Allowance for Losses on Loans

The Company has an asset quality review function that analyzes its loan portfolios and reports the results of the review to the Board of Directors on a quarterly basis. The single-family residential, HELOC and consumer portfolios are evaluated based on their performance as a pool of loans, since no single loan is individually significant or judged by its risk rating, size or potential risk of loss. The construction, land, multi-family, commercial real estate and commercial and industrial loans are risk rated on a loan by loan basis to determine the relative risk inherent in specific borrowers or loans. Based on that risk rating, the loans are assigned a grade and classified as follows:


•	Pass – the credit does not meet one of the definitions below.

•

Special mention – A special mention credit is considered to be currently protected from loss but is potentially weak. No loss of principal or interest is foreseen; however, proper supervision and Management attention is required to deter further deterioration in the credit. Assets in this category constitute some undue and unwarranted credit risk but not to the point of justifying a risk rating of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

•

Substandard – A substandard credit is an unacceptable credit. Additionally, repayment in the normal course is in jeopardy due to the existence of one or more well defined weaknesses. In these situations, loss of principal is likely if the weakness is not corrected. A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified will have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets risk rated substandard.

•

Doubtful – A credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The probability of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

•

Loss – Credits classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future. Losses should be taken in the period in which they are identified as uncollectible. Partial charge-off versus full charge-off may be taken if the collateral offers some identifiable protection.

The following table summarizes the activity in the allowance for loan losses for the quarter ended December 31, 2013 and fiscal year ended September 30, 2013:



Quarter Ended December 31, 2013	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	64,184	$	(2,334	)	$	8,827	$	(2,985	)	$	67,692
Construction - speculative	8,407		(450		)	95		90			8,142
Construction - custom	882		—			—		592			1,474
Land - acquisition & development	9,165		(456		)	439		(2,064		)	7,084
Land - consumer lot loans	3,552		(242		)	22		(58		)	3,274
Multi-family	3,816		—			—		293			4,109
Commercial real estate	5,595		—			—		273			5,868
Commercial & industrial	16,614		(248		)	421		(282		)	16,505
HELOC	1,002		—			—		(59		)	943
Consumer	3,524		(1,082		)	1,025		(400		)	3,067
	$	116,741	$	(4,812	)	$	10,829	$	(4,600	)	$	118,158



Fiscal Year Ended September 30, 2013	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	81,815	$	(20,947	)	$	9,416	$	(6,100	)	$	64,184
Construction - speculative	12,060		(1,446		)	501		(2,708		)	8,407
Construction - custom	347		(481		)	—		1,016			882
Land - acquisition & development	15,598		(3,983		)	4,105		(6,555		)	9,165
Land - consumer lot loans	4,937		(1,363		)	40		(62		)	3,552
Multi-family	5,280		(1,043		)	171		(592		)	3,816
Commercial real estate	1,956		(747		)	17		4,369			5,595
Commercial & industrial	7,626		(1,145		)	95		10,038			16,614
HELOC	965		(163		)	—		200			1,002
Consumer	2,563		(2,783		)	2,000		1,744			3,524
	$	133,147	$	(34,101	)	$	16,345	$	1,350		$	116,741

The Company recorded a $4,600,000 recovery for loan losses during the quarter ended December 31, 2013, while a $3,600,000 provision was recorded for the same quarter one year ago. The primary reason was the favorable settlement of a lawsuit related to previously purchased loans. In addition, the credit quality of the portfolio has been improving significantly and economic conditions are more favorable.

Non-performing assets (“NPAs”) amounted to $197,910,000, or 1.37%, of total assets at December 31, 2013, compared to $264,219,000, or 2.02%, of total assets one year ago. Acquired loans, including covered loans, are not classified as non-performing loans because, at acquisition, the carrying value of these loans was adjusted to reflect fair value. There was no additional provision for loan losses recorded on acquired or covered loans during the quarter ended December 31, 2013 as the associated discount is adequate to absorb potential losses. Non-accrual loans decreased from $163,116,000 at December 31, 2012, to $114,717,000 at December 31, 2013, a 29.7% decrease.

The Company had net recoveries of $6,017,000 for the quarter ended December 31, 2013, compared with $9,920,000 of net charge-offs for the same quarter one year ago. A loan is charged-off when the loss is estimable and it is confirmed that the borrower will not be able to meet its contractual obligations.

For the period ending December 31, 2013 , $116,552,000 of the allowance was calculated under our general allowance methodology and the remaining $1,606,000 was made up of specific reserves on loans that were deemed to be impaired. For the period ending September 30, 2013, these amounts were $113,268,000 and $3,473,000, respectively. The shift in total allowance allocation from specific reserves to general reserves is due to the Company having already addressed many of the problem loans focused in the speculative construction and land A&D portfolios, combined with an increase in delinquencies and elevated charge-offs in the single family residential portfolio.

The following tables shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of December 31, 2013 and September 30, 2013:



December 31, 2013	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	General Reserve Allocation		Gross Loans Subject to General Reserve (1)		Ratio		Specific Reserve Allocation		Gross Loans Subject to Specific Reserve (1)		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	67,692	$	5,336,460	1.3	%	$	—	$	85,436	—	%
Construction - speculative	7,607		122,994		6.2		535		12,874		4.2
Construction - custom	1,474		333,954		0.4		—		—		—
Land - acquisition & development	6,013		63,875		9.4		1,071		8,200		13.1
Land - consumer lot loans	3,274		104,675		3.1		—		14,531		—
Multi-family	4,109		833,508		0.5		—		8,835		—
Commercial real estate	5,868		416,440		1.4		—		16,921		—
Commercial & industrial	16,505		287,251		5.7		—		17		—
HELOC	943		110,570		0.9		—		1,007		—
Consumer	3,067		44,142		6.9		—		—		—
	$	116,552	$	7,653,869	1.5	%	$	1,606	$	147,821	1.1	%


(1)	Excludes acquired and covered loans



September 30, 2013	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	General Reserve Allocation		Gross Loans Subject to General Reserve (1)		Ratio		Specific Reserve Allocation		Gross Loans Subject to Specific Reserve (1)		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	64,184	$	5,262,159	1.2	%	$	—	$	96,989	—	%
Construction - speculative	7,307		115,554		6.3		1,100		15,224		7.2
Construction - custom	882		302,722		0.3		—		—		—
Land - acquisition & development	6,943		67,521		10.3		2,222		10,254		21.7
Land - consumer lot loans	3,506		107,216		3.3		46		14,455		0.3
Multi-family	3,711		824,279		0.5		105		7,405		1.4
Commercial real estate	5,595		400,789		1.4		—		14,172		—
Commercial & industrial	16,614		256,954		6.5		—		48		—
HELOC	1,002		111,169		0.9		—		1,017		—
Consumer	3,524		47,141		7.5		—		—		—
	$	113,268	$	7,495,504	1.5	%	$	3,473	$	159,564	2.2	%


(1)	Excludes acquired and covered loans

The following tables provide information on loans based on credit quality indicators (defined above) as of December 31, 2013 and September 30, 2013.

Credit Risk Profile by Internally Assigned Grade (excludes covered loans):



December 31, 2013	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,250,349		$	4,572		$	166,975		$	—		$	—		$	5,421,896
Construction - speculative	113,527			3,724			18,617			—			—			135,868
Construction - custom	333,954			—			—			—			—			333,954
Land - acquisition & development	62,085			—			9,990			—			—			72,075
Land - consumer lot loans	118,579			—			627			—			—			119,206
Multi-family	833,758			1,241			7,344			—			—			842,343
Commercial real estate	395,736			17,808			19,817			—			—			433,361
Commercial & industrial	256,375			16,332			1,725			—			—			274,432
HELOC	111,577			—			—			—			—			111,577
Consumer	43,715			—			427			—			—			44,142
	7,519,655			43,677			225,522			—			—			7,788,854

Acquired loans
Single-family residential	13,856			—			—			—			—			13,856
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	794			—			412			—			—			1,206
Land - consumer lot loans	3,261			—			—			—			—			3,261
Multi-family	3,636			—			137			—			—			3,773
Commercial real estate	92,287			3,543			21,062			146			—			117,038
Commercial & industrial	65,882			1,041			5,671			—			—			72,594
HELOC	9,538			—			—			—			—			9,538
Consumer	7,754			—			—			—			—			7,754
	197,008			4,584			27,282			146			—			229,020

Credit impaired acquired loans
Pool 1 - Construction and land A&D	1,434			—			791			—			—			2,225
Pool 2 - Single-family residential	331			—			—			—			—			331
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	10,898			—			—			—			—			10,898
Pool 5 - Commercial real estate	54,278			—			17,563			—			—			71,841
Pool 6 - Commercial & industrial	1,178			3,321			96			2,545			—			7,140
Total credit impaired acquired loans	68,119			3,321			18,450			2,545			—			92,435
Total gross loans	$	7,784,782		$	51,582		$	271,254		$	2,691		$	—		$	8,110,309

Total grade as a % of total gross loans	96.0		%	0.6		%	3.4		%	—		%	—		%



September 30, 2013	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,184,101		$	4,595		$	170,453		$	—		$	—		$	5,359,149
Construction - speculative	99,436			3,199			28,143			—			—			130,778
Construction - custom	302,722			—			—			—			—			302,722
Land - acquisition & development	64,355			775			12,645			—			—			77,775
Land - consumer lot loans	121,039			—			632			—			—			121,671
Multi-family	819,911			2,114			9,659			—			—			831,684
Commercial real estate	373,012			21,652			20,297			—			—			414,961
Commercial & industrial	240,441			1,049			1,709			—			—			243,199
HELOC	112,186			—			—			—			—			112,186
Consumer	46,720			—			421			—			—			47,141
	7,363,923			$	33,384		$	243,959		$	—		$	—		$	7,641,266

Acquired loans
Single-family residential	14,468			—			—			—			—			14,468
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	312			—			1,177			—			—			1,489
Land - consumer lot loans	3,313			—			—			—			—			3,313
Multi-family	3,227			—			687			—			—			3,914
Commercial real estate	105,055			4,190			24,178			—			—			133,423
Commercial & industrial	64,933			1,309			9,084			—			—			75,326
HELOC	10,179			—			—			—			—			10,179
Consumer	8,267			—			—			—			—			8,267
	209,754			5,499			35,126			—			—			250,379

Credit impaired acquired loans
Pool 1 - Construction and land A&D	980			461			955			—			—			2,396
Pool 2 - Single-family residential	333			—			—			—			—			333
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	11,337			—			—			—			—			11,337
Pool 5 - Commercial real estate	52,509			3,155			21,245			—			—			76,909
Pool 6 - Commercial & industrial	881			—			7,044			—			—			7,925
Total credit impaired acquired loans	66,040			3,616			29,244			—			—			98,900
Total gross loans	$	7,639,717		$	42,499		$	308,329		$	—		$	—		$	7,990,545
Total grade as a % of total gross loans	95.6		%	0.5		%	3.9		%	—		%	—		%

Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):



December 31, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,332,821	98.4	%	$	89,075	1.6	%
Construction - speculative	132,815		97.8		3,053		2.2
Construction - custom	333,954		100.0		—		—
Land - acquisition & development	69,262		96.1		2,813		3.9
Land - consumer lot loans	115,658		97.0		3,548		3.0
Multi-family	839,849		99.7		2,494		0.3
Commercial real estate	421,748		97.3		11,613		2.7
Commercial & industrial	273,777		99.8		655		0.2
HELOC	111,106		99.6		471		0.4
Consumer	43,147		97.7		995		2.3
	$	7,674,137	98.5	%	$	114,717	1.5	%



September 30, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,258,688	98.1	%	$	100,460	1.9	%
Construction - speculative	126,218		96.5		4,560		3.5
Construction - custom	302,722		100.0		—		—
Land - acquisition & development	74,872		96.3		2,903		3.7
Land - consumer lot loans	118,334		97.3		3,337		2.7
Multi-family	825,111		99.2		6,573		0.8
Commercial real estate	389,423		97.1		11,736		2.9
Commercial & industrial	256,525		99.8		477		0.2
HELOC	111,923		99.8		263		0.2
Consumer	46,151		97.9		990		0.2
	$	7,509,967	98.3	%	$	131,299	1.7	%

The following table provides information on impaired loan balances and the related allowances by loan types as of December 31, 2013 and September 30, 2013:




December 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	32,815	$	36,758	$	—		$	26,315
Construction - speculative	2,324		2,602		—			1,734
Construction - custom	—		—		—			—
Land - acquisition & development	3,071		10,527		—			2,846
Land - consumer lot loans	3,039		3,184		—			3,697
Multi-family	807		848		—			605
Commercial real estate	21,258		29,657		—			15,872
Commercial & industrial	6,983		30,732		—			5,130
HELOC	392		1,055		—			1,128
Consumer	604		640		—			3,252
	71,293		116,003		—			60,579
With an allowance recorded:
Single-family residential	355,448		361,771		13,973			343,662
Construction - speculative	11,435		11,885		535			9,452
Construction - custom	1,196		1,196		—			660
Land - acquisition & development	9,865		11,104		1,071			5,832
Land - consumer lot loans	13,411		13,794		—			15,550
Multi-family	8,701		8,921		—			5,345
Commercial real estate	18,749		19,686		—			12,097
Commercial & industrial	44		44		—			135
HELOC	1,198		1,198		—			2,504
Consumer	71		71		—			431
	420,118		429,670		15,579		(1)	395,668
Total:
Single-family residential	388,263		398,529		13,973			369,977
Construction - speculative	13,759		14,487		535			11,186
Construction - custom	1,196		1,196		—			660
Land - acquisition & development	12,936		21,631		1,071			8,678
Land - consumer lot loans	16,450		16,978		—			19,247
Multi-family	9,508		9,769		—			5,950
Commercial real estate	40,007		49,343		—			27,969
Commercial & industrial	7,027		30,776		—			5,265
HELOC	1,590		2,253		—			3,632
Consumer	675		711		—			3,683
	$	491,411	$	545,673	$	15,579	(1)	$	456,247

(1)Includes $1,606,000 of specific reserves and $13,973,000 included in the general reserves.



September 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			2013 Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	33,883	$	38,928	$	—		$	21,458
Construction - speculative	3,891		4,099		—			3,339
Construction - custom	—		—		—			—
Land - acquisition & development	3,020		10,705		—			2,548
Land - consumer lot loans	3,186		3,376		—			1,839
Multi-family	4,929		4,929		—			1,734
Commercial real estate	23,537		31,876		—			9,651
Commercial & industrial	7,279		31,197		—			3,123
HELOC	446		946		—			133
Consumer	601		618		—			127
	80,772		126,674		—			43,952
With an allowance recorded:
Single-family residential	335,140		341,910		15,137			330,407
Construction - speculative	8,892		9,342		1,100			12,362
Construction - custom	—		—		—			—
Land - acquisition & development	2,598		4,002		—			8,315
Land - consumer lot loans	12,631		13,014		2,222			12,301
Multi-family	5,958		6,178		46			7,731
Commercial real estate	7,539		8,476		105			9,321
Commercial & industrial	56		56		—			11
HELOC	938		938		—			858
Consumer	33		33		—			9
	373,785		383,949		18,610		(1)	381,315
Total:
Single-family residential	369,023		380,838		15,137			351,865
Construction - speculative	12,783		13,441		1,100			15,701
Construction - custom	—		—		—			—
Land - acquisition & development	5,618		14,707		—			10,863
Land - consumer lot loans	15,817		16,390		2,222			14,140
Multi-family	10,887		11,107		46			9,465
Commercial real estate	31,076		40,352		105			18,972
Commercial & industrial	7,335		31,253		—			3,134
HELOC	1,384		1,884		—			991
Consumer	634		651		—			136
	$	454,557	$	510,623	$	18,610	(1)	$	425,267


(1)	Includes $3,473,000 of specific reserves and $15,137,000 included in the general reserves.