Navy Federal Credit Union 2015 Annual Report Download - page 72

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Financial Section 53
2015—SHARED SUCCESS
Financial Instruments Accounted For Under Fair Value Option:
Mortgage Loans Awaiting Sale (MLAS)
Fair value and aggregate unpaid principal balance for MLAS are as follows:
Fair Value Unpaid Principal
Balance Dierence
(dollars in thousands)
December 31, 2015
MLAS $ 708,015 $ 692,368 $ 15,647
December 31, 2014
MLAS $ 572,420 $ 553,363 $ 19,057
Additional Fair Value Information Related to Other Financial Instruments:
Cash
The reported carrying amount of Cash approximates fair value for vault cash and demand
balances from other financial institutions.
Investments, Including Mortgage-Backed Securities
Fair value is based on quoted market prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
Loans to Members
For residential mortgages, fair value is estimated using the quoted market prices for securities
backed by similar loans. The fair value of other loan types, including consumer and equity loans, is
estimated by discounting expected principal and interest cash flows (net of defaults) using market
rates and adjustments related to non-interest income and expense. Loans that are individually
impaired are carried at the lower of cost or fair value of the underlying collateral, less estimated
cost to sell.
Members’ Accounts
For members’ accounts, the fair value is estimated by discounting expected future cash flows
using market rates. For accounts with no defined maturity, such as Savings, Money Market
Savings, Checking and IRA share accounts, a final maturity of ten years is assumed.
Derivative Instruments and Hedging Activities
Fair values of Navy Federal’s IRLCs are determined based on an evaluation of best execution
forward contract prices sourced from the TBA market. The fair value of forward sales contracts
on MLAS that Navy Federal intends to sell is based on the quoted market price of contracts with
similar characteristics. It is the established practice of Navy Federal to only purchase forward
contracts to cover mortgage loans in process, which are anticipated to close for delivery into
these forward contracts. Accordingly, the cost to terminate existing contracts, which is based on
current market prices, is not material to Navy Federal.
Navy Federal uses pay-fixed interest rate swaps to protect certain fixed-rate investments against
the adverse changes in fair value attributable to changes in interest rates, as well as to hedge the
variability in cash flows related to existing and anticipated replacement funding for floating rate
liabilities that reprice based on LIBOR.