Segment Information

Redwood operates in three segments: Residential Mortgage Banking, Residential Investments, and Commercial. Beginning in the first quarter of 2016, we renamed our former "Commercial mortgage banking and investments" segment to our "Commercial" segment, as a result of our announcement to discontinue the origination of commercial loans. 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, 2015.

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.

The following tables present financial information by segment for the three and six months ended June 30, 2016 and 2015.

Table 22.1 – Business Segment Financial Information



	Three Months Ended June 30, 2016
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			Corporate/ Other			Total
Interest income	$	7,910		$	40,895		$	13,151		$	4,831		$	66,787
Interest expense	(3,604		)	(4,652		)	(1,507		)	(12,681		)	(22,444		)
Net interest income (loss)	4,306			36,243			11,644			(7,850		)	44,343
Reversal of provision for loan losses	—			—			6,532			—			6,532
Non-interest income
Mortgage banking activities, net	7,728			—			—			—			7,728
MSR income (loss), net	—			2,783			—			—			2,783
Investment fair value changes, net	—			(11,121		)	342			(287		)	(11,066		)
Other income	—			1,532			27			—			1,559
Realized gains (losses), net	—			10,075			(191		)	—			9,884
Total non-interest income, net	7,728			3,269			178			(287		)	10,888
Direct operating expenses ⁽¹⁾	(6,047		)	(2,158		)	(669		)	(11,281		)	(20,155		)
Provision for income taxes	—			(327		)	—			—			(327		)
Segment Contribution	$	5,987		$	37,027		$	17,685		$	(19,418	)
Net Income													$	41,281
Non-cash amortization income (expense)	$	(31	)	$	6,339		$	(7	)	$	(1,005	)	$	5,296



	Three Months Ended June 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			Corporate/ Other			Total
Interest income	$	9,976		$	34,249		$	12,679		$	6,469		$	63,373
Interest expense	(3,298		)	(2,660		)	(3,497		)	(13,553		)	(23,008		)
Net interest income (loss)	6,678			31,589			9,182			(7,084		)	40,365
Reversal of provision for loan losses	—			—			261			—			261
Non-interest income
Mortgage banking activities, net	4,833			—			2,614			—			7,447
MSR income (loss), net	—			830			—			—			830
Investment fair value changes, net	—			(1,104		)	—			(684		)	(1,788		)
Other income	—			1,299			—			—			1,299
Realized gains, net	—			6,316			—			—			6,316
Total non-interest income, net	4,833			7,341			2,614			(684		)	14,104
Direct operating expenses	(11,033		)	(1,171		)	(3,020		)	(9,994		)	(25,218		)
(Provision for) benefit from income taxes	865			(3,768		)	(143		)	598			(2,448		)
Segment Contribution	$	1,343		$	33,991		$	8,894		$	(17,164	)
Net Income													$	27,064
Non-cash amortization income (expense)	$	(44	)	$	9,324		$	(78	)	$	(995	)	$	8,207



	Six Months Ended June 30, 2016
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			Corporate/ Other			Total
Interest income	$	15,779		$	80,831		$	22,732		$	9,773		$	129,115
Interest expense	(6,893		)	(9,605		)	(4,459		)	(25,437		)	(46,394		)
Net interest income (loss)	8,886			71,226			18,273			(15,664		)	82,721
Reversal of provision for loan losses	—			—			6,243			—			6,243
Non-interest income
Mortgage banking activities, net	17,008			—			(2,062		)	—			14,946
MSR income (loss), net	—			9,064			—			—			9,064
Investment fair value changes, net	—			(28,886		)	205			(1,923		)	(30,604		)
Other income	—			2,487			27			—			2,514
Realized gains (losses), net	—			19,321			(191		)	292			19,422
Total non-interest income, net	17,008			1,986			(2,021		)	(1,631		)	15,342
Direct operating expenses ⁽¹⁾	(11,368		)	(4,019		)	(2,271		)	(32,949		)	(50,607		)
Provision for income taxes	—			(355		)	—			—			(355		)
Segment Contribution	$	14,526		$	68,838		$	20,224		$	(50,244	)
Net Income													$	53,344
Non-cash amortization income (expense)	$	(74	)	$	14,407		$	(23	)	$	(1,995	)	$	12,315



	Six Months Ended June 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			Corporate/ Other			Total
Interest income	$	25,771		$	64,261		$	23,593		$	13,494		$	127,119
Interest expense	(7,076		)	(5,469		)	(6,986		)	(27,438		)	(46,969		)
Net interest income (loss)	18,695			58,792			16,607			(13,944		)	80,150
Provision for loan losses	—			—			55			—			55
Non-interest income
Mortgage banking activities, net	7,052			—			2,321			—			9,373
MSR income (loss), net	—			(10,094		)	—			—			(10,094		)
Investment fair value changes, net	—			(1,123		)	—			(1,813		)	(2,936		)
Other income	—			2,108			—			—			2,108
Realized gains, net	—			10,622			—			—			10,622
Total non-interest income, net	7,052			1,513			2,321			(1,813		)	9,073
Direct operating expenses	(21,936		)	(2,289		)	(6,502		)	(19,554		)	(50,281		)
(Provision for) benefit from income taxes	872			(258		)	710			1,544			2,868
Segment Contribution	$	4,683		$	57,758		$	13,191		$	(33,767	)
Net Income													$	41,865
Non-cash amortization income (expense)	$	(90	)	$	19,162		$	(128	)	$	(1,976	)	$	16,968


(1)	For the three and six months ended June 30, 2016, charges associated with the restructuring of our conforming residential mortgage loan operations and commercial operations, included in the direct operating expense line item, are presented under the Corporate/Other column. See Note 11 for further discussion of these restructuring charges.

The following tables present the components of Corporate/Other for the three and six months ended June 30, 2016 and 2015.

Table 22.2 – Components of Corporate/Other



	Three Months Ended June 30,
	2016									2015
(In Thousands)	Legacy Consolidated VIEs			Other			Total			Legacy Consolidated VIEs			Other			Total
Interest income	$	4,911		$	(80	)	$	4,831		$	6,462		$	7		$	6,469
Interest expense	(3,271		)	(9,410		)	(12,681		)	(4,048		)	(9,505		)	(13,553		)
Net interest income (loss)	1,640			(9,490		)	(7,850		)	2,414			(9,498		)	(7,084		)
Non-interest income
Investment fair value changes, net	(251		)	(36		)	(287		)	(684		)	—			(684		)
Total non-interest income, net	(251		)	(36		)	(287		)	(684		)	—			(684		)
Direct operating expenses	—			(11,281		)	(11,281		)	—			(9,994		)	(9,994		)
Benefit from income taxes	—			—			—			—			598			598
Total	$	1,389		$	(20,807	)	$	(19,418	)	$	1,730		$	(18,894	)	$	(17,164	)



	Six Months Ended June 30,
	2016									2015
(In Thousands)	Legacy VIEs ⁽¹⁾			Other			Total			Legacy VIEs ⁽¹⁾			Other			Total
Interest income	$	9,688		$	85		$	9,773		$	13,480		$	14		$	13,494
Interest expense	(6,568		)	(18,869		)	(25,437		)	(8,530		)	(18,908		)	(27,438		)
Net interest income (loss)	3,120			(18,784		)	(15,664		)	4,950			(18,894		)	(13,944		)
Non-interest income
Investment fair value changes, net	(1,831		)	(92		)	(1,923		)	(1,777		)	(36		)	(1,813		)
Realized gains, net	—			292			292			—			—			—
Total non-interest income, net	(1,831		)	200			(1,631		)	(1,777		)	(36		)	(1,813		)
Direct operating expenses	—			(32,949		)	(32,949		)	—			(19,554		)	(19,554		)
Benefit from income taxes	—			—			—			—			1,544			1,544
Total	$	1,289		$	(51,533	)	$	(50,244	)	$	3,173		$	(36,940	)	$	(33,767	)


(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 June 30, 2016 and December 31, 2015.

Table 22.3 – Supplemental Segment Information



(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial		Corporate/ Other		Total
June 30, 2016
Residential loans	$	882,380	$	2,277,561	$	—	$	880,197	$	4,040,138
Commercial loans	—		—		325,063		—		325,063
Real estate securities	—		835,681		48,120		—		883,801
Mortgage servicing rights	—		110,046		—		—		110,046
Total assets	918,746		3,448,727		375,576		1,154,543		5,897,592

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		415,716		1,316,235		6,220,047