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, securitized, or retained for investment. 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 valuation changes 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 and six months ended June 30, 2017 and 2016.

Table 21.1 – Business Segment Financial Information



	Three Months Ended June 30, 2017
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	45,833		$	8,415		$	4,976		$	59,224
Interest expense	(7,231		)	(4,403		)	(12,600		)	(24,234		)
Net interest income (loss)	38,602			4,012			(7,624		)	34,990
Non-interest income
Mortgage banking activities, net	—			12,046			—			12,046
MSR income, net	2,778			—			—			2,778
Investment fair value changes, net	9,115			—			(1,000		)	8,115
Other income	986			—			—			986
Realized gains, net	2,124			—			(752		)	1,372
Total non-interest income, net	15,003			12,046			(1,752		)	25,297
Direct operating expenses	(1,454		)	(6,021		)	(11,166		)	(18,641		)
Provision for income taxes	(2,320		)	(3,002		)	—			(5,322		)
Segment Contribution	$	49,831		$	7,035		$	(20,542	)
Net Income										$	36,324
Non-cash amortization income (expense)	$	5,194		$	(27	)	$	(744	)	$	4,423



	Three Months Ended June 30, 2016
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	54,046		$	7,910		$	4,831		$	66,787
Interest expense	(6,159		)	(3,604		)	(12,681		)	(22,444		)
Net interest income (loss)	47,887			4,306			(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, net	2,783			—			—			2,783
Investment fair value changes, net	(10,779		)	—			(287		)	(11,066		)
Other income	1,559			—			—			1,559
Realized gains, net	9,884			—			—			9,884
Total non-interest income, net	3,447			7,728			(287		)	10,888
Direct operating expenses	(2,827		)	(6,047		)	(11,281		)	(20,155		)
Provision for income taxes	(327		)	—			—			(327		)
Segment Contribution	$	54,712		$	5,987		$	(19,418	)
Net Income										$	41,281
Non-cash amortization income (expense)	$	6,332		$	(31	)	$	(1,005	)	$	5,296



	Six Months Ended June 30, 2017
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	88,083		$	15,889		$	9,880		$	113,852
Interest expense	(12,495		)	(7,327		)	(25,443		)	(45,265		)
Net interest income (loss)	75,588			8,562			(15,563		)	68,587
Non-interest income
Mortgage banking activities, net	—			29,650			—			29,650
MSR income, net	4,491			—			—			4,491
Investment fair value changes, net	12,474			—			(2,808		)	9,666
Other income	2,170			—			—			2,170
Realized gains, net	7,827			—			(752		)	7,075
Total non-interest income, net	26,962			29,650			(3,560		)	53,052
Direct operating expenses	(3,047		)	(11,902		)	(21,918		)	(36,867		)
Provision for income taxes	(4,057		)	(7,422		)	—			(11,479		)
Segment Contribution	$	95,446		$	18,888		$	(41,041	)
Net Income										$	73,293
Non-cash amortization income (expense)	$	11,041		$	(54	)	$	(1,741	)	$	9,246



	Six Months Ended June 30, 2016
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	102,809		$	15,779		$	10,527		$	129,115
Interest expense	(13,666		)	(6,893		)	(25,835		)	(46,394		)
Net interest income (loss)	89,143			8,886			(15,308		)	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, net	9,064			—			—			9,064
Investment fair value changes, net	(28,681		)	—			(1,923		)	(30,604		)
Other income	2,514			—			—			2,514
Realized gains, net	19,130			—			292			19,422
Total non-interest income, net	2,027			17,008			(3,693		)	15,342
Direct operating expenses ⁽¹⁾	(4,938		)	(11,368		)	(34,301		)	(50,607		)
Provision for income taxes	(355		)	—			—			(355		)
Segment Contribution	$	92,120		$	14,526		$	(53,302	)
Net Income										$	53,344
Non-cash amortization income (expense)	$	14,384		$	(74	)	$	(1,995	)	$	12,315


(1)	For the six months ended June 30, 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 and six months ended June 30, 2017 and 2016.

Table 21.2 – Components of Corporate/Other



	Three Months Ended June 30,
	2017									2016
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	4,863		$	113		$	4,976		$	4,911		$	(80	)	$	4,831
Interest expense	(3,692		)	(8,908		)	(12,600		)	(3,271		)	(9,410		)	(12,681		)
Net interest income (loss)	1,171			(8,795		)	(7,624		)	1,640			(9,490		)	(7,850		)
Non-interest income
Investment fair value changes, net	(987		)	(13		)	(1,000		)	(251		)	(36		)	(287		)
Realized gains, net	—			(752		)	(752		)	—			—			—
Total non-interest income, net	(987		)	(765		)	(1,752		)	(251		)	(36		)	(287		)
Direct operating expenses	—			(11,166		)	(11,166		)	—			(11,281		)	(11,281		)
Total	$	184		$	(20,726	)	$	(20,542	)	$	1,389		$	(20,807	)	$	(19,418	)



	Six Months Ended June 30,
	2017									2016
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	9,701		$	179		$	9,880		$	9,688		$	839		$	10,527
Interest expense	(7,208		)	(18,235		)	(25,443		)	(6,568		)	(19,267		)	(25,835		)
Net interest income (loss)	2,493			(18,056		)	(15,563		)	3,120			(18,428		)	(15,308		)
Non-interest income
Mortgage banking activities, net	—			—			—			—			(2,062		)	(2,062		)
Investment fair value changes, net	(2,797		)	(11		)	(2,808		)	(1,831		)	(92		)	(1,923		)
Realized gains, net	—			(752		)	(752		)	—			292			292
Total non-interest income, net	(2,797		)	(763		)	(3,560		)	(1,831		)	(1,862		)	(3,693		)
Direct operating expenses	—			(21,918		)	(21,918		)	—			(34,301		)	(34,301		)
Total	$	(304	)	$	(40,737	)	$	(41,041	)	$	1,289		$	(54,591	)	$	(53,302	)


(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 June 30, 2017 and December 31, 2016.

Table 21.3 – Supplemental Segment Information



(In Thousands)	Investment Portfolio		Residential Mortgage Banking		Corporate/ Other		Total
June 30, 2017
Residential loans	$	2,360,234	$	837,371	$	707,686	$	3,905,291
Real estate securities	1,218,503		—		—		1,218,503
Mortgage servicing rights	63,770		—		—		63,770
Total assets	3,809,618		859,706		986,158		5,655,482

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