Navy Federal Credit Union 2008 Annual Report Download - page 8

zation of premiums and accretion of discounts.
Management has the ability and intent to hold
these securities to maturity.
Securities classified as available-for-sale are carried
at fair value, with any unrealized gains and losses
recorded as a separate component of members’
equity (see Note 4). Gains and losses on dispositions
are computed using the specific identification
method. Resale and repurchase agreements are
treated as financing transactions and are carried at
the amounts at which the securities were initially
acquired or sold. Navy Federal takes title to securities
purchased under resale agreements, monitors the fair
value of the underlying securities, (which are prima-
rily U.S. Government and federal agency securities)
and requests additional collateral when appropriate.
Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-
temporary impairment losses, management considers
(1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer,
(3) the intent and ability to retain the investment for
a period of time that is sufficient to allow for any
anticipated recovery in fair value, and (4) materiality.
Mortgage Loans Awaiting Sale
Mortgage loans awaiting sale are carried at the lower
of original cost or market value in compliance with
SFAS No. 65, Accounting for Certain Mortgage Bank-
ing Activities. Market value is determined on a loan
by loan basis and is based on a market price offered
by the appropriate government sponsored enterprise
at the end of each month. Net unrealized losses are
recognized through a valuation allowance by charges
to income. Mortgage loans awaiting sale are sold
with the mortgage servicing rights retained by
Navy Federal.
Credit Enhanced Mortgage Loans
In February 2004, Navy Federal entered into an agree-
ment with NFFG and Charlie Mac, LLC, an investor
subsidiary of U.S. Central Credit Union, in which
Charlie Mac purchases up to $200.0 million of credit
enhanced mortgage loans from Navy Federal while
Navy Federal retains the mortgage servicing rights.
Should a credit enhanced loan default, Charlie Mac
will recover the loan amount from NFFG. The maxi-
mum total credit enhancement liability allowed in this
agreement is $8.5 million. Of that total, $1.0 million is
set aside by NFFG as non-current restricted cash with
a designated financial institution. For the remaining
amount of $7.5 million, Navy Federal issued an irrevo-
cable transferable standby letter of credit to Charlie
Mac as part of the agreement. In 2004, the aggre-
gate amount of credit enhanced mortgage loans
purchased by Charlie Mac had reached the $200.0
million limit. At the time of origination, all loans pur-
chased pursuant to the agreement had FICO credit
scores, loan to value ratios and debt to income ratios
greater than those required by the agreement. During
2008 and 2007, no new loans were sold to Charlie
Mac under this agreement. The total principal balance
of these loans as of December 31, 2008 and 2007,
was $122.7 million and $138.3 million, respectively.
As of December 31, 2008, there were no delinquent
loans under this agreement. Navy Federal has not
accrued an estimated loss regarding the credit en-
hanced mortgage loans for it is less than probable
that a liability had been incurred at the date of the
financial statements. Any liability reasonably expected
to result from this agreement is not expected to be
material to Navy Federal.
Loans and Leases
Loans, except for mortgage loans awaiting sale,
are stated at the amount of unpaid principal less
an allowance for loan losses. Interest on loans is
recognized on an accrual basis except for credit card
interest which is recognized on the member’s state-
ment date. Interest on loans is calculated using the
simple-interest method on the principal amount out-
standing except for credit cards. Interest on credit
cards is calculated by applying the periodic rate to
the average daily balance outstanding. Accrual of
interest on all loans is discontinued where manage-
ment believes collectibility is uncertain or payments
of principal or interest are past due by more than 90
days. All interest accrued but not collected on loans
that are placed in non-accrual status is reversed
against interest income. The interest on these loans
is accounted for on the cash basis until the loans
return to accrual status. Loans are returned to accrual
status when all the principal and interest amounts
contrac tually due are brought current and future
payments are reasonably assured. Fees and costs
Note 1: Summary of
Significant Accounting
Policies
Navy Federal Credit Union is a member-owned,
not-for-profit financial institution formed to provide
a variety of savings and lending programs to those
individuals in its field of membership which includes
military and civilian personnel who are or were
employed by the Department of the Navy and their
families. During the 2nd quarter of 2008, Navy
Federal expanded its field of membership to include
the Department of Defense and their families.
Navy Federal Financial Group (NFFG) is a wholly-
owned credit union service organization that provides
investment, insurance and other financial services to
members of Navy Federal Credit Union. Navy Federal
Brokerage Services and Navy Federal Asset Manage-
ment are wholly-owned subsidiaries of NFFG. In this
Annual Report, Navy Federal Credit Union and NFFG
(consolidated) are called Navy Federal.
Navy Federal Real Estate Services (NFRES), which
was a wholly-owned subsidiary of NFFG, discontinued
its operations as of December 31, 2008. NFFG lost
$1.2 million in its investment in NFRES.
The significant accounting policies are:
Basis of Accounting
Navy Federal maintains its accounting records on the
accrual basis, which is in accordance with accounting
principles generally accepted in the United States of
America (GAAP).
Consolidation
The consolidated financial statements include the
accounts of Navy Federal Credit Union and NFFG.
Significant intercompany accounts and transactions
were eliminated in consolidation.
Change in Accounting Principle
In September 2006, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value
Measurements. SFAS 157 enhances existing guid-
ance for measuring assets and liabilities using fair
value. Prior to the issuance of SFAS No. 157, guid-
ance for applying fair value was incorporated in
several accounting pronouncements. SFAS No. 157
provides a single definition of fair value, establishes
a consistent framework for measuring fair value,
and expands disclosure requirements for fair value
measurements.
Navy Federal adopted SFAS No. 157 on its effec-
tive date of January 1, 2008 and the adoption did
not have a material impact on financial condition,
results of operations, or liquidity. Furthermore,
as permitted under FASB Staff Position (FSP) No.
157-2, Effective Date of FASB Statement No. 157,
Navy Federal elected to defer the application of
SFAS No. 157 to certain non-financial assets and
liabilities, which are measured at fair value on a
recurring basis, until January 1, 2009.
See Note 16 for a discussion regarding the January
1, 2008 implementation of SFAS No. 157 relating to
Navy Federal’s financial assets and liabilities.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to
make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets
and liabilities in the consolidated financial statements
and accompanying notes. Actual results could differ
from those estimates.
Cash
For purposes of the consolidated financial statements,
cash includes cash and balances due from banks and
other credit unions.
Short Term Investments
For purposes of the consolidated financial statements,
short term investments include federal funds sold and
securities purchased under agreements to resell, all
of which have original maturities of 90 days or less.
As of December 31, 2008 and 2007, all short term
investments were recorded at cost which approxi-
mated market value.
Securities
Investment securities are classified as held-to-matu-
rity or available-for-sale in compliance with SFAS No.
115, Accounting for Certain Investments in Debt and
Equity Securities. Investments classified as held-to-
maturity are carried at cost, adjusted for the amor ti-
NAVY FEDERAL CREDIT UNION
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2008 FINANCIAL SECTION