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 June 30, 2013 and fiscal year ended September 30, 2012:



Quarter Ended June 30, 2013	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	77,422	$	(5,969	)	$	2,081	$	(6,148	)	$	67,386
Construction - speculative	7,757		(124		)	109		(9		)	7,733
Construction - custom	262		(481		)	—		498			279
Land - acquisition & development	12,221		(864		)	489		(462		)	11,384
Land - consumer lot loans	3,941		(212		)	1		245			3,975
Multi-family	4,272		—			156		(1,070		)	3,358
Commercial real estate	4,156		—			3		1,132			5,291
Commercial & industrial	8,628		(23		)	18		5,231			13,854
HELOC	1,031		(24		)	—		(13		)	994
Consumer	3,194		(571		)	631		596			3,850
	$	122,884	$	(8,268	)	$	3,488	$	—		$	118,104



Fiscal Year Ended September 30, 2012	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	83,307	$	(53,789	)	$	8,164	$	44,133		$	81,815
Construction - speculative	13,828		(4,916		)	711		2,437			12,060
Construction - custom	623		—			—		(276		)	347
Land - acquisition & development	32,719		(16,978		)	1,341		(1,484		)	15,598
Land - consumer lot loans	5,520		(2,670		)	—		2,087			4,937
Multi-family	7,623		(1,393		)	504		(1,454		)	5,280
Commercial real estate	4,331		(814		)	225		(1,786		)	1,956
Commercial & industrial	5,099		(249		)	2,366		410			7,626
HELOC	1,139		(232		)	66		(8		)	965
Consumer	2,971		(3,538		)	1,480		1,650			2,563
	$	157,160	$	(84,579	)	$	14,857	$	45,709		$	133,147

The Company recorded a $0 provision for loan losses during the quarter ended June 30, 2013, while a $10,367,000 provision was recorded for the same quarter one year ago. Non-performing assets (“NPAs”) amounted to $233,403,000, or 1.79%, of total assets at June 30, 2013, compared to $278,490,000, or 2.07%, 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 June 30, 2013 as the associated discount is adequate to absorb potential losses. Non-accrual loans decreased from $171,033,000 at June 30, 2012, to $148,655,000 at June 30, 2013, a 13.1% decrease. The Company had net charge-offs of $4,780,000 for the quarter ended June 30, 2013, compared with $16,235,000 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. $111,617,000 of the allowance was calculated under our general allowance methodology and the remaining $6,487,000 was made up of specific reserves on loans that were deemed to be impaired at June 30, 2013. For the period ending June 30, 2012, $116,164,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $21,787,000 was made up of specific reserves on loans that were deemed to be impaired. The primary reasons for 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 June 30, 2013 and September 30, 2012:



June 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	$	67,386	$	5,159,449	1.3	%	$	—	$	94,155	—	%
Construction - speculative	6,093		96,589		6.3		1,640		19,774		8.3
Construction - custom	279		237,832		0.1		—		120		—
Land - acquisition & development	7,444		66,516		11.2		3,940		18,732		21.0
Land - consumer lot loans	3,664		112,060		3.3		311		16,685		1.9
Multi-family	3,018		733,836		0.4		340		8,034		4.2
Commercial real estate	5,035		383,358		1.3		256		14,772		1.7
Commercial & industrial	13,854		239,407		5.8		—		62		—
HELOC	994		110,322		0.9		—		1,096		—
Consumer	3,850		51,515		7.5		—		—		—
	$	111,617	$	7,190,884	1.6		$	6,487	$	173,430	3.7

___________________


(1)	Excludes acquired and covered loans



September 30, 2012	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	$	81,737	$	5,694,337	1.4	%	$	78	$	84,584	0.1	%
Construction - speculative	9,079		104,312		8.7		2,981		25,325		11.8
Construction - custom	347		211,690		0.2		—		—		—
Land - acquisition & development	6,697		47,294		14.2		8,901		77,383		11.5
Land - consumer lot loans	4,176		138,666		3.0		761		3,178		23.9
Multi-family	2,818		694,140		0.4		2,462		16,000		15.4
Commercial real estate	1,158		292,550		0.4		798		26,660		3.0
Commercial & industrial	7,624		161,689		4.7		2		1,134		0.2
HELOC	965		112,812		0.9		—		90		—
Consumer	2,563		63,374		4.0		—		—		—
	$	117,164	$	7,520,864	1.6		$	15,983	$	234,354	6.8


(1)	Excludes acquired and covered loans

The following tables provide information on loans based on credit quality indicators (defined in Note A) as of June 30, 2013 and September 30, 2012:

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



June 30, 2013	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,071,745		$	3,134		$	178,725		$	—		$	—		$	5,253,604
Construction - speculative	83,989			771			31,603			—			—			116,363
Construction - custom	237,952			—			—			—			—			237,952
Land - acquisition & development	62,903			819			21,526			—			—			85,248
Land - consumer lot loans	127,867			—			878			—			—			128,745
Multi-family	721,538			1,254			19,078			—			—			741,870
Commercial real estate	361,726			15,312			21,092			—			—			398,130
Commercial & industrial	236,082			916			2,432			—			39			239,469
HELOC	111,418			—			—			—			—			111,418
Consumer	50,747			411			357			—			—			51,515
	7,065,967			22,617			275,691			—			39			7,364,314

Acquired loans
Single-family residential	15,354			—			—			—			—			15,354
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	2,164			—			1,556			—			—			3,720
Land - consumer lot loans	3,615			—			—			—			—			3,615
Multi-family	3,389			—			3,994			—			—			7,383
Commercial real estate	129,891			4,097			28,736			—			—			162,724
Commercial & industrial	77,114			1,793			9,851			—			10			88,768
HELOC	11,466			—			—			—			—			11,466
Consumer	9,035			—			—			—			—			9,035
	252,028			5,890			44,137			—			10			302,065

Credit impaired acquired loans
Pool 1 - Construction and land A&D	1,478			473			533			—			—			2,484
Pool 2 - Single-family residential	335			—			—			—			—			335
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	12,094			—			—			—			—			12,094
Pool 5 - Commercial real estate	51,503			805			25,285			926			—			78,519
Pool 6 - Commercial & industrial	924			3,871			3,451			360			—			8,606
Total credit impaired acquired loans	66,334			5,149			29,269			1,286			—			102,038
Total gross loans	$	7,384,329		$	33,656		$	349,097		$	1,286		$	49		$	7,768,417

Total grade as a % of total gross loans	95.1		%	0.4		%	4.5		%	—		%	—		%



September 30, 2012	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,588,252		$	844		$	189,826		$	—		$	—		$	5,778,922
Construction - speculative	86,126			10,113			33,398			—			—			129,637
Construction - custom	211,690			—			—			—			—			211,690
Land - acquisition & development	73,661			4,637			46,379			—			—			124,677
Land - consumer lot loans	140,006			223			1,615			—			—			141,844
Multi-family	684,649			5,098			20,393			—			—			710,140
Commercial real estate	278,022			16,282			24,906			—			—			319,210
Commercial & industrial	158,421			1,071			3,331			—			—			162,823
HELOC	112,902			—			—			—			—			112,902
Consumer	62,611			354			409			—			—			63,374
	7,396,340			$	38,622		$	320,257		$	—		$	—		$	7,755,219

Credit impaired acquired loans
Pool 1 - Construction and land A&D	2,466			—			3,125			—			—			5,591
Pool 2 - Single-family residential	342			—			—			—			—			342
Pool 3 - Multi-family	—			—			601			—			—			601
Pool 4 - HELOC & other consumer	14,137			—			—			—			—			14,137
Pool 5 - Commercial real estate	53,683			4,308			28,200			963			—			87,154
Pool 6 - Commercial & industrial	1,566			58			733			935			—			3,292
Total credit impaired acquired loans	72,194			4,366			32,659			1,898			—			111,117
Total gross loans	$	7,468,534		$	42,988		$	352,916		$	1,898		$	—		$	7,866,336
Total grade as a % of total gross loans	94.9		%	0.6		%	4.5		%	—		%	—		%

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



June 30, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,149,352	98.0	%	$	104,252	2.0	%
Construction - speculative	112,587		96.8		3,776		3.2
Construction - custom	237,952		100.0		—		—
Land - acquisition & development	75,662		88.8		9,586		11.2
Land - consumer lot loans	125,033		97.1		3,712		2.9
Multi-family	735,217		99.1		6,653		0.9
Commercial real estate	383,782		96.4		14,348		3.6
Commercial & industrial	234,397		97.9		5,072		2.1
HELOC	110,547		99.2		871		0.8
Consumer	51,130		99.3		385		0.7
	$	7,215,659	98.0		$	148,655	2.0



September 30, 2012	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,647,729	97.7	%	$	131,193	2.3	%
Construction - speculative	119,003		91.8		10,634		8.2
Construction - custom	211,151		99.7		539		0.3
Land - acquisition & development	111,200		89.2		13,477		10.8
Land - consumer lot loans	136,695		96.4		5,149		3.6
Multi-family	705,955		99.4		4,185		0.6
Commercial real estate	311,557		97.6		7,653		2.4
Commercial & industrial	162,807		100.0		16		—
HELOC	112,704		99.8		198		0.2
Consumer	62,991		99.4		383		0.6
	$	7,581,792	97.8	%	$	173,427	2.2	%

The following table provides information on impaired loan balances and the related allowances by loan types as of June 30, 2013 and September 30, 2012:



								Average Recorded Investment
June 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			Quarter Ended June 30, 2013		Nine Months Ended June 30, 2013
	(In thousands)
With no related allowance recorded:
Single-family residential	$	37,903	$	42,938	$	—		$	31,322	$	23,985
Construction - speculative	3,808		4,621		—			3,812		3,693
Construction - custom	—		—		—			—		—
Land - acquisition & development	8,177		20,135		—			7,739		7,607
Land - consumer lot loans	3,294		3,909		—			2,886		2,271
Multi-family	4,923		4,923		—			3,274		2,107
Commercial real estate	13,214		15,383		—			9,092		6,793
Commercial & industrial	7,296		31,197		—			3,711		2,091
HELOC	892		1,277		—			487		284
Consumer	36		45		—			18		9
	79,543		124,428		—			62,341		48,840
With an allowance recorded:
Single-family residential	359,124		366,099		20,437			353,027		342,111
Construction - speculative	15,729		16,179		1,640			15,781		15,860
Construction - custom	—		—		—			—		—
Land - acquisition & development	11,721		13,193		3,940			12,055		12,914
Land - consumer lot loans	13,165		13,323		311			13,097		12,894
Multi-family	8,882		9,492		340			9,244		10,456
Commercial real estate	9,846		9,846		256			9,859		9,911
Commercial & industrial	—		—		—			—		—
HELOC	939		939		—			940		839
Consumer	11		11		—			6		3
	419,417		429,082		26,924		(1)	414,009		404,988
Total:
Single-family residential	397,027		409,037		20,437			384,349		366,096
Construction - speculative	19,537		20,800		1,640			19,593		19,553
Construction - custom	—		—		—			—		—
Land - acquisition & development	19,898		33,328		3,940			19,794		20,521
Land - consumer lot loans	16,459		17,232		311			15,983		15,165
Multi-family	13,805		14,415		340			12,518		12,563
Commercial real estate	23,060		25,229		256			18,951		16,704
Commercial & industrial	7,296		$	31,197	—			3,711		2,091
HELOC	1,831		2,216		—			1,427		1,123
Consumer	47		56		—			24		12
	$	498,960	$	553,510	$	26,924	(1)	$	476,350	$	453,828

____________________

(1)Includes $6,487,000 of specific reserves and $20,437,000 included in the general reserves.



September 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	106,955	$	124,342	$	—		$	49,524
Construction - speculative	13,726		16,568		—			13,581
Construction - custom	—		—		—			—
Land - acquisition & development	18,000		30,209		—			16,417
Land - consumer lot loans	1,677		2,185		—			487
Multi-family	8,792		8,991		—			6,935
Commercial real estate	31,190		42,656		—			12,946
Commercial & industrial	1,146		7,363		—			581
HELOC	90		1,066		—			36
Consumer	—		4		—			—
	181,576		233,384		—			100,507
With an allowance recorded:
Single-family residential	317,901		317,901		25,723			305,350
Construction - speculative	12,836		12,836		2,981			12,822
Construction - custom	—		—		—			—
Land - acquisition & development	20,750		20,750		8,901			21,650
Land - consumer lot loans	13,881		13,881		761			13,126
Multi-family	14,153		14,555		2,462			14,279
Commercial real estate	3,722		3,722		798			2,897
Commercial & industrial	—		2		2			22
HELOC	734		734		—			743
Consumer	—		—		—			—
	383,977		384,381		41,628		(1)	370,889
Total:
Single-family residential	424,856		442,243		25,723			354,874
Construction - speculative	26,562		29,404		2,981			26,403
Construction - custom	—		—		—			—
Land - acquisition & development	38,750		50,959		8,901			38,067
Land - consumer lot loans	15,558		16,066		761			13,613
Multi-family	22,945		23,546		2,462			21,214
Commercial real estate	34,912		46,378		798			15,843
Commercial & industrial	1,146		7,365		2			603
HELOC	824		1,800		—			779
Consumer	—		4		—			—
	$	565,553	$	617,765	$	41,628	(1)	$	471,396


(1)	Includes $15,983,000 of specific reserves and $25,645,000 included in the general reserves.