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Segment Information
9 Months Ended
Sep. 30, 2015
Segment Reporting [Abstract]  
Segment Information
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 for the year ended December 31, 2014.
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 was a prospective change in how we are managing our business and allocating capital to each segment. As such, we have not conformed prior period 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 nine months ended September 30, 2015 and 2014.
Table 21.1 – Business Segment Financial Information
 
 
Three Months Ended September 30, 2015
(In Thousands)
 
 Residential Mortgage Banking
 
 Residential Investments
 
 Commercial Mortgage Banking and Investments
 
 Corporate/
Other
 
 Total
Interest income
 
$
12,115

 
$
34,074

 
$
11,191

 
$
6,104

 
$
63,484

Interest expense
 
(4,313
)
 
(2,660
)
 
(3,502
)
 
(13,400
)
 
(23,875
)
Net interest income (loss)
 
7,802

 
31,414

 
7,689

 
(7,296
)
 
39,609

Reversal of provision for loan losses
 
—

 
—

 
60

 
—

 
60

Non-interest income
 
 
 
 
 
 
 
 
 
 
Mortgage banking and investment activities, net (1)
 
331

 
(13,622
)
 
1,002

 
(547
)
 
(12,836
)
MSR income (loss), net
 
—

 
3,549

 
—

 
—

 
3,549

Other income
 
—

 
327

 
—

 
—

 
327

Realized gains, net
 
—

 
5,548

 
—

 
—

 
5,548

Total non-interest income, net
 
331

 
(4,198
)
 
1,002

 
(547
)
 
(3,412
)
Direct operating expenses
 
(11,278
)
 
(1,311
)
 
(3,136
)
 
(8,772
)
 
(24,497
)
Benefit from income taxes
 
2,690

 
4,082

 
(389
)
 
1,021

 
7,404

Segment Contribution
 
$
(455
)
 
$
29,987

 
$
5,226

 
$
(15,594
)
 
 
Net Income
 
 
 
 
 
 
 
 
 
$
19,164

Non-cash amortization income (expense)
 
$
(45
)
 
$
9,115

 
$
(61
)
 
$
(1,007
)
 
$
8,002

Hedging allocations (1)
 
(1,683
)
 
1,683

 
—

 
—

 
—

 
 
Three Months Ended September 30, 2014
(In Thousands)
 
 Residential Mortgage Banking
 
 Residential Investments
 
 Commercial Mortgage Banking and Investments
 
 Corporate/
Other
 
 Total
Interest income
 
$
16,911

 
$
27,600

 
$
12,603

 
$
6,237

 
$
63,351

Interest expense
 
(4,192
)
 
(3,142
)
 
(4,526
)
 
(11,490
)
 
(23,350
)
Net interest income (loss)
 
12,719

 
24,458

 
8,077

 
(5,253
)
 
40,001

Reversal of provision for loan losses
 
—

 
—

 
888

 
708

 
1,596

Non-interest income
 
 
 
 
 
 
 
 
 
 
Mortgage banking and investment activities, net
 
11,429

 
(3,371
)
 
6,486

 
(378
)
 
14,166

MSR income (loss), net
 
—

 
5,821

 
—

 
—

 
5,821

Other income
 
—

 
—

 
—

 
1,600

 
1,600

Realized gains, net
 
—

 
7,836

 
—

 
696

 
8,532

Total non-interest income, net
 
11,429

 
10,286

 
6,486

 
1,918

 
30,119

Direct operating expenses
 
(9,982
)
 
(802
)
 
(2,279
)
 
(8,343
)
 
(21,406
)
(Provision for) benefit from income taxes
 
(3,352
)
 
150

 
(1,764
)
 
(247
)
 
(5,213
)
Segment Contribution
 
$
10,814


$
34,092


$
11,408


$
(11,217
)
 
 
Net Income
 
 
 
 
 
 
 
 
 
$
45,097

Non-cash amortization income (expense)
 
$
(43
)
 
$
10,890

 
$
(191
)
 
$
(2,049
)
 
$
8,607

 
 
Nine Months Ended September 30, 2015
(In Thousands)
 
 Residential Mortgage Banking
 
 Residential Investments
 
 Commercial Mortgage Banking and Investments
 
 Corporate/
Other
 
 Total
Interest income
 
$
37,886

 
$
98,335

 
$
34,784

 
$
19,598

 
$
190,603

Interest expense
 
(11,389
)
 
(8,137
)
 
(10,488
)
 
(40,830
)
 
(70,844
)
Net interest income (loss)
 
26,497

 
90,198

 
24,296

 
(21,232
)
 
119,759

Reversal of provision for loan losses
 
—

 
—

 
115

 
—

 
115

Non-interest income
 
 
 
 
 
 
 
 
 
 
Mortgage banking and investment activities, net (1)
 
7,383

 
(14,745
)
 
3,323

 
(2,360
)
 
(6,399
)
MSR income (loss), net
 
—

 
(6,545
)
 
—

 
—

 
(6,545
)
Other income
 
—

 
2,435

 
—

 
—

 
2,435

Realized gains, net
 
—

 
16,170

 
—

 
—

 
16,170

Total non-interest income, net
 
7,383

 
(2,685
)
 
3,323

 
(2,360
)
 
5,661

Direct operating expenses
 
(33,214
)
 
(3,600
)
 
(9,638
)
 
(28,326
)
 
(74,778
)
Benefit from income taxes
 
3,562

 
3,824

 
321

 
2,565

 
10,272

Segment Contribution
 
$
4,228

 
$
87,737

 
$
18,417

 
$
(49,353
)
 
 
Net Income
 
 
 
 
 
 
 
 
 
$
61,029

Non-cash amortization income (expense)
 
$
(135
)
 
$
28,277

 
$
(188
)
 
$
(2,984
)
 
$
24,970

Hedging allocations (1)
 
1,120

 
(1,070
)
 
—

 
(50
)
 
—

 
 
Nine Months Ended September 30, 2014
(In Thousands)
 
 Residential Mortgage Banking
 
 Residential Investments
 
 Commercial Mortgage Banking and Investments
 
 Corporate/
Other
 
 Total
Interest income
 
$
40,015

 
$
83,120

 
$
34,204

 
$
19,481

 
$
176,820

Interest expense
 
(7,674
)
 
(9,106
)
 
(12,234
)
 
(34,546
)
 
(63,560
)
Net interest income (loss)
 
32,341

 
74,014

 
21,970

 
(15,065
)
 
113,260

Reversal of (provision for) loan losses
 
—

 
—

 
(56
)
 
685

 
629

Non-interest income
 
 
 
 
 
 
 
 
 
 
Mortgage banking and investment activities, net
 
11,704

 
(13,117
)
 
12,300

 
(903
)
 
9,984

MSR income (loss), net
 
—

 
4,650

 
—

 
—

 
4,650

Other income
 
—

 
—

 
—

 
1,600

 
1,600

Realized gains, net
 
—

 
9,815

 
—

 
872

 
10,687

Total non-interest income, net
 
11,704

 
1,348

 
12,300

 
1,569

 
26,921

Direct operating expenses
 
(26,577
)
 
(2,667
)
 
(7,085
)
 
(27,330
)
 
(63,660
)
(Provision for) benefit from income taxes
 
(3,258
)
 
1,826

 
(2,159
)
 
(112
)
 
(3,703
)
Segment Contribution
 
$
14,210

 
$
74,521

 
$
24,970

 
$
(40,253
)
 
 
Net Income
 
 
 
 
 
 
 
 
 
$
73,447

Non-cash amortization income (expense)
 
$
(131
)
 
$
32,724

 
$
(579
)
 
$
(6,068
)
 
$
25,946

(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 nine months ended September 30, 2015.
The following tables present the components of Corporate/Other for the three and nine months ended September 30, 2015 and 2014.
Table 21.2 – Components of Corporate/Other
 
 
Three Months Ended September 30,
 
 
2015
 
2014
(In Thousands)
 
Legacy Consolidated VIEs
 
Other
 
Total
 
Legacy Consolidated VIEs
 
Other
 
 Total
Interest income
 
$
6,098

 
$
6

 
$
6,104

 
$
6,233

 
$
4

 
$
6,237

Interest expense
 
(3,842
)
 
(9,558
)
 
(13,400
)
 
(5,250
)
 
(6,240
)
 
(11,490
)
Net interest income (loss)
 
2,256

 
(9,552
)
 
(7,296
)
 
983

 
(6,236
)
 
(5,253
)
Reversal of provision for loan losses
 
—

 
—

 
—

 
708

 
—

 
708

Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking and investment activities, net
 
(501
)
 
(46
)
 
(547
)
 
(361
)
 
(17
)
 
(378
)
MSR income (loss), net
 
—

 
—

 
—

 
—

 
—

 
—

Other income
 
—

 
—

 
—

 
—

 
1,600

 
1,600

Realized gains, net
 
—

 
—

 
—

 
696

 
—

 
696

Total non-interest income, net
 
(501
)
 
(46
)
 
(547
)
 
335

 
1,583

 
1,918

Direct operating expenses
 
—

 
(8,772
)
 
(8,772
)
 
(26
)
 
(8,317
)
 
(8,343
)
(Provision for) benefit from income taxes
 
—

 
1,021

 
1,021

 
—

 
(247
)
 
(247
)
Total
 
$
1,755

 
$
(17,349
)
 
$
(15,594
)
 
$
2,000

 
$
(13,217
)
 
$
(11,217
)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
(In Thousands)
 
Legacy Consolidated VIEs
 
Other
 
Total
 
Legacy Consolidated VIEs
 
Other
 
 Total
Interest income
 
$
19,578

 
$
20

 
$
19,598

 
$
19,473

 
$
8

 
$
19,481

Interest expense
 
(12,372
)
 
(28,458
)
 
(40,830
)
 
(15,950
)
 
(18,596
)
 
(34,546
)
Net interest income (loss)
 
7,206

 
(28,438
)
 
(21,232
)
 
3,523

 
(18,588
)
 
(15,065
)
Reversal of provision for loan losses
 
—

 
—

 
—

 
685

 
—

 
685

Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking and investment activities, net
 
(2,277
)
 
(83
)
 
(2,360
)
 
(825
)
 
(78
)
 
(903
)
MSR income (loss), net
 
—

 
—

 
—

 
—

 
—

 
—

Other income
 
—

 
—

 
—

 
—

 
1,600

 
1,600

Realized gains, net
 
—

 
—

 
—

 
872

 
—

 
872

Total non-interest income, net
 
(2,277
)
 
(83
)
 
(2,360
)
 
47

 
1,522

 
1,569

Direct operating expenses
 
—

 
(28,326
)
 
(28,326
)
 
(120
)
 
(27,210
)
 
(27,330
)
(Provision for) benefit from income taxes
 
—

 
2,565

 
2,565

 
—

 
(112
)
 
(112
)
Total
 
$
4,929

 
$
(54,282
)
 
$
(49,353
)
 
$
4,135

 
$
(44,388
)
 
$
(40,253
)


The following table presents supplemental information by segment at September 30, 2015 and December 31, 2014.
Table 21.3 – Supplemental Segment Information
(In Thousands)
 
Residential Mortgage Banking
 
Residential Investments
 
Commercial Mortgage Banking and Investments
 
Corporate/
Other
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
Residential loans
 
$
1,506,151

 
$
1,360,277

 
$
—

 
$
1,170,246

 
$
4,036,674

Commercial loans
 
—

 
—

 
468,157

 
—

 
468,157

Real estate securities
 
—

 
1,085,224

 
—

 
—

 
1,085,224

Mortgage servicing rights
 
—

 
162,726

 
—

 
—

 
162,726

Total assets
 
1,563,306

 
2,723,955

 
475,924

 
1,505,841

 
6,269,026

 
 
 
 
 
 
 
 
 
 


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