Allowance for Losses on Loans

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



Three Months Ended March 31, 2017	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	38,206	$	(381	)	$	223	$	(884	)	$	37,164
Construction	21,934		—			—		3,127			25,061
Construction - custom	1,110		(3		)	—		69			1,176
Land - acquisition & development	6,665		(43		)	4,211		(4,164		)	6,669
Land - consumer lot loans	2,501		—			180		(168		)	2,513
Multi-family	7,629		—			—		300			7,929
Commercial real estate	10,168		—			1,164		(560		)	10,772
Commercial & industrial	27,736		(105		)	217		517			28,365
HELOC	832		(53		)	—		47			826
Consumer	1,675		(508		)	314		(34		)	1,447
	$	118,456	$	(1,093	)	$	6,309	$	(1,750	)	$	121,922



Three Months Ended March 31, 2016	Beginning Allowance		Charge-offs			Recoveries			Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,756	$	(1,026	)	$	111		$	(5,013	)	$	41,828
Construction	7,014		—			(5		)	8,717			15,726
Construction - custom	1,062		—			—			(40		)	1,022
Land - acquisition & development	6,778		—			3,371			(2,897		)	7,252
Land - consumer lot loans	3,001		(268		)	—			(267		)	2,466
Multi-family	5,047		—			—			1,737			6,784
Commercial real estate	10,344		(9		)	992			(3,544		)	7,783
Commercial & industrial	24,096		(331		)	590			(531		)	23,824
HELOC	820		(26		)	—			34			828
Consumer	1,983		(278		)	397			304			2,406
	$	107,901	$	(1,938	)	$	5,456		$	(1,500	)	$	109,919



Six Months Ended March 31, 2017	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	37,796	$	(496	)	$	374	$	(510	)	$	37,164
Construction	19,838		—			—		5,223			25,061
Construction - custom	1,080		(3		)	—		99			1,176
Land - acquisition & development	6,023		(63		)	8,229		(7,520		)	6,669
Land - consumer lot loans	2,535		(17		)	250		(255		)	2,513
Multi-family	6,925		—			—		1,004			7,929
Commercial real estate	8,588		(11		)	1,520		675			10,772
Commercial & industrial	28,008		(163		)	942		(422		)	28,365
HELOC	813		(90		)	1		102			826
Consumer	1,888		(654		)	693		(480		)	1,447
	$	113,494	$	(1,497	)	$	12,009	$	(2,084	)	$	121,922



Six Months Ended March 31, 2016	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,347	$	(2,165	)	$	2,577	$	(5,931	)	$	41,828
Construction	6,680		—			150		8,896			15,726
Construction - custom	990		(60		)	—		92			1,022
Land - acquisition & development	5,781		—			3,406		(1,935		)	7,252
Land - consumer lot loans	2,946		(676		)	—		196			2,466
Multi-family	5,304		—			—		1,480			6,784
Commercial real estate	8,960		(32		)	1,115		(2,260		)	7,783
Commercial & industrial	24,980		(579		)	591		(1,168		)	23,824
HELOC	902		(27		)	21		(68		)	828
Consumer	2,939		(520		)	789		(802		)	2,406
	$	106,829	$	(4,059	)	$	8,649	$	(1,500	)	$	109,919

The Company recorded a release of allowance for loan losses of $1,600,000 during the three months ended March 31, 2017, compared to a $1,500,000 release of allowance for loan losses recorded during the three months ended March 31, 2016. A release of allowance for loan losses of $1,600,000 and $1,500,000 was recorded during the six months ended March 31, 2017 or March 31, 2016, respectively. Reserving for new loan originations as the loan portfolio grows has been largely offset by recoveries of previously charged-off loans. Recoveries, net of charge-offs, totaled $5,216,000 for the three months ended March 31, 2017, compared with $3,518,000 of net recoveries for the same period one year ago. Recoveries, net of charge-offs, totaled $10,512,000 for the six months ended March 31, 2017, compared with $4,590,000 of net recoveries for the same period one year ago.

Non-performing assets were $79,738,000, or 0.53%, of total assets at March 31, 2017, compared to $71,441,000, or 0.48%, of total assets at September 30, 2016. Non-accrual loans were $57,195,000 at March 31, 2017, compared to $42,414,000 at September 30, 2016. Delinquencies, as a percent of total loans, were 0.65% at March 31, 2017, compared to 0.68% at September 30, 2016.

The reserve for unfunded commitments was $5,050,000 as of March 31, 2017, which is an increase from $3,235,000 at September 30, 2016.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $126,972,000, or 1.09% of gross loans as of March 31, 2017, is sufficient to absorb estimated inherent losses.

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



March 31, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans (1)		Ratio		Allowance Allocation		Recorded Investment of Loans (1)		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	37,164	$	5,661,673	0.7	%	$	—	$	25,370	—	%
Construction	25,061		593,479		4.2		—		—		—
Construction - custom	1,176		251,801		0.5		—		105		—
Land - acquisition & development	6,666		102,281		6.5		2		438		0.1
Land - consumer lot loans	2,513		91,402		2.7		—		794		—
Multi-family	7,919		1,264,130		0.6		10		2,496		0.3
Commercial real estate	10,685		1,226,228		0.9		88		26,112		0.3
Commercial & industrial	28,365		1,059,310		2.7		—		9,606		—
HELOC	826		137,124		0.6		—		722		—
Consumer	1,447		107,472		1.3		—		15		—
	$	121,822	$	10,494,900	1.2	%	$	100	$	65,658	0.2	%


(1)	Excludes $70 million in acquired loans and covered loans with discounts sufficient to cover incurred losses.



September 30, 2016	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans (1)		Ratio		Allowance Allocation		Recorded Investment of Loans (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 impaired loans and covered loans with discounts sufficient to cover incurred losses.

As of March 31, 2017, $121,822,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $100,000 was specific reserves on loans deemed to be individually impaired. As of 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 was specific reserves on loans deemed to be individually impaired.

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 collection or 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 risk rating categories as defined above.



March 31, 2017	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Loan type
Single-family residential	$	5,643,124		$	—		$	49,948		$	—		$	—		$	5,693,072
Construction	1,302,209			5,875			3,551			—			—			1,311,635
Construction - custom	527,079			—			240			—			—			527,319
Land - acquisition & development	115,816			—			2,910			—			—			118,726
Land - consumer lot loans	100,098			—			1,129			—			—			101,227
Multi-family	1,251,583			3,206			12,122			—			—			1,266,911
Commercial real estate	1,251,520			6,918			37,601			—			—			1,296,039
Commercial & industrial	1,041,903			8,018			21,708			—			—			1,071,629
HELOC	144,972			—			1,200			—			—			146,172
Consumer	107,698			—			61			—			—			107,759
Total gross loans	$	11,486,002		$	24,017		$	130,470		$	—		$	—		$	11,640,489

Total grade as a % of total gross loans	98.7		%	0.2		%	1.1		%	—		%	—		%



September 30, 2016	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Loan type
Single-family residential	$	5,607,521		$	—		$	51,309		$	—		$	—		$	5,658,830
Construction	1,098,549			8,595			3,267			—			—			1,110,411
Construction - custom	473,069			—			—			—			—			473,069
Land - acquisition & development	111,225			—			7,272			—			—			118,497
Land - consumer lot loans	103,528			—			1,039			—			—			104,567
Multi-family	1,117,437			3,237			3,616			—			—			1,124,290
Commercial real estate	1,033,880			13,446			46,313			—			—			1,093,639
Commercial & industrial	930,776			7,207			40,606			—			—			978,589
HELOC	149,195			—			521			—			—			149,716
Consumer	138,917			—			83			—			—			139,000
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		%	—		%	—		%

The balance of loans internally graded as 'substandard' above includes $25,668,000 as of March 31, 2017 and $35,910,000 as of September 30, 2016 of acquired loans and covered loans.

The following tables provide information on loans (excluding acquired and covered loans) based on borrower payment activity.



March 31, 2017	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,626,725	99.4	%	$	34,373	0.6	%
Construction	1,311,636		100.0		—		—
Construction - custom	527,079		100.0		240		—
Land - acquisition & development	116,857		99.9		80		0.1
Land - consumer lot loans	97,537		98.9		1,129		1.1
Multi-family	1,263,004		99.9		1,364		0.1
Commercial real estate	1,173,483		99.1		10,507		0.9
Commercial & industrial	1,021,889		99.1		8,864		0.9
HELOC	134,376		99.6		583		0.4
Consumer	106,466		99.9		55		0.1
	$	11,379,052	99.5	%	$	57,195	0.5	%



September 30, 2016	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(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	%

The following tables provide information on impaired loan balances and the related allowances by loan types.




March 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	25,928	$	28,378	$	—		$	14,350
Construction - custom	296		300		—			99
Land - acquisition & development	123		8,346		—			130
Land - consumer lot loans	524		587		—			490
Multi-family	1,364		4,904		—			1,100
Commercial real estate	9,920		18,978		—			10,182
Commercial & industrial	9,606		16,096		—			6,772
HELOC	718		1,856		—			443
Consumer	59		1,366		—			47
	48,538		80,811		—			33,613
Impaired loans with an allowance recorded:
Single-family residential	204,955		209,294		4,316			202,838
Land - acquisition & development	594		594		3			510
Land - consumer lot loans	9,410		10,315		—			9,324
Multi-family	1,131		1,131		10			1,138
Commercial real estate	16,290		17,930		88			16,491
HELOC	1,414		1,487		—			1,283
Consumer	107		297		—			100
	233,901		241,048		4,417		(1)	231,684
Total impaired loans:
Single-family residential	230,883		237,672		4,316			217,188
Construction - custom	296		300		—			99
Land - acquisition & development	717		8,940		3			640
Land - consumer lot loans	9,934		10,902		—			9,814
Multi-family	2,495		6,035		10			2,238
Commercial real estate	26,210		36,908		88			26,673
Commercial & industrial	9,606		16,096		—			6,772
HELOC	2,132		3,343		—			1,726
Consumer	166		1,663		—			147
	$	282,439	$	321,859	$	4,417	(1)	$	265,297


(1)	Includes $100,000 of specific reserves and $4,317,000 included in the general reserves.



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
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
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
HELOC	1,506		1,521		—			1,413
Consumer	116		306		—			100
	261,531		271,547		3,915		(1)	250,292
Total impaired loans:
Single-family residential	237,813		243,961		3,809			223,143
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.