Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the twelve months ended September 30, 2014 and 2013:



September 30, 2014	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	64,184	$	(8,529	)	$	17,684	$	(10,576	)	$	62,763
Construction - speculative	8,407		(949		)	97		(813		)	6,742
Construction - custom	882		—			—		813			1,695
Land - acquisition & development	9,165		(541		)	3,071		(6,103		)	5,592
Land - consumer lot loans	3,552		(658		)	22		161			3,077
Multi-family	3,816		—			—		432			4,248
Commercial real estate	5,595		(105		)	33		2,025			7,548
Commercial & industrial	16,614		(826		)	5,043		(4,304		)	16,527
HELOC	1,002		(48		)	—		(26		)	928
Consumer	3,524		(3,443		)	3,513		(367		)	3,227
	$	116,741	$	(15,099	)	$	29,463	$	(18,758	)	$	112,347



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 reversal of $15,401,000 of provision for loan losses during the fiscal year ended September 30, 2014, while a $1,350,000 provision was recorded for the year ended September 30, 2013. The credit quality of the portfolio has been improving significantly and economic conditions are more stable.

Non-performing assets (“NPAs”) amounted to $147,311,000, or 1.00%, of total assets at September 30, 2014, compared to $213,616,000, or 1.63%, 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. For the year ended September 30, 2014, $42,590,000 in acquired loans were subject to the general allowance as the discount related to these balances is not sufficient to absorb potential losses. There was no additional provision for loan losses recorded on acquired or covered loans during the years ended September 30, 2014 and 2013. Non-accrual loans decreased from $131,299,000 at September 30, 2013, to $87,431,000 at September 30, 2014, a 33.4% decrease.

The Company had net recoveries of $14,365,000 for the twelve months ended September 30, 2014, compared with $17,756,000 of net charge-offs for the same period 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.

At September 30, 2014, $112,287,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $60,000 was made up of specific reserves on loans that were deemed to be impaired. For the year ending September 30, 2013, $113,268,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $3,473,000 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 Bank 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 show a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of September 30, 2014 and 2013:



September 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	$	62,067	$	5,487,331	1.1	%	$	—	$	72,869	—	%
Construction - speculative	6,682		130,901		5.5		60		9,159		0.7
Construction - custom	1,695		385,464		0.5		—		360		—
Land - acquisition & development	5,592		73,999		7.6		—		3,833		—
Land - consumer lot loans	3,077		95,684		3.2		—		12,939		—
Multi-family	4,248		911,162		0.5		—		6,124		—
Commercial real estate	7,548		563,534		1.4		—		27,802		—
Commercial & industrial	17,223		421,816		4.6		—		—		—
HELOC	928		114,393		0.9		—		1,650		—
Consumer	3,227		132,590		2.4		—		—		—
	$	112,287	$	8,316,874	1.4	%	$	60	$	134,736	—	%

___________________


(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 Company has an asset quality review function that analyzes the Bank's 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 defined 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 tables provide information on loans based on credit quality indicators (defined above) as of September 30, 2014 and 2013:



September 30, 2014	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,426,895		$	2,793		$	130,515		$	—		$	—		$	5,560,203
Construction - speculative	134,950			—			5,110			—			—			140,060
Construction - custom	385,824			—			—			—			—			385,824
Land - acquisition & development	71,692			—			6,140			—			—			77,832
Land - consumer lot loans	108,013			—			610			—			—			108,623
Multi-family	912,728			—			4,558			—			—			917,286
Commercial real estate	557,914			1,971			31,451			—			—			591,336
Commercial & industrial	359,221			14,740			5,265			—			—			379,226
HELOC	115,794			—			248			—			—			116,042
Consumer	132,349			—			241			—			—			132,590
	8,205,380			19,504			184,138			—			—			8,409,022

Acquired loans
Single-family residential	11,716			—			—			—			—			11,716
Construction - speculative	—			—			—			—			—			—
Construction - custom	—			—			—			—			—			—
Land - acquisition & development	503			—			402			—			—			905
Land - consumer lot loans	2,507			—			—			—			—			2,507
Multi-family	2,999			—			—			—			—			2,999
Commercial real estate	88,974			2,571			6,353			—			—			97,898
Commercial & industrial	36,311			13,642			4,208			58			—			54,219
HELOC	8,274			—			—			—			—			8,274
Consumer	5,670			—			—			—			—			5,670
	156,954			16,213			10,963			58			—			184,188

Credit impaired acquired loans
Pool 1 - Construction and land A&D	1,292			—			330			—			—			1,622
Pool 2 - Single-family residential	325			—			—			—			—			325
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	10,194			—			—			—			—			10,194
Pool 5 - Commercial real estate	48,878			2,143			12,702			—			—			63,723
Pool 6 - Commercial & industrial	643			—			—			—			—			643
Total credit impaired acquired loans	61,332			2,143			13,032			—			—			76,507
Total gross loans	$	8,423,666		$	37,860		$	208,133		$	58		$	—		$	8,669,717

Total grade as a % of total gross loans	97.2		%	0.4		%	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

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		%	—		%	—		%

The following tables provide information on non-acquired loans based on payment activity as of September 30, 2014 and 2013:



September 30, 2014	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)				(In thousands)
Single-family residential	$	5,486,136	98.7	%	$	74,067	1.3	%
Construction - speculative	138,583		98.9		1,477		1.1
Construction - custom	385,824		100.0		—		—
Land - acquisition & development	77,021		99.0		811		1.0
Land - consumer lot loans	105,986		97.6		2,637		2.4
Multi-family	915,544		99.8		1,742		0.2
Commercial real estate	586,230		99.1		5,106		0.9
Commercial & industrial	379,219		100.0		7		—
HELOC	115,247		99.3		795		0.7
Consumer	131,801		99.4		789		0.6
	$	8,321,591	99.0	%	$	87,431	1.0	%



September 30, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)				(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 tables provide information on impaired loans based on loan types as of September 30, 2014 and 2013:



September 30, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	24,044	$	26,628	$	—	$	16,843
Construction - speculative	1,603		2,173		—		1,804
Construction - custom	—		—		—		—
Land - acquisition & development	837		2,325		—		1,038
Land - consumer lot loans	974		1,072		—		713
Multi-family	1,111		1,111		—		327
Commercial real estate	13,234		20,085		—		11,720
Commercial & industrial	3,195		17,166		—		3,900
HELOC	1,019		1,730		—		612
Consumer	663		833		—		517
	46,680		73,123		—		37,474
With an allowance recorded:
Single-family residential	322,320		327,869		10,527		316,348
Construction - speculative	7,556		7,986		60		7,532
Construction - custom	—		—		—		—
Land - acquisition & development	4,696		5,636		—		4,114
Land - consumer lot loans	13,002		13,385		—		12,858
Multi-family	5,243		5,463		—		4,957
Commercial real estate	34,159		35,028		—		18,572
Commercial & industrial	—		—		—		—
HELOC	1,486		1,486		—		1,204
Consumer	43		214		—		79
	388,505		397,067		10,587		365,664
Total:
Single-family residential	346,364		354,497		10,527		333,191
Construction - speculative	9,159		10,159		60		9,336
Construction - custom	—		—		—		—
Land - acquisition & development	5,533		7,961		—		5,152
Land - consumer lot loans	13,976		14,457		—		13,571
Multi-family	6,354		6,574		—		5,284
Commercial real estate	47,393		55,113		—		30,292
Commercial & industrial	3,195		17,166		—		3,900
HELOC	2,505		3,216		—		1,816
Consumer	706		1,047		—		596
	$	435,185	$	470,190	$	10,587	$	403,138

____________________


(1)	Includes $60,000 of specific reserves and $10,527,000 included in the general reserves.



September 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			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.