Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from [Paul Patterson - Glenn Rock].
[Paul Patterson - Glenn Rock]
On the loan loss reserves, I guess because you guys are having less charge-offs its decreasing loan loss reserves year-over-year. Is that right? What’s the outlook for these loan loss reserves as this economy is weakening and all the others are negative credit indicators that you guys went over?
Constance H. Lau
Let me ask Tim to answer that.
Timothy K. Schools
From a banking standpoint we don’t typically look year-over-year. Last year was actually related to one credit. You may remember in the fourth quarter we had a sizable charge-off of about $5 million. That provision in third quarter last year was to prepare for that charge-off and that’s now through the system.
Our provisions actually have increased from second quarter. I don’t want to mislead anyone. We don’t see anything scary but certainly our trends you would call are negative and our past dues are increasing, our both 30-day and 90-day; we look at two measures.
Then on the commercial side there’s something called a risk rating scale where even if they’re not past due, you constantly are looking at the fundamentals of your customers as far as their covenants. So internally you have a risk grading system where you’ll grade them one to 10. We certainly are seeing a credit migration to lower ratings.
Nothing scary but the movement is downward, so therefore under the ALLL methodology you have factors that you provide for increased levels of charge-offs. If you take this quarter at $2 million times four, that’s an $8 million run rate. If you take the second quarter at $1.4 million or $1.2 million, so it was at maybe $4 million or $5 million run rate. So certainly the annualized run rate is increasing.
[Paul Patterson - Glenn Rock]
The reason why I mentioned last year is because that was a sort of better environment and I guess what you’re saying is that because of preparing for that $5 million number that’s what’s skewing it.
Timothy K. Schools
That was an isolated credit whereas the provision from second quarter to this one would be a lot more granular credits. It’s really across the scale where we’re seeing group migration. Let’s say again everything in the life is relative, we’re a [thrift] so we have very low numbers, fairly conservative. Our charge-offs will go up. I’m not going to mislead you. But if you looked at our 30-day past due, 90-day past due, watch loans, our percentages would be way near the bottom of the national average just because of the profile of the balance sheet. It doesn’t mean we won’t have losses.
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