Allowance for Losses on Loans

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



Three Months Ended June 30, 2018	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	34,144	$	(299	)	$	283	$	273		$	34,401
Construction	27,389		—			—		2,744			30,133
Construction - custom	2,081		—			—		(67		)	2,014
Land - acquisition & development	7,622		(12		)	2,699		(2,609		)	7,700
Land - consumer lot loans	2,853		(1		)	35		20			2,907
Multi-family	7,982		—			—		109			8,091
Commercial real estate	11,588		—			91		(100		)	11,579
Commercial & industrial	29,330		(3,317		)	433		1,069			27,515
HELOC	802		—			—		9			811
Consumer	3,785		(45		)	223		(448		)	3,515
	$	127,576	$	(3,674	)	$	3,764	$	1,000		$	128,666



Three Months Ended June 30, 2017	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	37,164	$	(267	)	$	81	$	1,133		$	38,111
Construction	25,061		—			—		(3,195		)	21,866
Construction - custom	1,176		—			—		714			1,890
Land - acquisition & development	6,669		—			863		(315		)	7,217
Land - consumer lot loans	2,513		—			118		(83		)	2,548
Multi-family	7,929		—			—		(17		)	7,912
Commercial real estate	10,772		—			164		411			11,347
Commercial & industrial	28,365		—			154		653			29,172
HELOC	826		—			1		50			877
Consumer	1,447		(144		)	282		(296		)	1,289
	$	121,922	$	(411	)	$	1,663	$	(945	)	$	122,229



Nine Months Ended June 30, 2018	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	36,892	$	(1,049	)	$	615	$	(2,057	)	$	34,401
Construction	24,556		—			—		5,577			30,133
Construction - custom	1,944		(50		)	—		120			2,014
Land - acquisition & development	6,829		(12		)	7,278		(6,395		)	7,700
Land - consumer lot loans	2,649		(67		)	35		290			2,907
Multi-family	7,862		—			—		229			8,091
Commercial real estate	11,818		(36		)	92		(295		)	11,579
Commercial & industrial	28,524		(3,433		)	603		1,821			27,515
HELOC	855		(1		)	—		(43		)	811
Consumer	1,144		(217		)	785		1,803			3,515
	$	123,073	$	(4,865	)	$	9,408	$	1,050		$	128,666



Nine Months Ended June 30, 2017	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	37,796	$	(763	)	$	455	$	623		$	38,111
Construction	19,838		—			—		2,028			21,866
Construction - custom	1,080		(3		)	—		813			1,890
Land - acquisition & development	6,023		(63		)	9,092		(7,835		)	7,217
Land - consumer lot loans	2,535		(17		)	368		(338		)	2,548
Multi-family	6,925		—			—		987			7,912
Commercial real estate	8,588		(11		)	1,684		1,086			11,347
Commercial & industrial	28,008		(163		)	1,096		231			29,172
HELOC	813		(90		)	2		152			877
Consumer	1,888		(798		)	975		(776		)	1,289
	$	113,494	$	(1,908	)	$	13,672	$	(3,029	)	$	122,229

The Company recorded a provision for loan losses of $1,000,000 for the three months ended June 30, 2018, compared to no provision for loan losses for the three months ended June 30, 2017. A provision for loan losses of $50,000 and a release of allowance for loan losses of $1,600,000 was recorded during the nine months ended June 30, 2018 and June 30, 2017, respectively. Reserving for new loan originations as the loan portfolio grows has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $90,000 for the three months ended June 30, 2018, compared to net recoveries of $1,252,000 during the three months ended June 30, 2017. Recoveries, net of charge-offs, totaled $4,543,000 for the nine months ended June 30, 2018, compared to net recoveries of $11,764,000 during the nine months ended June 30, 2017.

Non-performing assets were $71,859,000, or 0.46%, of total assets at June 30, 2018, compared to $70,238,000, or 0.46%, of total assets at September 30, 2017. Non-accrual loans were $60,584,000 at June 30, 2018, compared to $49,580,000 at September 30, 2017. Delinquencies, as a percent of total loans, were 0.40% at June 30, 2018, compared to 0.40% at September 30, 2017.

The reserve for unfunded commitments was $6,750,000 as of June 30, 2018, which is a decrease from $7,750,000 at September 30, 2017.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $135,416,000, or 1.06% of gross loans as of June 30, 2018, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments.

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



June 30, 2018	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands, except ratio data)						(In thousands, except ratio data)
Single-family residential	$	34,401	$	5,726,737	0.6	%	$	—	$	24,139	—	%
Construction	30,133		1,007,676		3.0		—		4,563		—
Construction - custom	2,014		285,858		0.7		—		—		—
Land - acquisition & development	7,700		118,323		6.5		—		3,184		—
Land - consumer lot loans	2,907		97,310		3.0		—		833		—
Multi-family	8,086		1,343,468		0.6		5		3,045		0.2
Commercial real estate	11,502		1,388,029		0.8		77		31,805		0.2
Commercial & industrial	27,515		1,087,664		2.5		—		45,400		—
HELOC	811		134,522		0.6		—		562		—
Consumer	3,515		188,004		1.9		—		26		—
	$	128,584	$	11,377,591	1.1	%	$	82	$	113,557	0.1	%



September 30, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands, except ratio data)						(In thousands, except ratio data)
Single-family residential	$	36,892	$	5,713,576	0.7	%	$	—	$	5,552	—	%
Construction	24,556		793,958		3.1		—		—		—
Construction - custom	1,944		277,495		0.7		—		105		—
Land - acquisition & development	6,828		104,767		6.5		1		89		1.0
Land - consumer lot loans	2,649		96,337		2.8		—		171		—
Multi-family	7,857		1,302,625		0.6		5		493		1.0
Commercial real estate	11,698		1,391,668		0.8		120		21,765		0.6
Commercial & industrial	28,524		1,093,210		2.6		—		81		—
HELOC	855		141,689		0.6		—		215		—
Consumer	1,144		84,887		1.4		—		82		—
	$	122,947	$	11,000,212	1.1	%	$	126	$	28,553	0.4	%

As of June 30, 2018, $128,584,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $82,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2017, $122,947,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $126,000 was specific reserves on loans deemed to be individually impaired.

The Company has an asset quality review function that analyzes its loan portfolio and reports the results of the review to its 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, 2018	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands, except ratio data)
Loan type
Single-family residential	$	5,713,075		$	—		$	32,523		$	—		$	—		$	5,745,598
Construction	1,880,415			55			4,564			—			—			1,885,034
Construction - custom	612,688			—			—			—			—			612,688
Land - acquisition & development	147,864			—			3,072			—			—			150,936
Land - consumer lot loans	102,476			—			642			—			—			103,118
Multi-family	1,343,950			—			2,584			—			—			1,346,534
Commercial real estate	1,402,581			4,900			27,937			—			—			1,435,418
Commercial & industrial	1,084,175			9,582			39,318			—			—			1,133,075
HELOC	136,122			—			644			—			—			136,766
Consumer	188,093			—			32			—			—			188,125
Total gross loans	$	12,611,439		$	14,537		$	111,316		$	—		$	—		$	12,737,292

Total grade as a % of total gross loans	99.0		%	0.1		%	0.9		%	—		%	—		%



September 30, 2017	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands, except ratio data)
Loan type
Single-family residential	$	5,671,229		$	—		$	39,775		$	—		$	—		$	5,711,004
Construction	1,594,926			—			3,070			—			—			1,597,996
Construction - custom	602,540			—			91			—			—			602,631
Land - acquisition & development	123,028			207			1,073			—			—			124,308
Land - consumer lot loans	103,787			—			618			—			—			104,405
Multi-family	1,295,261			5,795			2,092			—			—			1,303,148
Commercial real estate	1,391,996			5,944			36,670			—			—			1,434,610
Commercial & industrial	1,054,972			14,814			23,574			—			—			1,093,360
HELOC	144,229			—			621			—			—			144,850
Consumer	84,984			—			91			—			—			85,075
Total gross loans	$	12,066,952		$	26,760		$	107,675		$	—		$	—		$	12,201,387

Total grade as a % of total gross loans	98.9		%	0.2		%	0.9		%	—		%	—		%

The following tables provide information on gross loans based on borrower payment activity.



June 30, 2018	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands, except ratio data)
Single-family residential	$	5,719,479	99.5	%	$	26,119	0.5	%
Construction	1,883,193		99.9		1,841		0.1
Construction - custom	612,688		100.0		—		—
Land - acquisition & development	149,179		98.8		1,757		1.2
Land - consumer lot loans	102,476		99.4		642		0.6
Multi-family	1,346,534		100.0		—		—
Commercial real estate	1,425,734		99.3		9,684		0.7
Commercial & industrial	1,113,199		98.2		19,876		1.8
HELOC	136,129		99.5		637		0.5
Consumer	188,097		100.0		28		—
	$	12,676,708	99.5	%	$	60,584	0.5	%



September 30, 2017	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands, except ratio data)
Single-family residential	$	5,683,074	99.5	%	$	27,930	0.5	%
Construction	1,597,996		100.0		—		—
Construction - custom	602,540		99.9		91		0.1
Land - acquisition & development	124,012		99.8		296		0.2
Land - consumer lot loans	103,800		99.4		605		0.6
Multi-family	1,303,009		99.9		139		0.1
Commercial real estate	1,422,795		99.2		11,815		0.8
Commercial & industrial	1,085,278		99.3		8,082		0.7
HELOC	144,319		99.6		531		0.4
Consumer	84,984		99.9		91		0.1
	$	12,151,807	99.6	%	$	49,580	0.4	%

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



June 30, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment (Year-To-Date)
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	22,114	$	23,310	$	—		$	21,944
Construction	4,843		4,933		—			2,928
Construction - custom	—		—		—			37
Land - acquisition & development	3,073		3,120		—			1,741
Land - consumer lot loans	455		490		—			337
Multi-family	2,606		2,606		—			1,403
Commercial real estate	26,818		31,372		—			22,338
Commercial & industrial	35,427		35,736		—			19,507
HELOC	562		655		—			486
Consumer	26		68		—			56
	95,924		102,290		—			70,777
Impaired loans with an allowance recorded:
Single-family residential	153,356		156,644		2,792			167,211
Land - acquisition & development	—		—		—			23
Land - consumer lot loans	5,136		5,502		—			6,832
Multi-family	461		461		5			477
Commercial real estate	7,162		7,975		77			11,492
Commercial & industrial	3,924		6,964		—			4,547
HELOC	1,491		1,575		—			1,500
Consumer	73		73		—			87
	171,603		179,194		2,874		(1)	192,169
Total impaired loans:
Single-family residential	175,470		179,954		2,792			189,155
Construction	4,843		4,933		—			2,928
Construction - custom	—		—		—			37
Land - acquisition & development	3,073		3,120		—			1,764
Land - consumer lot loans	5,591		5,992		—			7,169
Multi-family	3,067		3,067		5			1,880
Commercial real estate	33,980		39,347		77			33,830
Commercial & industrial	39,351		42,700		—			24,054
HELOC	2,053		2,230		—			1,986
Consumer	99		141		—			143
	$	267,527	$	281,484	$	2,874	(1)	$	262,946


(1)	Includes $82,000 of specific reserves and $2,792,000 included in the general reserves.



September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment (Year-To-Date)
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	21,325	$	23,880	$	—		$	19,371
Construction - custom	148		165		—			231
Land - acquisition & development	330		8,208		—			176
Land - consumer lot loans	208		330		—			431
Multi-family	139		3,231		—			748
Commercial real estate	12,890		22,487		—			11,466
Commercial & industrial	8,279		14,321		—			7,425
HELOC	490		1,212		—			487
Consumer	88		1,433		—			57
	43,897		75,267		—			40,392
Impaired loans with an allowance recorded:
Single-family residential	181,941		186,167		4,030			204,723
Land - acquisition & development	90		90		1			576
Land - consumer lot loans	7,949		8,526		—			8,976
Multi-family	493		493		5			1,024
Commercial real estate	15,079		16,707		120			16,991
Commercial & industrial	—		—		—			297
HELOC	1,728		1,806		—			1,451
Consumer	97		284		—			100
	207,377		214,073		4,156		(1)	234,138
Total impaired loans:
Single-family residential	203,266		210,047		4,030			224,094
Construction - custom	148		165		—			231
Land - acquisition & development	420		8,298		1			752
Land - consumer lot loans	8,157		8,856		—			9,407
Multi-family	632		3,724		5			1,772
Commercial real estate	27,969		39,194		120			28,457
Commercial & industrial	8,279		14,321		—			7,722
HELOC	2,218		3,018		—			1,938
Consumer	185		1,717		—			157
	$	251,274	$	289,340	$	4,156	(1)	$	274,530


(1)	Includes $126,000 of specific reserves and $4,030,000 included in the general reserves.