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Federally insured by NCUA.
Navy Federal Credit Union • 2015 Annual Report
SHARED SUCCESS

Table of contents

  • Page 1
    SHARED SUCCESS Navy Federal Credit Union • 2015 Annual Report Federally insured by NCUA.

  • Page 2
    VISION STATEMENT Be the most preferred and trusted financial institution serving the military and their families.

  • Page 3
    ....3 7,701.0 4,720.4 2,243.0 387.3 Assets Loans Outstanding Savings, Checking, MMSAs, IRAs Share Certificates Members' Equity Gross Income Non-interest Expense Dividends Mortgage Loans Serviced $ 4,058.9 $ $ 2,045.3 351.8 $ 40,847.0 $ 47,436.5 MEMBERS 5,297,943 5,976,265 2015 ANNUAL REPORT 1

  • Page 4
    Our total membership grew to 5.9 million, representing year-over-year growth of 12.8 percent. 2 NAVY FEDERAL CREDIT UNION

  • Page 5
    ... subsidiary, Navy Federal Financial Group, grew to $2.3 billion, a 7.4 percent increase. Navy Federal Financial Group offers investment services, insurance products and financial planning to our members. In 2015, we opened a record-breaking 900,000 new checking accounts, bringing our total number to...

  • Page 6
    We provided more than 325,000 car and truck loans, totaling $6.6 billion. 4 NAVY FEDERAL CREDIT UNION

  • Page 7
    ...including auto, boat, motorcycle and personal loans, grew by 11.4 percent to $15.6 billion. Credit Cards Recognized for great rewards programs and excellent value, Navy Federal's credit cards performed exceedingly well again in 2015. Our credit card portfolio ended the year with 373,000 new accounts...

  • Page 8
    ... Mortgage and Equity Loans The U.S. real estate market posted its best sales numbers since 2007. Navy Federal was there to help with flexible terms and continued low rates. We closed more than 48,000 loans for a total of $12.3 billion, representing Navy Federal's best year on record. First-time...

  • Page 9
    In 2015, 42 percent of all deposits were made through mobile* or scan, an increase of just under 40 percent. 2015 ANNUAL REPORT 7

  • Page 10
    ... in 2014. With digital wallets, members can use their Navy Federal debit or credit cards to make secure purchases with their mobile devices at checkout and through merchant apps. By November, Mobile Banking became the most widely and often used channel for members to check account balances, transfer...

  • Page 11
    We invited new members to #JoinTheFamily and share their experiences and stories with us on social media. 2015 ANNUAL REPORT 9

  • Page 12
    Loans/Savings (dollars in billions) 2014 2015 $46.8/$44.2 $54.0/$48.9 Members 2014 2015 5,297,943 5,976,265 Assets (dollars in billions) 2014 2015 $63.6 $73.3 10 NAVY FEDERAL CREDIT UNION

  • Page 13
    ... for Military. This recognition underscores Navy Federal's commitment to its members and employees. This past year was exceptional for Navy Federal Credit Union in terms of growth in membership, deposits and loans. We added new products and services to improve the ways we help members achieve...

  • Page 14
    2015 BOARD OF DIRECTORS John A. Lockard Chairman of the Board Bruce B. Engelhardt First Vice Chairman Edward R. Cochrane Jr. Second Vice Chairman Cutler Dawson Treasurer Kenneth R. Burns Secretary 12 NAVY FEDERAL CREDIT UNION

  • Page 15
    Kirk A. Foster Neil W. T. Hogg William P. Mizerak Henry J. Sanford Delivering world-class service has been the cornerstone of Navy Federal's success ever since our founding in 1933. 2015 ANNUAL REPORT 13

  • Page 16
    Michael C. Wholley Chairman Kirk A. Foster Anthony M. Kurta Patrick J. McClanahan Pasquale M. Tamburrino Jr. 14 NAVY FEDERAL CREDIT UNION

  • Page 17
    ... audit of the credit union's year-end financial statements. PwC's year-end audit, the Independent Auditor's Report, appears in this Annual Report. Acting as your ombudsman, the Supervisory Committee assures that all members are treated fairly by maintaining an open communication with the membership...

  • Page 18
    ... through Navy Federal® Brokerage Services, LLC (NFBS), member FINRA/SIPC. Investment Advisory Services offered through Navy Federal® Asset Management, LLC (NFAM), an SEC registered investment advisor. Nondeposit investment products are not federally insured, are not obligations of the credit union...

  • Page 19
    SHARED SUCCESS Navy Federal Credit Union Consolidated Financial Statements and Independent Auditor's Report December 31, 2015 and 2014

  • Page 20
    ... of Navy Federal Credit Union, which comprise the consolidated statements of financial condition as of December 31, 2015 and December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in members' equity and of cash flows for the years then ended. Management...

  • Page 21
    Consolidated Statements of Financial Condition As of December 31, (dollars in thousands) 2015 2014 Assets Cash Short-term investments Available-for-sale securities Held-to-maturity securities Mortgage loans awaiting sale Loans to members, net of allowance for loan losses of $965,979 at December ...

  • Page 22
    ...-SHARED SUCCESS Consolidated Statements of Income For the Year Ended December 31, (dollars in thousands) 2015 2014 Interest income Loans to members Available-for-sale securities Held-to-maturity securities Other investments $ 3,264,271 316,512 5,768 21,248 $ 2,798,030 299,729 7,389 13,489 Total...

  • Page 23
    ... part of these consolidated financial statements. Consolidated Statements of Changes in Members' Equity Accumulated Other Comprehensive Income/(Loss) (dollars in thousands) Regular Reserve Capital Reserve Undivided Earnings Pension Available-forAccounting Sale Securities Adjustments $ (101,559...

  • Page 24
    2015-SHARED SUCCESS Consolidated Statements of Cash Flows (dollars in thousands) For the Year Ended December 31, Cash flows from operating activities Net income $ 2015 872,219 $ 2014 718,830 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan ...

  • Page 25
    ... their families. Navy Federal is headquartered in Vienna, VA with branch locations around the country and abroad. Basis of Presentation and Use of Estimates The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of...

  • Page 26
    ... of 90 days or less. Short-term investments also include cash held at Federal Reserve Bank in excess of the minimum reserves. As of December 31, 2015 and 2014, all short-term investments were carried at cost, which approximated fair value. Investments Navy Federal's securities are classified...

  • Page 27
    ...Navy Federal loan portfolio consists of consumer, credit card and real estate loans. Consumer loans consist of auto loans, signature loans, checking lines of credit and education loans. Real estate loans consist of mortgage and equity loans. At origination, all consumer, credit card and equity loans...

  • Page 28
    ... Navy Federal recognizes MSRs at fair value with changes in fair value recognized in Fair value adjustment of mortgage servicing rights in the Consolidated Statements of Income. Acquired Credit-Impaired Loans ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, addresses...

  • Page 29
    ...estate owned (REO) through foreclosure proceedings or when a delinquent borrower chooses to transfer a mortgaged property in lieu of foreclosure. REO is initially recorded at fair value less estimated costs to sell and is included in Other assets in the Consolidated Statements of Financial Condition...

  • Page 30
    ...in its Consolidated Statements of Financial Condition. See Note 9: Derivative Instruments and Hedging Activities for details. Economic Hedges Navy Federal enters into mortgage loan commitments, also called interest rate lock commitments (IRLCs), in connection with its mortgage banking activities to...

  • Page 31
    ... 2014. All derivative financial instruments are recognized at fair value and classified as Other assets or Other liabilities in the Consolidated Statements of Financial Condition. See Note 9: Derivative Instruments and Hedging Activities for details. Pension Accounting and Retirement Benefit Plans...

  • Page 32
    ... Revenue Service revenue ruling. Dividends Dividend rates on members' accounts are set by Navy Federal's Board of Directors, and dividends are charged to expense. Dividends on all share products are paid monthly. Reclassifications Certain amounts in the prior year's financial statements have...

  • Page 33
    ...in the Consolidated Statements of Financial Condition. NOTE 3: INVESTMENTS Navy Federal's HTM and AFS securities as of December 31, 2015 and 2014 were as follows: (dollars in thousands) December 31, 2015 Held-to-maturity securities U.S. government and federal agency securities Residential mortgage...

  • Page 34
    ... in earnings for the year ended December 31, 2014. The contractual maturities of Navy Federal's HTM and AFS debt securities as of December 31, 2015 and 2014 were as follows: December 31, 2015 (dollars in thousands) Amortized Cost Fair Value Held-to-maturity securities Due in one year or less Due...

  • Page 35
    ...security in an unrealized loss position at December 31, 2015 and December 31, 2014. The following tables present these investments at fair value and their associated gross unrealized losses broken down by the amount of time the investments have been in a loss position: 16 Navy Federal Credit Union

  • Page 36
    2015-SHARED SUCCESS (dollars in thousands) Less than 12 months Fair Value Gross Unrealized (Losses) 12 months or longer Fair Value Gross Unrealized (Losses) Fair Value Total Gross Unrealized (Losses) December 31, 2015 Held-to-maturity securities U.S. government and federal agency securities $ ...

  • Page 37
    ... and real estate loans. Consumer loans consist of auto loans, signature loans, checking lines of credit and education loans. Real estate loans consist of mortgage and equity loans. The composition of loans by portfolio and delinquency status of Navy Federal's loans to members as of December 31, 2015...

  • Page 38
    ... costs of $21.9 million, other adjustments of $(7.7) million, business loans of $44.5 million, checking line of credit of $399.8 million, pre-approved consumer loans of $12.7 million, overdrawn member accounts of $32.7 million and education loans of $321.6 million. December 31, 2014 (dollars...

  • Page 39
    ... attributes such as vintage, product and property type. Navy Federal uses estimated current loan-to-value (LTV) ratios and FICO score as indicators of credit quality for mortgage loans, which consisted of the following as of December 31, 2015 and 2014: December 31, 2015 (dollars in thousands) FICO...

  • Page 40
    ...unfunded commitments Credit Cards $ 335,343 463,288 (374,974) 20,790 (3,571) Real Estate $ 119,860 5,557 (34,448) 5,510 - Total $ 752,835 940,116 (798,822) 76,441 (4,591) Balance, end of year Ending balance: loans individually evaluated for impairment Ending balance: loans collectively evaluated...

  • Page 41
    ...: (dollars in thousands) 2015 $ 16,903 4,591 2014 $ 12,421 4,482 Balance, beginning of period Net change in allowance for unfunded commitments Balance, end of period $ 21,494 $ 16,903 Non-performing Loans When payments of principal or interest are past due by more than 90 days, Navy Federal...

  • Page 42
    ...the financial impact, by concession type, of loans that became TDRs during the years ended December 31, 2015 and 2014: Troubled Debt Restructurings During the Year Ended December 31, 2015(1) Interest Rate Reduction & Term Extension $ 4,376 - 5,327 $ (dollars in thousands) Consumer Credit card Real...

  • Page 43
    ... as of and for the years ended December 31, 2015 and 2014: December 31, 2015 Loan Amount Associated Allowance Average Balance Interest Income (cash basis) (dollars in thousands) Impaired Loans with an associated allowance Consumer Credit card Real estate Business real estate $ 456,143 284,656 491...

  • Page 44
    ... carrying value of Navy Federal's acquired credit-impaired (ACI) loans is included in Loans to members in the Consolidated Statements of Financial Condition, and the related outstanding balances as of December 31 were as follows: (dollars in thousands) Outstanding balance Carrying amount $ 2015 51...

  • Page 45
    ... in the Consolidated Statements of Income as Net gains on mortgage loan sales and totaled $173.0 million and $87.5 million for the years ended December 31, 2015 and 2014, respectively. Navy Federal recorded $9.7 million and $11.4 million of changes in MLAS fair value for the years ended December 31...

  • Page 46
    ... between Navy Federal and transferees on all loans transferred during the years ended December 31, 2015 and 2014: (dollars in thousands) Cash from sale of mortgage loans and mortgage-backed securities Repurchase of previously transferred loans Contractual servicing fees received $ 2015 5,145...

  • Page 47
    ...36 years CPR is based on the average of the CPR for all GNMA securities. GNMA securities are collateralized by government-insured loans and there is no anticipation of significant credit losses. (2) GNMA Securities (dollars in thousands) 2015 2014 Constant prepayment rate Decline in fair value...

  • Page 48
    2015-SHARED SUCCESS Financial Guarantees Related to Recourse Provided in Assets Transferred Representations and Warranties: For mortgage loans transferred in sale transactions or securitizations to FNMA, FHLMC and GNMA, Navy Federal has made representations and warranties that the loans meet their ...

  • Page 49
    ... and expected loan prepayment rates, discount rate, servicing costs and other economic factors. The fair value of MSRs is primarily affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. 30 Navy Federal Credit Union

  • Page 50
    ...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...

  • Page 51
    ... 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...

  • Page 52
    ... losses, in income representing the ineffectiveness of fair value hedges for the years ended December 31, 2015 and 2014, respectively. Cash Flow Accounting Hedges Navy Federal funds a portion of its operations with variable rate obligations. Navy Federal uses pay-fixed interest rate swaps to hedge...

  • Page 53
    ... presents its derivative assets and liabilities on a gross basis in its Consolidated Statements of Financial Condition. The following tables disclose the amounts eligible for offset in Navy Federal's Statements of Financial Condition as of December 31, 2015 and 2014: 34 Navy Federal Credit Union

  • Page 54
    ... Amounts Recognized (dollars in thousands) Gross Amounts Offset in the Statement of Financial Condition Net Amounts Presented in the Statement of Financial Condition Financial Instruments(1) Cash Collateral Net Amount Financial Assets Interest Rate Lock Commitments Forward Sales Contracts $ 18...

  • Page 55
    ... of business, Navy Federal enters into conditional commitments to extend credit and makes financial guarantees to help meet the financing needs of its members. Unfunded loan commitments are amounts Navy Federal has agreed to lend a member generally as long as the member remains in good standing...

  • Page 56
    .... Commitment balances as of December 31, 2015 and 2014 were as follows: (dollars in thousands) Credit cards Home equity lines of credit Checking lines of credit Pre-approved auto loans Other $ 2015 13,631,267 1,041,070 963,131 431,665 26,013 $ 2014 11,647,058 944,194 892,784 401,135 11,961 Total...

  • Page 57
    ...31, 2015, scheduled maturities of time deposits, consisting of share certificates and IRA certificates, were as follows: (dollars in thousands) 2016 2017 2018 2019 2020 Thereafter $ Amount 6,971,802 3,425,899 2,108,773 1,210,376 847,594 1,419,808 Total $ 15,984,252 38 Navy Federal Credit Union

  • Page 58
    ... 31, 2014 (dollars in thousands) FHLB Borrowing FHLB Borrowing FHLB Borrowing $ Amount Outstanding 6,251,200 2,841,000 850,000 Coupon 0.19% - 5.10% 2.00% - 6.04% 0.22% - 0.31% Fixed/Float Fixed Fixed Float Payment Monthly Quarterly Quarterly Maturities 2015 - 2034 2015 - 2033 2015 Total FHLB...

  • Page 59
    ...in mortgage loans held for investment. Navy Federal had the following unused lines of credit as of December 31: (dollars in thousands) Federal Reserve Bank FHLB Fed Funds $ 2015 15,027,866 2,843,749 272,500 $ 2014 5,166,028 4,089,873 272,500 Total $ 18,144,115 $ 9,528,401 NOTE 17: RETIREMENT...

  • Page 60
    ... retiree medical plans as well as the plan assets for the pension plan: Pension (dollars in thousands) Retiree Medical 2014 2015 $ $ 2015 $ $ 2014 - $ $ Accumulated benefit obligation at year end Projected Benefit obligation at beginning of year Employer service cost Interest cost Actuarial loss...

  • Page 61
    ... to provide for the benefits included in the benefit obligations. The assumption is based on several factors, including the anticipated long-term asset allocation of plan assets, historical market index and plan returns, and a forecast of future expected asset returns. 42 Navy Federal Credit Union

  • Page 62
    ... income (loss) for the years ended December 31, 2015 and 2014 consist of: Pension (dollars in thousands) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss): Amounts amortized during the year Net prior service (cost)/credit Net (loss)/gain Amounts...

  • Page 63
    ... retiree medical benefit plan for 2015 and 2014 was December 31. The investment strategy of the Navy Federal Credit Union Employees' Retirement Plan is to employ an investment approach, whereby a mix of equity and fixed-income investments are used to maximize the long-term return of plan assets at...

  • Page 64
    ...methodologies used for the Plan's financial instruments measured at fair value: > U.S. Equity Securities (Level 2)- During the years ended December 31, 2015 and 2014, the Plan invested in one common collective trust. The trust is valued at net asset value, which is calculated based on the fair value...

  • Page 65
    ...$33.4 million, respectively. Total deposit balances received from officials as of December 31, 2015 and 2014 were $10.9 million and $9.5 million, respectively. Loans were made at the same rates and terms as those available to all other members of the Credit Union. Deposit accounts earned interest at...

  • Page 66
    ..." if the credit union's quarter-end total assets exceed fifty million dollars ($50,000,000) and its RBNW requirement exceeds 6%. Navy Federal's RBNW requirement as of December 31, 2015 and 2014 was 5.73% and 5.93%, respectively. Based on the RBNW requirement, Navy Federal was not placed in the...

  • Page 67
    ... securities, treasury securities, municipal securities and bank notes are valued based on similar assets in the marketplace and the vintage of the underlying collateral, or at the closing price reported in the active market in which the individual security is traded. 48 Navy Federal Credit Union

  • Page 68
    ... is considered by discounting future cash flows using OIS rates adjusted for credit quality. Navy Federal also uses an internal process to further evaluate the risk of counterparty default. Fair values of Navy Federal's IRLCs are determined based on an evaluation of best execution forward contract...

  • Page 69
    ... value in the Consolidated Statements of Financial Condition on a recurring basis at December 31: Fair Value Measurements on Recurring Basis as of December 31, 2015 (dollars in thousands) Level 1 Level 2 Level 3 Total Available-for-sale securities U.S. government and federal agency securities...

  • Page 70
    ...Issuances/purchases Settlements/sales Balance, end of year Net unrealized gains (losses) related to assets still held at December 31, 2015 $ $ 270,876 (28,024) $ $ 18,570 18,570 $ $ 19 19 Reconciliation of Level 3 Assets and Liabilities as of December 31, 2014 Mortgage Servicing Rights $ 236...

  • Page 71
    ... to reflect changes in fair value. Navy Federal markets the REO properties for sale to the public and generally does not hold properties for longer than one year. The tables below present the items measured at fair value in the Consolidated Statements of Financial Condition on a non-recurring basis...

  • Page 72
    ... 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...

  • Page 73
    ... December 31 were: (dollars in thousands) Estimated Fair Value Carrying Amount Total Level 1 Level 2 Level 3 December 31, 2015 Financial assets: Cash Short-term investments Available-for-sale securities Held-to-maturity securities Mortgage loans awaiting sale Loans to members, net of allowance for...

  • Page 74
    2015-SHARED SUCCESS (dollars in thousands) Estimated Fair Value Carrying Amount Total Level 1 Level 2 Level 3 December 31, 2014 Financial assets: Cash Short-term investments Available-for-sale securities Held-to-maturity securities Mortgage loans awaiting sale Loans to members, net of allowance ...

  • Page 75
    ... on the financial statement line items for the year ended December 31, 2014 as presented in Navy Federal's 2015 consolidated financial statements. 2014 As Previously Reported $ 379,487 $ (dollars in thousands) Credit/debit card interchange income Total Adjustments (112,684) $ 2014 As Revised...

  • Page 76

  • Page 77
    Your savings federally insured to $250,000 National Credit Union Administration, a U.S. Government Agency Federally insured by NCUA. © 2016 Navy Federal NFCU 8010-F (3-16)

  • Page 78
    PO Box 3000, Merrifield, VA 22119-3000 • navyfederal.org © 2016 Navy Federal NFCU 8010 (3-16)