Redwood Trust(US:RWT)2024-05-08 21:28PART I — FINANCIAL INFORMATION Item 1. Financial Statements The company's total assets increased to $15.1 billion in Q1 2024 from $14.5 billion at year-end 2023, driven by growth in residential consumer loans, with net income for the quarter reaching $30.3 million ($0.21 per share), a significant increase from $4.6 million ($0.02 per share) in Q1 2023, primarily due to positive investment fair value changes Consolidated Balance Sheet Summary (Unaudited) | (In Thousands) | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $15,057,974 | $14,504,327 | | Residential consumer loans, held-for-investment | $7,104,886 | $6,139,445 | | Residential investor loans, held-for-investment | $4,901,443 | $5,040,048 | | Total Liabilities | $13,833,811 | $13,301,634 | | Asset-backed securities issued, net | $10,628,189 | $9,811,880 | | Long-term debt, net | $1,707,138 | $1,680,901 | | Total Equity | $1,224,163 | $1,202,693 | Consolidated Statement of Income Summary (Unaudited) | (In Thousands, except Share Data) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Interest Income | $24,210 | $26,437 | | Total non-interest income, net | $50,339 | $21,098 | | Investment fair value changes, net | $21,837 | $(4,392) | | Net Income | $30,262 | $4,620 | | Net income available to common stockholders | $28,512 | $3,201 | | Diluted earnings per common share | $0.21 | $0.02 | Notes to Consolidated Financial Statements The company operates across three segments and clarified its loan classifications in Q1 2024 for enhanced reporting clarity - The company operates in three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking, and Investment Portfolio, with primary income sources from net interest income and non-interest income from mortgage banking activities2829 - In Q1 2024, the company renamed 'Residential loans' to 'Residential consumer loans' and 'Business purpose loans' to 'Residential investor loans' for clarity, without changing account classifications32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management highlighted increased GAAP earnings and book value in Q1 2024, driven by accretive investments and strong Residential Consumer lock volumes, with a key strategic development being the partnership with CPP Investments, expected to enhance capital certainty and fee-based income, focusing on market share growth, credit risk management in its Residential Investor segment, and improved operating efficiency - The company's strategic focus is on evolving its investment approach by deploying capital alongside institutional partners to drive scale in its operating platforms and diversify revenue streams with more predictable, fee-based income421 - A significant milestone in Q1 2024 was the closing of a multi-pronged transaction with CPP Investments, which includes a $500 million joint venture with potential purchasing power of $4 billion for Residential Investor loans and a new $250 million secured revolving financing facility420421 Q1 2024 Key Financial Metrics | (In Thousands, except per Share Data) | Three Months Ended March 31, 2024 | Three Months Ended December 31, 2023 | | :--- | :--- | :--- | | Net income per diluted common share | $0.21 | $0.15 | | Return on common stockholders' equity | 10.0% | 7.3% | | Book Value per share | $8.78 | $8.64 | | Economic return on book value | 3.5% | 0.3% | Consolidated Results of Operations Net income significantly increased in Q1 2024 due to positive investment fair value changes, despite a slight decrease in net interest income and lower general and administrative expenses - Net income increased to $30.3 million in Q1 2024 from $4.6 million in Q1 2023, primarily driven by a $26.2 million positive swing in investment fair value changes, benefiting from tightening credit spreads across the securities portfolio439448 - Net interest income decreased slightly by $2.2 million year-over-year, mainly due to higher borrowing costs on long-term debt and ABS issued in the Investment Portfolio, partially offset by higher net interest income from Mortgage Banking operations440 - General and administrative expenses decreased by $1.0 million year-over-year, primarily due to lower variable and equity compensation expense resulting from a reduction in headcount, despite incurring $3 million in restructuring charges in Q1 2024457 Results of Operations by Segment The Residential Consumer Mortgage Banking segment turned profitable, while the Investment Portfolio's contribution significantly increased, offsetting a wider loss in the Residential Investor Mortgage Banking segment Segment Contribution Summary | (In Thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Residential Consumer Mortgage Banking | $7,019 | $(1,263) | | Residential Investor Mortgage Banking | $(5,509) | $(1,027) | | Investment Portfolio | $57,606 | $35,537 | | Corporate/Other | $(28,854) | $(28,627) | | Net Income | $30,262 | $4,620 | - The Residential Consumer Mortgage Banking segment's contribution turned positive to $7.0 million, driven by a significant increase in loan lock and distribution volumes, with $1.8 billion in locks and $1.4 billion distributed through securitizations and whole loan sales472476481 - The Investment Portfolio's contribution increased by $22.1 million year-over-year, primarily due to positive investment fair value changes from tightening credit spreads, higher HEI income, and improved MSR valuations472501 - The Residential Investor Mortgage Banking segment's loss widened to $5.5 million due to lower funding volumes and margins amid elevated interest rates, although operating expenses decreased due to headcount reductions472494 Liquidity and Capital Resources The company maintained strong capital and liquidity positions as of Q1 2024, bolstered by new debt issuance and a revolving financing facility, with plans to repay maturing convertible notes - As of March 31, 2024, the company had total capital of $1.92 billion and unrestricted cash and cash equivalents of $275 million561562 - In Q1 2024, the company issued $60 million of 9.125% senior unsecured notes due 2029 and entered into a new corporate secured revolving financing facility with CPP Investments with an initial borrowing limit of $200 million (subsequently increased to $250 million)561580407 - The company had $2.24 billion of secured recourse debt outstanding, of which $1.88 billion was non-marginable, meaning it is not subject to margin calls based solely on a lender's discretionary determination of market value declines565 - The company has a convertible note series with a $116 million outstanding balance maturing in July 2024, which it expects to repay with cash on hand582 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states there have been no material changes in its quantitative or qualitative exposure to market risk since December 31, 2023, other than developments described in the MD&A section, and refers to its 2023 Annual Report on Form 10-K for detailed information - Information concerning market risk is incorporated by reference from the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023608 - There have been no material changes in the company's quantitative or qualitative exposure to market risk since December 31, 2023, apart from developments discussed in the MD&A, such as changes in the fair values of assets608 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of March 31, 2024, with no material changes to internal control over financial reporting during the first quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the quarter610 - No changes in internal control over financial reporting occurred during the first quarter of 2024 that have materially affected, or are reasonably likely to materially affect, internal controls611 PART II — OTHER INFORMATION Item 1. Legal Proceedings The report refers to Note 17 of the financial statements for information on legal proceedings, which indicates no significant updates from the disclosures in the 2023 Annual Report on Form 10-K - There are no significant updates regarding litigation matters since the company's Annual Report on Form 10-K for the year ended December 31, 2023336614 Item 1A. Risk Factors The report states that risk factors are discussed in the company's Annual Report on Form 10-K for the year ended December 31, 2023, indicating no material changes or new risk factors in the current quarter - The company's risk factors are discussed in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2023614 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In March 2024, the company issued unregistered warrants to CPP Investments for a total of 6,583,017 shares of common stock in conjunction with their joint venture, and during the quarter, no shares of common or preferred stock were repurchased under the existing authorization programs - In March 2024, the company issued warrants to CPP Investments exercisable for a total of 6,583,017 shares of common stock, which were not registered under the Securities Act of 1933616 - During Q1 2024, the company did not repurchase any shares of its common or preferred stock, with authorization remaining for up to $101 million in common stock repurchases and $70 million in preferred stock repurchases as of March 31, 2024616 Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None619 Item 5. Other Information The company reported that no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the first quarter of 2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended March 31, 2024620 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, certifications from the CEO and CFO, and interactive data files (XBRL)