Commercial Loans

12 Months Ended

Dec. 31, 2014

Note 6. Residential Loans

We acquire residential loans from third-party originators. During the years ended December 31, 2014 and 2013, we purchased $8.81 billion and $7.01 billion (principal balance), respectively, of residential loans, for which we elected the fair value option. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia entities at December 31, 2014 and 2013.


December 31, 2014 (In Thousands)	Redwood		Sequoia		Total
Held-for-sale
Fair value - Conforming	$	244,714	$	—	$	244,714
Fair value - Jumbo		1,096,317		—		1,096,317
Lower of cost or fair value		1,488		—		1,488
Held-for-investment
Fair value - Jumbo		581,668		—		581,668
At amortized cost		—		1,474,386		1,474,386

Total Residential Loans	$	1,924,187	$	1,474,386	$	3,398,573


December 31, 2013 (In Thousands)	Redwood		Sequoia		Total
Held-for-sale
Fair value - Conforming	$	11,502	$	—	$	11,502
Fair value - Jumbo		391,100		—		391,100
Lower of cost or fair value		1,665		—		1,665
Held-for-investment, at amortized cost		—		1,762,167		1,762,167

Total Residential Loans	$	404,267	$	1,762,167	$	2,166,434

As of December 31, 2014, we owned mortgage servicing rights associated with $1.70 billion of consolidated residential loans purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our balance sheet. We contract with licensed sub-servicers that perform servicing functions for these loans.

Residential Loan Characteristics

The following table presents the geographic concentration of residential loans recorded on our consolidated balance sheets at December 31, 2014 and 2013.


	December 31, 2014									December 31, 2013
Geographic Concentration (by Principal)	Held-for-Sale			Held-for- Investment			Held-for- Investment at FVO			Held-for-Sale			Held-for- Investment			Held-for- Investment at FVO
California		39	%		20	%		24	%		44	%		20	%		—
Texas		9	%		5	%		14	%		7	%		5	%		—
Massachusetts		6	%		2	%		5	%		4	%		—			—
Virginia		5	%		3	%		7	%		6	%		—			—
Washington		5	%		2	%		4	%		6	%		—			—
Florida		4	%		13	%		6	%		—			13	%		—
New York		2	%		8	%		3	%		3	%		9	%		—
Georgia		2	%		5	%		—			1	%		5	%		—
Colorado		—			—			8	%
Other states (none greater than 5%)		28	%		42	%		29	%		29	%		48	%		—

Total		100	%		100	%		100	%		100	%		100	%		—

The following table displays the loan product type and accompanying loan characteristics of residential loans recorded on our consolidated balance sheets at December 31, 2014 and 2013.


December 31, 2014 (In Thousands)
Loan Balance	Number of Loans		Interest Rate⁽¹⁾	Maturity Date		Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment:
ARM loans:
$0 to $250		3,400	0.25% to 5.5%		12/2012 - 11/2035	$	400,779	$	14,604	$	16,332
$251 to $500		1,041	0% to 5.63%		12/2013 - 05/2036		360,848		14,536		13,955
$501 to $750		328	0.5% to 4.66%		08/2013 - 09/2035		198,661		7,218		12,862
$751 to $1,000		162	0.25% to 2.38%		02/2019 - 07/2035		143,687		2,396		9,262
over $1,000		132	0% to 2.63%		01/2022 - 05/2036		207,539		2,494		16,106

		5,063					1,311,514		41,248		68,517

Hybrid ARM loans:
$0 to $250		3	2.63% to 2.63%		09/2033 - 03/2034		364		—		—
$251 to $500		26	2.5% to 5.15%		07/2033 - 12/2039		10,056		—		319
$501 to $750		23	2.5% to 4.65%		07/2033 - 09/2040		14,711		—		—
$751 to $1,000		11	2.5% to 4.8%		07/2033 - 12/2040		9,393		—		—
over $1,000		7	2.5% to 4.95%		09/2033 - 11/2040		11,786		—		—

		70					46,310		—		319

Fixed loans:
$0 to $250		7	3.70% to 4.9%		04/2039 - 02/2041		1,040		—		—
$251 to $500		42	3.45% to 5.13%		02/2039 - 07/2041		17,574		—		—
$501 to $750		71	3.65% to 5.25%		02/2039 - 08/2041		42,609		—		—
$751 to $1,000		38	4.2% to 5.25%		08/2040 - 08/2041		32,966		—		726
over $1,000		24	4.3% to 5.38%		09/2040 - 06/2041		31,200		—		—

		182					125,389		—		726

Total Held-for-Investment		5,315				$	1,483,213	$	41,248	$	69,562

Held-for-Investment at fair value:
Hybrid ARM loans
$251 to $500		29	2.38% to 3.75%		01/2044 - 10/2044	$	12,487	$	—	$	—
$501 to $750		80	2.38% to 4.25%		02/2044 - 11/2044		49,085		619		—
$751 to $1,000		51	2.38% to 3.75%		05/2043 - 11/2044		43,835		—		—
over $1,000		14	2.38% to 3.25%		03/2044 - 11/2044		17,720		—		—

		174					123,127		619		—

Fixed loans
$0 to $250		1	4.13% to 4.13%		07/2044 - 07/2044		75		—		—
$251 to $500		158	3.13% to 4.75%		01/2029 - 12/2044		72,931		894		—
$501 to $750		272	3.13% to 5%		04/2029 - 12/2044		165,574		624		—
$751 to $1,000		136	3.13% to 4.88%		01/2029 - 12/2044		116,892		—		—
over $1,000		63	3.25% to 5%		01/2024 - 12/2044		87,773		—		—

		630					443,245		1,518		—

Total Held-for-Investment		804				$	566,372	$	2,137	$	—

Held-for-Sale:
ARM loans
$66 to $359		8	1.88% to 2.25%		11/2032 - 10/2033	$	1,286	$	170	$	471
Hybrid ARM loans
$252 to $1,985		109	2.63% - 4%		06/2037 - 01/2045		84,271		—		—
Fixed loans
$75 to $2,496		2,165	2.88% - 5%		12/2024 - 01/2045		1,219,936		1,178		—

Total Held-for-Sale		2,282				$	1,305,493	$	1,348	$	471


December 31, 2013 (In Thousands)
Loan Balance	Number of Loans		Interest Rate⁽¹⁾	Maturity Date		Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment:
ARM loans:
$0 to $250		3,917	0.25% to 6.45%		12/2012 - 11/2035	$	449,458	$	16,038	$	16,856
$251 to $500		1,231	-0.13% to 5.63%		07/2013 - 05/2036		428,503		14,111		15,775
$501 to $750		395	0.50% to 4.66%		08/2013 - 09/2035		240,407		8,951		14,527
$751 to $1,000		191	0.25% to 2.25%		09/2022 - 07/2035		170,454		3,108		7,886
over $1,000		169	-0.13% to 2.38%		02/2019 - 05/2036		269,153		5,309		23,340

		5,903					1,557,975		47,517		78,384

Hybrid ARM loans:
$0 to $250		2	2.63% to 4.25%		10/2033 - 07/2039		428		—		—
$251 to $500		34	2.63% to 5.15%		07/2033 - 07/2040		13,491		335		350
$501 to $750		26	2.63% to 4.75%		07/2033 - 09/2040		16,376		597		—
$751 to $1,000		20	2.63% to 4.88%		07/2033 - 12/2040		16,592		—		—
over $1,000		10	2.63% to 4.95%		09/2033 - 11/2040		15,662		—		—

		92					62,549		932		350

Fixed loans:
$0 to $250		9	3.70% to 4.90%		04/2039 - 02/2041		1,529		—		—
$251 to $500		40	3.45% to 5.63%		02/2039 - 07/2041		16,929		—		—
$501 to $750		86	3.65% to 5.25%		02/2039 - 08/2041		52,642		—		—
$751 to $1,000		47	4.20% to 5.25%		08/2040 - 08/2041		41,225		—		—
over $1,000		29	4.00% to 5.38%		09/2040 - 06/2041		37,954		—		—

		211					150,279		—		—

Total Held-for-Investment		6,206				$	1,770,803	$	48,449	$	78,734

Held-for-Sale:
ARM loans		9	1.88% to 2.50%		11/2032 - 10/2033	$	1,490	$	166	$	352
Hybrid ARM loans		114	2.38% to 4.63%		06/2037 - 01/2044		91,976		—		—
Fixed loans		424	3.13% to 5.63%		06/2037 - 01/2044		307,407		—		—

Total Held-for-Sale		547				$	400,873	$	166	$	352

(1)	Rate is net of servicing fee for consolidated loans for which we do not own the MSR. For borrowers whose current rate is less than the applicable servicing fee, the rate shown in the table above is zero.

Residential Loans Held-for-Sale

Residential Loans at Fair Value

At December 31, 2014 and 2013, there were 2,273 and 537 residential loans at fair value, respectively, with an aggregate outstanding principal balance of $1.30 billion and $399 million, respectively, and an aggregate fair value of $1.34 billion and $403 million, respectively. During the years ended December 31, 2014 and 2013, we recorded positive $51 million and negative $10 million of valuation adjustments, respectively, on residential loans for which we elected the fair value option through mortgage banking activities, a component of our consolidated statements of income.

Residential Loans at Lower of Cost or Fair Value

At December 31, 2014, there were nine residential loans at lower of cost or fair value with $2 million in outstanding principal balance and a carrying value of $2 million. At December 31, 2013, there were 10 residential loans at lower of cost or fair value with $2 million in outstanding principal balance and a carrying value of $2 million. During the years ended December 31, 2014 and 2013, we recorded valuation adjustments for residential loans held-for-sale of positive $56 thousand and positive $38 thousand, respectively.

Residential Loans Held-for-Investment

Residential Loans at Fair Value

During the year ended December 31, 2014, we transferred loans with a principal balance of $574 million from held-for-sale at fair value to held-for-investment at fair value. As of December 31, 2014, $564 million of held-for-investment loans at fair value were pledged as collateral under the FHLBC borrowing agreement and our current intention is to hold these loans for investment.

Residential Loans at Amortized Cost

The following table details the carrying value for residential loans held-for-investment at amortized cost at December 31, 2014 and 2013. These loans are owned at Sequoia securitization entities that we consolidate for financial reporting purposes.


(In Thousands)	December 31, 2014			December 31, 2013
Principal balance	$	1,483,213		$	1,770,803
Unamortized premium, net		12,511			16,791

Recorded investment		1,495,724			1,787,594
Allowance for loan losses		(21,338	)		(25,427	)

Carrying Value	$	1,474,386		$	1,762,167

Of the $1.48 billion of principal balance and $13 million of unamortized premium on loans held-for-investment at December 31, 2014, $598 million of principal balance and $8 million of unamortized premium relate to residential loans acquired prior to July 1, 2004. During 2014, 18% of these residential loans prepaid and we amortized 30% of the premium based upon the accounting elections we apply. For residential loans acquired after July 1, 2004, the principal balance was $889 million and the unamortized premium was $5 million. During 2014, 15% of these loans prepaid and we amortized 18% of the premium.

Of the $1.77 billion of principal balance and $17 million of unamortized premium on loans held-for-investment at December 31, 2013, $731 million of principal balance and $11 million of unamortized premium relate to residential loans acquired prior to July 1, 2004. For residential loans acquired after July 1, 2004, the principal balance was $1.04 billion and the unamortized premium was $6 million.

Credit Characteristics of Residential Loans Held-for-Investment

As a percentage of our recorded investment, 99% of residential loans held-for-investment at December 31, 2014, were first lien, predominately prime-quality loans at the time of origination. The remaining 1% of loans were second lien, home equity lines of credit. The weighted average original LTV ratio for our residential loans held-for-investment outstanding at December 31, 2014, was 66%. The weighted average FICO score for the borrowers of these loans was 733 at the time the loans were originated.

We consider the year of origination of our residential loans held-for-investment to be a general indicator of credit performance as loans originated in specific years have often possessed similar product and credit characteristics. The following table displays our recorded investment in residential loans held-for-investment at December 31, 2014 and 2013, organized by year of origination.


(In Thousands)	December 31, 2014		December 31, 2013
2003 & Earlier	$	717,783	$	881,364
2004		437,221		513,458
2005		58,931		62,675
2006		135,872		149,776
2007		—		—
2008		—		—
2009		17,943		25,860
2010		76,944		92,728
2011		51,030		61,733

Total Recorded Investment	$	1,495,724	$	1,787,594

Allowance for Loan Losses on Residential Loans

For residential loans held-for-investment, we establish and maintain an allowance for loan losses. The allowance includes a component for pools of residential loans owned at Sequoia securitization entities that we collectively evaluated for impairment, and a component for loans individually evaluated for impairment that includes restructured residential loans at Sequoia entities that have been determined to be troubled debt restructurings.

Activity in the Allowance for Loan Losses on Residential Loans

The following table summarizes the activity in the allowance for loan losses for the years ended December 31, 2014, 2013, and 2012.


	Years Ended December 31,
(In Thousands)	2014			2013			2012
Balance at beginning of period	$	25,427		$	28,504		$	66,881
Charge-offs, net		(4,966	)		(4,525	)		(11,903	)
Provision for loan losses		877			1,448			171
Deconsolidation adjustment		—			—			(26,645	)

Balance at End of Period	$	21,338		$	25,427		$	28,504

During the year ended December 31, 2014 there were $5 million of charge-offs of residential loans that reduced our allowance for loan losses. These charge-offs arose from $21 million of defaulted loan principal. During the years ended December 31, 2013 and 2012, there were $5 million and $12 million of charge-offs of residential loans, respectively, that arose from $14 million and $33 million of defaulted loan principal, respectively.

Residential Loans Collectively Evaluated for Impairment

We establish the collective component of the allowance for residential loan losses based primarily on the characteristics of the loan pools underlying the securitization entities that own the loans, including loan product types, credit characteristics, and origination years. The collective analysis is further divided into two segments. The first segment reflects our estimate of losses on delinquent loans within each loan pool. These loss estimates are determined by applying the loss factors described in Note 3 to the delinquent loans, including our expectations of the timing of defaults and the loss severities we expect once defaults occur. The second segment relates to our estimate of losses incurred on nondelinquent loans within each loan pool. This estimate is based on losses we expect to realize over a 23 month loss confirmation period, which is based on our historical loss experience as well as consideration of the loss factors described in Note 3.

The following table summarizes the balances for loans collectively evaluated for impairment at December 31, 2014 and 2013.


(In Thousands)	December 31, 2014		December 31, 2013
Principal balance	$	1,466,819	$	1,762,165
Recorded investment		1,479,667		1,779,161
Related allowance		19,840		24,762

The following table summarizes the recorded investment and past due status of residential loans collectively evaluated for impairment at December 31, 2014 and 2013.


(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Current		Total Loans
December 31, 2014	$	28,484	$	8,464	$	69,223	$	1,373,496	$	1,479,667
December 31, 2013		34,187		13,248		79,010		1,652,716		1,779,161

Residential Loans Individually Evaluated for Impairment

As part of the loss mitigation efforts undertaken by servicers of residential loans owned at Sequoia securitization entities, a number of loan modifications have been completed. For the years ended December 31, 2014, 2013, and 2012, all of the loan modifications determined to be TDRs were either: (i) conversions of a floating rate mortgage loan into a fixed rate mortgage loan; (ii) reductions in the contractual interest rates of a mortgage loan paired with capitalization of accrued interest; or (iii) principal forgiveness paired with interest rate reductions.

The following table presents the details of the loan modifications determined to be TDRs for the years ended December 31, 2014, 2013, and 2012.


	Years Ended December 31,
(Dollars in Thousands)	2014			2013			2012
TDRs
Number of modifications		28			12			15
Pre-modification outstanding recorded investment	$	8,652		$	2,939		$	6,603
Post-modification outstanding recorded investment		8,639			2,838			6,540
Loan modification effect on net interest income after provision and other MVA		(2,214	)		(863	)		(1,448	)
TDRs that Subsequently Defaulted
Number of modifications		7			6			10
Recorded investment	$	3,427		$	1,462		$	5,078

If we determine that a restructured loan is a TDR, we remove it from the general loan pools used for determining the allowance for residential loan losses and assess it for impairment on an individual basis. This assessment is based primarily on whether an adverse change in the expected future cash flows resulted from the restructuring. The average recorded investment of loans individually evaluated for impairment for the years ended December 31, 2014, 2013, and 2012, was $13 million, $7 million, and $14 million, respectively. For the years ended December 31, 2014, 2013 and 2012, we recorded interest income of $129 thousand, $123 thousand and $297 thousand, respectively, on individually impaired loans.

The following table summarizes the balances for loans individually evaluated for impairment, all of which had an allowance, at December 31, 2014 and 2013.


(In Thousands)	December 31, 2014		December 31, 2013
Principal balance	$	16,394	$	8,638
Recorded investment		16,057		8,433
Related allowance		1,498		665

The following table summarizes the recorded investment and past due status of residential loans individually evaluated for impairment at December 31, 2014 and 2013.


(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Current		Total Loans
December 31, 2014	$	2,419	$	2,295	$	1,015	$	10,328	$	16,057
December 31, 2013		1,560		—		567		6,306		8,433

Commercial Loans

Note 7. Commercial Loans

We invest in commercial loans that we originate as well as loans that we acquire from third-party originators. The following table summarizes the classifications and carrying value of commercial loans at December 31, 2014 and 2013.


(In Thousands)	December 31, 2014		December 31, 2013
Held-for-sale, at fair value	$	166,234	$	89,111
Held-for-investment
At fair value		71,262		—
At amortized cost		329,431		343,344

Total Commercial Loans	$	566,927	$	432,455

Of the held-for-investment commercial loans shown above at December 31, 2014 and 2013, $195 million and $258 million, respectively, were financed through the Commercial Securitization entity, as discussed in Note 4.

Commercial Loan Characteristics

The following table displays the geographic concentration of commercial loans recorded on our consolidated balance sheets at December 31, 2014 and 2013.


	December 31, 2014						December 31, 2013
Geographic Concentration (by Principal)	Held-for-Sale			Held-for- Investment			Held-for-Sale			Held-for- Investment
Washington, District of Columbia		25	%		—			—			—
Michigan		18	%		8	%		—			8	%
Colorado		17	%		—			—			—
Connecticut		10	%		—			—			—
Texas		9	%		—			—			7	%
Maryland		7	%		—			—			—
California		6	%		19	%		—			21	%
Florida		—			17	%		—			10	%
New York		—			18	%		39	%		19	%
North Carolina		—			6	%		28	%		—
New Jersey		—			—			13	%		—
Ohio		—			—			8	%		—
Indiana		—			—			6	%		—
Illinois		—			—			6	%		6	%
Other states (none greater than 5%)		8	%		32	%		—			29	%

Total		100	%		100	%		100	%		100	%

The following table displays the loan product type and accompanying loan characteristics of commercial loans recorded on our consolidated balance sheets at December 31, 2014 and 2013.


December 31, 2014 (In Thousands)
Loan Balance	Number of Loans		Interest Rate	Maturity Date	Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment:
Fixed-rate loans:
$0 to $5,000		37	9.50% to 12.50%	8/2016 - 12/2024	$	102,994	$	—	$	—
$5,001 to $10,000		14	4.43% to 11.00%	4/2015 - 1/2025		109,551		—		—
$10,001 to $15,000		2	9.50% to 9.50%	1/2018 - 6/2021		24,874		—		—
$15,001 to $20,000		2	10.0% to 11.00%	6/2016 - 6/2022		37,700		—		—
$25,001 to $30,000		1	10.00%	10/2016		25,629		—		—

		56				300,748		—		—

ARM loans:
$5,001 to $10,000		2	10.80% to 12.00%	2/2015 - 10/2016		15,478		—		—
$10,001 to $15,000		2	9.16% to 11.20%	11/2014 - 8/2016		25,524		—		—

		4				41,002		—		—

Total Held-for-Investment		60			$	341,750	$	—	$	—

Held-for-Investment, at fair value:
Fixed-rate loans:
$0 to $5,000		3	10.00% to 10.00%	12/2023 to 4/2024	$	4,555	$	—	$	—
$10,001 to $15,000		1	4.95% to 4.95%	1/2024		11,399		—		—
$20,001 to $25,000		1	4.83% to 4.83%	12/2023		22,102		—		—
$25,001 to $30,000		1	4.79%	4/2024		29,500		—		—

		6			$	67,556	$	—	$	—

Held-for-Sale
Fixed-rate loans:		13	4.19% to 4.79%	12/2024 to 1/2045	$	162,790	$	—	$	—


December 31, 2013 (In Thousands)
Loan Balance	Number of Loans		Interest Rate	Maturity Date		Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment:
Fixed-rate loans:
$0 to $5,000		24	9.75% to 12.50%		8/2016 - 1/2024	$	70,597	$	—	$	—
$5,001 to $10,000		15	4.43% to 12.25%		4/2015 - 6/2023		112,887		—		—
$10,001 to $15,000		3	9.50% to 10.00%		6/2015 - 6/2021		35,463		—		—
$15,001 to $20,000		2	10.50% to 11.00%		6/2016 - 6/2022		37,700		—		—
$20,001 to $25,000		1	9.50%		12/2014		21,500		—		—
$25,001 to $30,000		1	10.00%		10/2016		25,839		—		—

		46					303,986		—		—

ARM loans:
$5,001 to $10,000		2	10.80% to 12.00%		2/2015 - 10/2016		15,497		—		—
$10,001 to $15,000		1	11.20%		11/2014		14,598		—		—
$15,001 to $20,000		1	11.99%		8/2014		19,250		—		—

		4					49,345		—		—

Total Held-for-Investment		50				$	353,331	$	—	$	—

Held-for-Sale
Fixed-rate loans:		7	4.79% to 5.52%		12/2023 - 1/2024	$	87,650	$	—	$	—

Commercial Loans Held-for-Sale, at Fair Value

Commercial loans held-for-sale include loans we originate and intend to sell to third parties. At December 31, 2014, there were 13 senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $163 million and an aggregate fair value of $166 million. During the year ended December 31, 2014, we acquired $904 million (principal balance) of senior commercial loans for which we elected the fair value option and sold $791 million to third parties. During the year ended December 31, 2014, we recorded $21 million of positive valuation adjustments on senior commercial mortgage loans for which we elected the fair value option through mortgage banking activities on our consolidated statements of income.

At December 31, 2013, there were seven senior commercial loans at fair value, with an aggregate outstanding principal balance of $88 million and an aggregate fair value of $89 million. During the year ended December 31, 2013, we acquired $659 million (principal balance) of senior commercial loans for which we elected the fair value option and sold $597 million to third parties. During the year ended December 31, 2013, we recorded $9 million of positive valuation adjustments on commercial loans for which we elected the fair value option through mortgage banking activities, a component of our consolidated statements of income.

Prior to December 31, 2012 commercial loans included loans owned at consolidated Acacia securitization entities. We deconsolidated the Acacia entities in the fourth quarter of 2012. During the year ended December 31, 2012, we recorded less than $1 million of positive valuation adjustments on commercial loans through other market valuation adjustments, on our consolidated statements of income.

Commercial Loans Held-for-Investment

Commercial Loans Held-for-Investment, at Fair Value

Commercial loans held-for-investment at fair value include loans we hold for investment for which we have elected the fair value option. At December 31, 2014, we held three of these commercial loans, with an aggregate outstanding principal balance of $68 million and an aggregate fair value of $71 million. During the year ended December 31, 2014, we originated and funded commercial loans for $31 million and recorded $2 million of positive valuation adjustments on commercial loans held-for-investment at fair value through mortgage banking activities, a component of our consolidated income statement. We did not have any commercial loans held-for-investment at fair value at December 31, 2013.

Commercial Loans Held-for-Investment, at Amortized Cost

Commercial loans held-for-investment at amortized cost include loans we originate and preferred equity investments we make or, in either case, acquire from third parties. As of December 31, 2014, these loans primarily include mezzanine loans that are secured by a borrower’s ownership interest in a single purpose entity that owns commercial property, rather than a lien on the commercial property. The preferred equity investments are typically preferred equity interests in a single purpose entity that owns commercial property and are included within, and referred to herein, as commercial loans held-for-investment due to the fact that their risks and payment characteristics are nearly equivalent to commercial mezzanine loans.

The following table provides additional information for our commercial loans held-for-investment at December 31, 2014 and 2013.


(In Thousands)	December 31, 2014			December 31, 2013
Principal balance	$	341,750		$	353,331
Unamortized discount, net		(4,862	)		(2,614	)

Recorded investment		336,888			350,717
Allowance for loan losses		(7,457	)		(7,373	)

Carrying Value	$	329,431		$	343,344

At December 31, 2014, there were 60 commercial loans held-for-investment with an outstanding principal balance of $342 million and a carrying value of $329 million. Of the $337 million of recorded investment in commercial loans held-for-investment at December 31, 2014, 17% was originated in 2014, 17% was originated in 2013, 36% was originated in 2012, 26% was originated in 2011 and 4% was originated in 2010. During the year ended December 31, 2014, we originated or acquired $59 million (principal balance) of commercial loans held-for-investment and received repayments of $71 million. In connection with certain loan prepayments, we received $1.5 million of yield maintenance fees during the year ended December 31, 2014. As of December 31, 2014, $195 million of commercial loans held-for-investment were financed through the Commercial Securitization as discussed in Note 4.

At December 31, 2013, there were 50 commercial loans held-for-investment with an outstanding principal balance of $353 million and a carrying value of $343 million. Of the $351 million of recorded investment in commercial loans held-for-investment at December 31, 2013, 19% was originated in 2013, 43% was originated in 2012, 34% was originated in 2011, and 4% was originated in 2010. During the year ended December 31, 2013, we originated or acquired $66 million of commercial loans held-for-investment and received prepayments of $24 million. In connection with the loan prepayments, we received $3 million of yield maintenance fees during the year ended December 31, 2013.

Allowance for Loan Losses on Commercial Loans

For commercial loans classified as held-for-investment at amortized cost, we establish and maintain an allowance for loan losses. The allowance includes a component for loans collectively evaluated for impairment and a component for loans individually evaluated for impairment.

Our methodology for assessing the adequacy of the allowance for loan losses includes a formal review of each commercial loan in the portfolio and the assignment of an internal impairment status. Based on the assigned impairment status, a loan is categorized as “Pass,” “Watch List,” or “Workout.” The following table presents the principal balance of commercial loans held-for-investment by risk category.


(In Thousands)	December 31, 2014		December 31, 2013
Pass	$	316,122	$	309,792
Watch list		25,628		43,539

Total Commercial Loans Held-for-Investment	$	341,750	$	353,331

Activity in the Allowance for Loan Losses on Commercial Loans

The following table summarizes the activity in the allowance for commercial loan losses for the years ended December 31, 2014, 2013, and 2012.


	Year Ended December 31,
(In Thousands)	2014		2013		2012
Balance at beginning of period	$	7,373	$	4,084	$	608
Charge-offs, net		—		—		—
Provision for loan losses		84		3,289		3,476

Balance at End of Period	$	7,457	$	7,373	$	4,084

Commercial Loans Collectively Evaluated for Impairment

At December 31, 2014 and 2013, all of our commercial loans collectively evaluated for impairment were current. The following table summarizes the balances for loans collectively evaluated for impairment at December 31, 2014 and 2013.


(In Thousands)	December 31, 2014		December 31, 2013
Principal balance	$	341,750	$	353,331
Recorded investment		336,888		350,717
Related allowance		7,457		7,373

Commercial Loans Individually Evaluated for Impairment

We did not have any loans individually evaluated for impairment for either of the years ended December 31, 2014 or 2013.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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