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 twelve months ended September 30, 2011 and 2010:



September 30, 2011	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	47,160	$	(38,465	)	$	3,072	$	71,540		$	83,307
Construction - speculative	26,346		(13,197		)	2,143		(1,464		)	13,828
Construction - custom	770		(237		)	—		90			623
Land - acquisition & development	61,637		(39,797		)	2,271		8,608			32,719
Land - consumer lot loans	4,793		(4,196		)	—		4,923			5,520
Multi-family	5,050		(1,950		)	71		4,452			7,623
Commercial real estate	3,165		(1,593		)	328		2,431			4,331
Commercial & industrial	6,193		(4,733		)	1,925		1,714			5,099
HELOC	586		(939		)	185		1,307			1,139
Consumer	7,394		(4,602		)	1,429		(1,250		)	2,971
	$	163,094	$	(109,709	)	$	11,424	$	92,351		$	157,160



September 30, 2010	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers		Ending Allowance
	(In thousands)
Single-family residential	$	18,547	$	(33,812	)	$	104	$	62,321	$	47,160
Construction - speculative	21,841		(28,930		)	523		32,912		26,346
Construction - custom	81		(359		)	188		860		770
Land - acquisition & development	104,569		(105,576		)	844		61,800		61,637
Land - consumer lot loans	1,298		(359		)	11		3,843		4,793
Multi-family	1,878		(2,010		)	—		5,182		5,050
Commercial real estate	1,344		(651		)	3		2,469		3,165
Commercial & industrial	7,327		(8,902		)	923		6,845		6,193
HELOC	377		(118		)	—		327		586
Consumer	9,574		(6,670		)	1,140		3,350		7,394
	$	166,836	$	(187,387	)	$	3,736	$	179,909	$	163,094

The Company recorded a $93,104,000 provision for loan losses during the fiscal year ended September 30, 2011, while a $179,909,000 provision was recorded for the year ended September 30, 2010. The provision for loan losses for 2011 was $93,104,000, which was made up of the $92,351,000 shown above plus $753,000 in provision expense related to covered loans. Non-performing assets (“NPAs”) amounted to $370,294,000, or 2.76%, of total assets at September 30, 2011, compared to $434,530,000, or 3.22%, 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. The allowance for credit losses related to the acquired loans results from decreased expectations of future cash flows due to increased credit losses for certain acquired loan pools. Non-accrual loans decreased from 245,532,000 at September 30, 2010, to $210,465,000 at September 30, 2011, a 14.3% decrease. The Company had net charge-offs of $98,285,000 for the twelve months ended September 30, 2011, compared with $183,651,000 of net charge-offs for the same period 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. $115,248,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $41,912,000 was made up of specific reserves on loans that were deemed to be impaired at September 30, 2011. For the period ending September 30, 2010, $98,092,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $65,002,000 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 tables show a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of September 30, 2011 and 2010:



September 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	$	77,441	$	6,186,322	1.3	%	$	5,866	$	32,556	18.0	%
Construction - speculative	6,969		89,986		7.7		6,859		50,473		13.6
Construction - custom	623		279,851		0.2		—		—		—
Land - acquisition & development	10,489		61,277		17.1		22,230		139,415		15.9
Land - consumer lot loans	4,385		160,906		2.7		1,135		2,240		50.7
Multi-family	3,443		679,823		0.5		4,180		20,850		20.0
Commercial real estate	2,730		268,906		1.0		1,601		34,536		4.6
Commercial & industrial	5,058		106,406		4.8		41		2,926		1.4
HELOC	1,139		115,092		1.0		—		—		—
Consumer	2,971		67,509		4.4		—		—		—
	$	115,248	$	8,016,078	1.4	%	$	41,912	$	282,996	14.8	%

___________________


(1)	Excludes covered loans



September 30, 2010	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	$	41,057	$	6,525,729	0.6	%	$	6,103	$	26,107	23.4	%
Construction - speculative	15,792		113,059		14.0		10,554		56,653		18.6
Construction - custom	770		254,454		0.3		—		1,930		—
Land - acquisition & development	19,296		59,819		32.3		42,341		247,411		17.1
Land - consumer lot loans	3,020		183,253		1.7		1,773		3,587		49.4
Multi-family	2,490		688,778		0.4		2,560		8,573		29.9
Commercial real estate	2,313		315,063		0.7		852		852		100.0
Commercial & industrial	5,374		82,251		6.5		819		819		100.0
HELOC	586		116,143		0.5		—		—		—
Consumer	7,394		92,625		8.0		—		—		—
	$	98,092	$	8,431,174	1.2	%	$	65,002	$	345,932	18.8	%

___________________


(1)	Excludes covered loans

The following tables provide information on loans based on credit quality indicators (defined in Note A) as of September 30, 2011 and 2010:

Credit Risk Profile by Internally Assigned Grade:



September 30, 2011	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Single-family residential	$	6,047,279		$	—		$	171,599		$	—		$	—		$	6,218,878
Construction - speculative	56,485			21,035			62,939			—			—			140,459
Construction - custom	279,851			—			—			—			—			279,851
Land - acquisition & development	44,888			44,840			110,964			—			—			200,692
Land - consumer lot loans	162,670			—			476			—			—			163,146
Multi-family	663,582			4,629			32,462			—			—			700,673
Commercial real estate	264,083			4,125			35,234			—			—			303,442
Commercial & industrial	104,171			1,128			1,407			2,245			381			109,332
HELOC	115,092			—			—			—			—			115,092
Consumer	66,512			528			469			—			—			67,509
	$	7,804,613		$	76,285		$	415,550		$	2,245		$	381		$	8,299,074
Total grade as a % of total gross loans	94.1		%	0.9		%	5.0		%	—		%	—		%



September 30, 2010	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Single-family residential	$	6,395,018		$	1,041		$	155,778		$	—		$	—		$	6,551,837
Construction - speculative	68,984			7,689			93,039			—			—			169,712
Construction - custom	256,384			—			—			—			—			256,384
Land - acquisition & development	110,088			9,868			187,274			—			—			307,230
Land - consumer lot loans	186,840			—			—			—			—			186,840
Multi-family	661,820			2,046			33,485			—			—			697,351
Commercial real estate	273,001			3,768			39,048			—			98			315,915
Commercial & industrial	62,699			10,436			9,758			—			177			83,070
HELOC	116,143			—			—			—			—			116,143
Consumer	90,497			1,150			977			—			—			92,624
	$	8,221,474		$	35,998		$	519,359		$	—		$	275		$	8,777,106
Total grade as a % of total gross loans	93.7		%	0.4		%	5.9		%	—		%	—		%

Credit Risk Profile Based on Payment Activity:



September 30, 2011	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)				(In thousands)
Single-family residential	$	6,092,254	98.0	%	$	126,624	2.0	%
Construction - speculative	125,076		89.0		15,383		11.0
Construction - custom	279,216		99.8		635		0.2
Land - acquisition & development	163,353		81.4		37,339		18.6
Land - consumer lot loans	154,303		94.6		8,843		5.4
Multi-family	693,009		98.9		7,664		1.1
Commercial real estate	292,062		96.2		11,380		3.8
Commercial & industrial	107,653		98.5		1,679		1.5
HELOC	114,611		99.6		481		0.4
Consumer	67,072		99.4		437		0.6
	$	8,088,609	97.5	%	$	210,465	2.5	%



September 30, 2010	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)				(In thousands)
Single-family residential	$	6,428,214	98.1	%	$	123,623	1.9	%
Construction - speculative	129,797		76.5		39,915		23.5
Construction - custom	256,384		100.0		—		—
Land - acquisition & development	242,347		78.9		64,883		21.1
Land - consumer lot loans	186,840		100.0		—		—
Multi-family	692,420		99.3		4,931		0.7
Commercial real estate	305,084		96.6		10,831		3.4
Commercial & industrial	82,699		99.6		371		0.4
HELOC	116,143		100.0		—		—
Consumer	91,647		98.9		977		1.1
	$	8,531,575	97.2	%	$	245,531	2.8	%

The following tables provide information on impaired loans based on loan types as of September 30, 2011 and 2010:



September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	5,597	$	9,575	$	—		$	5,935
Construction - speculative	8,286		11,026		—			7,374
Construction - custom	—		—		—			—
Land - acquisition & development	22,436		50,970		—			28,168
Land - consumer lot loans	—		—		—			—
Multi-family	3,233		4,508		—			4,058
Commercial real estate	3,462		3,963		—			2,141
Commercial & industrial	—		—		—			—
HELOC	—		—		—			—
Consumer	—		—		—			—
	43,014		80,042		—			47,676
With an allowance recorded:
Single-family residential	331,546		331,546		29,378			261,736
Construction - speculative	29,255		29,255		6,859			26,385
Construction - custom	—		—		—			—
Land - acquisition & development	49,036		49,912		22,230			41,006
Land - consumer lot loans	352		352		1,135			110
Multi-family	17,149		17,149		4,180			12,380
Commercial real estate	6,429		6,429		1,601			3,351
Commercial & industrial	41		41		41			31
HELOC	—		—		—			—
Consumer	—		—		—			—
	433,808		434,684		65,424		(1)	344,999
Total:
Single-family residential	337,143		341,121		29,378			267,671
Construction - speculative	37,541		40,281		6,859			33,759
Construction - custom	—		—		—			—
Land - acquisition & development	71,472		100,882		22,230			69,174
Land - consumer lot loans	352		352		1,135			110
Multi-family	20,382		21,657		4,180			16,438
Commercial real estate	9,891		10,392		1,601			5,492
Commercial & industrial	41		41		41			31
HELOC	—		—		—			—
Consumer	—		—		—			—
	$	476,822	$	514,726	$	65,424	(1)	$	392,675

____________________


(1)	Includes $41,912,000 of specific reserves and $23,512,000 included in the general reserves.



September 30, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	3,385	$	3,385	$	—		$	1,614
Construction - speculative	21,563		24,971		—			17,085
Construction - custom	—		—		—			—
Land - acquisition & development	24,011		35,594		—			38,957
Land - consumer lot loans	—		—		—			—
Multi-family	8,934		8,934		—			2,403
Commercial real estate	10,607		10,607		—			3,332
Commercial & industrial	3,632		3,632		—			953
HELOC	—		—		—			—
Consumer	—		—		—			—
	72,132		87,123		—			64,344
With an allowance recorded:
Single-family residential	241,683		241,684		10,321			214,799
Construction - speculative	45,754		45,754		10,554			37,991
Construction - custom	—		—		—			—
Land - acquisition & development	116,428		116,428		42,341			108,251
Land - consumer lot loans	—		—		1,773			—
Multi-family	7,783		7,783		2,560			4,793
Commercial real estate	5,216		5,216		852			1,480
Commercial & industrial	830		830		819			230
HELOC	—		—		—			—
Consumer	—		—		—			—
	417,694		417,695		69,220		(1)	367,544
Total:
Single-family residential	245,068		245,069		10,321			216,413
Construction - speculative	67,317		70,725		10,554			55,076
Construction - custom	—		—		—			—
Land - acquisition & development	140,439		152,022		42,341			147,208
Land - consumer lot loans	—		—		1,773			—
Multi-family	16,717		16,717		2,560			7,196
Commercial real estate	15,823		15,823		852			4,812
Commercial & industrial	4,462		4,462		819			1,183
HELOC	—		—		—			—
Consumer	—		—		—			—
	$	489,826	$	504,818	$	69,220	(1)	$	431,888

____________________


(1)	Includes $65,002,000 of specific reserves and $4,218,000 included in the general reserves.