Note 21. Segment Information

Redwood operates in three segments: residential mortgage banking, residential investments, and commercial mortgage banking and investments. These business segments have been identified based on our organizational and management structure. Our segments are based on an internally-aligned segment structure, which is how our results are monitored and performance is assessed. The accounting policies of the reportable segments are the same as those described in Note 3—Summary of Significant Accounting Policies.

Our residential mortgage banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale through securitization or as whole loans. Jumbo loans we acquire are typically sold through private-label securitization through our Sequoia securitization program or to institutions that acquire pools of whole loans. Conforming loans we acquire are generally sold to the Agencies. Our residential loan acquisitions are usually made on a flow basis, after origination by banks or mortgage companies, and are periodically augmented by bulk acquisitions. Our acquisition and accumulation of residential loans is generally funded with equity and short-term debt. This segment also includes various derivative financial instruments and IO securities retained from our Sequoia securitizations that we utilize to manage certain risks associated with residential loans we acquire. Our residential mortgage banking segment’s main source of revenue is mortgage banking income, which includes valuation increases (or gains) on the loans we acquire for sale or securitization as well as valuation changes in associated derivatives and IO securities that are used in part to manage risks associated with our mortgage banking activities. Additionally, this segment may generate interest income on loans held for future sale or securitization and interest income from IO securities. Interest expense on short-term debt used to fund the purchase of residential loans, direct operating expenses and tax expenses associated with these activities are also included in the residential mortgage banking segment.

Our residential investments segment includes a portfolio of investments in residential mortgage-backed securities retained from our Sequoia securitizations, as well as residential mortgage-backed securities issued by third parties. This segment also includes MSRs associated with residential loans securitized through our Sequoia program and MSRs purchased from third parties. The residential investment segment’s main sources of revenue are interest income from investment portfolio securities, as well as the realized gains recognized upon sales of these securities and income from MSRs. This segment also includes derivative financial instruments that we utilize to manage certain risks associated with our residential investment portfolio. Also included in this segment is interest expense on the short-term debt and ABS used to partially finance certain of these securities, as well as direct operating expenses and tax provisions associated with these activities.

Our commercial mortgage banking and investments segment consists of our commercial mortgage banking operations as well as our portfolio of held-for-investment commercial real estate loans. We operate as a commercial real estate lender by originating mortgage loans and providing other forms of commercial real estate financing. This may include senior or subordinate mortgage loans, mezzanine loans, and other forms of financing, such as preferred equity interests in special purpose entities that own commercial real estate. We typically sell the senior loans we originate to third parties for securitization and the mezzanine and subordinate loans we originate are generally held for investment. This segment also includes derivative financial instruments that we utilize to manage certain risks associated with our commercial loan origination activity. Our commercial mortgage banking and investments segment’s main sources of revenue are interest income from our commercial loan investments as well as income from mortgage banking activities, which includes valuation increases (or gains) on the senior commercial loans we originate for sale as well as valuation changes in associated derivatives that are used to manage risks associated with our mortgage banking activities. Interest expense from our Commercial Securitization and from short-term debt used to fund the purchase of commercial loans as well as operating expenses and the tax provisions associated with these activities are also included in the commercial mortgage banking segment.

Segment contribution represents the measure of profit that management uses to assess the performance of its 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 legacy 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.

The following table presents financial information by segment for the three months ended March 31, 2014.

Business Segment Financial Information


	Three Months Ended March 31, 2014
(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
Interest income	$	10,668	$	27,594	$	10,394	$	6,830	$	55,486
Interest expense		(1,321)		(2,850)		(3,303)		(11,586)		(19,060)

Net interest income (loss)		9,347		24,744		7,091		(4,756)		36,426
Provision for loan losses		-		-		(655)		(629)		(1,284)
Mortgage banking activities, net		(1,510)		-		823		-		(687)
MSR income, net		-		606		-		-		606
Other market valuation adjustments, net		(2)		(5,957)		-		(179)		(6,138)
Realized gains, net		-		987		-		105		1,092
Operating expenses		(6,648)		(1,095)		(2,626)		(9,156)		(19,525)
(Provision for) benefit from income taxes		(165)		1,527		355		126		1,843

Segment Contribution	$	1,022	$	20,812	$	4,988	$	(14,489)

Net Income									$	12,333


Non-cash amortization expense		(52)		11,247		(173)		(1,946)		9,076

	Three Months Ended March 31, 2013
(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
Interest income	$	9,756	$	23,518	$	10,171	$	10,079	$	53,524
Interest expense		(2,110)		(2,666)		(2,808)		(10,676)		(18,260)

Net interest income (loss)		7,646		20,852		7,363		(597)		35,264
Provision for loan losses		-		-		(685)		(1,354)		(2,039)
Mortgage banking activities, net		38,687		-		6,313		-		45,000
MSR income, net		-		1,021		-		-		1,021
Other market valuation adjustments, net		40		(570)		-		227		(303)
Realized gains, net		-		12,038		210		19		12,267
Operating expenses		(4,142)		(1,583)		(3,196)		(10,770)		(19,691)
Provision for income taxes		(8,904)		(425)		(1,223)		(357)		(10,909)

Segment Contribution	$	33,327	$	31,333	$	8,782	$	(12,832)

Net Income									$	60,610


Non-cash amortization expense		(106)		7,580		(187)		(1,297)		5,990

The following table presents the components of Corporate/Other for the three months ended March 31, 2014 and 2013.


	Three Months Ended March 31, 2014						Three Months Ended March 31, 2013
(In Thousands)	Legacy Consolidated VIEs		Other		Total		Legacy Consolidated VIEs		Other		Total
Interest income	$	6,828	$	2	$	6,830	$	10,067	$	12	$	10,079
Interest expense		(5,460)		(6,126)		(11,586)		(7,268)		(3,408)		(10,676)

Net interest income (loss)		1,368		(6,124)		(4,756)		2,799		(3,396)		(597)
Provision for loan losses		(629)		-		(629)		(1,354)		-		(1,354)
Mortgage banking activities, net		-		-		-		-		-		-
MSR income, net		-		-		-		-		-		-
Other market valuation adjustments, net		(142)		(37)		(179)		227		-		227
Realized gains, net		105		-		105		19		-		19
Operating expenses		(52)		(9,104)		(9,156)		(34)		(10,736)		(10,770)
Provision for income taxes		-		126		126		-		(357)		(357)

Total	$	650	$	(15,139)	$	(14,489)	$	1,657	$	(14,489)	$	(12,832)


Non-cash amortization expense		(1,363)		(583)		(1,946)		(1,103)		(194)		(1,297)

The following table presents supplemental information by segment at March 31, 2014 and December 31, 2013.

Supplemental Disclosures


(In Thousands)	Residential Mortgage Banking		Residential Investments		Commercial Mortgage Banking and Investments		Corporate/ Other		Total
March 31, 2014
Residential loans, held-for-sale	$	774,936	$	-	$	-	$	-	$	774,936
Residential loans, held-for-investment		-		-		-		1,689,994		1,689,994
Commercial loans		-		-		491,275		-		491,275
Real estate securities		106,228		1,636,780		-		-		1,743,008
Mortgage servicing rights		-		64,971		-		-		64,971
Total assets		903,177		1,715,739		496,700		1,891,495		5,007,111

December 31, 2013
Residential loans, held-for-sale	$	404,267	$	-	$	-	$	-	$	404,267
Residential loans, held-for-investment		-		-		-		1,762,167		1,762,167
Commercial loans		-		-		432,455		-		432,455
Real estate securities		110,505		1,572,356		-		-		1,682,861
Mortgage servicing rights		-		64,824		-		-		64,824
Total assets		531,092		1,655,209		439,139		1,983,088		4,608,528