Navy Federal Credit Union 2011 Annual Report Download - page 51

2011 FINANCIAL SECTION 35
e NCUA categorized Navy Federal as “well capitalized” under the regulatory framework for prompt corrective action with a net worth-to-assets
ratio of 10.59% and 9.78% as of December 31, 2011 and 2010, respectively. Net worth for this calculation is dened as undivided earnings plus regular
and capital reserves. To be categorized as “well capitalized,” Navy Federal must maintain a minimum net worth ratio of 7%. ere are no conditions or
events since that notication that management believes have changed the institution’s category.
Note 21: Fair Value Measurement
Eective with the adoption of ASC 820-10, Fair Value Measurements and Disclosures (formerly known as SFAS No. 157), Navy Federal determines the
fair values of its nancial instruments based on the fair value hierarchy established 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:
u Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
u Level 2—Valuation is based upon observable inputs such as quoted prices for similar instruments
in active markets, quoted prices for identical or similar instruments in markets that are not active and
model-based valuation techniques for which all signicant assumptions are observable in the market.
u Level 3—Valuation is based upon unobservable inputs that are supported by little or no market activity
and that are signicant to the fair value of the instrument. Valuation is typically performed using pricing
models, discounted cash ow 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 signicant management judgment or estimation.
Certain assets and liabilities may be required to be measured at fair value on a non-recurring basis. ese non-recurring 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.
e following is a description of the valuation methodologies used by Navy Federal for the assets measured at fair value:
Securities Available-for-Sale (AFS)
Navy Federal receives pricing for securities available-for-sale from a third-party pricing service. ese securities are classied as Level 2 in the fair
value hierarchy. e following is a description of the valuation methodologies used for these securities:
u Residential and Commercial Mortgage-backed Securities—Residential and commercial mortgage-backed
securities are valued either based on similar assets in the market place, similar assets in the market place
and the vintage of the underlying collateral or at the closing price reported in the active market in which
the individual security is traded.
u Federal Agency Securities, Treasury Securities and Bank Notes—Federal agency securities, treasury
securities and bank notes are valued based on similar assets in the market place, similar assets in the
market place and the vintage of the underlying collateral or at the closing price reported in the active
market in which the individual security is traded.