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Navy Federal Credit Union • 2013 Financial Section
51
2013 ANNUAL REPORT
disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying fair value of Navy Federal. The following methods and assumptions were used
in estimating the fair values disclosed for financial instruments:
Loans to Members
For certain residential mortgages, fair value is estimated using the quoted market prices for securities
backed by similar loans. The fair value of other types of loans, such as consumer and equity loans, is
estimated by discounting the future cash flows using the current market rates at which similar loans
would be made to borrowers with similar credit ratings and for the same remaining maturities.
Investments, including Mortgage-backed Securities
Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Cash
The reported carrying amount of Cash approximates fair value for vault cash and demand balances
from other financial institutions.
Members’ Accounts
The fair value of Savings, Money Market Savings, Checking, and IRA share accounts is the amount
payable on demand at the reporting date. For IRA Certificate and Share Certificate accounts, fair value
is estimated using the discounted value of future cash flows based upon market interest rates and
remaining maturity.
Derivative Instruments and Hedging Activities
The fair value of mortgage loan commitments or IRLCs is based upon dierences between the
contracted interest rate and the current market interest rate of comparable mortgage loans. The fair
value of forward sales contracts on MLAS that Navy Federal intends to sell is based on the quoted
market price of contracts with similar characteristics. It is the established practice of Navy Federal to
only purchase forward contracts to cover mortgage loans in process, which are anticipated to close for
delivery into these forward contracts. Accordingly, the cost to terminate existing contracts, which is
based on current market prices, is not material to Navy Federal.
Navy Federal uses pay-fixed interest rate swaps to protect certain fixed-rate investments against the
adverse changes in fair value attributable to changes in interest rates, as well as to hedge the variability
in cash flows related to existing and anticipated replacement funding floating rate liabilities that reprices
based on LIBOR.
Navy Federal has elected to use the income approach to value its interest rate swaps, using observable
Level 2 market expectations at the measurement date. A standard valuation technique is used to convert
future cash flow amounts to a single present amount (discounted) assuming participants are motivated,
but not compelled to transact. The future cash flows are discounted to present value using the OIS curve
(short-term OIS rates and long-term OIS swap rates) at measurement date. The OIS curve, which is
considered a risk-free curve, is used for discounting because the swaps are fully collateralized with
liquid collateral.