REDWOOD TRUST INC

Within this Results of Operations section, we provide commentary that compares results period-over-period for 2024 and 2023. Most tables include a "change" column that shows the amount by which the results from 2024 are greater or less than the results from the respective period in 2023. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of 2024, compared to the third quarter of 2023 and increases or decreases during the "nine-month periods" refer to the change in results for the first nine months of 2024, compared to the first nine months of 2023.

Consolidated Results of Operations

The following table presents the components of our net income by segments for the three and nine months ended September 30, 2024 and 2023.

Table 1 – Net Income

Net Interest Income

Net interest income increased $5 million and $2 million during the three and nine-month periods. Net interest income from Residential Consumer Mortgage Banking operations increased $8 million and $26 million for the three and nine-month periods, respectively, primarily due to higher average residential consumer loan balances and the addition of certain hedges that provide net interest income. This was partially offset by a decrease of $16 million from our Investment Portfolio during the nine-month period, primarily related to lower net interest income from our bridge loan portfolio, an increase in borrowing costs on debt facilities and ABS issued to finance our investments within this segment.

Corporate net interest expense increased $6 million and $10 million during the three and nine-month periods. The increase was primarily related to higher cost of corporate unsecured debt issued recently relative to repurchases and payoffs of older vintage, lower coupon convertible debt. During the nine-month period through September 30, 2024, we issued $60 million of 9.125% and $85 million of 9.00% senior notes and procured a secured revolving financing facility, which we drew on starting in the second quarter of 2024. Additionally, we earned lower interest income at the corporate level from lower average cash balances invested in U.S. Treasury Securities relative to 2023.

Additional detail on net interest income is provided in the“Net Interest Income” section that follows.

Mortgage Banking Activities, Net

Mortgage Banking activities, net increased $20 million during both the three and nine-month periods, respectively, primarily due to higher Residential Consumer Mortgage Banking revenues.

Residential Consumer Mortgage Banking activities increased $18 million and $21 million during the three and nine-month periods primarily attributable to an increase in loan purchase volumes from both banks and independent mortgage bankers ("IMBs") across bulk and flow transactions, as well as a combination of spread tightening on securitization execution and net hedge income, particularly in the third quarter of 2024.

Residential Investor Mortgage Banking activities increased $2 million and decreased $1 million during the three and nine-month periods, respectively. The decrease during the nine-month period was primarily attributable to lower margins and volumes experienced in the first quarter of 2024, partially offset by high funding volume as well as improved economics from whole loan sales and sales to joint ventures in the second and third quarters of 2024.

A more detailed analysis of the changes in this line item is included in the “Residential Consumer Mortgage Banking Segment” and “Residential Investor Mortgage Banking Segment” section that follows.

Investment Fair Value Changes, Net

Investment fair value changes, net increased $29 million and $70 million during the three and nine-month periods, respectively, primarily due to strong credit performance on our securities portfolio and spread tightening across our securities and whole loan portfolios, which were partially offset by negative fair value changes on our bridge loans and, to a lesser extent, paydowns on assets held at a premium.

A more detailed analysis of the changes in this line item is included in the “Investment Portfolio Segment” section that follows.

HEI Income, net

HEI income, net remained flat and increased $12 million during the three and nine-month periods, respectively. Increases in the valuations of our HEI portfolio have been the result of actual and projected trends in home price appreciation and prepayment speeds steadily improving over the nine-month period and exceeding modeled pricing assumptions for the three and nine-month periods. HEI income is primarily comprised of recurring accretion of the underlying option value of the investments over time based on estimated future home price appreciation and other factors, along with periodic fluctuations in value influenced by changing housing, prepayment rates and other market conditions.

Additional detail on our HEI income is presented in Table 10.3 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Operating Expenses

Operating expenses increased $8 million and $14 million during the three and nine-month periods ended September 30, 2024, primarily related to an increase in variable and equity compensation expense associated with improved operating results and year-to-date earnings performance, as well as increased portfolio management costs related to specially serviced residential investor bridge loans and related workout arrangements incurred in 2024.

Additional detail on our General and administrative expenses is presented in Table 21.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries ("TRS"), which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. The increase in the tax provision in the three and nine-month periods was primarily the result of increased GAAP income earned at our TRS from mortgage banking activities in 2024 compared to 2023.

For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

Consolidated Net Interest Income

The following table presents the components of net interest income recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2024 and 2023.

Table 2 – Consolidated Net Interest Income

(1)Average balances for residential consumer loans held-for-sale and held-for-investment, residential investor loans held-for-sale and held-for-investment, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for AFS securities, debt facilities, corporate debt and certain ABS issued are calculated based upon amortized historical cost. Average balances for ABS carried at fair value are calculated based upon fair value.

(2)Interest income and interest expense at "Sequoia", "Freddie Mac SLST", "Freddie Mac K-Series", "CAFL Term", and "CAFL Bridge" reflect activity from consolidated variable interest entities. While we consolidate these entities for GAAP reporting purposes, economically, we earn interest income from the securities we own in these entities, which is represented by the net interest income (interest income less interest expense) from these consolidated entities presented in the table above.

(3)Real estate securities include trading securities consisting primarily of interest-only securities, which generate a higher cash interest yield. This interest income may be offset by a decline in fair value (recognized through investment fair value changes, net on our consolidated statements of income) related to the receipt of cash flows each period, resulting in a lower overall economic yield for these investments.

Consolidated Market Valuation Gains and Losses, Net

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2024 and 2023.

Table 3 – Consolidated Market Valuation Gains and Losses, Net

(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the market risks associated with our Residential Consumer Mortgage Banking operations.

(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases, or other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.

Footnotes to Table 3 (Continued)

(3)Includes changes in fair value of the residential consumer loans held-for-investment, securitized HEI, REO and the ABS issued at the entities, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election.

(4)Other investments includes changes in fair value of REO assets.

(5)Other income presented above does not include net MSR fee income or provisions for repurchases of MSRs, as these amounts do not represent market valuation adjustments.