Navy Federal Credit Union 2013 Annual Report Download - page 50
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Navy Federal Credit Union • 2013 Financial Section
30
2013 ANNUAL REPORT
NOTE 10:
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 aect 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 through a central clearing party (CCP). The following table identifies derivative
instruments included in Other assets or Other liabilities on the Consolidated Statements of Financial
Condition at December 31, 2013 and 2012.
(dollars in thousands)
Notional or
Contractual
Amount
Derivatives at Fair Value Notional or
Contractual
Amount
Derivatives at Fair Value
Asset Liability Asset Liability
Derivatives not designated
Interest rate lock commitments $ 333,406 $ 5,593 $ 45 $ 1,656,230 $ 50,282 $ 18
Forward sales contracts 695,500 2,558 86 2,445,089 1,401 3,115
Total derivatives not designated
as accounting hedges
$ $ $ $ $ $
Derivatives designated
Interest rate contracts:
Fair value interest rate contracts $ 10,000 $ 998 $ — $ 10,000 $ 159 $ —
Cash flow interest rate contracts 750,000 23,356 — 100,000 — 4,464
Total derivatives designated
as accounting hedges
$ $ $ — $ $ $
Total derivatives $ $ $ $ $ $
The forward sales contracts in the table above settle within a three-month period, and their note rates
range between 2.5% and 5.5%. Management has the intent and ability to fill the incremental amount of
forward sales contracts in excess of open interest rate lock commitments (IRLCs) with the balance of
closed mortgage loans classified as MLAS on the Consolidated Statements of Financial Condition.
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 on Navy Federal’s Consolidated Statements
of Financial Condition. Navy Federal makes mortgage loan commitments, called IRLCs, to members
at specified interest rates, exposing Navy Federal to the risk of adverse changes in value of the IRLCs
as interest rates fluctuate 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 up
until the time when the loan is delivered to the investor. To oset 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 accounts for both the IRLCs