Note 6: 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, 2019 and June 30, 2019, the Corporation had commitments to extend credit on loans to be held for investment of $7.1 million and $4.3 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	September 30, 2019		June 30, 2019
(In Thousands)
Undisbursed loan funds – Construction loans	$	6,213	$	6,592
Undisbursed lines of credit – Commercial business loans		1,065		1,003
Undisbursed lines of credit – Consumer loans		470		479
Commitments to extend credit on loans to be held for investment		7,109		4,254
Total	$	14,857	$	12,328

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 ended September 30, 2019 and 2018.


	For the Quarters Ended
	September 30,
(In Thousands)	2019		2018
Balance, beginning of the period	$	141	$	157
Provision (recovery)		2		(8)
Balance, end of the period	$	143	$	149

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. The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. As of September 30, 2019 and June 30, 2019, there were no outstanding derivative financial instruments.

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 ended September 30, 2019 and 2018 was as follows:


	For the Quarters Ended
	September 30,
Derivative Financial Instruments	2019		2018
(In Thousands)
Commitments to extend credit on loans to be held for sale	$	—	$	(329)
Mandatory loan sale commitments and TBA MBS trades		—		679
Total net gain	$	—	$	350

Loans previously sold to the FHLB – San Francisco under the Mortgage Partnership Finance (“MPF”) program have a recourse liability. The FHLB – San Francisco absorbs the first four basis points of loss by establishing a first loss account and a credit scoring process is used to calculate the maximum recourse amount for the Bank. All losses above the Bank’s maximum recourse are the responsibility of the FHLB – San Francisco. The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation. As of September 30, 2019 and June 30, 2019, the Bank serviced $8.8 million and $9.7 million of loans under this program, respectively and has established a recourse liability of $50,000 at both dates.

Occasionally, the Bank is required to repurchase loans sold to Freddie Mac, Fannie Mae or other 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 quarter ended September 30, 2019, the Bank repurchased one single-family loan of $566,000. In comparison, the Bank repurchased three single-family loans totaling $253,000 (including two loans that were fully charged off) during the quarter ended September 30, 2018. There were no other repurchase requests, which did not result in the repurchase of the loan itself , were settled in the quarters ended September 30, 2019 and 2018. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $200,000 for loans sold to other investors as of both September 30, 2019 and June 30, 2019.

The following table shows the summary of the recourse liability for the quarters ended September 30, 2019 and 2018:


	For the Quarters Ended
	September 30,
Recourse Liability	2019		2018
(In Thousands)
Balance, beginning of the period	$	250	$	283
Recovery from recourse liability		—		(33)
Net settlements in lieu of loan repurchases		—		—
Balance, end of the period	$	250	$	250