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Navy Federal Credit Union • 2013 Financial Section
47
2013 ANNUAL REPORT
> Federal Agency Securities, Treasury Securities, Municipal Securities, and Bank Notes—Federal
agency securities, treasury securities, municipal securities, and bank notes are valued 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.
Mortgage Servicing Rights (MSRs)
MSRs do not trade in an active, open market with readily observable prices. Navy Federal obtains the fair
value of the MSRs using a third-party pricing provider. The provider uses a combination of market and
income valuation methodologies. All assumptions are market driven. Once the preliminary results are
complete, they are further calibrated to observable market transactions, when they exist. The valuation of
Navy Federal’s MSRs is model driven and primarily based on unobservable inputs and therefore classified
within Level 3 of the fair value hierarchy.
Derivative Assets and Liabilities
Fair values of Navy Federal’s interest rate swaps designated as cash flow hedges are determined based
on third-party models that calculate the net present value of the expected cash flows using LIBOR rate
curves, futures, basis spreads (when applicable), and OIS curves at each period end date. Counterparty
non-performance risk is considered by discounting future cash flows using OIS rates adjusted for credit
quality. Navy Federal also uses an internal process to further evaluate the risk of counterparty default.
Fair values of Navy Federal’s designated fair value hedges are determined by a third party using the
income approach, observable Level 2 market expectations at measurement date, and standard valuation
techniques to convert future amounts to a single discounted present amount in accordance with ASC
820-10. Quoted prices for similar assets or liabilities in active markets—specifically, futures contracts
on LIBOR, LIBOR cash and swap rates, and basis adjustments at commonly quoted intervals when
applicable—are used as the Level 2 inputs for the swap valuations. Mid-market pricing is used as a
practical expedient for fair value measurements.
Fair values of Navy Federal’s IRLCs are determined based on an evaluation of best execution forward
contract prices sourced from the TBA market, adjusted by a factor that represents the probability it
will settle and become MLAS. IRLCs are classified as Level 2 in the fair value hierarchy.
Fair values of Navy Federal’s forward sales contracts on TBA securities are determined based on an
evaluation of best execution forward contract prices sourced from the TBA market, by agency. As such,
TBA hedges are classified as Level 2 in the fair value hierarchy.
Mortgage Loans Awaiting Sale (MLAS)
Mortgage loans awaiting sale comprise those loans that Navy Federal intends either to sell or to
securitize. The initial loan level basis is equal to unpaid principal balance plus or minus origination
costs and fees. Navy Federal has elected the fair value option for MLAS. The fair value of MLAS is
determined based on an evaluation of best execution forward sales contract prices sourced from the
TBA market, by agency (e.g., GNMA, FHLMC, and FNMA). As such, MLAS are classified as Level 2 in
the fair value hierarchy.
Real Estate Owned (REO)
Navy Federal acquires residential properties as a result of foreclosure or forfeiture, and those properties
are classified as REO properties. REOs are recognized at the lower of cost or fair value less costs to
sell. Navy Federal utilizes BPOs to estimate the fair market value of REOs. A BPO considers the value
of similar surrounding properties, sales trends in the neighborhood, an estimate of any of the costs
associated with getting the property ready for sale, and/or the cost of any needed repairs. Navy Federal
evaluates reasonableness by obtaining multiple BPOs on REO properties and also by analyzing significant