Derivatives and Other Financial Instruments with Off-Balance Sheet Risks

12 Months Ended

Jun. 30, 2012

Derivatives and Other Financial Instruments with Off-Balance Sheet Risks:

Derivatives and Other Financial Instruments with Off-Balance Sheet Risks

15.   Derivatives and Other Financial Instruments with Off-Balance Sheet Risks:

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, and loan sale commitments to third parties.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.

		June 30,
Commitments		2012	2011
(In Thousands)
Undisbursed lines of credit – Mortgage loans		$ 1,028	$ 1,028
Undisbursed lines of credit – Commercial business loans		1,340	2,867
Undisbursed lines of credit – Consumer loans		863	956
Commitments to extend credit on loans held for investment		1,720	200
	Total	$ 4,951	$ 5,051

Commitments to extend credit are agreements to lend money to a customer at some future date as long as all conditions have been met in the agreement.  These commitments generally have expiration dates within 60 days of the commitment date and may require the payment of a fee.  Since some of these commitments are expected to expire, the total commitment amount outstanding does not necessarily represent future cash requirements.  The Corporation evaluates each customer’s creditworthiness on a case-by-case basis prior to issuing a commitment.  At June 30, 2012 and 2011, interest rates on commitments to extend credit ranged from 2.75% to 5.00% and 3.38% to 5.75%, respectively.

In an effort to minimize its exposure to interest rate fluctuations on commitments to extend credit where the underlying loan will be sold, the Corporation may enter into loan sale commitments to sell certain dollar amounts of fixed rate and adjustable rate loans to third parties.  These agreements specify the minimum maturity of the loans, the yield to the purchaser, the servicing spread to the Corporation (if servicing is retained), the maximum principal amount of all loans to be delivered and the maximum principal amount of individual loans to be delivered.  The Corporation typically satisfies these loan sale commitments with its current loan production.  If the Corporation is unable to reasonably predict the dollar amounts of loans which may not fund, the Corporation may enter into “best efforts” loan sale commitments rather than “mandatory” loan sale commitments.  Mandatory loan sale commitments may include whole loan and/or To-Be-Announced MBS (“TBA-MBS”) loan sale commitments.  If the Corporation is unable to fulfill its loan sale commitments, the Corporation is required to settle the obligations through pair offs based on the prevailing fair value of the commitments.

In addition to the instruments described above, the Corporation may also purchase over-the-counter put option contracts (with expiration dates that generally coincide with the terms of the commitments to extend credit), which mitigates the interest rate risk inherent in commitments to extend credit.  In addition to put option contracts, the Corporation may purchase call option contracts to adjust its risk positions.  The contract amounts of these instruments reflect the extent of involvement the Corporation has in this particular class of financial instruments.  The Corporation’s exposure to loss on these financial instruments is limited to the premiums paid for the put and call option contracts.  Put and call options are adjusted to market in accordance with ASC 815, “Derivatives and Hedging,” as amended.

In accordance with ASC 815 and interpretations of the FASB’s Derivative Implementation Group, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, TBA-MBS trades and option contracts are recorded at fair value on the consolidated statements of financial condition, and are included in other assets (if the net result is a gain) or other liabilities (if the net result is a loss).  The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recognized in the gain on sale of loans on a current basis.

The following table provides information for the years ended June 30, 2012 and 2011 regarding the allowance for loan losses of the undisbursed funds and commitments to extend credit on loans to be held for investment.

	For the Year Ended June 30,
	2012		2011
(In Thousands)
Balance, beginning of the year	$ 94		$ 119
Recovery	(28	)	(25	)
Balance, end of the period	$  66		$   94

The net impact of derivative financial instruments on the Consolidated Statements of Operations during the years ended June 30, 2012, 2011 and 2010 was as follows:

	For the Year Ended June 30,
Derivative financial instruments	2012		2011		2010
(In Thousands)
Commitments to extend credit on loans to be held for sale	$ 3,343		$ (2,327	)	$  1,649
Mandatory loan sale commitments and TBA-MBS trades	(1,895	)	4,028		(4,104	)
Put option contracts	(259	)	(24	)	-
Call option contracts	(101	)	-		-
Total gains (losses)	$  1,088		$  1,677		$ (2,455	)

The outstanding derivative financial instruments at the dates indicated were as follows:

	June 30, 2012				June 30, 2011
			Fair				Fair
Derivative Financial Instruments	Amount		Value		Amount		Value
(In Thousands)
Commitments to extend credit on
loans to be held for sale (1)	$  220,357		$ 3,981		$  107,458		$    638
Best efforts loan sale commitments	(30,498	)	-		(8,159	)	-
Mandatory loan sale commitments and TBA-MBS trades	(408,636	)	(1,316	)	(279,856	)	579
Put option contracts	(15,000	)	36		(13,000	)	99
Total	$ (233,777	)	$ 2,701		$ (193,557	)	$ 1,316

(1)   Net of an estimated 33.8% of commitments at June 30, 2012 and 31.0% of commitments at June 30, 2011, which may not fund.

For fiscal 2012, 2011 and 2010, the estimated volume of commitments to extend credit on loans to be held for sale was $2.63 billion, $2.10 billion and $1.84 billion, respectively; while the estimated volume of loan sale commitments, primarily mandatory commitments in fiscal 2012, 2011 and 2010, was $2.62 billion, $2.10 billion and $1.86 billion, respectively.