Navy Federal Credit Union 2005 Annual Report Download - page 48

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18
Note 16: Fair Values of Financial Instruments
Navy Federal discloses fair value information of its financial
instruments, whether or not recognized in the Consolidated
Statements of Financial Condition, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement
of the instrument. Certain financial instruments and all non-
financial instruments are excluded from disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying fair value of Navy Federal.
The following methods and assumptions were used in estimating
the fair value disclosures for financial instruments:
Loans to Members
For certain residential mortgages, fair value is estimated using
the quoted market prices for securities backed by similar loans.
The fair value of other types of loans, such as consumer and
equity loans, is estimated by discounting the future cash flows
using the current market rates at which similar loans would be
made to borrowers with similar credit ratings and for the same
remaining maturities.
Investments, including Mortgage-backed Securities
Fair value is based on quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted
market prices for similar securities. For resale and repurchase
agreements, due to their short-term nature, the carrying amount
is a reasonable estimate of fair value.
Cash and Cash Equivalents
Cash and cash equivalents include cash and balances due from
banks, federal funds sold and securities purchased under agree-
ments to resell, all of which mature within ninety days. The
carrying amount reported approximates fair value for vault cash
and demand balances from other financial institutions. Fair value
for short-term securities is based on quoted market prices.
Members’ Accounts
The fair value of Share Savings, Money Market Savings, Sharechek
and Individual Retirement Account (IRA) share accounts is the
amount payable on demand at the reporting date. For IRA
Certificate and Share Certificate accounts, fair value is estimated
using the discounted value of future cash flows based upon market
interest rates and remaining maturity.
Derivative Instruments and Hedging Activities
Navy Federal does not receive loan commitment fees. The fair
value of loan commitments is based upon differences between
the contracted rate and the current market rate of comparable
mortgage loans. The fair value of forward contracts 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.