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 nine months ended September 30, 2016 and 2015.

Table 22.1 – Business Segment Financial Information



	Three Months Ended September 30, 2016
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			Corporate/ Other			Total
Interest income	$	8,831		$	39,981		$	7,195		$	4,899		$	60,906
Interest expense	(3,826		)	(4,471		)	(542		)	(12,758		)	(21,597		)
Net interest income (loss)	5,005			35,510			6,653			(7,859		)	39,309
Reversal of provision for loan losses	—			—			859			—			859
Non-interest income
Mortgage banking activities, net	9,766			—			—			—			9,766
MSR income (loss), net	—			3,770			—			—			3,770
Investment fair value changes, net	—			11,973			203			(258		)	11,918
Other income	—			1,643			—			—			1,643
Realized gains, net	—			1,991			4,624			—			6,615
Total non-interest income, net	9,766			19,377			4,827			(258		)	33,712
Direct operating expenses ⁽¹⁾	(5,807		)	(2,498		)	(253		)	(11,797		)	(20,355		)
Provision for income taxes	(240		)	(732		)	—			—			(972		)
Segment Contribution	$	8,724		$	51,657		$	12,086		$	(19,914	)
Net Income													$	52,553
Non-cash amortization income (expense)	$	(28	)	$	6,124		$	(1	)	$	(983	)	$	5,112



	Three Months Ended September 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			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 activities, net	331			—			1,002			—			1,333
MSR income (loss), net	—			3,549			—			—			3,549
Investment fair value changes, net	—			(13,622		)	—			(547		)	(14,169		)
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		)
(Provision for) 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	(1,683		)	1,683			—			—			—



	Nine Months Ended September 30, 2016
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			Corporate/ Other			Total
Interest income	$	24,610		$	120,812		$	29,927		$	14,672		$	190,021
Interest expense	(10,719		)	(14,076		)	(5,001		)	(38,195		)	(67,991		)
Net interest income (loss)	13,891			106,736			24,926			(23,523		)	122,030
Reversal of provision for loan losses	—			—			7,102			—			7,102
Non-interest income
Mortgage banking activities, net	26,774			—			(2,062		)	—			24,712
MSR income (loss), net	—			12,834			—			—			12,834
Investment fair value changes, net	—			(16,913		)	408			(2,181		)	(18,686		)
Other income	—			4,130			27			—			4,157
Realized gains, net	—			21,312			4,433			292			26,037
Total non-interest income, net	26,774			21,363			2,806			(1,889		)	49,054
Direct operating expenses ⁽¹⁾	(17,175		)	(6,517		)	(2,524		)	(44,746		)	(70,962		)
Provision for income taxes	(240		)	(1,087		)	—			—			(1,327		)
Segment Contribution	$	23,250		$	120,495		$	32,310		$	(70,158	)
Net Income													$	105,897
Non-cash amortization income (expense)	$	(102	)	$	20,531		$	(24	)	$	(2,978	)	$	17,427



	Nine Months Ended September 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial			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 activities, net	7,383			—			3,323			—			10,706
MSR income (loss), net	—			(6,545		)	—			—			(6,545		)
Investment fair value changes, net	—			(14,745		)	—			(2,360		)	(17,105		)
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	1,120			(1,070		)	—			(50		)	—


(1)	For the three and nine months ended September 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 nine months ended September 30, 2016 and 2015.

Table 22.2 – Components of Corporate/Other



	Three Months Ended September 30,
	2016									2015
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	4,837		$	62		$	4,899		$	6,098		$	6		$	6,104
Interest expense	(3,274		)	(9,484		)	(12,758		)	(3,842		)	(9,558		)	(13,400		)
Net interest income (loss)	1,563			(9,422		)	(7,859		)	2,256			(9,552		)	(7,296		)
Non-interest income
Investment fair value changes, net	(255		)	(3		)	(258		)	(501		)	(46		)	(547		)
Total non-interest income, net	(255		)	(3		)	(258		)	(501		)	(46		)	(547		)
Direct operating expenses	—			(11,797		)	(11,797		)	—			(8,772		)	(8,772		)
Provision for income taxes	—			—			—			—			1,021			1,021
Total	$	1,308		$	(21,222	)	$	(19,914	)	$	1,755		$	(17,349	)	$	(15,594	)



	Nine Months Ended September 30,
	2016									2015
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	14,525		$	147		$	14,672		$	19,578		$	20		$	19,598
Interest expense	(9,842		)	(28,353		)	(38,195		)	(12,372		)	(28,458		)	(40,830		)
Net interest income (loss)	4,683			(28,206		)	(23,523		)	7,206			(28,438		)	(21,232		)
Non-interest income
Investment fair value changes, net	(2,086		)	(95		)	(2,181		)	(2,277		)	(83		)	(2,360		)
Realized gains, net	—			292			292			—			—			—
Total non-interest income, net	(2,086		)	197			(1,889		)	(2,277		)	(83		)	(2,360		)
Direct operating expenses	—			(44,746		)	(44,746		)	—			(28,326		)	(28,326		)
Provision for income taxes	—			—			—			—			2,565			2,565
Total	$	2,597		$	(72,755	)	$	(70,158	)	$	4,929		$	(54,282	)	$	(49,353	)


(1)	Legacy consolidated 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 September 30, 2016 and December 31, 2015.

Table 22.3 – Supplemental Segment Information



(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial		Corporate/ Other		Total
September 30, 2016
Residential loans	$	1,188,514	$	2,282,674	$	—	$	839,976	$	4,311,164
Commercial loans	—		—		30,400		—		30,400
Real estate securities	—		864,300		72,610		—		936,910
Mortgage servicing rights	—		106,009		—		—		106,009
Total assets	1,215,240		3,470,013		103,507		1,083,859		5,872,619

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