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 and real estate securities. 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 primarily 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. This segment also includes residential loans from our consolidated Sequoia Choice entity. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. 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 nine months ended September 30, 2017 and 2016.

Table 21.1 – Business Segment Financial Information



	Three Months Ended September 30, 2017
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	47,023		$	10,626		$	5,088		$	62,737
Interest expense	(9,445		)	(4,135		)	(13,863		)	(27,443		)
Net interest income (loss)	37,578			6,491			(8,775		)	35,294
Non-interest income
Mortgage banking activities, net	—			21,200			—			21,200
MSR income, net	1,615			—			—			1,615
Investment fair value changes, net	1,372			—			(1,048		)	324
Other income	1,197			—			—			1,197
Realized gains, net	1,734			—			—			1,734
Total non-interest income, net	5,918			21,200			(1,048		)	26,070
Direct operating expenses	(1,324		)	(6,107		)	(12,491		)	(19,922		)
Provision for income taxes	(433		)	(4,829		)	—			(5,262		)
Segment Contribution	$	41,739		$	16,755		$	(22,314	)
Net Income										$	36,180
Non-cash amortization income (expense)	$	5,222		$	(25	)	$	(787	)	$	4,410



	Three Months Ended September 30, 2016
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	47,176		$	8,831		$	4,899		$	60,906
Interest expense	(5,013		)	(3,826		)	(12,758		)	(21,597		)
Net interest income (loss)	42,163			5,005			(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, net	3,770			—			—			3,770
Investment fair value changes, net	12,176			—			(258		)	11,918
Other income	1,643			—			—			1,643
Realized gains, net	6,615			—			—			6,615
Total non-interest income, net	24,204			9,766			(258		)	33,712
Direct operating expenses	(2,751		)	(5,807		)	(11,797		)	(20,355		)
Provision for income taxes	(732		)	(240		)	—			(972		)
Segment Contribution	$	63,743		$	8,724		$	(19,914	)
Net Income										$	52,553
Non-cash amortization income (expense)	$	6,123		$	(28	)	$	(983	)	$	5,112



	Nine Months Ended September 30, 2017
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	135,106		$	26,515		$	14,968		$	176,589
Interest expense	(21,940		)	(11,462		)	(39,306		)	(72,708		)
Net interest income (loss)	113,166			15,053			(24,338		)	103,881
Non-interest income
Mortgage banking activities, net	—			50,850			—			50,850
MSR income, net	6,106			—			—			6,106
Investment fair value changes, net	13,846			—			(3,856		)	9,990
Other income	3,367			—			—			3,367
Realized gains, net	9,561			—			(752		)	8,809
Total non-interest income, net	32,880			50,850			(4,608		)	79,122
Direct operating expenses	(4,371		)	(18,009		)	(34,409		)	(56,789		)
Provision for income taxes	(4,490		)	(12,251		)	—			(16,741		)
Segment Contribution	$	137,185		$	35,643		$	(63,355	)
Net Income										$	109,473
Non-cash amortization income (expense)	$	16,263		$	(79	)	$	(2,528	)	$	13,656



	Nine Months Ended September 30, 2016
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	149,985		$	24,610		$	15,426		$	190,021
Interest expense	(18,679		)	(10,719		)	(38,593		)	(67,991		)
Net interest income (loss)	131,306			13,891			(23,167		)	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, net	12,834			—			—			12,834
Investment fair value changes, net	(16,505		)	—			(2,181		)	(18,686		)
Other income	4,157			—			—			4,157
Realized gains, net	25,745			—			292			26,037
Total non-interest income, net	26,231			26,774			(3,951		)	49,054
Direct operating expenses ⁽¹⁾	(7,689		)	(17,175		)	(46,098		)	(70,962		)
Provision for income taxes	(1,087		)	(240		)	—			(1,327		)
Segment Contribution	$	155,863		$	23,250		$	(73,216	)
Net Income										$	105,897
Non-cash amortization income (expense)	$	20,507		$	(102	)	$	(2,978	)	$	17,427


(1)	For the nine months ended September 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 nine months ended September 30, 2017 and 2016.

Table 21.2 – Components of Corporate/Other



	Three Months Ended September 30,
	2017									2016
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	4,875		$	213		$	5,088		$	4,837		$	62		$	4,899
Interest expense	(3,838		)	(10,025		)	(13,863		)	(3,274		)	(9,484		)	(12,758		)
Net interest income (loss)	1,037			(9,812		)	(8,775		)	1,563			(9,422		)	(7,859		)
Non-interest income
Investment fair value changes, net	(1,045		)	(3		)	(1,048		)	(255		)	(3		)	(258		)
Total non-interest income, net	(1,045		)	(3		)	(1,048		)	(255		)	(3		)	(258		)
Direct operating expenses	—			(12,491		)	(12,491		)	—			(11,797		)	(11,797		)
Total	$	(8	)	$	(22,306	)	$	(22,314	)	$	1,308		$	(21,222	)	$	(19,914	)



	Nine Months Ended September 30,
	2017									2016
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	14,576		$	392		$	14,968		$	14,525		$	901		$	15,426
Interest expense	(11,046		)	(28,260		)	(39,306		)	(9,842		)	(28,751		)	(38,593		)
Net interest income (loss)	3,530			(27,868		)	(24,338		)	4,683			(27,850		)	(23,167		)
Non-interest income
Investment fair value changes, net	(3,842		)	(14		)	(3,856		)	(2,086		)	(95		)	(2,181		)
Realized gains, net	—			(752		)	(752		)	—			292			292
Total non-interest income, net	(3,842		)	(766		)	(4,608		)	(2,086		)	(1,865		)	(3,951		)
Direct operating expenses	—			(34,409		)	(34,409		)	—			(46,098		)	(46,098		)
Total	$	(312	)	$	(63,043	)	$	(63,355	)	$	2,597		$	(75,813	)	$	(73,216	)


(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, 2017 and December 31, 2016.

Table 21.3 – Supplemental Segment Information



(In Thousands)	Investment Portfolio		Residential Mortgage Banking		Corporate/ Other		Total
September 30, 2017
Residential loans	$	2,586,105	$	925,681	$	673,134	$	4,184,920
Real estate securities	1,356,272		—		—		1,356,272
Mortgage servicing rights	62,928		—		—		62,928
Total assets	4,236,023		947,503		947,173		6,130,699

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