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Segment Information
 3 Months Ended
Mar. 31, 2017
Segment Reporting [Abstract]  
Segment Information
Segment Information
During the first quarter of 2017, we reorganized our segments to align with changes in how we view our segments for making operating decisions and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following is a full description of our current segments.
Our Investment Portfolio segment primarily consists of investments in residential jumbo loans, real estate securities, and MSRs. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued CRT securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are made through a subsidiary of Redwood Trust that is a member of the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. Our MSR investments are primarily associated with residential loans we have sold or securitized, as well as MSRs that we purchased from third parties. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment, as well as MSR income. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans, and from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
Segment contribution represents the measure of profit that we use 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 our two segments, as well as activity from certain consolidated Sequoia entities and commercial mortgage banking activities (in the prior year), 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 months ended March 31, 2017 and 2016.
Table 21.1 – Business Segment Financial Information
 
 
Three Months Ended March 31, 2017
(In Thousands)
 
Investment Portfolio
 
 Residential Mortgage Banking
 
 Corporate/
Other
 
 Total
Interest income
 
$
42,250

 
$
7,474

 
$
4,904

 
$
54,628

Interest expense
 
(5,264
)
 
(2,924
)
 
(12,843
)
 
(21,031
)
Net interest income (loss)
 
36,986


4,550


(7,939
)
 
33,597

Reversal of provision for loan losses
 
—

 
—

 
—

 
—

Non-interest income
 
 
 
 
 
 
 
 
Mortgage banking activities, net
 
—

 
17,604

 
—

 
17,604

MSR income, net
 
1,713

 
—

 
—

 
1,713

Investment fair value changes, net
 
3,359

 
—

 
(1,808
)
 
1,551

Other income
 
1,184

 
—

 
—

 
1,184

Realized gains, net
 
5,703

 
—

 
—

 
5,703

Total non-interest income, net
 
11,959


17,604


(1,808
)
 
27,755

Direct operating expenses
 
(1,593
)
 
(5,881
)
 
(10,752
)
 
(18,226
)
Provision for income taxes
 
(1,737
)
 
(4,420
)
 
—

 
(6,157
)
Segment Contribution
 
$
45,615


$
11,853


$
(20,499
)
 
 
Net Income
 
 
 
 
 
 
 
$
36,969

Non-cash amortization income (expense)
 
$
5,847

 
$
(27
)
 
$
(997
)
 
$
4,823

 
 
Three Months Ended March 31, 2016
(In Thousands)
 
Investment Portfolio
 
 Residential Mortgage Banking
 
 Corporate/
Other
 
 Total
Interest income
 
$
48,763

 
$
7,869

 
$
5,696

 
$
62,328

Interest expense
 
(7,507
)
 
(3,289
)
 
(13,154
)
 
(23,950
)
Net interest income (loss)
 
41,256


4,580

 
(7,458
)
 
38,378

Reversal of provision for loan losses
 
(289
)
 
—

 
—

 
(289
)
Non-interest income
 
 
 
 
 
 
 
 
Mortgage banking activities, net
 
—

 
9,280

 
(2,062
)
 
7,218

MSR income, net
 
6,281

 
—

 
—

 
6,281

Investment fair value changes, net
 
(17,902
)
 
—

 
(1,636
)
 
(19,538
)
Other income
 
955

 
—

 
—

 
955

Realized gains, net
 
9,246

 
—

 
292

 
9,538

Total non-interest income, net
 
(1,420
)

9,280

 
(3,406
)
 
4,454

Direct operating expenses (1)
 
(2,111
)
 
(5,321
)
 
(23,020
)
 
(30,452
)
Provision for income taxes
 
(28
)
 
—

 
—

 
(28
)
Segment Contribution
 
$
37,408


$
8,539


$
(33,884
)
 
 
Net Income
 
 
 
 
 
 
 
$
12,063

Non-cash amortization income (expense)
 
$
8,052

 
$
(43
)
 
$
(990
)
 
$
7,019

(1)
For the three months ended March 31, 2016, $11 million of costs 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.
The following tables present the components of Corporate/Other for the three months ended March 31, 2017 and 2016.
Table 21.2 – Components of Corporate/Other
 
 
Three Months Ended March 31,
 
 
2017
 
2016
(In Thousands)
 
Legacy Consolidated VIEs (1)
 
Other
 
Total
 
Legacy Consolidated VIEs (1)
 
Other
 
 Total
Interest income
 
$
4,838

 
$
66

 
$
4,904

 
$
4,777

 
$
919

 
$
5,696

Interest expense
 
(3,516
)
 
(9,327
)
 
(12,843
)
 
(3,297
)
 
(9,857
)
 
(13,154
)
Net interest income (loss)
 
1,322

 
(9,261
)
 
(7,939
)
 
1,480

 
(8,938
)
 
(7,458
)
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking activities, net
 
—

 
—

 
—

 
—

 
(2,062
)
 
(2,062
)
Investment fair value changes, net
 
(1,810
)
 
2

 
(1,808
)
 
(1,580
)
 
(56
)
 
(1,636
)
Realized gains, net
 
—

 
—

 
—

 
—

 
292

 
292

Total non-interest income, net
 
(1,810
)
 
2

 
(1,808
)
 
(1,580
)
 
(1,826
)
 
(3,406
)
Direct operating expenses
 
—

 
(10,752
)
 
(10,752
)
 
—

 
(23,020
)
 
(23,020
)
Provision for income taxes
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
(488
)
 
$
(20,011
)
 
$
(20,499
)
 
$
(100
)
 
$
(33,784
)
 
$
(33,884
)
(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 March 31, 2017 and December 31, 2016.
Table 21.3 – Supplemental Segment Information
(In Thousands)
 
Investment Portfolio
 
Residential Mortgage Banking
 
Corporate/
Other
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
Residential loans
 
$
2,350,013

 
$
376,607

 
$
745,621

 
$
3,472,241

Real estate securities
 
1,165,940

 
—

 
—

 
1,165,940

Mortgage servicing rights
 
111,013

 
—

 
—

 
111,013

Total assets
 
3,771,370

 
410,229

 
1,032,692

 
5,214,291

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Residential loans
 
$
2,261,016

 
$
835,399

 
$
791,636

 
$
3,888,051

Real estate securities
 
1,018,439

 
—

 


 
1,018,439

Mortgage servicing rights
 
118,526

 
—

 
—

 
118,526

Total assets
 
3,615,535

 
866,356

 
1,001,586

 
5,483,477