Covered Assets

Covered assets represent loans and real estate held for sale acquired from the FDIC that are subject to loss sharing agreements and these net balances were $81,745,000 as of June 30, 2015 compared to $200,558,000 as of September 30, 2014. The FDIC loss share coverage for the acquired commercial loans from the former Horizon Bank of $47,774,000 expired as of March 31, 2015 with final reporting as of April 30, 2015 and these loans were transferred to non-covered loans receivable. Recoveries to the extent that claims were made will continue to be shared through March 31, 2018. As of June 30, 2015, there were $38,712,000 of commercial loans from the former Home Valley Bank which are scheduled to have their loss share expire on September 30, 2015. The FDIC loss share coverage for single family residential loans will continue for another five years.

Changes in the net carrying amount and accretable yield for acquired impaired and non-impaired covered loans for the year to date period ended June 30, 2015 and the fiscal year ended September 30, 2014 were as follows:



June 30, 2015	Acquired Impaired						Acquired Non-impaired
	Accretable Yield			Net Carrying Amount of Loans			Accretable Yield			Net Carrying Amount of Loans
	(In thousands)
Balance at beginning of period	$	64,534		$	78,055		$	10,259		$	98,422
Transfer to non-covered	(23,167		)	(15,866		)	(1,482		)	(33,649		)
Reclassification from nonaccretable balance, net	6,307			—			—			—
Accretion	(11,577		)	11,577			(4,358		)	4,358
Transfers to REO	—			(1,893		)	—			—
Payments received, net	—			(19,845		)	—			(43,848		)
Balance at end of period	$	36,097		$	52,028		$	4,419		$	25,283



September 30, 2014	Acquired Impaired						Acquired Non-impaired
	Accretable Yield			Net Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
	(In thousands)
Balance at beginning of period	$	78,277		$	138,091		$	17,263		$	157,856
Reclassification from nonaccretable balance, net	10,186			(2,069		)	—			—
Accretion	(23,929		)	23,929			(7,004		)	7,004
Transfers to REO	—			(8,943		)	—			—
Payments received, net	—			(72,953		)	—			(66,438		)
Balance at end of period	$	64,534		$	78,055		$	10,259		$	98,422

At June 30, 2015, none of the acquired impaired or non-impaired covered loans were classified as non-performing assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

The outstanding principal balance of acquired covered loans was $81,164,000 and $213,203,000 as of June 30, 2015 and September 30, 2014, respectively. The discount balance related to the acquired covered loans was $3,853,000 and $34,483,000 as of June 30, 2015 and September 30, 2014, respectively.

There is no allowance for covered loans as of June 30, 2015. There was an allowance of $2,244,000 as of September 30, 2014.

The allowance for credit losses related to the acquired loans as of September 30, 2014 results from decreased expectations of future cash flows due to increased credit losses for certain acquired loan pools. The allowance allocation was reversed during the quarter ended December 31, 2014 due to improvements in the expected future cash flows of certain acquired loan pools.

The following table shows the year to date activity for the FDIC indemnification asset:



	June 30, 2015			September 30, 2014
	(In thousands)
Balance at beginning of fiscal year 2015 and 2014	$	36,860		$	64,615
Additions and deletions (1)	(1,795		)	1,795
Payments made (received)	714			(2,502		)
Amortization	(17,418		)	(27,850		)
Accretion	422			802
Balance at end of period	$	18,783		$	36,860
(1) reclassification of ALLL allowance due to changes in cash flows

The following tables provide information on covered loans based on credit quality indicators (defined in Note E ) as of June 30, 2015 and September 30, 2014:



June 30, 2015	Internally Assigned Grade															Total Net Loans
	Pass			Special mention			Substandard			Doubtful			Loss			Total Net Loans
	(In thousands)
Acquired non-impaired loans:
Single-family residential	$	15,300		$	—		$	593		$	—		$	—		$	15,893
Commercial & industrial	—			—			28			—			—			28
HELOC	9,214			—			—			—			—			9,214
	$	24,514		$	—		$	621		$	—		$	—		$	25,135
Total grade as a % of total net loans	97.5		%	—		%	2.5		%	—		%	—		%

Acquired credit-impaired loans:
Pool 1 - Construction and land A&D	$	151		$	—		$	1,613		$	—		$	—		$	1,764
Pool 2 - Single-family residential	14,375			—			331			—			—			14,706
Pool 3 - Multi-family	48			—			377			—			—			425
Pool 4 - HELOC & other consumer	2,611			—			—			—			—			2,611
Pool 5 - Commercial real estate	23,805			—			11,048			—			—			34,853
Pool 6 - Commercial & industrial	394			—			1,276			—			—			1,670
	$	41,384		$	—		$	14,645		$	—		$	—		56,029
										Total covered loans						81,164
													Discount			(3,853		)
													Allowance			—
													Covered loans, net			$	77,311



September 30, 2014	Internally Assigned Grade															Total Net Loans
	Pass			Special mention			Substandard			Doubtful			Loss			Total Net Loans
	(In thousands)
Acquired non-impaired loans:
Single-family residential	$	21,311		$	—		$	1,756		$	—		$	—		$	23,067
Land - acquisition & development	972			—			392			—			—			1,364
Land - consumer lot loans	73			—			—			—			—			73
Multi-family	6,598			—			—			—			—			6,598
Commercial real estate	26,940			115			24,281			—			—			51,336
Commercial & industrial	2,801			—			2,691			—			—			5,492
HELOC	11,777			—			—			—			—			11,777
Consumer	454			—			—			—			—			454
	$	70,926		$	115		$	29,120		$	—		$	—		$	100,161
Total grade as a % of total net loans	70.8		%	0.1		%	29.1		%	—		%	—		%

Acquired credit-impaired loans:
Pool 1 - Construction and land A&D	$	8,349		$	—		$	11,912		$	—		$	—		$	20,261
Pool 2 - Single-family residential	15,585			—			379			—			—			15,964
Pool 3 - Multi-family	52			—			471			—			—			523
Pool 4 - HELOC & other consumer	2,804			—			1,173			—			—			3,977
Pool 5 - Commercial real estate	33,909			700			29,782			—			—			64,391
Pool 6 - Commercial & industrial	3,509			—			3,892			525			—			7,926
	$	64,208		$	700		$	47,609		$	525		$	—		113,042
										Total covered loans						213,203
													Discount			(34,483		)
													Allowance			(2,244		)
													Covered loans, net			$	176,476

The following tables provide an analysis of the age of acquired non credit-impaired covered loans in past due status as of June 30, 2015 and September 30, 2014:



June 30, 2015	Amount of Loans Net of LIP & Chg.-Offs		Days Delinquent Based on $ Amount of Loans										% based on $
Type of Loans	Amount of Loans Net of LIP & Chg.-Offs		Current		30		60		90		Total Past Due		% based on $
Single-family residential	$	15,893	$	15,300	$	—	$	214	$	379	$	593	3.73	%
Commercial & industrial	28		28		—		—		—		—		—
HELOC	9,214		9,204		10		—		—		10		0.11
	$	25,135	$	24,532	$	10	$	214	$	379	$	603	2.40	%



September 30, 2014	Amount of Loans Net of LIP & Chg.-Offs		Days Delinquent Based on $ Amount of Loans										% based on $
Type of Loans	Amount of Loans Net of LIP & Chg.-Offs		Current		30		60		90		Total Past Due		% based on $
Single-family residential	$	23,067	$	22,391	$	230	$	40	$	406	$	676	2.93	%
Land - acquisition & development	1,364		1,328		—		—		36		36		2.64
Land - consumer lot loans	73		73		—		—		—		—		—
Multi-family	6,598		5,502		—		—		1,096		1,096		16.61
Commercial real estate	51,336		51,336		—		—		—		—		—
Commercial & industrial	5,492		5,492		—		—		—		—		—
HELOC	11,777		11,777		—		—		—		—		—
Consumer	454		443		11		—		—		11		2.42
	$	100,161	$	98,342	$	241	$	40	$	1,538	$	1,819	1.82	%