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Allowance for Losses on Loans

9 Months Ended

Jun. 30, 2019

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



Three Months Ended June 30, 2019	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	31,476	$	(65	)	$	47	$	56		$	31,514
Construction	33,396		—			—		661			34,057
Construction - custom	1,976		(339		)	—		247			1,884
Land - acquisition & development	9,734		(65		)	2,025		(2,306		)	9,388
Land - consumer lot loans	2,076		(215		)	—		171			2,032
Multi-family	7,394		—			—		(111		)	7,283
Commercial real estate	12,448		—			90		466			13,004
Commercial & industrial	30,574		(4,034		)	3,218		1,313			31,071
HELOC	1,082		—			1		4			1,087
Consumer	2,930		(34		)	307		(501		)	2,702
	$	133,086	$	(4,752	)	$	5,688	$	—		$	134,022



Three Months Ended June 30, 2018	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	34,144	$	(299	)	$	283	$	273		$	34,401
Construction	27,389		—			—		2,744			30,133
Construction - custom	2,081		—			—		(67		)	2,014
Land - acquisition & development	7,622		(12		)	2,699		(2,609		)	7,700
Land - consumer lot loans	2,853		(1		)	35		20			2,907
Multi-family	7,982		—			—		109			8,091
Commercial real estate	11,588		—			91		(100		)	11,579
Commercial & industrial	29,330		(3,317		)	433		1,069			27,515
HELOC	802		—			—		9			811
Consumer	3,785		(45		)	223		(448		)	3,515
	$	127,576	$	(3,674	)	$	3,764	$	1,000		$	128,666



Nine Months Ended June 30, 2019	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	33,033	$	(238	)	$	586	$	(1,867	)	$	31,514
Construction	31,317		—			—		2,740			34,057
Construction - custom	1,842		(339		)	—		381			1,884
Land - acquisition & development	7,978		(65		)	5,107		(3,632		)	9,388
Land - consumer lot loans	2,164		(336		)	265		(61		)	2,032
Multi-family	8,329		—			—		(1,046		)	7,283
Commercial real estate	11,852		(339		)	860		631			13,004
Commercial & industrial	28,702		(4,499		)	3,276		3,592			31,071
HELOC	781		(1,086		)	45		1,347			1,087
Consumer	3,259		(506		)	784		(835		)	2,702
	$	129,257	$	(7,408	)	$	10,923	$	1,250		$	134,022



Nine Months Ended June 30, 2018	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	36,892	$	(1,049	)	$	615	$	(2,057	)	$	34,401
Construction	24,556		—			—		5,577			30,133
Construction - custom	1,944		(50		)	—		120			2,014
Land - acquisition & development	6,829		(12		)	7,278		(6,395		)	7,700
Land - consumer lot loans	2,649		(67		)	35		290			2,907
Multi-family	7,862		—			—		229			8,091
Commercial real estate	11,818		(36		)	92		(295		)	11,579
Commercial & industrial	28,524		(3,433		)	603		1,821			27,515
HELOC	855		(1		)	—		(43		)	811
Consumer	1,144		(217		)	785		1,803			3,515
	$	123,073	$	(4,865	)	$	9,408	$	1,050		$	128,666

The Company did not record any provision for loan losses for the three months ended June 30, 2019, compared to a $1,000,000 provision for loan losses for the three months ended June 30, 2018. A provision for loan losses of $250,000 and $50,000 was recorded for the nine months ended June 30, 2019 and June 30, 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 $936,000 for the three months ended June 30, 2019, compared to net recoveries of $90,000 during the three months ended June 30, 2018. Recoveries, net of charge-offs, totaled $3,515,000 for the nine months ended June 30, 2019, compared to net recoveries of $4,543,000 during the nine months ended June 30, 2018.

Non-performing assets were $51,117,000, or 0.31% of total assets, at June 30, 2019, compared to $70,093,000, or 0.44% of total assets, at September 30, 2018. Non-accrual loans were $41,005,000 at June 30, 2019, compared to $55,686,000 at September 30, 2018. Delinquencies, as a percent of total loans, were 0.35% at June 30, 2019, compared to 0.42% at September 30, 2018.

The reserve for unfunded commitments was $6,250,000 as of June 30, 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 $140,272,000, or 1.05% of gross loans as of June 30, 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.



June 30, 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	$	31,514	$	5,861,596	0.5	%	$	—	$	16,107	—	%
Construction	34,057		1,168,667		2.9		—		—		—
Construction - custom	1,884		293,063		0.6		—		1,161		—
Land - acquisition & development	9,371		160,210		5.8		17		173		9.8
Land - consumer lot loans	2,032		90,629		2.2		—		582		—
Multi-family	7,279		1,401,288		0.5		4		1,832		0.2
Commercial real estate	12,772		1,609,208		0.8		232		13,736		1.7
Commercial & industrial	30,993		1,250,289		2.5		78		6,155		1.3
HELOC	1,087		138,269		0.8		—		692		—
Consumer	2,702		142,210		1.9		—		—		—
	$	133,691	$	12,115,429	1.1	%	$	331	$	40,438	0.8	%



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 June 30, 2019, $133,691,000 of the allowance was calculated under the Company's general allowance methodology and the remaining $331,000 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.



June 30, 2019	Internally Assigned Grade
	Pass			Special mention			Substandard			Doubtful			Loss			Total Gross Loans
	(In thousands, except ratio data)
Loan type
Single-family residential	$	5,846,169		$	—		$	27,414		$	—		$	—		$	5,873,583
Construction	1,997,236			—			—			—			—			1,997,236
Construction - custom	569,736			—			1,161			—			—			570,897
Land - acquisition & development	199,241			—			3,845			—			—			203,086
Land - consumer lot loans	94,413			—			814			—			—			95,227
Multi-family	1,395,316			—			7,826			—			—			1,403,142
Commercial real estate	1,590,337			2,771			29,835			—			—			1,622,943
Commercial & industrial	1,224,843			4,141			26,139			1,275			—			1,256,398
HELOC	139,112			—			802			—			—			139,914
Consumer	142,317			—			—			—			—			142,317
Total gross loans	$	13,198,720		$	6,912		$	97,836		$	1,275		$	—		$	13,304,743

Total grade as a % of total gross loans	99.20		%	0.05		%	0.74		%	0.01		%	—		%



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	99.03		%	0.21		%	0.76		%	—		%	—		%

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



June 30, 2019	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands, except ratio data)
Single-family residential	$	5,851,298	99.6	%	$	22,285	0.4	%
Construction	1,997,236		100.0		—		—
Construction - custom	569,736		99.8		1,161		0.2
Land - acquisition & development	202,913		99.9		173		0.1
Land - consumer lot loans	94,586		99.3		641		0.7
Multi-family	1,401,711		99.9		1,431		0.1
Commercial real estate	1,614,479		99.5		8,464		0.5
Commercial & industrial	1,250,351		99.5		6,047		0.5
HELOC	139,111		99.4		803		0.6
Consumer	142,317		100.0		—		—
	$	13,263,738	99.7	%	$	41,005	0.3	%



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.



June 30, 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	$	15,045	$	16,340	$	—		$	16,361
Construction	—		—		—			1,465
Construction - custom	1,257		1,257		—			314
Land - acquisition & development	78		143		—			343
Land - consumer lot loans	466		499		—			273
Multi-family	1,431		1,431		—			358
Commercial real estate	8,854		14,320		—			9,245
Commercial & industrial	5,715		9,904		—			8,682
HELOC	692		785		—			537
Consumer	—		35		—			17
	33,538		44,714		—			37,595
Impaired loans with an allowance recorded:
Single-family residential	117,967		120,785		2,165			129,459
Land - acquisition & development	95		153		—			101
Land - consumer lot loans	4,056		4,472		17			4,516
Multi-family	402		402		4			426
Commercial real estate	4,882		6,002		232			5,408
Commercial & industrial	440		529		78			3,063
HELOC	953		966		—			964
Consumer	62		62		—			66
	128,857		133,371		2,496		(1)	144,003
Total impaired loans:
Single-family residential	133,012		137,125		2,165			145,820
Construction	—		—		—			1,465
Construction - custom	1,257		1,257		—			314
Land - acquisition & development	173		296		—			444
Land - consumer lot loans	4,522		4,971		17			4,789
Multi-family	1,833		1,833		4			784
Commercial real estate	13,736		20,322		232			14,653
Commercial & industrial	6,155		10,433		78			11,745
HELOC	1,645		1,751		—			1,501
Consumer	62		97		—			83
	$	162,395	$	178,085	$	2,496	(1)	$	181,598


(1)	Includes $331,000 of specific reserves and $2,165,000 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.