Segment Information

Redwood operates in two segments: Investment Portfolio and 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. Additionally, beginning in the third quarter of 2018, our Investment Portfolio segment includes fix-and-flip loans held-for-investment as well as the multifamily loans held-for-investment at consolidated Freddie Mac securitization entities and our Mortgage Banking segment includes our single-family rental loans held-for-sale.

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 nine months ended September 30, 2018 and 2017.

Table 22.1 – Business Segment Financial Information



	Three Months Ended September 30, 2018
(In Thousands)	Investment Portfolio			Mortgage Banking			Corporate/ Other			Total
Interest income	$	79,556		$	14,427		$	5,414		$	99,397
Interest expense	(40,852		)	(7,537		)	(15,962		)	(64,351		)
Net interest income (loss)	38,704			6,890			(10,548		)	35,046
Non-interest income
Mortgage banking activities, net	—			11,224			—			11,224
Investment fair value changes, net	10,566			—			(234		)	10,332
Other income, net	3,334			—			119			3,453
Realized gains, net	7,275			—			—			7,275
Total non-interest income, net	21,175			11,224			(115		)	32,284
Direct operating expenses	(2,659		)	(6,570		)	(12,261		)	(21,490		)
Provision for income taxes	(2,840		)	(2,079		)	—			(4,919		)
Segment Contribution	$	54,380		$	9,465		$	(22,924	)
Net Income										$	40,921
Non-cash amortization income (expense), net	$	4,019		$	(54	)	$	(1,176	)	$	2,789



	Three Months Ended September 30, 2017
(In Thousands)	Investment Portfolio			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
Investment fair value changes, net	1,372			—			(1,048		)	324
Other income, net	2,812			—			—			2,812
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



	Nine Months Ended September 30, 2018
(In Thousands)	Investment Portfolio			Mortgage Banking			Corporate/ Other			Total
Interest income	$	202,882		$	40,408		$	15,702		$	258,992
Interest expense	(87,719		)	(21,303		)	(45,056		)	(154,078		)
Net interest income (loss)	115,163			19,105			(29,354		)	104,914
Non-interest income
Mortgage banking activities, net	—			48,396			—			48,396
Investment fair value changes, net	13,756			—			(926		)	12,830
Other income, net	8,774			—			119			8,893
Realized gains, net	21,352			—			—			21,352
Total non-interest income, net	43,882			48,396			(807		)	91,471
Direct operating expenses	(6,524		)	(20,941		)	(36,064		)	(63,529		)
Provision for income taxes	(4,858		)	(7,485		)	—			(12,343		)
Segment Contribution	$	147,663		$	39,075		$	(66,225	)
Net Income										$	120,513
Non-cash amortization income (expense)	$	13,290		$	(99	)	$	(3,021	)	$	10,170



	Nine Months Ended September 30, 2017
(In Thousands)	Investment Portfolio			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
Investment fair value changes, net	13,846			—			(3,856		)	9,990
Other income, net	9,473			—			—			9,473
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

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

Table 22.2 – Components of Corporate/Other



	Three Months Ended September 30,
	2018									2017
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	5,174		$	240		$	5,414		$	4,875		$	213		$	5,088
Interest expense	(4,257		)	(11,705		)	(15,962		)	(3,838		)	(10,025		)	(13,863		)
Net interest income (loss)	917			(11,465		)	(10,548		)	1,037			(9,812		)	(8,775		)
Non-interest income
Investment fair value changes, net	(248		)	14			(234		)	(1,045		)	(3		)	(1,048		)
Other income	—			119			119			—			—			—
Total non-interest income, net	(248		)	133			(115		)	(1,045		)	(3		)	(1,048		)
Direct operating expenses	—			(12,261		)	(12,261		)	—			(12,491		)	(12,491		)
Total	$	669		$	(23,593	)	$	(22,924	)	$	(8	)	$	(22,306	)	$	(22,314	)



	Nine Months Ended September 30,
	2018									2017
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	15,003		$	699		$	15,702		$	14,576		$	392		$	14,968
Interest expense	(12,324		)	(32,732		)	(45,056		)	(11,046		)	(28,260		)	(39,306		)
Net interest income (loss)	2,679			(32,033		)	(29,354		)	3,530			(27,868		)	(24,338		)
Non-interest income
Investment fair value changes, net	(976		)	50			(926		)	(3,842		)	(14		)	(3,856		)
Other income	—			119			119			—			—			—
Realized gains, net	—			—			—			—			(752		)	(752		)
Total non-interest income, net	(976		)	169			(807		)	(3,842		)	(766		)	(4,608		)
Direct operating expenses	—			(36,064		)	(36,064		)	—			(34,409		)	(34,409		)
Total	$	1,703		$	(67,928	)	$	(66,225	)	$	(312	)	$	(63,043	)	$	(63,355	)


(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, 2018 and December 31, 2017.

Table 22.3 – Supplemental Segment Information



(In Thousands)	Investment Portfolio		Mortgage Banking		Corporate/ Other		Total
September 30, 2018
Residential loans	$	4,501,857	$	866,444	$	553,958	$	5,922,259
Business purpose loans	95,515		20,105		—		115,620
Multifamily loans	942,165		—		—		942,165
Real estate securities	1,470,084		—		—		1,470,084
Total assets	7,436,674		909,926		793,035		9,139,635

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