Notes Receivable and Allowance for Losses

The Company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories: Mezzanine and Other Notes Receivable and Forgivable Notes Receivable. The Company utilizes the level of security it has in the various notes receivable as its primary credit quality indicator (i.e. senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans within these categories.

The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then principal. The Company does not resume interest accrual until all delinquent payments are received. For impaired loans, the Company recognizes interest income on a cash basis.

The following table shows the composition of our notes receivable balances:



	June 30, 2014						December 31, 2013
	(In thousands)						(In thousands)
Credit Quality Indicator	Forgivable Notes Receivable		Mezzanine & Other Notes Receivable		Total		Forgivable Notes Receivable		Mezzanine & Other Notes Receivable		Total
Senior	$	—	$	10,150	$	10,150	$	—	$	18,052	$	18,052
Subordinated	—		13,770		13,770		—		14,152		14,152
Unsecured	25,048		4,131		29,179		20,625		3,405		24,030
Total notes receivable	25,048		28,051		53,099		20,625		35,609		56,234
Allowance for losses on non-impaired loans	2,477		1,600		4,077		1,650		1,607		3,257
Allowance for losses on receivables specifically evaluated for impairment	—		8,348		8,348		—		8,289		8,289
Total loan reserves	2,477		9,948		12,425		1,650		9,896		11,546
Net carrying value	$	22,571	$	18,103	$	40,674	$	18,975	$	25,713	$	44,688
Current portion, net	$	126	$	6,056	$	6,182	$	361	$	12,455	$	12,816
Long-term portion, net	22,445		12,047		34,492		18,614		13,258		31,872
Total	$	22,571	$	18,103	$	40,674	$	18,975	$	25,713	$	44,688

The Company classifies notes receivable due within one year as other current assets in the Company’s consolidated balance sheets.

The following table summarizes the activity related to the Company’s Forgivable Notes Receivable and Mezzanine and Other Notes Receivable allowance for losses for the six months ended June 30, 2014:



	Forgivable Notes Receivable			Mezzanine & Other Notes Receivable
	(In thousands)
Beginning balance	$	1,650		$	9,896
Provisions	1,129			102
Recoveries	(9		)	(50		)
Write-offs	(95		)	—
Other⁽¹⁾	(198		)	—
Ending balance	$	2,477		$	9,948

(1) Consists of default rate assumption changes

Forgivable Notes Receivable

As of June 30, 2014 and December 31, 2013, the unamortized balance of the Company's forgivable notes receivable totaled $25.0 million and $20.6 million, respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $2.5 million and $1.7 million at June 30, 2014 and December 31, 2013, respectively. Amortization expense included in the accompanying consolidated statements of income related to the notes for the three months ended June 30, 2014 and 2013 was $1.2 million and $1.0 million, respectively. Amortization expense for the six months ended June 30, 2014 and 2013 was $2.4 million and $2.0 million, respectively.

Past due balances of forgivable notes receivable are as follows:



	30-89 days Past Due		> 90 days Past Due		Total Past Due		Current		Total Notes Receivable
	(In thousands)
As of June 30, 2014
Forgivable Notes	$	—	$	1,347	$	1,347	$	23,701	$	25,048
	$	—	$	1,347	$	1,347	$	23,701	$	25,048

As of December 31, 2013
Forgivable Notes	$	—	$	—	$	—	$	20,625	$	20,625
	$	—	$	—	$	—	$	20,625	$	20,625

Mezzanine and Other Notes Receivable

The Company determined that approximately $11.8 million and $12.5 million of its mezzanine and other notes receivable were impaired at June 30, 2014 and December 31, 2013, respectively. The Company recorded allowance for credit losses on these impaired loans at June 30, 2014 and December 31, 2013 totaling $8.3 million and $8.3 million, respectively, resulting in a carrying value of impaired loans of $3.4 million and $4.2 million, respectively. For the six months ended June 30, 2014 and 2013, the average mezzanine and other notes receivable on non-accrual status was approximately $12.2 million and $12.9 million, respectively. The Company recognized approximately $22 thousand and $76 thousand of interest income on impaired loans during the three and six months ended June 30, 2014, respectively, on the cash basis. The Company recognized approximately $73 thousand and $139 thousand of interest on impaired loans during the three and six months ended June 30, 2013. The Company provided loan reserves on non-impaired loans totaling $1.6 million at both June 30, 2014 and December 31, 2013.

Past due balances of mezzanine and other notes receivable by credit quality indicators are as follows:



	30-89 days Past Due		> 90 days Past Due		Total Past Due		Current		Total Notes Receivable
	(In thousands)
As of June 30, 2014
Senior	$	—	$	—	$	—	$	10,150	$	10,150
Subordinated	1,368		9,629		10,997		2,773		13,770
Unsecured	—		47		47		4,084		4,131
	$	1,368	$	9,676	$	11,044	$	17,007	$	28,051
As of December 31, 2013
Senior	$	—	$	—	$	—	$	18,052	$	18,052
Subordinated	—		9,629		9,629		4,523		14,152
Unsecured	—		47		47		3,358		3,405
	$	—	$	9,676	$	9,676	$	25,933	$	35,609

Loans Acquired with Deteriorated Credit Quality

On December 2, 2011, the Company acquired an $11.5 million mortgage, held on a franchisee hotel asset, from a financial institution for $7.9 million. At the time of acquisition, the Company determined that it would be unable to collect all contractually required payments under the original mortgage terms. The contractually required payments receivable, including principal and interest, under the terms of the acquired mortgage totaled $12.0 million. During the three months ended June 30, 2014, the borrower repaid the Company an amount equal to its original loan acquisition cost of $7.9 million and the Company does not expect to receive further payments. At December 31, 2013, the carrying amount of this loan, which is reported under senior mezzanine and other notes receivables, was $7.9 million and there was no allowance for uncollectable amounts. The Company's accretable yield at acquisition was $1.8 million or 7.36% and a reconciliation of the accretable yield for the six months ended June 30, 2014 is as follows:



	Accretable Yield
	(In thousands)
Beginning balance	$	582
Additions	—
Accretion	(143		)
Disposals	(439		)
Reclassifications from nonaccretable yield	—
Ending balance	$	—