Navy Federal Credit Union 2014 Annual Report Download - page 26

Navy Federal Credit Union8
Loan origination fees and certain direct origination costs are deferred and amortized over the life of the
loans using the interest method (eective yield) under ASC 310-20, Receivables—Non-refundable Fees
and Other Costs, for all products except for credit card loans, where fees and costs are deferred and
amortized on a straight-line basis annually.
Allowance for Loan Losses
Navy Federal accrues estimated losses in accordance with ASC 450, Contingencies. The allowance for
loan losses is a reserve against Loans to members established through a provision for loan losses charged
to earnings. Loan losses are charged against the allowance when management believes the collectability
of the loan amount is unlikely. Recoveries on previously charged-o loans are credited to the allowance.
The allowance for loan losses is evaluated monthly by management and is based on management’s
periodic review of the collectability of the loans based on prior historical experience, changes in the value
of loans outstanding, overall delinquency and delinquencies by loan product, and current economic
conditions and trends that may adversely aect a borrower’s ability to pay. Loans that are not in
foreclosure or undergoing a modification or repayment plan are typically charged o to the allowance
at 180 days past due.
Navy Federal’s loan portfolio consists mainly of large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment. The allowance for loan losses is maintained at a level that, in
management’s judgment, is sucient to absorb losses inherent in the portfolio based on evaluations of
the collectability of loans and prior loan loss experience.
Acquired Credit-Impaired Loans
ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, addresses
accounting for dierences, attributable to credit quality, between contractual cash flows and cash
flows expected to be collected from an investor’s initial investment in loans or debt securities acquired
in a transfer. Acquired loans are considered to be impaired if Navy Federal does not expect to receive
all contractually required cash flows and the loans have exhibited credit deterioration since origination.
Credit deterioration can be evidenced by lower FICO score or past-due status. Acquired credit-
impaired (ACI) loans are recorded at fair value at acquisition, determined by discounting expected
future principal and interest cash flows. The excess of the expected future cash flows on ACI loans
over the recorded investment is referred to as accretable yield, which is recognized as interest income
over the remaining life of the loan using an eective yield methodology. The dierence between
contractually required payments at acquisition date, considering the impact of prepayments and
credit losses expected over the life of the loan, and the cash flows expected to be collected is referred
to as the non-accretable dierence.
Each quarter, Navy Federal re-evaluates the performance and credit quality of its ACI loans by
aggregating individual loans that have common risk characteristics and estimating their expected future
cash flows. Decreases in expected or actual cash flows that are attributable, at least in part, to credit
quality are charged to the provision for loan losses resulting in an increase in the allowance for loan
losses. Conversely, increases in expected or actual cash flows are treated as a recovery of any previously
recorded allowance for loan losses, and to the extent applicable, are reclassified from non-accretable
dierence to accretable yield.
Navy Federal’s ACI loans are accounted for in pools. Loans deemed uncollectible on an individual basis
remain in the pool and are not reported as charge-os. Disposals of loans, whether through sale or
foreclosure, result in the loan’s removal from the pool at its carrying amount. See Note 6 for details.