Navy Federal Credit Union 2008 Annual Report Download - page 16

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2008 FINANCIAL SECTIONNAVY FEDERAL CREDIT UNION
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Mortgage Loans Awaiting Sale (MLAS)
Mortgage loans awaiting sale are comprised of those loans that Navy Federal intends either to sell or to
securitize. Navy Federal sold loans in 2008, which resulted in an immaterial unrealized loss amount of
$0.1 million and started holding loans for sale again in December. Beginning in March, NFCU began
transferring loans in MLAS status to a GNMA securitization and then holding the resulting securities in the
AFS portfolio. Prior to sale or securitization, MLAS loans are carried at the lower of cost or market. As such,
MLAS loans are classified as Level 2 in the fair value hierarchy on a nonrecurring basis.
The table below presents the balances of the financial instruments measured at fair value on a recurring basis
as of December 31, 2008:
The following table summarizes the changes in fair value for all financial instruments measured at fair value
(Level 3) on a recurring basis using significant unobservable inputs:
The table below presents the balances of the financial instruments measured at fair value on a nonrecurring
basis as of December 31, 2008:
exceeds our risk based net worth requirement.
The NCUA categorized Navy Federal as “well capi-
talized” under the regulatory framework for prompt
corrective action with a net worth to assets ratio of
9.60% and 9.83% as of December 31, 2008 and
2007 (as restated), respectively. Net worth for this cal-
culation is defined as undivided earnings plus regular
and capital reserves. To be categorized as “well capi-
talized,” Navy Federal must maintain a minimum net
worth ratio of 7% of assets. There are no conditions
or events since that notification that management
believes have changed the institution’s category.
Note 16: Fair Value
Measurement
Effective with the adoption of SFAS No. 157,
Navy Federal determines the fair values of its financial
instruments based on the fair value hierarchy estab-
lished in that standard, which requires an entity to
maximize the use of quoted prices and observable
inputs when measuring fair value. A description of
the fair value hierarchy is as follows:
4Level 1—Valuation is based upon quoted prices
for identical instruments traded in active markets.
4Level 2—Valuation is based upon observable
inputs such as quoted prices for similar instru-
ments in active markets, quoted prices for
identical or similar instruments in markets that
are not active, and model-based valuation
techniques for which all significant assumptions
are observable in the market.
4Level 3—Valuation is based upon unobservable
inputs that are supported by little or no market
activity and that are significant to the fair value
of the instrument. Valuation is typically per-
formed using pricing models, discounted cash
flow methodologies, or similar techniques, which
incorporate management’s own estimates of
assumptions that market participants would
use in pricing the instrument or valuations that
require significant management judgment
or estimation.
Certain assets and liabilities may be required to
be measured at fair value on a nonrecurring basis.
These nonrecurring fair value measurements usually
result from the application of lower of cost or market
accounting or the write-down of individual assets
due to impairment.
The following is a description of the valuation
methodologies used by Navy Federal for financial
instruments measured at fair value:
Securities Available for Sale (AFS)
Securities available for sale are composed of agency
securities. Agency securities are bullet securities
issued by the government sponsored entities. Navy
Federal receives pricing for these bullet securities
from a third-party pricing provider. Agency securities
are classified as Level 2 in the fair value hierarchy
as the valuation provided by the third-party provider
uses observable market data.
Mortgage Servicing Rights (MSRs)
Mortgage Servicing Rights do not trade in an active,
open market with readily observable prices. Accord-
ingly, Navy Federal obtains the fair value of the MSRs
using a third-party pricing provider. The provider
uses a combination of market and income valuation
methodologies. All assumptions are market driven.
Once the preliminary results are complete, they are
further calibrated to observable market transactions,
when they exist. Therefore, Mortgage Servicing
Rights are classified within Level 3 of the fair value
hierarchy as the valuation is model driven and
primarily based on unobservable inputs.
Derivative Commitments—Assets and
Liabilities
Navy Federal uses derivative commitments to hedge
against interest rate risk. These derivatives (assets
and liabilities) are valued using quoted market prices
of similar assets and are classified within Level 2
of the fair value hierarchy.
(dollars in thousands)
Quoted prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance
as of
December 31,
2008
Mortgage loans awaiting sale $—$ 68,371 $—$ 68,731
Total assets at fair value
on a nonrecurring basis $—$ 68,371 $—$ 68,731
(dollars in thousands)
Quoted prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance
as of
December 31,
2008
Securities available-for-sale $—$ 2,631,256 $—$ 2,631,256
Mortgage servicing rights — — 131,194 131,194
Other assets—Derivative
commitments —5,380 —5,380
Total assets at fair value
on a recurring basis — 2,636, 636 131,194 2,767,830
Other liabilities—Derivative
commitments —445 —445
Total liabilities at fair value
on a recurring basis $—$445 $—$445
(dollars in thousands) Mortgage servicing rights
Balance, beginning of year $ 169,306
Total gains/(losses) included in earnings (66,323)
Purchases, issuances and settlements 28,211
Balance YTD 2008 131,194
Change in unrealized gains/(losses) related to
financial instruments still held at December 31, 2008 $ (53,094)