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Derivative and Other Financial Instruments with Off-Balance Sheet Risks

6 Months Ended

Dec. 31, 2023

Derivative and Other Financial Instruments with Off-Balance Sheet Risks

Derivative and Other Financial Instruments with Off-Balance Sheet Risks

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 December 31, 2023 and June 30, 2023, the Corporation had commitments to extend credit on loans to be held for investment of $1.8 million and $2.4 million, respectively.

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



Commitments		December 31, 2023			June 30, 2023
(In Thousands)
Undisbursed loan funds – Construction loans		$	796		$	2,032
Undisbursed lines of credit – Commercial business loans			443			607
Undisbursed lines of credit – Consumer loans			352			363
Commitments to extend credit on loans to be held for investment			1,813			2,394
Total		$	3,404		$	5,396

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 December 31, 2023 and June 30, 2023, there were no outstanding derivative financial instruments.

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 amount are the responsibility of the FHLB – San Francisco. The FHLB – San Francisco pays the Bank a credit enhancement fee monthly to compensate the Bank for accepting the recourse obligation. As of December 31, 2023 and June 30, 2023, the Bank serviced $3.3 million and $3.5 million of loans under this program, respectively, and has established a recourse liability of $8,000 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 quarters and six months ended December 31, 2023 and 2022, the Bank did not repurchase any loans or settle any request to repurchase a loan. In addition to the specific recourse liability for the MPF program, the Bank established a recourse liability of $22,500 and $25,000 for loans sold to other investors at December 31, 2023 and June 30, 2023, respectively.

The following table shows the summary of the recourse liability for the quarters and six months ended December 31, 2023 and 2022:


		For the Quarter Ended						For the Six Months Ended
		December 31,						December 31,
Recourse Liability		2023			2022			2023			2022
(In Thousands)
Balance, beginning of the period		$	33		$	160		$	33		$	160
(Recovery) provision for recourse liability			(2)			—			(2)			—
Net settlements in lieu of loan repurchases			—			—			—			—
Balance, end of the period		$	31		$	160		$	31		$	160