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Derivative and Other Financial Instruments with Off-Balance Sheet Risks

9 Months Ended

Mar. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 March 31, 2019 and June 30, 2018, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $16.6 million and $66.3 million, respectively.

The following table provides information at the dates indicated regarding undisbursed funds on construction loans, undisbursed funds to borrowers on existing lines of credit with the Corporation as well as commitments to originate loans to be held for investment at the dates indicated below.

Commitments	March 31, 2019		June 30, 2018
(In Thousands)

Undisbursed loan funds – Construction loans	$	6,109	$	4,302
Undisbursed lines of credit – Commercial business loans		950		495
Undisbursed lines of credit – Consumer loans		481		503
Commitments to extend credit on loans to be held for investment		4,346		9,352
Total	$	11,886	$	14,652

The following table provides information regarding the allowance for loan losses for the undisbursed funds and commitments to extend credit on loans to be held for investment for the quarters and nine months ended March 31, 2019 and 2018.

	For the Quarters Ended March 31,					For the Nine Months Ended March 31,
(In Thousands)	2019		2018			2019			2018
Balance, beginning of the period	$	150	$	188		$	157		$	277
Provision (recovery)		1		(29	)		(6	)		(118	)
Balance, end of the period	$	151	$	159		$	151		$	159

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 March 31, 2019, $240,000 was included in other assets and $224,000 was included in other liabilities; at June 30, 2018, $849,000 was included in other assets and $464,000 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 net impact of derivative financial instruments recorded within the gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters and nine months ended March 31, 2019 and 2018 was as follows:

	For the Quarters Ended March 31,						For the Nine Months Ended March 31,
Derivative Financial Instruments	2019			2018			2019			2018
(In Thousands)
Commitments to extend credit on loans to be held for sale	$	(264	)	$	266		$	(585	)	$	173
Mandatory loan sale commitments and TBAMBS trades		465			(281	)		216			(1,072	)
Option contracts, net		—			—			—			(37	)
Total net gain (loss)	$	201		$	(15	)	$	(369	)	$	(936	)

The outstanding derivative financial instruments and other loan sale agreements at the dates indicated were as follows:

	March 31, 2019						June 30, 2018
Derivative Financial Instruments	Amount			Fair Value			Amount			Fair Value
(In Thousands)
Commitments to extend credit on loans to be held for sale ⁽¹⁾	$	12,211		$	240		$	56,906		$	825
Best efforts loan sale commitments		(10,212	)		—			(29,502	)		—
Mandatory loan sale commitments and TBA MBS trades		(28,817	)		(224	)		(117,759	)		(440	)
Total	$	(26,818	)	$	16		$	(90,355	)	$	385

⁽¹⁾

Net of 18.6% at March 31, 2019 and 24.7% at June 30, 2018 of commitments which management has estimated may not fund.

Occasionally, the Corporation is required to repurchase loans sold to Freddie Mac, Fannie Mae or other institutional investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date. During the third quarter of fiscal 2019, the Corporation repurchased two loans totaling $446,000 pursuant to the recourse/repurchase covenants contained in the loan sale agreements. In comparison, the Corporation repurchased two loans totaling $602,000 from investors during the third quarter of fiscal 2018. During the first nine months of fiscal 2019, the Corporation repurchased five loans totaling $699,000, including two loans that were fully charged off ($25,000). In comparison, the Corporation repurchased two loans totaling $602,000 from investors during the first nine months of fiscal 2018. Additional repurchase requests may have been settled that did not result in the repurchase of the loan itself. The primary reasons for honoring the repurchase requests are borrower fraud, undisclosed liabilities on borrower applications, and documentation, verification and appraisal disputes. For the third quarters of fiscal 2019 and 2018, the Corporation did not record any provision for the recourse liability and did not settle any claims. For the first nine months of fiscal 2019 and 2018, the Corporation recorded a $33,000 recovery and a $22,000 recovery from the recourse liability, respectively, and did not settle any claims. As of March 31, 2019, the total recourse reserve for loans sold that are subject to repurchase decreased to $250,000, as compared to $283,000 at June 30, 2018 and $283,000 at March 31, 2018.

Beginning in 2008, in connection with the downturn in the real estate market, the Corporation implemented tighter underwriting standards to reduce potential loan repurchase requests, including requiring higher credit scores, generally lower debt-to-income ratios, and verification of income and assets, among other criteria. Despite management’s diligent estimate of the recourse reserve, the Corporation is still subject to risks and uncertainties associated with potentially higher loan repurchase claims from investors, and there are no assurances that the current recourse reserve will be sufficient to cover all future recourse claims.

The following table shows the summary of the recourse liability for the quarters and nine months ended March 31, 2019 and 2018:

	For the Quarters Ended March 31,				For the Nine Months Ended March 31,
Recourse Liability	2019		2018		2019			2018
(In Thousands)

Balance, beginning of the period	$	250	$	283	$	283		$	305
Recovery from recourse liability		—		—		(33	)		(22	)
Net settlements in lieu of loan repurchases		—		—		—			—
Balance, end of the period	$	250	$	283	$	250		$	283