Navy Federal Credit Union 2008 Annual Report Download - page 12

15
2008 FINANCIAL SECTION
Loans on which the accrual of interest has been discontinued totaled $264.6 million and $134.1 million at
December 31, 2008 and 2007, respectively. If interest on those loans had been accrued at original contracted
rates, interest income would have been approximately $9.3 million and $5.0 million higher for 2008 and
2007, respectively.
Navy Federal originates mortgage loans both for sale and for its own portfolio. Navy Federal originated
$5.7 billion and $5.1 billion of first mortgage loans for its members in 2008 and 2007, respectively, of which
$0.2 billion and $1.6 billion loans were sold in 2008 and 2007, respectively. At December 31, $26.3 billion and
$23.2 billion of originated mortgages were being serviced by Navy Federal in 2008 and 2007, respectively.
Note 6: Mortgage Servicing Rights
Navy Federal capitalizes Mortgage Servicing Rights (MSRs) when mortgage loans are sold and Navy Federal
retains the right to service the loans. Navy Federal adopted SFAS No. 156 in 2006 and elected to record MSRs
at fair value and discontinued amortizing servicing assets and also stopped assessing impairment adjustments
related to the servicing assets.
The changes in fair value of MSRs during 2008 and 2007 (as restated) were as follows:
Navy Federal obtains the fair value of its MSRs from a third-party service organization. The service organiza-
tion determines the fair value by discounting projected net servicing cash flows of the remaining servicing
portfolio. The valuation model used by the service organization considers market loan prepayment predictions
and other economic factors. The 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 $45.9 million and $47.5 million in 2008 and 2007
(as restated), respectively. Related late charges and miscellaneous fees totaled $1.1 million in both 2008 and
2007 (as restated).
The key economic assumptions used in determining the fair value of MSRs at December 31, 2008
and 2007, were as follows:
NAVY FEDERAL CREDIT UNION
14
(dollars in thousands) 2008 2007 (as restated)
Balance, beginning of period $ 169,306 $ 181,525
Originations 28,211 13,516
(Loss) on changes in value of MSRs (66,323) (25,735)
Balance, end of period $ 131,194 $ 169,306
(at year-end) 2008 2007
Weighted average life (years) 4.97 6.32
Prepayment speed 16.34% 12.82%
Yield to maturity discount rate 9.83% 9.39%
Note 7: Derivative
Instruments and Economic
Hedging Activities
Navy Federal is an active participant in the production
of mortgage loans which are sold to investors in the
secondary market. This 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
commitment 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. These 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 awaiting 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. These derivative instruments are
economic hedges to which Navy Federal does not
receive hedge accounting treatment.
The notional value of the mortgage loan
commitments totaled $240.9 million and $43.8
million, respectively, as of December 31, 2008 and
2007. A gross gain and gross loss on these deriva-
tives at December 31, 2008 and 2007 were reported
as follows:
The notional value of the forward sales contracts
was $132.5 million and $109.5 million, respectively,
as of December 31, 2008 and 2007. A gross gain
and gross loss on these derivatives at December 31,
2008 and 2007, were reported as follows:
Navy Federal recognized the net gain of $5.3 million
and the net loss of $79,000 in the fair value of these
derivative instruments during 2008 and 2007, re-
spectively, and included it in earnings as “Unrealized
loss from derivative and economic hedging activities”
in the Consolidated Statements of Operations.
Note 8: Legal Contingencies
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 operations
of Navy Federal.
Note 9: Commitments
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, 2008, the credit
risk related to these commitments was similar to
that on its existing loans.
(dollars in thousands at year-end)
Mortgage
loan commitments 2008 2007
Gain $ 5,229 $ 202
Loss — (119)
Net $ 5,229 83
(dollars in thousands at year-end)
Forward sales
contracts 2008 2007
Gain $ 151 $ 90
Loss (445) (547)
Net $ (294) (457)