(9) Mortgage Loans Held-to-Maturity

(a)

Gross Mortgage Loans Outstanding

Through our bank subsidiary, Union Federal, we carry a portfolio of mortgage loans held-to-maturity. The following table provides information on the carrying values and implicit credit quality of this portfolio:


	June 30,
	2013			2012
	(dollars in thousands)
Gross loan principal outstanding	$	13,021		$	8,381
Allowance for loan losses		(440	)		(591	)
Deferred costs		48			21

Mortgage loans held-to-maturity, net of allowance	$	12,629		$	7,811


Outstanding principal on mortgage loans on non-accrual status	$	987		$	1,424

We did not have any mortgage loans greater than 90 days past due that were accruing interest.

(b)

Mortgage Loan Allowance for Loan Losses and the Related Provision for Loan Losses

We recorded the following activity in the allowance for loan losses for mortgage loans:


	Fiscal years ended June 30,
	2013			2012
	(dollars in thousands)
Balance, beginning of year	$	591		$	882
Provision (credit) for loan losses		137			(13	)
Charge-offs		(295	)		(335	)
Recoveries from borrowers		7			57

Balance, end of year	$	440		$	591

On a quarterly basis, we prepare an estimate of the allowance necessary to cover estimated credit losses. We maintain the allowance at a level that we deem adequate to absorb all reasonably anticipated losses from specifically known and other credit risks associated with the portfolio. We use a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves, for loans individually evaluated and deemed impaired and general reserves, for groups of loans with similar risk characteristics, which rely on a combination of qualitative and quantitative factors that could have an impact on the credit quality of the portfolio. Key qualitative factors that we deemed likely to cause estimated credit losses to differ from the historical charge-off rate included underlying collateral values and the current economic environment and conditions. We believe these to be the most significant qualitative factors; however, we recognize that additional issues may also impact the estimate of credit losses to some degree. From time to time, we will re-evaluate the qualitative factors in use in order to consider the impact of other issues, which based on changing circumstances, may become more significant in the future.

We place mortgage loans on non-accrual status when they become 90 days past due as to either principal or interest. The following table summarizes the aging of past due mortgage loans. The balances represent the recorded investment in the loans, which is equal to outstanding principal net of charge-offs.


	June 30,
	2013		2012
	(dollars in thousands)
Non-accrual loans:
Residential (1-4 family)	$	570	$	1,049
Commercial/mixed use		94		220
Accruing loans:
Accruing loans 30-59 days past due		560		708

We did not have any accruing mortgage loans that were 60 or more days past due.

Impaired Loans

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, we measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, we measure impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. See Note 2, “Summary of Significant Accounting Policies,” for a description of our policy for recognizing interest income on impaired loans.

The composition of impaired loans was as follows:


	June 30,
	2013		2012
	(dollars in thousands)
Impaired loans on non-accrual	$	664	$	1,269
Total recorded investment in impaired loans		1,506		2,078
Average recorded investment of impaired loans		2,077		2,232
Unpaid principal balance of impaired loans		1,872		2,233
Accruing troubled debt restructurings		413		578
Interest income recognized on impaired loans		80		85

The following impaired loans had specific reserves at June 30, 2013 and 2012:


	June 30,
	2013				2012
	Carrying Value		Specific Reserve		Carrying Value		Specific Reserve
	(dollars in thousands)
Commercial/mixed use	$	121	$	36	$	220	$	118
Residential (1-4) family		590		209		409		156

	$	711	$	245	$	629	$	274

There was one impaired commercial/mixed use loan of $94 thousand with no specific reserve at June 30, 2013. There were four impaired residential (1-4) family loans totaling $701 thousand with no specific reserve at June 30, 2013. These impaired loans had no specific reserves at June 30, 2013 due to partial charge-offs taken for the amounts determined to be uncollectible. There were eight impaired residential (1-4) family loans totaling $1.4 million with no specific reserve at June 30, 2012. Three of the eight impaired loans had no specific reserves at June 30, 2012 due to partial charge-offs taken for the amounts determined to be uncollectible. The remaining five impaired loans had no specific reserves at June 30, 2012 as the balances were supported by expected future cash flows or, for those collateral dependent loans, the net realizable value of the underlying collateral.

Troubled Debt Restructurings

TDRs are loans where Union Federal, for economic reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would not otherwise consider. TDRs can be classified as either accrual or non-accrual loans. Union Federal continued to accrue interest on all TDRs except for five loans totaling $664 thousand as of June 30, 2013 and five loans totaling $908 thousand as of June 30, 2012. Union Federal had TDRs of $1.1 million and $1.5 million at June 30, 2013 and June 30, 2012, respectively. Union Federal assigned $176 thousand and $240 thousand of specific reserves to loans classified as TDRs as of June 30, 2013 and June 30, 2012, respectively. TDRs were assigned specific reserves in accordance with our allowance for loan loss methodology.

The following is information pertaining to TDRs that occurred during the fiscal year ended June 30, 2013:


	Number of loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
	(dollars in thousands)
Residential (1-4) family		2	$	299	$	311

There were two non-performing residential (1-4) family loans modified during fiscal 2013. The loans were modified by reducing interest rates as well as extending the terms of the loans. The financial impact of the modifications was a $6 thousand reduction in interest payments for the fiscal year ended June 30, 2013.

The following is information pertaining to TDRs that occurred during the fiscal year ended June 30, 2012:


	Number of loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
	(dollars in thousands)
Commercial/mixed use		1	$	227	$	227

There was one non-performing commercial/mixed use loan modified during fiscal 2012. The loan was modified by reducing the interest rate of the loan. The financial impact of the modification was a $2 thousand reduction in interest payments for the fiscal year ended June 30, 2012.