Allowance for Losses on Loans

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



Three Months Ended June 30, 2016	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	41,828	$	(634	)	$	162	$	(675	)	$	40,681
Construction	15,726		—			207		1,729			17,662
Construction - custom	1,022		—			60		(54		)	1,028
Land - acquisition & development	7,252		(31		)	2,741		(3,240		)	6,722
Land - consumer lot loans	2,466		(26		)	5		59			2,504
Multi-family	6,784		—			—		137			6,921
Commercial real estate	7,783		—			454		(94		)	8,143
Commercial & industrial	23,824		(150		)	6		716			24,396
HELOC	828		(27		)	—		55			856
Consumer	2,406		(307		)	437		(433		)	2,103
	$	109,919	$	(1,175	)	$	4,072	$	(1,800	)	$	111,016



Three Months Ended June 30, 2015	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	54,762	$	(1,698	)	$	3,878	$	(4,938	)	$	52,004
Construction	5,445		—			—		488			5,933
Construction - custom	968		—			—		17			985
Land - acquisition & development	7,405		—			1		(1,634		)	5,772
Land - consumer lot loans	3,035		(276		)	187		53			2,999
Multi-family	4,673		—			—		362			5,035
Commercial real estate	6,734		(1,592		)	230		1,896			7,268
Commercial & industrial	21,146		(2,106		)	896		1,726			21,662
HELOC	850		(26		)	1		39			864
Consumer	3,305		(853		)	1,045		(408		)	3,089
	$	108,323	$	(6,551	)	$	6,238	$	(2,399	)	$	105,611



Nine Months Ended June 30, 2016	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,347	$	(2,800	)	$	2,739	$	(6,605	)	$	40,681
Construction	6,680		—			357		10,625			17,662
Construction - custom	990		(60		)	60		38			1,028
Land - acquisition & development	5,781		(31		)	6,148		(5,176		)	6,722
Land - consumer lot loans	2,946		(701		)	5		254			2,504
Multi-family	5,304		—			—		1,617			6,921
Commercial real estate	8,960		(32		)	1,569		(2,354		)	8,143
Commercial & industrial	24,980		(729		)	597		(452		)	24,396
HELOC	902		(54		)	21		(13		)	856
Consumer	2,939		(827		)	1,226		(1,235		)	2,103
	$	106,829	$	(5,234	)	$	12,722	$	(3,301	)	$	111,016



Nine Months Ended June 30, 2015	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	62,763	$	(4,801	)	$	10,553	$	(16,511	)	$	52,004
Construction	6,742		(388		)	75		(496		)	5,933
Construction - custom	1,695		—			—		(710		)	985
Land - acquisition & development	5,592		(38		)	206		12			5,772
Land - consumer lot loans	3,077		(363		)	221		64			2,999
Multi-family	4,248		—			220		567			5,035
Commercial real estate	7,548		(1,619		)	711		628			7,268
Commercial & industrial	16,527		(2,461		)	948		6,648			21,662
HELOC	928		(26		)	1		(39		)	864
Consumer	3,227		(1,981		)	2,394		(551		)	3,089
Covered loans	2,244							(2,244		)	—
	$	114,591	$	(11,677	)	$	15,329	$	(12,632	)	$	105,611

The Company recorded a release of allowance for loan losses of $1,650,000 for the three months ended June 30, 2016, which compares to a release of allowance of $1,932,000 for the three months ended June 30, 2015. The release of allowance for loan losses for the quarter ended June 30, 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 $2,897,000 for the quarter ended June 30, 2016, compared with net charge-offs of $313,000 for the same quarter one year ago. Non-performing assets were $79,031,000, or 0.53%, of total assets at June 30, 2016, compared to $93,329,000, or 0.64%, and $128,577,000, or 0.88%, of total assets at March 31, 2016 and September 30, 2015, respectively. Non-accrual loans were $47,349,000 at June 30, 2016, compared to $54,559,000 and $67,810,000 at March 31, 2016 and September 30, 2015, respectively. Delinquencies, as a percent of total loans, were 0.73% at June 30, 2016, compared to 0.90% and 0.88% at March 31, 2016 and September 30, 2015, respectively

The reserve for unfunded commitments was $3,235,000 as of June 30, 2016, which is an increase from $3,085,000 at September 30, 2015.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $114,251,000, or 1.08% of gross loans, is sufficient to absorb estimated inherent losses.

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 June 30, 2016, $21,158,000 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.



June 30, 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	$	39,986	$	5,547,373	0.7	%	$	693	$	24,451	2.8	%
Construction	17,662		442,437		4.0		—		—		—
Construction - custom	1,027		211,215		0.5		—		1,125		—
Land - acquisition & development	6,710		87,099		7.7		13		1,454		0.9
Land - consumer lot loans	2,504		90,983		2.8		—		1,238		—
Multi-family	6,911		1,091,709		0.6		11		1,513		0.7
Commercial real estate	7,963		848,187		0.9		180		21,313		0.8
Commercial & industrial	24,397		832,429		2.9		—		—		—
HELOC	856		132,869		0.6		—		468		—
Consumer	2,103		154,107		1.4		—		—		—
	$	110,119	$	9,438,408	1.2	%	$	897	$	51,562	1.7	%


(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 June 30, 2016, $110,119,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $897,000 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.



June 30, 2016	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,533,837		$	—		$	59,181		$	—		$	—		$	5,593,018
Construction	1,012,203			—			4,102			—			—			1,016,305
Construction - custom	408,538			—			578			—			—			409,116
Land - acquisition & development	94,830			—			7,019			—			—			101,849
Land - consumer lot loans	100,173			—			1,558			—			—			101,731
Multi-family	1,087,363			3,252			4,121			—			—			1,094,736
Commercial real estate	861,771			11,345			13,841			—			—			886,957
Commercial & industrial	755,361			6,532			48,549			—			—			810,442
HELOC	133,939			—			796			—			—			134,735
Consumer	154,148			—			113			—			—			154,261
	10,142,163			21,129			139,858			—			—			10,303,150

Non-impaired acquired loans	132,710			47			7,612			—			—			140,369
Credit-impaired acquired loans	65,106			—			31,381			—			4			96,491
Covered loans	31,849			—			342			—			—			32,191
Total gross loans	$	10,371,828		$	21,176		$	179,193		$	—		$	4		$	10,572,201

Total grade as a % of total gross loans	98.1		%	0.2		%	1.7		%	—		%	—		%



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.



June 30, 2016	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,556,312	99.3	%	$	36,707	0.7	%
Construction	1,016,305		100.0		—		—
Construction - custom	408,610		99.9		506		0.1
Land - acquisition & development	101,422		99.6		427		0.4
Land - consumer lot loans	100,626		98.9		1,105		1.1
Multi-family	1,093,495		99.9		1,238		0.1
Commercial real estate	880,661		99.3		6,297		0.7
Commercial & industrial	809,921		99.9		521		0.1
HELOC	134,188		99.6		548		0.4
Consumer	154,261		100.0		—		—
	$	10,255,801	99.5	%	$	47,349	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.




June 30, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	9,602	$	11,287	$	—		$	8,491
Construction - custom	578		578		—			289
Land - acquisition & development	164		8,393		—			164
Land - consumer lot loans	650		747		—			599
Multi-family	428		4,177		—			736
Commercial real estate	5,673		6,588		—			5,697
Commercial & industrial	906		7,627		—			544
HELOC	368		483		—			354
Consumer	33		483		—			17
	18,402		40,363		—			16,891
Impaired loans with an allowance recorded:
Single-family residential	223,533		227,633		4,202			224,274
Land - acquisition & development	1,454		2,656		8			1,543
Land - consumer lot loans	9,672		10,734		5			9,748
Multi-family	1,513		1,513		11			1,518
Commercial real estate	20,490		24,316		180			19,816
HELOC	1,379		1,394		—			1,388
Consumer	95		285		—			95
	258,136		268,531		4,406		(1)	258,382
Total impaired loans:
Single-family residential	233,135		238,920		4,202			232,765
Construction - custom	578		578		—			289
Land - acquisition & development	1,618		11,049		8			1,707
Land - consumer lot loans	10,322		11,481		5			10,347
Multi-family	1,941		5,690		11			2,254
Commercial real estate	26,163		30,904		180			25,513
Commercial & industrial	906		7,627		—			544
HELOC	1,747		1,877		—			1,742
Consumer	128		768		—			112
	$	276,538	$	308,894	$	4,406	(1)	$	275,273


(1)	Includes $897,000 of specific reserves and $3,509,000 included in the general reserves.



September 30, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans 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
Impaired loans 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 impaired loans:
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.