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Commercial Loans | 9 Months Ended
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Sep. 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 September 30, 2015 and December 31, 2014. Table 7.1 – Classifications and Carrying Value of Commercial Loans
(In Thousands) |  | September 30, 2015 |  | December 31, 2014
Held-for-sale, at fair value |  | $ | 80,756 |  |  | $ | 166,234 |
Held-for-investment |  |  |  |
At fair value |  | 70,096 |  |  | 71,262 |
At amortized cost |  | 317,305 |  |  | 329,431 |
Total Commercial Loans |  | $ | 468,157 |  |  | $ | 566,927 |
Of the held-for-investment commercial loans at amortized cost shown above at September 30, 2015 and December 31, 2014, $180 million and $195 million, respectively, were financed through the Commercial Securitization entity. 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 September 30, 2015, we held 7 senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $78 million and an aggregate fair value of $81 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 nine months ended September 30, 2015, we acquired $168 million and $518 million (principal balance), respectively, of senior commercial loans for which we elected the fair value option and sold $254 million and $602 million (principal balance), respectively, of loans to third parties. During the three months ended September 30, 2015 and 2014, we recorded positive $4 million of valuation adjustments for both periods 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 nine months ended September 30, 2015 and 2014, we recorded positive $11 million and positive $14 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 September 30, 2015, all commercial loans held-for-sale were current and loans with a market value of $53 million were pledged as collateral under short-term borrowing arrangements. 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 September 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 nine months ended September 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 September 30, 2015 and December 31, 2014 were $5 million. 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 September 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 September 30, 2015 and December 31, 2014. Table 7.2 – Carrying Value for Commercial Loans Held-for-Investment
(In Thousands) |  | September 30, 2015 |  | December 31, 2014
Principal balance |  | $ | 328,925 |  |  | $ | 341,750 |
Unamortized discount, net |  | (4,279 | ) |  | (4,862 | )
Recorded investment |  | 324,646 |  |  | 336,888 |
Allowance for loan losses |  | (7,341 | ) |  | (7,457 | )
Carrying Value |  | $ | 317,305 |  |  | $ | 329,431 |
At September 30, 2015 and December 31, 2014, we held 62 and 60, respectively, commercial loans held-for-investment at amortized cost. During the three and nine months ended September 30, 2015, we originated or acquired $13 million and $22 million, respectively, of commercial loans held-for-investment at amortized cost. Of the $325 million of recorded investment in commercial loans held-for-investment at September 30, 2015, 7% was originated in 2015, 18% was originated in 2014, 15% was originated in 2013, 32% 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. Table 7.3 – Principal Balance of Commercial Loans Held-for-Investment by Risk Category
(In Thousands) |  | September 30, 2015 |  | December 31, 2014
Pass |  | $ | 303,462 |  |  | $ | 316,122 |
Watch list |  | 25,463 |  |  | 25,628 |
Total Commercial Loans Held-for-Investment |  | $ | 328,925 |  |  | $ | 341,750 |
The following table summarizes the activity in the allowance for commercial loan losses for the three and nine months ended September 30, 2015 and 2014. Table 7.4 – Activity in the Allowance for Commercial Loan Losses
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Balance at beginning of period |  | $ | 7,401 |  |  | $ | 8,317 |  |  | $ | 7,456 |  |  | $ | 7,373 |
Charge-offs, net |  | — |  |  | — |  |  | — |  |  | — |
(Reversal of) provision for loan losses |  | (60 | ) |  | (888 | ) |  | (115 | ) |  | 56 |
Balance at End of Period |  | $ | 7,341 |  |  | $ | 7,429 |  |  | $ | 7,341 |  |  | $ | 7,429 |
At September 30, 2015 and December 31, 2014, all of our commercial loans collectively evaluated for impairment were current. We did not have any commercial loans individually evaluated for impairment at either September 30, 2015 or December 31, 2014. The following table summarizes the balances for loans collectively evaluated for impairment at September 30, 2015 and December 31, 2014. Table 7.5 – Loans Collectively Evaluated for Impairment Review
(In Thousands) |  | September 30, 2015 |  | December 31, 2014
Principal balance |  | $ | 328,925 |  |  | $ | 341,750 |
Recorded investment |  | 324,646 |  |  | 336,888 |
Related allowance |  | 7,341 |  |  | 7,457 |

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