Navy Federal Credit Union 2011 Annual Report Download - page 24

NAVY FEDERAL CREDIT UNION8
or payments of principal or interest are past due by more than 90
days. ese loans are placed in non-accrual status and the interest
is accounted for on a cash basis until the loans return to accrual
status. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future
payments are reasonably assured. Fees and costs for loan and lease
products are deferred and amortized over the life of the loans under
ASC 310-20, Receivables—Non-refundable Fees and Other Costs
(formerly known as SFAS No. 91).
Navy Federal currently uses the direct nancing method to account
for all automobile leases. Under this method, lease contract
receivables are equal to the total minimum lease payments plus the
residual value of the leased automobiles, net of unearned interest
revenue. Interest revenue is recognized monthly on the receipt of
rental payments.
Allowance for Loan Losses
Navy Federal accrues estimated losses in accordance with ASC 450-
10, Contingencies (formerly known as SFAS No. 5). e allowance
for loan losses is established through a provision for loan losses
charged to expense. Loan principal is charged against the allowance
for loan losses when management believes that the collectability of
the amount is unlikely; subsequent recoveries are credited to the
allowance for loan losses. Navy Federal’s loan portfolio consists
mainly of large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment. e 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. e evaluations take into consideration such factors as
changes in the value of loans outstanding, prior history of charge-
os and recoveries, overall delinquency and delinquencies by loan
product and current economic conditions and trends that may aect
a borrower’s ability to pay. e allowance for loan and lease losses
is reviewed on a monthly basis and the provision that is charged to
expense is adjusted accordingly.
Acquired Credit-Impaired Loans
ASC 310-30, Loans and Debt Securities Acquired with Deteriorated
Credit Quality, addresses accounting for dierences between
contractual cash ows and cash ows expected to be collected from
an investor’s initial investment in loans or debt securities acquired in
a transfer if those dierences are attributable, at least in part, to credit
quality. Acquired loans are considered to be impaired if Navy Federal
does not expect to receive all contractually required cash ows and
the loans have exhibited credit deterioration since origination. Credit
deterioration can be evidenced by lower FICO scores or past-due
status. ese credit-impaired loans are initially recorded upon
acquisition at fair value, determined by discounting expected future
principal and interest cash ows.
e excess of the future cash ows expected to be collected,
initially measured at acquisition date, over Navy Federal’s recorded
investment, is referred to as accretable yield. Accretable yield
is recognized in interest income over the remaining life of the
loan using eective yield methodology. e 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 ows expected to be collected, is referred
to as the non-accretable dierence.
In periods subsequent to the acquisition, Navy Federal re-evaluates
the performance and credit quality of these loans each quarter by
aggregating individual loans that have common risk characteristics
and estimating their expected future cash ows. Decreases in
expected or actual cash ows that are attributable at least in part to
credit quality are recognized as impairments through a charge to the
provision for credit losses resulting in an increase in the allowance
for loan losses. Conversely, increases in expected or actual cash
ows are treated as a recovery of any previously recorded allowance
for loan losses, and to the extent applicable, a reclassication from
non-accretable dierence to accretable yield. Increases in expected
prepayments not attributable to credit quality are treated as a
reduction in contractual cash ows expected to be collected and