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 March 31, 2015 and December 31, 2014.



(In Thousands)	March 31, 2015		December 31, 2014
Held-for-sale, at fair value	$	54,407	$	166,234
Held-for-investment
At fair value	72,619		71,262
At amortized cost	333,316		329,431
Total Commercial Loans	$	460,342	$	566,927

Of the held-for-investment commercial loans at amortized cost shown above at March 31, 2015 and December 31, 2014, $192 million and $195 million, respectively, were financed through the Commercial Securitization entity.

Commercial Loans Held-for-Sale

Commercial loans held-for-sale include loans we originate and intend to sell to third parties. At March 31, 2015, we held five senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $53 million and an aggregate fair value of $54 million. As of 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 three months ended March 31, 2015, we acquired $93 million (principal balance) of senior commercial loans for which we elected the fair value option and sold $203 million (principal balance) of loans to third parties. During the three months ended March 31, 2015 and 2014, we recorded positive $6 million and positive $2 million, respectively, of 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.

Commercial Loans Held-for-Investment

Commercial Loans Held-for-Investment, at Fair Value

Commercial loans held-for-investment at fair value include senior mortgage loans for which we have elected the fair value option and have been split into senior A-notes and junior B-notes. Although the A-notes for each of the loans were sold, the transfers did not qualify for sale accounting treatment and we treated the sales as secured borrowings. At March 31, 2015, we held three of these A/B notes with an aggregate outstanding principal balance of $67 million and an aggregate fair value of $73 million. At December 31, 2014, we held three A/B notes, with an aggregate outstanding principal balance of $68 million and an aggregate fair value of $71 million. During the three months ended March 31, 2015 and 2014, we recorded positive $2 million and positive $1 million, respectively, of valuation adjustments on commercial loans held-for-investment at fair value through mortgage banking activities, a component of our consolidated income statement.

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 March 31, 2015, 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 amortized cost at March 31, 2015 and December 31, 2014.



(In Thousands)	March 31, 2015			December 31, 2014
Principal balance	$	345,646		$	341,750
Unamortized discount, net	(4,668		)	(4,862		)
Recorded investment	340,978			336,888
Allowance for loan losses	(7,662		)	(7,457		)
Carrying Value	$	333,316		$	329,431

At March 31, 2015 and December 31, 2014 ,we held 62 and 60 commercial loans held-for-investment at amortized cost, respectively. During the three months ended March 31, 2015, we originated or acquired $8 million of commercial loans held-for-investment at amortized cost. Of the $341 million of recorded investment in commercial loans held-for-investment at March 31, 2015, 2% was originated in 2015, 17% was originated in 2014, 17% was originated in 2013, 36% was originated in 2012, 24% was originated in 2011 and 4% was originated in 2010.

Allowance for Loan Losses on Commercial Loans

For commercial loans classified as held-for-investment, 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)	March 31, 2015		December 31, 2014
Pass	$	320,075	$	316,122
Watch list	25,571		25,628
Total Commercial Loans Held-for-Investment	$	345,646	$	341,750

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 three months ended March 31, 2015 and 2014.



	Three Months Ended March 31,
(In Thousands)	2015		2014
Balance at beginning of period	$	7,456	$	7,373
Charge-offs, net	—		—
Provision for loan losses	206		655
Balance at End of Period	$	7,662	$	8,028

Commercial Loans Collectively Evaluated for Impairment

At March 31, 2015 and December 31, 2014, all of our commercial loans collectively evaluated for impairment were current. The following table summarizes the balances for loans collectively evaluated for impairment at March 31, 2015 and December 31, 2014.



(In Thousands)	March 31, 2015		December 31, 2014
Principal balance	$	345,646	$	341,750
Recorded investment	340,978		336,888
Related allowance	7,662		7,457

Commercial Loans Individually Evaluated for Impairment

We did not have any commercial loans individually evaluated for impairment at either March 31, 2015 or December 31, 2014.