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Commercial Loans | 6 Months Ended
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Jun. 30, 2015
Commercial Loans |
Accounts, Notes, Loans and Financing Receivable [Line Items] |
Loans | 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 June 30, 2015 and December 31, 2014.
(In Thousands) |  | June 30, 2015 |  | December 31, 2014
Held-for-sale, at fair value |  | $ | 165,853 |  |  | $ | 166,234 |
Held-for-investment |  |  |  |
At fair value |  | 69,763 |  |  | 71,262 |
At amortized cost |  | 315,715 |  |  | 329,431 |
Total Commercial Loans |  | $ | 551,331 |  |  | $ | 566,927 |
Of the held-for-investment commercial loans at amortized cost shown above at June 30, 2015 and December 31, 2014, $182 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 June 30, 2015, we held 11 senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $165 million and an aggregate fair value of $166 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 and six months ended June 30, 2015, we acquired $258 million and $350 million (principal balance), respectively, of senior commercial loans for which we elected the fair value option and sold $146 million and $348 million (principal balance), respectively, of loans to third parties. During the three months ended June 30, 2015 and 2014, we recorded positive $1 million and positive $6 million, respectively, of valuation adjustments on senior commercial mortgage loans for which we elected the fair value option through mortgage banking and investment activities, net on our consolidated statements of income. During the six months ended June 30, 2015 and 2014, we recorded positive $7 million and positive $9 million, respectively, of valuation adjustments on senior commercial mortgage loans for which we elected the fair value option through mortgage banking and investment activities, net on our consolidated statements of income. At June 30, 2015, all commercial loans held-for-sale were current and loans with a principal balance of $60 million were pledged as collateral under short-term borrowing arrangements. 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 June 30, 2015, we held three of these A/B notes with an aggregate outstanding principal balance of $67 million and an aggregate fair value of $70 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. We carry the A-notes and associated secured commercial borrowings at the same fair values and the periodic valuation adjustments associated with these assets and liabilities offset through mortgage banking and investment activities, net on our consolidated statements of income. During the three and six months ended June 30, 2015 and 2014, there were no net changes in the fair value of the B-notes, in which we retain an actual economic interest. The carrying value of the B-notes at both June 30, 2015 and December 31, 2014 were $5 million. 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 June 30, 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 June 30, 2015 and December 31, 2014.
(In Thousands) |  | June 30, 2015 |  | December 31, 2014
Principal balance |  | $ | 327,592 |  |  | $ | 341,750 |
Unamortized discount, net |  | (4,476 | ) |  | (4,862 | )
Recorded investment |  | 323,116 |  |  | 336,888 |
Allowance for loan losses |  | (7,401 | ) |  | (7,457 | )
Carrying Value |  | $ | 315,715 |  |  | $ | 329,431 |
At both June 30, 2015 and December 31, 2014, we held 60 commercial loans held-for-investment at amortized cost. During the three and six months ended June 30, 2015, we originated or acquired $2 million and $9 million, respectively, of commercial loans held-for-investment at amortized cost. Of the $323 million of recorded investment in commercial loans held-for-investment at June 30, 2015, 3% was originated in 2015, 18% was originated in 2014, 15% 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) |  | June 30, 2015 |  | December 31, 2014
Pass |  | $ | 302,075 |  |  | $ | 316,122 |
Watch list |  | 25,517 |  |  | 25,628 |
Total Commercial Loans Held-for-Investment |  | $ | 327,592 |  |  | $ | 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 and six months ended June 30, 2015 and 2014.
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In Thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Balance at beginning of period |  | $ | 7,662 |  |  | $ | 8,028 |  |  | $ | 7,456 |  |  | $ | 7,373 |
Charge-offs, net |  | — |  |  | — |  |  | — |  |  | — |
(Reversal of) provision for loan losses |  | (261 | ) |  | 289 |  |  | (55 | ) |  | 944 |
Balance at End of Period |  | $ | 7,401 |  |  | $ | 8,317 |  |  | $ | 7,401 |  |  | $ | 8,317 |
Commercial Loans Collectively Evaluated for Impairment At June 30, 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 June 30, 2015 and December 31, 2014.
(In Thousands) |  | June 30, 2015 |  | December 31, 2014
Principal balance |  | $ | 327,592 |  |  | $ | 341,750 |
Recorded investment |  | 323,116 |  |  | 336,888 |
Related allowance |  | 7,401 |  |  | 7,457 |
Commercial Loans Individually Evaluated for Impairment We did not have any commercial loans individually evaluated for impairment at either June 30, 2015 or December 31, 2014.

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