Segment Information

6 Months Ended

Jun. 30, 2020

Segment Reporting [Abstract]

Segment Information

Segment Information

Redwood operates in three segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. Beginning in the second quarter of 2020, we combined what was previously our Multifamily Investments segment and Third-Party Residential Investments segment into a new segment called Third-Party Investments. Prior periods have been conformed to the current presentation. Following is a full description of our current segments.

Residential Lending – consists of a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer into our investment portfolio, as well as the investments we retain from these activities. We typically acquire prime, jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. Our investments in this segment primarily consist of residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations (some of which we consolidate for GAAP purposes) and MSRs retained from jumbo whole loans we sold or securitized. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of residential loans held-for-sale and long-term investments we hold within this segment. This segment’s main source of revenue is net interest income from its long-term investments and its inventory of loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on loans we acquire and subsequently sell, securitize, or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.

Business Purpose Lending – consists of a platform that originates and acquires business purpose residential loans for subsequent securitization or transfer into our investment portfolio, as well as the investments we retain from these activities. We typically originate single-family rental and residential bridge loans and distribute certain single-family rental loans through our CoreVest American Finance Lender ("CAFL") private-label securitization program and retain others for investment along with our residential bridge loans. Single-family rental loans are business purpose residential mortgage loans to investors in single-family (1-4 unit) rental properties. Residential bridge loans are business purpose residential mortgage loans to investors rehabilitating and subsequently reselling or renting residential properties. Our investments in this segment primarily consist of securities retained from our CAFL securitizations (which we consolidate for GAAP purposes), and residential bridge loans. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with our inventory of single-family rental loans held-for-sale and our investments. This segment’s main source of revenue is net interest income from its investments and loans held-for-sale, as well as income from mortgage banking activities, which includes valuation increases (or gains) on loans we originate or acquire and subsequently sell, securitize or transfer into our investment portfolio, and the hedges used to manage risks associated with these activities. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.

Third-Party Investments – consists of investments in RMBS issued by third parties, investments in Freddie Mac K-Series multifamily loan securitizations and SLST reperforming loan securitizations (which we consolidate for GAAP purposes), our servicer advance investments, and other residential and multifamily credit investments not generated through our Residential or Business Purpose Lending segments. This segment’s main sources of revenue are interest income from securities and loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.

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 three 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 indirect general and administrative expenses and other expense.

The following tables present financial information by segment for the three and six months ended June 30, 2020 and 2019.

Table 23.1 – Business Segment Financial Information

	Three Months Ended June 30, 2020
(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	$	36,653	$	53,742	$	36,811	$	2,740	$	129,946
Interest expense	(30,169)		(38,837)		(27,869)		(5,791)		(102,666)
Net interest income	6,484		14,905		8,942		(3,051)		27,280
Non-interest income
Mortgage banking activities, net	(8,005)		2,233		—		—		(5,772)
Investment fair value changes, net	35,085		40,401		76,972		(230)		152,228
Other income, net	230		476		(509)		758		955
Realized gains, net	205		—		578		25,182		25,965
Total non-interest income, net	27,515		43,110		77,041		25,710		173,376
General and administrative expenses	(3,875)		(10,293)		(2,106)		(13,818)		(30,092)
Other expenses	—		(3,884)		(1,065)		(134)		(5,083)
Benefit from (provision for) income taxes	3,323		2,439		(5,799)		—		(37)
Segment Contribution	$	33,447	$	46,277	$	77,013	$	8,707
Net Income									$	165,444
Non-cash amortization (expense) income, net	$	(1,265)	$	(6,391)	$	312	$	(1,619)	$	(8,963)

	Six Months Ended June 30, 2020
(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	$	97,284	$	106,802	$	118,007	$	5,934	$	328,027
Interest expense	(71,571)		(73,827)		(95,626)		(8,313)		(249,337)
Net interest income	25,713		32,975		22,381		(2,379)		78,690
Non-interest income
Mortgage banking activities, net	(31,086)		(3,097)		—		—		(34,183)
Investment fair value changes, net	(161,550)		(101,729)		(454,586)		(739)		(718,604)
Other income, net	(267)		2,169		732		758		3,392
Realized gains, net	2,001		—		2,634		25,182		29,817
Total non-interest income, net	(190,902)		(102,657)		(451,220)		25,201		(719,578)
General and administrative expenses	(9,507)		(24,626)		(3,894)		(24,733)		(62,760)
Other expenses	—		(96,869)		817		(446)		(96,498)
Benefit from income taxes	8,653		9,021		4,518		—		22,192
Segment Contribution	$	(166,043)	$	(182,156)	$	(427,398)	$	(2,357)
Net Loss									$	(777,954)
Non-cash amortization (expense) income, net	$	(1,053)	$	(11,316)	$	1,053	$	(1,728)	$	(13,044)
Other significant non-cash expense: goodwill impairment	$	—	$	(88,675)	$	—	$	—	$	(88,675)

	Three Months Ended June 30, 2019
(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	$	67,611	$	4,131	$	72,024	$	4,776	$	148,542
Interest expense	(49,321)		(2,238)		(60,680)		(3,981)		(116,220)
Net interest income	18,290		1,893		11,344		795		32,322
Non-interest income
Mortgage banking activities, net	15,359		3,801		—		—		19,160
Investment fair value changes, net	(8,102)		(457)		11,856		(159)		3,138
Other income, net	2,990		1,829		40		—		4,859
Realized gains, net	2,791		—		36		—		2,827
Total non-interest income, net	13,038		5,173		11,932		(159)		29,984
General and administrative expenses	(6,799)		(6,120)		(900)		(12,436)		(26,255)
Other expenses	—		(1,899)		(242)		(311)		(2,452)
(Provision for) benefit from income taxes	(1,484)		38		(887)		—		(2,333)
Segment Contribution	$	23,045	$	(915)	$	21,247	$	(12,111)
Net Income									$	31,266
Non-cash amortization income (expense), net	$	2,268	$	(2,068)	$	(417)	$	(300)	$	(517)

	Six Months Ended June 30, 2019
(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
Interest income	$	134,450	$	7,068	$	128,436	$	9,629	$	279,583
Interest expense	(96,997)		(3,777)		(106,626)		(8,096)		(215,496)
Net interest income	37,453		3,291		21,810		1,533		64,087
Non-interest income
Mortgage banking activities, net	26,186		5,283		—		—		31,469
Investment fair value changes, net	(9,822)		(760)		34,435		(556)		23,297
Other income, net	4,439		2,295		40		2,710		9,484
Realized gains, net	7,728		—		5,785		—		13,513
Total non-interest income, net	28,531		6,818		40,260		2,154		77,763
General and administrative expenses	(14,002)		(8,685)		(1,886)		(24,841)		(49,414)
Other expenses	—		(2,532)		(469)		(489)		(3,490)
(Provision for) benefit from income taxes	(1,985)		33		(1,264)		—		(3,216)
Segment Contribution	$	49,997	$	(1,075)	$	58,451	$	(21,643)
Net Income									$	85,730
Non-cash amortization income (expense), net	$	4,243	$	(2,800)	$	(688)	$	(791)	$	(36)

The following table presents the components of Corporate/Other for the three and six months ended June 30, 2020 and 2019.

Table 23.2 – Components of Corporate/Other

	Three Months Ended June 30,
	2020						2019
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	2,686	$	54	$	2,740	$	4,776	$	—	$	4,776
Interest expense	(1,518)		(4,273)		(5,791)		(3,981)		—		(3,981)
Net interest income	1,168		(4,219)		(3,051)		795		—		795
Non-interest income
Investment fair value changes, net	(230)		—		(230)		(123)		(36)		(159)
Other income	—		758		758		—		—		—
Realized gains, net	—		25,182		25,182		—		—		—
Total non-interest income, net	(230)		25,940		25,710		(123)		(36)		(159)
General and administrative expenses	—		(13,818)		(13,818)		—		(12,436)		(12,436)
Other expenses	—		(134)		(134)		—		(311)		(311)
Total	$	938	$	7,769	$	8,707	$	672	$	(12,783)	$	(12,111)

	Six Months Ended June 30,
	2020						2019
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	5,880	$	54	$	5,934	$	9,629	$	—	$	9,629
Interest expense	(4,040)		(4,273)		(8,313)		(8,096)		—		(8,096)
Net interest income	1,840		(4,219)		(2,379)		1,533		—		1,533
Non-interest income
Investment fair value changes, net	(621)		(118)		(739)		(497)		(59)		(556)
Other income	—		758		758		—		2,710		2,710
Realized gains, net	—		25,182		25,182		—		—		—
Total non-interest income, net	(621)		25,822		25,201		(497)		2,651		2,154
General and administrative expenses	—		(24,733)		(24,733)		—		(24,841)		(24,841)
Other expenses	—		(446)		(446)		—		(489)		(489)
Total	$	1,219	$	(3,576)	$	(2,357)	$	1,036	$	(22,679)	$	(21,643)

(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 June 30, 2020 and December 31, 2019.

Table 23.3 – Supplemental Segment Information

(In Thousands)	Residential Lending		Business Purpose Lending		Third-Party Investments		Corporate/ Other		Total
June 30, 2020
Residential loans	$	2,084,587	$	—	$	2,145,111	$	304,632	$	4,534,330
Business purpose residential loans	—		3,782,200		—		—		3,782,200
Multifamily loans	—		—		489,075		—		489,075
Real estate securities	142,713		—		173,723		—		316,436
Other investments	19,661		26,933		383,246		—		429,840
Goodwill and intangible assets	—		64,610		—		—		64,610
Total assets	2,303,320		4,009,371		3,211,030		837,821		10,361,542
December 31, 2019
Residential loans	$	4,939,745	$	—	$	2,367,215	$	407,890	$	7,714,850
Business purpose residential loans	—		3,506,743		—		—		3,506,743
Multifamily loans	—		—		4,408,524		—		4,408,524
Real estate securities	229,074		—		870,800		—		1,099,874
Other investments	42,224		21,002		294,904		—		358,130
Goodwill and intangible assets	—		161,464		—		—		161,464
Total assets	5,410,540		3,786,641		8,028,946		769,313		17,995,440