Navy Federal Credit Union 2008 Annual Report Download - page 17

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2008 FINANCIAL SECTION
Note 17: Fair Values of
Financial Instruments
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, requires the disclosure of the
estimated fair value of the financial instruments
including those financial instruments for which
Navy Federal did not elect to fair value. The financial
instruments that are accounted for under SFAS
No. 157 are disclosed separately on Note 16.
Navy Federal discloses fair value information for
its financial instruments, whether the fair value is
recognized in the Consolidated Statements of
Financial Condition or not, 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 immedi-
ate 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 securi-
ties 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 agree-
ments, 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 and credit unions, 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, Checking 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.
NAVY FEDERAL CREDIT UNION
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The estimated fair values of financial instruments at December 31, 2008 and 2007, were:
SFAS No. 107 also requires the disclosure of all significant concentrations of credit risk arising from financial
liabilities, whether from an individual counterparty or groups of counterparties. Navy Federal has assessed the
counterparty credit risk on the financial liabilities and has determined that there is no material impact on the
financial statements.
Note 18: Loan Securitizations
Navy Federal started securitizing GNMA mortgage loans, which were classified as mortgage loans awaiting sale
(MLAS) in the first quarter of 2008. Navy Federal retains servicing rights for these loans and holds the resulting
security in its available-for-sale (AFS) portfolio. The securities are carried at fair value with changes recorded in
Other Comprehensive Income (OCI).
Navy Federal used a third party to value its securities, which used a single cash flow stream model and mar-
ket prices to value the securities. The fair value of Navy Federal’s on-balance sheet securitizations at December
31, 2008, was $320.0 million.
The unpaid principal balance of the securitized loans was $310.0 million. The delinquent loans associated
with the securitized asset totaled $0.6 million and no securitized loans were charged-off. The fair value
of the mortgage servicing rights associated with the securitized loans was $4.3 million.
Key Assumptions at December 31, 2008
As required by SFAS No. 140, the effect of two negative changes in each of the key assumptions used to deter-
mine the fair value must be disclosed. The negative effect of each change must be calculated independently,
holding all other assumptions constant.
(dollars in thousands at year-end)
2008
Carrying Amount 2008 Fair Value
2007 (as restated)
Carrying Amount 2007 Fair Value
Financial Assets:
Cash and cash equivalents $ 534,401 534,401 $ 2,306,328 $ 2,306,328
Securities available-for-sale 2,631,256 2,631,256 680,898 680,898
Securities held-to-maturity 225,179 219,154 821,598 820,673
Interest-bearing deposits 31,626 31,626 1,039,190 1,039,190
Other investments 3,374 3,374 3,371 3,371
Investment in FHLB-Atlanta 376,435 376,435 224,318 224,318
Mortgage servicing rights 131,194 131,194 169,306 169,306
Mortgage loans awaiting sale 66,522 68,731 67,836 68,940
Loans, net of allowance
for loan losses 30,585,853 31,027,296 27,856,129 25,964,244
Financial liabilities and equity:
Securities sold under
repurchase agreements 311,500 311,500 873,002 873,002
Members’ accounts $ 24,725,515 $ 23,771,295 $ 23,977,641 $ 24,094,118