Commercial Loans

We invest in commercial loans that we historically originated or acquired. In February 2016, we discontinued commercial loan originations. The following table summarizes the classifications and carrying value of commercial loans at March 31, 2016 and December 31, 2015.

Table 7.1 – Classifications and Carrying Value of Commercial Loans



(In Thousands)	March 31, 2016		December 31, 2015
Held-for-sale, at fair value	$	—	$	39,141
Held-for-investment
At fair value	69,674		67,657
At amortized cost	294,219		295,849
Total Commercial Loans	$	363,893	$	402,647

Of the held-for-investment commercial loans at amortized cost shown above at March 31, 2016 and December 31, 2015, $165 million and $166 million, respectively, were financed through the Commercial Securitization entity, and $7 million and $135 million, respectively, were pledged as collateral under short-term borrowing arrangements.

Commercial Loans Held-for-Sale at Fair Value

Commercial loans held-for-sale include loans we originated with the intent to sell to third parties. At March 31, 2016, we did not hold any senior commercial mortgage loans. As of December 31, 2015, there were four senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $39 million and an aggregate fair value of $39 million.

During the three months ended March 31, 2016 and 2015, we acquired $38 million and $93 million (principal balance), respectively, of senior commercial loans for which we elected the fair value option and sold $76 million and $203 million (principal balance), respectively, of loans to third parties. During the three months ended March 31, 2016 and 2015, we recorded $0.4 million and $6 million, respectively, of net market valuation gains on senior commercial mortgage loans for which we elected the fair value option through Mortgage banking activities, net on our consolidated statements of income.

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, 2016 and December 31, 2015, we held three of these A/B notes with an aggregate outstanding principal balance of $67 million and $67 million, respectively, and an aggregate fair value of $70 million and $68 million, respectively. 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 completely offset through our consolidated statements of income. During the three months ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015 was $4 million and $5 million, respectively.

At Amortized Cost

Commercial loans held-for-investment primarily include mezzanine loans that are secured by a borrower’s ownership interest in a single purpose entity that owns commercial property. The following table provides additional information for our commercial loans held-for-investment at amortized cost at March 31, 2016 and December 31, 2015.

Table 7.2 – Carrying Value for Commercial Loans Held-for-Investment at Amortized Cost



(In Thousands)	March 31, 2016			December 31, 2015
Principal balance	$	305,517		$	307,047
Unamortized discount, net	(3,908		)	(4,096		)
Recorded investment	301,609			302,951
Allowance for loan losses	(7,390		)	(7,102		)
Carrying Value	$	294,219		$	295,849

At March 31, 2016 and December 31, 2015, we held 58 and 59, respectively, commercial loans held-for-investment at amortized cost. Of the $302 million of recorded investment in commercial loans held-for-investment at March 31, 2016, 7% was originated in 2015, 19% was originated in 2014, 16% was originated in 2013, 31% was originated in 2012, 23% 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)	March 31, 2016		December 31, 2015
Pass	$	260,599	$	272,768
Watch list	44,918		34,279
Total Commercial Loans Held-for-Investment	$	305,517	$	307,047

The following table summarizes the activity in the allowance for commercial loan losses for the three months ended March 31, 2016 and 2015.

Table 7.4 – Activity in the Allowance for Commercial Loan Losses



	Three Months Ended March 31,
(In Thousands)	2016		2015
Balance at beginning of period	$	7,102	$	7,457
Provision for loan losses	288		205
Balance at End of Period	$	7,390	$	7,662

At March 31, 2016 and December 31, 2015, all of our commercial loans collectively evaluated for impairment were current. We did not have any commercial loans individually evaluated for impairment at either March 31, 2016 or December 31, 2015. The following table summarizes the balances for loans collectively evaluated for impairment at March 31, 2016 and December 31, 2015.

Table 7.5 – Loans Collectively Evaluated for Impairment Review



(In Thousands)	March 31, 2016		December 31, 2015
Principal balance	$	305,517	$	307,047
Recorded investment	301,609		302,951
Related allowance	7,390		7,102