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NAVY FEDERAL CREDIT UNION • 2013 ANNUAL REPORT
Celebrating 80 Years of Excellence
Federally insured by NCUA.

Table of contents

  • Page 1
    Celebrating Navy Federal CredIT UNION • 2013 aNNUal repOrT 80 Years of Excellence Federally insured by NCUA.

  • Page 2
    Vision Statement Be the most Preferred and trusted financial institution serving the military and their families. 80 years

  • Page 3
    Financial Summary 2013 Was a Record Year for Navy Federal. As of December 31 2012 2013 (dollars in millions) Assets Loans Outstanding Savings, Checking, MMSAs, IRAs Share Certificates Members' Equity Gross Income Non-interest Expense Dividends Mortgage Loans Serviced $ 52,455.1 $ 35,257.1 $ ...

  • Page 4
    Navy Federal Credit Union • 2013 Annual report 2

  • Page 5
    ...the appeal of low loan rates-maybe to get that new car. Many join on the recommendation of a friend, family member, or coworker. Active Duty members appreciate Navy Federal's expanding branch presence around military installations. These new members are very engaged, depositing nearly $1 billion and...

  • Page 6
    Navy Federal Credit Union • 2013 Annual report 4

  • Page 7
    ...comprising checking lines of credit and auto, boat, motorcycle, and nearly $6 billion. personal loans, grew to $12 billion, a 19% increase over 2012. The housing market continued its rebound throughout 2013, with continued low interest rates. At Navy Federal, we closed over 46,500 mortgage loans for...

  • Page 8
    Navy Federal Credit Union • 2013 Annual report 6

  • Page 9
    ... outside of the U.S. in Asia and Europe, and in 2013 we added the continent of Africa with the opening of our branch in Djibouti, at Camp Lemonnier. Our contact center handled a record volume of calls from members-over 23 million-up 11% from 2012. Navy Federal Credit Union • 2013 Annual report 7

  • Page 10
    Navy Federal Credit Union • 2013 Annual report 8

  • Page 11
    ...success. Our unwavering position on doing what is right for the people that matter most-our members-is at the foundation of our success, and it will continue to be so in the months and years ahead. John A. Lockard Chairman Cutler Dawson President Navy Federal Credit Union • 2013 Annual report 9

  • Page 12
    Navy Federal Credit Union • 2013 Annual report 10

  • Page 13
    ....5 Loans/Savin g s Members Assets Total assets increased by $3 billion to reach $56 billion. Total reserves, a measure of Navy Federal's safety and soundness, reached $6 billion. These numbers measure the notable success of Navy Federal for 2013. Navy Federal Credit Union • 2013 Annual report...

  • Page 14
    2013 Board of Directors John A. Lockard Chairman of the Board Kenneth R. Burns First Vice Chairman Bruce B. Engelhardt Second Vice Chairman Cutler Dawson Treasurer Grisell F. Collazo Secretary 12 Navy Federal Credit Union • 2013 Annual report 12

  • Page 15
    Delivering world-class service has been the cornerstone of Navy Federal's success ever since our founding in 1933. Edward R. Cochrane Jr. Neil W. T. Hogg William P. Mizerak Henry J. Sanford Navy Federal Credit Union • 2013 Annual report 13

  • Page 16
    Supervisory Commit tee Michael C. Wholley Neil W. T. Hogg Chairman Kirk A. Foster Patrick J. McClanahan Navy Federal Credit Union • 2013 Annual report 14

  • Page 17
    ...'s year-end financial statements. Their comprehensive year-end audit, Independent Auditor's Report, appears in this Annual Report. Periodic supervisory examinations are also performed by NCUA, the regulatory agency for all federally-chartered credit unions. In 2013, the NCUA evaluated Navy Federal...

  • Page 18
    ... Navy Federal Asset Management, LLC (NFAM). Representatives registered with NFBS and NFAM (Members FINRA/SIPC). Trust Services available through MEMBERS Trust Company, 14025 Riveredge Dr., Suite 280, Tampa, FL 33637. 1-877-221-8108. Fax 703-206-1510. Navy Federal Credit Union • 2013 Annual report...

  • Page 19
    pO Box 3000, Merrifield, va 22119-3000 • navyfederal.org © 2014 Navy Federal NFCU 8010 (4-14)

  • Page 20
    Celebrating 80 Years of Excellence Navy Federal Credit UNioN • 2013 aNNUal report

  • Page 21
    ...Navy Federal Credit Union, which comprise the consolidated statements of financial condition as of December 31, 2013 and December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in reserves, and undivided earnings, and of cash flows for the years then ended...

  • Page 22
    ... Property, plant, and equipment, net Investments in FHLbs NCUSIF deposit Mortgage servicing rights Prepaid expenses Goodwill and other intangible assets, net Other assets Total assets liabilities and Members' equity Members' accounts Checking accounts Savings accounts Money market accounts Share...

  • Page 23
    ...interest income after provision for loan losses Non-interest income Net gains on mortgage loan sales Net gains on sales of investments Mortgage servicing revenue Credit/debit card interchange Payment protection plan fees ATM convenience fees Overdrawn checking fees Fee income Other income 1,619,746...

  • Page 24
    Consolidated Statements of Comprehensive Income 2013 ANNUAL REPoRT years ended december 31 (dollars in thousands) 2013 $ 695,838 $ 2012 760,420 Net income other comprehensive (loss)/income Defined benefit pension plans: Amortization of prior service cost included in net periodic pension cost ...

  • Page 25
    ...Cash at end of year Additional cash ï¬,ow information Interest paid Transfers from loans to other real estate The accompanying notes are an integral part of these consolidated financial statements. $ $ 501,906 $ 256,790 61,527 $ 366,496 657,249 77,082 Navy Federal Credit Union • 2013 Financial...

  • Page 26
    ... Credit Union that provides investment, insurance, and other financial services to members of Navy Federal Credit Union. Navy Federal brokerage Services and Navy Federal Asset Management are wholly-owned subsidiaries of NFFG. In this Annual Report, Navy Federal Credit Union and its consolidated...

  • Page 27
    ... Statements of Income. Navy Federal elects the fair value option for mortgage loans awaiting sale (MLAS). MLAS are sold with the mortgage servicing rights retained by Navy Federal. Loans are removed from the Consolidated Statements of Financial Condition as assets and sales treatment is applied...

  • Page 28
    ... is a loan for which Navy Federal has granted a concession that it would not otherwise consider because that member is experiencing financial difficulty. The types of concessions that Navy Federal grants in a TDR primarily include term extensions and interest rate Navy Federal Credit Union • 2013...

  • Page 29
    ... assets or liabilities and future cash flows. Navy Federal accounts for its derivative financial instruments in accordance with ASC 815, Derivatives and Hedging, which requires all derivative instruments to be carried at fair value on the Consolidated Statements of Financial Condition. Some of Navy...

  • Page 30
    ... recognized at fair value and classified as Other assets or Other liabilities on the Consolidated Statements of Financial Condition. See Note 10 for details. Pension Accounting and Retirement Benefit Plans Navy Federal has defined benefit pension plans, 401(k) and 457(b) savings plans, and a non...

  • Page 31
    ... in the statement of financial position, but for which fair value is disclosed. Navy Federal qualifies for, and has applied this exception in its disclosures of fair value. In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate...

  • Page 32
    ... cash at December 31, 2013 and 2012, respectively, as part of its original agreement with Charlie Mac, LLC. See Note 8 for details. All restricted cash amounts are classified as Other assets on the Consolidated Statements of Financial Condition. Navy Federal Credit Union • 2013 Financial...

  • Page 33
    ...) (4,506) (1) $ Estimated Fair value 359,833 17,179 359,922 17,112 total held-to-maturity Available-for-sale U.S. government and federal agency securities Residential mortgage-backed securities Commercial mortgage-backed securities bank notes Municipal securities Mutual funds 2.19% 2.58% 3.07...

  • Page 34
    ...the Federal Home Loan bank (FHLb) of San Francisco and the FHLb of Atlanta as of December 31, 2013 and 2012. FHLb stock is a restricted investment carried at cost and evaluated for impairment. As a member of the FHLb system, Navy Federal has access to a $9.9 billion line of credit facility. All debt...

  • Page 35
    ...the fair value of securities held by Navy Federal that were considered other-than-temporary. As of December 31, 2013 and 2012, Navy Federal had $1.4 billion and $0.05 billion, respectively, in investments pledged as collateral for borrowed funds under repurchase agreements. NOTE 4: loaNs to MeMbers...

  • Page 36
    2013 ANNUAL REPoRT The composition of Navy Federal's loans to members as of December 31, 2013 and 2012 was as follows: (dollars in thousands) 2013 2012 Consumer loans Auto Unamortized cost Other (1) Checking lines of credit (CLOC) Federal education loans Credit card loans $ 8,395,078 13,006 2,...

  • Page 37
    2013 ANNUAL REPoRT The following tables present credit quality indicators by loan product type: consumer loans, credit card loans, mortgage loans, and equity loans. Navy Federal uses collateral type and FICO score as the primary credit quality indicators for its consumer loans, which consisted of ...

  • Page 38
    2013 ANNUAL REPoRT Navy Federal uses estimated current LTV ratios and FICO score as the primary credit quality indicators for its mortgage loans, which consisted of the following as of December 31, 2013 and 2012: as of december 31, 2013 (dollars in thousands) FiCo score less than 610 $ 145,368 ...

  • Page 39
    2013 ANNUAL REPoRT Navy Federal uses delinquency status and FICO score as the primary credit quality indicators for its equity loans, which consisted of the following as of December 31, 2013 and 2012: as of december 31, 2013 (dollars in thousands) FiCo score less than 610 $ 280,741 40,606 $ ...

  • Page 40
    2013 ANNUAL REPoRT Changes in the allowance for loan losses during the years ended December 31, 2013 and 2012 were as follows: (dollars in thousands) as of december 31, 2013 Consumer Credit Cards Real Estate 172,402 50,041 - (79,776) 7,518 other $ 247 - - - 2 Total $ 634,227 455,598 12,421 (523,...

  • Page 41
    ... as servicer include remitting monthly principal and interest payments, maintaining escrow deposits, performing loss mitigation and foreclosure activities, and funding servicing advances that have not yet been collected from the borrower. Navy Federal Credit Union • 2013 Financial Section...

  • Page 42
    2013 ANNUAL REPoRT Navy Federal recognizes servicing advances that are reimbursable as Accounts receivable on its Consolidated Statements of Financial Condition. Servicing advances as of December 31, 2013 and 2012 were as follows: (dollars in thousands) 2013 $ 14,826 2,587 9,580 $ 2012 13,896 2,...

  • Page 43
    ... card Real estate Total $ 863,233 $ 768,354 $ 51,187 $ 174,159 At December 31, 2013 and 2012, the amount of loan commitments available to members whose loans had previously been modified as TDRs was $1.7 million and $0.5 million, respectively. Navy Federal Credit Union • 2013 Financial...

  • Page 44
    ... to members on the Consolidated Statements of Financial Condition, and their outstanding balances at December 31 were as follows: (dollars in thousands) 2013 $ 80,850 31,596 $ 2012 81,067 38,814 Outstanding balance Carrying amount For the years ended December 31, 2013 and 2012, Navy Federal...

  • Page 45
    .... Navy Federal's servicing fees are priced based on minimum rates required by the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Government National Mortgage Association (GNMA). During the years ended December 31, 2013 and 2012, Navy Federal...

  • Page 46
    ...-insured loans, and there is no anticipation of significant credit losses. gNMa Mortgages (dollars in thousands) 2013 $ 1,687 3,528 $ 2012 7,166 13,929 Constant prepayment rate Adverse fair value change of 10% Adverse fair value change of 20% Navy Federal Credit Union • 2013 Financial...

  • Page 47
    ...: Navy Federal uses a third party to value its GNMA securities with a single cash flow stream model and market prices of similar assets. The fair value of Navy Federal's securitizations at December 31, 2013 and 2012 was $1.9 billion and $2.2 billion, respectively. The UPB of the securitized loans...

  • Page 48
    ... and no private mortgage insurance. Under this agreement, Navy Federal received proceeds of $775.0 million and $618.9 million from the sale of mortgage loans during the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, the UPb of these loans was $749.5 million...

  • Page 49
    ... total balances of REO at December 31, 2013 and 2012 were as follows: (dollars in thousands) 2013 $ 29,932 (8,529) $ 2012 32,187 (16,943) Real estate owned (REO) Holding period losses REo balance, end of period $ 21,403 $ 15,244 Navy Federal Credit Union • 2013 Financial Section...

  • Page 50
    ... excess of open interest rate lock commitments (IRLCs) with the balance of closed mortgage loans classified as MLAS on the Consolidated Statements of Financial Condition. Derivatives Accounted For as Economic Hedges Navy Federal is an active participant in the production of mortgage loans that are...

  • Page 51
    ... fair value hedges during the years ended December 31, 2013 and 2012. gain recognized in Income on Derivative (dollars in thousands) (Loss) Recognized in income on hedged item 2013 144 $ (650) $ 2013 $ 708 $ 2012 2012 (139) Interest rate contracts Navy Federal Credit Union • 2013 Financial...

  • Page 52
    2013 ANNUAL REPoRT Cash Flow Accounting Hedges Navy Federal funds a portion of its investments and overall operations with variable rate obligations. Navy Federal uses pay-fixed interest rate swaps to hedge the variability in cash flows related to existing and anticipated replacement funding that ...

  • Page 53
    ...7,597 50,000 $ (5,643) (50,000) $ (1,006) - $ 948 - Total Financial Liabilities $ 57,597 $ - $ 57,597 $ (55,643) $ (1,006) $ 948 (1) Includes offset by same counterparty where legally enforceable under master netting agreement. Navy Federal Credit Union • 2013 Financial Section 33

  • Page 54
    ... cards Home equity lines of credit Checking lines of credit Pre-approved auto loans Utility deposit guarantee programs Other Total $ 13,188,338 $ 11,433,429 Navy Federal had an allowance of $12.4 million and $9.1 million at December 31, 2013 and 2012, respectively, against unfunded credit card...

  • Page 55
    ... 30, 2013 and 2012, pursuant to ASU 2011-08, Testing Goodwill for Impairment, and concluded that it was not likely that the fair value of any reporting unit was below its carrying amount, and therefore did not recognize any impairment charges. Navy Federal Credit Union • 2013 Financial Section 35

  • Page 56
    ... million core deposit intangible asset related to money market accounts. Core deposit balances represent a favorable source of financing for financial institutions, and a "core deposit intangible" asset represents the fair value of cost savings derived from available core deposits acquired relative...

  • Page 57
    ... member accounts totaled $33.6 million and $23.7 million as of December 31, 2013 and 2012, respectively, and are classified as Accounts receivable in the Consolidated Statements of Financial Condition. The Helping Families Save Their Homes Act of 2009 provided $250,000 per account of share insurance...

  • Page 58
    ...dollars in thousands) 2013 $ 291,773 22,738 44,130 9,653 2,370 $ 2012 318,470 21,611 44,565 11,093 2,279 Share and IRA certificates Savings and member escrow Money market and IRA money market Checking IRA shares Total dividends $ 370,664 $ 398,018 Navy Federal Credit Union • 2013 Financial...

  • Page 59
    ...88% 1.88% 5,123,835 Securities sold under repurchase agreements 2019 Fixed Quarterly 50,000 Total long-term borrowings total borrowed funds (1) Variable coupon is a spread to 3-month LIBOR and is determined quarterly. 5,173,835 $ 8,404,185 Navy Federal Credit Union • 2013 Financial Section 39

  • Page 60
    ... of monthly retirement benefits, determined by a set formula, to vested employees. The formula is based on the final average earnings (an average of the three highest consecutive years of income) multiplied by 2%, times the length of employee service. Navy Federal Credit Union • 2013 Financial...

  • Page 61
    ... paying full cost. The following table sets forth the over/(under) funded status of the pension and retiree medical benefit plans: pension (dollars in thousands) Retiree Medical 2012 2013 $ - 44,559 $ 2013 $ 1,141,342 856,149 $ 2012 - 50,090 Funded status, end of year: Fair value of plan assets...

  • Page 62
    ... benefits expected to be paid over the next ten years: (dollars in thousands) pension $ 39,150 41,475 44,172 47,066 50,359 298,870 Retiree Medical $ 2,071 2,178 2,285 2,418 2,543 15,141 2014 2015 2016 2017 2018 2019-2023 Total $ 521,092 $ 26,636 Navy Federal Credit Union • 2013 Financial...

  • Page 63
    ... pension and retiree medical benefit plan for 2013 and 2012 was December 31. The investment strategy of the Navy Federal Credit Union Employees' Retirement Plan is to employ an investment approach, whereby a mix of equity and fixed income investments are used to maximize the long-term return of plan...

  • Page 64
    ... used for the Plan's financial instruments measured at fair value. > U.S. Equity Securities & Global Equity Securities (Level 2)-During the years ended December 31, 2013 and 2012, the Plan invested in one common collective trust. The trust is valued at net asset value, which is calculated based...

  • Page 65
    ... of expenses related to benefits during the years ended December 31, 2013 and 2012, respectively. NOTE 19: related party traNsaCtioNs In the normal course of business, Navy Federal extends loans to credit union officials. Credit union officials are defined as volunteer members of the Board of...

  • Page 66
    ... commercial mortgagebacked securities are valued either 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. Navy Federal Credit Union • 2013 Financial Section 46

  • Page 67
    ... 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...

  • Page 68
    ... recognized at fair value on the Consolidated Statements of Financial Condition on a recurring basis at December 31, 2013 and 2012: Fair value Measurements at december 31, 2013 quoted prices in Active Markets for Identical Assets (level 1) $ - - - - - 10,880 $ (dollars in thousands) significant...

  • Page 69
    ..., beginning of year Net gains/(losses) Originations Payoffs/Maturities Gain on changes in value of MSRs balance, end of year Change in unrealized gains related to financial instruments still held at December 31, 2013 $ $ 236,579 64,669 Navy Federal Credit Union • 2013 Financial Section 49

  • Page 70
    .... 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...

  • Page 71
    ... 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...

  • Page 72
    ...including Federal Home Loan Bank (FHLB) Borrowed Funds FHLb debt comprises both short-term (operational) and long-term (strategic) debt. The fair value of FHLb borrowings is based on the present value of future discounted cash flows using implied forward rates. The estimated fair values of financial...

  • Page 73
    Federally insured by NCUa. © 2014 Navy Federal NFCU 8010-F (4-14)