Allowance for Losses on Loans

The following tables summarize the activity in the allowance for loan losses.



Three Months Ended March 31, 2016	Beginning Allowance		Charge-offs			Recoveries			Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,756	$	(1,026	)	$	111		$	(5,013	)	$	41,828
Construction	7,014		—			(5		)	8,717			15,726
Construction - custom	1,062		—			—			(40		)	1,022
Land - acquisition & development	6,778		—			3,371			(2,897		)	7,252
Land - consumer lot loans	3,001		(268		)	—			(267		)	2,466
Multi-family	5,047		—			—			1,737			6,784
Commercial real estate	10,344		(9		)	992			(3,544		)	7,783
Commercial & industrial	24,096		(331		)	590			(531		)	23,824
HELOC	820		(26		)	—			34			828
Consumer	1,983		(278		)	397			304			2,406
	$	107,901	$	(1,938	)	$	5,456		$	(1,500	)	$	109,919



Three Months Ended March 31, 2015	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	55,495	$	(1,409	)	$	4,122	$	(3,446	)	$	54,762
Construction	5,451		—			75		(81		)	5,445
Construction - custom	965		—			—		3			968
Land - acquisition & development	6,671		—			204		530			7,405
Land - consumer lot loans	3,113		(52		)	34		(60		)	3,035
Multi-family	4,500		—			—		173			4,673
Commercial real estate	5,872		—			453		409			6,734
Commercial & industrial	23,328		(355		)	18		(1,845		)	21,146
HELOC	892		—			—		(42		)	850
Consumer	2,413		(701		)	734		859			3,305
	$	108,700	$	(2,517	)	$	5,640	$	(3,500	)	$	108,323



Six Months Ended March 31, 2016	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,347	$	(2,165	)	$	2,577	$	(5,931	)	$	41,828
Construction	6,680		—			150		8,896			15,726
Construction - custom	990		(60		)	—		92			1,022
Land - acquisition & development	5,781		—			3,406		(1,935		)	7,252
Land - consumer lot loans	2,946		(676		)	—		196			2,466
Multi-family	5,304		—			—		1,480			6,784
Commercial real estate	8,960		(32		)	1,115		(2,260		)	7,783
Commercial & industrial	24,980		(579		)	591		(1,168		)	23,824
HELOC	902		(27		)	21		(68		)	828
Consumer	2,939		(520		)	789		(802		)	2,406
	$	106,829	$	(4,059	)	$	8,649	$	(1,500	)	$	109,919



Six Months Ended March 31, 2015	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	62,763	$	(3,103	)	$	6,675	$	(11,573	)	$	54,762
Construction	6,742		(388		)	75		(984		)	5,445
Construction - custom	1,695		—			—		(727		)	968
Land - acquisition & development	5,592		(38		)	205		1,646			7,405
Land - consumer lot loans	3,077		(87		)	34		11			3,035
Multi-family	4,248		—			220		205			4,673
Commercial real estate	7,548		(27		)	481		(1,268		)	6,734
Commercial & industrial	16,527		(355		)	52		4,922			21,146
HELOC	928		—			—		(78		)	850
Consumer	3,227		(1,128		)	1,349		(143		)	3,305
Covered loans	2,244							(2,244		)	—
	$	114,591	$	(5,126	)	$	9,091	$	(10,233	)	$	108,323

The Company recorded a release of allowance for loan losses of $1,500,000 for the three months ended March 31, 2016, which compares to a release of allowance of $3,949,000 for the three months ended March 31, 2015. The release of allowance for loan losses for the quarter ended March 31, 2016 was a result of continued improvement in credit quality of the loan portfolio offset by net growth in the loan portfolio. The related improvement in the credit quality of the loan portfolio relates to the factors below.

The Company had recoveries, net of charge-offs, of $3,518,000 for the quarter ended March 31, 2016, compared with $3,123,000 of net recoveries for the same quarter one year ago. Non-performing assets were $93,329,000, or 0.64%, of total assets at March 31, 2016, compared to $98,846,000, or 0.67%, and $128,577,000, or 0.88%, of total assets at December 31, 2015 and September 30, 2015, respectively. Non-accrual loans were $54,559,000 at March 31, 2016, compared to $56,748,000 and $67,810,000 at December 31, 2015 and September 30, 2015, respectively.

The reserve for unfunded commitments was $3,085,000 as of March 31, 2016, which is unchanged since September 30, 2015.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $113,004,000, or 1.10% of gross loans, is sufficient to absorb estimated losses inherent in the portfolio.

Acquired loans, including covered loans, are not usually classified as non-performing because at acquisition, the carrying value of these loans is recorded at fair value. As of March 31, 2016, $24,101,000 in acquired loans were subject to the general allowance as the discount related to these balances was no longer sufficient to absorb all of the expected losses.

The following tables show loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves.



March 31, 2016	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans (1)		Ratio		Allowance Allocation		Recorded Investment of Loans (1)		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	40,974	$	5,557,463	0.7	%	$	854	$	28,462	3.0	%
Construction	15,726		391,616		4.0		—		—		—
Construction - custom	1,021		210,809		0.5		—		171		—
Land - acquisition & development	7,221		88,064		8.2		31		1,280		2.4
Land - consumer lot loans	2,466		89,741		2.8		—		1,114		—
Multi-family	6,774		1,070,178		0.6		11		1,522		0.7
Commercial real estate	7,643		810,343		0.9		140		12,602		1.1
Commercial & industrial	23,824		829,394		2.9		—		—		—
HELOC	828		128,295		0.7		—		566		—
Consumer	2,406		164,612		1.5		—		—		—
	$	108,883	$	9,340,515	1.2	%	$	1,036	$	45,717	2.3	%


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



September 30, 2015	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans (1)		Ratio		Allowance Allocation		Recorded Investment of Loans (1)		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	47,073	$	5,595,752	0.8	%	$	275	$	51,718	0.5	%
Construction	6,680		124,679		5.4		—		5,441		—
Construction - custom	990		205,692		0.5		—		—		—
Land - acquisition & development	5,781		72,602		8.0		—		2,198		—
Land - consumer lot loans	2,946		93,103		3.2		—		10,824		—
Multi-family	5,304		1,062,194		0.5		—		5,348		—
Commercial real estate	8,960		844,691		1.1		—		8,826		—
Commercial & industrial	24,980		643,577		3.9		—		—		—
HELOC	902		126,594		0.7		—		1,072		—
Consumer	2,938		194,569		1.5		—		86		—
	$	106,554	$	8,963,453	1.2	%	$	275	$	85,513	0.3	%

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

As of March 31, 2016, $108,883,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $1,036,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2015, $106,554,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $275,000 was specific reserves on loans deemed to be individually impaired.

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 collection or 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 tables provide information on loans based on risk rating categories as defined above.



March 31, 2016	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,547,231		$	—		$	71,723		$	—		$	—		$	5,618,954
Construction	774,540			7,500			3,806			—			—			785,846
Construction - custom	395,010			—			3,787			—			—			398,797
Land - acquisition & development	93,668			—			7,937			—			—			101,605
Land - consumer lot loans	99,081			—			1,775			—			—			100,856
Multi-family	1,065,161			3,613			4,448			—			—			1,073,222
Commercial real estate	813,405			8,281			11,884			—			—			833,570
Commercial & industrial	747,693			3,975			53,604			—			—			805,272
HELOC	129,656			—			803			—			—			130,459
Consumer	164,292			—			380			—			—			164,672
	9,829,737			23,369			160,147			—			—			10,013,253

Non-impaired acquired loans	143,164			—			9,408			—			—			152,572
Credit-impaired acquired loans	73,699			—			32,938			—			—			106,637
Covered loans	33,649			—			562			—			—			34,211
Total gross loans	$	10,080,249		$	23,369		$	203,055		$	—		$	—		$	10,306,673

Total grade as a % of total gross loans	97.8		%	0.2		%	2.0		%	—		%	—		%



September 30, 2015	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,558,700		$	—		$	93,145		$	—		$	—		$	5,651,845
Construction	197,935			—			2,574			—			—			200,509
Construction - custom	396,307			—			—			—			—			396,307
Land - acquisition & development	89,656			—			4,552			—			—			94,208
Land - consumer lot loans	103,569			—			420			—			—			103,989
Multi-family	1,118,673			865			6,184			—			—			1,125,722
Commercial real estate	971,510			4,360			10,400			—			—			986,270
Commercial & industrial	575,034			1,496			36,306			—			—			612,836
HELOC	127,398			—			248			—			—			127,646
Consumer	194,451			—			204			—			—			194,655
	9,333,233			6,721			154,033			—			—			9,493,987

Non-impaired acquired loans	149,891			—			16,402			—			—			166,293
Credit-impaired acquired loans	61,019			—			26,062			—			—			87,081
Covered loans	61,776			—			14,133			—			—			75,909
Total gross loans	$	9,605,919		$	6,721		$	210,630		$	—		$	—		$	9,823,270

Total grade as a % of total gross loans	97.8		%	0.1		%	2.1		%	—		%	—		%

The following tables provide information on loans (excluding acquired and covered loans) based on borrower payment activity.



March 31, 2016	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,576,559	99.2	%	$	42,395	0.8	%
Construction	785,846		100.0		—		—
Construction - custom	398,730		100.0		67		—
Land - acquisition & development	101,128		99.5		477		0.5
Land - consumer lot loans	99,916		99.1		940		0.9
Multi-family	1,071,702		99.9		1,520		0.1
Commercial real estate	825,869		99.1		7,701		0.9
Commercial & industrial	804,676		99.9		596		0.1
HELOC	129,905		99.6		554		0.4
Consumer	164,363		99.8		309		0.2
	$	9,958,694	99.5	%	$	54,559	0.5	%



September 30, 2015	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,592,771	99.0	%	$	59,074	1.0	%
Construction	199,755		99.6		754		0.4
Construction - custom	395,575		99.8		732		0.2
Land - acquisition & development	94,208		100.0		—		—
Land - consumer lot loans	102,716		98.8		1,273		1.2
Multi-family	1,123,165		99.8		2,558		0.2
Commercial real estate	984,093		99.8		2,176		0.2
Commercial & industrial	612,836		100.0		—		—
HELOC	127,083		99.6		563		0.4
Consumer	193,975		99.7		680		0.3
	$	9,426,177	99.3	%	$	67,810	0.7	%

The following tables provide information on impaired loan balances and the related allowances by loan types.




March 31, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	11,818	$	13,412	$	—		$	10,345
Construction - custom	699		759		—			449
Land - acquisition & development	188		9,086		—			365
Land - consumer lot loans	548		634		—			418
Multi-family	1,044		4,793		—			675
Commercial real estate	5,797		6,428		—			4,891
Commercial & industrial	182		6,611		—			567
HELOC	439		830		—			330
Consumer	116		501		—			218
	20,831		43,054		—			18,258
With an allowance recorded:
Single-family residential	233,544		237,663		4,277			234,260
Land - acquisition & development	1,632		2,834		24			1,867
Land - consumer lot loans	9,981		11,037		7			10,496
Multi-family	1,522		1,522		11			1,527
Commercial real estate	22,139		24,586		140			22,876
HELOC	1,396		1,398		—			1,394
Consumer	94		284		—			96
	270,308		279,324		4,459		(1)	272,516
Total:
Single-family residential	245,362		251,075		4,277			244,605
Construction - custom	699		759		—			449
Land - acquisition & development	1,820		11,920		24			2,232
Land - consumer lot loans	10,529		11,671		7			10,914
Multi-family	2,566		6,315		11			2,202
Commercial real estate	27,936		31,014		140			27,767
Commercial & industrial	182		6,611		—			567
HELOC	1,835		2,228		—			1,724
Consumer	210		785		—			314
	$	291,139	$	322,378	$	4,459	(1)	$	290,774


(1)	Includes $1,036,000 of specific reserves and $3,423,000 included in the general reserves.



September 30, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	17,250	$	19,644	$	—		$	14,069
Construction	453		2,151		—			471
Construction - custom	554		554		—			182
Land - acquisition & development	2,570		9,426		—			926
Land - consumer lot loans	727		814		—			544
Multi-family	3,770		7,054		—			1,545
Commercial real estate	9,427		15,620		—			8,130
Commercial & industrial	2,955		13,066		—			2,681
HELOC	683		1,532		—			536
Consumer	477		703		—			390
	38,866		70,564		—			29,474
With an allowance recorded:
Single-family residential	259,461		263,268		6,678			260,028
Construction	4,988		5,778		—			5,432
Land - acquisition & development	2,486		3,426		—			3,478
Land - consumer lot loans	11,289		11,554		—			11,324
Multi-family	3,823		3,823		—			3,732
Commercial real estate	19,124		21,078		—			18,886
HELOC	1,443		1,443		—			1,359
Consumer	99		289		—			102
	302,713		310,659		6,678		(1)	304,341
Total:
Single-family residential	276,711		282,912		6,678			274,097
Construction	5,441		7,929		—			5,903
Construction - custom	554		554		—			182
Land - acquisition & development	5,056		12,852		—			4,404
Land - consumer lot loans	12,016		12,368		—			11,868
Multi-family	7,593		10,877		—			5,277
Commercial real estate	28,551		36,698		—			27,016
Commercial & industrial	2,955		13,066		—			2,681
HELOC	2,126		2,975		—			1,895
Consumer	576		992		—			492
	$	341,579	$	381,223	$	6,678	(1)	$	333,815


(1)	Includes $275,000 of specific reserves and $6,403,000 included in the general reserves.