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Note E - Allowance for Losses on Loans | 9 Months Ended
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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

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