Allowance for Losses on Loans

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



Three Months Ended March 31, 2018	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	35,928	$	(290	)	$	211	$	(1,705	)	$	34,144
Construction	25,214		—			—		2,175			27,389
Construction - custom	2,052		—			—		29			2,081
Land - acquisition & development	7,355		—			1,207		(940		)	7,622
Land - consumer lot loans	2,906		(18		)	—		(35		)	2,853
Multi-family	7,904		—			—		78			7,982
Commercial real estate	11,625		(36		)	1		(2		)	11,588
Commercial & industrial	29,268		—			115		(53		)	29,330
HELOC	808		(1		)	—		(5		)	802
Consumer	4,095		(94		)	276		(492		)	3,785
	$	127,155	$	(439	)	$	1,810	$	(950	)	$	127,576



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



Six Months Ended March 31, 2018	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	36,892	$	(750	)	$	331	$	(2,329	)	$	34,144
Construction	24,556		—			—		2,833			27,389
Construction - custom	1,944		(50		)	—		187			2,081
Land - acquisition & development	6,829		—			4,579		(3,786		)	7,622
Land - consumer lot loans	2,649		(66		)	—		270			2,853
Multi-family	7,862		—			—		120			7,982
Commercial real estate	11,818		(36		)	1		(195		)	11,588
Commercial & industrial	28,524		(116		)	170		752			29,330
HELOC	855		(1		)	1		(53		)	802
Consumer	1,144		(172		)	562		2,251			3,785
	$	123,073	$	(1,191	)	$	5,644	$	50		$	127,576



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

The Company recorded a release of allowance for loan losses of $950,000 for the three months ended March 31, 2018, compared to a $1,600,000 release of allowance for loan losses for the three months ended March 31, 2017. A release of allowance for loan losses of $950,000 and $1,600,000 was recorded during the six months ended March 31, 2018 and March 31, 2017, 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 $1,371,000 for the three months ended March 31, 2018, compared to net recoveries of $5,216,000 during the three months ended March 31, 2017. Recoveries, net of charge-offs, totaled $4,453,000 for the six months ended March 31, 2018, compared to net recoveries of $10,512,000 during the six months ended March 31, 2017.

Non-performing assets were $69,712,000, or 0.45%, of total assets at March 31, 2018, compared to $70,238,000, or 0.46%, of total assets at September 30, 2017. Non-accrual loans were $53,808,000 at March 31, 2018, compared to $49,580,000 at September 30, 2017. Delinquencies, as a percent of total loans, were 0.40% at March 31, 2018, compared to 0.40% at September 30, 2017.

The reserve for unfunded commitments was $6,750,000 as of March 31, 2018, which is a decrease from $7,750,000 at September 30, 2017.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $134,326,000, or 1.07% of gross loans as of March 31, 2018, 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, 2018	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	34,144	$	5,684,940	0.6	%	$	—	$	27,608	—	%
Construction	27,389		911,650		3.0		—		5,012		—
Construction - custom	2,081		295,699		0.7		—		—		—
Land - acquisition & development	7,622		116,877		6.5		—		2,186		—
Land - consumer lot loans	2,853		95,482		3.0		—		495		—
Multi-family	7,978		1,324,959		0.6		4		3,068		0.1
Commercial real estate	11,484		1,385,851		0.8		104		39,861		0.3
Commercial & industrial	28,784		1,114,171		2.6		546		36,888		1.5
HELOC	802		133,152		0.6		—		273		—
Consumer	3,785		202,766		1.9		—		38		—
	$	126,922	$	11,265,547	1.1	%	$	654	$	115,429	0.6	%



September 30, 2017	Loans Collectively Evaluated for Impairment						Loans Individually Evaluated for Impairment
	Allowance Allocation		Recorded Investment of Loans		Ratio		Allowance Allocation		Recorded Investment of Loans		Ratio
	(In thousands)						(In thousands)
Single-family residential	$	36,892	$	5,713,576	0.7	%	$	—	$	5,552	—	%
Construction	24,556		793,958		3.1		—		—		—
Construction - custom	1,944		277,495		0.7		—		105		—
Land - acquisition & development	6,828		104,767		6.5		1		89		1.0
Land - consumer lot loans	2,649		96,337		2.8		—		171		—
Multi-family	7,857		1,302,625		0.6		5		493		1.0
Commercial real estate	11,698		1,391,668		0.8		120		21,765		0.6
Commercial & industrial	28,524		1,093,210		2.6		—		81		—
HELOC	855		141,689		0.6		—		215		—
Consumer	1,144		84,887		1.4		—		82		—
	$	122,947	$	11,000,212	1.1	%	$	126	$	28,553	0.4	%

As of March 31, 2018, $126,922,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $654,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2017, $122,947,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $126,000 was specific reserves on loans deemed to be individually impaired.

The Company has an asset quality review function that analyzes its 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 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, 2018	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Loan type
Single-family residential	$	5,670,826		$	—		$	34,524		$	—		$	—		$	5,705,350
Construction	1,727,190			—			5,012			—			—			1,732,202
Construction - custom	597,671			—			—			—			—			597,671
Land - acquisition & development	139,442			—			2,186			—			—			141,628
Land - consumer lot loans	101,733			—			1,046			—			—			102,779
Multi-family	1,325,076			379			2,594			—			—			1,328,049
Commercial real estate	1,410,194			634			32,609			—			—			1,443,437
Commercial & industrial	1,101,878			9,958			39,272			—			—			1,151,108
HELOC	134,763			—			356			—			—			135,119
Consumer	202,873			—			38			—			—			202,911
Total gross loans	$	12,411,646		$	10,971		$	117,637		$	—		$	—		$	12,540,254

Total grade as a % of total gross loans	99.0		%	0.1		%	0.9		%	—		%	—		%



September 30, 2017	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands)
Loan type
Single-family residential	$	5,671,229		$	—		$	39,775		$	—		$	—		$	5,711,004
Construction	1,594,926			—			3,070			—			—			1,597,996
Construction - custom	602,540			—			91			—			—			602,631
Land - acquisition & development	123,028			207			1,073			—			—			124,308
Land - consumer lot loans	103,787			—			618			—			—			104,405
Multi-family	1,295,261			5,795			2,092			—			—			1,303,148
Commercial real estate	1,391,996			5,944			36,670			—			—			1,434,610
Commercial & industrial	1,054,972			14,814			23,574			—			—			1,093,360
HELOC	144,229			—			621			—			—			144,850
Consumer	84,984			—			91			—			—			85,075
Total gross loans	$	12,066,952		$	26,760		$	107,675		$	—		$	—		$	12,201,387

Total grade as a % of total gross loans	98.9		%	0.2		%	0.9		%	—		%	—		%

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



March 31, 2018	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,680,031	99.6	%	$	25,319	0.4	%
Construction	1,729,906		99.9		2,296		0.1
Construction - custom	597,671		100.0		—		—
Land - acquisition & development	139,624		98.6		2,004		1.4
Land - consumer lot loans	101,734		99.0		1,045		1.0
Multi-family	1,328,049		100.0		—		—
Commercial real estate	1,433,910		99.3		9,527		0.7
Commercial & industrial	1,137,746		98.8		13,362		1.2
HELOC	134,902		99.8		217		0.2
Consumer	202,873		100.0		38		—
	$	12,486,446	99.6	%	$	53,808	0.4	%



September 30, 2017	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,683,074	99.5	%	$	27,930	0.5	%
Construction	1,597,996		100.0		—		—
Construction - custom	602,540		99.9		91		0.1
Land - acquisition & development	124,012		99.8		296		0.2
Land - consumer lot loans	103,800		99.4		605		0.6
Multi-family	1,303,009		99.9		139		0.1
Commercial real estate	1,422,795		99.2		11,815		0.8
Commercial & industrial	1,085,278		99.3		8,082		0.7
HELOC	144,319		99.6		531		0.4
Consumer	84,984		99.9		91		0.1
	$	12,151,807	99.6	%	$	49,580	0.4	%

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



March 31, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment (Year-To-Date)
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	23,936	$	25,229	$	—		$	21,889
Construction	5,898		5,898		—			2,289
Construction - custom	—		—		—			49
Land - acquisition & development	2,186		2,230		—			1,297
Land - consumer lot loans	386		432		—			298
Multi-family	2,616		2,616		—			1,002
Commercial real estate	33,272		38,372		—			20,845
Commercial & industrial	29,882		29,989		—			14,200
HELOC	273		366		—			461
Consumer	38		104		—			65
	98,487		105,236		—			62,395
Impaired loans with an allowance recorded:
Single-family residential	162,875		166,405		2,942			171,831
Land - acquisition & development	—		—		—			30
Land - consumer lot loans	6,837		7,431		—			7,397
Multi-family	473		473		4			482
Commercial real estate	11,818		12,673		104			12,936
Commercial & industrial	7,006		7,006		546			4,754
HELOC	1,424		1,506		—			1,503
Consumer	86		273		—			91
	190,519		195,767		3,596		(1)	199,024
Total impaired loans:
Single-family residential	186,811		191,634		2,942			193,720
Construction	5,898		5,898		—			2,289
Construction - custom	—		—		—			49
Land - acquisition & development	2,186		2,230		—			1,327
Land - consumer lot loans	7,223		7,863		—			7,695
Multi-family	3,089		3,089		4			1,484
Commercial real estate	45,090		51,045		104			33,781
Commercial & industrial	36,888		36,995		546			18,954
HELOC	1,697		1,872		—			1,964
Consumer	124		377		—			156
	$	289,006	$	301,003	$	3,596	(1)	$	261,419


(1)	Includes $654,000 of specific reserves and $2,942,000 included in the general reserves.



September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment (Year-To-Date)
	(In thousands)
Impaired loans with no related allowance recorded:
Single-family residential	$	21,325	$	23,880	$	—		$	19,371
Construction - custom	148		165		—			231
Land - acquisition & development	330		8,208		—			176
Land - consumer lot loans	208		330		—			431
Multi-family	139		3,231		—			748
Commercial real estate	12,890		22,487		—			11,466
Commercial & industrial	8,279		14,321		—			7,425
HELOC	490		1,212		—			487
Consumer	88		1,433		—			57
	43,897		75,267		—			40,392
Impaired loans with an allowance recorded:
Single-family residential	181,941		186,167		4,030			204,723
Land - acquisition & development	90		90		1			576
Land - consumer lot loans	7,949		8,526		—			8,976
Multi-family	493		493		5			1,024
Commercial real estate	15,079		16,707		120			16,991
Commercial & industrial	—		—		—			297
HELOC	1,728		1,806		—			1,451
Consumer	97		284		—			100
	207,377		214,073		4,156		(1)	234,138
Total impaired loans:
Single-family residential	203,266		210,047		4,030			224,094
Construction - custom	148		165		—			231
Land - acquisition & development	420		8,298		1			752
Land - consumer lot loans	8,157		8,856		—			9,407
Multi-family	632		3,724		5			1,772
Commercial real estate	27,969		39,194		120			28,457
Commercial & industrial	8,279		14,321		—			7,722
HELOC	2,218		3,018		—			1,938
Consumer	185		1,717		—			157
	$	251,274	$	289,340	$	4,156	(1)	$	274,530


(1)	Includes $126,000 of specific reserves and $4,030,000 included in the general reserves.