Navy Federal Credit Union 2014 Annual Report Download - page 42

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Navy Federal Credit Union24
NOTE 6: ACQUIRED CREDIT-IMPAIRED LOANS
Navy Federal applies ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality,
to account for the credit-impaired loans obtained in connection with its acquisition of USAFCU on
October 1, 2010. The carrying value of these acquired credit-impaired (ACI) loans is included in Loans
to members on the Consolidated Statements of Financial Condition, and their outstanding balances as
of December 31 were as follows:
(dollars in thousands) 2014 2013
Outstanding balance $ 80,778 $ 80,850
Carrying amount 27,919 31,596
For the years ended December 31, 2014 and 2013, Navy Federal recognized interest on ACI loans of $2.1
million and $2.5 million, respectively. The average balance of ACI loans as of December 31, 2014 and 2013
was $29.8 million and $35.2 million, respectively.
Decreases in cash flows expected to be received on ACI loans resulted in increases in the allowance for
loan losses of $0.5 million and $0.7 million as of December 31, 2014 and 2013, respectively.
During 2014 and 2013, previously established allowances were reduced by $1.4 million and $2.4 million,
respectively, because either cash flows received were significantly greater than previously expected or
it was probable that there would be a significant increase in expected cash flows. During 2014 and 2013,
previously established allowances were increased by $1.9 million and $3.1 million, respectively, because
either cash flows received were less than previously expected or it was probable that there would be a
significant decrease in expected cash flows.
Accretable yield activity for ACI loans for the years ended December 31, 2014 and 2013 was as follows:
Accretable Yield
(dollars in thousands) 2014 2013
Balance, beginning of period $ 19,493 $ 22,706
Accretion (3,049) (3,519)
Net reclassifications(1) 2,359 3,534
Removals (1,359) (3,228)
Balance, end of period $ 17,444 $ 19,493
(1)Includes transfers between accretable yield and non-accretable yield.
NOTE 7: MORTGAGE SERVICING RIGHTS
Navy Federal capitalizes mortgage servicing rights (MSRs) when mortgage loans are sold and
Navy Federal retains the right to service those loans. Navy Federal recognizes MSRs at fair value
with changes in fair value recognized in Fair value adjustment of mortgage servicing rights on the
Consolidated Statements of Income. MSR valuation is sensitive to interest rate and prepayment risk.