Navy Federal Credit Union 2015 Annual Report Download - page 50

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Financial Section 31
2015—SHARED SUCCESS
MSR valuation is sensitive to interest rate and prepayment risk. A sensitivity analysis of the
hypothetical eect on the fair value of MSRs to adverse changes in key assumptions is presented
below. Changes in fair value generally cannot be extrapolated because the relationship of the
change in the assumption to the change in fair value may not be linear. Also, the eect of a
variation in a particular assumption on the fair value of the MSRs is calculated independently
without changing any other assumptions. Changes in one assumption may aect changes in
another, which could either magnify or counteract the sensitivities.
The key economic assumptions used in determining the fair value of MSRs and the sensitivity
analysis of the hypothetical eect on the fair value of the MSRs to immediate adverse changes
of 10% and 20% in those assumptions at December 31, 2015 and 2014 were as follows:
(dollars in thousands) 2015 2014
Weighted-average life (years) 6.20 5.90
Weighted-average prepayment rate 11.56% 12.63%
Decline in fair value from 10% adverse change $ 259,618 $ 225,018
Decline in fair value from 20% adverse change 249,121 215,106
Weighted-average discount rate 9.86% 9.84%
Decline in fair value from 10% adverse change $ 261,439 $ 227,608
Decline in fair value from 20% adverse change 252,615 220,034
NOTE 8: REAL ESTATE OWNED
Navy Federal obtains REO through foreclosure proceedings or when a delinquent borrower
chooses to transfer a mortgaged property in lieu of foreclosure. REO represents held-for-sale
assets carried at lower of cost or fair value less costs to sell. Navy Federal generally expects
to dispose of REO held within one year or less, and the holding costs such as insurance,
maintenance, taxes and utility costs are expensed as incurred. REO, which we report in our
Consolidated Statements of Financial Condition under Other assets, totaled $19.1 million and
$18.5 million as of December 31, 2015 and 2014, respectively.
Mortgage loans for which formal foreclosure proceedings were in process amounted to $38.8
million and $43.0 million as of December 31, 2015 and 2014, respectively.
NOTE 9: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Navy Federal’s risk management strategies include the use of derivatives as economic hedges
and derivatives designated as qualifying accounting hedges. The goal of these strategies is to
mitigate market risk so that movements in interest rates do not adversely aect the value of
Navy Federal’s assets or liabilities, or its earnings and future cash flows. Navy Federal executes
derivative contracts over-the-counter and clears these transactions through a derivative clearing
organization (DCO). The following table identifies derivative instruments in a gain position
included in Other assets as well as derivative instruments in a loss position included in Other
liabilities in the Consolidated Statements of Financial Condition at December 31, 2015 and 2014.