Note 7: Derivative and Other Financial Instruments With Off-balance Sheet Risks

12 Months Ended

Sep. 30, 2012

Notes

Note 7: Derivative and Other Financial Instruments With Off-balance Sheet Risks

Note 7: Derivative 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, loan sale commitments to third parties and option contracts.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed 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 entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  As of September 30, 2012 and June 30, 2012, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $302.0 million and $222.1 million, respectively.

The following table provides information regarding undisbursed funds to borrowers on existing lines of credit with the Bank as well as commitments to originate loans to be held for investment.

	September 30,	June 30,
	2012	2012
Commitments
(In Thousands)
Undisbursed lines of credit – Mortgage loans	$937	$1,028
Undisbursed lines of credit – Commercial business loans	1,300	1,340
Undisbursed lines of credit – Consumer loans	836	863
Commitments to extend credit on loans to be held for investment	2,351	1,720
Total	$5,424	$4,951

In accordance with ASC 815, “Derivatives and Hedging,” and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, to be announced (“TBA”) MBS trades, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition.  At September 30, 2012, $8.4 million was included in other assets and $6.0 million was included in other liabilities; at June 30, 2012, $4.0 million was included in other assets and $1.3 million was included in other liabilities.  The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings.

The following table provides information regarding the allowance for loan losses of the undisbursed funds and commitments to extend credit on loans to be held for investment.

	For the Quarters Ended
	September 30,
	2012	2011
(In Thousands)
Balance, beginning of the period	$66	$94
Recovery	-	(1)
Balance, end of the period	$66	$93

The net impact of derivative financial instruments on the gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters ended September 30, 2012 and 2011 was as follows:

	For the Quarters Ended
	September 30,
	2012	2011
Derivative Financial Instruments
(In Thousands)
Commitments to extend credit on loans to be held for sale	$4,389	$2,824
Mandatory loan sale commitments and TBA MBS trades	(4,658)	(2,472)
Option contracts	(262)	(154)
Total	$(531)	$198

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

	September 30, 2012		June 30, 2012
		Fair		Fair
	Amount	Value	Amount	Value
Derivative Financial Instruments
(In Thousands)
Commitments to extend credit on loans
to be held for sale (1)	$  299,625	$ 8,370	$  220,357	$ 3,981
Best efforts loan sale commitments	(21,651)	-	(30,498)	-
Mandatory loan sale commitments and TBA MBS trades	(512,492)	(5,974)	(408,636)	(1,316)
Put option contracts	45,000	65	(15,000)	36
Total	$ (189,518)	$ 2,461	$ (233,777)	$ 2,701

⁽¹⁾       Net of 35.5 percent at September 30, 2012 and 33.8 percent at June 30, 2012 of commitments, which management has estimated may not fund.