Navy Federal Credit Union 2013 Annual Report Download - page 66

Navy Federal Credit Union • 2013 Financial Section
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2013 ANNUAL REPORT
Quantitative measures established by regulation to ensure capital adequacy require Navy Federal to
maintain minimum amounts and ratios of net worth to total assets. Credit unions are also required to
calculate a risk-based net worth (RBNW) requirement that establishes whether the credit union will
be considered “complex” under the regulatory framework. A credit union is defined as “complex” if
the credit union’s quarter-end total assets exceed ten million dollars ($10,000,000) and its RBNW
requirement exceeds 6%. Navy Federal’s RBNW requirement as of December 31, 2013 and 2012 was
6.19% and 6.09%, respectively, which exceeds the regulatory threshold of 6% and places Navy Federal
in the “complex” category. There is no impact to Navy Federal based on the complex designation
because its statutory net worth ratio qualifies Navy Federal as “well capitalized” by NCUA standards,
and its statutory net worth exceeds its RBNW requirement.
The NCUA categorized Navy Federal as “well capitalized” under the regulatory framework for prompt
corrective action with a net worth-to-assets ratio of 11.58% and 10.93% as of December 31, 2013 and
2012, respectively. Net worth for this calculation is defined 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%. There are no conditions or events since December 31, 2013 that management believes have
changed Navy Federal’s categorization.
NOTE 21:
Eective with the adoption of ASC 820-10, Fair Value Measurements and Disclosures, Navy Federal
determines the fair values of its financial 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:
> Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
> 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 significant assumptions are observable in the market.
> Level 3—Valuation is based upon unobservable inputs that are supported by little or no market activity
and are significant to the fair value of the instrument. Valuation is typically performed 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 non-recurring basis. These
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.
The following is a description of the valuation methodologies used by Navy Federal for its assets
measured at fair value:
Securities Available-for-Sale (AFS)
Navy Federal receives pricing for AFS securities from a third-party pricing service. These securities are
classified as Level 2 in the fair value hierarchy.
> Residential and Commercial Mortgage-backed Securities—Residential and commercial mortgage-
backed securities are valued either based on similar assets in the marketplace and the vintage of
the underlying collateral, or at the closing price reported in the active market in which the individual
security is traded.