusts 1 and 2 funded 76.7% or $1.17 billion of principal value of
loans, including $53.9 million of Hybrid loans. The remaining loans, 23.3% or
$354.6 million, were funded with short-term debt.
MORTGAGE LOANS: MARKET VALUE ADJUSTMENTS
At September 30, 1998, the Company adopted "lower-of-cost-or-market" or "LOCOM"
accounting for $1.03 billion principal value of loans for which the Company does
not currently expect to have a long-term holding period. LOCOM loans included
loans committed for sale at September 30, 1998, short-term funded loans, and the
$237.1 million principal value of loans in Sequoia Mortgage Trust 1. The Sequoia
1 debt will most likely become callable by the Company in the first half of
1999; the Company may call the debt and sell the loans at that time. All LOCOM
loans are shown on the Company's balance sheet as "Mortgage Loans:
Held-For-Sale".
Under LOCOM accounting, the Company includes as part of its quarterly earnings
the unrealized change in the market value of these assets during the quarter.
The recognition of unrealized gains and losses in earnings results in a change
in the carrying value (the premium and discount balances) of the LOCOM assets on
the Company's balance sheet. The recognition of unrealized gains can be limited,
however, as LOCOM assets cannot be written up to a higher value than their
historical amortized cost.
In accordance with accounting principles, the Company does not carry a credit
reserve for LOCOM loans. Instead, any credit impairment issues with these loans
are reflected in a lower market value for the loans and an adjustment to
earnings through the "Net unrealized gains and losses on assets" account rather
than the `Credit provisions" account.
At September 30, 1998, the $1.03 billion principal value of "Mortgage Loans:
Held-for-Sale" was carried on the Company's books at $1.03 billion, or 100.1% of
principal value. These assets had an unamortized premium balance of $2.3 million
and an unamortized discount balance of $1.4 million. At September 30, 1998, the
estimated bid-side market value for these assets was $1.04 billion, or 100.7% of
principal value. The estimated bid-side market value of these assets may at
times differ from the reported value as the LOCOM accounting principles do not
allow for assets to be written up to a value in excess of their amortized cost.
At September 30, 1998, the Company owned $1.23 billion principal value of
"Mortgage Loans: Held for Investment" loans accounted for at historical
amortized cost for income statement and balance sheet purposes. The mortgage
loans in this category were carried on the Company's balance sheet at September
30, 1998 at an amortized cost before credit reserves of 101.5% of principal
value, representing an unamortized premium balance of $18.0 million and no
discount balance. For these loans, the Company establishes a credit reserve in
anticipation
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<PAGE> 26
of potential credit losses. The credit reserve for these loans was $3.4 million
as of September 30, 1998. The net carrying value of these loans was thus 101.2%
of principal value. All these loans are funded with long-term debt in Sequoia
Mortgage Trusts 2 and 3. Unrealized market value fluctuations are not recognized
in earnings but a realized gain or loss could eventually be recognized should
Company call the long-term debt in a few years and sell the loans. The estimated
quarter-end bid-side market value of these loans was $1.25 billion or 101.0% of
principal value.
At December 31, 1997 all loans, totaling $1.52 billion of principal value, were
accounted for as Held for Investment and as such were accounted for at
historical amortized cost. The loans had a reported value of $1.55 billion, or
102.1% of principal value and an estimated bid-side market value of $1.55
billion, or 102.2% of principal value.
MORTGAGE LOANS: PREPAYMENT RATE CHARACTERISTICS
As the Company receives principal payments on its mortgage loan portfolio, it
amortizes its mortgage premium and discount balances as well as the premium and
discount balances associated with long-term debt that is retired with mortgage
loan principal receipts. The net value of all these amortizing accounts at
September 30, 1998 was an effective premium of $17.3 million. This will be
amortized as a net expense over time.
One common measure of principal prepayments is the conditional prepayment rate
("CPR"). The CPR measures how much principal prepaid in a period, expressed as a
percentage of the remaining, unamortized principal balance at the beginning of
that period. This percentage is stated as an annualized number. The Company's
adjustable-rate mortgage loans prepaid at a CPR of 22%, 28% and 27% in the
first, second, and third quarters of 1998, respectively. The Company acquired a
material volume of Hybrid loans for the first time in the third quarter of 1998;
these loans prepaid in the third quarter at a CPR of 18%. The weighted average
CPR for all Company mortgage loans was 22%, 28%, and 23% in the first, second,
and third quarters of 1998, respectively.
Thus far in 1998, ARM prepayments have accelerated beyond historical averages
due to falling interest rates, a flatter interest rate yield curve, a strong
housing market, and other factors. Hybrid prepayments have been fast, especially
given that these loans are newly originated, for similar reasons.
MORTGAGE LOANS: LOAN CHARACTERISTICS
As verified by its re-underwriting process, the Company believes that its
mortgage loans owned as of September 30, 1998 and December 31, 1997 were
generally originated to "A", or "Prime" quality, underwriting standards. All of
the Company's loans in portfolio through September 30, 1998 have been
residential mortgage loans.
At September 30, 1998, the average loan size was $310,000. Loans with current
balances less than $227,150 (the FNMA/FHLMC 1998 conventional loan balance limit
for most loans) made up 12.6% of the principal balance of the Company's mortgage
loan portfolio, while loans with current balances in excess of $500,000 made up
25.9% of the portfolio. Loans on owner-occupied houses made up 93.7% of the
principal balance of the Company's loans. Second homes and investment properties
represented 4.9% and 1.4% of the portfolio, respectively. As of September 30,
1998, the average seasoning of the loan portfolio was 15 months.
The average original loan-to-value ratio ("OLTV") for the Company's loan
portfolio was 74.6% as of September 30, 1998. At September 30, 1998, 24.3% of
mortgage loans had an OLTV in excess of 80%. Of these, 97.3% had either primary
mortgage insurance ("PMI") or additional collateral in the form of pledged
accounts. After giving effect to PMI and additional collateral, the average
effective OLTV was 68.0%.
At September 30, 1998, 43.9% of the mortgage loans owned by the Company were on
properties located in California (24.7% in Northern California and 19.2% in
Southern California). Loans on properties located in Florida were 5.5%, loans on
properties in New York were 4.2%, and loans on properties in each of the other
states were less than 4.0% of the total.
At December 31, 1997, the Company owned 5,041 adjustable-rate, first-lien
mortgage loans on single-family residential properties with an average loan size
of $301,000. Loans with current balances less than $214,600 (the
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<PAGE> 27
FNMA/FHLMC 1997 conventional loan balance limit for most loans) made up 18.1% of
the dollar balance of the Company's mortgage loan portfolio while loans with
current balances in excess of $500,000 made up 36.5%. Loans on owner-occupied
houses made up 88.6% of the loan portfolio. Second homes represented 8.5% and
investment properties 2.9% of the portfolio. As of December 31, 1997, the
average seasoning of the loan portfolio was 18 months.
At December 31, 1997, 37.5% of loans had an OLTV in excess of 80%. Of these,
94.9% had either PMI or additional collateral in the form of pledged accounts.
The average OLTV for the Company's loan portfolio was 77.7% as of December 31,
1997; after giving effect to PMI and additional collateral, the average
effective OLTV was 66.1%.
At December 31, 1997, 29.4% of the mortgage loans owned by the Company were on
properties located in California (11.2% in Northern California and 18.2% in
Southern California). Loans on properties in Florida were 9.4%, loans on
properties in New York were 7.2%, and loans on properties in each of the other
states were less than 5.0%.
MORTGAGE LOANS: CREDIT RISK AND RESERVES
Total cumulative realized credit losses on the Company's mortgage loan portfolio
have been minor, totaling $0.3 million through September 30, 1998. Current
delinquency levels are low, with non-performing assets ("NPAs") equaling $4.9
million, or 0.21% of the Company's mortgage portfolio as of September 30, 1998.
NPAs are Real Estate Owned ("REO") plus loans over 90 days delinquent, in
foreclosure, or in bankruptcy. In addition, the Company's loss experience on
defaulted loans has been excellent, with an average recovery to date on loans
which have defaulted and resulted in a loss equal to 91% of the loan balance (a
loss severity of 9%).
The Company believes, however, that it is reasonable to expect that loan
delinquencies, default frequencies, and loss severities will increase as the
loan portfolio seasons. This would result in an increase in realized mortgage
loan credit losses. In addition, realized credit losses would likely increase
should the U.S. housing market soften or the U.S. economy enter a recession.
Other factors could cause an increase in loan losses as well.
For the 45.5%, or $1.03 billion of principal value, of the Company's mortgage
loan portfolio that the Company accounts for as lower-of-cost-or-market, the
Company does not build a credit reserve for future credit losses. The Company
believes that this is the appropriate accounting method as the Company intends
to sell these loans in the short-term rather than hold them to maturity. The
Company does, however, take a charge to earnings for any delinquent loans in
this portfolio by lowering the estimated market value of such loans. At
September 30, 1998, NPAs in this portfolio totaled $4.0 million.
For the 54.5%, or $1.23 billion of principal value, of the Company's mortgage
loan portfolio that the Company accounts for as held-for-investment, the
Company's credit reserve at September 30, 1998 was $3.4 million. This reserve
equals 0.27% of the current loan balance of this portfolio. The Company
generally has been taking credit provisions to add to this reserve at an
annualized rate of approximately 0.15%. At September 30, 1998, NPAs in this
portfolio totaled $0.9 million.
At December 31, 1997, all the Company's loans were accounted for as
held-for-investment and the Company had established a credit reserve in
anticipation of potential future loan losses. The credit reserve totaled $2.9
million, or 0.18% of the $1.55 billion of amortized cost of the loans. NPAs
totaled $3.9 million, or 0.25% of the mortgage loan portfolio.
MORTGAGE SECURITIES: SUMMARY
At September 30, 1998, the Company owned mortgage securities with a principal
value of $1.46 billion. These securities had a carrying value before credit
reserves of $1.46 billion, or 100.0% of principal value. These securities were
reported on the Company's balance sheet at a net amount of $1.46 billion or
99.9% of principal value. This value represented the estimated quarter-end
bid-side market value of the securities.
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The substantial majority of the Company's mortgage securities at September 30,
1998 represented interests in pools of ARMs on single-family residential
properties. The Company acquired all of these assets through the secondary
market for mortgage securities. Over 98% of the Company's mortgage securities
are rated "AAA" or "AA".
During the third quarter of 1998, the Company's mortgage securities balance
sheet value decreased from $1.57 billion to $1.46 billion. This was the net
result of securities acquisitions of $135.7 million, net premium amortization of
$3.8 million, credit losses and changes in the credit reserve of negative $0.2
million, principal repayments of $227.3 million, and an unrealized decrease in
the market value of the securities of $16.3 million.
During the nine months from December 31, 1997 to September 30, 1998, the
Company's mortgage securities balance declined by $355.1 million, from $1.81
billion to $1.46 billion. This was the net result of securities acquisitions of
$366.9 million, net premium amortization of $16.9 million, credit losses and
changes in credit reserves of negative $0.8 million, principal repayments of
$670.1 million, securities sales of $9.3 million, and an unrealized decrease in
the market value of the securities of $24.9 million.
MORTGAGE SECURITIES: FINANCING
All of the Company's mortgage securities were financed with short-term debt and
equity at September 30, 1998. Many of these securities were pledged to
collateralize $1.29 billion of short-term borrowings; the total market value of
securities exceeded these borrowings by $171.0 million.
At December 31, 1997, all of the Company's mortgage securities were financed
with short-term debt and equity. Many of these securities were pledged to
collateralize $1.56 billion of short-term borrowings; the total market value of
securities exceeded these borrowings by $252.4 million.
MORTGAGE SECURITIES: INTEREST RATE CHARACTERISTICS
At September 30, 1998, 42.1% of the mortgage securities had coupon rate
adjustments based on LIBOR or CD indices and 52.8% had coupon adjustments based
on U.S. Treasury indices. Adjustable-rate mortgage securities with other indices
were 2.6% of the total. Fixed-rate mortgage securities represented 2.5% of the
total. The reset frequency on the non-fixed-rate securities was one month for
8.3 % of the total, six months for 39.4% of the total, and one-year for 52.3% of
the total.
Potential coupon rate changes on securities can be limited by periodic and life
caps. At September 30, 1998, all of the adjustable-rate mortgage securities had
a life cap and the average maximum life cap rate was 11.61%. At September 30,
1998, periodic caps limited coupon changes to 2% annually for 91.0% of the
adjustable-rate mortgage securities, and there were no periodic caps for 9.0% of
the adjustable-rate securities.
At December 31, 1997, 59.3% of the securities had coupon rate adjustments based
on LIBOR or CD indices and 39.1% were based on U.S. Treasury indices, and
securities with other indices made up 1.6% of the total. At December 31, 1997,
all of the securities had a life cap and the average maximum life cap was
11.97%. At December 31, 1997, 97.2% of securities had periodic caps that limited
coupon changes to 2% annually and 2.8% of the securities had no periodic caps.
The cost of short-term debt funding these assets typically varies monthly as a
function of short-term LIBOR rates; changes in the cost of these funds are not
limited. In general, the cost of the short-term debt that funds mortgage
securities will adjust to changing market conditions more quickly than will the
average coupon rate earned from these securities. The resulting risk of spread
variation should be offset to some degree by the Company's hedging program.
MORTGAGE SECURITIES: MARKET VALUE ADJUSTMENTS
In the third quarter of 1998, the Company adopted "mark-to-market" accounting
for its $1.44 billion principal value of mortgage securities funded with
short-term borrowings. All mark-to-market mortgage securities are shown on the
Company's balance sheet as "Mortgage Securities: Trading." The "Trading"
designation is an
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accounting classification. The Company does not intend to "trade" the securities
portfolio in practice though it may make purchases and sales from time to time.
Under this accounting methodology, the Company will include as part of its
quarterly earnings the unrealized gain or loss in the market value of these
assets during the quarter. The recognition of unrealized gains and losses also
results in a change in the carrying value of these mortgage securities on the
Company's balance sheet.
At September 30, 1998, the $1.44 billion principal value of "Mortgage
Securities: Trading" was carried on the Company's books at their estimated
market value of 100.6% of principal value. These assets have an unamortized
premium balance of $10.3 million and an unamortized discount balance of $1.3
million.
At September 30, 1998, the Company owned $18.2 million principal value of
securities representing the retained mortgage equity interests in the Company's
December 1997 re-REMIC of subordinated mortgage securities. The Company funds
these securities with equity. These mortgage equity interests are classified as
"Mortgage Securities: Available for Sale" and are accounted for on the Company's
balance sheet at their estimated market values through the market valuation
account. Quarterly changes in market values in these mortgage securities do not
effect the Company's income. The mortgage securities in this category were
carried on the September 30, 1998 balance sheet at their estimated market value
of 44.30% of principal value. This includes an unamortized discount of $9.0
million, credit reserves of $1.4 million and a positive $0.3 million market
valuation adjustment (included in Accumulated Other Comprehensive Income on the
balance sheet).
At December 31, 1997, all mortgage securities were classified as
available-for-sale and reported on the balance sheet at their estimated bid-side
market value through the valuation account. The principal value of these
securities was $1.78 billion and the reported value was $1.81 billion, or 102.0%
of the principal value. This includes an unamortized premium of $51.3 million,
an unamortized discount of $12.4 million, credit reserves of $2.1 million and a
market valuation adjustment of negative $1.4 million.
MORTGAGE SECURITIES: PREPAYMENT RATE CHARACTERISTICS
At September 30, 1998, the total premium balance associated with the mortgage
securities was $10.3 million and the total discount balance was $10.3 million
resulting in an amortized cost before credit reserves equal to 100.0% of
principal value. At December 31, 1998, the total premium balance was $51.3
million and the total discount balance was $12.4 million, resulting in an
amortized cost before credit reserves equal to 102.0% of principal value. The
rate at which the Company amortizes the premium (as an expense) and the discount
(as income) depends on the prepayment rate of the mortgage loans underlying
these securities plus other factors influencing the Company's rate of principal
receipt from this portfolio.
The prepayment speeds on the Company's mortgage securities slowed down slightly
in the third quarter of 1998. The CPR for the Company's mortgage securities
portfolio was 37% for the third quarter of 1998, as compared to 40% for the
second quarter of 1998 and 29% for the first quarter of 1998.
Many of the securities owned by the Company represent interests in structured
transactions wherein certain classes are entitled to more (or less) than their
pro-rata share of principal repayments. In addition, many such structures have
call provisions. For these reasons, the Company may receive principal in excess
of the amount that it would expect to receive based solely on the prepayment
speeds of the collateral underlying these securities. The Company estimates the
"effective CPR" (accounting for the accelerated principal repayments and calls
that occurred) on the securities portfolio was 47% in the third quarter of 1998,
48% in the second quarter of 1998, and 36% in the first quarter of 1998.
MORTGAGE SECURITIES: CREDIT RISK AND RESERVES
At September 30, 1998, 98.8% of the principal value of the Company's mortgage
securities had a credit rating equivalent of "AAA" or "AA." These included
mortgage securities guaranteed by Fannie Mae or Freddie Mac and non-agency
mortgage securities structured with large amounts of subordination or other
forms of third-party credit enhancement and rated "AAA" or "AA." Based on
information available as of September 30, 1998, the
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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".
The remaining 1.2% of the mortgage securities portfolio represented mortgage
equity interests retained by the Company from its December 1997 financing
transaction. In this transaction, the Company issued the functional equivalent
of long-term debt to permanently finance its portfolio of subordinated
residential mortgage securities. The mortgage equity interests retained by the
Company bear much of the credit risk of the mortgage loans underlying the
securities used as collateral in this transaction.
The Company's credit risk from these mortgage equity interests is limited to the
amortized cost less credit reserve of $7.7 million. The Company has established
a credit reserve of $1.4 million for these assets. This reserve is sufficient to
cover all losses should all the non-performing loans in the underlying mortgage
loan pools as of September 30, 1998 default and incur a loss severity of 40%. In
practice, not all non-performing loans default and not all defaulted loans
result in a loss. In addition, the actual historical loss severity rate for
these loans has been 22%. The Company may, in the future, add to its reserve for
these assets but also believes that the existing reserve is sufficient at this
time given currently available information.
At December 31, 1997, 98.8% of the principal value of the Company's mortgage
securities had a credit rating equivalent of "AAA" or "AA" and the remaining
1.2% represented the mortgage equity interests retained by the Company from its
December 1997 financing transaction. The credit reserve of $2.1 million
established at that time was sufficient to cover all the losses had all
non-performing loans in the underlying mortgage loan pools defaulted and
incurred a loss severity of 40%.
INTEREST RATE AGREEMENTS
At September 30, 1998, the Company owned $4.2 billion notional face of interest
rate agreements. The Company uses these agreements in an economic sense as
hedges, attempting to partially stabilize the Company's balance sheet value and
income as interest rates fluctuate. For accounting purposes, none of the
interest rate agreements were designated as hedges at September 30, 1998.
With the changes in accounting principles adopted by the Company in the third
quarter of 1998, interest rate agreements are reported on the balance sheet at
market values and the Company will report unrealized market value gains and
losses in interest rate agreements as a component of quarterly income. This is
true whether or not such agreements are designated as hedges for accounting
purposes. These interest rate agreements had various start dates, maturity
dates, and interest rate protection features. See "Note 2. Summary of
Significant Accounting Policies," "Note 6. Interest Rate Agreements" and "Note
10. Fair Value of Financial Instruments" in the Notes to Consolidated Financial
Statements for additional detail.
At September 30, 1998, the estimated market value of the Company's interest rate
agreements was $2.4 million. As with all market value estimates, there can be no
assurances that the estimated market value could be realized should the Company
seek to sell these assets.
There is a risk that the counter-parties to the Company's interest rate
agreements will be unable to perform to the terms of the interest rate
agreements. The Company's credit loss exposure is limited to its basis in the
agreements plus the Company's collateral held by counter-parties. The true
economic opportunity cost to the Company in the case of a counter-party default
could exceed its accounting cost. At September 30, 1998, all counter-parties
with whom the Company has entered into such agreements are rated "A" or higher.
At December 31, 1997, the Company owned $5.3 billion notional face of interest
rate agreements. The balance sheet carrying value of these interest rate
agreements at December 31, 1997 was $2.1 million. These agreements had a
historical amortized cost basis of $10.8 million and an estimated bid-side
market value of $1.5 million.
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INVESTMENT IN RWT HOLDINGS, INC.
The Company carries its investment in Holdings at its original cost, plus its
share of any net income or loss, less any dividends received. The Company's
original investment in Holdings was $9.9 million. At September 30, 1998, its
cumulative equity in earnings of Holdings was negative $2.2 million. No
dividends have been received from Holdings. At September 30, 1998, the carrying
value of the Company's investment in Holdings was $7.7 million.
See "Note 7. Investment in RWT Holdings, Inc." in the Notes to the Consolidated
Financial Statements and the discussion under "Results of Operations: Equity in
Earnings (Losses) of RWT Holdings, Inc." for additional information.
WORKING CAPITAL AND OTHER ASSETS
Working capital and other assets include the Company's cash balances, amounts
due from RWT Holdings, Inc., accrued interest receivable, other assets, accrued
interest payable, accrued expenses, dividends payable, and other liabilities.
At September 30, 1998, the Company cash balances totaled $23.5 million.
"Restricted" cash equaled $19.7 million, representing payments received from
mortgage loans due to long-term debt holders on the next bond payment date. At
December 31, 1997, cash balances were $49.5 million, with $24.9 million
representing restricted cash balances.
Total net non-cash working capital and other assets (the Company's net
non-earning assets) equaled $16.5 million at September 30, 1998 and $3.6 million
at December 31, 1997, due to a decrease in payables.
SHORT-TERM DEBT
Short-term collateralized borrowings such as reverse repurchase agreements,
notes payable, and revolving lines of credit are used to fund the Company's
mortgage securities and some of its mortgage loans. Short-term debt increased
from $1.91 billion at December 31, 1997 to $2.07 billion at September 30, 1998.
The increase in short-term borrowing was the result of an increase in mortgage
loans owned by the Company.
As of September 30, 1998, mortgage available to collateralize the $2.07 billion
in short-term borrowings had an estimated market value of $2.25 billion. As of
December 31, 1997, the mortgage assets available to collateralize the $1.91
billion in short-term debt had an estimated market value of $2.17 billion.
At September 30, 1998, the average term-to-maturity of the Company's short-term
debt was 73 days and the average term-to-next-rate-adjustment was 27 days. The
term-to-next-rate-adjustment was shorter than the term-to-maturity as some of
the Company's debt had a cost of funds that adjusted to market levels on a
monthly basis during the term of the debt. At December 31, 1997 the average
term-to-maturity of The Company's short-term debt was 64 days and the average
term-to-next-rate-adjustment was 31 days.
LONG-TERM DEBT
At September 30, 1998, the Company's long-term borrowings consisted of $1.47
billion non-recourse, floating-rate, amortizing, callable, long-term debt. 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. At September 30, 1998, 6.3% of the
long-term debt had an interest rate tied to the Fed Funds rate, 33.1% had an
interest rate tied to the one-year Treasury rate, 19.2% had an interest rate
tied to one-month LIBOR, and 41.4% had a fixed interest rate through December
2002. The debt is primarily "AAA" rated. Adjustable-rate debt had lifetime
interest rate caps of 10% or 11%.
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At December 31, 1997, the Company's long-term borrowings consisted of $1.17
billion long-term debt. At December 31, 1997, 13.9% of the long-term debt had an
interest rate tied to the Fed Funds rate, 49.8% had an interest rate tied to the
one-year Treasury rate, and 36.3% had an interest rate tied to one-month LIBOR.
The debt was "AAA" rated and had a lifetime interest rate cap of 10%.
STOCKHOLDERS' EQUITY
REPORTED BOOK VALUE OF EQUITY
With the adoption of FAS 133, mark-to-market accounting on most mortgage
securities, and the lower-of-cost-or-market accounting on a portion of mortgage
loans at September 30, 1998, the Company carried 99% of mortgage securities and
100% of interest rate agreements at their estimated bid-side market value. The
Company carried 46% of its mortgage loans at the lower of the historical
amortized cost or market value, and carried 1% of its securities at the
historical amortized cost with a market valuation adjustments reported on the
balance sheet through other comprehensive income. The remaining assets and
liabilities were carried at historical amortized cost.
From December 31, 1997 to September 30, 1998, the Company's reported equity
decreased $77.0 million, from $334.5 million to $257.5 million. Preferred stock
was unchanged at $26.7 million. The Company's reported common equity decreased
from $307.8 million to $230.8 million. This was the net effect of the Company's
stock repurchases of $39.1 million, issuance of stock through the Company's
Dividend Reinvestment Plan of $1.6 million, an increase in accumulated other
comprehensive income of $10.4 million as most of the prior market valuation
differences were recognized through the income statement in the third quarter of
1998, a $43.9 million loss in earnings before preferred dividends, and dividend
distributions of $6.0 million.
In order to utilize excess capital and increase long-term shareholder value, the
Company's Board of Directors authorized a common stock repurchase program
commencing in September 1997. In the first nine months of 1998, the Company
repurchased 2,550,100 shares at an average price of $15.33 per share, spending a
total of $39.1 million. In the fourth quarter through November 13, 1998, the
Company repurchased 526,400 additional common shares at an average stock price
of $13.54. To date, the Company has repurchased a total of 3,916,400 shares of
common stock since commencement of its stock repurchase program. At November 13,
1998, there were 1,538,500 remaining shares currently authorized for repurchase
under the Company's repurchase program.
As a result of these changes, reported book value, or equity, per common share
decreased by 9.5% from $21.55 on December 31, 1997 to $19.51 on September 30,
1998.
TOTAL MARK-TO-MARKET VALUE OF EQUITY
In order to provide more information to its shareholders, the Company has also
calculated the "total mark-to-market value of common equity." This generally
represents the equity value that would be reported if all the Company's assets,
liabilities and hedges were marked to market and preferred stock was redeemed at
its preference value of $31 per share. The total mark-to-market value of equity
is not a proxy for liquidation value. An actual liquidation would include other
costs not included in this estimate. Furthermore, there can be no assurances
that estimated market values reflect actual realizable valuations under
liquidation market conditions.
The Company estimates that its total mark-to-market value of common equity was
$306.8 million at December 31, 1997 and $233.6 million at September 30, 1998.
The estimated total mark-to-market value per common share outstanding decreased
from $21.47 as of December 31, 1997 to $19.74 as of September 30, 1998. The
effect of declining asset values was partially offset by the accretive effect of
the Company's stock repurchase program. The estimated total mark-to-market value
at September 30, 1998 of $19.74 per common share was higher than the reported
book value of $19.51 per common share since the market values of some loans were
greater than their carrying value at that time.
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RESULTS OF OPERATIONS
THE THREE MONTHS ENDING SEPTEMBER 30, 1998 (THIRD QUARTER 1998)
COMPARED TO THE THREE MONTHS ENDING SEPTEMBER 30, 1997 (THIRD QUARTER 1997)
In the third quarter of 1998, the Company had a net loss of $47.9 million, or
$3.60 per diluted common share. In the third quarter of 1997, the Company earned
$6.9 million, or $0.47 per share. The following discussion compares the results
for these time periods by income and expense category.
In the third quarter of 1998, the Company adopted FAS 133, Accounting for
Derivative Instruments and Hedging Activities, moved to mark-to-market
accounting for all securities funded with short-term debt, and adopted
"lower-of-cost-or-market" accounting for some of its loans. The result of these
accounting changes was in a net earnings charge of $50.4 million. The bulk of
this charge recognized unrealized market value declines and thus was a non-cash
item.
The Company's results include the results of Redwood REIT plus the Company's
share of the operating results of Holdings. The following discussion focuses
primarily on operating results at Redwood REIT. Holding's results are discussed
under "Equity in Earnings of Holdings."
INTEREST INCOME
In the third quarter of 1998, mortgage coupon income was $68.0 million, mortgage
premium amortization expense was $7.3 million, mortgage discount amortization
income was $0.4 million, and interest earned on cash balances was $0.5 million.
Total interest income was $61.6 million.
In the third quarter of 1998, the average mortgage coupon rate was 7.22%. The
average mortgage prepayment rate was 29% CPR; the resulting net amortization
expense of $6.9 million reduced the earning asset yield by 0.72%. Other factors,
including an average mortgage basis of 101.1% of mortgage principal value,
reduced the earning asset yield to 6.42%. Earning assets for the period averaged
$3.83 billion.
In the third quarter of 1997, mortgage coupon income was $62.5 million, mortgage
premium amortization expense was $6.9 million, mortgage discount amortization
income was $0.4 million, and interest earned on cash balances was $0.5 million.
Total interest income was $56.5 million.
In the third quarter of 1997, the average mortgage coupon rate was 7.75%. The
average mortgage prepayment rate was 24% CPR; the resulting net amortization
expense of $6.5 million reduced the earning asset yield by 0.79%. Other factors,
including an average mortgage basis of 102.2% of mortgage principal value,
reduced the earning asset yield to 6.81%. Earning assets for the period averaged
$3.32 billion.
Even though the earning asset yield declined, from the third quarter of 1997 to
the third quarter of 1998 total interest income increased as average earning
assets increased. The earning asset yield declined primarily due to a decline in
the average mortgage coupon rate. This rate declined primarily due to a decline
in the short-term interest rate indices that determine coupon adjustments for
the Company's adjustable-rate mortgage assets. The underlying indices declined
from 5.65% at September 30, 1997 to 4.76% at September 30, 1998. The average
coupon also declined as the Company acquired Hybrid mortgage loans with initial
fixed coupon rates generally below those of the Company's adjustable-rate
mortgage assets.
INTEREST EXPENSE
In the third quarter of 1998, interest expense on short-term debt was $31.5
million, interest expense on long-term debt was $24.3 million, expenses for the
amortization of bond issuance costs and bond issuance discount were $0.6
million, income from amortization of bond issuance premium was $0.5 million, and
other related expenses were $0.3 million. Total interest rate expense was $56.2
million. Average short-term borrowings were $2.13 billion, average long-term
borrowings were $1.53 billion and average total borrowings were $3.66 billion.
The cost of funds was 5.93% for short-term debt, 6.46% for long-term debt, and
6.15% overall.
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In the third quarter of 1997, interest expense on short-term debt was $40.3
million, interest expense on long-term debt was $5.3 million, expenses for the
amortization of bond issuance costs and bond issuance discount were $0.2
million, there was no income from amortization of bond issuance premium, and
other related expenses were $0.1 million. Total interest rate expense was $45.9
million. Average short-term borrowings were $2.70 billion, average long-term
borrowings were $0.35 billion and average total borrowings were $3.05 billion.
The cost of funds was 5.98% for short-term debt, 6.28% for long-term debt, and
6.02% overall.
The Company's short-term borrowing costs typically vary as a function of changes
in the one-month LIBOR rate. Although other short-term interest rates declined
from the third quarter of 1997 to the third quarter of 1998, the one-month LIBOR
rate, and thus the Company's cost of short-term borrowings, remained in a narrow
range. The average one-month LIBOR rate equaled 5.65% for the third quarter of
1997 and 5.62% in the third quarter of 1998.
The cost of funds for the Company's long-term debt rose over the last year as
the Company structured its newer debt issuances so that a greater portion of the
interest rate risk, prepayment risk, and credit risk of the underlying mortgages
is passed on to bondholders. Accelerated mortgage prepayment rates also resulted
in faster than expected retirement of long-term debt and thus resulted in
increased bond amortization expenses.
The Company's overall cost of funds rose as the cost of long-term debt rose and
as the Company utilized a greater amount of higher-cost long-term debt. In the
third quarter of 1997, long-term debt averaged 11.6% of total borrowings. In the
third quarter of 1998, long-term debt averaged 41.8% of total borrowings.
INTEREST RATE AGREEMENTS EXPENSE
Third quarter 1998 net interest rate agreements expense was $0.2 million. This
was a significant decrease from the $1.0 million expense in the third quarter of
1997. The lower expense during the third quarter of 1998 was due to the change
in the accounting methodologies adopted in this period, which reduced the cost
basis for such agreements. On an annualized basis, net interest rate agreements
expense was 0.03% and 0.14% of average borrowings in the third quarter of 1998
and the third quarter of 1997, respectively.
For additional detail, see "Note 6. Interest Rate Agreements" in the Notes to
the Consolidated Financial Statements.
NET INTEREST INCOME
Net interest income is total interest income less interest expense and net
interest rate agreements expense. Interest rate spread is the spread between the
yield on earning assets and the cost of funds and hedging.
In the third quarter of 1998, interest income was $61.6 million, interest
expense and interest rate agreement expense was $56.4 million and net interest
income was $5.1 million. The yield on earning assets was 6.42%, the cost of
funds and hedging was 6.18% and the resulting interest rate spread was 0.24%.
Average earning assets were $3.83 billion, average borrowings were $3.65 billion
and the ratio of earning assets to borrowings was 1.05.
In the third quarter of 1997, interest income was $56.5 million, interest
expense and interest rate agreement expense was $46.9 million and net interest
income was $9.6 million. The yield on earning assets was 6.80%, the cost of
funds and hedging was 6.16% and the resulting interest rate spread was 0.64%.
Average earning assets were $3.32 billion, average borrowings were $3.05 billion
and the ratio of earning assets to borrowings was 1.09.
Even through earning assets increased, net interest income declined from the
third quarter of 1997 to the third quarter of 1998 due primarily to a decline in
the interest rate spread earned. The interest rate spread declined over this
period as the yield on earning assets declined at the same time that the cost of
funds increased: see "Interest Income" and "Interest Expense" above.
Growth in net interest income also did not keep pace with growth in earning
assets as the Company used an increased percentage of debt rather than equity to
fund its earning assets; the ratio of earning assets to borrowings declined.
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CREDIT PROVISION EXPENSE
In the third quarter of 1998, the Company changed its accounting methodology to
lower-of-cost-or-market for 45.5% of its mortgage loans. The Company does not
intend to hold these loans long-term. Any credit impairment of these loans will
be recognized in earnings through a market value adjustment. Accordingly, the
Company's need for a credit reserve was reduced. The Company reversed $0.6
million of credit provision expenses for the quarter. In the third quarter of
1997, credit provision expenses were $0.9 million.
EQUITY IN EARNINGS (LOSSES) OF RWT HOLDINGS
The Company acquired a preferred stock equity interest in RWT Holdings, Inc. in
March 1998. The Company accounts for this investment on the equity method. The
Company recognizes its pro-rata share of Holding's net assets and operating
results in a single line item on the Company's balance sheet and income
statement.
Holdings has three start-up businesses. Redwood Financial Services ("RFS")
provides mortgage loan portfolio management and disposition services to banks
and thrifts from its location in Ft. Lauderdale, Florida. Redwood Commercial
Funding, Inc. ("RCF") originates and services high-quality, small-balance
commercial real estate mortgages from its location in Reno, Nevada. Redwood
Residential Funding, Inc, ("RRF") acquires, aggregates, and sells "A"-quality
jumbo residential mortgages through its wholesale correspondent operations
located in Larkspur, California.
In accordance with its business plan, Holdings continues to expand its
operations in advance of earning material revenues. In the third quarter of
1998, Holdings generated interest income of $0.1 million and had no interest
expense. Holdings had operating expenses of $1.7 million and a net loss of $1.6
million.
Please see "Financial Conditions - Investment in RWT Holdings, Inc." above and
"Note 7. Investment in RWT Holdings, Inc." in the Notes to the Consolidated
Financial Statements for additional information on Holdings.
OPERATING EXPENSES
The Company's operating expenses for the third quarter of 1998 were $1.0
million. Operating expenses were 0.10% of average assets and 1.41% of average
equity. For the third quarter of 1997, operating expenses were $1.1 million, or
0.13% of average assets and 1.33% of average equity.
The number of full time equivalent employees at the Company increased over the
last year. Operating expenses declined, however, due to lower accrual rates in
1998 for bonuses and Dividend Equivalent Rights.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
In the third quarter of 1998, the Company earned $3.2 million before gain and
loss on assets, preferred dividends, and the effect of adopting FAS 133.
Preferred dividends were $0.7 million. Gain and loss on assets and the effect of
adopting FAS 133 totaled to an earnings charge of $50.4 million. Net loss to
common shareholders was $47.9 million.
Included in "Net realized and unrealized gain and loss on assets" were realized
gains and losses on sales of assets and hedges for the quarter. The Company sold
loans and closed out hedges during the quarter that would have resulted in net
realized losses on sale of $1.0 million and $7.6 million, respectively, under
old accounting methods. The remaining balance of this income statement category,
plus "Cumulative transition effect of adoption of SFAS No. 133", represents net
unrealized market value losses recognized into income as a result of the third
quarter change in accounting methodologies. In general, market values of assets
declined during the quarter due to increased prepayment speeds and the effects
of the nationwide financial market "liquidity crunch". Market values of interest
rate agreements declined due to the liquidity crunch and due to falling interest
rates.
In the third quarter of 1997, the Company earned $7.5 million before preferred
dividends. Preferred dividends were $0.7 million and net income to shareholders
was $6.9 million.
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DILUTED EARNINGS (LOSS) PER SHARE
Due to the Company's stock repurchase program, the average number of diluted
common shares outstanding has decreased over the past twelve months. For the
three month period ending September 30, 1998, there was an average of 13.3
million diluted common shares outstanding, a decrease of 9.0% from the 14.6
million average during the three month period ending September 30, 1997.
Third quarter 1998 diluted earnings per share decreased to negative $3.60 per
share from $0.47 per share in the third quarter of 1997.
TAXABLE INCOME (LOSS)
Taxable income results for the third quarter of 1998 were a loss of $9.9
million. This includes net realized losses on sale of $8.6 million and an
operating loss of $1.3 million. Due to the taxable loss, no common stock
dividend was declared for the third quarter.
Net premium amortization and hedging expenses for tax were higher than for GAAP
as GAAP amortization benefited from the reduction in asset basis during the
quarter. The tax basis of assets remains at amortized historical cost.
Net taxable results exceeded GAAP results for the third quarter by $37.9 million
primarily because unrealized and realized losses reduced GAAP income whereas
only realized losses reduced taxable income.
In the third quarter of 1997, taxable income was $7.5 million. This exceeded
GAAP income by $0.6 million primarily due to credit expense differences.
Some of the significant differences which can arise between taxable income
(which influences dividends) and GAAP income are:
i) Under new accounting methodologies, many Company assets are
marked-to-market, with unrealized gains and losses included as a component
of income for GAAP but not for tax. Only realized gains and losses on sale
(sale price less the tax basis) will effect taxable income.
ii) Amortization of premium and discount balances and hedge expenses will
differ as the basis of assets and hedges will generally be the historical
amortized cost for tax but will be market value for GAAP for many of the
Company's mortgage assets and all of its interest rate agreements.
Amortization methods also differ.
iii) Holdings' results are reflected in the Company's GAAP income but taxable
results for the Company will only recognize income from Holdings to the
extent that the Company receives a dividend from Holdings. Holdings
currently intends to retain its earnings.
iv) The issuance of long-term debt, or its functional equivalent, could result
in financing treatment for GAAP but sale treatment for tax, thus triggering
a realized gain or loss on sale for tax. Other GAAP/tax differences can
arise from such transactions as well.
v) Credit expense for GAAP effectively includes credit provisions for
held-to-maturity assets and market value write-downs of credit impaired
mark-to-market and lower-of-cost-or-market assets. Credit expense for tax
equals actual realized credit losses.
vi) The exercise of non-qualified stock options can lower taxable income but
will have no effect on GAAP income.
COMMON SHARE DIVIDENDS
The Company did not declare a common dividend for the third quarter of 1998. A
common dividend of $0.60 per share was declared for the third quarter of 1997.
The decrease in the dividend rate from the earlier period was the result of the
decrease in taxable income.
The Company's current policy is to declare a common dividend such that total
dividends will equal 100% of REIT dividend distribution requirements over time.
In most quarters, this is expected to mean that the common
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dividend for each quarter will equal that quarter's taxable income per common
share entitled to a dividend. The first three quarters' dividends will be
declared after taxable income has been determined for the quarter. The dividend
declaration for the first, second and third quarter dividends is expected to
occur in the last week of April, July and October, respectively. The fourth
quarter's dividend will be declared in December based on estimated fourth
quarter taxable income and any other adjustments necessary to comply with REIT
dividend distribution rules. The record and payable dates for dividends will be
announced at the time the dividends are declared.
The Company's common dividend is expected to vary from quarter to quarter, both
due to fluctuations in the Company's operating results and due to changes in
operating and non-operating items that impact taxable income.
Tax losses, depending on their characterization, may reduce future as well as
concurrent dividend declarations under the Company's dividend policy as the
Company may seek to utilize, if possible, any tax-loss carry-forwards generated.
THE NINE MONTHS ENDING SEPTEMBER 30, 1998
COMPARED TO THE NINE MONTHS ENDING SEPTEMBER 30, 1997
In the first nine months of 1998, the Company had a net loss of $45.9 million,
or $3.30 per diluted common share. This loss was principally due to the earning
charges related to changes in accounting methodologies in the third quarter of
1998. In the first nine months of 1997, the Company earned $20.3 million, or
$1.52 per share. The following discussion compares the results for these time
periods by income and expense category.
INTEREST INCOME
In the first nine months of 1998, mortgage coupon income was $193.9 million,
mortgage premium amortization expense was $27.1 million, mortgage discount
amortization income was $1.1 million, and interest earned on cash balances was
$1.3 million. Total interest income was $169.2 million.
In the first nine months of 1998, the average mortgage coupon rate was 7.45%.
The average mortgage prepayment rate was 30% CPR; the resulting net amortization
expense of $26.0 million reduced the earning asset yield by 0.98%. Other
factors, including an average mortgage basis of 101.7% of mortgage principal
value, reduced the earning asset yield to 6.33%. Earning assets for the period
averaged $3.56 billion.
In the first nine months of 1997, mortgage coupon income was $159.1 million,
mortgage premium amortization expense was $16.5 million, mortgage discount
amortization income was $1.1 million, and interest earned on cash balances was
$0.9 million. Total interest income was $144.6 million.
In the first nine months of 1997, the average mortgage coupon rate was 7.73%.
The average mortgage prepayment rate was 24% CPR; the resulting net amortization
expense of $15.4 million reduced the earning asset yield by 0.73%. Other
factors, including an average mortgage basis of 102.1% of mortgage principal
value, reduced the earning asset yield to 6.83%. Earning assets for the period
averaged $2.82 billion.
Even though the earning asset yield declined from nine-month period ending
September 30, 1997 to the nine-month period ending September 30, 1998, total
interest income increased as average earning assets increased.
The earning asset yield declined primarily due to a decline in the average
mortgage coupon rate. This rate declined primarily due to a decline in the
short-term interest rate indices that determine coupon adjustments for the
Company's adjustable-rate mortgage assets. The underlying indices declined, from
an average of 5.58% at January 1, 1997 to 4.76% at September 30, 1998. The
average coupon on the mortgage loan portfolio also declined as the Company
acquired Hybrid mortgage loans with initial fixed coupon rates generally below
those of the Company's adjustable-rate mortgage assets.
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INTEREST EXPENSE
In the first nine months of 1998, interest expense on short-term debt was $92.8
million, interest expense on long-term debt was $58.4 million, expenses for the
amortization of bond issuance costs and bond issuance discount were $1.5
million, income from amortization of bond issuance premium was $1.2 million, and
other related expenses were $0.9 million. Total interest rate expense was $152.4
million. Average short-term borrowings were $2.11 billion, average long-term
borrowings were $1.23 billion and average total borrowings were $3.35 billion.
The cost of funds was 5.86% for short-term debt, 6.44% for long-term debt, and
6.07% overall.
In the first nine months of 1997, interest expense on short-term debt was $108.2
million, interest expense on long-term debt was $5.3 million, expenses for the
amortization of bond issuance costs and bond issuance discount were $0.2
million, there was no income from amortization of bond issuance premium, and
other related expenses were $0.1 million. Total interest rate expense was $113.8
million. Average short-term borrowings were $2.47 billion, average long-term
borrowings were $0.12 billion and average total borrowings were $2.59 billion.
The cost of funds was 5.83% for short-term debt, 6.21% for long-term debt, and
5.85% overall.
The Company's short-term borrowing costs typically vary as a function of changes
in the one-month LIBOR rate. Although other short-term interest rates declined
during these periods, the one-month LIBOR rate and thus the Company's cost of
short-term borrowings, remained in a narrow range. The average one-month LIBOR
rate equaled 5.60% for the first three quarters of 1997 and 5.64% for the first
three quarters of 1998.
The cost of funds for the Company's long-term debt rose over the last year as
the Company structured its newer debt issuances so that a greater portion of the
interest rate risk, prepayment risk, and credit risk of the underlying mortgages
is passed on to bondholders. Accelerated mortgage prepayment rates also resulted
in faster than expected retirement of long-term debt and thus resulted in
increased bond amortization expenses.
The Company's overall cost of funds rose as the cost of long-term debt rose and
as the Company utilized a greater amount of higher-cost long-term debt. In the
first nine months of 1997, long-term debt averaged 4.6% of total borrowings. In
the first nine months of 1998, long-term debt averaged 36.9% of total
borrowings.
INTEREST RATE AGREEMENTS EXPENSE
In the first nine months of 1998, net interest rate agreements expense was $3.2
million, an increase from the $2.5 million expense in the first nine months of
1997. The greater expense during the first nine months of 1998 was due to an
increase in the effective amount of interest rate agreements. This increase in
cost was partially offset by the change in the accounting methodologies adopted
in the third quarter of 1998, which reduced the cost basis for such agreements.
On an annualized basis, net interest rate agreements expense was 0.13% of
average borrowings during both periods.
For additional detail, see "Note 6. Interest Rate Agreements" in the Notes to
the Consolidated Financial Statements.
NET INTEREST INCOME
In the first nine months of 1998, interest income was $169.2 million, interest
expense and interest rate agreement expense was $155.7 and net interest income
was $13.5 million. The yield on earning assets was 6.33%, the cost of funds and
hedging was 6.20% and the resulting interest rate spread was 0.13%. Average
earning assets were $3.56 billion, average borrowings were $3.35 billion and the
ratio of earning assets to borrowings was 1.06.
In the first nine months of 1997, interest income was $144.6 million, interest
expense and interest rate agreement expense was $116.2 million and net interest
income was $28.4 million. The yield on earning assets was 6.83%, the cost of
funds and hedging was 5.98% and the resulting interest rate spread was 0.85%.
Average earning assets were $2.82 billion, average borrowings were $2.59 billion
and the ratio of earning assets to borrowings was 1.09.
Even through earning assets increased, net interest income declined from the
nine-month period ending September 30, 1997 to the nine-month period ending
September 30, 1998 due primarily to a decline in the interest rate
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spread earned. The interest rate spread declined over this period as the yield
on earning assets declined at the same time that the cost of funds increased:
see "Interest Income" and "Interest Expense" above.
Growth in net interest income also did not keep pace with growth in earning
assets as the Company used an increased percentage of debt rather than equity to
fund its earning assets; the ratio of earning assets to borrowings declined.
CREDIT PROVISION EXPENSE
In the nine-month period ending September 30, 1998, the Company changed its
accounting methodology to lower-of-cost-or-market for 45.5% of its mortgage
loans. Accordingly, the Company's need for a credit reserve was reduced. Also,
the re-REMIC transaction completed in late 1997 reduced the Company's potential
credit exposure and thus allowed the Company to stop taking a credit provision
on its existing securities portfolio. The Company's net credit provision was
$0.7 million for the nine months ending September 30, 1998. In the first nine
months of 1997, credit provision expenses were $2.4 million.
EQUITY IN EARNINGS (LOSSES) OF RWT HOLDINGS, INC.
In the nine months ending September 30, 1998, Holdings generated interest income
of $3.0 million, had a $2.5 million interest expense and realized a minimal gain
on sale. Holdings had operating expenses of $2.6 million and a net loss of $2.2
million.
Please see "Financial Condition - Investment in RWT Holdings, Inc." above and
"Note 7. Investment in RWT Holdings, Inc." in the Notes to the Consolidated
Financial Statements for additional information on Holdings.
OPERATING EXPENSES
The Company's operating expenses for the first nine months of 1998 were $3.5
million. Operating expenses were 0.13% of average assets and 1.45% of average
equity. For the first nine months of 1997, operating expenses were $3.5 million,
or 0.16% of average assets and 1.61% of average equity.
The levels of operating expenses were unchanged in the nine-month periods ending
September 30, 1997 and 1998. The number of full time equivalent employees
increased. Compensation expense declined, however, from $2.4 to $1.6 million, as
DER and bonus accruals were much lower in the 1998 period.
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
In the first nine months of 1998, the Company had operating profits of $7.2
million before gain and loss on assets, preferred dividends, and the effect of
adopting FAS 133. Preferred dividends were $2.1 million. Gain and loss on assets
and the effect of adopting FAS 133 totaled to an earnings charge of $51.0
million. Net loss to common shareholders was $45.9 million.
In the first nine months of 1997, the Company earned $22.4 million before
preferred dividends. Preferred dividends were $2.1 million and net income to
shareholders was $20.3 million.
DILUTED EARNINGS (LOSS) PER SHARE
Diluted earnings per share decreased to negative $3.30 per share for the nine
months ending September 30, 1998 from $1.52 per share for the nine months ending
September 30, 1997.
The average number of diluted common shares increased from 13.4 million in the
first nine months of 1997 to 13.9 million in the first nine months of 1998 as
the Company issued new shares in 1997. The Company began its stock repurchase
program late in 1997 with the bulk of the repurchases occurring in the third
quarter of 1998.
TAXABLE INCOME (LOSS)
Taxable income results for the first nine months of 1998 were a loss of $5.9
million. This includes net realized losses on sale of $8.6 million and operating
profits of $2.7 million. Net taxable results exceeded GAAP results for this
nine-month period by $40.0 million primarily because unrealized and realized
losses reduced GAAP income whereas only realized losses reduced taxable income.
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In the first nine months of 1997, taxable income was $22.2 million. This
exceeded GAAP income for the same period by $1.9 million primarily due to credit
expense differences.
COMMON SHARE DIVIDENDS
The Company declared common dividends of $0.28 per share for the first three
quarters of 1998. Dividends of $1.80 per share were declared in the first three
quarters of 1997. The decrease in dividends reflects the decrease in taxable
income.
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. At the same
time, the Company seeks to provide an opportunity for the Company's shareholders
to realize attractive total rates of return through long-term stock ownership in
the Company. While the Company does not seek to avoid risk, it does seek, to the
best of its ability, to: i) assume risks that can be quantified from historical
experience, ii) actively manage such risk, iii) earn sufficient compensation to
justify taking of such risks, and iv) maintain capital levels consistent with
the risks it does undertake.
The Company seeks to limit credit risk by maintaining what it believes to be
high-quality mortgage loan underwriting standards for loans retained in its
portfolio. The Company is a nationwide "A" (or "prime") quality lending company:
it currently acquires and owns first mortgages on single-family residential
properties that 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 credit cycles has
been contained relative to credit losses arising from other forms of commercial,
consumer and residential mortgage lending.
In the fourth quarter of 1998, Holdings commence the origination and acquisition
of commercial real estate loans through its Redwood Commercial Funding, Inc.
subsidiary.
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 September 30, 1998, the Company remained exposed to
such risks particularly in general market environments of rapidly rising
interest rates, market dislocation or illiquidity.
In the fourth quarter of 1998, the Company agreed on several new short-term
borrowing commitments to accept lower advance rates (higher haircuts) and higher
spreads between the cost of these borrowings and LIBOR rates than typically had
been the case in the past. In addition, in at least one instance, a short-term
lender to the Company indicated that they would not renew certain borrowings as
they became due; the Company met its financing needs with other lenders. These
are symptoms of the nationwide "liquidity crunch" which has impacted financial
markets in general, including the mortgage market and the short-term lenders
supplying funds to the mortgage market.
The Company has entered into commitments to roll-over short-term debt coming due
in the fourth quarter of 1998 in amounts the Company believes are sufficient to
meet its liquidity needs. Thus all the Company's short-term borrowings and
borrowing commitments mature in 1999, mostly in the first quarter of 1999. The
Company's ability to roll-over these borrowings as they become due will depend
on many factors, including the status at that time of the liquidity crunch. If
new financing is unavailable to the Company, or only available with onerous
terms, the
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Company may be forced to liquidate assets. If the spread between the cost of new
financing and LIBOR rates increases, lower earnings than would otherwise have
been the case could result. If new financings have lower advance rates (higher
haircuts) than has typically been the case in the past, the Company's liquidity
reserves could be reduced or eliminated and its ability to grow and fund its
business plan could be diminished.
The Company seeks to manage some of its interest rate risk through matching the
interest rate characteristics of its mortgages, its borrowings, and its hedges
to the degree that management believes is likely to be in the best interests of
the shareholders in the long-term. The Company does not seek to be perfectly
matched or to entirely eliminate interest rate risk.
Interest rate agreements are a form of interest rate insurance, or hedging,
which 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 its ARMs and Hybrids,
their associated liabilities, or both. The Company also may hedge the market
value of acquired mortgage loans prior to securitization, the anticipated
issuance of liabilities, or the premium amortization risk that may arise from
falling interest rates. The Company may use interest rate agreements for other
hedging purposes as well. The Company's interest rate agreements may function
economically as a hedge even if they are not designated as hedges for accounting
purposes.
Through September 30, 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). 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.
While the Company's mortgage portfolio has in the past consisted primarily of
ARMs (as of December 31 1997 ARMS represented 98.4% of the mortgage asset
portfolio), the majority of the Company's 1998 acquisitions were Hybrid mortgage
loans and, as a result, Hybrid mortgage loans represented 37.8% of the mortgage
asset portfolio as of September 30, 1998. Hybrid mortgage loans have an initial
fixed-rate coupon period ranging from three to ten years. At that point, the
Hybrid coupon will adjust to market conditions in a manner similar to ARMs. Due
to the fixed-rate coupon period, the challenges of the managing the liquidity
risk, short-term borrowing roll-over risk, interest rate risk and other
asset/liability type risks of Hybrids are different from those of ARMs. To date,
the Company has sought to manage the risks of Hybrid mortgage loans through the
issuance of matching, long-term, amortizing debt with a fixed-rate period
similar to that of the coupons of the Company's Hybrids and through the use of
Treasury and eurodollar futures and options to hedge risks of short-term funded
Hybrids. The Company expects that its Hybrid hedging strategy will evolve over
time. The Company does not seek to hedge all of the risk of its Hybrid loan
portfolio, and there can be no assurance that the Company's efforts to hedge
Hybrids and associated liabilities will be beneficial to the Company.
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 asset growth rate; net asset
growth is generally an important component of future earnings growth.
Higher-than-expected mortgage principal repayments may also reduce prospects for
the Company if the potential return characteristics of assets then available for
acquisition are less attractive than those of the existing assets held in
portfolio. Prepayment rates for mortgage loans increased in 1998 relative to
prior years and prepayment rates may continue to increase. Slowing rates of
mortgage principal repayment could exacerbate certain liquidity, market value
fluctuation, interest rate risks, and other risks, particularly in a rising
interest rate environment.
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While mortgage principal repayment rates are not highly predictable, management
believes the strongest influencing factors in the past have been the shape of
the yield curve and the absolute level of longer-term interest rates. As
longer-term rates drop, mortgage principal repayments have tended to increase,
particularly if longer-term rates drop relative to shorter-term interest rates.
In addition, management believes mortgage principal repayments have been
increasing on a secular trend basis due to structural and behavioral changes in
the mortgage origination market. In 1998, the Company successfully implemented
some hedges that benefited earnings during the recent period of rapidly falling
long-term interest rates. 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 at a price above par.
At September 30, 1998, the Company's net unamortized effective premium was $16.7
million, or $54.9 million less than the $71.6 million reported at December 31,
1997. This decrease was the result of net premium amortization during the first
nine months of 1998 totaling $26.0 million, sales of assets with total premiums
of $8.4 million, acquisitions of assets with $12.5 million of premium, changes
in long-term debt premium netting a total of $0.2 million, and reductions in net
premiums due to the effect of accounting treatments totaling $32.8 million. As a
percent of common equity, net effective premium decreased from 22.5% to 7.2%
over this nine-month period.
The pricing of mortgage assets relative to the underlying risk in the assets,
and relative to levels at which the Company can issue short-term and long-term
debt, has a large effect on the Company's net asset growth, financing costs, and
equity utilization, and therefore on the Company's earnings growth. Asset growth
will likely slow when mortgage prices are high.
Growth in assets and earnings may be limited when the Company's access to new
equity capital is limited. Holdings and the Company can benefit over time from
the re-investment of any retained earnings at Holdings. Redwood REIT, however,
is generally required to distribute at least 95% of its taxable income as
dividends.
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 (assets funded with long-term debt) 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 equity-to-assets ratio capital amount has declined as the Company has
eliminated some of these short-term risks through the creation of mortgage
equity interests by issuing long-term debt.
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 and slowing prepayment rates)
while its actual capital levels as determined for the Risk-Adjusted Capital
Policy would likely fall as the market values of its mortgages, net of
mark-to-market gains on hedges, decreased (market value declines may be
temporary as well, as future coupon adjustments on ARMs 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 decreased below the Company's capital
adequacy guideline amount, the Company would generally cease the acquisition of
new mortgage assets until capital balance
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was restored. In certain cases prior to a planned equity offering or other
circumstances, the Board of Directors has authorized management to acquire
mortgage assets in a limited amount beyond the usual constraints of the
Company's Risk-Adjusted Capital Policy.
Beginning in mid-1997, strong demand for mortgage assets in an environment of
reduced supply led to increasing prices for mortgage loans and mortgage
securities. These rising prices together with the potential for increased
mortgage prepayment rates led the Company to reduce the rate at which it sought
to acquire new mortgage assets. This decision resulted in the Company's balance
sheet having excess capital in the latter part of 1997 and thus far in 1998.
Management believed that refraining from committing significant capital to new
mortgage acquisitions until mortgage prices adjusted downwards would maximize
long-term shareholder value. During the third quarter of 1998, prices of
mortgages and of equities of financial companies generally declined due to the
nationwide liquidity crunch. Due to the Company's excess capital position, it
was able to take advantage of this situation by repurchasing a substantial
amount of its own common stock.
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.
YEAR 2000 ISSUES
Certain computer programs and embedded logic devices that utilize two digits
rather than four to define the applicable year may fail to properly recognize
date sensitive information when the year changes to 2000 (the "Year 2000
Issue").
The Company is conducting a comprehensive review to determine if the Year 2000
Issue will affect its computer systems. The Company currently believes that it
does not face "legacy" computer systems and software issues because it commenced
operations within the past five years. Thus, the Company does not anticipate
incurring internal Year 2000 Issue costs that would be material to its financial
position, results of operations, or cash flows in future periods. Through
September 30, 1998, the Company incurred less than $50,000 of expenses in
connection with its review of the Year 2000 Issue.
There can be no assurance, however, that the Company's lenders, custodians, loan
servicers, vendors, clients and other third-party partners (collectively,
"Contract Parties") will resolve their own Year 2000 Issues in a timely manner,
or that any failure by these Contract Parties to resolve such issues would not
have an adverse effect on the Company's operations and financial condition. Each
Contract Party is in turn subject to the Year 2000 Issues of various third
parties with which it does business, making the Company's exposure to the
noncompliance of any Contract Party difficult to assess. The Company believes it
is devoting the necessary resources to address all of the Year 2000 Issues over
which it has control. With respect to the Year 2000 Issues of Contract Parties,
over which the Company has no control, the Company's contingency plan is to
identify replacement vendors, where possible.
43
<PAGE> 44
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 1
<TABLE>
<CAPTION>
INCOME STATEMENT FOR THREE MONTHS ENDING
----------------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Mortgage Assets
Coupon Income $ 67,964 $ 64,348 $ 61,635
Amortization of Discount Balances 414 450 185
Amortization of Premium Balances (7,280) (11,470) (8,343)
-------- -------- --------
Total Interest Income From Mortgage Assets 61,098 53,328 53,477
Interest Income: Cash Balances 460 455 384
-------- -------- --------
Total Interest Income 61,558 53,783 53,861
Interest Expense on Short-Term Debt (31,528) (33,282) (28,003)
Interest Expense on Long-Term Debt (24,642) (16,887) (18,094)
-------- -------- --------
Total Interest Expense (56,170) (50,169) (46,097)
Interest Rate Agreement Expense (322) (1,652) (1,426)
Interest Rate Agreement Income 75 28 48
-------- -------- --------
Net Interest Rate Agreement Expense (247) (1,624) (1,378)
Net Interest Income 5,142 1,990 6,386
Provision for Potential Credit Losses
Mortgage Loans 638 (763) (601)
Mortgage Securities 0 0 0
-------- -------- --------
Total Credit Provision 638 (763) (601)
Equity in Earnings of RWT Holdings, Inc. (1,575) (581) 0
Operating Expenses
Compensation and Benefits Expense (390) (145) (1,048)
Dividend Equivalent Rights Expense 0 (6) (195)
Other Operating Expenses (639) (438) (682)
-------- -------- --------
Total Operating Expenses (1,029) (589) (1,925)
Other Income (Expenses) -- 139 0
-------- -------- --------
Income before Unrealized and Realized Gains (Losses) on Assets 3,175 196 3,860
Net Unrealized and Realized Gains (Losses) on Assets (40,293) 0 (723)
-------- -------- --------
Income Before Preferred Dividends and Change in Accounting Principle (37,118) 196 3,137
Preferred Dividends (687) (687) (687)
-------- -------- --------
Income Before Change in Accounting Principle (37,804) (491) 2,450
SFAS No. 133 Adjustments (10,061) 0 0
-------- -------- --------
Income before Corporate Income Tax Expense (47,866) (491) 2,450
Corporate Income Tax Expense 0 0 0
-------- -------- --------
Net Income to Common Shareholders $(47,866) $ (491) $ 2,450
======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $(47,179) $ 196 $ 3,137
Mortgage Amortization and Income Differences (4,452) (268) 43
Credit Provisions less Actual Losses (938) 299 552
Net Unrealized and Realized Gains (Losses) on Assets Differences 41,741 15 729
Equity in earnings of RWT Holdings, Inc. net of Dividends to Redwood REIT 1,575 581 0
Operating Expense Differences 13 15 67
-------- -------- --------
Taxable Income Before Preferred Dividend $ (9,240) $ 838 $ 4,528
======== ======== ========
</TABLE>
44
<PAGE> 45
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,
1997 1997 1997 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage Assets
Coupon Income $ 61,506 $ 62,556 $ 54,353 $ 42,224
-------- -------- -------- --------
Amortization of Discount Balances 258 376 417 272
Amortization of Premium Balances (8,179) (6,888) (5,527) (4,090)
-------- -------- -------- --------
Total Interest Income From Mortgage Assets 53,585 56,044 49,243 38,406
Interest Income: Cash Balances 399 499 266 162
-------- -------- -------- --------
Total Interest Income 53,984 56,543 49,509 38,568
Interest Expense on Short-Term Debt (31,964) (40,318) (38,958) (28,900)
Interest Expense on Long-Term Debt (14,567) (5,570) 0 0
-------- -------- -------- --------
Total Interest Expense (46,531) (45,888) (38,958) (28,900)
Interest Rate Agreement Expense (1,281) (1,064) (912) (602)
Interest Rate Agreement Income 12 26 73 7
-------- -------- -------- --------
Net Interest Rate Agreement Expense (1,269) (1,038) (839) (595)
Net Interest Income 6,184 9,617 9,712 9,073
Provision for Potential Credit Losses
Mortgage Loans (1,516) (473) (299) (215)
Mortgage Securities 1,000 (470) (477) (480)
-------- -------- -------- --------
Total Credit Provision (516) (943) (776) (695)
Equity in Earnings of RWT Holdings, Inc. 0 0 0 0
Operating Expenses
Compensation and Benefits Expense (413) (441) (516) (529)
Dividend Equivalent Rights Expense (145) (361) (358) (203)
Other Operating Expenses (570) (346) (341) (435)
-------- -------- -------- --------
Total Operating Expenses (1,128) (1,148) (1,215) (1,167)
Other Income (Expenses) 0 0 0 0
-------- -------- -------- --------
Income before Unrealized and Realized Gains (Losses) on Assets 4,540 7,526 7,721 7,211
Net Unrealized and Realized Gains (Losses) on Assets 543 20 0 0
-------- -------- -------- --------
Income Before Preferred Dividends and Change in Accounting Principle 5,083 7,546 7,721 7,211
Preferred Dividends (686) (687) (687) (755)
-------- -------- -------- --------
Income Before Change in Accounting Principle 4,397 6,859 7,034 6,456
SFAS No. 133 Adjustments 0 0 0 0
-------- -------- -------- --------
Income before Corporate Income Tax Expense 4,397 6,859 7,034 6,456
Corporate Income Tax Expense 0 0 0 0
-------- -------- -------- --------
Net Income to Common Shareholders $ 4,397 $ 6,859 $ 7,034 $ 6,456
======== ======== ======== ========
Calculation of Taxable REIT Income
GAAP Net Income Before Preferred Dividends $ 5,083 $ 7,546 $ 7,721 $ 7,211
Mortgage Amortization and Income Differences 105 (95) (103) (87)
Credit Provisions less Actual Losses 475 875 747 653
Net Unrealized and Realized Gains (Losses) on Assets Differences (190) 0 0 0
Equity in earnings of RWT Holdings, Inc. net of Dividends to Redwood REIT 0 0 0 0
Operating Expense Differences 113 (175) (50) 135
-------- -------- -------- --------
Taxable Income Before Preferred Dividend $ 5,586 $ 8,151 $ 8,315 $ 7,912
======== ======== ======== ========
</TABLE>
45
<PAGE> 46
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 Assets
Coupon Income $ 220,639 $ 71,598 $ 15,138 $ 1,102
Amortization of Discount Balances 1,323 909 919 101
Amortization of Premium Balances (24,684) (6,107) (563) (19)
--------- --------- --------- ---------
Total Interest Income From Mortgage Assets 197,278 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
Equity in Earnings of RWT Holdings, Inc. 0 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
--------- --------- --------- ---------
Income before Unrealized and Realized Gains (Losses) on Assets 26,998 12,685 3,155 382
Net Unrealized and Realized Gains (Losses) on Assets 563 0 0 0
--------- --------- --------- ---------
Income Before Preferred Dividends and Change in Accounting Principle 27,561 12,685 3,155 382
Preferred Dividends (2,815) (1,148) 0 0
--------- --------- --------- ---------
Income Before Change in Accounting Principle 24,746 11,537 3,155 382
SFAS No. 133 Adjustments 0 0 0 0
========= ========= ========= =========
Income before Corporate Income Tax Expense 24,746 11,537 3,155 382
Corporate Income Tax Expense 0 0 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 and Income Differences (180) 449 175 (28)
Credit Provisions less Actual Losses 2,750 1,689 490 0
Net Unrealized and Realized Gains (Losses) on Assets Differences (190) 0 0 0
Equity in earnings of RWT Holdings, Inc. net of Dividends to Redwood REIT 0 0 0 0
Operating Expense Differences 23 345 12 0
--------- --------- --------- ---------
Taxable Income Before Preferred Dividend $ 29,964 $ 15,168 $ 3,832 $ 354
========= ========= ========= =========
</TABLE>
46
<PAGE> 47
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 2
<TABLE>
<CAPTION>
AT
---------------------------------------------
BALANCE SHEETS SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1998 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage Assets
Principal Value 3,725,916 3,745,697 3,578,995
Unamortized Premium 30,653 75,158 85,048
Unamortized Discount (11,669) (10,650) (12,131)
Real Estate Owned 171 266 497
Reserve For Credit Losses (4,826) (5,784) (5,484)
Market Valuation Account 321 (10,497) (4,375)
----------- ----------- -----------
Total Mortgage Assets 3,740,566 3,794,190 3,642,549
Unrestricted Cash $ 3,811 $ 11,354 $ 6,468
Restricted Cash 19,675 21,560 25,734
----------- ----------- -----------
Total Cash and Cash Equivalents 23,486 32,914 32,202
Interest Rate Agreements 2,285 9,938 10,337
Market Valuation Account 0 (7,520) (8,710)
----------- ----------- -----------
Total Interest Rate Agreements 2,285 2,418 1,627
Accrued Interest Receivable 25,050 21,554 23,886
Investment in RWT Holdings, Inc. 7,744 9,319 9,900
Due From RWT Holdings, Inc. 776 831 0
Fixed Assets, Leasehold, Org. Costs 725 725 551
Prepaid Expenses and Other Receivables 1,584 4,976 2,975
----------- ----------- -----------
Other Assets 35,879 37,405 37,312
Total Assets $ 3,802,216 $ 3,866,927 $ 3,713,691
=========== =========== ===========
Short-Term Borrowings $ 2,067,166 $ 1,936,158 $ 2,288,018
Long-Term Borrowings 1,465,888 1,593,344 1,081,279
Accrued Interest Payable 9,152 13,675 12,212
Accrued Expenses and Other Payables 1,781 2,192 1,797
Dividends Payable 687 687 687
----------- ----------- -----------
Total Liabilities 3,544,674 3,546,056 3,383,993
----------- ----------- -----------
Preferred Stock 26,736 26,736 26,736
Common Stock 118 141 141
Additional Paid-in Capital 287,046 320,687 320,282
Accumulated Other Comprehensive Income 321 (18,017) (13,085)
Cumulative Earnings (63) 47,253 50,729
Cumulative Distributions to Shareholders (56,616) (55,929) (55,104)
----------- ----------- -----------
Total Stockholders' Equity 257,542 320,871 329,698
----------- ----------- -----------
Total Liabilities plus Stockholders' Equity $ 3,802,216 $ 3,866,927 $ 3,713,691
=========== =========== ===========
</TABLE>
47
<PAGE> 48
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 2 (CONTINUED)
<TABLE>
<CAPTION>
AT
--------------------------------------------------------------
BALANCE SHEETS DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage Assets
Principal Value 3,298,499 3,358,993 3,290,215 2,555,729
Unamortized Premium 86,173 86,934 87,661 65,107
Unamortized Discount (12,442) (14,387) (15,091) (15,641)
Real Estate Owned 713 220 346 128
Reserve For Credit Losses (4,931) (4,456) (3,580) (2,833)
Market Valuation Account (1,390) 10,619 3,603 2,224
----------- ----------- ----------- -----------
Total Mortgage Assets 3,366,622 3,437,923 3,363,154 2,604,714
Unrestricted Cash $ 24,892 $ 28,758 $ 29,425 $ 12,985
Restricted Cash 24,657 28,938 0 0
----------- ----------- ----------- -----------
Total Cash and Cash Equivalents 49,549 57,696 29,425 12,985
Interest Rate Agreements 10,781 11,708 12,233 7,879
Market Valuation Account (8,681) (8,782) (7,366) (2,106)
----------- ----------- ----------- -----------
Total Interest Rate Agreements 2,100 2,926 4,867 5,773
Accrued Interest Receivable 23,119 23,859 24,065 17,722
Investment in RWT Holdings, Inc. 0 0 0 0
Due From RWT Holdings, Inc. 0 0 0 0
Fixed Assets, Leasehold, Org. Costs 539 358 257 259
Prepaid Expenses and Other Receivables 2,268 2,490 2,738 1,611
----------- ----------- ----------- -----------
Other Assets 25,926 26,707 27,060 19,592
Total Assets $ 3,444,197 $ 3,525,252 $ 3,424,506 $ 2,643,064
=========== =========== =========== ===========
Short-Term Borrowings $ 1,914,525 $ 2,639,773 $ 3,102,784 $ 2,373,279
Long-Term Borrowings 1,172,801 497,367 0 0
Accrued Interest Payable 14,476 20,216 18,153 14,962
Accrued Expenses and Other Payables 2,172 2,129 1,743 1,262
Dividends Payable 5,686 9,433 8,638 7,899
----------- ----------- ----------- -----------
Total Liabilities 3,109,660 3,168,918 3,131,318 2,397,402
----------- ----------- ----------- -----------
Preferred Stock 26,736 26,733 26,733 29,383
Common Stock 143 146 133 119
Additional Paid-in Capital 324,555 333,841 274,420 219,461
Accumulated Other Comprehensive Income (10,071) 1,837 (3,762) 118
Cumulative Earnings 43,783 38,700 31,154 23,433
Cumulative Distributions to Shareholders (50,609) (44,923) (35,490) (26,852)
----------- ----------- ----------- -----------
Total Stockholders' Equity 334,537 356,334 293,188 245,662
----------- ----------- ----------- -----------
Total Liabilities plus Stockholders' Equity $ 3,444,197 $ 3,525,252 $ 3,424,506 $ 2,643,064
=========== =========== =========== ===========
</TABLE>
48
<PAGE> 49
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>
Mortgage Assets
Principal Value 3,298,499 2,117,048 443,625 120,627
Unamortized Premium 86,173 54,317 9,644 828
Unamortized Discount (12,442) (16,093) (17,032) (1,320)
Real Estate Owned 713 196 0 0
Reserve For Credit Losses (4,931) (2,180) (490) 0
Market Valuation Account (1,390) 139 (3,502) (2,658)
----------- ----------- ----------- -----------
Total Mortgage Assets 3,366,622 2,153,428 432,244 117,477
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
Interest Rate Agreements 10,781 6,200 2,521 1,791
Market Valuation Account (8,681) (3,599) (1,974) 101
----------- ----------- ----------- -----------
Total Interest Rate Agreements 2,100 2,601 547 1,892
Accrued Interest Receivable 23,119 14,134 3,270 743
Investment in RWT Holdings, Inc. 0 0 0 0
Due From RWT Holdings, Inc. 0 0 0 0
Fixed Assets, Leasehold, Org. Costs 539 257 206 201
Prepaid Expenses and Other Receivables 2,268 2,709 465 188
----------- ----------- ----------- -----------
Other Assets 25,926 17,100 3,941 1,132
Total Assets $ 3,444,197 $ 2,184,197 $ 441,557 $ 121,528
=========== =========== =========== ===========
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)
Cumulative Earnings 43,783 16,222 3,537 382
Cumulative Distributions to Shareholders (50,609) (18,954) (3,721) (350)
----------- ----------- ----------- -----------
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>
49
<PAGE> 50
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 3
<TABLE>
<CAPTION>
DETAIL OF INTEREST INCOME AND MORTGAGE ASSET BALANCES AT OR FOR THREE MONTHS ENDING
---------------------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME ON MORTGAGE ASSETS
Mortgage Loans - Held for Sale
Coupon Income $ 0 $ 0 $ 0
Amortization of Discount Balances 0 0 0
Amortization of Premium Balances 0 0 0
----------- ----------- -----------
Interest Income: Mortgage Loans - Held for Sale $ 0 $ 0 $ 0
Mortgage Loans - Held for Investment
Coupon Income $ 40,614 $ 33,523 $ 28,306
Amortization of Discount Balances 1 1 0
Amortization of Premium Balances (3,021) (3,619) (2,496)
----------- ----------- -----------
Interest Income: Mortgage Loans - Held for Investment $ 37,594 $ 29,905 $ 25,810
Mortgage Securities - Trading
Coupon Income $ 26,962 $ 0 $ 0
Amortization of Discount Balances 26 0 0
Amortization of Premium Balances (4,259) 0 0
----------- ----------- -----------
Interest Income: Mortgage Securities - Trading $ 22,728 $ 0 $ 0
Mortgage Securities - Available for Sale
Coupon Income $ 389 $ 30,825 $ 33,330
Amortization of Discount Balances 388 449 185
Amortization of Premium Balances 0 (7,851) (5,848)
----------- ----------- -----------
Interest Income: Mortgage Securities - Available for Sale $ 777 $ 23,423 $ 27,667
MORTGAGE ASSET BALANCES
Mortgage Loans - Held for Sale
Principal Value $ 1,031,058 $ 0 $ 0
Unamortized Premium 2,326 0 0
Unamortized Discount (1,369) 0 0
Real Estate Owned 171 0 0
Reserve For Credit Losses 0 0 0
Market Valuation Account 0 0 0
----------- ----------- -----------
Total Mortgage Loans - Held for Sale $ 1,032,186 $ 0 $ 0
Mortgage Loans - Held for Investment
Principal Value $ 1,234,075 $ 2,191,501 $ 1,837,020
Unamortized Premium 17,993 35,660 37,943
Unamortized Discount 0 0 (27)
Real Estate Owned 0 266 497
Reserve For Credit Losses (3,390) (4,079) (3,449)
Market Valuation Account 0 0 0
----------- ----------- -----------
Total Mortgage Loans - Held for Investment $ 1,248,678 $ 2,223,348 $ 1,871,984
Mortgage Securities - Trading
Principal Value $ 1,442,574 $ 0 $ 0
Unamortized Premium 10,334 0 0
Unamortized Discount (1,272) 0 0
Reserve For Credit Losses 0 0 0
Market Valuation Account 0 0 0
----------- ----------- -----------
Total Mortgage Securities - Trading $ 1,451,636 $ 0 $ 0
Mortgage Securities - Available for Sale
Principal Value $ 18,209 $ 1,554,196 $ 1,741,975
Unamortized Premium 0 39,498 47,105
Unamortized Discount (9,028) (10,650) (12,104)
Reserve For Credit Losses (1,436) (1,705) (2,035)
Market Valuation Account 321 (10,497) (4,375)
----------- ----------- -----------
Total Mortgage Securities - Available for Sale $ 8,066 $ 1,570,842 $ 1,770,566
</TABLE>
50
<PAGE> 51
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 3 (CONTINUED)
<TABLE>
<CAPTION>
DETAIL OF INTEREST INCOME AND MORTGAGE ASSET BALANCES AT OR FOR THREE MONTHS ENDING
--------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME ON MORTGAGE ASSETS
Mortgage Loans - Held for Sale
Coupon Income $ 0 $ 0 $ 0 $ 0
Amortization of Discount Balances 0 0 0 0
Amortization of Premium Balances 0 0 0 0
----------- ----------- ----------- -----------
Interest Income: Mortgage Loans - Held for Sale $ 0 $ 0 $ 0 $ 0
Mortgage Loans - Held for Investment
Coupon Income $ 24,911 $ 21,432 $ 14,474 $ 10,784
Amortization of Discount Balances 0 1 8 11
Amortization of Premium Balances (2,088) (1,803) (1,462) (940)
----------- ----------- ----------- -----------
Interest Income: Mortgage Loans - Held for Investment $ 22,823 $ 19,630 $ 13,020 $ 9,855
Mortgage Securities - Trading
Coupon Income $ 0 $ 0 $ 0 $ 0
Amortization of Discount Balances 0 0 0 0
Amortization of Premium Balances 0 0 0 0
----------- ----------- ----------- -----------
Interest Income: Mortgage Securities - Trading $ 0 $ 0 $ 0 $ 0
Mortgage Securities - Available for Sale
Coupon Income $ 36,595 $ 41,124 $ 39,879 $ 31,440
Amortization of Discount Balances 258 375 409 261
Amortization of Premium Balances (6,091) (5,085) (4,065) (3,150)
----------- ----------- ----------- -----------
Interest Income: Mortgage Securities -Available for Sale $ 30,762 $ 36,414 $ 36,223 $ 28,551
MORTGAGE ASSET BALANCES
Mortgage Loans - Held for Sale
Principal Value $ 0 $ 0 $ 0 $ 0
Unamortized Premium 0 0 0 0
Unamortized Discount 0 0 0 0
Real Estate Owned 0 0 0 0
Reserve For Credit Losses 0 0 0 0
Market Valuation Account 0 0 0 0
----------- ----------- ----------- -----------
Total Mortgage Loans - Held for Sale $ 0 $ 0 $ 0 $ 0
Mortgage Loans - Held for Investment
Principal Value $ 1,519,124 $ 1,348,619 $ 1,111,029 $ 716,009
Unamortized Premium 34,844 30,852 25,442 15,951
Unamortized Discount 0 0 (123) (131)
Real Estate Owned 713 220 346 128
Reserve For Credit Losses (2,855) (1,363) (929) (630)
Market Valuation Account 0 0 0 (1,291)
----------- ----------- ----------- -----------
Total Mortgage Loans - Held for Investment $ 1,551,826 $ 1,378,328 $ 1,135,765 $ 730,035
Mortgage Securities - Trading
Principal Value $ 0 $ 0 $ 0 $ 0
Unamortized Premium 0 0 0 0
Unamortized Discount 0 0 0 0
Reserve For Credit Losses 0 0 0 0
Market Valuation Account 0 0 0 0
----------- ----------- ----------- -----------
Total Mortgage Securities - Trading $ 0 $ 0 $ 0 $ 0
Mortgage Securities - Available for Sale
Principal Value $ 1,779,375 $ 2,010,374 $ 2,179,186 $ 1,839,720
Unamortized Premium 51,329 56,082 62,219 49,156
Unamortized Discount (12,442) (14,387) (14,968) (15,510)
Reserve For Credit Losses (2,076) (3,093) (2,651) (2,203)
Market Valuation Account (1,390) 10,619 3,603 3,516
----------- ----------- ----------- -----------
Total Mortgage Securities - Available for Sale $ 1,814,796 $ 2,059,595 $ 2,227,389 $ 1,874,679
</TABLE>
51
<PAGE> 52
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 3 (CONTINUED)
<TABLE>
<CAPTION>
DETAIL OF INTEREST INCOME AND MORTGAGE ASSET BALANCES AT OR FOR YEAR ENDING
--------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME ON MORTGAGE ASSETS
Mortgage Loans - Held for Sale
Coupon Income $ 0 $ 0 $ 0 $ 0
Amortization of Discount Balances 0 0 0 0
Amortization of Premium Balances 0 0 0 0
----------- ----------- ----------- -----------
Interest Income: Mortgage Loans - Held for Sale $ 0 $ 0 $ 0 $ 0
Mortgage Loans - Held for Investment
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 - Held for Investment $ 65,328 $ 5,184 $ 379 $ 0
Mortgage Securities - Trading
Coupon Income $ 0 $ 0 $ 0 $ 0
Amortization of Discount Balances 0 0 0 0
Amortization of Premium Balances 0 0 0 0
----------- ----------- ----------- -----------
Interest Income: Mortgage Securities - Trading $ 0 $ 0 $ 0 $ 0
Mortgage Securities - Available for Sale
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 -Available for Sale $ 131,949 $ 61,216 $ 15,115 $ 1,184
MORTGAGE ASSET BALANCES
Mortgage Loans - Held for Sale
Principal Value $ 0 $ 0 $ 0 $ 0
Unamortized Premium 0 0 0 0
Unamortized Discount 0 0 0 0
Real Estate Owned 0 0 0 0
Reserve For Credit Losses 0 0 0 0
Market Valuation Account 0 0 0 0
----------- ----------- ----------- -----------
Total Mortgage Loans - Held for Sale $ 0 $ 0 $ 0 $ 0
Mortgage Loans - Held for Investment
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 - Held for Investment $ 1,551,826 $ 525,475 $ 26,450 $ 0
Mortgage Securities - Trading
Principal Value $ 0 $ 0 $ 0 $ 0
Unamortized Premium 0 0 0 0
Unamortized Discount 0 0 0 0
Reserve For Credit Losses 0 0 0 0
Market Valuation Account 0 0 0 0
----------- ----------- ----------- -----------
Total Mortgage Securities - Trading $ 0 $ 0 $ 0 $ 0
Mortgage Securities - Available for Sale
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 - Available for Sale $ 1,814,796 $ 1,627,953 $ 405,794 $ 117,477
</TABLE>
52
<PAGE> 53
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 4
<TABLE>
<CAPTION>
MORTGAGE ASSET CHARACTERISTICS AT OR FOR THREE MONTHS ENDING
--------------------------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Average Characteristics of Loans and Securities (Mortgage Assets)
at End of Period
Single-Family Properties 100% 100% 100%
Short-Term Adjustable Rate Mortgage Assets (First reset in 12 months or less) 62% 77% 91%
Hybrid Loans (First reset in more than 12 months) 38% 23% 9%
First Lien 98% 100% 100%
Home Equity Loans (AAA and AA securities) 2% 0% 0%
Average Credit Rating Equivalent AA+ AA+ AA+
Amortized Cost as % of Principal Value 100.51% 101.72% 102.04%
Coupon Rate 7.24% 7.42% 7.59%
Months to Next Coupon Adjustment (Short-Term Adjustable Rate Mortgage Assets) 4 4 4
Months to Next Coupon Adjustment (Hybrid Loans) 58 56 52
------------- ------------- -------------
Months to Next Coupon Adjustment (Total Mortgage Assets) 24 15 8
For Short-Term Adjustable Rate Mortgage Assets
Coupon Rate 7.37% 7.59% 7.67%
Level of Index 4.87% 5.61% 5.61%
Net Margin 2.03% 1.98% 2.02%
Fully Indexed Coupon Rate 6.90% 7.59% 7.63%
Coupon Rate Versus Fully-Indexed Rate 0.47% 0.00% 0.04%
Net Life Cap 11.63% 12.09% 12.09%
Percentage of Mortgage Assets by Credit Type, by Amortized Cost
Mortgage Loans 61.0% 58.5% 51.3%
Mortgage Securities: AAA/AA 38.8% 41.3% 48.4%
Mortgage Securities: A/BBB 0.0% 0.0% 0.0%
Mortgage Securities: Below BBB 0.2% 0.2% 0.3%
------------- ------------- -------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $ 3,745,071 $ 3,810,471 $ 3,652,409
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap, By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 11.3% 18.8% 20.2%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 14.4% 16.2% 20.0%
6 Month LIBOR, adjusts every 6 months, no periodic cap 8.2% 10.4% 11.6%
6 Month CD, adjusts every 6 months, 2% annualized periodic cap 0.8% 0.9% 1.0%
6 Mo. Treasury, adjusts every 6 months, 2% annualized periodic cap 0.4% 0.4% 0.5%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.3% 0.4% 0.4%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.0% 1.1% 1.3%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 33.1% 21.5% 8.1%
7/1 Hybrid: 12 Month Treasury with 7 year initial coupon 3.8% 21.5% 0.0%
12 Month Treasury, adjusts annually, 2% periodic cap 24.6% 28.7% 35.2%
12 Month Treasury, adjusts annually, no periodic cap 0.0% 0.3% 0.3%
Other 2.1% 1.3% 1.4%
------------- ------------- -------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0%
Total Mortgage Assets (Principal Value) $ 3,726,087 $ 3,745,963 $ 3,579,492
Net Mortgage Asset Growth
Mortgage Acquisitions $ 764,918 $ 594,836 $ 603,803
Mortgage Principal Repayments (414,719) (425,292) (306,112)
Amortization (6,866) (11,020) (8,158)
Mark-to-Market Adjustments (32,873) 0 0
Writedowns 0 0 (729)
Credit Losses (320) (462) (49)
Sales (375,539) 0 (9,289)
------------- ------------- -------------
Change in Mortgage Assets (Amortized Cost) $ (65,399) $ 158,062 $ 279,466
</TABLE>
53
<PAGE> 54
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 4 (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE ASSET CHARACTERISTICS AT OR FOR THREE MONTHS ENDING
-----------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average Characteristics of Loans and Securities
(Mortgage Assets) at End of Period
Single-Family Properties 100% 100% 100% 100%
Short-Term Adjustable Rate Mortgage Assets
(First reset in 12 months or less) 98% 98% 98% 98%
Hybrid Loans (First reset in more than 12 months) 2% 2% 2% 2%
First Lien 100% 100% 100% 100%
Home Equity Loans (AAA and AA securities) 0% 0% 0% 0%
Average Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 102.23% 102.16% 102.21% 101.94%
Coupon Rate 7.71% 7.75% 7.73% 7.70%
Months to Next Coupon Adjustment
(Short-Term Adjustable Rate Mortgage Assets) 4 4 4 5
Months to Next Coupon Adjustment
(Hybrid Loans) 21 24 27 30
------------- ------------- ------------- -------------
Months to Next Coupon Adjustment
(Total Mortgage Assets) 4 4 5 5
For Short-Term Adjustable Rate Mortgage Assets
Coupon Rate 7.73% 7.77% 7.75% 7.71%
Level of Index 5.68% 5.65% 5.77% 5.98%
Net Margin 2.05% 2.10% 2.15% 2.20%
Fully Indexed Coupon Rate 7.73% 7.75% 7.92% 8.18%
Coupon Rate Versus Fully-Indexed Rate 0.00% 0.02% -0.17% -0.47%
Net Life Cap 12.07% 12.01% 11.99% 11.88%
Percentage of Mortgage Assets by Credit
Type, by Amortized Cost
Mortgage Loans 46.1% 40.2% 33.8% 28.1%
Mortgage Securities: AAA/AA 53.6% 58.2% 64.5% 69.8%
Mortgage Securities: A/BBB 0.0% 0.7% 0.8% 1.0%
Mortgage Securities: Below BBB 0.3% 0.9% 0.9% 1.1%
------------- ------------- ------------- -------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $ 3,372,943 $ 3,431,760 $ 3,363,131 $ 2,605,323
Percentage of Mortgage Assets by Index, Adjustment Frequency,
and Annualized Periodic Cap, By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 20.2% 12.4% 8.9% 2.6%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 21.5% 26.2% 27.5% 32.4%
6 Month LIBOR, adjusts every 6 months, no periodic cap 11.2% 11.4% 7.4% 1.9%
6 Month CD, adjusts every 6 months, 2% annualized periodic cap 1.2% 1.3% 1.5% 1.9%
6 Mo. Treasury, adjusts every 6 months, 2% annualized periodic cap 0.6% 0.6% 0.6% 0.8%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.5% 0.5% 0.5% 0.7%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.6% 1.7% 1.8% 2.4%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 0.0% 0.0% 0.0% 0.0%
7/1 Hybrid: 12 Month Treasury with 7 year initial coupon 0.0% 0.0% 0.0% 0.0%
12 Month Treasury, adjusts annually, 2% periodic cap 41.6% 44.5% 50.3% 55.4%
12 Month Treasury, adjusts annually, no periodic cap 0.1% 0.1% 0.1% 0.1%
Other 1.5% 1.3% 1.4% 1.8%
------------- ------------- ------------- -------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Principal Value) $ 3,299,212 $ 3,359,213 $ 3,290,562 $ 2,555,857
Net Mortgage Asset Growth
Mortgage Acquisitions $ 342,283 $ 369,463 $ 962,890 $ 627,075
Mortgage Principal Repayments (347,427) (252,398) (199,945) (173,362)
Amortization (7,921) (6,512) (5,109) (3,818)
Mark-to-Market Adjustments 0 0 0 0
Writedowns 0 0 0 0
Credit Losses (40) (68) (28) (41)
Sales (45,712) (41,856) 0 0
------------- ------------- ------------- -------------
Change in Mortgage Assets (Amortized Cost) $ (58,817) $ 68,629 $ 757,808 $ 449,854
</TABLE>
54
<PAGE> 55
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 4 (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE ASSET CHARACTERISTICS AT OR FOR YEAR ENDING
--------------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average Characteristics of Loans and Securities
(Mortgage Assets) at End of Period
Single-Family Properties 100% 100% 100% 100%
Short-Term Adjustable Rate Mortgage Assets
(First reset in 12 months or less) 98% 100% 100% 100%
Hybrid Loans (First reset in more than 12 months) 2% 0% 0% 0%
First Lien 100% 100% 100% 100%
Home Equity Loans (AAA and AA securities) 0% 0% 0% 0%
Average Credit Rating Equivalent AA+ AA+ AA+ AA+
Amortized Cost as % of Principal Value 102.23% 101.81% 98.33% 99.59%
Coupon Rate 7.71% 7.75% 7.50% 6.00%
Months to Next Coupon Adjustment
(Short-Term Adjustable Rate Mortgage Assets) 4 5 3 3
Months to Next Coupon Adjustment (Hybrid Loans) 21 n/a n/a n/a
------------- ------------- ------------- -------------
Months to Next Coupon Adjustment (Total Mortgage Assets) 4 5 3 3
For Short-Term Adjustable Rate Mortgage Assets
Coupon Rate 7.73% 7.75% 7.50% 6.00%
Level of Index 5.68% 5.58% 5.44% 6.94%
Net Margin 2.05% 2.24% 2.08% 2.25%
Fully Indexed Coupon Rate 7.73% 7.82% 7.52% 9.19%
Coupon Rate Versus Fully-Indexed Rate 0.00% -0.07% -0.02% -3.19%
Net Life Cap 12.07% 11.73% 11.54% 11.48%
Percentage of Mortgage Assets by Credit Type,
by Amortized Cost
Mortgage Loans 46.1% 24.5% 6.1% 0.0%
Mortgage Securities: AAA/AA 53.6% 73.0% 81.5% 92.9%
Mortgage Securities: A/BBB 0.0% 1.2% 5.8% 4.3%
Mortgage Securities: Below BBB 0.3% 1.3% 6.6% 2.8%
------------- ------------- ------------- -------------
Total Mortgage Assets (%) 100.0% 100.0% 100.0% 100.0%
Total Mortgage Assets (Amortized Cost) $ 3,372,943 $ 2,155,469 $ 436,236 $ 120,135
Percentage of Mortgage Assets by Index,
Adjustment Frequency, and Annualized
Periodic Cap, By Principal Value
1 Month LIBOR, adjusts monthly, no periodic cap 20.2% 1.4% 7.6% 3.9%
6 Month LIBOR, adjusts every 6 months, 2% periodic cap 21.5% 36.2% 60.3% 78.3%
6 Month LIBOR, adjusts every 6 months, no periodic cap 11.2% 0.0% 0.0% 0.0%
6 Month CD, adjusts every 6 months,
2% annualized periodic cap 1.2% 2.5% 12.2% 17.8%
6 Mo. Treasury, adjusts every 6 months,
2% annualized periodic cap 0.6% 1.1% 0.0% 0.0%
6 Month Treasury, adjusts every 6 months, no periodic cap 0.5% 0.9% 4.9% 0.0%
3/1 Hybrid: 12 Month Treasury with 3 year initial coupon 1.6% 0.0% 0.0% 0.0%
5/1 Hybrid: 12 Month Treasury with 5 year initial coupon 0.0% 0.0% 0.0% 0.0%
7/1 Hybrid: 12 Month Treasury with 7 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
Mark-to-Market Adjustments 0 0 0 0
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>
55
<PAGE> 56
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 5
<TABLE>
<CAPTION>
AT
----------------------------------------------
MORTGAGE LOAN SUMMARY SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1998 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Number of Loans 7,299 7,032 5,939
Principal Value $ 2,265,305 $ 2,191,767 $ 1,837,518
Amortized Cost 2,284,254 2,227,427 1,875,433
Reported Value (Net of Credit Reserve) 2,280,864 2,223,348 1,871,984
Estimated Bid-Side Market Value 2,283,738 2,219,772 1,872,775
Short-Term Adjustable Rate Loans (Initial reset in 12 months or less) 37.6% 61.8% 81.6%
Hybrid Loans (Initial reset in more than 12 months) 62.4% 38.2% 18.4%
Single-Family 100.0% 100.0% 100.0%
"A" Quality Underwriting 100.0% 100.0% 100.0%
First Lien 100.0% 100.0% 100.0%
Primary Residence (Owner-Occupied) 93.7% 90.6% 89.3%
Second Home 4.9% 7.1% 7.9%
Investor Property 1.4% 2.3% 2.8%
Average Loan Size $ 310 $ 312 $ 309
Loan Balance < Conventional Loan Balance Limit ($227,150 in 1998) 12.6% 15.9% 18.8%
Loan Balance Greater Than $500,000 25.9% 32.9% 36.4%
Original Loan-To-Value Ratio 74.6% 76.1% 77.0%
Original Loan-to-Value Ratio > 80% 24.3% 30.8% 34.6%
% of Original Loan-to-Value Ratio > 80% with Primary Mortgage 97.3% 97.0% 96.5%
Insurance or Pledged Account Collateral
Effective Average Original Loan-to-Value Ratio Including Primary 68.0% 67.3% 66.8%
Mortgage Insurance or Pledged Account Collateral
Year of Origination
1992 and Prior Years' Origination 2.2% 2.6% 3.5%
1993 1.1% 1.6% 2.5%
1994 4.9% 6.4% 9.6%
1995 0.5% 0.7% 1.0%
1996 4.9% 5.9% 8.1%
1997 34.2% 51.6% 63.8%
1998 52.2% 31.2% 11.5%
Average Seasoning in Months 15 15 16
Geographic Distribution of Properties Securing Loans
Northern California 24.7% 18.0% 12.6%
Southern California 19.2% 16.9% 17.2%
Florida 5.5% 7.5% 8.8%
New York 4.2% 5.6% 6.7%
New Jersey 3.8% 4.2% 4.2%
Colorado 3.7% 4.5% 4.3%
Texas 3.4% 3.5% 4.0%
Illinois 3.3% 3.0% 3.0%
Connecticut 2.8% 3.4% 3.7%
Georgia 2.8% 4.6% 5.1%
Washington 2.5% 1.8% 1.7%
Massachusetts 2.3% 2.3% 2.5%
Michigan 2.2% 2.3% 2.3%
Maryland 1.9% 2.2% 2.6%
Other States 17.7% 20.2% 21.3%
</TABLE>
56
<PAGE> 57
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 5 (CONTINUED)
<TABLE>
<CAPTION>
AT
---------------------------------------------------------
MORTGAGE LOAN SUMMARY DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1997 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Number of Loans 5,041 4,651 3,983 2,795
Principal Value $ 1,519,837 $ 1,348,839 $ 1,111,376 $ 716,137
Amortized Cost 1,554,681 1,379,691 1,136,694 731,957
Reported Value (Net of Credit Reserve) 1,551,826 1,378,328 1,135,765 730,035
Estimated Bid-Side Market Value 1,552,586 1,379,166 1,136,004 729,561
Short-Term Adjustable Rate Loans (Initial reset in 12 months or less) 96.4% 95.9% 94.8% 91.6%
Hybrid Loans (Initial reset in more than 12 months) 3.6% 4.2% 5.2% 8.4%
Single-Family 100.0% 100.0% 100.0% 100.0%
"A" Quality Underwriting 100.0% 100.0% 100.0% 100.0%
First Lien 100.0% 100.0% 100.0% 100.0%
Primary Residence (Owner-Occupied) 88.6% 90.6% 91.9% 94.3%
Second Home 8.5% 7.2% 6.0% 4.0%
Investor Property 2.9% 2.4% 2.1% 1.7%
Average Loan Size $ 301 $ 290 $ 279 $ 256
Loan Balance < Conventional Loan Balance Limit ($227,150 in 1998) 18.1% 19.3% 19.8% 19.7%
Loan Balance Greater Than $500,000 36.5% 32.6% 27.0% 14.3%
Original Loan-To-Value Ratio 77.7% 76.5% 77.7% 73.7%
Original Loan-to-Value Ratio > 80% 37.5% 34.5% 32.8% 24.3%
% of Original Loan-to-Value Ratio > 80% with Primary Mortgage 94.9% 95.6% 93.8% 94.5%
Insurance or Pledged Account Collateral
Effective Average Original Loan-to-Value Ratio Including Primary 66.1% 66.3% 69.2% 68.5%
Mortgage Insurance or Pledged Account Collateral
Year of Origination
1992 and Prior Years' Origination 4.6% 5.8% 8.0% 13.8%
1993 3.5% 4.3% 5.8% 9.3%
1994 13.3% 16.9% 23.1% 40.6%
1995 1.3% 1.6% 2.4% 4.3%
1996 11.1% 13.9% 18.2% 29.9%
1997 66.2% 57.5% 42.5% 2.1%
1998 n/a n/a n/a n/a
Average Seasoning in Months 18 19 22 33
Geographic Distribution of Properties Securing Loans
Northern California 11.2% 12.5% 12.8% 16.9%
Southern California 18.2% 19.1% 20.9% 24.4%
Florida 9.4% 8.6% 8.2% 4.6%
New York 7.2% 6.4% 5.3% 3.8%
New Jersey 4.4% 4.2% 3.9% 3.2%
Colorado 3.8% 3.1% 2.9% 2.2%
Texas 3.9% 4.1% 3.7% 3.4%
Illinois 2.9% 3.2% 3.5% 4.0%
Connecticut 4.2% 4.1% 3.7% 3.2%
Georgia 4.9% 3.9% 3.1% 2.3%
Washington 1.3% 1.6% 1.2% 1.4%
Massachusetts 2.4% 2.3% 2.3% 2.7%
Michigan 1.9% 2.1% 2.0% 1.6%
Maryland 3.0% 3.4% 4.3% 6.4%
Other States 21.3% 21.4% 22.2% 19.9%
</TABLE>
57
<PAGE> 58
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 5 (CONTINUED)
<TABLE>
<CAPTION>
AT
----------------------------------------------------------
MORTGAGE LOAN SUMMARY DEC. 31, DEC. 31, DEC. 31, DEC. 31,
(ALL DOLLARS IN THOUSANDS) 1997 1996 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Number of Loans 5,041 2,172 109 0
Principal Value $ 1,519,837 $ 515,033 $ 26,411 $ 0
Amortized Cost 1,554,681 527,280 26,449 0
Reported Value (Net of Credit Reserve) 1,551,826 525,475 26,450 0
Estimated Bid-Side Market Value 1,552,586 525,475 26,450 0
Short-Term Adjustable Rate Loans
(Initial reset in 12 months or less) 96.4% 100.0% 100.0% n/a
Hybrid Loans (Initial reset in more than 12 months) 3.6% 0.0% 0.0% n/a
Single-Family 100.0% 100.0% 100.0% n/a
"A" Quality Underwriting 100.0% 100.0% 100.0% n/a
First Lien 100.0% 100.0% 100.0% n/a
Primary Residence (Owner-Occupied) 88.6% 94.4% 100.0% n/a
Second Home 8.5% 4.0% 0.0% n/a
Investor Property 2.9% 2.0% 0.0% n/a
Average Loan Size $ 301 $ 237 $ 242 n/a
Loan Balance < Conventional Loan Balance Limit ($227,150 in 1998) 18.1% 21.7% 11.3% n/a
Loan Balance Greater Than $500,000 36.5% 7.6% 12.8% n/a
Original Loan-To-Value Ratio 77.7% 76.8% 76.0% n/a
Original Loan-to-Value Ratio > 80% 37.5% 25.3% 26.0% n/a
% of Original Loan-to-Value Ratio > 80% with
Primary Mortgage 94.9% 96.6% 100.0% n/a
Insurance or Pledged Account Collateral
Effective Average Original Loan-to-Value Ratio
Including Primary 66.1% 73.2% 72.4% n/a
Mortgage Insurance or Pledged Account Collateral
Year of Origination
1992 and Prior Years' Origination 4.6% 19.1% 0.0% n/a
1993 3.5% 13.5% 0.0% n/a
1994 13.3% 52.5% 2.0% n/a
1995 1.3% 7.2% 98.0% n/a
1996 11.1% 7.7% n/a n/a
1997 66.2% n/a n/a n/a
1998 n/a n/a n/a n/a
Average Seasoning in Months 18 37 4 n/a
Geographic Distribution of Properties Securing Loans
Northern California 11.2% 17.5% 30.0% n/a
Southern California 18.2% 26.0% 44.0% n/a
Florida 9.4% 4.2% 1.1% n/a
New York 7.2% 3.1% 0.0% n/a
New Jersey 4.4% 2.8% 1.2% n/a
Colorado 3.8% 1.3% 3.2% n/a
Texas 3.9% 2.3% 3.9% n/a
Illinois 2.9% 3.8% 0.0% n/a
Connecticut 4.2% 3.0% 1.3% n/a
Georgia 4.9% 2.3% 1.0% n/a
Washington
Massachusetts 2.4% 3.4% 1.7% n/a
Michigan 1.9% 1.1% 0.0% n/a
Maryland 3.0% 8.0% 1.6% n/a
Other States 21.3% 19.9% 7.2% n/a
</TABLE>
58
<PAGE> 59
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 6
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDING
EARNING ASSET YIELD, INTEREST RATE SPREAD -------------------------------------
AND INTEREST RATE MARGIN SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.22% 7.52% 7.65%
Amortized Cost as % of Principal Value 101.13% 101.98% 102.21%
Coupon Yield on Amortized Cost 7.14% 7.37% 7.49%
Effect of Premium/Discount Amortization -0.72% -1.26% -0.99%
Mortgage Yield 6.42% 6.11% 6.50%
Cash Yield 5.68% 5.23% 5.51%
--------- --------- ---------
Earning Asset Yield (Mortgages plus Cash) 6.42% 6.10% 6.49%
Cost of Funds of Short-Term Borrowings 5.93% 5.88% 5.77%
Cost of Funds of Long-Term Borrowings 6.46% 6.45% 6.44%
--------- --------- ---------
Total Cost of Funds 6.15% 6.06% 6.01%
Cost of Hedging (as % of Borrowings) 0.03% 0.19% 0.18%
Interest Rate Spread 0.24% -0.15% 0.30%
Net Interest Margin (Net Interest Income/Assets) 0.52% 0.22% 0.75%
Net Interest Income/Average Equity 7.04% 2.33% 7.45%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets -0.06% 0.08% 0.07%
Credit Provisions as a % of Equity -0.87% 0.89% 0.70%
Operating Expenses to Average Assets 0.10% 0.06% 0.22%
Operating Expenses to Average Equity 1.41% 0.69% 2.24%
Efficiency Ratio (Op. Exp./Net Int. Income) 20.03% 29.65% 30.14%
Combined Entity Total Operating Expenses $ 2,751 $ 1,379 $ 1,925
Combined Entity Operating Expenses to Average Assets 0.28% 0.14% 0.22%
Combined Entity Operating Expenses to Average Equity 3.77% 1.62% 2.24%
Combined Entity Efficiency Ratio (Op. Exp./Net Int. Income) 52.18% 59.71% 30.14%
GAAP Return on Common Equity -72.19% -0.62% 3.10%
Taxable Income Return on Common Equity -14.97% 0.19% 4.86%
PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 29% 34% 26%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 23% 28% 22%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 37% 40% 29%
</TABLE>
59
<PAGE> 60
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 6 (CONTINUED)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDING
EARNING ASSET YIELD, INTEREST RATE SPREAD ---------------------------------------------------
AND INTEREST RATE MARGIN DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.70% 7.77% 7.74% 7.70%
Amortized Cost as % of Principal Value 102.20% 102.22% 102.15% 101.84%
Coupon Yield on Amortized Cost 7.53% 7.60% 7.57% 7.56%
Effect of Premium/Discount Amortization -0.98% -0.79% -0.71% -0.68%
Mortgage Yield 6.55% 6.81% 6.86% 6.88%
Cash Yield 5.59% 5.60% 5.52% 5.33%
--------- --------- --------- ---------
Earning Asset Yield (Mortgages plus Cash) 6.54% 6.80% 6.86% 6.87%
Cost of Funds of Short-Term Borrowings 5.96% 5.98% 5.86% 5.62%
Cost of Funds of Long-Term Borrowings 6.40% 6.28% n/a n/a
--------- --------- --------- ---------
Total Cost of Funds 6.09% 6.02% 5.86% 5.62%
Cost of Hedging (as % of Borrowings) 0.17% 0.14% 0.13% 0.12%
Interest Rate Spread 0.28% 0.64% 0.87% 1.13%
Net Interest Margin (Net Interest Income/Assets) 0.72% 1.12% 1.31% 1.57%
Net Interest Income/Average Equity 7.06% 11.13% 13.25% 15.30%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.06% 0.11% 0.10% 0.12%
Credit Provisions as a % of Equity 0.59% 1.09% 1.06% 1.17%
Operating Expenses to Average Assets 0.13% 0.13% 0.16% 0.20%
Operating Expenses to Average Equity 1.29% 1.33% 1.66% 1.97%
Efficiency Ratio (Op. Exp./Net Int. Income) 18.25% 11.93% 12.51% 12.86%
Combined Entity Total Operating Expenses $ 1,128 $ 1,148 $ 1,215 $ 1,167
Combined Entity Operating Expenses to Average Assets 0.13% 0.13% 0.16% 0.20%
Combined Entity Operating Expenses to Average Equity 1.29% 1.33% 1.66% 1.97%
Combined Entity Efficiency Ratio (Op. Exp./Net Int. Income) 18.25% 11.93% 12.51% 12.86%
GAAP Return on Common Equity 5.43% 8.60% 10.65% 12.44%
Taxable Income Return on Common Equity 6.06% 9.36% 11.55% 13.79%
PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 27% 24% 23% 24%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 24% 23% 28% 24%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 30% 25% 22% 23%
</TABLE>
60
<PAGE> 61
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 6 (CONTINUED)
<TABLE>
<CAPTION>
EARNING ASSET YIELD, INTEREST RATE SPREAD FOR YEAR ENDING
AND INTEREST RATE MARGIN ---------------------------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Mortgage Coupon Rate (All Mortgage Assets) 7.72% 7.55% 7.16% 6.09%
Amortized Cost as % of Principal Value 102.13% 100.68% 99.02% 100.02%
Coupon Yield on Amortized Cost 7.56% 7.50% 7.23% 6.09%
Effect of Premium/Discount Amortization -0.81% -0.55% 0.17% 0.45%
Mortgage Yield 6.75% 6.95% 7.40% 6.54%
Cash Yield 5.53% 5.51% 5.43% 4.73%
--------- --------- --------- ---------
Earning Asset Yield (Mortgages plus Cash) 6.74% 6.93% 7.36% 6.33%
Cost of Funds of Short-Term Borrowings 5.86% 5.71% 6.06% 5.55%
Cost of Funds of Long-Term Borrowings 6.31% n/a n/a n/a
--------- --------- --------- ---------
Total Cost of Funds 5.92% 5.71% 6.06% 5.55%
Cost of Hedging (as % of Borrowings) 0.14% 0.13% 0.19% 0.06%
Interest Rate Spread 0.68% 1.09% 1.11% 0.72%
Net Interest Margin (Net Interest Income/Assets) 1.14% 1.69% 2.17% 2.50%
Net Interest Income/Average Equity 11.27% 12.90% 11.03% 7.27%
SELECTED OPERATING RATIOS AND RETURN ON EQUITY
Credit Provisions as a % of Assets 0.10% 0.17% 0.22% 0.00%
Credit Provisions as a % of Equity 0.95% 1.29% 1.14% 0.00%
Operating Expenses to Average Assets 0.15% 0.26% 0.51% 0.69%
Operating Expenses to Average Equity 1.52% 1.94% 2.61% 2.01%
Efficiency Ratio (Op. Exp./Net Int. Income) 13.47% 15.08% 23.66% 27.73%
Combined Entity Total Operating Expenses $ 4,658 $ 2,554 $ 1,131 $ 146
Combined Entity Operating Expenses to Average Assets 0.15% 0.26% 0.51% 0.69%
Combined Entity Operating Expenses to Average Equity 1.52% 1.94% 2.61% 2.01%
Combined Entity Efficiency Ratio (Op. Exp./Net Int. Income) 13.47% 15.08% 23.66% 27.73%
GAAP Return on Common Equity 8.87% 9.61% 7.28% 5.25%
Taxable Income Return on Common Equity 9.73% 11.68% 8.84% 4.86%
PREPAYMENT RATES
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities and Mortgage Loan Pools 25% 25% 19% 9%
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Loan Pools 24% 26% 5% n/a
Average Annual Conditional Prepayment Rate (CPR) of Underlying
Mortgages in Mortgage Securities Pools 25% 24% 19% 9%
</TABLE>
61
<PAGE> 62
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 7
<TABLE>
<CAPTION>
AVERAGE DAILY BALANCE SHEET AT OR FOR THREE MONTHS ENDING
---------------------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash $ 32,316 $ 34,833 $ 27,907
Mortgage Loans 2,332,743 1,867,851 1,546,869
Mortgage Securities 1,472,594 1,622,388 1,745,368
Credit Reserve (5,733) (5,677) (5,126)
Market Valuation Adjustment, Mortgage Assets 1,295 (4,401) (4,272)
Interest Rate Agreements 679 9,995 10,394
Market Valuation Adjustment, Interest Rate Agreements 0 (8,246) (8,863)
Other Assets 128,846 136,765 98,835
----------- ----------- -----------
Total Assets 3,962,741 3,653,508 3,411,112
----------- ----------- -----------
Short-Term Borrowings 2,127,967 2,263,697 1,942,426
Long-Term Borrowings 1,526,785 1,047,828 1,124,190
Other Liabilities 14,737 13,464 14,602
----------- ----------- -----------
Total Liabilities 3,669,488 3,324,989 3,081,218
----------- ----------- -----------
Preferred Stock 26,736 26,736 26,736
Common Stock 305,633 321,266 321,420
Market Valuation Adjustment 1,295 (12,647) (13,136)
Retained Earnings, after Dividend (40,411) (6,836) (5,127)
----------- ----------- -----------
Stockholders' Equity $ 293,253 $ 328,519 $ 329,894
=========== =========== ===========
Amortized Cost of Total Assets $ 3,961,446 $ 3,666,155 $ 3,424,247
Equity, before Market Valuation Adjustments 291,958 341,166 343,029
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 58.5% 54.9% 67.9%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 8.0% 9.3% 11.3%
Long-Term Borrowings: Federal Funds, 10% cap 2.6% 3.2% 4.2%
Long-Term Borrowings: 1 Year Treasury, 10% cap 13.7% 14.7% 16.6%
Long-Term Borrowings: Fixed Rate until December 2002 17.2% 18.0% 0.0%
----------- ----------- -----------
Total Borrowings % 100.0% 100.0% 100.0%
Total Borrowings $ $ 3,533,054 $ 3,529,502 $ 3,369,297
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 3,811 $ 11,354 $ 6,468
Estimated Borrowing Capacity 113,764 145,285 174,702
----------- ----------- -----------
Total Liquidity $ 117,575 $ 156,639 $ 181,170
Total Liquidity as Percent of Short-Term Borrowings 6% 8% 8%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 30,653 $ 75,158 $ 85,048
Unamortized Discount of Mortgage Assets (11,669) (10,651) (12,131)
Unamortized Deferred Bond Issuance Cost of Long-Term Debt 4,140 4,704 3,300
Net Unamortized Premium of Long-Term Debt (6,451) (6,970) (5,551)
----------- ----------- -----------
Net Premium $ 16,673 $ 62,242 $ 70,666
Net Premium as Percent of Equity (before Market Value Adjustments) 6.5% 18.4% 20.6%
Net Premium as Percent of Common Equity (before MV Adjustments) 7.2% 19.9% 22.4%
Net Premium as Percent of Assets (Amortized Cost) 0.4% 1.6% 1.9%
</TABLE>
62
<PAGE> 63
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 7 (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE DAILY BALANCE SHEET AT OR FOR THREE MONTHS ENDING
--------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 28,592 $ 35,647 $ 19,307 $ 12,147
Mortgage Loans 1,360,029 1,155,099 758,445 574,781
Mortgage Securities 1,914,118 2,136,442 2,111,832 1,658,629
Credit Reserve (4,679) (3,873) (3,083) (2,394)
Market Valuation Adjustment, Mortgage Assets 5,937 6,072 1,913 1,022
Interest Rate Agreements 11,207 11,943 11,185 6,899
Market Valuation Adjustment, Interest Rate Agreements (8,792) (8,640) (4,576) (4,004)
Other Assets 117,643 85,689 75,928 58,856
----------- ----------- ----------- -----------
Total Assets 3,424,055 3,418,379 2,970,951 2,305,936
----------- ----------- ----------- -----------
Short-Term Borrowings 2,144,794 2,695,438 2,659,914 2,056,051
Long-Term Borrowings 910,870 355,028 0 0
Other Liabilities 20,912 24,714 20,530 15,691
----------- ----------- ----------- -----------
Total Liabilities 3,076,576 3,075,181 2,680,444 2,071,742
----------- ----------- ----------- -----------
Preferred Stock 26,733 26,733 28,946 29,545
Common Stock 328,384 321,492 265,561 208,426
Market Valuation Adjustment (2,855) (2,568) (2,663) (2,982)
Retained Earnings, after Dividend (4,783) (2,458) (1,337) (795)
----------- ----------- ----------- -----------
Stockholders' Equity $ 347,479 $ 343,199 $ 290,507 $ 234,194
=========== =========== =========== ===========
Amortized Cost of Total Assets $ 3,426,910 $ 3,420,947 $ 2,973,614 $ 2,308,918
Equity, before Market Valuation Adjustments 350,334 345,767 293,170 237,176
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 62.0% 84.1% 100.0% 100.0%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 13.8% 9.9% 0.0% 0.0%
Long-Term Borrowings: Federal Funds, 10% cap 5.3% 6.0% 0.0% 0.0%
Long-Term Borrowings: 1 Year Treasury, 10% cap 18.9% 0.0% 0.0% 0.0%
Long-Term Borrowings: Fixed Rate until December 2002 0.0% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Total Borrowings % 100.0% 100.0% 100.0% 100.0%
Total Borrowings $ $ 3,087,326 $ 3,137,140 $ 3,102,784 $ 2,373,279
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 24,893 $ 28,758 $ 29,425 $ 12,985
Estimated Borrowing Capacity 182,713 206,442 160,338 140,561
----------- ----------- ----------- -----------
Total Liquidity $ 207,606 $ 235,200 $ 189,763 $ 153,546
Total Liquidity as Percent of Short-Term Borrowings 11% 9% 6% 6%
NET PREMIUM AS % OF EQUITY AND ASSETS
(AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 86,173 $ 86,934 $ 87,661 $ 65,107
Unamortized Discount of Mortgage Assets (12,442) (14,387) (15,091) (15,641)
Unamortized Deferred Bond Issuance Cost of
Long-Term Debt 3,703 1,492 0 0
Net Unamortized Premium of Long-Term Debt (5,795) 0 0 0
----------- ----------- ----------- -----------
Net Premium $ 71,639 $ 74,039 $ 72,569 $ 49,466
Net Premium as Percent of Equity
(before Market Value Adjustments) 20.8% 20.9% 24.4% 20.1%
Net Premium as Percent of Common Equity
(before MV Adjustments) 22.5% 22.6% 26.9% 22.9%
Net Premium as Percent of Assets
(Amortized Cost) 2.1% 2.1% 2.1% 1.9%
</TABLE>
63
<PAGE> 64
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 7 (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE DAILY BALANCE SHEET AT OR FOR YEAR ENDING
--------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 24,001 $ 16,016 $ 4,272 $ 6,627
Mortgage Loans 964,768 77,215 5,006 0
Mortgage Securities 1,956,452 877,907 204,284 50,080
Credit Reserve (3,514) (1,262) (92) 0
Market Valuation Adjustment, Mortgage Assets (1,134) (2,347) (78) (583)
Interest Rate Agreements 10,325 3,280 2,039 759
Market Valuation Adjustment, Interest Rate Agreements (2,482) (1,948) (1,046) 31
Other Assets 84,693 26,606 5,107 948
----------- ----------- ----------- -----------
Total Assets 3,033,108 995,467 219,492 57,862
----------- ----------- ----------- -----------
Short-Term Borrowings 2,390,132 861,316 174,926 37,910
Long-Term Borrowings 319,076 0 0 0
Other Liabilities 20,488 7,131 2,342 367
----------- ----------- ----------- -----------
Total Liabilities 2,729,696 868,447 177,268 38,277
----------- ----------- ----------- -----------
Preferred Stock 27,978 11,274 0 0
Common Stock 281,405 120,436 43,390 20,941
Market Valuation Adjustment (3,617) (4,295) (1,124) (552)
Retained Earnings, after Dividend (2,354) (395) (42) (804)
----------- ----------- ----------- -----------
Stockholders' Equity $ 303,412 $ 127,020 $ 42,224 $ 19,585
============ =========== =========== ===========
Amortized Cost of Total Assets $ 3,036,725 $ 999,762 $ 220,616 $ 58,414
Equity, before Market Valuation Adjustments 307,029 131,315 43,349 20,137
BORROWING COMPOSITION (AT END OF PERIOD)
Short-Term Borrowings: 1 to 6 Month LIBOR, no caps 62.0% 100.0% 100.0% 100.0%
Long-Term Borrowings: 1 Month LIBOR, 10% cap 13.8% 0.0% 0.0% 0.0%
Long-Term Borrowings: Federal Funds, 10% cap 5.3% 0.0% 0.0% 0.0%
Long-Term Borrowings: 1 Year Treasury, 10% cap 18.9% 0.0% 0.0% 0.0%
Long-Term Borrowings: Fixed Rate until December 2002 0.0% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Total Borrowings % 100.0% 100.0% 100.0% 100.0%
Total Borrowings $ $ 3,087,326 $ 1,953,103 $ 370,316 $ 100,376
LIQUIDITY (AT END OF PERIOD)
Unrestricted Cash $ 24,893 $ 11,068 $ 4,825 $ 1,027
Estimated Borrowing Capacity 182,713 123,995 38,698 11,907
----------- ----------- ----------- -----------
Total Liquidity $ 207,606 $ 135,063 $ 43,523 $ 12,934
Total Liquidity as Percent of Short-Term Borrowings 11% 7% 12% 13%
NET PREMIUM AS % OF EQUITY AND ASSETS (AT END OF PERIOD)
Unamortized Premium of Mortgage Assets $ 86,173 $ 54,318 $ 9,644 $ 827
Unamortized Discount of Mortgage Assets (12,442) (16,093) (17,032) (1,320)
Unamortized Deferred Bond Issuance Cost of Long-Term Debt 3,703 0 0 0
Net Unamortized Premium of Long-Term Debt (5,795) 0 0 0
----------- ----------- ----------- -----------
Net Premium $ 71,639 $ 38,225 $ (7,389) $ (493)
Net Premium as Percent of Equity
(before Market Value Adjustments) 20.8% 17.8% -10.0% -2.2%
Net Premium as Percent of Common Equity
(before MV Adjustments) 22.5% 20.7% -10.0% -2.2%
Net Premium as Percent of Assets
(Amortized Cost) 2.1% 1.7% -1.7% -0.4%
</TABLE>
64
<PAGE> 65
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 8
<TABLE>
<CAPTION>
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / AT OR FOR THREE MONTHS ENDING
REALIZABLE VALUE --------------------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash $ 23,486 $ 32,914 $ 32,202
Mortgage Loans 2,283,738 2,219,772 1,872,775
Mortgage Securities 1,459,702 1,570,842 1,770,566
Interest Rate Agreements 2,285 (123) 2,584
Other Assets 34,824 36,476 36,521
Short-Term Borrowings 2,067,166 1,936,158 2,288,018
Long-Term Borrowings 1,464,947 1,591,961 1,080,530
Other Liabilities 10,094 15,255 13,288
----------- ----------- -----------
"Mark-To-Market" of Total Equity 261,828 316,507 332,812
Liquidation Cost of Preferred Equity 28,195 28,195 28,195
----------- ----------- -----------
"Mark-To-Market" of Common Equity $ 233,633 $ 288,312 $ 304,617
"Mark-To-Market" of Common Equity / Common Share Outstanding $ 19.74 $ 20.48 $ 21.65
Reported Common Equity Per Common Share Outstanding $ 19.51 $ 20.89 $ 21.53
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD
VERSUS RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 7.37% 9.31% 10.02%
Average Risk-Adjusted Capital Guideline 6.43% 7.37% 7.76%
Average Balance Sheet Capacity Utilization 87% 79% 77%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 6.77% 8.30% 8.88%
Ending Risk-Adjusted Capital Guideline 6.08% 6.48% 7.59%
Excess Capital $ 25,559 $ 64,465 $ 49,552
Estimated Asset Growth Potential
(Same Asset Mix and Funding) $ 418,136 $ 1,007,936 $ 560,440
Estimated Asset Growth Potential Assuming All Assets
(existing and future) Use Long-Term Funding $ 1,288,989 $ 3,800,803 $ 4,185,088
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 20.6% 19.9% 22.1%
Mortgage Securities Rated "AAA" or "AA" 30.7% 26.3% 28.0%
Mortgage Securities Rated "A" or below 0.0% 0.0% 0.0%
Mortgage Loans 17.0% 12.6% 18.2%
----------- ----------- -----------
Equity Investment in Assets with Short-Term Funding 68.3% 58.8% 68.3%
Equity Investment in Assets with Long-Term,
Non-Recourse Funding (Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 3.6% 2.9% 2.8%
Mortgage Loans 18.1% 17.8% 14.1%
----------- ----------- -----------
Equity Investment in Assets with Long-Term,
Non-Recourse Funding 21.7% 20.7% 16.9%
Excess Capital 10.0% 20.5% 14.8%
----------- ----------- -----------
Total Market-Value of Capital % 100.0% 100.0% 100.0%
Total Capital Available per Risk-Adjusted Capital $ 256,571 $ 314,679 $ 331,548
Capital Utilization at Period-end 90% 80% 85%
Capital Utilization at Period-end assuming all Mortgage
Loans use Long-Term, Non-Recourse Funding 82% 73% 76%
</TABLE>
65
<PAGE> 66
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 8 (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / AT OR FOR THREE MONTHS ENDING
REALIZABLE VALUE ------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash $ 49,549 $ 57,696 $ 29,425 $ 12,985
Mortgage Loans 1,552,586 1,379,166 1,136,004 729,561
Mortgage Securities 1,814,796 2,059,595 2,227,389 1,874,679
Interest Rate Agreements 1,522 2,169 4,206 5,773
Other Assets 25,156 26,048 25,857 19,291
Short-Term Borrowings 1,914,525 2,639,773 3,102,784 2,373,279
Long-Term Borrowings 1,172,938 497,465 0 0
Other Liabilities 21,201 30,628 27,515 23,411
----------- ----------- ----------- -----------
"Mark-To-Market" of Total Equity 334,945 356,808 292,582 245,598
Liquidation Cost of Preferred Equity 28,195 28,195 28,195 30,989
----------- ----------- ----------- -----------
"Mark-To-Market" of Common Equity $ 306,750 $ 328,613 $ 264,387 $ 214,610
"Mark-To-Market" of Common Equity / Common Share Outstanding $ 21.47 $ 22.54 $ 19.95 $ 18.03
Reported Common Equity Per Common Share Outstanding $ 21.55 $ 22.61 $ 20.11 $ 18.17
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD VERSUS
RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 10.22% 10.11% 9.86% 10.27%
Average Risk-Adjusted Capital Guideline 8.07% 9.04% 9.52% 10.10%
Average Balance Sheet Capacity Utilization 79% 89% 96% 98%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 9.71% 10.12% 8.55% 9.28%
Ending Risk-Adjusted Capital Guideline 7.51% 8.59% 9.41% 10.09%
Excess Capital $ 76,589 $ 53,027 $ (27,047) $ (20,519)
Estimated Asset Growth Potential (Same Asset Mix and Funding) $ 1,037,376 $ 551,347 $ (563,228) $ (267,698)
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $ 4,791,828 $ 5,209,015 $ 3,461,784 $ 3,450,901
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 24.0% 25.7% 35.7% 37.0%
Mortgage Securities Rated "AAA" or "AA" 27.6% 28.6% 36.3% 37.1%
Mortgage Securities Rated "A" or below 0.0% 5.9% 6.4% 7.6%
Mortgage Loans 8.2% 17.9% 30.8% 26.6%
----------- ----------- ----------- -----------
Equity Investment in Assets with Short-Term Funding 59.8% 78.1% 109.2% 108.3%
Equity Investment in Assets with Long-Term, Non-Recourse Funding
(Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 2.7% 0.0% 0.0% 0.0%
Mortgage Loans 14.7% 7.1% 0.0% 0.0%
----------- ----------- ----------- -----------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 17.4% 7.1% 0.0% 0.0%
Excess Capital 22.8% 14.9% -9.2% -8.3%
----------- ----------- ----------- -----------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0%
Total Capital Available per Risk-Adjusted Capital $ 335,345 $ 355,797 $ 294,952 $ 246,109
Capital Utilization at Period-end 77% 85% 109% 108%
Capital Utilization at Period-end assuming all Mortgage
Loans use Long-Term, Non-Recourse Funding 73% 76% 94% 95%
</TABLE>
66
<PAGE> 67
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 8 (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED PERIOD-END BID-SIDE MARKET VALUE / AT OR 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
AVERAGE BALANCE SHEET UTILIZATION DURING PERIOD
VERSUS RISK-ADJUSTED CAPITAL GUIDELINES
Actual Average Equity/Assets 10.11% 13.13% 19.65% 34.47%
Average Risk-Adjusted Capital Guideline 9.09% 10.93% 13.45% 10.62%
Average Balance Sheet Capacity Utilization 90% 83% 68% 31%
Excess Capital and Asset Growth Potential At Period End
Ending Actual Equity/Assets 9.71% 9.66% 15.47% 16.69%
Ending Risk-Adjusted Capital Guideline 7.51% 9.97% 12.59% 10.84%
Excess Capital $ 76,589 $ (7,835) $ 12,117 $ 6,600
Estimated Asset Growth Potential (Same Asset Mix and Funding) $ 1,037,376 $ 254,662 $ 104,902 $ 215,757
Estimated Asset Growth Potential Assuming All Assets (existing
and future) Use Long-Term Funding $ 4,791,828 $ 3,970,772 $ 1,340,981 $ 799,596
INVESTMENT OF RISK-ADJUSTED CAPITAL
Equity Investments in Assets with Short-Term Funding
Agencies 24.0% 39.3% 29.3% 33.1%
Mortgage Securities Rated "AAA" or "AA" 27.6% 32.6% 22.7% 18.9%
Mortgage Securities Rated "A" or below 0.0% 8.9% 26.7% 14.8%
Mortgage Loans 8.2% 22.9% 3.5% 0.0%
----------- ----------- ----------- -----------
Equity Investment in Assets with Short-Term Funding 59.8% 103.7% 82.2% 66.9%
Equity Investment in Assets with Long-Term, Non-Recourse Funding
(Mortgage Equity Interests)
Mortgage Securities Rated "A" or below 2.7% 0.0% 0.0% 0.0%
Mortgage Loans 14.7% 0.0% 0.0% 0.0%
----------- ----------- ----------- -----------
Equity Investment in Assets with Long-Term, Non-Recourse Funding 17.4% 0.0% 0.0% 0.0%
Excess Capital 22.8% -3.7% 17.8% 33.1%
----------- ----------- ----------- -----------
Total Market-Value of Capital % 100.0% 100.0% 100.0% 100.0%
Total Capital Available per Risk-Adjusted Capital $ 334,945 $ 211,241 $ 68,142 $ 20,036
Capital Utilization at Period-end 77% 104% 82% 67%
Capital Utilization at Period-end assuming all Mortgage
Loans use Long-Term, Non-Recourse Funding 73% 92% 80% 67%
</TABLE>
67
<PAGE> 68
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 9
<TABLE>
<CAPTION>
CREDIT PROVISIONS AND CREDIT RESERVES AT OR FOR THREE MONTHS ENDING
--------------------------------
(ALL DOLLARS IN THOUSANDS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
------- ------- -------
<S> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ (638) $ 763 $ 601
Actual Losses During Period 51 133 7
Cumulative Actual Losses 267 216 83
Mortgage Loan Credit Reserve at End of Period 3,390 4,079 3,450
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans Held for Investment -0.22% 0.16% 0.16%
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans - Held for Investment at Period End
(as of 9/30/98) 0.27% 0.18% 0.18%
Non-Performing Assets: 90+ Days Delinquent,
Foreclosures, Bankruptcies, and REO
Number of Loans 17 21 19
Non-Performing Assets Loan Balance $ 4,862 $ 4,947 $ 4,358
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.21% 0.22% 0.23%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.13% 0.13% 0.12%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 70% 82% 79%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 14 9 7
Average Loss Severity Experience (Cumulative) 9% 11% 6%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future) Non-Performing Mortgage
Loans Held for Investment Default:
At 10% Loss Severity $ 95 $ 504 $ 444
At 20% Loss Severity 190 1,009 888
At 30% Loss Severity 285 1,513 1,331
At 40% Loss Severity 380 2,017 1,775
Mortgage Loan Credit Reserve at End of Period $ 3,390 $ 4,079 $ 3,450
MORTGAGE SECURITIES
Credit Provision During Period $ 0 $ 0 $ 0
Actual Losses During Period 249 331 42
Cumulative Actual Losses 735 487 156
Mortgage Securities Credit Reserve at End of Period 1,436 1,705 2,035
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated < BBB 0.0% 0.0% 0.0%
Mortgage Securities Credit Reserve as % of Amortized Cost of
Mortgage Securities Rated < BBB at End of Period 15.6% 18.7% 22.3%
Amortized Cost of Mortgage Securities Rated < BBB at End of Period $ 9,182 $ 9,116 $ 9,137
Credit Experience of Loans in Pools Underlying Mortgage
Securities Rated <BBB (Since Acquisition)
Resolved Defaulted Loans (Cumulative) 424 351 284
Average Loss Severity Experience (Cumulative) 22% 21% 21%
Scenario Analysis of Potential Credit Losses Over Next 12
Months If All Current (But No Future) Seriously Delinquent
Loans in Mortgage Pools Underlying < BBB
Rated Securities Default:
At 10% Loss Severity $ 312 $ 429 $ 480
At 20% Loss Severity 555 712 951
At 30% Loss Severity 958 910 1,170
At 40% Loss Severity 1,405 1,385 1,824
Mortgage Securities Credit Reserve at End of Period $ 1,436 $ 1,705 $ 2,035
</TABLE>
68
<PAGE> 69
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 9 (CONTINUED)
<TABLE>
<CAPTION>
CREDIT PROVISIONS AND CREDIT RESERVES AT OR FOR THREE MONTHS ENDING
--------------------------------------------
(ALL DOLLARS IN THOUSANDS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
MORTGAGE LOANS
Credit Provision During Period $ 1,516 $ 473 $ 299 $ 215
Actual Losses During Period 23 40 0 13
Cumulative Actual Losses 76 53 13 13
Mortgage Loan Credit Reserve at End of Period 2,855 1,363 929 630
Annualized Mortgage Loan Credit Provision as % of Average
Amortized Cost of Mortgage Loans Held for Investment 0.45% 0.16% 0.16% 0.15%
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans - Held for Investment at
Period End (as of 9/30/98) 0.18% 0.10% 0.08% 0.09%
Non-Performing Assets: 90+ Days Delinquent,
Foreclosures, Bankruptcies, and REO
Number of Loans 17 13 12 6
Non-Performing Assets Loan Balance $ 3,903 $ 2,792 $ 2,366 $ 1,220
Non-Performing Assets as % of Amortized Cost of Mortgage Loans 0.25% 0.20% 0.21% 0.17%
Non-Performing Assets as % of Amortized Cost of Total Assets 0.11% 0.08% 0.07% 0.05%
Mortgage Loan Credit Reserve as % of Non-Performing Assets 73% 49% 39% 52%
Credit Experience of Mortgage Loans
Liquidated Defaulted Loans (Cumulative) 6 4 1 1
Average Loss Severity Experience (Cumulative) 7% 6% 7% 7%
Scenario Analysis of Potential Credit Losses Over Next 12 Months
If All Current (But No Future) Non-Performing
Mortgage Loans Held for Investment Default:
At 10% Loss Severity $ 396 $ 283 $ 241 $ 124
At 20% Loss Severity 793 567 481 248
At 30% Loss Severity 1,189 850 722 372
At 40% Loss Severity 1,586 1,133 962 496
Mortgage Loan Credit Reserve at End of Period $ 2,855 $ 1,363 $ 929 $ 630
MORTGAGE SECURITIES
Credit Provision During Period $(1,000) $ 470 $ 477 $ 480
Actual Losses During Period 17 28 29 29
Cumulative Actual Losses 113 97 69 40
Mortgage Securities Credit Reserve at End of Period 2,076 3,093 2,651 2,203
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated < BBB -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 22.8% 10.6% 9.1% 7.6%
Amortized Cost of Mortgage Securities Rated < BBB at End of Period $ 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) 256 182 137 90
Average Loss Severity Experience (Cumulative) 21% 23% 24% 25%
Scenario Analysis of Potential Credit Losses Over Next
12 Months If All Current (But No Future) Seriously
Delinquent Loans in Mortgage Pools Underlying < BBB
Rated Securities Default:
At 10% Loss Severity $ 389 $ 724 $ 109 $ 80
At 20% Loss Severity 894 2,286 1,488 792
At 30% Loss Severity 1,163 3,789 3,702 2,845
At 40% Loss Severity 1,825 6,437 6,410 5,103
Mortgage Securities Credit Reserve at End of Period $ 2,076 $ 3,093 $ 2,651 $ 2,203
</TABLE>
69
<PAGE> 70
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 9 (CONTINUED)
<TABLE>
<CAPTION>
CREDIT PROVISIONS AND CREDIT RESERVES AT OR 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 Held for Investment 0.26% 0.45% 1.58% n/a
Mortgage Loan Credit Reserve as % of Amortized Cost
of Mortgage Loans - Held for Investment at Period End
(as of 9/30/98) 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 Held for Investment Default:
At 10% Loss Severity $ 396 $ 127 $ 0 $ 0
At 20% Loss Severity 793 253 0 0
At 30% Loss Severity 1,189 380 0 0
At 40% Loss Severity 1,586 506 0 0
Mortgage Loan Credit Reserve at End of Period $ 2,855 $ 428 $ 79 $ 0
MORTGAGE SECURITIES
Credit Provision During Period $ 427 $ 1,348 $ 414 $ 0
Actual Losses During Period 104 7 4 0
Cumulative Actual Losses 113 11 4 0
Mortgage Securities Credit Reserve at End of Period 2,076 1,752 411 (0)
Annualized Mortgage Securities Credit Provision as % of Average
Amortized Cost of Mortgage Securities Rated < 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>
70
<PAGE> 71
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 10
<TABLE>
<CAPTION>
SHARES OUTSTANDING AND PER SHARE DATA AT OR FOR THREE MONTHS ENDING
------------------------------------------------
(ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEP. 30, JUN. 30, MAR. 31,
1998 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Common Shares Outstanding at Period End 11,832,956 14,078,933 14,070,557
Shares Entitled to Dividends
Common (RWT) 11,832,956 13,768,056 14,107,100
Class A Preferred (converted 9/95) 0 0 0
Class B Preferred (RTW-PB) 909,518 909,518 909,518
------------ ------------ ------------
Total 12,742,474 14,677,574 15,016,618
Common Dividend Declared $ -- $ 0.010 $ 0.270
Class A Preferred Dividend Declared n/a n/a n/a
Class B Preferred Dividends Declared $ 0.755 $ 0.755 $ 0.755
Common Dividend Total $ -- $ 138 $ 3,809
Class A Preferred Dividend Total 0 0 0
Class B Preferred Dividends Total 687 687 687
------------ ------------ ------------
Total Dividend $ 687 $ 825 $ 4,496
Taxable Income Earned $ (9,240) $ 838 $ 4,528
Dividend Pay-Out Ratio for Period -7% 98% 99%
Cumulative Dividend Pay-Out Ratio 125% 102% 102%
Warrants Outstanding at Period End (expired 12/31/97) 0 0 0
Average Shares Outstanding During Period
Common 13,247,908 14,106,828 14,123,951
Class A Preferred 0 0 0
Class B Preferred 909,518 909,518 909,518
------------ ------------ ------------
Total 14,157,426 15,016,346 15,033,469
Calculation of "Diluted" Common Shares
Average Common Shares 13,247,908 14,106,828 14,123,951
Potential Dilution Due to Warrants 0 0 0
Potential Dilution Due to Options 63,620 149,030 110,474
------------ ------------ ------------
Total Average "Diluted" Common Shares 13,311,528 14,255,858 14,234,425
Net Income to Common Shareholders $ (47,866) $ (491) $ 2,450
Total Average "Diluted" Common Shares 13,311,528 14,255,858 14,234,425
------------ ------------ ------------
Earnings Per Share ("Diluted") $ (3.60) $ (0.03) $ 0.17
Earnings Per Share ("Basic") $ (3.61) $ (0.03) $ 0.17
Per Share Ratios (Average Common and Preferred Shares Outstanding)
Average Total Assets $ 279.81 $ 244.14 $ 227.77
Average Total Equity $ 20.62 $ 22.72 $ 22.82
Net Interest Income $ 0.36 $ 0.13 $ 0.43
Credit Expenses $ (0.05) $ 0.05 $ 0.04
Operating Expenses $ 0.07 $ 0.04 $ 0.13
Realized and Unrealized Gains and Effects of Accounting Changes $ 3.55 $ 0.00 $ 0.05
Other Expense (Income) $ 0.00 $ (0.01) $ 0.00
Equity in Earnings of RWT Holdings, Inc. $ 0.11 $ 0.04 $ 0.00
Net Income $ (3.33) $ 0.01 $ 0.21
</TABLE>
71
<PAGE> 72
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 10 (CONTINUED)
<TABLE>
<CAPTION>
SHARES OUTSTANDING AND PER SHARE DATA AT OR FOR THREE MONTHS ENDING
----------------------------------------------------------------
(ALL DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common Shares Outstanding at Period End 14,284,657 14,576,477 13,251,847 11,905,957
Shares Entitled to Dividends
Common (RWT) 14,284,657 14,576,477 13,251,847 11,905,957
Class A Preferred (converted 9/95) 0 0 0 0
Class B Preferred (RTW-PB) 909,518 909,518 909,518 999,638
------------ ------------ ------------ ------------
Total 15,194,175 15,485,995 14,161,365 12,905,595
Common Dividend Declared $ 0.350 $ 0.600 $ 0.600 $ 0.600
Class A Preferred Dividend Declared n/a n/a n/a n/a
Class B Preferred Dividends Declared $ 0.755 $ 0.755 $ 0.755 $ 0.755
Common Dividend Total $ 5,000 $ 8,746 $ 7,951 $ 7,144
Class A Preferred Dividend Total 0 0 0 0
Class B Preferred Dividends Total 686 687 687 755
------------ ------------ ------------ ------------
Total Dividend $ 5,686 $ 9,433 $ 8,638 $ 7,899
Taxable Income Earned $ 5,586 $ 8,151 $ 8,315 $ 7,912
Dividend Pay-Out Ratio for Period 102% 116% 104% 100%
Cumulative Dividend Pay-Out Ratio 103% 103% 100% 98%
Warrants Outstanding at Period End
(expired 12/31/97) 0 149,466 236,297 272,304
Average Shares Outstanding During Period
Common 14,375,992 14,316,678 12,997,566 11,605,171
Class A Preferred 0 0 0 0
Class B Preferred 909,518 909,518 990,725 1,005,515
------------ ------------ ------------ ------------
Total 15,285,510 15,226,196 13,988,291 12,610,686
Calculation of "Diluted" Common Shares
Average Common Shares 14,375,992 14,316,678 12,997,566 11,605,171
Potential Dilution Due to Warrants 57,139 130,489 182,137 258,422
Potential Dilution Due to Options 99,383 177,434 291,227 253,274
------------ ------------ ------------ ------------
Total Average "Diluted" Common Shares 14,532,514 14,624,601 13,470,930 12,116,867
Net Income to Common Shareholders $ 4,397 $ 6,859 $ 7,034 $ 6,456
Total Average "Diluted" Common Shares 14,532,514 14,624,601 13,470,930 12,116,867
------------ ------------ ------------ ------------
Earnings Per Share ("Diluted") $ 0.30 $ 0.47 $ 0.52 $ 0.53
Earnings Per Share ("Basic") $ 0.31 $ 0.48 $ 0.54 $ 0.56
Per Share Ratios (Average Common and
Preferred Shares Outstanding)
Average Total Assets $ 224.19 $ 224.68 $ 212.58 $ 183.09
Average Total Equity $ 22.92 $ 22.71 $ 20.96 $ 18.81
Net Interest Income $ 0.40 $ 0.63 $ 0.70 $ 0.72
Credit Expenses $ 0.03 $ 0.06 $ 0.06 $ 0.06
Operating Expenses $ 0.07 $ 0.07 $ 0.09 $ 0.09
Realized and Unrealized Gains and
Effects of Accounting Changes $ (0.03) $ 0.00 $ 0.00 $ 0.00
Other Expense (Income) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Equity in Earnings of RWT Holdings, Inc. $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income $ 0.33 $ 0.50 $ 0.55 $ 0.57
</TABLE>
72
<PAGE> 73
SUPPLEMENTAL HISTORICAL INFORMATION
TABLE 10 (CONTINUED)
<TABLE>
<CAPTION>
SHARES OUTSTANDING AND PER SHARE DATA AT OR 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>
Common Shares Outstanding at Period End 14,284,657 10,996,572 5,517,299 1,874,395
------------ ------------ ------------ ------------
Shares Entitled to Dividends
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
Realized and Unrealized Gains and
Effects of Accounting Changes $ (0.04) $ 0.00 $ 0.00 $ 0.00
Other Expense (Income) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Equity in Earnings of RWT Holdings, Inc. $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income $ 1.93 $ 1.52 $ 0.95 $ 0.23
</TABLE>
73
<PAGE> 74
PART II OTHER INFORMATION
Item 1. Legal Proceedings
At September 30, 1998, there were no pending legal proceedings to
which the Company as a party or of which any of its property was
subject.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
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 and nine months ended September 30, 1998 and September
30, 1997.
Exhibit 27 - Financial Data Schedule
(b) Reports
None
74
<PAGE> 75
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: November 12, 1998 By: /s/ DOUGLAS B. HANSEN
---------------------------------
Douglas B. Hansen
President and Chief Financial
Officer
(authorized officer of registrant)
Dated: November 12, 1998 By: /s/ VICKIE L. RATH
----------------------------------
Vickie L. Rath
Vice President, Treasurer and
Controller
(principal accounting officer)
75
<PAGE> 76
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------ ----
<S> <C>
11.1 Computations of Earnings per Share............................... 77
27 Financial Data Schedule.......................................... 78
</TABLE>
76
<PAGE> 1
EXHIBIT 11.1
REDWOOD TRUST, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
BASIC:
Average common shares outstanding ............................. 13,247,908 13,823,020
------------ ------------
Total 13,247,908 13,823,020
============ ============
Net Income ($47,866,200) ($45,907,029)
============ ============
Per Share Amount ($ 3.61) ($ 3.32)
============ ============
DILUTED:
Average common shares outstanding ............................. 13,247,908 13,823,020
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ... 63,620 92,624
------------ ------------
Total 13,311,528 13,915,644
============ ============
Net Income ($47,866,200) ($45,907,029)
============ ============
Per Share Amount ($ 3.60) ($ 3.30)
============ ============
</TABLE>
77
<PAGE> 2
EXHIBIT 11.1
REDWOOD TRUST, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
BASIC:
Average common shares outstanding ............................. 14,316,678 12,983,071
----------- -----------
Total 14,316,678 12,983,071
=========== ===========
Net Income $ 6,859,361 $20,349,907
=========== ===========
Per Share Amount $ 0.48 $ 1.57
=========== ===========
DILUTED:
Average common shares outstanding ............................. 14,316,678 12,983,071
Net effect of dilutive stock options outstanding
during the period -- based on the treasury stock method ... 177,434 243,410
Net effect of dilutive stock warrants outstanding
during the period -- based on the treasury stock method ... 130,489 189,551
----------- -----------
Total 14,624,601 13,416,032
=========== ===========
Net Income $ 6,859,361 $20,349,907
=========== ===========
Per Share Amount $ 0.47 $ 1.52
=========== ===========
</TABLE>
78
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1,000
<CASH> 23,486
<SECURITIES> 3,742,851
<RECEIVABLES> 25,050
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,802,216
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,802,216
<CURRENT-LIABILITIES> 2,078,786
<BONDS> 1,465,888
0
26,736
<COMMON> 287,164
<OTHER-SE> (56,358)
<TOTAL-LIABILITY-AND-EQUITY> 3,802,216
<SALES> 0
<TOTAL-REVENUES> 61,558
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,851
<LOSS-PROVISION> (638)
<INTEREST-EXPENSE> 56,170
<INCOME-PRETAX> (37,805)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10,061)
<NET-INCOME> (47,866)
<EPS-PRIMARY> (3.61)
<EPS-DILUTED> (3.60)
</TABLE>
