Allowance for Losses on Loans

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



Three Months Ended March 31, 2019	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	31,484	$	(150	)	$	310	$	(168	)	$	31,476
Construction	31,463		—			—		1,933			33,396
Construction - custom	1,926		—			—		50			1,976
Land - acquisition & development	9,156		—			1,300		(722		)	9,734
Land - consumer lot loans	2,144		(48		)	—		(20		)	2,076
Multi-family	7,884		—			—		(490		)	7,394
Commercial real estate	12,711		—			244		(507		)	12,448
Commercial & industrial	30,279		(285		)	24		556			30,574
HELOC	1,064		(200		)	43		175			1,082
Consumer	3,054		(332		)	265		(57		)	2,930
	$	131,165	$	(1,015	)	$	2,186	$	750		$	133,086



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



Six Months Ended March 31, 2019	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	33,033	$	(175	)	$	539	$	(1,921	)	$	31,476
Construction	31,317		—			—		2,079			33,396
Construction - custom	1,842		—			—		134			1,976
Land - acquisition & development	7,978		—			3,082		(1,326		)	9,734
Land - consumer lot loans	2,164		(120		)	265		(233		)	2,076
Multi-family	8,329		—			—		(935		)	7,394
Commercial real estate	11,852		(339		)	770		165			12,448
Commercial & industrial	28,702		(464		)	58		2,278			30,574
HELOC	781		(1,086		)	44		1,343			1,082
Consumer	3,259		(472		)	477		(334		)	2,930
	$	129,257	$	(2,656	)	$	5,235	$	1,250		$	133,086



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

The Company recorded a provision for loan losses of $750,000 for the three months ended March 31, 2019, compared to a $950,000 release of allowance for loan losses for the three months ended March 31, 2018. A provision for loan losses of $250,000 and a release of allowance for loan losses of $950,000 was recorded for the six months ended March 31, 2019 and March 31, 2018, 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 $1,171,000 for the three months ended March 31, 2019, compared to net recoveries of $1,371,000 during the three months ended March 31, 2018. Recoveries, net of charge-offs, totaled $2,579,000 for the six months ended March 31, 2019, compared to net recoveries of $4,453,000 during the six months ended March 31, 2018.

Non-performing assets were $59,572,000, or 0.36% of total assets, at March 31, 2019, compared to $70,093,000, or 0.44% of total assets, at September 30, 2018. Non-accrual loans were $48,941,000 at March 31, 2019, compared to $55,686,000 at September 30, 2018. Delinquencies, as a percent of total loans, were 0.40% at March 31, 2019, compared to 0.42% at September 30, 2018.

The reserve for unfunded commitments was $6,250,000 as of March 31, 2019, which is a decrease from $7,250,000 at September 30, 2018.

Management believes the allowance for loan losses plus the reserve for unfunded commitments, totaling $139,336,000, or 1.05% of gross loans as of March 31, 2019, is sufficient to absorb estimated losses inherent in the portfolio of loans and unfunded commitments.

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



March 31, 2019	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, except ratio data)						(In thousands, except ratio data)
Single-family residential	$	31,476	$	5,848,663	0.5	%	$	—	$	16,836	—	%
Construction	33,396		1,138,688		2.9		—		1,282		—
Construction - custom	1,976		307,405		0.6		—		—		—
Land - acquisition & development	9,727		152,304		6.4		7		242		2.9
Land - consumer lot loans	2,076		92,614		2.2		—		309		—
Multi-family	7,390		1,422,864		0.5		4		837		0.5
Commercial real estate	12,328		1,552,990		0.8		120		17,512		0.7
Commercial & industrial	30,329		1,219,921		2.5		245		12,651		1.9
HELOC	1,082		137,716		0.8		—		528		—
Consumer	2,930		154,201		1.9		—		52		—
	$	132,710	$	12,027,366	1.1	%	$	376	$	50,249	0.7	%



September 30, 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, except ratio data)						(In thousands, except ratio data)
Single-family residential	$	33,033	$	5,782,870	0.6	%	$	—	$	21,345	—	%
Construction	31,317		1,060,428		3.0		—		2,427		—
Construction - custom	1,842		289,192		0.6		—		—		—
Land - acquisition & development	7,969		122,639		6.5		9		920		1.0
Land - consumer lot loans	2,164		96,583		2.2		—		507		—
Multi-family	8,325		1,384,655		0.6		4		448		1.0
Commercial real estate	11,702		1,432,791		0.8		150		19,378		0.8
Commercial & industrial	28,348		1,126,438		2.5		354		14,437		2.5
HELOC	781		128,715		0.6		—		1,162		—
Consumer	3,259		173,181		1.9		—		56		—
	$	128,740	$	11,597,492	1.1	%	$	517	$	60,680	0.9	%

As of March 31, 2019, $132,710,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $376,000 was specific reserves on loans deemed to be individually impaired. As of September 30, 2018, $128,740,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $517,000 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 its 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, 2019	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands, except ratio data)
Loan type
Single-family residential	$	5,831,775		$	—		$	29,629		$	—		$	—		$	5,861,404
Construction	1,978,992			—			1,282			—			—			1,980,274
Construction - custom	586,515			—			—			—			—			586,515
Land - acquisition & development	190,807			2,424			1,508			—			—			194,739
Land - consumer lot loans	96,573			—			579			—			—			97,152
Multi-family	1,415,872			—			7,851			—			—			1,423,723
Commercial real estate	1,529,461			7,599			33,442			—			—			1,570,502
Commercial & industrial	1,195,835			4,238			30,815			—			—			1,230,888
HELOC	138,391			—			812			—			—			139,203
Consumer	155,978			—			24			—			—			156,002
Total gross loans	$	13,120,199		$	14,261		$	105,942		$	—		$	—		$	13,240,402

Total grade as a % of total gross loans	99.1		%	0.1		%	0.8		%	—		%	—		%



September 30, 2018	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands, except ratio data)
Loan type
Single-family residential	$	5,766,096		$	—		$	32,870		$	—		$	—		$	5,798,966
Construction	1,886,304			1,937			2,427			—			—			1,890,668
Construction - custom	624,479			—			—			—			—			624,479
Land - acquisition & development	152,984			—			2,220			—			—			155,204
Land - consumer lot loans	101,249			—			787			—			—			102,036
Multi-family	1,378,803			1,633			4,689			—			—			1,385,125
Commercial real estate	1,421,602			7,114			23,452			—			—			1,452,168
Commercial & industrial	1,093,405			16,513			30,956			—			—			1,140,874
HELOC	130,330			—			522			—			—			130,852
Consumer	173,285			—			21			—			—			173,306
Total gross loans	$	12,728,537		$	27,197		$	97,944		$	—		$	—		$	12,853,678

Total grade as a % of total gross loans	99.0		%	0.2		%	0.8		%	—		%	—		%

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



March 31, 2019	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands, except ratio data)
Single-family residential	$	5,836,930	99.6	%	$	24,474	0.4	%
Construction	1,978,992		99.9		1,282		0.1
Construction - custom	586,515		100.0		—		—
Land - acquisition & development	194,497		99.9		242		0.1
Land - consumer lot loans	96,573		99.4		579		0.6
Multi-family	1,423,723		100.0		—		—
Commercial real estate	1,561,340		99.4		9,162		0.6
Commercial & industrial	1,218,522		99.0		12,366		1.0
HELOC	138,391		99.4		812		0.6
Consumer	155,978		100.0		24		—
	$	13,191,461	99.6	%	$	48,941	0.4	%



September 30, 2018	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands, except ratio data)
Single-family residential	$	5,771,323	99.5	%	$	27,643	0.5	%
Construction	1,888,241		99.9		2,427		0.1
Construction - custom	624,479		100.0		—		—
Land - acquisition & development	154,284		99.4		920		0.6
Land - consumer lot loans	101,249		99.2		787		0.8
Multi-family	1,385,125		100.0		—		—
Commercial real estate	1,443,197		99.4		8,971		0.6
Commercial & industrial	1,126,480		98.7		14,394		1.3
HELOC	130,329		99.6		523		0.4
Consumer	173,285		100.0		21		—
	$	12,797,992	99.6	%	$	55,686	0.4	%

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



March 31, 2019	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	$	16,089	$	16,964	$	—		$	16,800
Construction	1,532		1,750		—			1,953
Land - acquisition & development	143		143		—			431
Land - consumer lot loans	135		165		—			209
Commercial real estate	8,757		13,482		—			9,376
Commercial & industrial	9,006		9,321		—			9,670
HELOC	528		528		—			486
Consumer	22		88		—			22
	36,212		42,441		—			38,947
Impaired loans with an allowance recorded:
Single-family residential	126,265		129,043		2,202			133,290
Land - acquisition & development	99		154		—			103
Land - consumer lot loans	4,489		4,946		7			4,669
Multi-family	419		419		4			434
Commercial real estate	4,942		6,051		120			5,583
Commercial & industrial	3,360		6,830		245			3,937
HELOC	960		972		—			968
Consumer	65		65		—			67
	140,599		148,480		2,578		(1)	149,051
Total impaired loans:
Single-family residential	142,354		146,007		2,202			150,090
Construction	1,532		1,750		—			1,953
Land - acquisition & development	242		297		—			534
Land - consumer lot loans	4,624		5,111		7			4,878
Multi-family	419		419		4			434
Commercial real estate	13,699		19,533		120			14,959
Commercial & industrial	12,366		16,151		245			13,607
HELOC	1,488		1,500		—			1,454
Consumer	87		153		—			89
	$	176,811	$	190,921	$	2,578	(1)	$	187,998


(1)	Includes $376,000 of specific reserves and $2,202,000 included in the general reserves.



September 30, 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	$	18,872	$	20,050	$	—		$	20,097
Construction	2,698		2,818		—			1,349
Construction - custom	—		—		—			74
Land - acquisition & development	814		814		—			572
Land - consumer lot loans	311		336		—			260
Multi-family	—		—		—			70
Commercial real estate	9,425		14,035		—			11,158
Commercial & industrial	10,137		10,146		—			9,208
HELOC	410		1,170		—			450
Consumer	20		56		—			54
	42,687		49,425		—			43,292
Impaired loans with an allowance recorded:
Single-family residential	139,796		143,099		2,871			161,729
Land - acquisition & development	107		157		—			39
Land - consumer lot loans	4,916		5,290		9			6,449
Multi-family	448		448		4			471
Commercial real estate	6,254		7,733		150			10,445
Commercial & industrial	4,291		7,506		354			4,495
HELOC	976		984		—			1,395
Consumer	70		70		—			83
	156,858		165,287		3,388		(1)	185,106
Total impaired loans:
Single-family residential	158,668		163,149		2,871			181,826
Construction	2,698		2,818		—			1,349
Construction - custom	—		—		—			74
Land - acquisition & development	921		971		—			611
Land - consumer lot loans	5,227		5,626		9			6,709
Multi-family	448		448		4			541
Commercial real estate	15,679		21,768		150			21,603
Commercial & industrial	14,428		17,652		354			13,703
HELOC	1,386		2,154		—			1,845
Consumer	90		126		—			137
	$	199,545	$	214,712	$	3,388	(1)	$	228,398


(1)	Includes $517,000 of specific reserves and $2,871,000 included in the general reserves.