Segment Information

Redwood operates in three segments: residential mortgage banking, residential investments, and commercial mortgage banking and investments. 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.

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 expenses not directly assigned or allocated to one of the three primary segments, as well as activity from certain consolidated Sequoia entities consolidated for GAAP financial reporting purposes, 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.

Prior to the second quarter of 2015, we utilized certain Sequoia interest only (IO) securities in part to serve as hedges in our residential mortgage banking segment. As such, we included these securities in the segment’s assets as well as the interest income and valuation adjustments related to the securities in the segment’s results. During the second quarter of 2015, we transferred these securities to our residential investments segment.

Additionally, beginning in the second quarter of 2015, we began to record a hedging allocation between our segments. As we currently manage our market interest rate risk on an enterprise-wide basis, we rely on certain assets to serve as natural hedges to other assets, and in some cases these assets can be in different segments. Management uses this allocation to assess the economic returns of each segment on a stand-alone basis and the allocation has no impact on our consolidated results.

This is a prospective change in how we are managing our business and allocating capital to each segment. As such, we have not conformed prior year results for our segments. Analysis of our year-over-year results are discussed in Part I, Item 2, Management’s Discussion and Analysis of Results of Operations in this quarterly report on Form 10-Q.

The following tables present financial information by segment for the three and six months ended June 30, 2015 and 2014.

Business Segment Financial Information



	Three Months Ended June 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	9,976		$	34,249		$	12,679		$	6,469		$	63,373
Interest expense	(3,298		)	(2,660		)	(3,497		)	(13,553		)	(23,008		)
Net interest income (loss)	6,678			31,589			9,182			(7,084		)	40,365
Reversal of provision for loan losses	—			—			261			—			261
Non-interest income
Mortgage banking and investment activities, net ⁽¹⁾	4,833			(1,104		)	2,614			(684		)	5,659
MSR income (loss), net	—			830			—			—			830
Other income	—			1,299			—			—			1,299
Realized gains, net	—			6,316			—			—			6,316
Total non-interest income, net	4,833			7,341			2,614			(684		)	14,104
Direct operating expenses	(11,033		)	(1,171		)	(3,020		)	(9,994		)	(25,218		)
(Provision for) benefit from income taxes	865			(3,768		)	(143		)	598			(2,448		)
Segment Contribution	$	1,343		$	33,991		$	8,894		$	(17,164	)
Net Income													$	27,064

Non-cash amortization income (expense)	(44		)	9,324			(78		)	(995		)	8,207
Hedging allocations ⁽¹⁾	2,803			(2,753		)	—			(50		)	—



	Three Months Ended June 30, 2014
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	12,438		$	27,924		$	11,217		$	6,414		$	57,993
Interest expense	(2,161		)	(3,116		)	(4,404		)	(11,470		)	(21,151		)
Net interest income (loss)	10,277			24,808			6,813			(5,056		)	36,842
Reversal of provision (provision) for loan losses	—			—			(289		)	604			315
Non-interest income
Mortgage banking and investment activities, net	1,342			(3,788		)	4,981			(346		)	2,189
MSR income (loss), net	—			(1,777		)	—			—			(1,777		)
Other income	—			—			—			—			—
Realized gains, net	—			992			—			71			1,063
Total non-interest income, net	1,342			(4,573		)	4,981			(275		)	1,475
Direct operating expenses	(9,501		)	(770		)	(2,180		)	(9,831		)	(22,282		)
(Provision for) benefit from income taxes	259			149			(750		)	9			(333		)
Segment Contribution	$	2,377		$	19,614		$	8,575		$	(14,549	)
Net Income													$	16,017

Non-cash amortization income (expense)	(36		)	10,586			(215		)	(2,073		)	8,262



	Six Months Ended June 30, 2015
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	25,771		$	64,261		$	23,593		$	13,494		$	127,119
Interest expense	(7,076		)	(5,469		)	(6,986		)	(27,438		)	(46,969		)
Net interest income (loss)	18,695			58,792			16,607			(13,944		)	80,150
Reversal of provision for loan losses	—			—			55			—			55
Non-interest income
Mortgage banking and investment activities, net ⁽¹⁾	7,052			(1,123		)	2,321			(1,813		)	6,437
MSR income (loss), net	—			(10,094		)	—			—			(10,094		)
Other income				2,108									2,108
Realized gains, net	—			10,622			—			—			10,622
Total non-interest income, net	7,052			1,513			2,321			(1,813		)	9,073
Direct operating expenses	(21,936		)	(2,289		)	(6,502		)	(19,554		)	(50,281		)
(Provision for) benefit from income taxes	872			(258		)	710			1,544			2,868
Segment Contribution	$	4,683		$	57,758		$	13,191		$	(33,767	)
Net Income													$	41,865

Non-cash amortization income (expense)	(90		)	19,162			(128		)	(1,976		)	16,968
Hedging allocations ⁽¹⁾	2,803			(2,753		)	—			(50		)	—



	Six Months Ended June 30, 2014
(In Thousands)	Residential Mortgage Banking			Residential Investments			Commercial Mortgage Banking and Investments			Corporate/ Other			Total
Interest income	$	23,104		$	55,519		$	21,601		$	13,245		$	113,469
Interest expense	(3,482		)	(5,966		)	(7,708		)	(23,055		)	(40,211		)
Net interest income (loss)	19,622			49,553			13,893			(9,810		)	73,258
Provision for loan losses	—			—			(944		)	(23		)	(967		)
Non-interest income
Mortgage banking and investment activities, net	276			(9,746		)	5,814			(525		)	(4,181		)
MSR income (loss), net	—			(1,171		)	—			—			(1,171		)
Other income	—			—			—			—			—
Realized gains, net	—			1,979			—			176			2,155
Total non-interest income, net	276			(8,938		)	5,814			(349		)	(3,197		)
Direct operating expenses	(16,595		)	(1,865		)	(4,806		)	(18,988		)	(42,254		)
(Provision for) benefit from income taxes	94			1,676			(395		)	135			1,510
Segment Contribution	$	3,397		$	40,426		$	13,562		$	(29,035	)
Net Income													$	28,350

Non-cash amortization income (expense)	(88		)	21,833			(388		)	(4,019		)	17,338


(1)	Intersegment hedging allocation presented in the tables above is included in the mortgage banking and investment activities, net line item of the segment income statements for the three and six months ended June 30, 2015.

The following tables present the components of Corporate/Other for the three and six months ended June 30, 2015 and 2014.



	Three Months Ended June 30,
	2015									2014
(In Thousands)	Legacy Consolidated VIEs			Other			Total			Legacy Consolidated VIEs			Other			Total
Interest income	$	6,462		$	7		$	6,469		$	6,411		$	3		$	6,414
Interest expense	(4,048		)	(9,505		)	(13,553		)	(5,240		)	(6,230		)	(11,470		)
Net interest income (loss)	2,414			(9,498		)	(7,084		)	1,171			(6,227		)	(5,056		)
Reversal of provision for loan losses	—			—			—			604			—			604
Non-interest income
Mortgage banking and investment activities, net	(684		)	—			(684		)	(321		)	(25		)	(346		)
MSR income (loss), net	—			—			—			—			—			—
Realized gains, net	—			—			—			71			—			71
Total non-interest income, net	(684		)	—			(684		)	(250		)	(25		)	(275		)
Direct operating expenses	—			(9,994		)	(9,994		)	(42		)	(9,789		)	(9,831		)
Benefit from income taxes	—			598			598			—			9			9
Total	$	1,730		$	(18,894	)	$	(17,164	)	$	1,483		$	(16,032	)	$	(14,549	)



	Six Months Ended June 30,
	2015									2014
(In Thousands)	Legacy Consolidated VIEs			Other			Total			Legacy Consolidated VIEs			Other			Total
Interest income	$	13,480		$	14		$	13,494		$	13,240		$	5		$	13,245
Interest expense	(8,530		)	(18,908		)	(27,438		)	(10,699		)	(12,356		)	(23,055		)
Net interest income (loss)	4,950			(18,894		)	(13,944		)	2,541			(12,351		)	(9,810		)
Provision for loan losses	—			—			—			(23		)	—			(23		)
Non-interest income
Mortgage banking and investment activities, net	(1,777		)	(36		)	(1,813		)	(464		)	(61		)	(525		)
MSR income (loss), net	—			—			—			—			—			—
Realized gains, net	—			—			—			176			—			176
Total non-interest income, net	(1,777		)	(36		)	(1,813		)	(288		)	(61		)	(349		)
Direct operating expenses	—			(19,554		)	(19,554		)	(94		)	(18,894		)	(18,988		)
Benefit from income taxes	—			1,544			1,544			—			135			135
Total	$	3,173		$	(36,940	)	$	(33,767	)	$	2,136		$	(31,171	)	$	(29,035	)

The following table presents supplemental information by segment at June 30, 2015 and December 31, 2014.

Supplemental Disclosures



(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
June 30, 2015
Residential loans	$	892,081	$	1,157,285	$	—	$	1,237,114	$	3,286,480
Commercial loans	—		—		551,331		—		551,331
Real estate securities	—		1,157,599		—		—		1,157,599
Mortgage servicing rights	—		168,462		—		—		168,462
Total assets	938,720		2,559,481		560,956		1,536,727		5,595,884

December 31, 2014
Residential loans	$	1,342,519	$	581,668	$	—	$	1,474,386	$	3,398,573
Commercial loans	—		—		566,927		—		566,927
Real estate securities	93,802		1,285,428		—		—		1,379,230
Mortgage servicing rights	—		139,293		—		—		139,293
Total assets	1,468,856		2,057,256		575,943		1,816,911		5,918,966