REDWOOD TRUST, INC.

Consolidated Income Statements ⁽¹⁾

First

Fourth

Third

Second

First

($ in millions, except share and per share data)

Quarter

Quarter

Quarter

Quarter

Quarter

2018

2017

2017

2017

2017

Interest income

$

77

$

71

$

63

$

59

$

55

Interest expense

(42)

(36)

(27)

(24)

(21)

Net interest income

35

35

35

35

34

Non-interest income

Mortgage banking activities, net

27

3

21

12

18

MSR income, net

1

2

2

3

2

Investment fair value changes, net

2

—

—

8

2

Other income

1

1

1

1

1

Realized gains, net

9

5

2

1

6

Total non-interest income, net

40

11

26

25

28

Operating expenses

(23)

(20)

(20)

(19)

(18)

(Provision for) benefit from income taxes

(5)

5

(5)

(5)

(6)

Net income

$

47

$

31

$

36

$

36

$

37

Weighted average diluted shares (thousands) ⁽²⁾

108,195

109,621

102,703

97,494

97,946

Diluted earnings per share

$

0.50

$

0.35

$

0.41

$

0.43

$

0.43

Regular dividends declared per common share

$

0.28

$

0.28

$

0.28

$

0.28

$

0.28

(1)

Certain totals may not foot due to rounding.

(2)

In the periods presented above, weighted average diluted shares included shares from the assumed conversion of our convertible and/or exchangeable debt in accordance with GAAP diluted EPS provisions. Actual shares outstanding at March 31, 2018, December 31, 2017, September 30, 2017, June 30, 2017, and March 31, 2017 were 75,703, 76,600, 77,123, 77,117, and 77,039,  respectively.

REDWOOD TRUST, INC.

Reconciliation of GAAP Net Income to Non-GAAP Core Earnings ^{(1) (2)}

Three Months Ended

($ in millions, except per share data)

March 31, 2018

December 31, 2017

GAAP net income

$

47

$

31

Adjustments:

Eliminate mark-to-market changes on long-term investments and associated derivatives ⁽³⁾

(7)

(7)

Include cumulative gain (loss) on long-term investments sold, net ⁽⁴⁾

18

5

Income taxes associated with core earnings adjustments ⁽⁵⁾

—

2

Total adjustments

11

—

Non-GAAP core earnings

$

58

$

30

GAAP net income per diluted common share

$

0.50

$

0.35

Non-GAAP core earnings per diluted common share ⁽⁶⁾

$

0.60

$

0.35

(1)

Certain totals may not foot due to rounding.

(2)

Core earnings is a non-GAAP measure of Redwood's earnings and results of operations. Specifically, management has defined core earnings as: GAAP net income adjusted to (i) eliminate the impact of quarterly mark-to-market changes on the fair value of long-term investments (and associated derivatives) related to changes in benchmark interest rates and credit spreads, (ii) include the cumulative net gains or losses on long-term investments accounted for as trading securities under GAAP that were sold during the period presented, net of any gains or losses from derivatives associated with the investments sold, and (iii) include the hypothetical income taxes associated with core earnings adjustments.

Management utilizes this core earnings measure internally as one way of analyzing Redwood's performance over multiple periods, as it believes it provides useful comparative results absent the impact of certain quarterly mark-to-market changes and other items that management believes are not reflective of core results. Core earnings should not be utilized in isolation, nor should it be considered as an alternative to GAAP net income or other measurements of results of operations computed in accordance with GAAP. A further discussion of core earnings is included in the first quarter Redwood Review.

(3)

Adjustments eliminate the mark-to-market changes on the fair value of loans held-for-investment, trading securities, other investments, and associated derivatives that are primarily related to changes in benchmark interest rates and credit spreads. Details on the components of investment fair value changes, net, are included in the Appendix of the first quarter Redwood Review.

(4)

Adjustment includes the cumulative net gains or losses on long-term investments accounted for as trading securities under GAAP that were sold during the period presented, net of any realized gains or losses from derivatives associated with the investments sold. Cumulative gains and losses are calculated by multiplying the difference between the sales price and original purchase price by the face value of the securities sold.

(5)

We apply estimated effective tax rates to core earnings adjustments occurring within Redwood's taxable REIT subsidiaries to estimate the hypothetical income tax expense or benefit associated with those adjustments.

(6)

Consistent with the calculation of net income per diluted common share for GAAP purposes, non-GAAP core earnings per diluted common share is calculated following the "two-class" method. Additional information on the calculation of core earnings using the "two-class" method can be found in Table 2 in the Financial Tables section of the first quarter Redwood Review.

REDWOOD TRUST, INC.

Consolidated Balance Sheets ⁽¹⁾

31-Mar

31-Dec

30-Sep

30-Jun

31-Mar

($ in millions, except share and per share data)

2018

2017

2017

2017

2017

Residential loans

$

5,146

$

5,115

$

4,185

$

3,905

$

3,472

Real estate securities

1,358

1,477

1,356

1,219

1,166

Mortgage servicing rights

66

64

63

64

111

Cash and cash equivalents

179

145

258

217

222

Other assets

251

240

269

251

243

Total assets

$

7,000

$

7,040

$

6,131

$

5,655

$

5,214

Short-term debt

$

1,504

$

1,939

$

1,238

$

1,295

$

564

Other liabilities

157

149

166

152

135

Asset-backed securities issued

1,542

1,165

944

693

728

Long-term debt, net

2,576

2,575

2,574

2,336

2,621

Total liabilities

5,780

5,828

4,922

4,476

4,049

Stockholders' equity

1,220

1,212

1,209

1,179

1,166

Total liabilities and equity

$

7,000

$

7,040

$

6,131

$

5,655

$

5,214

Shares outstanding at period end (thousands)

75,703

76,600

77,123

77,117

77,039

GAAP book value per share

$

16.12

$

15.83

$

15.67

$

15.29

$

15.13

(1)

Certain totals may not foot due to rounding.