Segment Information

Redwood operates in two segments: Investment Portfolio and Residential Mortgage Banking. 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, 2017.

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 corporate expenses not directly assigned or allocated to one of our two segments, as well as activity from certain consolidated Sequoia entities, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate 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, 2018 and 2017.

Table 20.1 – Business Segment Financial Information



	Three Months Ended June 30, 2018
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	64,569		$	13,084		$	5,323		$	82,976
Interest expense	(27,004		)	(7,629		)	(13,580		)	(48,213		)
Net interest income (loss)	37,565			5,455			(8,257		)	34,763
Non-interest income
Mortgage banking activities, net	—			10,596			—			10,596
Investment fair value changes, net	1,600			—			(711		)	889
Other income, net	3,322			—			—			3,322
Realized gains, net	4,714			—			—			4,714
Total non-interest income, net	9,636			10,596			(711		)	19,521
Direct operating expenses	(1,858		)	(5,611		)	(11,540		)	(19,009		)
Provision for income taxes	(1,130		)	(1,398		)	—			(2,528		)
Segment Contribution	$	44,213		$	9,042		$	(20,508	)
Net Income										$	32,747
Non-cash amortization income (expense), net	$	4,654		$	(23	)	$	(814	)	$	3,817



	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
Investment fair value changes, net	9,115			—			(1,000		)	8,115
Other income, net	3,764			—			—			3,764
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



	Six Months Ended June 30, 2018
(In Thousands)	Investment Portfolio			Residential Mortgage Banking			Corporate/ Other			Total
Interest income	$	123,326		$	25,981		$	10,288		$	159,595
Interest expense	(46,867		)	(13,766		)	(29,094		)	(89,727		)
Net interest income (loss)	76,459			12,215			(18,806		)	69,868
Non-interest income
Mortgage banking activities, net	—			37,172			—			37,172
Investment fair value changes, net	3,190			—			(692		)	2,498
Other income, net	5,440			—			—			5,440
Realized gains, net	14,077			—			—			14,077
Total non-interest income, net	22,707			37,172			(692		)	59,187
Direct operating expenses	(3,865		)	(14,243		)	(23,931		)	(42,039		)
Provision for income taxes	(2,018		)	(5,406		)	—			(7,424		)
Segment Contribution	$	93,283		$	29,738		$	(43,429	)
Net Income										$	79,592
Non-cash amortization income (expense)	$	9,271		$	(45	)	$	(1,672	)	$	7,554



	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
Investment fair value changes, net	12,474			—			(2,808		)	9,666
Other income, net	6,661			—			—			6,661
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

The following table presents the components of Corporate/Other for the three and six months ended June 30, 2018 and 2017.

Table 20.2 – Components of Corporate/Other



	Three Months Ended June 30,
	2018									2017
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	5,017		$	306		$	5,323		$	4,863		$	113		$	4,976
Interest expense	(4,215		)	(9,365		)	(13,580		)	(3,692		)	(8,908		)	(12,600		)
Net interest income (loss)	802			(9,059		)	(8,257		)	1,171			(8,795		)	(7,624		)
Non-interest income
Investment fair value changes, net	(720		)	9			(711		)	(987		)	(13		)	(1,000		)
Realized gains, net	—			—			—			—			(752		)	(752		)
Total non-interest income, net	(720		)	9			(711		)	(987		)	(765		)	(1,752		)
Direct operating expenses	—			(11,540		)	(11,540		)	—			(11,166		)	(11,166		)
Total	$	82		$	(20,590	)	$	(20,508	)	$	184		$	(20,726	)	$	(20,542	)



	Six Months Ended June 30,
	2018									2017
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	9,829		$	459		$	10,288		$	9,701		$	179		$	9,880
Interest expense	(8,067		)	(21,027		)	(29,094		)	(7,208		)	(18,235		)	(25,443		)
Net interest income (loss)	1,762			(20,568		)	(18,806		)	2,493			(18,056		)	(15,563		)
Non-interest income
Investment fair value changes, net	(728		)	36			(692		)	(2,797		)	(11		)	(2,808		)
Realized gains, net	—			—			—			—			(752		)	(752		)
Total non-interest income, net	(728		)	36			(692		)	(2,797		)	(763		)	(3,560		)
Direct operating expenses	—			(23,931		)	(23,931		)	—			(21,918		)	(21,918		)
Total	$	1,034		$	(44,463	)	$	(43,429	)	$	(304	)	$	(40,737	)	$	(41,041	)


(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, 2018 and December 31, 2017.

Table 20.3 – Supplemental Segment Information



(In Thousands)	Investment Portfolio		Residential Mortgage Banking		Corporate/ Other		Total
June 30, 2018
Residential loans	$	3,794,481	$	1,104,660	$	592,029	$	5,491,170
Real estate securities	1,453,936		—		—		1,453,936
Total assets	5,591,778		1,124,300		796,473		7,512,551

December 31, 2017
Residential loans	$	3,054,448	$	1,427,945	$	632,817	$	5,115,210
Real estate securities	1,476,510		—		—		1,476,510
Total assets	4,743,873		1,453,069		842,880		7,039,822