Navy Federal Credit Union 2005 Annual Report Download - page 41

11
Note 5: Derivative Instruments and Economic
Hedging Activities
Navy Federal is an active participant in the production of mortgage
loans which are sold to investors in the secondary market. This
mortgage banking activity involves making mortgage loan commit-
ments to members at specified interest rates. Navy Federal is
exposed to changes in the value of its mortgage loan commitments
as interest rates may change between the time that it enters into a
mortgage loan commitment and the time that it ultimately delivers
mortgage loans to investors. To protect against this interest rate
risk, Navy Federal enters into forward sales contracts at specified
prices to deliver mortgage loans to investors. These forward sales
commitments act as an economic hedge against the risk of
changes in the value of both the mortgage loan commitments and
mortgage loans held for sale. As required by FAS 133, Accounting
for Derivative Instruments and Hedging Activities,
as amended and
interpreted, Navy Federal accounts for both the mortgage loan
commitments and the forward sales contracts as derivative instru-
ments on its Consolidated Statements of Financial Condition as fair
value with changes in fair value included in current earnings. These
derivative instruments are economic hedges to which Navy Federal
does not receive hedge accounting treatment.
The notional value of the mortgage loan commitments totaled
$206,241,000 and $208,999,000, respectively, as of December 31,
2005 and 2004. A net loss of $1,516,000 and $1,205,000 on
the mortgage loans commitment derivative was reported in the
Statement of Financial Condition at December 31, 2005 and
2004, respectively.
The notional value of the forward sales contracts was $370,040,000
and $382,751,000, respectively, as of December 31, 2005 and 2004.
A net loss of $1,315,000 and a net gain of $1,117,000 on the
forward sales contracts derivative was reported in the Statement
of Financial Condition at December 31, 2005 and 2004, respectively.
The net change in the fair value of these derivative instruments
was a loss of $2,744,000 and $2,199,000 during the years ended
December 31, 2005 and 2004, respectively, and was included in
earnings as “Unrealized loss from derivative and economic hedging
activities” in the Statement of Operations.
Note 6: Legal Contingencies
Navy Federal is a party to various legal actions normally associated
with financial institutions, the aggregate effect of which, in man-
agement’s and legal counsel’s opinion, would not be material to the
financial condition or results of operations of Navy Federal.
Note 7: Commitments
Navy Federal is a party to conditional commitments to lend funds
in the normal course of business to meet the financing needs of
its members. Unused commitments for loans to members are
amounts which Navy Federal has agreed to lend a member as long
as the member does not default on existing loans or violate any
condition of the loan agreement. Commitments generally have fixed
expiration dates or other termination clauses. Since many of the
commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements. Navy Federal uses the same credit policies
in making commitments as it does for all loans to members and,
accordingly, at December 31, 2005, the credit risk related to these
commitments was similar to that on its existing loans.
The following financial instruments were outstanding in 2005 and
2004
(dollars in thousands):
Unused commitments: 2005 2004
Credit cards $ 3,958,828 $ 3,504,353
NAVchek lines of credit 527,916 511,654
Home equity lines of credit 1,101,992 839,361
Preapproved auto loans 160,638 122,960
Utility deposit guarantee
programs 2,855 2,594
Letter of credit 7,500 7,500
Total $ 5,759,729 $ 4,988,422