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Note E - Allowance for Losses on Loans
9 Months Ended
Jun. 30, 2011
Allowance for Losses on Loans [Abstract]  
Allowance for Losses on Loans
Allowance for Losses on Loans
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 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 table summarizes the activity in the allowance for loan losses for the quarter ended June 30, 2011:
 
 
Beginning
Allowance
 
Charge-offs
 
Recoveries
 
Provision &
Transfers
 
Ending
Allowance
 
(In thousands)
Single-family residential
$
66,883


 
$
(8,985
)
 
$
969


 
$
15,694


 
$
74,561


Construction - speculative
21,536


 
(733
)
 
564


 
1,108


 
22,475


Construction - custom
548


 
(80
)
 


 
122


 
590


Land - acquisition & development
44,648


 
(12,027
)
 
158


 
2,576


 
35,355


Land - consumer lot loans
5,675


 
(1,169
)
 


 
1,307


 
5,813


Multi-family
8,007


 
(1,100
)
 


 
22


 
6,929


Commercial real estate
3,499


 
(75
)
 
53


 
874


 
4,351


Commercial & industrial
6,406


 
(189
)
 
70


 
(1,224
)
 
5,063


HELOC
1,148


 
(496
)
 
110


 
386


 
1,148


Consumer
5,267


 
(983
)
 
395


 
135


 
4,814


 
$
163,617


 
$
(25,837
)
 
$
2,319


 
$
21,000


 
$
161,099




The Company recorded a $21,000,000 provision for loan losses during the quarter ended June 30, 2011, while a $20,736,000 provision was recorded for the same quarter one year ago. Non-performing assets (“NPAs”) amounted to $394,679,000, or 2.96%, of total assets at June 30, 2011, compared to $473,121,000, or 3.45%, of total assets one year ago. Covered loans are not classified as non-performing loans because, at acquisition, the carrying value of these loans was adjusted to reflect fair value and are covered under FDIC loss sharing agreements. There was no allowance for loan losses related to the covered loans at June 30, 2011, as these loans are performing as anticipated or better than the projections used in the purchase accounting fair value calculations. Non-accrual loans decreased from $292,335,000 at June 30, 2010, to $232,752,000 at June 30, 2011, a 20.4% decrease. The Company had net charge-offs of $23,519,000 for the quarter ended June 30, 2011, compared with $41,862,000 of net charge-offs for the same quarter one year ago. A loan is charged-off when the loss is estimable and it is confirmed that the borrower will not be able to meet its contractual obligations. While the percentage of loans 30 days or more delinquent decreased from 3.95% at June 30, 2010, to 3.66% at June 30, 2011, delinquencies in the single-family residential portfolio, the largest portion of the loan portfolio, increased from 3.09% at June 30, 2010, to 3.43% at June 30, 2011. In addition to these mixed asset quality trends, real estate values remain under pressure in most of the Company's primary markets, thus the Company recorded a similar provision for loan losses in the current quarter as compared to the same quarter one year ago. $114,159,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $46,940,000 was made up of specific reserves on loans that were deemed to be impaired at June 30, 2011. For the period ending June 30, 2010, $89,759,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $83,668,000 was made up of specific reserves on loans that were deemed to be impaired. The primary reasons for the shift in total allowance allocation from specific reserves to general reserves is due to the Company having already addressed many of the problem loans focused in the speculative construction and land A&D portfolios, combined with an increase in delinquencies and elevated charge-offs in the single-family residential portfolio.
The following table shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of June 30, 2011:
 
 
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
$
70,755


 
$
6,265,274


 
1.1
%
 
$
3,806


 
$
15,798


 
24.1
%
Construction - speculative
15,069


 
98,464


 
15.3


 
7,406


 
45,500


 
16.3


Construction - custom
590


 
270,894


 
0.2


 


 


 


Land - acquisition & development
6,196


 
53,351


 
11.6


 
29,159


 
177,550


 
16.4


Land - consumer lot loans
4,579


 
167,418


 
2.7


 
1,234


 
2,296


 
53.7


Multi-family
3,474


 
695,986


 
0.5


 
3,455


 
21,121


 
16.4


Commercial real estate
2,690


 
268,519


 
1.0


 
1,661


 
34,504


 
4.8


Commercial & industrial
4,844


 
77,884


 
6.2


 
219


 
4,207


 
5.2


HELOC
1,148


 
114,676


 
1.0


 


 


 


Consumer
4,814


 
73,061


 
6.6


 


 


 


 
$
114,159


 
$
8,085,527


 
1.4


 
$
46,940


 
$
300,976


 
15.6


 ___________________
(1)
Excludes covered loans
The following tables provide information on loans based on credit quality indicators (defined in Note A) as of June 30, 2011:
Credit Risk Profile by Internally Assigned Grade:
 
  
Internally Assigned Grade
 
Total
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Loss
 
Gross Loans
 
(In thousands)
Single-family residential
$
6,149,861


 
$


 
$
131,211


 
$


 
$


 
$
6,281,072


Construction - speculative
31,871


 
5,484


 
106,609


 


 


 
143,964


Construction - custom
270,894


 


 


 


 


 
270,894


Land - acquisition & development
42,791


 
2,470


 
185,640


 


 


 
230,901


Land - consumer lot loans
169,590


 


 
124


 


 


 
169,714


Multi-family
680,729


 
3,756


 
32,622


 


 


 
717,107


Commercial real estate
263,993


 
4,345


 
34,685


 


 


 
303,023


Commercial & industrial
75,834


 
1,316


 
4,941


 


 


 
82,091


HELOC
114,676


 


 


 


 


 
114,676


Consumer
72,264


 
511


 
286


 


 


 
73,061


 
$
7,872,503


 
$
17,882


 
$
496,118


 
$


 
$


 
$
8,386,503


Total grade as a % of total gross loans
93.9
%
 
0.2
%
 
5.9
%
 
%
 
%
 
 




Credit Risk Profile Based on Payment Activity:
 
 
Performing Loans
 
Non-Performing Loans
 
Amount
 
% of Total
Gross  Loans
 
Amount
 
% of Total
Gross  Loans
 
(In thousands)
Single-family residential
$
6,151,274


 
97.9
%
 
$
129,798


 
2.1
%
Construction - speculative
119,425


 
83.0


 
24,539


 
17.0


Construction - custom
270,894


 
100.0


 


 


Land - acquisition & development
179,801


 
77.9


 
51,100


 
22.1


Land - consumer lot loans
163,566


 
96.4


 
6,148


 
3.6


Multi-family
709,257


 
98.9


 
7,850


 
1.1


Commercial real estate
290,837


 
96.0


 
12,186


 
4.0


Commercial & industrial
81,834


 
99.7


 
257


 
0.3


HELOC
114,086


 
99.5


 
590


 
0.5


Consumer
72,777


 
99.6


 
284


 
0.4


 
$
8,153,751


 
97.2


 
$
232,752


 
2.8




The following table provides information on impaired loans based on loan types as of June 30, 2011:


 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
(In thousands)
With no related allowance recorded:
 
 
 
 
 
 
 
Single-family residential
$


 
$


 
$


 
$


Construction - speculative
23,523


 
32,184


 


 
28,839


Construction - custom


 


 


 


Land - acquisition & development
44,320


 
78,408


 


 
26,180


Land - consumer lot loans


 


 


 


Multi-family
5,206


 
6,306


 


 
2,564


Commercial real estate
16,399


 
16,885


 


 
5,536


Commercial & industrial


 


 


 


HELOC


 


 


 


Consumer


 


 


 


 
89,448


 
133,783


 


 
63,119


With an allowance recorded:
 
 
 
 
 
 
 
Single-family residential
287,504


 
287,504


 
25,368


 
251,584


Construction - speculative
41,914


 
42,091


 
7,406


 
37,197


Construction - custom


 


 


 


Land - acquisition & development
64,836


 
64,836


 
29,159


 
41,410


Land - consumer lot loans


 


 
1,234


 


Multi-family
16,934


 
16,934


 
3,455


 
6,097


Commercial real estate
3,784


 
3,784


 
1,661


 
1,632


Commercial & industrial
279


 
279


 
219


 
741


HELOC


 


 


 


Consumer


 


 


 


 
415,251


 
415,428


 
68,502


(1)
338,661


Total:
 
 
 
 
 
 
 
Single-family residential
287,504


 
287,504


 
25,368


 
251,584


Construction - speculative
65,437


 
74,275


 
7,406


 
66,036


Construction - custom


 


 


 


Land - acquisition & development
109,156


 
143,244


 
29,159


 
67,590


Land - consumer lot loans


 


 
1,234


 


Multi-family
22,140


 
23,240


 
3,455


 
8,661


Commercial real estate
20,183


 
20,669


 
1,661


 
7,168


Commercial & industrial
279


 
279


 
219


 
741


HELOC


 


 


 


Consumer


 


 


 


 
$
504,699


 
$
549,211


 
$
68,502


(1)
$
401,780


____________________ 
(1)
Includes $46,940,000 of specific reserves and $21,562,000 included in the general reserves