NOTE 4 — MORTGAGE BANKING ACTIVITIES

Loans held for sale at September 30, 2012 and June 30, 2012 were $19,765,946 and $25,062,786, respectively.

The Company utilizes the fair value option for accounting for its loans held for sale. The fair value of loans held for sale exceeded the unpaid principal balance of these loans by $651,108 and $738,742 as of September 30, 2012 and June 30, 2012, respectively. The gain on loans held for sale as of September 30, 2012 was reported as gain on sale of mortgage loans on the consolidated statement of operations. Interest on loans held for sale was reported in interest income.

The Company services real estate loans for investors that are not included in the accompanying consolidated financial statements. Mortgage servicing rights are established based on the fair value of servicing rights retained on loans originated by the Company and subsequently sold in the secondary market. Mortgage servicing rights are included in the consolidated statements of financial condition under the caption “Prepaid expenses and other assets.” At September 30, 2012, the mortgage loan servicing portfolio was approximately $1.0 billion.

Originated mortgage servicing rights capitalized and amortized during the three months ended September 30, 2012 and 2011 were as follows:


	Three months ended
	September 30
	2012			2011
Servicing rights:
Beginning of period	$	6,867,334		$	7,519,287
Additions		1,548,248			520,263
Amortized to expense		(972,306	)		(773,379	)
Change in valuation allowance		(604,179	)		(698,468	)

End of period	$	6,839,097		$	6,567,703

Activity in the valuation allowance for mortgage servicing rights over the three months ended September 30, 2012, as compared with the same periods during 2011, were as follows:


	Three months ended			Three months ended
	September 30, 2012			September 30, 2011
Balance, beginning of period	$	(816,481	)	$	(304,001	)
Impairment charges		(604,179	)		(698,468	)
Impairment recoveries		—			—

Balance, end of period	$	(1,420,660	)	$	(1,002,469	)

Mortgage banking activities for the three months ended September 30, 2012 and 2011, net consisted of the following:


	Three months ended
	September 30
	2012			2011
Mortgage loan servicing fees	$	671,611		$	654,577
Amortization of mortgage loan servicing rights		(972,306	)		(773,379	)
Impairment of mortgage loan servicing rights		(604,179	)		(698,468	)

Mortgage loan servicing (loss), net		(904,874	)		(817,270	)

Changes in fair value of loans held for sale		(87,634	)		231,052
Changes in fair value of mortgage banking derivatives		567,931			748,776
Realized gains on sale of loans		3,550,824			847,607

Gain on the sale of mortgage loans	$	4,031,121		$	1,827,435

The above amounts do not include non-interest expense related to mortgage banking activities.

At September 30, 2012 and June 30, 2012, the Company had interest rate-lock commitments on $74,101,724 and $65,996,365, respectively, of loans intended for sale in the secondary market. These commitments are considered to be free-standing derivatives and the change in fair value is recorded in the consolidated financial statements. The fair value of these commitments as of September 30, 2012 and June 30, 2012 was estimated to be $3,067,188 and $1,773,453, respectively, as a reduction of accrued expenses and other liabilities in the consolidated statements of financial position. In order to mitigate the interest rate risk represented by these interest rate-lock commitments, the Company entered into contracts to sell mortgage loans of $65,021,613 and $69,150,472 as of September 30, 2012 and June 30, 2012,

respectively. These contracts are also considered to be free-standing derivatives and the change in fair value is also recorded in the consolidated financial statements. The fair value of these contracts at September 30, 2012 and June 30, 2012 were estimated to be $(843,522) and $(117,718) respectively. These amounts were netted against the fair value of interest rate-lock commitments recorded in accrued expenses and other liabilities. Changes in fair value for both types of derivatives are reported in mortgage banking activities in the consolidated statements of operations.