Allowance for Losses on Loans

The following table summarizes the activity in the allowance for loan losses for the quarter ended December 31, 2014 and fiscal year ended September 30, 2014:



Quarter Ended December 31, 2014	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	62,763	$	(1,694	)	$	2,553	$	(8,127	)	$	55,495
Construction - speculative	6,742		(388		)	—		(903		)	5,451
Construction - custom	1,695		—			—		(730		)	965
Land - acquisition & development	5,592		(38		)	1		1,116			6,671
Land - consumer lot loans	3,077		(35		)	—		71			3,113
Multi-family	4,248		—			220		32			4,500
Commercial real estate	7,548		(27		)	28		(1,677		)	5,872
Commercial & industrial	16,527		—			34		6,767			23,328
HELOC	928		—			—		(36		)	892
Consumer	3,227		(427		)	615		(1,002		)	2,413
	$	112,347	$	(2,609	)	$	3,451	$	(4,489	)	$	108,700



Fiscal Year Ended 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

The Company recorded a $5,500,000 reversal for loan losses during the quarter ended December 31, 2014, while a $4,600,000 reversal was recorded for the same quarter one year ago. The credit quality of the portfolio has been improving significantly and economic conditions are more favorable. The primary reason for the reversal in the quarter ended December 31, 2013, was the favorable settlement of a lawsuit related to previously purchased loans. During the fiscal year ended September 30, 2014, there was a transfer of $2,910,000 to establish a reserve for unfunded commitments. This reserve was $1,898,000 as of December 31, 2014.

Non-performing assets (“NPAs”) amounted to $164,317,000, or 1.13%, of total assets at December 31, 2014, compared to $197,910,000, or 1.37%, 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. As of December 31, 2014, $37,136,000 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 quarter ended December 31, 2014. Non-accrual loans decreased from $114,717,000 at December 31, 2013, to $98,352,555 at December 31, 2014, a 14.3% decrease.

The Company had net recoveries of $841,000 for the quarter ended December 31, 2014, compared with $6,017,000 of net recoveries for the same quarter one year ago largely attributed to the lawsuit settlement discussed above. 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 December 31, 2014, $108,700,000 of the allowance was calculated under the formulas contained in our general allowance methodology. 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.

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 December 31, 2014 and September 30, 2014:



December 31, 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	$	55,495	$	5,542,825	1.0	%	$	—	$	63,091	—	%
Construction - speculative	5,451		87,711		6.2		—		7,656		—
Construction - custom	965		191,787		0.5		—		—		—
Land - acquisition & development	6,671		66,953		10.0		—		3,394		—
Land - consumer lot loans	3,113		91,588		3.4		—		12,856		—
Multi-family	4,500		901,277		0.5		—		5,019		—
Commercial real estate	5,872		533,593		1.1		—		26,217		—
Commercial & industrial	23,328		425,724		5.4		—		—		—
HELOC	892		116,544		0.8		—		1,598		—
Consumer	2,413		126,920		1.9		—		9		—
	$	108,700	$	8,084,922	1.4	%	$	—	$	119,840	—	%


(1)	Excludes acquired loans with sufficient discounts and covered loans



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 sufficient discounts and covered 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 tables provide information on loans based on credit quality indicators (defined above) as of December 31, 2014 and September 30, 2014.

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



December 31, 2014	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,484,864		$	2,357		$	120,987		$	—		$	—		$	5,608,208
Construction - speculative	147,979			—			4,471			—			—			152,450
Construction - custom	377,561			—			—			—			—			377,561
Land - acquisition & development	78,428			—			5,572			—			—			84,000
Land - consumer lot loans	103,890			—			602			—			—			104,492
Multi-family	971,647			—			6,105			—			—			977,752
Commercial real estate	566,553			1,955			28,928			—			—			597,436
Commercial & industrial	333,082			13,653			44,592			—			—			391,327
HELOC	117,799			—			248			—			—			118,047
Consumer	126,929			—			—			—			—			126,929
	8,308,732			17,965			211,505			—			—			8,538,202

Acquired loans
Single-family residential	11,163			—			—			—			—			11,163
Land - acquisition & development	479			—			393			—			—			872
Land - consumer lot loans	2,496			—			—			—			—			2,496
Multi-family	2,954			—			—			—			—			2,954
Commercial real estate	83,991			742			7,400			—			—			92,133
Commercial & industrial	45,643			13,001			171			21			—			58,836
HELOC	7,749			—			—			—			—			7,749
Consumer	4,369			—			—			—			—			4,369
	158,844			13,743			7,964			21			—			180,572

Credit impaired acquired loans
Pool 1 - Construction and land A&D	1,244			—			289			—			—			1,533
Pool 2 - Single-family residential	323			—			—			—			—			323
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	9,256			—			—			—			—			9,256
Pool 5 - Commercial real estate	48,716			—			11,571			—			—			60,287
Pool 6 - Commercial & industrial	452			2,803			—			—			—			3,255
Total credit impaired acquired loans	59,991			2,803			11,860			—			—			74,654
Total gross loans	$	8,527,567		$	34,511		$	231,329		$	21		$	—		$	8,793,428

Total grade as a % of total gross loans	97.0		%	0.4		%	2.6		%	—		%	—		%



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
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			1,375			58			—			51,386
HELOC	8,274			—			—			—			—			8,274
Consumer	5,670			—			—			—			—			5,670
	156,954			16,213			8,130			58			—			181,355

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			—			2,833			—			—			3,476
Total credit impaired acquired loans	61,332			2,143			15,865			—			—			79,340
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		%	—		%	—		%

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



December 31, 2014	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,533,792	98.7	%	$	74,416	1.3	%
Construction - speculative	151,121		99.1		1,329		0.9
Construction - custom	377,561		100.0		—		—
Land - acquisition & development	84,000		100.0		—		—
Land - consumer lot loans	102,232		97.8		2,260		2.2
Multi-family	976,733		99.9		1,019		0.1
Commercial real estate	581,466		97.3		15,970		2.7
Commercial & industrial	390,655		99.8		672		0.2
HELOC	116,593		98.8		1,454		1.2
Consumer	125,696		99.0		1,233		1.0
	$	8,439,849	98.8	%	$	98,353	1.2	%



September 30, 2014	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(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	%

The following table provides information on impaired loan balances and the related allowances by loan types as of December 31, 2014 and September 30, 2014:




December 31, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	24,441	$	26,661	$	—		$	21,251
Construction - speculative	1,006		1,201		—			1,040
Land - acquisition & development	790		2,163		—			813
Land - consumer lot loans	1,689		1,787		—			1,268
Multi-family	1,255		1,255		—			1,068
Commercial real estate	27,233		33,352		—			26,902
Commercial & industrial	4,429		16,320		—			3,812
HELOC	1,163		1,948		—			1,075
Consumer	651		836		—			647
	62,657		85,523		—			57,876
With an allowance recorded:
Single-family residential	304,029		309,207		9,964			304,359
Construction - speculative	6,317		7,182		—			6,506
Land - acquisition & development	4,238		5,178		—			4,467
Land - consumer lot loans	12,231		12,614		—			12,446
Multi-family	3,492		3,492		—			3,828
Commercial real estate	18,028		18,896		—			18,072
HELOC	1,486		1,486		—			1,486
Consumer	126		297		—			85
	349,947		358,352		9,964		(1)	351,249
Total:
Single-family residential	328,470		335,868		9,964			325,610
Construction - speculative	7,323		8,383		—			7,546
Land - acquisition & development	5,028		7,341		—			5,280
Land - consumer lot loans	13,920		14,401		—			13,714
Multi-family	4,747		4,747		—			4,896
Commercial real estate	45,261		52,248		—			44,974
Commercial & industrial	4,429		16,320		—			3,812
HELOC	2,649		3,434		—			2,561
Consumer	777		1,133		—			732
	$	412,604	$	443,875	$	9,964	(1)	$	409,125

(1)Included in the general reserves.



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
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
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
HELOC	1,486		1,486		—			1,204
Consumer	43		214		—			79
	388,505		397,067		10,587		(1)	365,664
Total:
Single-family residential	346,364		354,497		10,527			333,191
Construction - speculative	9,159		10,159		60			9,336
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	(1)	$	403,138


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