Navy Federal Credit Union 2012 Annual Report Download - page 31

Navy Federal Credit Union42 Leading with Vision. Achieving Results. 43
2012 Financial Section
NOTE 21: FAIR VALUES OF FINANCIAL INSTRUMENTS
ASC 825-10-50, Fair Value of Financial Instruments—Disclosure, requires the disclosure of the estimated
fair value of the financial instruments, including those financial instruments for which Navy Federal did
not elect fair value treatment. The financial instruments that are accounted for under ASC 820-10, Fair
Value Measurement, are disclosed separately in Note 20. Navy Federal discloses fair value information
for its financial instruments, whether recognized at fair value on the Consolidated Statements of
Financial Condition or not, and for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly aected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair value cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in immediate settlement
of the instrument. Certain financial instruments and all non-financial instruments are excluded from
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 price, if available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Cash and Cash Equivalents
Cash and cash equivalents include cash and balances due from banks and credit unions, all of which mature
within 90 days. The carrying amount reported approximates fair value for vault cash and demand balances
from other financial institutions. Fair value for short-term securities is based on quoted market prices.
Members’ Accounts
The fair value of Savings, Money Market Savings, Checking, and Individual Retirement Account (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
Navy Federal does not receive loan commitment fees. The fair value of loan commitments is based
upon dierences between the contracted rate and the current market rate of comparable mortgage
loans. The fair value of forward contracts 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.
Fair Value at December 31, 2011 Mortgage
servicing
rights
(dollars in thousands)
Balance, beginning of year $ 161,150
Originations 32,476
Payos/Maturities (21,426)
(Loss) on changes in value of MSRs (29,832)
Balance, end of year $ 142,368
Change in unrealized gains/(losses) related to financial instruments
still held at December 31, 2011 $ (34,494)
The tables below present the items measured at fair value on the Consolidated Statements of Financial
Condition on a non-recurring basis when certain assets are measured at the lower of cost or market
that were recognized at fair value below cost at the end of the period at December 31, 2012 and
December 31, 2011:
Fair Value at December 31, 2012
(dollars in thousands)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance as of
December 31,
2012
Other real estate owned $ — $ — $ 15,244 $ 15,244
Total assets at fair value
on a non-recurring basis $ — $ — $ 15,244 $ 15,244
Fair Value at December 31, 2011
(dollars in thousands)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance as of
December 31,
2011
Other real estate owned $ — $ — $ 32,811 $ 32,811
Total assets at fair value
on a non-recurring basis $ — $ — $ 32,811 $ 32,811