Mortgage Loans on Real Estate

Our mortgage loan portfolio, summarized in the following table, totaled $2.5 billion at June 30, 2014 and $2.6 billion at December 31, 2013, with commitments outstanding of $38.6 million at June 30, 2014.



	June 30, 2014			December 31, 2013
	(Dollars in thousands)
Principal outstanding	$	2,570,950		$	2,607,698
Loan loss allowance	(26,582		)	(26,047		)
Deferred prepayment fees	(558		)	(569		)
Carrying value	$	2,543,810		$	2,581,082

The portfolio consists of commercial mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The mortgage loan portfolio is summarized by geographic region and property type as follows:



	June 30, 2014				December 31, 2013
	Principal		Percent		Principal		Percent
	(Dollars in thousands)
Geographic distribution
East	$	774,014	30.1	%	$	765,717	29.4	%
Middle Atlantic	145,663		5.7	%	156,489		6.0	%
Mountain	328,284		12.8	%	356,246		13.7	%
New England	14,700		0.6	%	21,324		0.8	%
Pacific	303,922		11.8	%	317,431		12.2	%
South Atlantic	500,612		19.5	%	483,852		18.5	%
West North Central	338,343		13.1	%	351,794		13.5	%
West South Central	165,412		6.4	%	154,845		5.9	%
	$	2,570,950	100.0	%	$	2,607,698	100.0	%
Property type distribution
Office	$	533,472	20.8	%	$	590,414	22.6	%
Medical Office	104,025		4.0	%	125,703		4.8	%
Retail	729,497		28.4	%	711,364		27.3	%
Industrial/Warehouse	681,540		26.5	%	673,449		25.8	%
Hotel	43,784		1.7	%	61,574		2.4	%
Apartment	340,621		13.2	%	291,823		11.2	%
Mixed use/other	138,011		5.4	%	153,371		5.9	%
	$	2,570,950	100.0	%	$	2,607,698	100.0	%

We evaluate our mortgage loan portfolio for the establishment of a loan loss reserve by specific identification of impaired loans and the measurement of an estimated loss for each individual loan identified. A mortgage loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell. In addition, we analyze the mortgage loan portfolio for the need of a general loan allowance for probable losses on all other loans. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions.

Our financing receivables currently consist of one portfolio segment which is our commercial mortgage loan portfolio. These are mortgage loans with collateral consisting of commercial real estate and borrowers consisting mostly of limited liability partnerships or limited liability corporations.

We rate the mortgage loans in our portfolio based on factors such as historical operating performance, loan to value ratio and economic outlook, among others. We calculate a loss factor to apply to each rating based on historical losses we have recognized in our mortgage loan portfolio. We apply the loss factors to the total principal outstanding within each rating category to determine an appropriate estimate of general loan loss allowance.

The following tables present a rollforward of our specific and general valuation allowances for mortgage loans on real estate:



	Three Months Ended June 30, 2014						Three Months Ended June 30, 2013
	Specific Allowance			General Allowance			Specific Allowance			General Allowance
	(Dollars in thousands)
Beginning allowance balance	$	(16,462	)	$	(8,800	)	$	(22,631	)	$	(10,400	)
Charge-offs	1,808			—			2,612			—
Recoveries	255			—			—			—
Provision for credit losses	(2,883		)	(500		)	(1,157		)	(100		)
Ending allowance balance	$	(17,282	)	$	(9,300	)	$	(21,176	)	$	(10,500	)

	Six Months Ended June 30, 2014						Six Months Ended June 30, 2013
	Specific Allowance			General Allowance			Specific Allowance			General Allowance
	(Dollars in thousands)
Beginning allowance balance	$	(16,847	)	$	(9,200	)	$	(23,134	)	$	(11,100	)
Charge-offs	2,757			—			4,181			—
Recoveries	255			—			—			—
Provision for credit losses	(3,447		)	(100		)	(2,223		)	600
Ending allowance balance	$	(17,282	)	$	(9,300	)	$	(21,176	)	$	(10,500	)

The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance is for the group of loans discussed above which are collectively evaluated for impairment. The following table presents the total outstanding principal of loans evaluated for impairment by basis of impairment method:



	June 30, 2014		December 31, 2013
	(Dollars in thousands)
Individually evaluated for impairment	$	42,963	$	47,018
Collectively evaluated for impairment	2,527,987		2,560,680
Total loans evaluated for impairment	$	2,570,950	$	2,607,698

Charge-offs include allowances that have been established on loans that were satisfied by taking ownership of the collateral. When the property is taken it is recorded at the lower of the mortgage loan's carrying value or the property's fair value as a component of other investments and the mortgage loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. Charge-offs also include situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance). We define collateral dependent loans as those mortgage loans for which we will depend on the value of the collateral real estate to satisfy the outstanding principal of the loan.

During the three months ended June 30, 2014, four mortgage loans were satisfied by taking ownership of any real estate serving as collateral and during the six months ended June 30, 2014, five mortgage loans were satisfied by taking ownership of the real estate serving as collateral compared to zero and one mortgage loan for the same periods in 2013. The following table summarizes the activity in the real estate owned which was obtained in satisfaction of mortgage loans on real estate:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Real estate owned at beginning of period	$	20,592		$	28,764		$	22,844		$	33,172
Real estate acquired in satisfaction of mortgage loans	8,294			—			10,007			844
Additions	—			480			—			480
Sales	(4,118		)	(2,333		)	(7,148		)	(7,413		)
Impairments	—			(145		)	(799		)	(145		)
Depreciation	(162		)	(157		)	(298		)	(329		)
Real estate owned at end of period	$	24,606		$	26,609		$	24,606		$	26,609

We analyze credit risk of our mortgage loans by analyzing all available evidence on loans that are delinquent and loans that are in a workout period.



	June 30, 2014		December 31, 2013
	(Dollars in thousands)
Credit Exposure--By Payment Activity
Performing	$	2,559,419	$	2,593,276
In workout	2,213		6,248
Delinquent	—		—
Collateral dependent	9,318		8,174
	$	2,570,950	$	2,607,698

The loans that are categorized as "in workout" consist of loans that we have agreed to lower or no mortgage payments for a period of time while the borrowers address cash flow and/or operational issues. The key features of these workouts have been determined on a loan-by-loan basis. Most of these loans are in a period of low cash flow due to tenants vacating their space or tenants requesting rent relief during difficult economic periods. Generally, we have allowed the borrower a six month interest only period and in some cases a twelve month period of interest only. Interest only workout loans are expected to return to their regular debt service payments after the interest only period. Interest only loans that are not fully amortizing will have a larger balance at their balloon date than originally contracted. Fully amortizing loans that are in interest only periods will have larger debt service payments for their remaining term due to lost principal payments during the interest only period. In limited circumstances we have allowed borrowers to pay the principal portion of their loan payment into an escrow account that can be used for capital and tenant improvements for a period of not more than twelve months. In these situations new loan amortization schedules are calculated based on the principal not collected during this twelve month workout period and larger payments are collected for the remaining term of each loan. In all cases, the original interest rate and maturity date have not been modified, and we have not forgiven any principal amounts.

Mortgage loans are considered delinquent when they become 60 days past due. When loans become 90 days past due, become collateral dependent or enter a period with no debt service payments required we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If payments are received to bring a delinquent loan back to current we will resume accruing interest income on that loan. Outstanding principal of loans in a non-accrual status at June 30, 2014 and December 31, 2013 totaled $9.3 million and $8.2 million, respectively.

All of our commercial mortgage loans depend on the cash flow of the borrower to be at a sufficient level to service the principal and interest payments as they come due. In general, cash inflows of the borrowers are generated by collecting monthly rent from tenants occupying space within the borrowers' properties. Our borrowers face collateral risks such as tenants going out of business, tenants struggling to make rent payments as they become due, and tenants canceling leases and moving to other locations. We have a number of loans where the real estate is occupied by a single tenant. Our borrowers sometimes face both a reduction in cash flow on their mortgage property as well as a reduction in the fair value of the real estate collateral. If borrowers are unable to replace lost rent revenue and increases in the fair value of their property do not materialize we could potentially incur more losses than what we have allowed for in our specific and general loan loss allowances.

Aging of financing receivables is summarized in the following table, with loans in a "workout" period as of the reporting date considered current if payments are current in accordance with agreed upon terms:



	30 - 59 Days		60 - 89 Days		90 Days and Over		Total Past Due		Current		Collateral Dependent Receivables		Total Financing Receivables
	(Dollars in thousands)
Commercial Mortgage Loans
June 30, 2014	$	1,045	$	—	$	—	$	1,045	$	2,560,587	$	9,318	$	2,570,950
December 31, 2013	$	—	$	—	$	—	$	—	$	2,599,524	$	8,174	$	2,607,698

Financing receivables summarized in the following two tables represent all loans that we are either not currently collecting, or those we feel it is probable we will not collect, all amounts due according to the contractual terms of the loan agreements (all loans that we have worked with the borrower to alleviate short-term cash flow issues, loans delinquent for more than 60 days at the reporting date, loans we have determined to be collateral dependent and loans that we have recorded specific impairments on that we feel may continue to have performance issues).



	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
June 30, 2014
Mortgage loans with an allowance	$	25,681	$	42,963	$	(17,282	)
Mortgage loans with no related allowance	2,656		2,656		—
	$	28,337	$	45,619	$	(17,282	)
December 31, 2013
Mortgage loans with an allowance	$	30,171	$	47,018	$	(16,847	)
Mortgage loans with no related allowance	3,264		3,264		—
	$	33,435	$	50,282	$	(16,847	)



	Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Three months ended June 30, 2014
Mortgage loans with an allowance	$	27,054	$	600
Mortgage loans with no related allowance	2,656		13
	$	29,710	$	613
Three months ended June 30, 2013
Mortgage loans with an allowance	$	26,232	$	426
Mortgage loans with no related allowance	18,699		266
	$	44,931	$	692
Six months ended June 30, 2014
Mortgage loans with an allowance	$	27,236	$	1,235
Mortgage loans with no related allowance	2,656		—
	$	29,892	$	1,235
Six months ended June 30, 2013
Mortgage loans with an allowance	$	26,885	$	862
Mortgage loans with no related allowance	18,739		528
	$	45,624	$	1,390

A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:


•	borrower is in default,


•	borrower has declared bankruptcy,


•	there is growing concern about the borrower's ability to continue as a going concern,


•	borrower has insufficient cash flows to service debt,


•	borrower's inability to obtain funds from other sources, and


•	there is a breach of financial covenants by the borrower.

If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower was granted a concession:


•	assets used to satisfy debt are less than our recorded investment,


•	interest rate is modified,


•	maturity date extension at an interest rate less than market rate,


•	capitalization of interest,


•	delaying principal and/or interest for a period of three months or more, and


•	partial forgiveness of the balance or charge-off.

Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. A summary of mortgage loans on commercial real estate with outstanding principal at June 30, 2014 and December 31, 2013 that we determined to be TDRs are as follows:



Geographic Region	Number of TDRs	Principal Balance Outstanding		Specific Loan Loss Allowance			Net Carrying Amount
		(Dollars in thousands)
June 30, 2014
South Atlantic	7	14,537		(3,911		)	10,626
East North Central	1	2,213		(467		)	1,746
West North Central	1	1,908		(474		)	1,434
	9	$	18,658	$	(4,852	)	$	13,806
December 31, 2013
East	1	$	3,712	$	(949	)	$	2,763
Mountain	7	22,140		(329		)	21,811
South Atlantic	7	13,930		(4,177		)	9,753
East North Central	1	2,219		(467		)	1,752
West North Central	1	1,938		(475		)	1,463
West South Central	1	1,714		(256		)	1,458
	18	$	45,653	$	(6,653	)	$	39,000