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 (excluding acquired and covered loans) for the quarter ended June 30, 2014 and fiscal year ended September 30, 2013:



Quarter Ended June 30, 2014	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	63,348	$	(2,530	)	$	4,717	$	(3,175	)	$	62,360
Construction - speculative	6,773		—			2		(388		)	6,387
Construction - custom	1,599		—			—		79			1,678
Land - acquisition & development	6,027		—			85		843			6,955
Land - consumer lot loans	2,974		(86		)	—		(26		)	2,862
Multi-family	4,187		—			—		(46		)	4,141
Commercial real estate	5,924		(32		)	24		773			6,689
Commercial & industrial	20,403		(38		)	4		(1,673		)	18,696
HELOC	975		(18		)	—		58			1,015
Consumer	2,721		(696		)	787		555			3,367
	$	114,931	$	(3,400	)	$	5,619	$	(3,000	)	$	114,150



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 $3,000,000 reversal of the provision for loan losses during the quarter ended June 30, 2014, while $0 provision was recorded for the same quarter one year ago. The primary reason for the current period recovery is the credit quality of the portfolio has been improving significantly and economic conditions are more favorable.

Non-performing assets (“NPAs”) amounted to $162,357,000, or 1.10%, of total assets at June 30, 2014, compared to $213,616,000, or 1.63%, of total assets as of September 30, 2013. Acquired loans, including covered loans, are not initially classified as non-performing loans because, at acquisition, the carrying value of these loans is adjusted to reflect fair value. Non-accrual loans decreased from $131,299,000 at September 30, 2013, to $94,226,000 at June 30, 2014, a 28.2% decrease.

The Company had net recoveries of $2,219,000 for the quarter ended June 30, 2014, compared with $4,780,000 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 June 30, 2014, $114,090,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $60,000 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 as compared to prior to the 2009-2011 financial crisis.

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 June 30, 2014 and September 30, 2013:



June 30, 2014	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	$	62,360	$	5,388,306	1.2	%	$	—	$	78,464	—	%
Construction - speculative	6,327		116,420		5.4		60		10,506		0.6
Construction - custom	1,678		372,789		0.5		—		—		—
Land - acquisition & development	6,955		86,030		8.1		—		2,289		—
Land - consumer lot loans	2,862		98,860		2.9		—		13,059		—
Multi-family	4,141		888,346		0.5		—		5,395		—
Commercial real estate	6,689		495,988		1.4		—		27,863		—
Commercial & industrial	18,696		377,271		5.0		—		40		—
HELOC	1,015		116,174		0.9		—		1,004		—
Consumer	3,367		132,061		2.6		—		—		—
	$	114,090	$	8,072,245	1.4	%	$	60	$	138,620	—	%


(1)	Excludes acquired loans with discounts sufficient to absorb potential losses 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 loans with discounts sufficient to absorb potential losses and covered loans

The following tables provide information on loans based on credit quality indicators (defined above) as of June 30, 2014 and September 30, 2013.

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



June 30, 2014	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,325,757		$	2,993		$	138,021		$	—		$	—		$	5,466,771
Construction - speculative	116,002			—			10,924			—			—			126,926
Construction - custom	372,789			—			—			—			—			372,789
Land - acquisition & development	79,820			—			8,499			—			—			88,319
Land - consumer lot loans	111,459			—			460			—			—			111,919
Multi-family	888,836			—			4,906			—			—			893,742
Commercial real estate	490,940			17,097			15,813			—			—			523,850
Commercial & industrial	312,811			16,508			4,123			110			—			333,552
HELOC	116,929			—			248			—			—			117,177
Consumer	131,910			—			152			—			—			132,062
	7,947,253			36,598			183,146			110			—			8,167,107

Non-impaired acquired loans
Single-family residential	12,014			—			—			—			—			12,014
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	663			—			406			—			—			1,069
Land - consumer lot loans	2,654			—			—			—			—			2,654
Multi-family	3,057			—			—			—			—			3,057
Commercial real estate	89,566			2,516			11,133			—			—			103,215
Commercial & industrial	42,571			13,600			4,144			34			—			60,349
HELOC	8,469			—			—			—			—			8,469
Consumer	6,427			—			—			—			—			6,427
	165,421			16,116			15,683			34			—			197,254

Credit-impaired acquired loans
Pool 1 - Construction and land A&D	1,340			—			330			—			—			1,670
Pool 2 - Single-family residential	326			—			—			—			—			326
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	10,716			—			—			—			—			10,716
Pool 5 - Commercial real estate	50,556			2,155			13,645			—			—			66,356
Pool 6 - Commercial & industrial	712			3,162			—			406			—			4,280
Total credit impaired acquired loans	63,650			5,317			13,975			406			—			83,348
Total gross loans	$	8,176,324		$	58,031		$	212,804		$	550		$	—		$	8,447,709

Total grade as a % of total gross loans	96.9		%	0.7		%	2.4		%	—		%	—		%



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

Non-impaired 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):



June 30, 2014	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,388,454	98.6	%	$	78,317	1.4	%
Construction - speculative	124,960		98.5		1,966		1.5
Construction - custom	372,646		100.0		143		—
Land - acquisition & development	86,024		97.4		2,295		2.6
Land - consumer lot loans	110,040		98.3		1,879		1.7
Multi-family	891,639		99.8		2,103		0.2
Commercial real estate	518,408		99.0		5,442		1.0
Commercial & industrial	333,036		99.8		516		0.2
HELOC	116,207		99.2		970		0.8
Consumer	131,467		99.5		595		0.5
	$	8,072,881	98.8	%	$	94,226	1.2	%



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		2.1
	$	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 June 30, 2014 and September 30, 2013:




June 30, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	24,929	$	27,853	$	—		$	22,460
Construction - speculative	1,755		2,378		—			1,762
Construction - custom	360		360		—			180
Land - acquisition & development	1,934		8,931		—			1,794
Land - consumer lot loans	812		910		—			714
Multi-family	130		130		—			130
Commercial real estate	28,024		34,904		—			23,625
Commercial & industrial	3,916		24,183		—			3,809
HELOC	1,154		1,835		—			708
Consumer	439		554		—			380
	63,453		102,038		—			55,562
With an allowance recorded:
Single-family residential	333,814		339,578		10,956			333,527
Construction - speculative	8,751		9,181		60			8,927
Construction - custom	1,196		1,196		—			1,196
Land - acquisition & development	5,092		6,032		—			5,085
Land - consumer lot loans	12,922		13,305		—			12,852
Multi-family	5,266		5,486		—			5,278
Commercial real estate	19,292		20,160		—			16,837
Commercial & industrial	23		23		—			27
HELOC	1,198		1,198		—			1,198
Consumer	236		236		—			152
	387,790		396,395		11,016		(1)	385,079
Total:
Single-family residential	358,743		367,431		10,956			355,987
Construction - speculative	10,506		11,559		60			10,689
Construction - custom	1,556		1,556		—			1,376
Land - acquisition & development	7,026		14,963		—			6,879
Land - consumer lot loans	13,734		14,215		—			13,566
Multi-family	5,396		5,616		—			5,408
Commercial real estate	47,316		55,064		—			40,462
Commercial & industrial	3,939		24,206		—			3,836
HELOC	2,352		3,033		—			1,906
Consumer	675		790		—			532
	$	451,243	$	498,433	$	11,016	(1)	$	440,641

(1)Includes $60,000 of specific reserves and $10,956,000 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.