Note 21. Segment Information

Redwood operates in three segments: residential mortgage banking, residential investments, and commercial mortgage banking and investments. These business segments have been identified based on our organizational and management structure. Our segments are based on an internally-aligned segment structure, which is how our results are monitored and performance is assessed. The accounting policies of the reportable segments are the same as those described in Note 3—Summary of Significant Accounting Policies.

Our residential mortgage banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale through securitization or as whole loans. Jumbo loans we acquire are typically sold through private-label securitization through our Sequoia securitization program or to institutions that acquire pools of whole loans. Conforming loans we acquire are generally sold to the Agencies. Our residential loan acquisitions are usually made on a flow basis, after origination by banks or mortgage companies, and are periodically augmented by bulk acquisitions. Our acquisition and accumulation of residential loans is generally funded with equity and short-term debt. This segment also includes various derivative financial instruments and IO securities retained from our Sequoia securitizations that we utilize to manage certain risks associated with residential loans we acquire. Our residential mortgage banking segment’s main source of revenue is mortgage banking income, which includes valuation increases (or gains) on the loans we acquire for sale or securitization as well as valuation changes in associated derivatives and IO securities that are used in part to manage risks associated with our mortgage banking activities. Additionally, this segment may generate interest income on loans held for future sale or securitization and interest income from IO securities. Interest expense on short-term debt used to fund the purchase of residential loans, direct operating expenses and tax provisions associated with these activities are also included in the residential mortgage banking segment.

Our residential investments segment includes a portfolio of investments in residential mortgage-backed securities retained from our Sequoia securitizations, as well as residential mortgage-backed securities issued by third parties. This segment also includes MSRs associated with residential loans securitized through our Sequoia program and MSRs purchased from third parties. The residential investment segment’s main sources of revenue are interest income from investment portfolio securities, as well as the realized gains recognized upon sales of these securities and income from MSRs. This segment also includes derivative financial instruments that we utilize to manage certain risks associated with our residential investment portfolio. Also included in this segment is interest expense on the short-term debt and ABS used to partially finance certain of these securities, as well as direct operating expenses and tax provisions associated with these activities.

Our commercial mortgage banking and investments segment consists of our commercial mortgage banking operations as well as our portfolio of held-for-investment commercial real estate loans. We operate as a commercial real estate lender by originating mortgage loans and providing other forms of commercial real estate financing. This may include senior or subordinate mortgage loans, mezzanine loans, and other forms of financing, such as preferred equity interests in special purpose entities that own commercial real estate. We typically sell the senior loans we originate to third parties for securitization and the mezzanine and subordinate loans we originate are generally held for investment. This segment also includes derivative financial instruments that we utilize to manage certain risks associated with our commercial loan origination activity. Our commercial mortgage banking and investments segment’s main sources of revenue are interest income from our commercial loan investments as well as income from mortgage banking activities, which includes valuation increases (or gains) on the senior commercial loans we originate for sale as well as valuation changes in associated derivatives that are used to manage risks associated with our mortgage banking activities. Interest expense from our Commercial Securitization and from short-term and long-term debt used to fund the purchase of commercial loans as well as operating expenses and tax provisions associated with these activities are also included in the commercial mortgage banking and investments segment.

Segment contribution represents the measure of profit that management uses to assess the performance of its business segments and make resource allocation and operating decisions. Certain expenses not directly assigned or allocated to one of the three primary segments, as well as activity from certain legacy Sequoia entities consolidated for GAAP financial reporting purposes, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated expenses primarily include interest expense associated with certain long-term debt, indirect operating expenses, and other expense.

The following tables present financial information by segment for the three and six months ended June 30, 2014 and 2013.

Business Segment Financial Information


	Three Months Ended June 30, 2014
(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
Interest income	$	12,438	$	27,924	$	11,217	$	6,414	$	57,993
Interest expense		(2,161)		(3,116)		(4,404)		(11,470)		(21,151)

Net interest income (loss)		10,277		24,808		6,813		(5,056)		36,842
Reversal of provision (provision) for loan losses		-		-		(289)		604		315
Mortgage banking activities, net		1,329		-		4,981		-		6,310
MSR income (loss), net		-		(1,777)		-		-		(1,777)
Other market valuation adjustments, net		13		(3,788)		-		(346)		(4,121)
Realized gains, net		-		992		-		71		1,063
Operating expenses		(9,501)		(770)		(2,180)		(9,831)		(22,282)
(Provision for) benefit from income taxes		259		149		(750)		9		(333)

Segment Contribution	$	2,377	$	19,614	$	8,575	$	(14,549)



Net Income									$	16,017


Non-cash amortization income (expense)		(36)		10,586		(215)		(2,073)		8,262


	Three Months Ended June 30, 2013
(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
Interest income	$	15,158	$	24,015	$	9,623	$	8,923	$	57,719
Interest expense		(3,020)		(2,553)		(2,560)		(13,283)		(21,416)

Net interest income (loss)		12,138		21,462		7,063		(4,360)		36,303
Reversal of provision (provision) for loan losses		-		-		(891)		4,163		3,272
Mortgage banking activities, net		42,290		-		6,433		-		48,723
MSR income (loss), net		-		10,547		-		-		10,547
Other market valuation adjustments, net		38		(5,738)		-		(558)		(6,258)
Realized gains, net		-		526		-		30		556
Operating expenses		(6,053)		(1,956)		(2,654)		(13,767)		(24,430)
(Provision for) benefit from income taxes		(2,409)		(1,236)		(495)		1,000		(3,140)

Segment Contribution	$	46,004	$	23,605	$	9,456	$	(13,492)



Net Income									$	65,573


Non-cash amortization income (expense)		(13)		8,066		(224)		(2,084)		5,745


	Six Months Ended June 30, 2014
(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
Interest income	$	23,104	$	55,519	$	21,601	$	13,245	$	113,469
Interest expense		(3,482)		(5,966)		(7,708)		(23,055)		(40,211)

Net interest income (loss)		19,622		49,553		13,893		(9,810)		73,258
Provision for loan losses		-		-		(944)		(23)		(967)
Mortgage banking activities, net		265		-		5,814		-		6,079
MSR income (loss), net		-		(1,171)		-		-		(1,171)
Other market valuation adjustments, net		11		(9,746)		-		(525)		(10,260)
Realized gains, net		-		1,979		-		176		2,155
Operating expenses		(16,595)		(1,865)		(4,806)		(18,988)		(42,254)
(Provision for) benefit from income taxes		94		1,676		(395)		135		1,510

Segment Contribution	$	3,397	$	40,426	$	13,562	$	(29,035)



Net Income									$	28,350


Non-cash amortization income (expense)		(88)		21,833		(388)		(4,019)		17,338

	Six Months Ended June 30, 2013
(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
Interest income	$	24,914	$	47,533	$	19,794	$	19,002	$	111,243
Interest expense		(5,130)		(5,219)		(5,368)		(24,001)		(39,718)

Net interest income (loss)		19,784		42,314		14,426		(4,999)		71,525
Reversal of provision (provision) for loan losses		-		-		(1,576)		2,809		1,233
Mortgage banking activities, net		81,514		-		12,746		-		94,260
MSR income (loss), net		-		11,568		-		-		11,568
Other market valuation adjustments, net		78		(6,308)		-		(331)		(6,561)
Realized gains, net		-		12,564		210		49		12,823
Operating expenses		(10,691)		(3,539)		(5,850)		(24,536)		(44,616)
(Provision for) benefit from income taxes		(11,314)		(1,661)		(1,718)		644		(14,049)

Segment Contribution	$	79,371	$	54,938	$	18,238	$	(26,364)

Net Income									$	126,183


Non-cash amortization income (expense)		(119)		15,646		(411)		(3,381)		11,735

The following tables present the components of Corporate/Other for the three and six months ended June 30, 2014 and 2013.


	Three Months Ended June 30,
	2014						2013
(In Thousands)	Legacy Consolidated VIEs		Other		Total		Legacy Consolidated VIEs		Other		Total
Interest income	$	6,411	$	3	$	6,414	$	8,786	$	137	$	8,923
Interest expense		(5,240)		(6,230)		(11,470)		(6,728)		(6,555)		(13,283)

Net interest income (loss)		1,171		(6,227)		(5,056)		2,058		(6,418)		(4,360)
Reversal of provision for loan losses		604		-		604		4,163		-		4,163
Mortgage banking activities, net		-		-		-		-		-		-
MSR income, net		-		-		-		-		-		-
Other market valuation adjustments, net		(321)		(25)		(346)		(558)		-		(558)
Realized gains, net		71		-		71		30		-		30
Operating expenses		(42)		(9,789)		(9,831)		(73)		(13,694)		(13,767)
Benefit from income taxes		-		9		9		-		1,000		1,000

Total	$	1,483	$	(16,032)	$	(14,549)	$	5,620	$	(19,111)	$	(13,492)


Non-cash amortization expense		(1,432)		(641)		(2,073)		(1,561)		(523)		(2,084)

	Six Months Ended June 30,
	2014						2013
(In Thousands)	Legacy Consolidated VIEs		Other		Total		Legacy Consolidated VIEs		Other		Total
Interest income	$	13,240	$	5	$	13,245	$	18,853	$	149	$	19,002
Interest expense		(10,699)		(12,356)		(23,055)		(13,997)		(10,004)		(24,001)

Net interest income (loss)		2,541		(12,351)		(9,810)		4,856		(9,855)		(4,999)
Reversal of provision (provision) for loan losses		(23)		-		(23)		2,809		-		2,809
Mortgage banking activities, net		-		-		-		-		-		-
MSR income), net		-		-		-		-		-		-
Other market valuation adjustments, net		(464)		(61)		(525)		(331)		-		(331)
Realized gains, net		176		-		176		49		-		49
Operating expenses		(94)		(18,894)		(18,988)		(107)		(24,429)		(24,536)
Benefit from income taxes		-		135		135		-		644		644

Total	$	2,136	$	(31,171)	$	(29,035)	$	7,276	$	(33,640)	$	(26,364)


Non-cash amortization expense		(2,795)		(1,224)		(4,019)		(2,664)		(717)		(3,381)

The following table presents supplemental information by segment at June 30, 2014 and December 31, 2013.

Supplemental Disclosures


(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
June 30, 2014
Residential loans, held-for-sale	$	1,107,877	$	-	$	-	$	-	$	1,107,877
Residential loans, held-for-investment		-		-		-		1,616,504		1,616,504
Commercial loans		-		-		468,766		-		468,766
Real estate securities		159,311		1,685,756		-		-		1,845,067
Mortgage servicing rights		-		71,225		-		-		71,225
Total assets		1,291,983		1,774,525		474,821		1,837,221		5,378,550

December 31, 2013
Residential loans, held-for-sale	$	404,267	$	-	$	-	$	-	$	404,267
Residential loans, held-for-investment		-		-		-		1,762,167		1,762,167
Commercial loans		-		-		432,455		-		432,455
Real estate securities		110,505		1,572,356		-		-		1,682,861
Mortgage servicing rights		-		64,824		-		-		64,824
Total assets		531,092		1,655,209		439,139		1,983,088		4,608,528