Commitments and Contingencies

First Federal 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 generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

First Federal’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. First Federal uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Management does not anticipate any material loss as a result of these transactions.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First Federal evaluates each customer’s creditworthiness on a case-by-case basis. First Federal did not incur any significant losses on its commitments for the three months ended September 30, 2014 and the year ended June 30, 2014.

The following financial instruments were outstanding whose contract amounts represent credit risk at September 30, 2014 and June 30, 2014:



	September 30,		June 30,
	2014		2014
	(In thousands)
Commitments to grant loans	$	300	$	191
Standby letters of credit	260		260
Unfunded commitments under lines of credit or existing loans	37,122		38,538

Legal contingencies - Various legal claims may arise from time to time in the normal course of business, which, in the opinion of management, have no current material effect on First Federal’s consolidated financial statements.

Significant group concentrations of credit risk - Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial loan concentrations in a specific type of loan within First Federal’s loan portfolio, thereby exposing First Federal to greater risks resulting from adverse economic, political, regulatory, geographic, industrial, or credit developments. Loans-to-one-borrower are subject to the state banking regulations general limitation of 20 percent of First Federal’s equity, excluding accumulated other comprehensive income. At September 30, 2014 and June 30, 2014, First Federal’s most significant concentration of credit risk was in loans secured by real estate. These loans totaled approximately $470.8 million and $475.8 million, or 94.8% and 94.4%, of First Federal’s total loan portfolio at September 30, 2014 and June 30, 2014, respectively. Real estate construction, including land acquisition and land development, commercial real estate, multifamily, home equity, and one to four family residential loans are included in the total loans secured by real estate for purposes of this calculation. After a period of decline the real estate market has begun to recover, which has helped stabilize nonperforming loans and the allowance for loan losses.

At September 30, 2014 and June 30, 2014, First Federal’s most significant investment concentration of credit risk was with the U.S. Government, its agencies, and Government Sponsored Enterprises (GSEs). First Federal’s exposure, which results from positions in securities issued by the U.S. Government, its agencies, and securities guaranteed by GSEs, was $210.6 million and $218.9 million, or 90.1% and 90.4%, of First Federal’s total investment portfolio (including FHLB stock) at September 30, 2014 and June 30, 2014, respectively.