Navy Federal Credit Union 2006 Annual Report Download - page 24

Navy Federal’s investments in corporate credit unions at
December 31, 2006 and 2005, respectively, exceeded the
federally insured amount. Navy Federal requires these
institutions to maintain their credit ratings above a certain
level and believes that its investments in the corporate
credit unions are sound.
(dollars in thousands):
N : L  M 
A  L L
e composition of loans to members is as follows
(dollars in thousands):
Navy Federal originates mortgage loans both for sale and
for its own portfolio. Navy Federal originated, both for sale
and for its own portfolio, $4.81 billion and $5.58 billion
of first mortgage loans for its members in 2006 and 2005,
respectively. Navy Federal sold $3.34 billion and $4.44
billion of mortgage loans in 2006 and 2005, respectively. At
December 31, $20.4 billion and $17.9 billion of originated
mortgages were being serviced by Navy Federal in 2006 and
2005, respectively.
A summary of the changes in the allowance for loan losses is
as follows (dollars in thousands):
Loans on which the accrual of interest has been discontin-
ued totaled $59.9 million and $73.0 million at December
31, 2006 and 2005, respectively. If interest on those loans
had been accrued at original contracted rates, interest
income would have been approximately $2.04 million and
$2.05 million higher for 2006 and 2005, respectively.
11
10
N : D I
 E H A
Navy Federal is an active participant in the production of
mortgage loans which are sold to investors in the secondary
market. is mortgage banking activity involves making
mortgage loan commitments to members at specified interest
rates. Navy Federal is exposed to changes in the value of its
mortgage loan commitments as interest rates may change
between the time that it enters into a mortgage loan commit-
ment and the time that it ultimately delivers mortgage loans
to investors. To protect against this interest rate risk, Navy
Federal enters into forward sales contracts at specified prices
to deliver mortgage loans to investors. ese forward sales
commitments act as an economic hedge against the risk of
changes in the value of both the mortgage loan commitments
and mortgage loans held for sale. As required by SFAS No.
133, Accounting for Derivative Instruments and Hedging
Activities, Navy Federal accounts for both the mortgage loan
commitments and the forward sales contracts as derivative
instruments on its Consolidated Statements of Financial
Condition at fair value with changes in fair value included
in current earnings. ese derivative instruments are eco-
nomic hedges to which Navy Federal does not receive hedge
accounting treatment.
e notional value of the mortgage loan commitments
totaled $104 million and $206 million, respectively, as of
December 31, 2006 and 2005. A gross gain and gross loss
on this derivative at December 31, 2006 and 2005 were
reported as follows (dollars in thousands at year end):
e notional value of the forward sales contracts was
$143 million and $370 million, respectively, as of
December 31, 2006 and 2005. A gross gain and gross
loss on this derivative at December 31, 2006 and 2005 were
reported as follows (dollars in thousands at year end):
Navy Federal recognized the net gain of $2.54 million
and the net loss of $2.74 million in the fair value of
these derivative instruments during 2006 and 2005, respec-
tively, and included it in earnings as “Unrealized loss from
derivative and economic hedging activities” in the
Consolidated Statements of Operations.
N : L C
Navy Federal is a party to various legal actions normally
associated with financial institutions, the aggregate effect of
which, in management’s and legal counsel’s opinion, would
not be material to the financial condition or results of oper-
ations of Navy Federal.
N : C
Navy Federal is a party to conditional commitments to lend
funds in the normal course of business to meet the financing
needs of its members. Unused commitments for loans to
members are amounts which Navy Federal has agreed to
lend a member as long as the member does not default on
existing loans or violate any condition of the loan agreement.
Commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future
cash requirements. Navy Federal uses the same credit policies
in making commitments as it does for all loans to members
and, accordingly, at December 31, 2006, the credit risk
related to these commitments was similar to that on its
existing loans.
Unused commitment balances as of December 31, 2006
and 2005 were as follows (dollars in thousands at year end):
N : F A
e following is a summary of property and equipment
Navy Federal owned at December 31, 2006 and 2005
(dollars in thousands at year end):
Navy Federal has obligations under a number of non-
cancelable operating leases for premises. e future
minimum payments under the terms of leases as of
December 31, 2006 were (dollars in thousands):
Rent expense was $8.68 million and $6.86 million in 2006
and 2005, respectively. Income from sublease contracts was
$69,000 and $94,000 in 2006 and 2005, respectively.
N : G
e changes in the carrying amount of goodwill were as fol-
lows (dollars in thousands):
Goodwill acquired in business combinations is tested for
impairment quarterly in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Navy Federal uses the
number of new accounts opened at acquired office locations and
net income per member to estimate the fair value of the good-
will. e carrying value of the goodwill is included in “Other
assets” in the Consolidated Statements of Financial Condition.
December 31 2006 2005
Consumer loans
Auto $ 5,179,778 $ 4,364,580
Other 1,744,896 1,604,296
NAVchek® lines of credit 229,144 215,717
Federal education loans 289,719 282,565
Vehicle leases 117,329 133,174
Credit card loans 2,651,948 2,110,143
Mortgage loans
Mortgage Loan Investments
Fixed rate 5,350,993 4,525,314
Variable rate 230,601 176,921
Mortgage Loans Awaiting Sale
Fixed rate 79,873 206,516
Variable rate 886 12,474
Mortgage Loans in Process
Mortgage Loan
Investments 12,928 4,992
Mortgage Loans
Awaiting Sale 9,838 22,219
Unamortized Discount Points (12,757) (12,338)
Equity loans
Fixed equity 3,784,753 2,258,102
Home equity lines of credit 1,000,809 1,039,732
20,670,738 16,944,407
Less: Allowance for loan losses (176,326) (201,102)
Total loans to members $ 20,494,412 $ 16,743,305
2006 2005
Balance, beginning of year $ 201,102 $ 161,889
Provision charged to operations 120,567 244,370
Loans charged off (169,604) (219,259)
Recoveries 24,261 14,102
Balance, end of year $ 176,326 $ 201,102
December 31 2006 2005
Certificates of deposit $ 582,177 $ 605,632
Overnight investments 210,000 200,000
Membership, capital shares 22,689 18,761
Share deposits 11
Total $ 814,867 $ 824,394
Mortgage loan commitments 2006 2005
Gain $ 125 $ 312
Loss (1,018) (1,828)
Net $ (893) $ (1,516)
Forward Sales Contracts 2006 2005
Gain $ 633 $ 107
Loss (34) (1,422)
Net $ 599 $ (1,315)
Unused Commitments: 2006 2005
Credit cards $ 4,397,857 $ 3,958,828
NAVchek® lines of credit 537,943 527,916
Home equity lines of credit 1,234,649 1,101,992
Preapproved auto loans 196,936 160,638
Utility deposit guarantee
programs 3,003 2,855
Letter of credit 7,500 7,500
Total $ 6,377,888 $ 5,759,729
Property and Equipment: 2006 2005
Land and buildings $ 267,064 $ 209,408
Equipment, furniture
and fixtures 379,974 322,566
Leasehold improvements 59,404 47,229
Subtotal 706,442 579,203
Less: Accumulated depreciation (367,282) (321,332)
Total $ 339,160 $257,871
Future Minimum Payments
2007 $ 9,397
2008 9,679
2009 9,970
2010 10,269
2011 10,577
ereafter 11,894
Total $ 60,786
N : M S A
Effective January 1, 2006, upon adoption of SFAS No. 156,
Navy Federal remeasured all of its mortgage servicing rights
(MSRs) at fair value and recognized an adjustment of $39.7
million in its Consolidated Statements of Financial Condition
and also recognized a cumulative effect adjustment of $39.7
million to the beginning balance of undivided earnings in
its Consolidated Statements of Changes in Reserves and
Undivided Earnings.
e changes in MSRs during 2006 and 2005 were as
follows (dollars in thousands):
(1) As of December 31, 2005, the carrying value of MSRs under SFAS No. 140
was $39.7 million less than the fair value. Effective January 1, 2006, with adoption
of SFAS No. 156, Navy Federal increased the carrying value of MSRs by $39.7
million to record its MSRs at the fair value.
(2) Upon adoption of SFAS No. 156, Navy Federal discontinued amortizing
MSRs over the period of estimated net serving income and also ended measuring
impairment to account for MSRs at the lower-of-cost-or-market value.
Navy Federal obtains the fair value of its MSRs from a
third-party service organization. e service organization
determines the fair value by discounting projected net serv-
icing cash flows of the remaining servicing portfolio. e
valuation model used by the service organization considers
market loan prepayment predictions and other economic
factors. e fair value of MSRs is mostly affected by changes
in mortgage interest rates since rate changes cause the loan
prepayment acceleration factors to increase or decrease.
Navy Federal received mortgage loan servicing fees of $50.3
million and $43.1 million in 2006 and 2005, respectively.
Related late charges and miscellaneous fees totaled $6.78
million and $5.49 million in 2006 and 2005, respectively.
e key economic assumptions used in determining the
fair value of MSRs at December 31, 2006 and 2005 were
as follows:
(1) Prepayment speed is the constant prepayment rate that results in the weighted
average life.
2006 2005
Balance, beginning of period $ 131,667 $ 102,384
Fair falue adjustment⁽¹⁾ 39,668 –
Originations 48,519 54,928
Gain (loss) on charges in
value of MSRs (21,147) –
Amortization⁽²⁾ –(20,672)
Allowance for impairment⁽²⁾ –(4,973)
Balance, end of period $ 198,707 $ 131,667
December 31 2006 2005
Weighted average life (years) 5.85 6.02
Prepayment speed⁽¹⁾ 13.91% 12.82%
Yield to maturity discount rate 9.45% 9.48%
December 31, 2004 $ 15,693
Reduction in goodwill related to decreased num-
ber of new accounts opened (254)
December 31, 2005 $ 15,439
Reduction in goodwill related to decreased num-
ber of new accounts opened (225)
December 31, 2006 $ 15,214