ALLOWANCE FOR LOSSES ON LOANS

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



Twelve Months Ended September 30, 2016	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,347	$	(3,106	)	$	3,251	$	(9,696	)	$	37,796
Construction	6,680		—			745		12,413			19,838
Construction - custom	990		(60		)	60		90			1,080
Land - acquisition & development	5,781		(42		)	8,220		(7,936		)	6,023
Land - consumer lot loans	2,946		(732		)	5		316			2,535
Multi-family	5,304		—			—		1,621			6,925
Commercial real estate	8,960		(103		)	1,812		(2,081		)	8,588
Commercial & industrial	24,980		(941		)	2,933		1,036			28,008
HELOC	902		(54		)	21		(56		)	813
Consumer	2,939		(962		)	2,018		(2,107		)	1,888
	$	106,829	$	(6,000	)	$	19,065	$	(6,400	)	$	113,494



Twelve Months Ended September 30, 2015	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	62,763	$	(5,524	)	$	13,403	$	(23,295	)	$	47,347
Construction	6,742		(388		)	120		206			6,680
Construction - custom	1,695		—			—		(705		)	990
Land - acquisition & development	5,592		(38		)	207		20			5,781
Land - consumer lot loans	3,077		(459		)	221		107			2,946
Multi-family	4,248		—			220		836			5,304
Commercial real estate	7,548		(1,711		)	735		2,388			8,960
Commercial & industrial	16,527		(3,354		)	1,374		10,433			24,980
HELOC	928		(66		)	2		38			902
Consumer	3,227		(3,060		)	3,688		(916		)	2,939
Covered loans	2,244		—			—		(2,244		)	—
	$	114,591	$	(14,600	)	$	19,970	$	(13,132	)	$	106,829

The Company recorded a release of allowance for loan losses of $6,400,000 during the year ended September 30, 2016, as compared to a release of $11,162,000 for the year ended September 30, 2015. The credit quality of the portfolio has been improving significantly and economic conditions are more stable.

The Company had recoveries, net of charge-offs, of $13,065,000 for the year ended September 30, 2016, compared with net recoveries of $5,370,000 for the year ended September 30, 2015. A loan is charged-off when the loss is estimable and it is confirmed that the borrower is not expected to be able to meet its contractual obligations.

Non-accrual loans decreased to $42,414,000 as of September 30, 2016 from $67,810,000 as of September 30, 2015. Non-performing assets (“NPAs”) totaled $71,441,000, or 0.48% of total assets, at September 30, 2016, compared to $128,908,000, or 0.88% of total assets, as of September 30, 2015. Acquired loans, including covered loans, are not classified as non-performing loans because they are recorded at fair value at acquisition and reflect lifetime estimated losses at that time. As of September 30, 2016, $20,175,000 in acquired loans were subject to the general allowance as the discount related to these balances was not sufficient to absorb potential losses.

There is no allowance for covered loans as of September 30, 2016 or September 30, 2015.

At September 30, 2016, $113,128,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $366,000 represents specific reserves on loans that were deemed to be impaired.

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



September 30, 2016	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	$	37,536	$	5,585,912	0.7	%	$	260	$	19,629	1.3	%
Construction	19,838		498,450		4.0		—		—		—
Construction - custom	1,080		229,298		0.5		—		330		—
Land - acquisition & development	6,022		90,850		6.6		2		850		0.2
Land - consumer lot loans	2,535		92,828		2.7		—		558		—
Multi-family	6,911		1,091,974		0.6		13		1,505		0.9
Commercial real estate	8,497		957,380		0.9		91		11,157		0.8
Commercial & industrial	28,008		966,930		2.9		—		—		—
HELOC	813		133,203		0.6		—		239		—
Consumer	1,888		137,315		1.4		—		3		—
	$	113,128	$	9,784,140	1.2	%	$	366	$	34,271	1.1	%

___________________


(1)	Excludes acquired loans with discounts sufficient to absorb potential losses and covered loans



September 30, 2015	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	$	47,073	$	5,595,752	0.8	%	$	275	$	51,718	0.5	%
Construction	6,680		124,679		5.4		—		5,441		—
Construction - custom	990		205,692		0.5		—		—		—
Land - acquisition & development	5,781		72,602		8.0		—		2,198		—
Land - consumer lot loans	2,946		93,103		3.2		—		10,824		—
Multi-family	5,304		1,062,194		0.5		—		5,348		—
Commercial real estate	8,960		844,691		1.1		—		8,826		—
Commercial & industrial	24,980		643,577		3.9		—		—		—
HELOC	902		126,594		0.7		—		1,072		—
Consumer	2,938		194,569		1.5		—		86		—
	$	106,554	$	8,963,453	1.2	%	$	275	$	85,513	0.3	%

___________________


(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 loan portfolio 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).



September 30, 2016	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,570,634		$	—		$	50,432		$	—		$	—		$	5,621,066
Construction	1,098,549			8,595			3,267			—			—			1,110,411
Construction - custom	473,069			—			—			—			—			473,069
Land - acquisition & development	110,125			—			6,031			—			—			116,156
Land - consumer lot loans	100,862			—			991			—			—			101,853
Multi-family	1,112,342			3,237			3,222			—			—			1,118,801
Commercial real estate	928,032			13,446			14,686			—			—			956,164
Commercial & industrial	900,571			7,160			38,917			—			—			946,648
HELOC	134,298			—			487			—			—			134,785
Consumer	137,367			—			83			—			—			137,450
Total non-acquired loans	10,565,849			32,438			118,116			—			—			10,716,403
Acquired loans	108,616			47			6,731			—			—			115,394
Credit impaired acquired loans	60,985			—			28,852			—			—			89,837
Covered loans	28,647			—			327			—			—			28,974
Total gross loans	$	10,764,097		$	32,485		$	154,026		$	—		$	—		$	10,950,608

Total grade as a % of total gross loans	98.3		%	0.3		%	1.4		%	—		%	—		%



September 30, 2015	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,558,700		$	—		$	93,145		$	—		$	—		$	5,651,845
Construction	197,935			—			2,574			—			—			200,509
Construction - custom	396,307			—			—			—			—			396,307
Land - acquisition & development	89,656			—			4,552			—			—			94,208
Land - consumer lot loans	103,569			—			420			—			—			103,989
Multi-family	1,118,673			865			6,184			—			—			1,125,722
Commercial real estate	971,510			4,360			10,400			—			—			986,270
Commercial & industrial	575,034			1,496			36,306			—			—			612,836
HELOC	127,398			—			248			—			—			127,646
Consumer	194,451			—			204			—			—			194,655
Total non-acquired loans	9,333,233			6,721			154,033			—			—			9,493,987
Acquired loans	149,891			—			16,402			—			—			166,293
Credit impaired acquired loans	61,019			—			26,062			—			—			87,081
Covered loans	61,776			—			14,133			—			—			75,909
Total gross loans	$	9,605,919		$	6,721		$	210,630		$	—		$	—		$	9,823,270

Total grade as a % of total gross loans	97.8		%	0.1		%	2.1		%	—		%	—		%

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



September 30, 2016	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)				(In thousands)
Single-family residential	$	5,587,919	99.4	%	$	33,148	0.6	%
Construction	1,110,411		100.0		—		—
Construction - custom	473,069		100.0		—		—
Land - acquisition & development	116,097		99.9		58		0.1
Land - consumer lot loans	101,343		99.5		510		0.5
Multi-family	1,118,025		99.9		776		0.1
Commercial real estate	949,064		99.3		7,100		0.7
Commercial & industrial	946,065		99.9		583		0.1
HELOC	134,546		99.8		239		0.2
Consumer	137,450		100.0		—		—
	$	10,673,989	99.6	%	$	42,414	0.4	%



September 30, 2015	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)				(In thousands)
Single-family residential	$	5,592,771	99.0	%	$	59,074	1.0	%
Construction	199,755		99.6		754		0.4
Construction - custom	395,575		99.8		732		0.2
Land - acquisition & development	94,208		100.0		—		—
Land - consumer lot loans	102,716		98.8		1,273		1.2
Multi-family	1,123,165		99.8		2,558		0.2
Commercial real estate	984,093		99.8		2,176		0.2
Commercial & industrial	612,836		100.0		—		—
HELOC	127,083		99.6		563		0.4
Consumer	193,975		99.7		680		0.3
	$	9,426,177	99.3	%	$	67,810	0.7	%

The following tables provide information on impaired loans by loan category.



September 30, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	9,627	$	11,366	$	—		$	6,511
Construction	—		—		—			—
Construction - custom	—		—		—			—
Land - acquisition & development	138		9,001		—			614
Land - consumer lot loans	499		609		—			317
Multi-family	394		3,972		—			638
Commercial real estate	11,741		21,301		—			6,260
Commercial & industrial	1,030		3,082		—			863
HELOC	209		315		—			165
Consumer	74		550		—			111
	23,712		50,196		—			15,479
Impaired loans with an allowance recorded:
Single-family residential	228,186		232,595		3,809			216,632
Construction	—		—		—			—
Construction - custom	—		—		—			—
Land - acquisition & development	1,154		2,094		1			1,766
Land - consumer lot loans	9,630		10,678		1			9,548
Multi-family	1,505		1,505		13			1,522
Commercial real estate	19,434		22,848		91			19,311
Commercial & industrial	—		—		—			—
HELOC	1,506		1,521		—			1,413
Consumer	116		306		—			100
	261,531		271,547		3,915		(1)	250,292
Total:
Single-family residential	237,813		243,961		3,809			223,143
Construction	—		—		—			—
Construction - custom	—		—		—			—
Land - acquisition & development	1,292		11,095		1			2,380
Land - consumer lot loans	10,129		11,287		1			9,865
Multi-family	1,899		5,477		13			2,160
Commercial real estate	31,175		44,149		91			25,571
Commercial & industrial	1,030		3,082		—			863
HELOC	1,715		1,836		—			1,578
Consumer	190		856		—			211
	$	285,243	$	321,743	$	3,915	(1)	$	265,771

____________________


(1)	Includes $366,000 of specific reserves and $3,549,000 included in the general reserves.



September 30, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	17,250	$	19,644	$	—		$	14,069
Construction	453		2,151		—			471
Construction - custom	554		554		—			182
Land - acquisition & development	2,570		9,426		—			926
Land - consumer lot loans	727		814		—			544
Multi-family	3,770		7,054		—			1,545
Commercial real estate	9,427		15,620		—			8,130
Commercial & industrial	2,955		13,066		—			2,681
HELOC	683		1,532		—			536
Consumer	477		703		—			390
	38,866		70,564		—			29,474
Impaired loans with an allowance recorded:
Single-family residential	259,461		263,268		6,678			260,028
Construction	4,988		5,778		—			5,432
Construction - custom	—		—		—			—
Land - acquisition & development	2,486		3,426		—			3,478
Land - consumer lot loans	11,289		11,554		—			11,324
Multi-family	3,823		3,823		—			3,732
Commercial real estate	19,124		21,078		—			18,886
Commercial & industrial	—		—		—			—
HELOC	1,443		1,443		—			1,359
Consumer	99		289		—			102
	302,713		310,659		6,678		(1)	304,341
Total:
Single-family residential	276,711		282,912		6,678			274,097
Construction	5,441		7,929		—			5,903
Construction - custom	554		554		—			182
Land - acquisition & development	5,056		12,852		—			4,404
Land - consumer lot loans	12,016		12,368		—			11,868
Multi-family	7,593		10,877		—			5,277
Commercial real estate	28,551		36,698		—			27,016
Commercial & industrial	2,955		13,066		—			2,681
HELOC	2,126		2,975		—			1,895
Consumer	576		992		—			492
	$	341,579	$	381,223	$	6,678	(1)	$	333,815

____________________


(1)	Includes $275,000 of specific reserves and $6,403,000 included in the general reserves.