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 March 31, 2013 and fiscal year ended September 30, 2012:



Quarter Ended March 31, 2013	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	77,508	$	(5,140	)	$	2,368	$	2,686		$	77,422
Construction - speculative	8,660		(68		)	146		(981		)	7,757
Construction - custom	275		—			—		(13		)	262
Land - acquisition & development	15,056		(308		)	737		(3,264		)	12,221
Land - consumer lot loans	4,963		(574		)	—		(448		)	3,941
Multi-family	5,107		(653		)	9		(191		)	4,272
Commercial real estate	2,651		(147		)	10		1,642			4,156
Commercial & industrial	8,062		(55		)	40		581			8,628
HELOC	1,044		(15		)	—		2			1,031
Consumer	3,501		(814		)	521		(14		)	3,194
	$	126,827	$	(7,774	)	$	3,831	$	—		$	122,884



Fiscal Year Ended September 30, 2012	Beginning Allowance		Charge-offs			Recoveries		Provision & Transfers			Ending Allowance
	(In thousands)
Single-family residential	$	83,307	$	(53,789	)	$	8,164	$	44,133		$	81,815
Construction - speculative	13,828		(4,916		)	711		2,437			12,060
Construction - custom	623		—			—		(276		)	347
Land - acquisition & development	32,719		(16,978		)	1,341		(1,484		)	15,598
Land - consumer lot loans	5,520		(2,670		)	—		2,087			4,937
Multi-family	7,623		(1,393		)	504		(1,454		)	5,280
Commercial real estate	4,331		(814		)	225		(1,786		)	1,956
Commercial & industrial	5,099		(249		)	2,366		410			7,626
HELOC	1,139		(232		)	66		(8		)	965
Consumer	2,971		(3,538		)	1,480		1,650			2,563
	$	157,160	$	(84,579	)	$	14,857	$	45,709		$	133,147

The Company recorded a $0 provision for loan losses during the quarter ended March 31, 2013, while an $18,000,000 provision was recorded for the same quarter one year ago. Non-performing assets (“NPAs”) amounted to $246,075,000, or 1.88%, of total assets at March 31, 2013, compared to $286,248,000, or 2.11%, 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 March 31, 2013 as the associated discount is adequate to absorb potential losses. Non-accrual loans decreased from $166,153,000 at March 31, 2012, to $149,033,000 at March 31, 2013, a 10.3% decrease. The Company had net charge-offs of $3,943,000 for the quarter ended March 31, 2013, compared with $28,721,000 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. $114,039,000 of the allowance was calculated under our general allowance methodology and the remaining $8,845,000 was made up of specific reserves on loans that were deemed to be impaired at March 31, 2013. For the period ending March 31, 2012, $114,039,000 of the allowance was calculated under the formulas contained in our general allowance methodology and the remaining $29,781,000 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 shows a summary of loans collectively and individually evaluated for impairment and the related allocation of general and specific reserves as of March 31, 2013 and September 30, 2012:



March 31, 2013	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	$	77,422	$	5,264,505	1.5	%	$	—	$	110,471	—	%
Construction - speculative	5,749		99,513		5.8		2,008		21,104		9.5
Construction - custom	262		217,036		0.1		—		—		—
Land - acquisition & development	7,331		66,863		11.0		4,890		26,633		18.4
Land - consumer lot loans	3,630		115,399		3.1		311		14,657		2.1
Multi-family	2,892		714,430		0.4		1,380		10,892		12.7
Commercial real estate	3,900		370,717		1.1		256		14,870		1.7
Commercial & industrial	8,628		190,472		4.5		—		126		—
HELOC	1,031		110,570		0.9		—		1,052		—
Consumer	3,194		53,955		5.9		—		—		—
	$	114,039	$	7,203,460	1.6		$	8,845	$	199,805	4.4

___________________


(1)	Excludes acquired and covered loans



September 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	$	81,737	$	5,694,337	1.4	%	$	78	$	84,584	0.1	%
Construction - speculative	9,079		104,312		8.7		2,981		25,325		11.8
Construction - custom	347		211,690		0.2		—		—		—
Land - acquisition & development	6,697		47,294		14.2		8,901		77,383		11.5
Land - consumer lot loans	4,176		138,666		3.0		761		3,178		23.9
Multi-family	2,818		694,140		0.4		2,462		16,000		15.4
Commercial real estate	1,158		292,550		0.4		798		26,660		3.0
Commercial & industrial	7,624		161,689		4.7		2		1,134		0.2
HELOC	965		112,812		0.9		—		90		—
Consumer	2,563		63,374		4.0		—		—		—
	$	117,164	$	7,520,864	1.6		$	15,983	$	234,354	6.8


(1)	Excludes acquired and covered loans

The following tables provide information on loans based on credit quality indicators (defined in Note A) as of March 31, 2013 and September 30, 2012:

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



March 31, 2013	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,210,626		$	1,742		$	162,609		$	—		$	—		$	5,374,977
Construction - speculative	94,497			362			25,758			—			—			120,617
Construction - custom	217,036			—			—			—			—			217,036
Land - acquisition & development	64,282			840			28,374			—			—			93,496
Land - consumer lot loans	129,175			123			758			—			—			130,056
Multi-family	707,869			1,886			15,567			—			—			725,322
Commercial real estate	341,175			13,016			31,396			—			—			385,587
Commercial & industrial	186,296			1,391			2,702			—			209			190,598
HELOC	111,622			—			—			—			—			111,622
Consumer	53,359			411			186			—			—			53,956
	7,115,937			19,771			267,350			—			209			7,403,267

Acquired loans
Single-family residential	15,428			—			—			—			—			15,428
Construction - speculative	—			—			177			—			—			177
Construction - custom	313			—			—			—			—			313
Land - acquisition & development	2,198			—			1,238			—			—			3,436
Land - consumer lot loans	3,800			—			19			—			—			3,819
Multi-family	3,349			—			4,365			—			—			7,714
Commercial real estate	137,416			4,832			34,853			—			—			177,101
Commercial & industrial	80,507			1,379			14,115			254			—			96,255
HELOC	13,094			—			—			—			—			13,094
Consumer	10,046			—			—			—			—			10,046
	266,151			6,211			54,767			254			—			327,383

Credit impaired acquired loans
Pool 1 - Construction and land A&D	1,513			484			2,330			—			—			4,327
Pool 2 - Single-family residential	338			—			—			—			—			338
Pool 3 - Multi-family	—			—			—			—			—			—
Pool 4 - HELOC & other consumer	12,838			—			—			—			—			12,838
Pool 5 - Commercial real estate	52,254			1,014			25,651			949			—			79,868
Pool 6 - Commercial & industrial	1,018			195			499			379			—			2,091
Total credit impaired acquired loans	67,961			1,693			28,480			1,328			—			99,462
Total gross loans	$	7,450,049		$	27,675		$	350,597		$	1,582		$	209		$	7,830,112

Total grade as a % of total gross loans	95.1		%	0.4		%	4.5		%	—		%	—		%



September 30, 2012	Internally Assigned Grade															Total
	Pass			Special mention			Substandard			Doubtful			Loss			Gross Loans
	(In thousands)
Non-acquired loans
Single-family residential	$	5,588,252		$	844		$	189,826		$	—		$	—		$	5,778,922
Construction - speculative	86,126			10,113			33,398			—			—			129,637
Construction - custom	211,690			—			—			—			—			211,690
Land - acquisition & development	73,661			4,637			46,379			—			—			124,677
Land - consumer lot loans	140,006			223			1,615			—			—			141,844
Multi-family	684,649			5,098			20,393			—			—			710,140
Commercial real estate	278,022			16,282			24,906			—			—			319,210
Commercial & industrial	158,421			1,071			3,331			—			—			162,823
HELOC	112,902			—			—			—			—			112,902
Consumer	62,611			354			409			—			—			63,374
	7,396,340			$	38,622		$	320,257		$	—		$	—		$	7,755,219

Credit impaired acquired loans
Pool 1 - Construction and land A&D	2,466			—			3,125			—			—			5,591
Pool 2 - Single-family residential	342			—			—			—			—			342
Pool 3 - Multi-family	—			—			601			—			—			601
Pool 4 - HELOC & other consumer	14,137			—			—			—			—			14,137
Pool 5 - Commercial real estate	53,683			4,308			28,200			963			—			87,154
Pool 6 - Commercial & industrial	1,566			58			733			935			—			3,292
Total credit impaired acquired loans	72,194			4,366			32,659			1,898			—			111,117
Total gross loans	$	7,468,534		$	42,988		$	352,916		$	1,898		$	—		$	7,866,336
Total grade as a % of total gross loans	94.9		%	0.6		%	4.5		%	—		%	—		%

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



March 31, 2013	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,266,407	98.0	%	$	108,570	2.0	%
Construction - speculative	111,146		92.1		9,471		7.9
Construction - custom	216,997		100.0		39		—
Land - acquisition & development	79,178		84.7		14,318		15.3
Land - consumer lot loans	126,032		96.9		4,024		3.1
Multi-family	717,415		98.9		7,907		1.1
Commercial real estate	368,629		95.6		16,958		4.4
Commercial & industrial	189,611		99.5		987		0.5
HELOC	111,133		99.6		489		0.4
Consumer	53,603		99.3		353		0.7
	$	7,240,151	97.8		$	163,116	2.2



September 30, 2012	Performing Loans				Non-Performing Loans
	Amount		% of Total Gross Loans		Amount		% of Total Gross Loans
	(In thousands)
Single-family residential	$	5,647,729	97.7	%	$	131,193	2.3	%
Construction - speculative	119,003		91.8		10,634		8.2
Construction - custom	211,151		99.7		539		0.3
Land - acquisition & development	111,200		89.2		13,477		10.8
Land - consumer lot loans	136,695		96.4		5,149		3.6
Multi-family	705,955		99.4		4,185		0.6
Commercial real estate	311,557		97.6		7,653		2.4
Commercial & industrial	162,807		100.0		16		—
HELOC	112,704		99.8		198		0.2
Consumer	62,991		99.4		383		0.6
	$	7,581,792	97.8	%	$	173,427	2.2	%

The following table provides information on impaired loan balances and the related allowances by loan types as of March 31, 2013 and September 30, 2012:



								Average Recorded Investment
March 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance			Quarter Ended March 31, 2013		Six Months Ended March 31, 2013
	(In thousands)
With no related allowance recorded:
Single-family residential	$	41,125	$	48,331	$	—		$	34,045	$	32,492
Construction - speculative	4,377		5,217		—			4,135		4,066
Construction - custom	120		120		—			60		40
Land - acquisition & development	10,026		21,395		—			9,855		10,099
Land - consumer lot loans	3,000		3,246		—			2,498		2,325
Multi-family	5,498		5,498		—			3,218		2,460
Commercial real estate	15,616		16,956		—			12,968		11,244
Commercial & industrial	1,629		6,938		—			1,153		1,077
HELOC	157		172		—			165		167
Consumer	18		31		—			9		9
	81,566		107,904		—			68,106		63,979
With an allowance recorded:
Single-family residential	357,645		365,192		18,392			349,958		347,976
Construction - speculative	16,903		17,748		2,008			17,325		17,683
Construction - custom	—		—		—			—		—
Land - acquisition & development	17,763		20,424		4,890			19,028		20,195
Land - consumer lot loans	13,306		13,452		311			13,217		13,199
Multi-family	11,053		11,769		1,380			12,079		12,478
Commercial real estate	7,455		7,455		256			7,475		7,494
Commercial & industrial	—		—		—			—		—
HELOC	940		940		—			841		805
Consumer	—		—		—			—		—
	425,065		436,980		27,237		(1)	419,923		419,830
Total:
Single-family residential	398,770		413,523		18,392			384,003		380,468
Construction - speculative	21,280		22,965		2,008			21,460		21,749
Construction - custom	120		120		—			60		40
Land - acquisition & development	27,789		41,819		4,890			28,883		30,294
Land - consumer lot loans	16,306		16,698		311			15,715		15,524
Multi-family	16,551		17,267		1,380			15,297		14,938
Commercial real estate	23,071		24,411		256			20,443		18,738
Commercial & industrial	1,629		$	6,938	—			1,153		1,077
HELOC	1,097		1,112		—			1,006		972
Consumer	18		31		—			9		9
	$	506,631	$	544,884	$	27,237	(1)	$	488,029	$	483,809

____________________

(1)Includes $8,845,000 of specific reserves and $18,392,000 included in the general reserves.



September 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment
	(In thousands)
With no related allowance recorded:
Single-family residential	$	106,955	$	124,342	$	—		$	49,524
Construction - speculative	13,726		16,568		—			13,581
Construction - custom	—		—		—			—
Land - acquisition & development	18,000		30,209		—			16,417
Land - consumer lot loans	1,677		2,185		—			487
Multi-family	8,792		8,991		—			6,935
Commercial real estate	31,190		42,656		—			12,946
Commercial & industrial	1,146		7,363		—			581
HELOC	90		1,066		—			36
Consumer	—		4		—			—
	181,576		233,384		—			100,507
With an allowance recorded:
Single-family residential	317,901		317,901		25,723			305,350
Construction - speculative	12,836		12,836		2,981			12,822
Construction - custom	—		—		—			—
Land - acquisition & development	20,750		20,750		8,901			21,650
Land - consumer lot loans	13,881		13,881		761			13,126
Multi-family	14,153		14,555		2,462			14,279
Commercial real estate	3,722		3,722		798			2,897
Commercial & industrial	—		2		2			22
HELOC	734		734		—			743
Consumer	—		—		—			—
	383,977		384,381		41,628		(1)	370,889
Total:
Single-family residential	424,856		442,243		25,723			354,874
Construction - speculative	26,562		29,404		2,981			26,403
Construction - custom	—		—		—			—
Land - acquisition & development	38,750		50,959		8,901			38,067
Land - consumer lot loans	15,558		16,066		761			13,613
Multi-family	22,945		23,546		2,462			21,214
Commercial real estate	34,912		46,378		798			15,843
Commercial & industrial	1,146		7,365		2			603
HELOC	824		1,800		—			779
Consumer	—		4		—			—
	$	565,553	$	617,765	$	41,628	(1)	$	471,396


(1)	Includes $15,983,000 of specific reserves and $25,645,000 included in the general reserves.