Segment Information

Redwood operates in three segments: residential mortgage banking, residential investments, and commercial mortgage banking and investments. Our segments are based on our organizational and management structure, which aligns with how our results are monitored and performance is assessed. For a full description of our segments, see Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2014.

Segment contribution represents the measure of profit that management uses to assess the performance of our 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 consolidated 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.

Prior to the second quarter of 2015, we utilized certain Sequoia interest only ("IO") securities in part to serve as hedges in our residential mortgage banking segment. As such, we included these securities in the segment’s assets as well as the interest income and valuation adjustments related to the securities in the segment’s results. During the second quarter of 2015, we transferred these securities to our residential investments segment.

Additionally, beginning in the second quarter of 2015, we began to record a hedging allocation between our segments. As we currently manage our market interest rate risk on an enterprise-wide basis, we rely on certain assets to serve as natural hedges to other assets, and in some cases these assets can be in different segments. Management uses this allocation to assess the economic returns of each segment on a stand-alone basis and the allocation has no impact on our consolidated results. This was a prospective change in how we are managing our business and allocating capital to each segment. As such, we have not conformed prior period results for our segments. Analysis of our year-over-year results are discussed in Part I, Item 2, Management’s Discussion and Analysis of Results of Operations in this quarterly report on Form 10-Q.

The following tables present financial information by segment for the three and nine months ended September 30, 2015 and 2014.

Table 21.1 – Business Segment Financial Information



	Three Months Ended September 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	12,115		$	34,074		$	11,191		$	6,104		$	63,484
Interest expense	(4,313		)	(2,660		)	(3,502		)	(13,400		)	(23,875		)
Net interest income (loss)	7,802			31,414			7,689			(7,296		)	39,609
Reversal of provision for loan losses	—			—			60			—			60
Non-interest income
Mortgage banking and investment activities, net ⁽¹⁾	331			(13,622		)	1,002			(547		)	(12,836		)
MSR income (loss), net	—			3,549			—			—			3,549
Other income	—			327			—			—			327
Realized gains, net	—			5,548			—			—			5,548
Total non-interest income, net	331			(4,198		)	1,002			(547		)	(3,412		)
Direct operating expenses	(11,278		)	(1,311		)	(3,136		)	(8,772		)	(24,497		)
Benefit from income taxes	2,690			4,082			(389		)	1,021			7,404
Segment Contribution	$	(455	)	$	29,987		$	5,226		$	(15,594	)
Net Income													$	19,164
Non-cash amortization income (expense)	$	(45	)	$	9,115		$	(61	)	$	(1,007	)	$	8,002
Hedging allocations ⁽¹⁾	(1,683		)	1,683			—			—			—



	Three Months Ended September 30, 2014
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	16,911		$	27,600		$	12,603		$	6,237		$	63,351
Interest expense	(4,192		)	(3,142		)	(4,526		)	(11,490		)	(23,350		)
Net interest income (loss)	12,719			24,458			8,077			(5,253		)	40,001
Reversal of provision for loan losses	—			—			888			708			1,596
Non-interest income
Mortgage banking and investment activities, net	11,429			(3,371		)	6,486			(378		)	14,166
MSR income (loss), net	—			5,821			—			—			5,821
Other income	—			—			—			1,600			1,600
Realized gains, net	—			7,836			—			696			8,532
Total non-interest income, net	11,429			10,286			6,486			1,918			30,119
Direct operating expenses	(9,982		)	(802		)	(2,279		)	(8,343		)	(21,406		)
(Provision for) benefit from income taxes	(3,352		)	150			(1,764		)	(247		)	(5,213		)
Segment Contribution	$	10,814		$	34,092		$	11,408		$	(11,217	)
Net Income													$	45,097
Non-cash amortization income (expense)	$	(43	)	$	10,890		$	(191	)	$	(2,049	)	$	8,607



	Nine Months Ended September 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	37,886		$	98,335		$	34,784		$	19,598		$	190,603
Interest expense	(11,389		)	(8,137		)	(10,488		)	(40,830		)	(70,844		)
Net interest income (loss)	26,497			90,198			24,296			(21,232		)	119,759
Reversal of provision for loan losses	—			—			115			—			115
Non-interest income
Mortgage banking and investment activities, net ⁽¹⁾	7,383			(14,745		)	3,323			(2,360		)	(6,399		)
MSR income (loss), net	—			(6,545		)	—			—			(6,545		)
Other income	—			2,435			—			—			2,435
Realized gains, net	—			16,170			—			—			16,170
Total non-interest income, net	7,383			(2,685		)	3,323			(2,360		)	5,661
Direct operating expenses	(33,214		)	(3,600		)	(9,638		)	(28,326		)	(74,778		)
Benefit from income taxes	3,562			3,824			321			2,565			10,272
Segment Contribution	$	4,228		$	87,737		$	18,417		$	(49,353	)
Net Income													$	61,029
Non-cash amortization income (expense)	$	(135	)	$	28,277		$	(188	)	$	(2,984	)	$	24,970
Hedging allocations ⁽¹⁾	1,120			(1,070		)	—			(50		)	—



	Nine Months Ended September 30, 2014
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	40,015		$	83,120		$	34,204		$	19,481		$	176,820
Interest expense	(7,674		)	(9,106		)	(12,234		)	(34,546		)	(63,560		)
Net interest income (loss)	32,341			74,014			21,970			(15,065		)	113,260
Reversal of (provision for) loan losses	—			—			(56		)	685			629
Non-interest income
Mortgage banking and investment activities, net	11,704			(13,117		)	12,300			(903		)	9,984
MSR income (loss), net	—			4,650			—			—			4,650
Other income	—			—			—			1,600			1,600
Realized gains, net	—			9,815			—			872			10,687
Total non-interest income, net	11,704			1,348			12,300			1,569			26,921
Direct operating expenses	(26,577		)	(2,667		)	(7,085		)	(27,330		)	(63,660		)
(Provision for) benefit from income taxes	(3,258		)	1,826			(2,159		)	(112		)	(3,703		)
Segment Contribution	$	14,210		$	74,521		$	24,970		$	(40,253	)
Net Income													$	73,447
Non-cash amortization income (expense)	$	(131	)	$	32,724		$	(579	)	$	(6,068	)	$	25,946


(1)	Intersegment hedging allocation presented in the tables above is included in the mortgage banking and investment activities, net line item of the segment income statements for the three and nine months ended September 30, 2015.

The following tables present the components of Corporate/Other for the three and nine months ended September 30, 2015 and 2014.

Table 21.2 – Components of Corporate/Other



	Three Months Ended September 30,
	2015									2014
(In Thousands)	Legacy Consolidated VIEs			Other			Total			Legacy Consolidated VIEs			Other			Total
Interest income	$	6,098		$	6		$	6,104		$	6,233		$	4		$	6,237
Interest expense	(3,842		)	(9,558		)	(13,400		)	(5,250		)	(6,240		)	(11,490		)
Net interest income (loss)	2,256			(9,552		)	(7,296		)	983			(6,236		)	(5,253		)
Reversal of provision for loan losses	—			—			—			708			—			708
Non-interest income
Mortgage banking and investment activities, net	(501		)	(46		)	(547		)	(361		)	(17		)	(378		)
MSR income (loss), net	—			—			—			—			—			—
Other income	—			—			—			—			1,600			1,600
Realized gains, net	—			—			—			696			—			696
Total non-interest income, net	(501		)	(46		)	(547		)	335			1,583			1,918
Direct operating expenses	—			(8,772		)	(8,772		)	(26		)	(8,317		)	(8,343		)
(Provision for) benefit from income taxes	—			1,021			1,021			—			(247		)	(247		)
Total	$	1,755		$	(17,349	)	$	(15,594	)	$	2,000		$	(13,217	)	$	(11,217	)



	Nine Months Ended September 30,
	2015									2014
(In Thousands)	Legacy Consolidated VIEs			Other			Total			Legacy Consolidated VIEs			Other			Total
Interest income	$	19,578		$	20		$	19,598		$	19,473		$	8		$	19,481
Interest expense	(12,372		)	(28,458		)	(40,830		)	(15,950		)	(18,596		)	(34,546		)
Net interest income (loss)	7,206			(28,438		)	(21,232		)	3,523			(18,588		)	(15,065		)
Reversal of provision for loan losses	—			—			—			685			—			685
Non-interest income
Mortgage banking and investment activities, net	(2,277		)	(83		)	(2,360		)	(825		)	(78		)	(903		)
MSR income (loss), net	—			—			—			—			—			—
Other income	—			—			—			—			1,600			1,600
Realized gains, net	—			—			—			872			—			872
Total non-interest income, net	(2,277		)	(83		)	(2,360		)	47			1,522			1,569
Direct operating expenses	—			(28,326		)	(28,326		)	(120		)	(27,210		)	(27,330		)
(Provision for) benefit from income taxes	—			2,565			2,565			—			(112		)	(112		)
Total	$	4,929		$	(54,282	)	$	(49,353	)	$	4,135		$	(44,388	)	$	(40,253	)

The following table presents supplemental information by segment at September 30, 2015 and December 31, 2014.

Table 21.3 – Supplemental Segment Information



(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
September 30, 2015
Residential loans	$	1,506,151	$	1,360,277	$	—	$	1,170,246	$	4,036,674
Commercial loans	—		—		468,157		—		468,157
Real estate securities	—		1,085,224		—		—		1,085,224
Mortgage servicing rights	—		162,726		—		—		162,726
Total assets	1,563,306		2,723,955		475,924		1,505,841		6,269,026

December 31, 2014
Residential loans	$	1,342,519	$	581,668	$	—	$	1,474,386	$	3,398,573
Commercial loans	—		—		566,927		—		566,927
Real estate securities	93,802		1,285,428		—		—		1,379,230
Mortgage servicing rights	—		139,293		—		—		139,293
Total assets	1,468,856		2,057,256		575,943		1,816,911		5,918,966