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Loans | 3 Months Ended
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Mar. 31, 2012
Loans [Abstract] |
Loans | Note 5: Loans Classes of loans are summarized as follows:
| March 31 | June 30,
| 2012 | 2011
Real Estate Loans: |  |
Conventional | $194,060,780 | $199,884,607
Construction | 36,358,139 | 29,921,110
Commercial | 194,157,967 | 185,158,763
Consumer loans | 29,266,940 | 29,963,281
Commercial loans | 117,307,035 | 126,290,143
| 571,150,861 | 571,217,904
Loans in process | (17,850,702) | (8,330,245)
Deferred loan fees, net | 185,014 | 126,847
Allowance for loan losses | (7,258,712) | (6,438,451)
Total loans | $546,226,461 | $556,576,055
The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. The Company has also occasionally purchased loan participation interests originated by other lenders and secured by properties generally located in the states of Missouri and Arkansas. Supervision of the loan portfolio is the responsibility of our Chief Lending Officer. Loan officers have varying amounts of lending authority depending upon experience and types of loans. Loans beyond their authority are presented to the next level of authority, or to one of several lending committees, comprised of lenders and other officers with expertise in the type of loan the committee is authorized to approve. Loans to one borrower (or group of related borrowers), in aggregate, in excess of $1,500,000 require the approval of a majority of the Discount Committee, which consists of all Bank directors, prior to the closing of the loan. All loans are subject to ratification by the full Board of Directors. The aggregate amount of loans that the Company is permitted to make under applicable federal regulations to any one borrower, including related entities, or the aggregate amount that the Company could have invested in any one real estate project, is based on the Bank's capital levels. Residential Mortgage Lending. The Company actively originates loans for the acquisition or refinance of one- to four-family residences. These loans are originated as a result of customer and real estate agent referrals, existing and walk-in customers and from responses to the Company’s marketing campaigns. The Company currently offers both fixed-rate and adjustable-rate mortgage (“ARM”) loans. Substantially all of the one- to four-family residential mortgage originations in the Company's portfolio are located within the Company's primary market area. The Company generally originates one- to four-family residential mortgage loans in amounts up to 90% of the lower of the purchase price or appraised value of residential property. For loans originated in excess of 80%, the Company charges an interest rate an additional 50 basis points higher, but does not require private mortgage insurance. At March 31, 2012, the outstanding balance of loans originated with a loan-to-value ratio in excess of 80% was $49.6 million, as compared to $45.0 million at June 30, 2011. Originating loans with higher loan-to-value ratios presents additional credit risk to the Company. Consequently, the Company limits this product to borrowers with a favorable credit history and a demonstrable ability to service the debt. The majority of new residential mortgage loans originated by the Company conform to secondary market standards. The interest rates charged on these loans are competitively priced based on local market conditions, the availability of funding, and anticipated profit margins. Fixed and ARM loans originated by the Company are amortized over periods as long as 30 years, but typically are repaid over shorter periods. Fixed-rate loans secured by one- to four-family residences have contractual maturities up to 30 years, and are generally fully amortizing with payments due monthly. These loans normally remain outstanding for a substantially shorter period of time because of refinancing and other prepayments. A significant change in the interest rate environment can alter the average life of a residential loan portfolio. The one- to four-family fixed-rate loans do not contain prepayment penalties. Most are written using secondary market guidelines. The Company currently originates ARM loans, which adjust annually after an initial period of one, three or five years. Typically, originated ARM loans secured by owner occupied properties reprice at a margin of 2.75% to 3.00% over the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year (“CMT”). Generally, ARM loans secured by non-owner occupied residential properties reprice at a margin of 3.75% over the CMT index. Current residential ARM loan originations are subject to annual and lifetime interest rate caps and floors. As a consequence of using interest rate caps, initial rates which may be at a premium or discount, and a “CMT” loan index, the interest earned on the Company’s ARMs will react differently to changing interest rates than the Company’s cost of funds. In underwriting one- to four-family residential real estate loans, the Company evaluates the borrower's ability to meet debt service requirements at current as well as fully indexed rates for ARM loans, as well as the value of the property securing the loan. Most properties securing real estate loans made by the Company have appraisals performed on them by independent fee appraisers approved and qualified by the Board of Directors. The Company generally requires borrowers to obtain title insurance and fire, property and flood insurance (if indicated) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company also originates loans secured by multi-family residential properties that are generally located in the Company’s primary market area. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 20 years, with balloon maturities of up to five years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” in the loan agreement. Variable rate loans may adjust daily, monthly, quarterly, or annually based on the Wall Street Journal prime interest rate. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. The Company generally requires a Board-approved independent certified fee appraiser to be engaged in determining the collateral value. As a general rule, the Company requires the unlimited guarantee of all individuals (or entities) owning (directly or indirectly) 20% or more of the stock of the borrowing entity. The primary risk associated with multi-family loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in borrowers having to provide rental rate concessions to achieve adequate occupancy rates. In an effort to reduce these risks, the Bank will evaluate the guarantor’s ability to inject personal funds as a tertiary source of repayment. Commercial Real Estate Lending. The Company actively originates loans secured by commercial real estate including land (improved, unimproved, and farmland), strip shopping centers, retail establishments and other businesses generally located in the Company’s primary market area. Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 20 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity for up to five years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to five years, based upon the Wall Street Journal’s published prime rate. The Company typically includes an interest rate “floor” in the loan agreement. Variable rate commercial real estate originations typically adjust daily, monthly, quarterly or annually based on the Wall Street Journal’s published prime rate. Generally, improved commercial real estate loan amounts do not exceed 85% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio. Before credit is extended, the Company analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property and the value of the property itself. Generally, personal guarantees are obtained from the borrower in addition to obtaining the secured property as collateral for such loans. The Company also generally requires appraisals on properties securing commercial real estate to be performed by a Board-approved independent certified fee appraiser. Generally, loans secured by commercial real estate involve a greater degree of credit risk than one- to four-family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial real estate are often dependent on the successful operation or management of the secured property, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Construction Lending. The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally secured by mortgage loans for the construction of owner occupied residential real estate or to finance speculative construction secured by residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. Speculative construction and land development lending generally affords the Company an opportunity to receive higher interest rates and fees with shorter terms to maturity than those obtainable from residential lending. Nevertheless, construction and land development lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending due to (i) the concentration of principal among relatively few borrowers and development projects, (ii) the increased difficulty at the time the loan is made of accurately estimating building or development costs and the selling price of the finished product, (iii) the increased difficulty and costs of monitoring and disbursing funds for the loan, (iv) the higher degree of sensitivity to increases in market rates of interest and changes in local economic conditions, and (v) the increased difficulty of working out problem loans. Due in part to these risk factors, the Company may be required from time to time to modify or extend the terms of some of these types of loans. In an effort to reduce these risks, the application process includes a submission to the Company of accurate plans, specifications and costs of the project to be constructed. These items are also used as a basis to determine the appraised value of the subject property. Loan amounts are generally limited to 80% of the lesser of current appraised value and/or the cost of construction. To closely monitor the inherent risks associated with construction loans, the Company will typically utilize maturity periods ranging from 6 to 12 months for these loans. Weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately nine months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically obtains lien waivers and may have interim inspections completed by an independent third party. This monitoring further allows the Company opportunity to assess risk. At March 31, 2012, construction loans outstanding included 19 loans, totaling $2.3 million, for which a modification had been agreed to. At June 30, 2011, construction loans outstanding included 24 loans, totaling $2.2 million, for which a modification had been agreed to. All modifications were solely for the purpose of extending the maturity date due to conditions described above. None of these modifications were executed due to financial difficulty on the part of the borrower and, therefore, were not accounted for as TDRs. Once construction is completed, construction loans may be converted to permanent financing with monthly payments using amortization schedules of up to 30 years on residential and generally up to 20 years on commercial real estate. Consumer Lending. The Company offers a variety of secured consumer loans, including home equity, direct and indirect automobile loans, second mortgages, mobile home loans and loans secured by deposits. The Company originates substantially all of its consumer loans in its primary market area. Usually, consumer loans are originated with fixed rates for terms of up to five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years. Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised value of the property securing the line of credit, less the outstanding balance on the first mortgage. Interest rates on the HELOCs are adjustable and are tied to the current prime interest rate. This rate is obtained from the Wall Street Journal and adjusts on a daily basis. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity. HELOCs, which are secured by residential properties, are secured by stronger collateral than automobile loans and because of the adjustable rate structure, contain less interest rate risk to the Company. Lending up to 100% of the value of the property presents greater credit risk to the Company. Consequently, the Company limits this product to customers with a favorable credit history. At March 31, 2012, the Company had HELOC balances of $15.7 million outstanding, of which lines of credit up to 80% of the property value at origination represented 83.9% of outstanding balances, and 87.2% of outstanding balances and commitments; lines of credit for more than 80% but not exceeding 90% of the property value at origination represented 15.6% of outstanding balances, and 12.3% of outstanding balances and commitments; and lines of credit in excess of 90% of the property value at origination represented 0.5% of outstanding balances, and 0.4% of outstanding balances and commitments. These figures compared to HELOC balances of $14.0 million at June 30, 2011, of which lines of credit up to 80% of the property value at origination represented 83.7% of outstanding balances, and 87.6% of outstanding balances and commitments; lines of credit for more than 80% but not exceeding 90% of the property value at origination represented 15.7% of outstanding balances, and 11.9% of outstanding balances and commitments; and lines of credit in excess of 90% of the property value at origination represented 0.6% of outstanding balances, and 0.5% of outstanding balances and commitments. Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed for consumer loans include employment stability, an application, a determination of the applicant's payment history on other debts, and an assessment of ability to meet existing and proposed obligations. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, because they are generally unsecured or are secured by rapidly depreciable or mobile assets, such as automobiles. In the event of repossession or default, there may be no secondary source of repayment or the underlying value of the collateral could be insufficient to repay the loan. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Commercial Business Lending. The Company’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit, including agricultural production and equipment loans. The Company currently offers both fixed and adjustable rate commercial business loans. Adjustable rate business loans typically reprice daily, monthly, quarterly, or annually, in accordance with the Wall Street Journal’s prime rate of interest. The Company typically includes an interest rate “floor” in the loan agreement. Commercial business loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Generally, commercial loans secured by fixed assets are amortized over periods up to five years, while commercial operating lines of credit or agricultural production lines are generally for a one year period. The Company’s commercial business loans are evaluated based on the loan application, a determination of the applicant's payment history on other debts, business stability and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The following tables present the balance in the allowance for loan losses and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment and impairment methods as of March 31, 2012, and June 30, 2011, and activity in the allowance for loan losses for the three- and nine-month periods ended March 31, 2012 and 2011:
| At period end and for the nine months ended
| March 31, 2012
| Conventional | Construction | Commercial |  |  |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial | Unallocated | Total
Allowance for loan losses: |  |  |  |  |  |  |
Balance, beginning of period | $1,618,285 | $192,752 | $2,671,482 | $441,207 | $1,514,725 | $- | $6,438,451
Provision charged to expense | 139,665 | (12,868) | 144,844 | 213,176 | 592,636 | - | 1,077,454
Losses charged off | (91,369) | - | (24,824) | (137,002) | (33,625) | - | (286,820)
Recoveries | 6,614 | 801 | 430 | 10,814 | 10,968 | - | 29,627
Balance, end of period | $1,673,195 | $180,685 | $2,791,932 | $528,195 | $2,084,704 | $- | $7,258,712
Ending Balance: individually |  |  |  |  |  |  |
evaluated for impairment | $- | $- | $316,591 | $- | $482,145 | $- | $798,736
Ending Balance: collectively |  |  |  |  |  |  |
evaluated for impairment | $1,673,195 | $180,685 | $2,333,611 | $528,195 | $1,589,697 | $- | $6,305,384
Ending Balance: loans acquired |  |  |  |  |  |  |
with deteriorated credit quality | $- | $- | $141,730 | $- | $12,862 | $- | $154,592
Loans: |  |  |  |  |  |  |
Ending Balance: individually |  |  |  |  |  |  |
evaluated for impairment | $- | $- | $977,539 | $- | $482,145 | $- | $1,459,684
Ending Balance: collectively |  |  |  |  |  |  |
evaluated for impairment | $193,964,257 | $18,507,437 | $189,443,805 | $29,266,940 | $115,432,188 | $- | $546,614,627
Ending Balance: loans acquired |  |  |  |  |  |  |
with deteriorated credit quality | $96,523 | $- | $3,736,623 | $- | $1,392,702 | $- | $5,225,848
| For the three months ended
| March 31, 2012
| Conventional | Construction | Commercial |  |  |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial | Unallocated | Total
Allowance for loan losses: |  |  |  |  |  |  |
Balance, beginning of period | $1,838,114 | $183,020 | $2,650,831 | $534,780 | $1,839,846 | $- | $7,046,590
Provision charged to expense | (164,982) | (2,676) | 141,102 | (1,020) | 242,914 | - | 215,338
Losses charged off | - | - | - | (9,235) | - | - | (9,235)
Recoveries | 63 | 341 | - | 3,671 | 1,944 | - | 6,019
Balance, end of period | $1,673,195 | $180,685 | $2,791,932 | $528,195 | $2,084,704 | $- | $7,258,712
| At June 30, 2011
| Conventional | Construction | Commercial |  |  |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial | Unallocated | Total
Allowance for loan losses: |  |  |  |  |  |  |
Balance, end of period | $1,618,285 | $192,752 | $2,671,482 | $441,207 | $1,514,725 | $- | $6,438,451
Ending Balance: individually |  |  |  |  |  |  |
evaluated for impairment | $- | $- | $477,517 | $- | $- | $- | $477,517
Ending Balance: collectively |  |  |  |  |  |  |
evaluated for impairment | $1,618,285 | $192,752 | $2,072,595 | $441,207 | $1,514,725 | $- | $5,839,564
Ending Balance: loans acquired |  |  |  |  |  |  |
with deteriorated credit quality | $- | $- | $121,370 | $- | $- | $- | $121,370
Loans: |  |  |  |  |  |  |
Ending Balance: individually |  |  |  |  |  |  |
evaluated for impairment | $- | $- | $1,484,711 | $- | $- | $- | $1,484,711
Ending Balance: collectively |  |  |  |  |  |  |
evaluated for impairment | $198,328,878 | $21,590,865 | $181,257,071 | $29,963,281 | $123,062,000 | $- | $554,202,095
Ending Balance: loans acquired |  |  |  |  |  |  |
with deteriorated credit quality | $1,555,729 | $- | $2,416,981 | $- | $3,228,143 | $- | $7,200,853
| For three months ended
| March 31, 2011
| Conventional | Construction | Commercial |  |  |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial | Unallocated | Total
Allowance for loan losses: |  |  |  |  |  |  |
Balance, beginning of period | $1,129,072 | $131,813 | $1,980,193 | $486,677 | $1,225,274 | $346,795 | $5,299,824
Provision charged to expense | 296,685 | 85,223 | 620,687 | 148,097 | 391,994 | (346,795) | 1,195,891
Losses charged off | (64,180) | - | - | (32,393) | - | - | (96,573)
Recoveries | 802 | - | 218 | 10,790 | - | - | 11,810
Balance, end of period | $1,362,379 | $217,036 | $2,601,098 | $613,171 | $1,617,268 | $- | $6,410,952
Ending Balance: individually |  |  |  |  |  |  |
evaluated for impairment | $- | $- | $392,015 | $- | $- | $- | $392,015
Ending Balance: collectively |  |  |  |  |  |  |
evaluated for impairment | $1,362,379 | $217,036 | $2,209,083 | $613,171 | $1,617,268 | $- | $6,018,937
Ending Balance: loans acquired |  |  |  |  |  |  |
with deteriorated credit quality | $- | $- | $- | $- | $- | $- | $-
| For nine months ended
| March 31, 2011
| Conventional | Construction | Commercial |  |  |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial | Unallocated | Total
Allowance for loan losses: |  |  |  |  |  |  |
Balance, beginning of period | $902,122 | $198,027 | $1,605,218 | $473,064 | $1,330,180 | $- | $4,508,611
Provision charged to expense | 576,208 | 19,009 | 1,054,847 | 178,722 | 283,314 | - | 2,112,100
Losses charged off | (118,587) | - | (59,955) | (53,469) | (200) | - | (232,211)
Recoveries | 2,636 | - | 988 | 14,854 | 3,974 | - | 22,452
Balance, end of period | $1,362,379 | $217,036 | $2,601,098 | $613,171 | $1,617,268 | $- | $6,410,952
Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when an amount is determined to be uncollectible, based on management’s analysis of expected cash flow (for non-collateral-dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Under the Company’s methodology, loans are first segmented into 1) those comprising large groups of smaller-balance homogeneous loans, including single-family mortgages and installment loans, which are collectively evaluated for impairment, and 2) all other loans which are individually evaluated. Those loans in the second category are further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge offs are most likely to have a significant impact on operations. A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by the Company’s internal audit function and applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized. A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. If a loan that is individually evaluated for impairment is found to have none, it is grouped together with loans having similar characteristics (i.e., the same risk grade), and an allowance for loan losses is based upon quantitative and qualitative factors discussed below. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. The general component covers non-impaired loans and is based on quantitative and qualitative factors. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio. During fiscal 2011, the Company changed its allowance methodology to consider, as the primary quantitative factor, average net charge offs over the most recent twelve-month period. The Company had previously considered average net charge offs over the most recent five-year period as the primary quantitative factor. The impact of the modification was minimal. Included in the Company’s loan portfolio are certain loans accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans. The following tables present the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of March 31, 2012, and June 30, 2011. These tables include purchased credit impaired loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:
| March 31, 2012
| Conventional | Construction | Commercial |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial
Pass | $191,936,827 | $18,507,437 | $186,810,955 | $29,246,932 | $110,830,066
Special Mention | 1,528,455 | - | 48,536 | - | 5,273,085
Substandard | 595,498 | - | 7,298,476 | 20,008 | 1,203,884
Doubtful | - | - | - | - | -
Total | $194,060,780 | $18,507,437 | $194,157,967 | $29,266,940 | $117,307,035
| June 30, 2011
| Conventional | Construction | Commercial |  |
| Real Estate | Real Estate | Real Estate | Consumer | Commercial
Pass | $198,104,835 | $21,590,865 | $177,467,948 | $29,951,645 | $119,248,931
Special Mention | 1,478,676 | - | 1,005,338 | - | 5,499,249
Substandard | 215,702 | - | 6,685,477 | 9,996 | 1,541,963
Doubtful | 85,394 | - | - | 1,640 | -
Total | $199,884,607 | $21,590,865 | $185,158,763 | $29,963,281 | $126,290,143
The above amounts include purchased credit impaired loans. At March 31, 2012, these loans comprised $1.0 million of credits rated “Pass”; $1.5 million of credits rated “Special Mention”; $2.8 million of loans rated “Substandard”; and no credits rated “Doubtful”. At June 30, 2011, these loans comprised $2.1 million of credits rated “Pass”; $ 2.4 million of credits rated “Special Mention”; $2.7 million of credits rated “Substandard”; and no credits rated “Doubtful”. Credit Quality Indicators. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination, and is updated on a quarterly basis for loans risk rated “Special Mention”, “Substandard”, or “Doubtful”. In addition, lending relationships over $250,000 are subject to an independent loan review following origination, and lending relationships in excess of $2.5 million are subject to an independent loan review annually, as are a sample of lending relationships between $1.0 million and $2.5 million, in order to verify risk ratings. The Company uses the following definitions for risk ratings: Special Mention – Loans classified as special mention warrant more than usual monitoring. Issues may include deteriorating financial condition, payments made after the due date but within 30 days, adverse industry conditions, management problems, or other signs of deterioration that indicate a potential weakening of the institution’s credit position in the future. Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all the weaknesses of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of March 31, 2012, and June 30, 2011. These tables include purchased credit impaired loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:
| March 31, 2012
| 30-59 Days | 60-89 Days | Greater Than | Total |  | Total Loans | Total Loans > 90
| Past Due | Past Due | 90 Days | Past Due | Current | Receivable | Days & Accruing
Real Estate Loans: |  |  |  |  |  |  |
Conventional | $1,814,021 | $335,705 | $164,763 | $2,314,489 | $191,746,291 | $194,060,780 | $31,788
Construction | 148,756 | - | - | 148,756 | 18,358,681 | 18,507,437 | -
Commercial | 295,982 | - | 698,537 | 994,519 | 193,163,448 | 194,157,967 | 616,064
Consumer loans | 115,413 | 28,026 | 19,779 | 163,218 | 29,103,722 | 29,266,940 | -
Commercial loans | 862,928 | - | 1 | 862,929 | 116,444,106 | 117,307,035 | -
Total loans | $3,237,100 | $363,731 | $883,080 | $4,483,911 | $548,816,248 | $553,300,159 | $647,852
| June 30, 2011
| 30-59 Days | 60-89 Days | Greater Than | Total |  | Total Loans | Total Loans > 90
| Past Due | Past Due | 90 Days | Past Due | Current | Receivable | Days & Accruing
Real Estate Loans: |  |  |  |  |  |  |
Conventional | $1,287,921 | $997,076 | $275,021 | $2,560,018 | $197,324,589 | $199,884,607 | $189,627
Construction | 800,198 | 100,000 | 151,699 | 1,051,897 | 20,538,968 | 21,590,865 | -
Commercial | 338,484 | - | 124,825 | 463,309 | 184,695,454 | 185,158,763 | 124,824
Consumer loans | 433,468 | 18,528 | 121,934 | 573,930 | 29,389,351 | 29,963,281 | 121,934
Commercial loans | 1,153,498 | 13,583 | 1,841 | 1,168,922 | 125,121,221 | 126,290,143 | 1,840
Total loans | $4,013,569 | $1,129,187 | $675,320 | $5,818,076 | $557,069,583 | $562,887,659 | $438,225
The above amounts include purchased credit impaired loans. At March 31, 2012, these loans comprised $953,000 credits 30-59 Days Past Due; $0 of credits 60-89 Days Past Due; $616,000 credits Greater Than 90 Days Past Due; $1.6 million of Total Past Due credits; $3.7 million of credits Current; and $616,000 Loans > 90 Days & Accruing. At June 30, 2011, these loans comprised $1.8 million of credits 30-59 Days Past Due; $442,000 of credits 60-89 Days Past Due; $153,000 of credits Greater Than 90 Days Past Due; $2.4 million of Total Past Due credits; $4.7 of credits Current; and $0 of Total Loans > 90 Days & Accruing. A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, as well as performing loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The tables below present impaired loans as of March 31, 2012, and June 30, 2011. These tables include purchased credit impaired loans. Purchased credit impaired loans are those for which it was deemed probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In an instance where, subsequent to the acquisition, the Company determines it is probable, for a specific loan, that cash flows received will exceed the amount previously expected, the Company will recalculate the amount of accretable yield in order to recognize the improved cash flow expectation as additional interest income over the remaining life of the loan. These loans, however, will continue to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determines it is probable, for a specific loan, that cash flows received will be less than the amount previously expected, the Company will allocate a specific allowance under the terms of ASC 310-10-35.
| March 31, 2012
| Recorded | Unpaid Principal | Specific
| Balance | Balance | Allowance
Loans without a specific valuation allowance: |  |  |
Conventional real estate | $96,523 | $118,956 | $-
Construction real estate | - | - | -
Commercial real estate | 3,976,184 | 5,098,768 | -
Consumer loans | - | - | -
Commercial loans | 1,129,230 | 1,723,302 | -
Loans with a specific valuation allowance: |  |  |
Conventional real estate | $- | $- | $-
Construction real estate | - | - | -
Commercial real estate | 1,601,236 | 1,656,293 | 458,321
Consumer loans | - | - | -
Commercial loans | 755,895 | 773,092 | 495,007
Total: |  |  |
Conventional real estate | $96,523 | $118,956 | $-
Construction real estate | $- | $- | $-
Commercial real estate | $5,577,420 | $6,755,061 | $458,321
Consumer loans | $- | $- | $-
Commercial loans | $1,885,125 | $2,496,394 | $495,007
| June 30, 2011
| Recorded | Unpaid Principal | Specific
| Balance | Balance | Allowance
Loans without a specific valuation allowance: |  |  |
Conventional real estate | $1,555,729 | $2,307,417 | $-
Construction real estate | - | - | -
Commercial real estate | 1,835,250 | 3,228,059 | -
Consumer loans | - | - | -
Commercial loans | 3,228,143 | 4,728,158 | -
Loans with a specific valuation allowance: |  |  |
Conventional real estate | $- | $- | $-
Construction real estate | - | - | -
Commercial real estate | 2,066,442 | 2,114,016 | 598,887
Consumer loans | - | - | -
Commercial loans | - | - | -
Total: |  |  |
Conventional real estate | $1,555,729 | $2,307,417 | $-
Construction real estate | $- | $- | $-
Commercial real estate | $3,901,692 | $5,342,075 | $598,887
Consumer loans | $- | $- | $-
Commercial loans | $3,228,143 | $4,728,158 | $-
The above amounts include purchased credit impaired loans. At March 31, 2012, these loans comprised $4.3 million of impaired loans without a specific valuation allowance; $897,000 of loans with a specific valuation allowance, and $5.2 million of total impaired loans. At June 30, 2011, these loans comprised $6.6 million of impaired loans without a specific valuation allowance; $582,000 of loans with a specific valuation allowance, and $7.2 million of total impaired loans. Included in certain loan categories in the impaired loans are troubled debt restructurings, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities, and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months. When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, and uses the current fair value of the collateral, less selling costs, for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance. At March 31, 2012, and June 30, 2011, the Company had $2.9 million and $0, respectively, of commercial real estate loans, $395,000 and $0, respectively, of commercial loans, and $6,000 and $0, respectively, of conventional real estate loans that were modified in TDRs and impaired. All loans classified as TDRs at March 31, 2012, and June 30, 2011, were so classified due to interest rate concessions. Performing loans classified as troubled debt restructurings during the nine months ended March 31, 2012, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonaccrual loans.
| Nine months ended
| March 31, 2012
| Number of | Recorded
modifications | Investment
Conventional real estate | 1 | $6,208
Construction real estate | - | -
Commercial real estate | 10 | 2,916,247
Consumer loans | - | -
Commercial loans | 5 | 395,463
Total | 16 | $3,317,918
As a result of adopting the amendments in ASU No. 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (beginning July 1, 2011) for identification as troubled debt restructurings (TDRs). The Company identified as TDRs certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology. Upon identifying those receivables as TDRs, the Company identified them as impaired under the guidance in Section 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. As of March 31, 2012, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $3.3 million, and no allowance for credit losses was associated with those receivables on the basis of a current evaluation of loss, and as a result, there was no financial statement impact resulting from the adoption. The following tables present information regarding interest income recognized on impaired loans:
| For the period three-months ended | For the period three-months ended
| March 31, 2012 | March 31, 2011
| Average |  | Average |
| Investment in | Interest Income | Investment in | Interest Income
| Impaired Loans | Recognized | Impaired Loans | Recognized
Conventional Real Estate | $1,864 | $75 | $444 | $44
Construction Real Estate | - | - | - | -
Commercial Real Estate | 2,735 | 135 | 1,975 | 78
Consumer Loans | - | - | - | -
Commercial Loans | 1,906 | 552 | 1,182 | 91
Total Loans | $6,505 | $762 | $3,600 | $212
| For the period nine-months ended | For the period nine-months ended
| March 31, 2012 | March 31, 2011
| Average |  | Average |
| Investment in | Interest Income | Investment in | Interest Income
| Impaired Loans | Recognized | Impaired Loans | Recognized
Conventional Real Estate | $1,761 | $233 | $789 | $49
Construction Real Estate | - | - | - | -
Commercial Real Estate | 2,679 | 430 | 2,446 | 154
Consumer Loans | - | - | - | -
Commercial Loans | 1,923 | 1,002 | 1,868 | 115
Total Loans | $6,363 | $1,665 | $5,103 | $318
Interest income on impaired loans recognized on a cash basis in the three- and nine-month periods ended March 31, 2012 and 2011, was immaterial. For the three- and nine-month periods ended March 31, 2012, the amount of interest income recorded for impaired loans that represented a change in the present value of cash flows attributable to the passage of time was approximately $463,000 and $1,098,000, respectively, as compared to $95,000 and $95,000, respectively, for the three- and nine-month periods ended March 31, 2011. The following table presents the Company’s nonaccrual loans at March 31, 2012, and June 30, 2011. This table includes purchased impaired loans. Purchased credit impaired loans are placed on nonaccrual status in the event the Company cannot reasonably estimate cash flows expected to be collected. The table excludes performing TDRs.
| March 31, 2012 | June 30, 2011
Conventional real estate | $382,168 | $97,131
Construction real estate | - | -
Commercial real estate | 1,060,012 | 151,701
Consumer loans | 30,779 | 11,636
Commercial loans | 482,146 | 2,022
Total loans | $1,955,105 | $262,490
The above amounts include purchased credit impaired loans. At March 31, 2012, and June 30, 2011, these loans comprised $0 and $153,000 of nonaccrual loans, respectively. At March 31, 2012, TDRs totaled $3.3 million, of which $0 was considered nonperforming and was included in the nonaccrual loan table above. The remaining $3.3 million in TDRs have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to a accrual status loans. In general, these loans were subject to classification as TDRs at March 31, 2012, on the basis of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. At June 30, 2011, the Company had no loans classified as TDRs. The Company has had no TDRs that were restructured in the prior twelve months that have defaulted. The Company defines a default as any loan that becomes 90 days or more past due that was restructured in the prior twelve months.

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(k)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 3, 4 -Article 5 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7512638&loc=d3e5074-111524 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 11 -URI http://asc.fasb.org/extlink&oid=7512638&loc=d3e5162-111524 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.3,4) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph k -Article 4 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Statement of Position (SOP) -Number 01-6 -Paragraph 13 -Subparagraph d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7512638&loc=d3e5066-111524 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 03 -Paragraph 7 -Article 9 + Details
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