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 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, 2012 and fiscal year ended September 30, 2011:



Quarter Ended June 30, 2012	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	83,875	$	(14,134	)	$	2,240	$	9,363		$	81,344
Construction - speculative	15,943		(2,288		)	86		(888		)	12,853
Construction - custom	384		—			—		(40		)	344
Land - acquisition & development	19,929		(1,519		)	533		(1,549		)	17,394
Land - consumer lot loans	7,712		(670		)	—		295			7,337
Multi-family	4,837		—			279		(278		)	4,838
Commercial real estate	2,869		(206		)	148		337			3,148
Commercial & industrial	4,427		(69		)	70		2,535			6,963
HELOC	969		(147		)	6		144			972
Consumer	2,874		(955		)	391		448			2,758
	$	143,819	$	(19,988	)	$	3,753	$	10,367		$	137,951



Fiscal Year Ended 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

The Company recorded a $10,367,000 provision for loan losses during the quarter ended June 30, 2012, while a $21,000,000 provision was recorded for the same quarter one year ago. Non-performing assets (“NPAs”) amounted to $278,490,000, or 2.07%, of total assets at June 30, 2012, compared to $394,679,000, or 2.96%, of total assets one year ago. Acquired loans, including covered loans, are not classified as non-performing loans because, at acquisition, the carrying value of these loans was adjusted to reflect fair value. There was no additional provision for loan losses recorded on acquired or covered loans during the quarter ended June 30, 2012. Non-accrual loans decreased from $232,752,000 at June 30, 2011, to $171,033,000 at June 30, 2012, a 26.5% decrease. The Company had net charge-offs of $16,235,000 for the quarter ended June 30, 2012, compared with $23,519,000 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. The percentage of loans 30 days or more delinquent decreased from 3.66% at June 30, 2011, to 2.69% at June 30, 2012. Delinquencies in the single-family residential portfolio, the largest portion of the loan portfolio, decreased from 3.43% at June 30, 2011, to 2.81% at June 30, 2012. In addition to these improving asset quality trends, real estate values are beginning to increase in most of the Company's primary markets. As a result, the Company recorded a smaller provision for loan losses in the current quarter as compared to the same quarter one year ago. $116,164,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $21,787,000 was made up of specific reserves on loans that were deemed to be impaired at June 30, 2012. For the period ending June 30, 2011, $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. 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 a still weak macro economic environment which may negatively impact the single-family residential portfolio.

The following tables shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of June 30, 2012 and September 30, 2011:



June 30, 2012	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	$	80,437	$	5,823,964	1.4	%	$	907	$	80,842	1.1	%
Construction - speculative	8,615		98,980		8.7		4,238		31,760		13.3
Construction - custom	344		210,488		0.2		—		—		—
Land - acquisition & development	5,777		40,803		14.2		11,617		94,589		12.3
Land - consumer lot loans	6,447		142,712		4.5		890		2,417		36.8
Multi-family	2,728		671,837		0.4		2,110		20,927		10.1
Commercial real estate	1,136		286,779		0.4		2,012		23,808		8.5
Commercial & industrial	6,950		147,394		4.7		13		1,183		1.1
HELOC	972		113,559		0.9		—		—		—
Consumer	2,758		68,202		4.0		—		—		—
	$	116,164	$	7,604,718	1.5		$	21,787	$	255,526	8.5

___________________


(1)	Excludes acquired and covered loans



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

The following tables provide information on loans based on credit quality indicators (defined in Note A) as of June 30, 2012 and September 30, 2011:

Credit Risk Profile by Internally Assigned Grade (excludes covered loans):



June 30, 2012	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,714,905		$	299		$	189,601		$	—		$	—		$	5,904,805
Construction - speculative	80,542			6,695			43,504			—			—			130,741
Construction - custom	210,488			—			—			—			—			210,488
Land - acquisition & development	42,907			21,935			70,550			—			—			135,392
Land - consumer lot loans	144,658			356			115			—			—			145,129
Multi-family	660,948			7,574			24,241			—			—			692,763
Commercial real estate	271,050			4,608			34,930			—			—			310,588
Commercial & industrial	146,075			352			2,150			—			—			148,577
HELOC	113,559			—			—			—			—			113,559
Consumer	67,301			528			373			—			—			68,202
	7,452,433			42,347			365,464			—			—			7,860,244

Credit impaired acquired loans
Pool 1 - Construction and land A&D	2,514			—			3,587			—			—			6,101
Pool 2 - Single-family residential	343			—			—			—			—			343
Pool 3 - Multi-family	—			—			1,074			—			—			1,074
Pool 4 - HELOC & other consumer	15,151			—			—			—			—			15,151
Pool 5 - Commercial real estate	52,223			5,493			32,257			1,033			—			91,006
Pool 6 - Commercial & industrial	2,548			805			1,343			404			—			5,100
Total credit impaired acquired loans	72,779			6,298			38,261			1,437			—			118,775
Total gross loans	$	7,525,212		$	48,645		$	403,725		$	1,437		$	—		$	7,979,019

Total grade as a % of total gross loans	94.3		%	0.6		%	5.1		%	—		%	—		%



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		%	—		%	—		%

Credit Risk Profile Based on Payment Activity (excludes acquired and covered loans):



June 30, 2012	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,775,510	97.8	%	$	129,295	2.2	%
Construction - speculative	118,317		90.5		12,424		9.5
Construction - custom	209,949		99.7		539		0.3
Land - acquisition & development	122,878		90.8		12,514		9.2
Land - consumer lot loans	139,285		96.0		5,844		4.0
Multi-family	689,358		99.5		3,405		0.5
Commercial real estate	304,303		98.0		6,285		2.0
Commercial & industrial	148,577		100.0		—		—
HELOC	113,171		99.7		388		0.3
Consumer	67,863		99.5		339		0.5
	$	7,689,211	97.8		$	171,033	2.2



September 30, 2011	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(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	%

The following table provides information on impaired loans based on loan types as of June 30, 2012 and September 30, 2011:



								Average Recorded Investment
June 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance			Quarter Ended June 30, 2012		Nine Months Ended June 30, 2012
	(In thousands)
With no related allowance recorded:
Single-family residential	$	76,505	$	94,492	$	—		$	60,077	$	33,103
Construction - speculative	14,041		16,819		—			15,463		13,697
Construction - custom	—		157		—			—		—
Land - acquisition & development	16,213		35,449		—			16,422		18,025
Land - consumer lot loans	794		1,000		—			438		219
Multi-family	8,276		8,484		—			7,889		6,638
Commercial real estate	26,038		39,965		—			14,982		7,962
Commercial & industrial	1,568		13,265		—			885		443
HELOC	90		3,018		—			83		42
Consumer	—		60		—			—		—
	143,525		212,709		—			116,239		80,129
With an allowance recorded:
Single-family residential	345,103		345,103		25,796			334,249		333,820
Construction - speculative	14,602		14,602		4,238			14,600		14,519
Construction - custom	—		—		—			—		—
Land - acquisition & development	26,985		26,984		11,617			27,232		27,966
Land - consumer lot loans	1,622		1,622		890			811		406
Multi-family	11,312		11,312		2,110			11,332		11,367
Commercial real estate	7,269		7,269		2,012			6,912		6,656
Commercial & industrial	13		13		13			18		28
HELOC	—		—		—			—		—
Consumer	—		—		—			—		—
	406,906		406,905		46,676		(1)	395,154		394,762
Total:
Single-family residential	421,608		439,595		25,796			394,326		366,923
Construction - speculative	28,643		31,421		4,238			30,063		28,216
Construction - custom	—		157		—			—		—
Land - acquisition & development	43,198		62,433		11,617			43,654		45,991
Land - consumer lot loans	2,416		2,622		890			1,249		625
Multi-family	19,588		19,796		2,110			19,221		18,005
Commercial real estate	33,307		47,234		2,012			21,894		14,618
Commercial & industrial	1,581		$	13,278	13			903		471
HELOC	90		3,018		—			83		42
Consumer	—		60		—			—		—
	$	550,431	$	619,614	$	46,676	(1)	$	511,393	$	474,891

____________________

(1)Includes $21,787,000 of specific reserves and $24,889,000 included in the general reserves.



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.