Segment Information

During 2015, Redwood operated 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. The accounting policies of the reportable segments are the same as those described in Note 3 — Summary of Significant Accounting Policies. For a full description of our segments, see Item 1—Business in this Annual Report on Form 10-K.

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 market 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, in the second quarter of 2015, we began to record a hedging allocation between our segments. During 2015, we managed our market interest rate risk on an enterprise-wide basis, whereby we relied on certain assets to serve as natural hedges to other assets, and in some cases these assets were in different segments. Management used this allocation to assess the economic returns of each segment on a stand-alone basis and the allocation had no impact on our consolidated results. This was a prospective change in how we manage our business and allocate capital to each segment. As such, we did not conform prior period results for our segments. Analysis of our year-over-year results are discussed in Part II, Item 7, Management’s Discussion and Analysis of Results of Operations in this Annual Report on Form 10-K.

The following tables present financial information by segment for the years ended December 31, 2015, 2014, and 2013.

Table 21.1 – Business Segment Financial Information



	Year Ended December 31, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	52,260		$	135,395		$	46,933		$	24,844		$	259,432
Interest expense	(17,207		)	(11,204		)	(13,809		)	(53,663		)	(95,883		)
Net interest income (loss)	35,053			124,191			33,124			(28,819		)	163,549
Reversal of provision for loan losses	—			—			355			—			355
Non-interest income
Mortgage banking and investment activities, net ⁽¹⁾	8,268			(20,089		)	2,704			(1,268		)	(10,385		)
MSR income (loss), net	—			(3,922		)	—			—			(3,922		)
Other income	—			3,192			—			—			3,192
Realized gains, net	—			36,369			—			—			36,369
Total non-interest income, net	8,268			15,550			2,704			(1,268		)	25,254
Direct operating expenses	(43,182		)	(4,346		)	(11,331		)	(38,557		)	(97,416		)
Benefit from income taxes	4,169			847			1,452			3,878			10,346
Segment Contribution	$	4,308		$	136,242		$	26,304		$	(64,766	)
Net Income													$	102,088
Non-cash amortization income (expense)	$	(186	)	$	36,850		$	(267	)	$	(3,994	)	$	32,403
Hedging allocations ⁽¹⁾	1,120			(1,070		)	—			(50		)	—


(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 statement for the year ended December 31, 2015.



	Year Ended December 31, 2014
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	58,272		$	110,433		$	47,567		$	25,798		$	242,070
Interest expense	(12,776		)	(11,848		)	(15,836		)	(47,003		)	(87,463		)
Net interest income (loss)	45,496			98,585			31,731			(21,205		)	154,607
Provision for loan losses	—			—			(84		)	(877		)	(961		)
Non-interest income
Mortgage banking and investment activities, net	21,554			(9,178		)	13,440			(1,024		)	24,792
MSR income (loss), net	—			(4,261		)	—			—			(4,261		)
Other income	—			181			—			1,600			1,781
Realized gains, net	—			13,777			—			1,701			15,478
Total non-interest income, net	21,554			519			13,440			2,277			37,790
Direct operating expenses	(37,664		)	(3,681		)	(11,324		)	(37,454		)	(90,123		)
(Provision for) benefit from income taxes	(1,774		)	1,340			(234		)	(76		)	(744		)
Segment Contribution	$	27,612		$	96,763		$	33,529		$	(57,335	)
Net Income													$	100,569
Non-cash amortization income (expense)	$	(181	)	$	42,784		$	(673	)	$	(8,232	)	$	33,698



	Year Ended December 31, 2013
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	52,517		$	96,399		$	43,420		$	33,820		$	226,156
Interest expense	(10,167		)	(10,067		)	(12,677		)	(48,060		)	(80,971		)
Net interest income (loss)	42,350			86,332			30,743			(14,240		)	145,185
Provision for loan losses	—			—			(3,288		)	(1,449		)	(4,737		)
Non-interest income
Mortgage banking and investment activities, net	79,431			(5,134		)	23,101			(613		)	96,785
MSR income (loss), net	—			20,309			—			—			20,309
Realized gains, net	—			24,765			210			284			25,259
Total non-interest income, net	79,431			39,940			23,311			(329		)	142,353
Direct operating expenses	(22,880		)	(4,035		)	(9,579		)	(50,113		)	(86,607		)
Other expense	—			—			—			(12,000		)	(12,000		)
(Provision for) benefit from income taxes	(5,947		)	(3,027		)	(3,827		)	1,853			(10,948		)
Segment Contribution	$	92,954		$	119,210		$	37,360		$	(76,278	)
Net Income													$	173,246
Non-cash amortization income (expense)	$	—		$	34,578		$	(798	)	$	(7,338	)	$	26,442

The following table presents the components of Corporate/Other that are presented in the preceding tables for the years ended December 31, 2015, 2014, and 2013.



	Years Ended December 31,
	2015									2014									2013
(In Thousands)	Legacy VIEs ⁽¹⁾			Other			Total			Legacy VIEs ⁽¹⁾			Other			Total			Legacy VIEs ⁽¹⁾			Other			Total
Interest income	$	24,814		$	30		$	24,844		$	25,786		$	12		$	25,798		$	33,663		$	157		$	33,820
Interest expense	(15,646		)	(38,017		)	(53,663		)	(20,844		)	(26,159		)	(47,003		)	(25,876		)	(22,184		)	(48,060		)
Net interest income (loss)	9,168			(37,987		)	(28,819		)	4,942			(26,147		)	(21,205		)	7,787			(22,027		)	(14,240		)
Provision for loan losses	—			—			—			(877		)	—			(877		)	(1,449		)	—			(1,449		)
Non-interest income
Mortgage banking and investment activities, net	(1,192		)	(76		)	(1,268		)	(894		)	(130		)	(1,024		)	(613		)	—			(613		)
MSR income (loss), net	—			—			—			—			—			—			—			—			—
Other income	—			—			—			—			1,600			1,600			—			—			—
Realized gains, net	—			—			—			1,701			—			1,701			284			—			284
Total non-interest income, net	(1,192		)	(76		)	(1,268		)	807			1,470			2,277			(329		)	—			(329		)
Direct operating expenses	—			(38,557		)	(38,557		)	(165		)	(37,289		)	(37,454		)	(231		)	(49,882		)	(50,113		)
Other expense	—			—			—			—			—			—			—			(12,000		)	(12,000		)
(Provision for) benefit from income taxes	—			3,878			3,878			—			(76		)	(76		)	—			1,853			1,853
Total	$	7,976		$	(72,742	)	$	(64,766	)	$	4,707		$	(62,042	)	$	(57,335	)	$	5,778		$	(82,056	)	$	(76,278	)


(1)	Legacy VIEs represent legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.

The following table presents supplemental information by segment at December 31, 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
December 31, 2015
Residential loans	$	1,115,738	$	1,791,195	$	—	$	1,021,870	$	3,928,803
Commercial loans	—		—		402,647		—		402,647
Real estate securities	197,007		1,028,171		8,078		—		1,233,256
Mortgage servicing rights	—		191,976		—		—		191,976
Total assets	1,347,492		3,140,604		416,258		1,326,673		6,231,027

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