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 Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2018.

Our Mortgage Banking segment includes activity from both our residential and business purpose mortgage banking operations. Our business purpose mortgage banking operations includes activity from our wholly-owned subsidiary 5 Arches and our single-family rental loans that we are aggregating for subsequent sale or securitization. In connection with our acquisition of 5 Arches on March 1, 2019, the goodwill, intangible assets, and contingent consideration we recorded on our consolidated balance sheets were included in our Mortgage Banking segment. The gain on re-measurement of our initial minority investment and purchase option in 5 Arches during the three months ended March 31, 2019 was included in Corporate/Other.

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 months ended March 31, 2019 and 2018.

Table 23.1 – Business Segment Financial Information



	Three Months Ended March 31, 2019
(In Thousands)	Investment Portfolio			Mortgage Banking			Corporate/ Other			Total
Interest income	$	115,452		$	10,377		$	5,212		$	131,041
Interest expense	(77,887		)	(5,564		)	(15,825		)	(99,276		)
Net interest income (loss)	37,565			4,813			(10,613		)	31,765
Non-interest income
Mortgage banking activities, net	—			12,309			—			12,309
Investment fair value changes, net	20,556			—			(397		)	20,159
Other income (expense), net	1,221			(167		)	2,533			3,587
Realized gains, net	10,686			—			—			10,686
Total non-interest income, net	32,463			12,142			2,136			46,741
Direct operating expenses	(2,661		)	(8,104		)	(12,394		)	(23,159		)
Provision for income taxes	(342		)	(541		)	—			(883		)
Segment Contribution	$	67,025		$	8,310		$	(20,871	)
Net Income										$	54,464
Non-cash amortization income (expense), net	$	2,368		$	(723	)	$	(1,300	)	$	345



	Three Months Ended March 31, 2018
(In Thousands)	Investment Portfolio			Mortgage Banking			Corporate/ Other			Total
Interest income	$	58,757		$	12,897		$	4,965		$	76,619
Interest expense	(19,863		)	(6,137		)	(15,514		)	(41,514		)
Net interest income (loss)	38,894			6,760			(10,549		)	35,105
Non-interest income
Mortgage banking activities, net	—			26,576			—			26,576
Investment fair value changes, net	1,590			—			19			1,609
Other income, net	2,118			—			—			2,118
Realized gains, net	9,363			—			—			9,363
Total non-interest income, net	13,071			26,576			19			39,666
Direct operating expenses	(2,007		)	(8,632		)	(12,391		)	(23,030		)
Provision for income taxes	(888		)	(4,008		)	—			(4,896		)
Segment Contribution	$	49,070		$	20,696		$	(22,921	)
Net Income										$	46,845
Non-cash amortization income (expense), net	$	4,617		$	(22	)	$	(954	)	$	3,641

The following table presents the components of Corporate/Other for the three months ended March 31, 2019 and 2018.

Table 23.2 – Components of Corporate/Other



	Three Months Ended March 31,
	2019									2018
(In Thousands)	Legacy Consolidated VIEs ⁽¹⁾			Other			Total			Legacy Consolidated VIEs ⁽¹⁾			Other			Total
Interest income	$	4,853		$	359		$	5,212		$	4,812		$	153		$	4,965
Interest expense	(4,115		)	(11,710		)	(15,825		)	(3,852		)	(11,662		)	(15,514		)
Net interest income (loss)	738			(11,351		)	(10,613		)	960			(11,509		)	(10,549		)
Non-interest income
Investment fair value changes, net	(374		)	(23		)	(397		)	(8		)	27			19
Other income	—			2,533			2,533			—			—			—
Total non-interest income, net	(374		)	2,510			2,136			(8		)	27			19
Direct operating expenses	—			(12,394		)	(12,394		)	—			(12,391		)	(12,391		)
Total	$	364		$	(21,235	)	$	(20,871	)	$	952		$	(23,873	)	$	(22,921	)


(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, 2019 and December 31, 2018.

Table 23.3 – Supplemental Segment Information



(In Thousands)	Investment Portfolio		Mortgage Banking		Corporate/ Other		Total
March 31, 2019
Residential loans	$	5,988,583	$	797,073	$	488,645	$	7,274,301
Business purpose residential loans	103,916		56,696		—		160,612
Multifamily loans	2,175,899		—		—		2,175,899
Real estate securities	1,543,152		—		—		1,543,152
Other investments	411,853		2,345		—		414,198
Goodwill and intangible assets	—		52,895		—		52,895
Total assets	10,444,279		942,596		806,484		12,193,359

December 31, 2018
Residential loans	$	5,685,983	$	1,048,801	$	519,958	$	7,254,742
Business purpose residential loans	112,798		28,460		—		141,258
Multifamily loans	2,144,598		—		—		2,144,598
Real estate securities	1,452,494		—		—		1,452,494
Other investments	427,764		—		10,754		438,518
Total assets	10,093,993		1,103,090		740,323		11,937,406