Note 18 – Business Segment Reporting

Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. A brief description of our current business segments is as follows:

Servicing. This segment is primarily comprised of our core residential mortgage servicing business and currently accounts for most of our total revenues. We provide residential and commercial mortgage loan servicing, special servicing and asset management services. We earn fees for providing these services to owners of the mortgage loans and foreclosed real estate. In most cases, we provide these services either because we purchased the MSRs from the owner of the mortgage, retained the MSRs on the sale of residential mortgage loans or because we entered into a subservicing or special servicing agreement with the entity that owns the MSR. Our residential servicing portfolio includes conventional, government-insured and non-Agency loans. Non-Agency loans include subprime loans, which represent residential loans that generally did not qualify under GSE guidelines or have subsequently become delinquent.

Lending. The Lending segment purchases and originates conventional and government-insured residential forward and reverse mortgage loans. The loans are typically sold shortly after origination into a liquid market on a servicing retained (securitization) or servicing released (sale to a third party) basis. We originate loans directly with customers (retail channel) in forward lending as well as through our correspondent lending arrangements, broker relationships (wholesale) and retail channels of reverse mortgage lending.

Corporate Items and Other. Corporate Items and Other includes revenues and expenses of corporate support services, CR Limited (CRL), our wholly-owned captive reinsurance subsidiary, discontinued operations and inactive entities, business activities that are individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash and interest expense on corporate debt. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2019 related to our re-engineering plan. Our cash balances are included in Corporate Items and Other. CRL provides re-insurance related to coverage on foreclosed real estate properties owned or serviced by us.

We allocate a portion of interest income to each business segment, including interest earned on cash balances and short-term investments. We also allocate expenses incurred by corporate support services to each business segment. Interest expense on direct asset financings are recorded in the respective Servicing and Lending segments, while interest expense on the SSTL and Senior Notes is recorded in Corporate Items and Other and is not allocated.

Financial information for our segments is as follows:



	Three Months Ended June 30, 2019
Results of Operations	Servicing			Lending			Corporate Items and Other			Corporate Eliminations		Business Segments Consolidated
Revenue	$	242,510		$	28,794		$	3,034		$	—	$	274,338

Expenses (1)	290,087			21,026			20,381			—		331,494

Other income (expense):
Interest income	1,872			1,546			419			—		3,837
Interest expense	(14,191		)	(1,399		)	(15,981		)	—		(31,571		)
Bargain purchase gain	—			—			(96		)			(96		)
Other	890			444			(681		)	—		653
Other income (expense), net	(11,429		)	591			(16,339		)	—		(27,177		)

Income (loss) before income taxes	$	(59,006	)	$	8,359		$	(33,686	)	$	—	$	(84,333	)



	Three Months Ended June 30, 2018
Results of Operations	Servicing			Lending			Corporate Items and Other			Corporate Eliminations		Business Segments Consolidated
Revenue	$	230,509		$	19,002		$	4,070		$	—	$	253,581

Expenses (1)	166,888			17,785			20,977			—		205,650

Other income (expense):
Interest income	1,466			1,360			529			—		3,355
Interest expense	(62,675		)	(1,472		)	(13,356		)	—		(77,503		)
Other	(326		)	294			(2,156		)	—		(2,188		)
Other income (expense), net	(61,535		)	182			(14,983		)	—		(76,336		)

Income (loss) before income taxes	$	2,086		$	1,399		$	(31,890	)	$	—	$	(28,405	)

	Six months ended June 30, 2019
Revenue	$	501,784		$	69,885		$	6,557		$	—	$	578,226

Expenses (1) (2)	555,984			42,357			13,258			—		611,599

Other income (expense):
Interest income	4,165			3,095			1,135			—		8,395
Interest expense	(68,889		)	(3,067		)	(30,060		)	—		(102,016		)
Bargain purchase gain	—			—			(381		)	—		(381		)
Other	2,416			663			(1,121		)	—		1,958
Other income (expense), net	(62,308		)	691			(30,427		)	—		(92,044		)

Income (loss) before income taxes	$	(116,508	)	$	28,219		$	(37,128	)	$	—	$	(125,417	)

	Six months ended June 30, 2018
Revenue	$	456,605		$	48,197		$	9,036		$	—	$	513,838

Expenses (1)	337,984			38,081			36,086			—		412,151

Other income (expense):
Interest income	1,894			2,852			1,309			—		6,055
Interest expense	(97,193		)	(3,417		)	(27,703		)	—		(128,313		)
Other	(754		)	620			(2,735		)	—		(2,869		)
Other income (expense), net	(96,053		)	55			(29,129		)	—		(125,127		)

Income (loss) before income taxes	$	22,568		$	10,171		$	(56,179	)	$	—	$	(23,440	)



Total Assets	Servicing		Lending		Corporate Items and Other		Corporate Eliminations		Business Segments Consolidated
June 30, 2019	$	3,195,218	$	5,978,325	$	454,250	$	—	$	9,627,793

December 31, 2018	$	3,306,208	$	5,603,481	$	484,527	$	—	$	9,394,216

June 30, 2018	$	2,851,910	$	5,242,716	$	325,570	$	—	$	8,420,196



Depreciation and Amortization Expense	Servicing		Lending		Corporate Items and Other		Business Segments Consolidated
Three months ended June 30, 2019
Depreciation expense	$	761	$	46	$	10,205	$	11,012
Amortization of debt discount	—		—		350		350
Amortization of debt issuance costs	—		—		751		751

Three months ended June 30, 2018
Depreciation expense	$	1,256	$	25	$	4,834	$	6,115
Amortization of debt discount	—		—		442		442
Amortization of debt issuance costs	—		—		1,005		1,005

Six months ended June 30, 2019
Depreciation expense	$	1,569	$	81	$	17,913	$	19,563
Amortization of debt discount	—		—		701		701
Amortization of debt issuance costs	—		—		1,451		1,451

Six months ended June 30, 2018
Depreciation expense	$	2,613	$	54	$	9,973	$	12,640
Amortization of debt discount	—		—		706		706
Amortization of debt issuance costs	—		—		1,662		1,662

(1)

Compensation and benefits expense in the Corporate Items and Other segment for the three and six months ended June 30, 2019 and 2018 includes $0.8 million and $19.2 million, and $1.6 million, and $7.3 million, respectively, of severance expense attributable to PHH integration-related headcount reductions of primarily U.S.-based employees in 2019 and headcount reductions in connection with our strategic decisions to exit the automotive capital services business and the forward lending correspondent and wholesale channels in late 2017 and early 2018, as well as our overall efforts to reduce costs.


(2)	Included in the Corporate Items and Other segment for the six months ended June 30, 2019, we recorded in Professional services expense a recovery from a service provider of $30.7 million during the first quarter of 2019 of amounts previously recognized as expense.