Navy Federal Credit Union 2012 Annual Report Download - page 21

Navy Federal Credit Union22 Leading with Vision. Achieving Results. 23
2012 Financial Section
Accretable yield activity for acquired credit-impaired loans was as follows for the years ended
December 31, 2012 and 2011:
Accretable Yield
(dollars in thousands) 2012 2011
Balance, beginning of period $ 28,770 $ 38,328
Accretion (4,524) (4,889)
Net reclassifications* 2,566 (1,446)
Removals (4,106) (3,223)
Balance, end of period $ 22,706 $ 28,770
*Includes transfers between accretable and non-accretable as well as Navy Federal and USAFCU loan IDs.
NOTE 7: MORTGAGE SERVICING RIGHTS (MSRs)
Navy Federal capitalizes MSRs when mortgage loans are sold and Navy Federal retains the right
to service the loans. Navy Federal records MSRs at fair value with changes in fair value recorded
and separately disclosed in the Consolidated Statement of Income. MSR valuation is sensitive to
interest rate and prepayment risk.
The changes in fair value of MSRs during 2012 and 2011 were as follows:
(dollars in thousands) 2012 2011
Balance, beginning of period $ 142,368 $ 161,150
Originations 52,773 32,476
Payos/Maturities (39,642) (21,426)
(Loss) on changes in value of MSRs (11,410) (29,832)
Balance, end of period $ 144,089 $ 142,368
Navy Federal obtains the fair value of its MSRs from a third-party service organization. The service
organization 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 aected by
changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors
to increase or decrease.
Navy Federal received $61.7 million and $57.5 million during the years ended December 31, 2012 and 2011,
respectively, in mortgage loan servicing fees. Navy Federal’s servicing fees are priced based on agency-
required minimums. Late charges and miscellaneous fees are recognized as income when received and
totaled $1.4 million and $1.1 million during the years ended December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011, the amount of loans serviced by Navy Federal for outside investors
was $16.7 billion and $15.9 billion, respectively.
Cumulative total loan amounts, related impairment, average loan balances, and interest recognized on
Navy Federal’s TDRs for the years ended December 31, 2012 and 2011 were as follows:
2012
(dollars in thousands) Loan Amount Average Balance Interest Impairment
Consumer $ 254,513 $ 169,283 $ 24,433 $ 63,864
Credit card 142,756 146,411 13,354 51,906
Real estate 465,964 452,660 13,400 58,389
Total $ 863,233 $ 768,354 $ 51,187 $ 174,159
2011
(dollars in thousands) Loan Amount Average Balance Interest Impairment
Consumer $ 84,053 $ 106,659 $ 6,742 $ 7,141
Credit card 150,067 127,623 8,322 32,873
Real estate 439,356 406,515 9,908 41,343
Total $ 673,476 $ 640,797 $ 24,972 $ 81,357
At December 31, 2012 and 2011, the amount of loan commitments available to members that had
previously been through a TDR was $43.0 million and $28.4 million, respectively.
NOTE 6: ACQUIRED CREDIT-IMPAIRED LOANS
Navy Federal applies ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality,
to account for the credit-impaired loans in connection with the acquisition of USAFCU on October 1,
2010. The carrying value of these acquired credit-impaired loans is included in “Loans to members” on
the Consolidated Statements of Financial Condition, and their outstanding balances at December 31
were as follows:
(dollars in thousands) 2012 2011
Outstanding balance $ 81,067 $ 81,516
Carrying amount $ 38,814 $ 47,560
For the years ended December 31, 2012 and 2011, Navy Federal recognized $3.1 million and $3.5 million,
respectively, of interest on acquired credit-impaired loans. The average balance of acquired credit-
impaired loans as of December 31, 2012 and 2011 was $43.2 million and $55.6 million, respectively.
Decreases in cash flows expected to be received on these loans resulted in increases in the allowance
for loan losses of $0.9 million and $6.1 million as of December 31, 2012 and 2011, respectively. During 2012
and 2011, previously established allowances were reduced by $4.4 million and $5.0 million, respectively,
because either cash flow received was significantly greater than previously expected or it was probable
that there would be a significant increase in expected cash flows.