Loans, Impaired Loans, and Allowance for Loan Losses

9 Months Ended

Jun. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 3. Loans, Impaired Loans, and Allowance for Loan Losses

          The following table presents the loan portfolio by major category.

Loans (in thousands)	June 30, 2011		September 30, 2010
Residential loans
Residential 1-4 family	$	895,650	$	836,644
Residential construction		19,603		14,436
Residential land		42,763		56,344
Total residential loans		958,016		907,424
Commercial loans
Commercial business		80,566		92,650
Commercial real estate		482,315		598,547
Commercial construction		16,037		28,449
Commercial land		70,562		143,366
Total commercial loans		649,480		863,012
Consumer loans
Home equity		379,122		397,632
Manufactured housing		274,192		269,857
Marine		57,406		65,901
Other consumer		53,853		60,522
Total consumer loans		764,573		793,912
Total loans		2,372,069		2,564,348
Less: Allowance for loan losses		55,491		86,871
Net loans	$	2,316,578	$	2,477,477
Residential 1-4 family, to be sold in the secondary market	$	23,994	$	28,400
Loans held for sale; to be sold in a bulk sale		60,294		—
Total loans held for sale	$	84,288	$	28,400

          The following table presents the loan portfolio by age of delinquency.

Age Analysis Past Due Loans
	As of June 30, 2011
(in thousands)	31-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater, Accruing		Total Past Due		Current1		Total Loans
Residential loans
Residential 1-4 family	$	159	$	1,245	$	1,242	$	—	$	2,646	$	893,004	$	895,650
Residential construction		—		—		—		—		—		19,603		19,603
Residential land		—		325		451		—		776		41,987		42,763
Total residential loans		159		1,570		1,693		—		3,422		954,594		958,016
Commercial loans
Commercial business		2,091		296		3,664		—		6,051		74,515		80,566
Commercial real estate		2,568		135		16,396		—		19,099		463,216		482,315
Commercial construction		—		—		1,451		—		1,451		14,586		16,037
Commercial land		722		99		5,411		—		6,232		64,330		70,562
Total commercial loans		5,381		530		26,922		—		32,833		616,647		649,480
Consumer loans
Home equity		2,227		1,038		9,165		—		12,430		366,692		379,122
Manufactured housing		1,512		786		2,953		—		5,251		268,941		274,192
Marine		208		55		94		—		357		57,049		57,406
Other consumer		465		124		129		76		794		53,059		53,853
Total consumer loans		4,412		2,003		12,341		76		18,832		745,741		764,573
Total loans	$	9,952	$	4,103	$	40,956	$	76	$	55,087	$	2,316,982	$	2,372,069
Total loans excluding covered loans	$	7,218	$	3,874	$	24,771	$	76	$	35,939	$	2,173,843	$	2,209,782

¹ Included in current loans are $1.5 million of performing TDRs.

          On April 10, 2009, First Federal entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and liabilities of Cape Fear Bank. The acquired loan portfolio and other repossessed assets (solely comprised of other real estate owned (“OREO”)) are subject to a loss sharing agreement with the FDIC and the table above includes these “covered loans” and “covered OREO.”

          The following table summarizes nonperforming assets.

Nonperforming Assets (in thousands)	June 30, 2011		September 30, 2010
Nonaccrual loans	$	40,956	$	140,231
Loans 90+ days, still accruing		76		175
Restructured loans, still accruing		1,535		750
Total nonperforming loans		42,567		141,156
Nonperforming loans held for sale		42,656		—
Other repossessed assets acquired		27,812		11,950
Total nonperfoming assets	$	113,035	$	153,106

          Covered loans that were performing at the time of acquisition and have subsequently become nonperforming and placed on nonaccrual or have migrated to other repossessed assets acquired are included in the table above. Covered nonperforming loans totaled $16.9 million at June 30, 2011, compared with $9.8 million at September 30, 2010. OREO totaled $7.3 million at June 30, 2011, compared with $4.9 million at September 30, 2010. Covered loans which were considered nonperforming at acquisition, and accounted for as specified by ASC 310-30, are not included in the table above as these loans are recorded at fair value.

Impaired Loans

          In accordance with ASC 310-10-35, a loan is considered impaired when First Federal determines it is probable that the principal and interest due under the contractual terms of the loan will not be collected. Criticized and classified commercial loans (as defined in the “Criticized Loans, Classified Loans and Other Risk Characteristics” section of this Note) greater than $500,000 are reviewed for potential impairment as part of a monthly problem loan review process. In addition, homogeneous loans which have been modified are reviewed for potential impairment. Smaller balance homogenous loans, such as residential mortgage loans and consumer loans, are evaluated collectively for potential loss.

          In assessing the impairment of a loan and the related reserve required for that loan, various methodologies are employed. Impairment measurement on loans that are not collateral dependent is determined primarily using the present value of expected future cash flows discounted at the loan’s effective interest rate. With respect to most real estate loans, and specifically if the loan is considered to be collected through a probable foreclosure, an approach that estimates the fair value of the underlying collateral is used. The collateral is appraised to reflect estimated realizable value, with the market value being adjusted for estimated selling costs. First Federal’s policy is to update collateral appraisals on impaired loans at least annually, and more frequently if deemed necessary based on market conditions or specific circumstances. Significant downward trends in the real estate market can adversely affect First Federal’s collateral position. For larger credits or loans that are classified “substandard” or worse that rely primarily on real estate collateral, re-appraisal would occur earlier than the stated policy if management believes the market conditions have changed such that the existing appraisal may no longer reflect the current market value of the property. At a minimum, at the time a loan with a principal balance of over $500,000 is downgraded to “substandard” or worse, or if the loan is determined to be impaired, the property securing the loan is re-appraised to update the value. In addition to updated appraisals, market bids or current offers may be utilized to estimate current value.

          First Federal maintains a valuation reserve for impaired loans as part of the allowance for loan losses. Cash collected on impaired nonaccrual loans is applied to outstanding principal. Effective June 30, 2011, First Financial reclassified $155.3 million of certain nonperforming and performing loans to loans held for sale. Prior to the loan reclassification, the June 30, 2011 total recorded investment in impaired loans was $104.4 million. A summary of impaired loans, related valuation reserves, and their effect on interest income follows.

Impaired Loans
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Specific Allowance		Recorded Investment With Specific Allowance		Total Recorded Investment		Specific Allowance		Year to Date Average Balance		Interest Income Recognized for the Quarter		Interest Income Recognized Year to Date
June 30, 2011
Residential loans
Residential 1-4 family	$	1,449	$	733	$	601	$	1,334	$	127	$	4,513	$	10	$	30
Residential land		—		—		—		—		—		1,128		—		—
Total residential loans		1,449		733		601		1,334		127		5,641		10		30
Commercial loans
Commercial business		3,388		1,343		1,745		3,088		8		3,682		—		—
Commercial real estate		16,601		9,153		3,193		12,346		436		33,168		13		26
Commercial construction		1,497		265		1,186		1,451		444		2,882		—		—
Commercial land		7,886		2,976		1,380		4,356		378		29,216		—		—
Total commercial loans		29,372		13,737		7,504		21,241		1,266		68,947		13		26
Consumer loans
Home equity		2,575		811		1,639		2,450		1,032		1,479		—		—
Manufactured Housing		156		139		—		139		—		35		—		—
Marine		—		—		—		—		—		4		—		—
Total consumer loans		2,731		950		1,639		2,589		1,032		1,518		—		—
Total impaired loans	$	33,552	$	15,420	$	9,744	$	25,164	$	2,425	$	76,106	$	23	$	56
September 30, 2010
Residential loans
Residential 1-4 family	$	3,483	$	2,489	$	691	$	3,180	$	178			$	—	$	—
Residential land		3,868		1,635		549		2,184		77				—		—
Total residential loans		7,351		4,124		1,240		5,364		255				—		—
Commercial loans
Commercial business		3,583		1,578		1,106		2,684		877				—		—
Commercial real estate		44,794		19,154		14,712		33,866		2,925				—		—
Commercial construction		6,588		4,148		780		4,928		343				—		—
Commercial land		63,106		17,412		22,284		39,696		8,674				—		—
Total commercial loans		118,071		42,292		38,882		81,174		12,819				—		—
Consumer loans
Home equity		338		338		—		338		—				—		—
Marine		15		—		15		15		3				—		—
Total consumer loans		353		338		15		353		3				—		—
Total impaired loans	$	125,775	$	46,754	$	40,137	$	86,891	$	13,077	$	89,311	$	—	$	—

Troubled Debt Restructuring

          First Federal accounts for certain loan modifications or restructurings as a troubled debt restructurings (“TDR”). In general, the modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that First Federal would not otherwise consider. As of June 30, 2011, First Federal had 23 TDRs with an aggregate balance of $13.1 million classified as impaired and included in the appropriate nonperforming loan category in the tables above. Included in the impaired total were two TDRs that were considered performing in accordance with modified terms and still accruing interest.

Criticized Loans, Classified Loans and Other Risk Characteristics

          Federal regulations provide for the designation of lower quality loans as special mention, substandard, doubtful or loss. Commercial loans designated as special mention are considered “criticized” by regulatory definitions and possess characteristics of weakness which may not necessarily manifest into future loss. Commercial loans designated as substandard, doubtful or loss are considered “classified” by regulatory definitions. Substandard loans are inadequately protected by the current net worth, liquidity and paying capacity of the borrower or any collateral pledged and include loans characterized by the distinct possibility that some loss will occur if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values. Loans classified as loss are those considered uncollectible and of such little value that their continuance without the establishment of a specific loss reserve is not warranted. When First Federal classifies problem loans as a loss, they are charged-off in the period in which they are deemed uncollectible. First Federal evaluates its loans regularly to determine whether they are appropriately rated in accordance with applicable regulations and internal policies. The following table presents the risk profiles for the commercial loan portfolio by the primary categories monitored.

Commercial Credit Quality1	As of June 30, 2011
(in thousands)	Commercial Business		Commercial Real Estate		Commercial Construction		Commercial Land		Total Commercial Loans
Pass	$	61,301	$	359,606	$	10,310	$	31,943	$	463,160
Special mention		4,313		45,151		1,344		16,457		67,265
Substandard		12,357		65,378		3,380		15,595		96,710
Doubtful		214		319		—		216		749
Total		78,185		470,454		15,034		64,211		627,884
Covered ASC 310-30 loans		2,381		11,861		1,003		6,351		21,596
Total	$	80,566	$	482,315	$	16,037	$	70,562	$	649,480

¹        Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

          For residential and consumer loans, First Federal evaluates credit quality based on payment activity, accrual status, and if a loan was modified from its original contractual terms. Similar to commercial loans classified as substandard or doubtful, nonperforming residential and consumer loans are considered to be classified loans. The following tables present the risk indicators for the residential and consumer loan portfolios.

Residential Credit Quality1	As of June 30, 2011
(in thousands)	Residential 1-4 Family		Residential Construction		Residential Land		Total Residential Loans
Performing2	$	893,350	$	19,603	$	42,039	$	954,992
Nonperforming		1,975		—		451		2,426
Total		895,325		19,603		42,490		957,418
Covered ASC 310-30 loans		325		—		273		598
Total	$	895,650	$	19,603	$	42,763	$	958,016

¹        Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

²        Performing residential loans include $9.2 million of classified loans.

Consumer Credit Quality1	As of June 30, 2011
(in thousands)	Home Equity		Manufactured Housing		Marine		Other Consumer		Total Consumer Loans
Performing2	$	369,352	$	271,239	$	57,312	$	53,613	$	751,516
Nonperforming		9,165		2,953		94		205		12,417
Total		378,517		274,192		57,406		53,818		763,933
Covered ASC 310-30 loans		605		—		—		35		640
Total	$	379,122	$	274,192	$	57,406	$	53,853	$	764,573

¹        Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

²        Performing consumer loans include $9 thousand of classified loans.

A summary of changes in the allowance for loan losses follows.

Allowance for Loan Losses
	As of and for the Three Months Ended June 30, 2011
(in thousands)	Residential		Commercial Business		Commercial Real Estate		Commercial Construction		Commercial Land		Consumer		Total
Allowance for Loan Losses:
Balance at March 31, 2010	$	9,831	$	8,060	$	25,277	$	1,984	$	17,052	$	22,934	$	85,138
Provision for loan losses		14,094		3,105		27,789		2,147		24,502		6,166		77,803
Loan charge-offs		16,493		6,882		41,033		3,098		34,191		6,506		108,203
Recoveries		217		56		11		31		196		242		753
Net charge-offs		16,276		6,826		41,022		3,067		33,995		6,264		107,450
Balance at June 30, 2011	$	7,649	$	4,339	$	12,044	$	1,064	$	7,559	$	22,836	$	55,491

	As of and for the Nine Months Ended June 30, 2011
(in thousands)	Residential		Commercial Business		Commercial Real Estate		Commercial Construction		Commercial Land		Consumer		Total
Allowance for Loan Losses:
Balance at September 30, 2010	$	10,730	$	7,169	$	22,598	$	1,620	$	21,795	$	22,959	$	86,871
Provision for loan losses		16,138		6,089		32,900		2,822		26,710		16,302		100,961
Loan charge-offs		19,803		9,153		43,639		3,415		41,599		17,321		134,930
Recoveries		584		234		185		37		653		896		2,589
Net charge-offs		19,219		8,919		43,454		3,378		40,946		16,425		132,341
Balance at June 30, 2011	$	7,649	$	4,339	$	12,044	$	1,064	$	7,559	$	22,836	$	55,491
Loans as of June 30, 2011
Individually evaluated for impairment	$	1,334	$	3,088	$	12,346	$	1,451	$	4,356	$	2,589	$	25,164
Collectively evaluated for impairment		956,084		75,097		458,108		13,583		59,855		761,344		2,324,071
Covered ASC 310-30 loans		598		2,381		11,861		1,003		6,351		640		22,834
Total loans	$	958,016	$	80,566	$	482,315	$	16,037	$	70,562	$	764,573	$	2,372,069