Note 6—MORTGAGE BANKING ACTIVITIES

Loans held for sale at June 30, 2013 and 2012 were $28,835,018 and $25,062,786, respectively.

The Company accounts for loans held for sale at fair value. The fair value of loans held for sale exceeded the unpaid principal balance of these loans by $719,505 and $738,742 as of June 30, 2013 and 2012, respectively. The gain on loans held for sale as of June 30, 2013 was reported in the mortgage banking activities line of 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 June 30, 2013 and 2012, the mortgage loan servicing portfolio was approximately $1.1 billion.

Originated mortgage servicing rights capitalized and amortized during the years ended June 30, 2013, 2012 and 2011 were as follows:


	2013			2012			2011
Servicing rights:
Beginning of period	$	6,867,334		$	7,519,287		$	6,960,969
Additions		4,309,341			3,473,077			3,862,505
Amortized to expense		(3,780,263	)		(3,612,550	)		(3,000,186	)
Change in valuation allowance for impairment		(178,087	)		(512,480	)		(304,001	)

End of period	$	7,218,325		$	6,867,334		$	7,519,287

Activity in the valuation allowance for mortgage servicing rights over the years ended June 30, 2013, 2012 and 2011 was as follows:


	2013			2012			2011
Balance, beginning of period	$	(816,481	)	$	(304,001	)	$	0
Impairment charges		(765,858	)		(698,468	)		(1,183,799	)
Impairment recoveries		587,771			185,988			879,798

Balance, end of period	$	(994,568	)	$	(816,481	)	$	(304,001	)

The fair value of capitalized mortgage servicing rights was $7,774,125 and $7,928,789 at June 30, 2013 and 2012, respectively. Fair value was determined using discount rates ranging from 10.0% to 12.0% and prepayment speeds ranging from 213.0% to 593.0%, depending on the stratification of the specific rights. The weighted average life was determined to be 4.95 years. At June 30, 2013 there were ten tranches of the Company’s mortgage servicing asset that were considered impaired. The weighted average coupon of the loans serviced represented by these tranches was 3.97%, and the Company recorded a valuation allowance for impairment of $994,568 on these tranches. At June 30, 2012, an impairment of $816,481 was recorded.

Mortgage banking activities, net, as presented in the consolidated statements of operations consisted of the following:


	Twelve months ended June 30,
	2013			2012			2011
Mortgage loan servicing fees	$	2,718,150		$	2,314,186		$	2,580,089
Amortization of mortgage servicing rights		(3,780,263	)		(3,612,550	)		(3,000,186	)
Recovery (impairment) of mortgage servicing rights		(178,087	)		(512,480	)		(304,001	)

Mortgage loan servicing (loss), net		(1,240,200	)		(1,810,844	)		(724,098	)
Changes in fair value of loans held for sale		(19,237	)		556,778			(142,208	)
Changes in fair value of mortgage banking derivatives		(964,244	)		1,370,796			(438,949	)
Realized gains on sale of loans		13,679,113			9,020,634			7,920,334

Mortgage banking activities, net	$	11,455,432		$	9,137,364		$	6,615,079

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

At June 30, 2013 and 2012, the Bank had IRLC’s on $34,672,027 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 June 30, 2013 and 2012 was estimated to be $118,090 and $1,773,453, respectively, which is included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. To mitigate the interest rate risk represented by these IRLC’s, the Bank entered into contracts to sell mortgage loans of $50,000,000 and $69,150,472 as of June 30, 2013 and 2012, respectively. These contracts are also considered to be free-standing derivatives, and the change in fair value also is recorded in the financial statements. The fair value of these contracts at June 30, 2013 and 2012 was estimated to be $573,401 and ($117,718), respectively. These amounts are added to (netted against) the fair value of IRLC’s 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.