Navy Federal Credit Union 2015 Annual Report Download - page 51

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Navy Federal Credit Union32
December 31, 2015 December 31, 2014
Notional or
Contractual
Amount
Derivatives at Fair Value Notional or
Contractual
Amount
Derivatives at Fair Value
(dollars in thousands) Asset Liability Asset Liability
Derivatives not designated as accounting hedges:
Interest rate lock
commitments $ 924,445 $ 18,570 $ 19 $ 373,468 $ 8,771 $ 3
Forward sales contracts 1,321,000 1,385 688 753,000 943 3,558
Total derivatives
not designated as
accounting hedges
$ 2,245,445 $ 19,955 $ 707 $ 1,126,468 $ 9,714 $ 3,561
Derivatives designated as accounting hedges:
Interest rate contracts:
Fair value interest rate
contracts $ 10,000 $ 194 $ — $ 10,000 $ 361 $ —
Cash flow interest rate
contracts 950,000 162 40,918 850,000 743 34,311
Total derivatives
designated as
accounting hedges
$ 960,000 $ 356 $ 40,918 $ 860,000 $ 1,104 $ 34,311
Total derivatives $ 3,205,445 $ 20,311 $ 41,625 $ 1,986,468 $ 10,818 $ 37,872
The forward sales contracts in the table above settle within a three-month period, and their note
rates range between 2% and 4%. Management has the intent and ability to fill the incremental
amount of forward sales contracts in excess of open IRLCs. Navy Federal had $708.0 million and
$572.4 million as of December 31, 2015 and 2014, respectively, of mortgage loans classified as
MLAS in the Consolidated Statements of Financial Condition to meet these commitments.
Derivatives Accounted For as Economic Hedges
Navy Federal is an active participant in the production of mortgage loans that are sold to
investors in the secondary market. These loans are classified as MLAS in Navy Federal’s
Consolidated Statements of Financial Condition. The value of Navy Federal’s IRLCs is exposed
to the risk of adverse changes in interest rates between the time of commitment and the time
Navy Federal funds the loan at origination. Navy Federal is also exposed to the risk of adverse
changes in value after funding the loan up until the time when the loan is delivered to the investor.
To oset this exposure, Navy Federal enters into forward sales contracts to deliver mortgage
loans to investors at specified prices in the “To Be Announced” market (TBA securities). These
forward sales contracts act as an economic hedge against the risk of changes in the value of
both the IRLCs and the funded loans. Navy Federal does not account for these derivatives as
qualifying accounting hedges and therefore accounts for them as economic hedges. As required
by ASC 815, Derivatives and Hedging, Navy Federal records IRLCs and forward sales contracts
as derivative instruments at fair value in its Consolidated Statements of Financial Condition and
records changes in the fair value of those derivative instruments in current earnings.
The table below presents gains (losses) on these derivatives for 2015 and 2014. These gains
(losses) are largely oset by the income or expense that is recorded on the IRLCs and funded
loans in Net gains on mortgage loan sales in the Consolidated Statements of Income.