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Navy Federal Credit UnionFlorida Project-Specific Audit
For the year ended December 31, 2012
Navy Federal Credit Union Florida Project-Specific Audit Table of Contents For the Year Ended December 31, 2012
Independent Auditor's Report…………………………………………………………………..…1-2 Schedule of Expenditures of State Financial Assistance…………………………………………....3 Note to Schedule of Expenditures of State Financial Assistance…………….…...………………...4 Schedule of Findings and Questioned Costs related to State Financial Assistance …..…….…...…5
PricewaterhouseCoopers LLP, 1800 Tysons Blvd., McLean, Virginia 22102 T: (703) 918 3000, www.pwc.com/us
Independent Auditor’s Report
To the Board of Directors and Supervisory Committee of Navy Federal Credit Union:
Report on Compliance for Each Major State Project We have audited Navy Federal Credit Union’s (the “Company”) compliance with the types of compliance requirements described in the Department of Financial Services’ State Projects Compliance Supplement that could have a direct and material effect on each of the Company’s major state projects for the year ended December 31, 2012. The Company’s major state projects are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its state projects. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of the Company’s major state projects based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Chapter 10.650, Rules of the Auditor General. Those standards and Chapter 10.650, Rules of the Auditor General, require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major state project occurred. An audit includes examining, on a test basis, evidence about the Company’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major state project. However, our audit does not provide a legal determination of the Company’s compliance. Opinion on Each Major State Project In our opinion, the Company complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major state projects for the year ended December 31, 2012. Report on Internal Control Over Compliance Management of the Company is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Company’s internal control over compliance with the types of requirements that could have a direct and material effect on each major state project to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major state project and to test and report on internal control over compliance in accordance with Chapter 10.650, Rules of the Auditor General, but not for the purpose of
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expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Company's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a state project on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a state project will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a state project that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing is based on the requirements of Chapter 10.650, Rules of the Auditor General. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of State Financial Assistance We have audited the financial statements of the Company as of and for the year ended December 31, 2012, and have issued our report thereon dated March 28, 2013, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of state financial assistance is presented for purposes of additional analysis as required by Chapter 10.650, Rules of the Auditor General, and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of state financial assistance is fairly stated in all material respects in relation to the financial statements as a whole.
May 2, 2013
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NAVY FEDERAL CREDIT UNIONSCHEDULE OF EXPENDITURES OF STATE FINANCIAL ASSISTANCE
For the Year Ended 12/31/2012
CSFA Grant ExpendituresNo. No. (in thousands)
State of FloridaUniversity of West Florida Office of Economic Development & Engagement(OEDE)
DIRECT PROJECTOEDE Industry Recruitment, Retention, and Expansion Fund Grant 40.012 221727-1 $680
Total OEDE $680
Total Expenditures of State Financial Assistance $680
The accompanying note is an integral part of this schedule.
Navy Federal Credit UnionFlorida Project Specific AuditNote to Schedule of Expenditures of State Financial AssistanceFor the Year Ended December 31, 2012
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Note 1: Summary of Significant Accounting Policies
Basis of PresentationThe accompanying Schedule of Expenditures of State Financial Assistance (the "Schedule")summarizes the expenditures of Navy Federal Credit Union (the "Company") under this program forthe year ended December 31, 2012 and is presented using the accrual basis of accounting. Theinformation in the Schedule is presented in accordance with the requirements of Chapter 69I-5, Rulesof the Florida Department of Financial Services, Florida Administrative Code, Schedule ofExpenditures of State Financial Assistance. Because the Schedule presents only a selected portion ofthe operations of the Company, it is not intended to and does not present the financial position, resultsof operations and cash flows of the Company.
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Schedule of Findings and Questioned Costs related to State Financial AssistanceFiscal Year Ended December 31, 2012
Summary of Auditor’s Results The auditor performed a project-specific audit over the Schedule of Expenditures of State
Financial Assistance for the Company and the report expresses an unqualified opinion. The auditor’s report on compliance with requirements that could have a direct and material effect
on each major State project for the Company expresses an unqualified opinion. Our audit disclosed no findings required to be reported related to state projects required to be
disclosed under Chapter 10.656.
The project tested as a major project was the following:
State Project State CSFA No. YearOEDE Industry Recruitment,Retention, and Expansion FundGrant
40.012 Fiscal year ended December 31,2012
The threshold for distinguishing Type A and Type B projects was $204,000 for major stateprojects.
Other Issues No management letter is required because there were no findings required to be reported the
management letter. No Summary Schedule of Prior Audit Findings is required because there were no prior audit
findings related to state projects. No Corrective Action Plan is required because there were no findings required to be reported
under the Florida Single Audit Act.
Navy Federal Credit UnionAnnual Report
Report and Consolidated Financial StatementsDecember 31, 2012 and 2011
Navy Federal Credit UnionAnnual ReportTable of ContentsDecember 31, 2012 and 2011_____________________________________________________________________________________________________________________
Table of Contents
Independent Auditor's Report…………………………………………………………………1
Financial Statements
Consolidated Statements of Financial Condition………………………………………………. 2
Consolidated Statements of Income……………………………………………………………..3
Consolidated Statements of Comprehensive Income…………….….…………………..………4
Consolidated Statements of Changes in Reserves and Undivided Earnings……………….……5
Consolidated Statements of Cash Flows………………………………………………………...6
Notes to Consolidated Financial Statements…………………………………………………7-46
PricewaterhouseCoopers LLP,T: (703) 918 3000, F: (703) 918
To the Board of Directors and Supervisory Committee of Navy Federal Credit Union:
We have audited the accompanying(the “Company”), which comprise the31, 2012 and December 31, 2011income, changes in reserves and undivided earnings and of cash flows
Management's Responsibility for the
Management is responsible for the preparation and fair presentation of thestatements in accordance with accounting principles generally accepted in the United StAmerica; this includes the design, implementation, and maintenance of internal control relevant tothe preparation and fair presentation ofmisstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on theaudits. We conducted our audits in accordance with auditing standards generally accepted in theUnited States of America. Those streasonable assurance about whether themisstatement.
An audit involves performing procedures to obtain audit evidence aboutin the consolidated financial statements.the assessment of the risks of material misstatement of thewhether due to fraud or error. In making those risk assessments, we consider internal controlrelevant to the Company's preparation and fair presentation of thein order to design audit procedures thof expressing an opinion on the effectiveness of the Company's internal control.express no such opinion. An audit also includesused and the reasonableness ofevaluating the overall presentationevidence we have obtained is sufficient and ap
Opinion
In our opinion, the consolidatedrespects, the financial position of2011, and the results of itsaccounting principles generally accepted in the United States
March 28, 2013
PricewaterhouseCoopers LLP, 1800 Tysons Boulevard, McLean, VA 22102918 3200, www.pwc.com/us
Independent Auditor's Report
the Board of Directors and Supervisory Committee of Navy Federal Credit Union:
We have audited the accompanying consolidated financial statements of Navy Federal Credit Union, which comprise the consolidated statements of financial condition
December 31, 2011, and the related consolidated statements of ichanges in reserves and undivided earnings and of cash flows for the years then ended.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of thestatements in accordance with accounting principles generally accepted in the United StAmerica; this includes the design, implementation, and maintenance of internal control relevant tothe preparation and fair presentation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.
s Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on ourWe conducted our audits in accordance with auditing standards generally accepted in the
. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free
involves performing procedures to obtain audit evidence about the amountsfinancial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidatedwhether due to fraud or error. In making those risk assessments, we consider internal controlrelevant to the Company's preparation and fair presentation of the consolidatedin order to design audit procedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company's internal control.
An audit also includes evaluating the appropriateness ofthe reasonableness of significant accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statementsevidence we have obtained is sufficient and appropriate to provide a basis for our
consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Navy Federal Credit Union at December 31, 2012
its operations and its cash flows for the years then ended inaccounting principles generally accepted in the United States of America.
the Board of Directors and Supervisory Committee of Navy Federal Credit Union:
Navy Federal Credit Unionfinancial condition as of December
statements of income, comprehensivefor the years then ended.
Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financialstatements in accordance with accounting principles generally accepted in the United States ofAmerica; this includes the design, implementation, and maintenance of internal control relevant to
financial statements that are free from material
financial statements based on ourWe conducted our audits in accordance with auditing standards generally accepted in the
andards require that we plan and perform the audit to obtainfinancial statements are free from material
the amounts and disclosuresThe procedures selected depend on our judgment, including
consolidated financial statements,whether due to fraud or error. In making those risk assessments, we consider internal control
consolidated financial statementsat are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, weappropriateness of accounting policies
estimates made by management, as well asfinancial statements. We believe that the audit
provide a basis for our audit opinion.
referred to above present fairly, in all materialDecember 31, 2012 and December 31,
cash flows for the years then ended in accordance with
Navy Federal Credit UnionAnnual ReportConsolidated Statements of Financial ConditionDecember 31, 2012 and 2011_____________________________________________________________________________________________________________________
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(dollars in thousands)ASSETS 2012 2011
Cash 366,496$ 307,231$
Short-term investments 1,785,003 1,440,626
Securities available-for-sale 12,679,523 11,186,686
Securities held-to-maturity 469,752 794,529
Mortgage loans aw aiting sale 1,442,868 692,740
Loans to members, net of allow ance for loan losses of $643,336
at December 31, 2012 and $602,388 at December 31, 2011 33,170,924 30,191,509
Investment in FHLB 403,797 374,359
Interest-bearing deposits 100,940 8,781
Accounts receivable 315,499 284,490
Accrued interest receivable 177,914 169,528
Property, Plant & Equipment 842,285 829,863
NCUSIF deposit 335,673 307,180
Mortgage servicing rights 144,089 142,368
Prepaid expenses 32,229 31,053
Goodw ill and other intangible assets, net 59,797 60,307
Other assets 109,323 104,229
Total assets 52,436,112$ 46,925,479$
LIABILITIES AND MEMBERS’ EQUITY
Members’ accounts
Savings accounts 8,892,890 7,637,920
Money market savings accounts 7,672,947 6,822,286
Checking accounts 6,217,947 5,601,077
Share certif icate accounts 10,234,440 9,493,829
Individual retirement accounts 4,347,208 4,084,953
Total members’ accounts 37,365,432 33,640,065
Liabilities
Securities sold under repurchase agreements 50,000 -
Notes payable 8,354,185 7,605,185
Drafts payable 196,108 158,005
Accrued expenses and accounts payable 389,749 303,069
Accrued interest payable 24,467 23,727
Other liabilities 179,824 116,613
Total members' accounts and liabilities 46,559,765 41,846,664
Members’ Equity
Regular reserve 349,808 349,808
Capital reserve 5,316,885 4,556,465
Undivided earnings 50,000 50,000
Accumulated other comprehensive income 159,654 122,542
Total members’ equity 5,876,347 5,078,815
Total liabilities and members’ equity 52,436,112$ 46,925,479$
The accompanying notes (beginning on page 7) are an integral part of these consolidated financial statements.
December 31
Navy Federal Credit UnionAnnual ReportConsolidated Statements of IncomeFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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(dollars in thousands)Interest income 2012 2011
Interest on loans to members 2,242,663$ 2,184,196$
Interest on securities available-for-sale 280,668 259,986
Interest on securities held-to-maturity 16,352 20,618
Interest on other investments 7,513 4,543
Total interest income 2,547,196 2,469,343
Dividend and interest expense
Dividends to members 398,018 420,861
Interest on securities sold under repurchase
agreements and notes payable 259,972 257,856
Total dividend and interest expense 657,990 678,717
Net interest income 1,889,206 1,790,626
Provision for loan losses (455,189) (450,661)
Net interest income after provision for loan losses 1,434,017 1,339,965
Non-interest income
Gain on mortgage loan sales, net 290,683 88,216
Gain on investment sales 40,706 22,399
Mortgage servicing 61,882 57,466
Credit card interchange 169,440 143,529
Check card interchange 98,379 159,519
Payment protection plan 100,199 84,063
ATM convenience 35,159 34,286
Overdraw n checking fee 60,169 52,832
Other 247,515 189,865
Total non-interest income 1,104,132 832,175
Non-interest expense
Salaries and employee benefits 716,117 630,772
Office operating 174,233 129,798
Loan servicing 278,949 232,031
Professional and outside services 180,698 120,211
Office occupancy 55,689 52,050
Education and marketing 76,957 43,193
Fair value adjustment of mortgage servicing rights 51,053 51,258
Depreciation 122,224 101,026
Other 89,970 85,678
Total non-interest expense 1,745,890 1,446,017
Non-operating loss
Realized loss on NCUSIF stabilization and membership capital (31,839) (76,795)
for corporate credit unions
Net income 760,420$ 649,328$
The accompanying notes (beginning on page 7) are an integral part of these consolidated financial statements.
Years Ended December 31
Navy Federal Credit UnionAnnual ReportConsolidated Statements of Comprehensive IncomeFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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(dollars in thousands) 2012 2011
Net income 760,420$ 649,328$
Other Comprehensive Income
Defined benefit pension plans:
Prior service cost/(credit) amortized during period 4,813 4,813
Net unamortized (loss)/gain arising during period (64,774) (129,757)
Less:amortization of prior service cost included in net 22,976 11,374
Adjustments related to pension accounting (36,985) (113,570)
Unrealized gains on securities and derivatives
Unrealized holding gains arising during period 114,220 334,648
Less: reclassif ication adjustment for gains included in net income (40,123) 2,316
Net unrealized gain/(loss) on available-for-sale securities and derivatives 74,097 336,964
Total Other Comprehensive Income 37,112 223,394
Total Comprehensive Income 797,532$ 872,722$
The accompanying notes (beginning on page 7) are an integral part of these consolidated financial statements.
Years Ended December 31
Navy Federal Credit UnionAnnual ReportConsolidated Statements of Changes in Reserves and Undivided EarningsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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(dollars in thousands)Regular
Reserve
Capital
Reserve
Undivided
Earnings
Accumulated
Other
Comprehensive
Income
Total Reserves
and Undivided
Earnings
Balance at December 31, 2010 349,808$ 3,907,137$ 50,000$ (100,852)$ 4,206,093$
Other comprehensive income 223,394 223,394
Net income - 649,328 - 649,328
Discretionary transfer - 649,328 (649,328) - -
Balance at December 31, 2011 349,808 4,556,465 50,000 122,542 5,078,815
Other comprehensive income 37,112 37,112
Net income - 760,420 - 760,420
Discretionary transfer - 760,420 (760,420) - -
Balance at December 31, 2012 349,808$ 5,316,885$ 50,000$ 159,654$ 5,876,347$
The accompanying notes (beginning on page 7) are an integral part of these consolidated financial statements.
Navy Federal Credit UnionAnnual ReportConsolidated Statements of Cash FlowsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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(dollars in thousands)Cash flows from operating activities 2012 2011
Net income 760,420$ 649,328$
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 455,189 450,661
Depreciation of property, plant & equipment 122,224 101,026
Loss on disposal of property, plant & equipment 1,505 1,516
Realized loss on membership capital in other credit unions (49) -
Gain on sale of investments (40,706) (22,399)
Amortization of loan origination fees and costs 3,525 11,219
Loss on change in value of mortgage servicing assets 51,053 51,258
Mortgage loans originated for sale (6,161,347) (3,022,064)
Gain on sale of mortgages (94,202) (43,312)
Mortgage loan sales proceeds 4,647,984 2,493,074
Accretion of AFS investment securities 72,350 42,163
Amortization of HTM investment securities 1,172 465
(Increase) in mortgage servicing assets (44,744) (29,483)
(Increase) in accrued interest receivable (8,386) (13,523)
(Increase)/decrease in prepaid expenses (1,177) 6,056
(Increase)/decrease in accounts receivable (31,009) 366,348
(Increase) in intangible and other assets (78,909) (93,262)
Increase in drafts payable 38,103 9,614
Increase in accrued expenses and accounts payable 86,680 33,832
Increase/(decrease) in accrued interest payable 741 (1,327)
Increase in other liabilities 34,506 41,681
Net cash (used in)/provided by operating activities (185,077) 1,032,871Cash flows from investing activities
Net increase in short-term and interest bearing deposits (436,487) (485,851)
Purchases of AFS investment securities (4,152,670) (3,770,057)
Purchases of HTM investment securities (150,766) (49,621)
Proceeds from maturities, paydow ns, calls, and sales of AFS investment securities 3,580,242 1,964,384
Proceeds from maturities, paydow ns, and calls of HTM investment securities 474,371 99,145
Net (purchases)/redemptions of FHLB Stock (29,438) 25,608
Net increase in loans to members (3,438,129) (514,490)
Purchase of property, plant & equipment (294,275) (315,287)
Sale of property, plant & equipment 158,124 176,878
Increase in deposit to NCUSIF (28,493) (19,315)
Proceeds from REO sales 37,496 43,515
Net cash used in investing activities (4,280,025) (2,845,091)Cash flows from financing activities
Net increase in members' accounts - other 2,967,755 2,493,510
Net increase/(decrease) in members' accounts from issuance and maturity of CDs 740,610 (97,457)
Net increase in members' accounts from borrow ers' escrow 17,002 8,124
Net increase in securities sold under repurchase agreements 50,000 -
Proceeds from borrow ings 15,791,141 8,173,283
Repayment of notes payable (15,042,141) (8,806,873)
Net cash provided by financing activities 4,524,367 1,770,587Net increase/(decrease) in cash 59,265 (41,633)
Cash at beginning of year 307,231 348,864
Cash at end of year 366,496$ 307,231$
Additional cash flow information:
Interest paid 657,249$ 680,044$
Transfers from loans to other real estate 77,082 88,219
The accompanying notes (beginning on page 7) are an integral part of these consolidated financial statements.
Years Ended December 31
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Note 1: Summary of Significant Accounting Policies
OrganizationNavy Federal Credit Union is a member-owned, not-for-profit financial institution formed to provide avariety of savings and lending programs to those individuals in its field of membership, whichincludes military and civilian personnel who are or were employed by the Department of Defense andtheir families.
Basis of Presentation and ConsolidationThe consolidated financial statements include the accounts of Navy Federal Credit Union and itsconsolidated entities presented in accordance with accounting principles generally accepted in theUnited States of America (GAAP). Navy Federal Credit Union consolidates its majority-owned andcontrolled entities. All significant intercompany accounts and transactions are eliminated inconsolidation.
Navy Federal Financial Group (NFFG) is a credit union service organization wholly owned by NavyFederal Credit Union that provides investment, insurance and other financial services to members ofNavy Federal Credit Union. Navy Federal Brokerage Services and Navy Federal Asset Managementare wholly-owned subsidiaries of NFFG. In this Annual Report, Navy Federal Credit Union and itsconsolidated entities are called Navy Federal.
Navy Federal evaluated subsequent events through the date these financial statements were issued,March 28, 2013.
Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues andexpenses and the disclosure of contingent assets and liabilities in the consolidated financial statementsand accompanying notes. Actual results could differ from those estimates.
Business CombinationsThe Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805-10-05, Business Combinations, requires that all business combinations be accounted for by applyingthe acquisition method. Accordingly, Navy Federal recognizes assets obtained and liabilities assumedin a business combination at fair value on the acquisition date and includes the results of operations ofthe acquired entity on its Consolidated Statements of Income from the acquisition date. Navy Federalalso recognizes as goodwill the excess of acquisition price over the fair value of net assets acquired.
CashFor purposes of the consolidated financial statements, cash includes cash and balances due from banksand other credit unions.
Short-Term InvestmentsFor purposes of the consolidated financial statements, short-term investments include federal fundssold and securities purchased under agreements to resell, all of which have original maturities of 90days or less. As of December 31, 2012 and 2011, all short-term investments were carried at cost,which approximated fair value.
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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SecuritiesInvestment securities are classified as held-to-maturity (HTM) or available-for-sale (AFS) inaccordance with ASC 320-10, Investments—Debt and Equity Securities. Investments classified asHTM are carried at cost, adjusted for the amortization of premiums and accretion of discounts.Management has the ability and intent to hold these securities to maturity.
Securities classified as AFS are carried at fair value, with any unrealized gains and losses recorded asaccumulated other comprehensive income, which is a separate component of members’ equity (seeNote 3 for details). Gains and losses on dispositions are computed using the specific identificationmethod.
Navy Federal evaluates its securities for other-than-temporary impairment (OTTI) in accordance withASC 320-10-35, Investments—Debt and Equity Securities. An investment is impaired when its fairvalue is less than its amortized cost basis. Navy Federal considers an OTTI to have occurred when it(a) has the intent to sell the debt security, (b) is more likely than not that Navy Federal will be requiredto sell the debt security before its anticipated recovery, or (c) does not expect to recover the entireamortized cost basis of the security even if Navy Federal does not intend to sell the security.
In order to determine whether the entire amortized cost basis of the security can be recovered,(condition (c) above), Navy Federal compares the present value of cash flows expected to be collectedfrom the security with the amortized cost basis of the security and considers (1) the length of time andthe extent to which the fair value has been less than cost, (2) adverse conditions specifically related tothe security or specific industry, (3) the volatility of the security and its expected cash flows, (4)changes in ratings of the issuer, and (5) materiality.
Declines in fair value deemed OTTI attributable to credit quality are recognized in earnings anddeclines in fair value related to other factors are recognized in Accumulated other comprehensiveincome.
In accordance with ASC 860-10, Transfers and Servicing, repurchase (reverse repurchase) agreementsare treated as financing (investment) transactions and are carried at the amounts at which the securitieswere initially acquired or sold. Navy Federal takes title to securities purchased under reverserepurchase agreements, monitors the fair value of the underlying securities, (which are primarily U.S.government and federal agency securities) and requests additional collateral when appropriate.
Mortgage Loans Awaiting SaleASC 825-10-25, Financial Instruments — Fair Value Option, permits entities to elect to measuremany financial instruments and certain other items at fair value. Once elected, the decision to measurefinancial instruments at fair value is irrevocable and subsequent changes to estimated fair value arerecognized on the Consolidated Statements of Income. Navy Federal elects the fair value option formortgage loans awaiting sale (MLAS). MLAS are sold with the mortgage servicing rights retained byNavy Federal. Loans are removed from the Consolidated Statements of Financial Condition as assetsand sales treatment is applied when, pursuant to ASC 860-10 Transfers and Servicing, the conditionsfor sale of financial assets are met.
LoansLoans, except for MLAS, are stated at the amount of unpaid principal less an allowance for loanlosses. Interest on loans is recognized on an accrual basis except for credit card interest, which is
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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recognized on the member’s statement date. Contractual interest on loans is calculated using thesimple-interest method on the principal amount outstanding except for credit cards. Interest on creditcards is calculated by applying the periodic rate to the average daily balance outstanding. Accrual ofinterest on all loans is discontinued when management believes collectability is uncertain or paymentsof principal or interest are past due by more than 90 days. These loans are placed in non-accrual statusand the interest is accounted for on a cash basis until the loans return to accrual status. Loans arereturned to accrual status when all the principal and interest amounts contractually due are broughtcurrent and future payments are reasonably assured. Fees and costs for loan products are deferred andamortized over the life of the loans under ASC 310-20, Receivables–Nonrefundable Fees and OtherCosts.
Allowance for Loan LossesNavy Federal accrues estimated losses in accordance with ASC 450, Contingencies. The allowance forloan losses is established through a provision for loan losses charged to expense. Loan principal ischarged against the allowance for loan losses when management believes that the collectability of theamount is unlikely; subsequent recoveries are credited to the allowance for loan losses. Navy Federal’sloan portfolio consists mainly of large groups of smaller balance homogeneous loans that arecollectively evaluated for impairment. The allowance for loan losses is maintained at a level that, inmanagement’s judgment, is sufficient to absorb losses inherent in the portfolio based on evaluations ofthe collectability of loans and prior loan loss experience. The evaluations take into consideration suchfactors as changes in the value of loans outstanding, prior history of charge-offs and recoveries, overalldelinquency and delinquencies by loan product, and current economic conditions and trends that mayaffect a borrower’s ability to pay. The allowance for loan losses is reviewed on a monthly basis andthe provision that is charged to expense is adjusted accordingly.
Acquired Credit-Impaired LoansASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, addressesaccounting for differences between contractual cash flows and cash flows expected to be collectedfrom an investor's initial investment in loans or debt securities acquired in a transfer. Acquired loansare considered to be impaired if Navy Federal does not expect to receive all contractually requiredcash flows and the loans have exhibited credit deterioration since origination. Credit deterioration canbe evidenced by lower FICO scores or past-due status. These credit-impaired loans are initiallyrecorded upon acquisition at fair value, determined by discounting expected future principal andinterest cash flows.
The excess of the future cash flows expected to be collected, initially measured at acquisition date,over Navy Federal’s recorded investment, is referred to as accretable yield. Accretable yield isrecognized as interest income over the remaining life of the loan using an effective yield methodology.The difference between contractually required payments at acquisition date, considering the impact ofprepayments and credit losses expected over the life of the loan, and the cash flows expected to becollected, is referred to as the non-accretable difference.
Navy Federal re-evaluates the performance and credit quality of these loans each quarter byaggregating individual loans that have common risk characteristics and estimating their expectedfuture cash flows. Decreases in expected or actual cash flows that are attributable, at least in part, tocredit quality are recognized as impairments through a charge to the provision for loan losses resultingin an increase in the allowance for loan losses. Conversely, increases in expected or actual cash flowsare treated as a recovery of any previously recorded allowance for loan losses, and to the extent
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applicable, a reclassification from non-accretable difference to accretable yield. Increases in expectedprepayments not attributable to credit quality are treated as a reduction in contractual cash flowsexpected to be collected and a reduction of projections of contractual cash flows, such that the non-accretable difference is not affected, but instead the effective interest yield is reduced prospectively.
Navy Federal’s acquired credit-impaired loans are accounted for in pools. Loans deemed asuncollectible on an individual basis remain in the pool and are not reported as charge-offs. Disposalsof loans, which may include sales or foreclosures, result in removal of the loan from the pool at itscarrying amount. See Note 6 for details.
Troubled Debt RestructuringsA troubled debt restructuring (TDR) is a loan in which Navy Federal has granted a concession that itwould not otherwise consider to a member experiencing financial difficulty. The types of concessionsthat Navy Federal grants as part of a TDR primarily include term extensions and interest ratereductions. TDR loans are accounted for in accordance with ASC 310-40, Troubled DebtRestructurings by Creditors. See Note 5 for details.
Property, Plant & EquipmentLand is carried at cost. Buildings, furniture, fixtures, equipment, computer software, and capitalizedinformation technology (IT) projects are carried at cost less accumulated depreciation andamortization, which are computed on a straight-line basis over the assets' estimated useful lives.Leasehold improvements are carried at cost less accumulated amortization and are amortized over thelease term or the useful life of the improvement, whichever is shorter.
Navy Federal uses the straight-line method to account for its operating leases. Under this method,Navy Federal divides the total contractual rent by the total term of the lease. The average monthly rentis recorded as rent expense and the remaining rent amount is deferred. Navy Federal reviews itsoperating leases annually for the existence of asset retirement obligations that should be accruedpursuant to ASC 410-20, Asset Retirement Obligations.
NCUSIF DepositThe deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with theFederal Credit Union Act and the National Credit Union Administration (NCUA) regulations, whichrequire the maintenance of a deposit by each credit union in an amount equal to one percent of itsinsured shares. The deposit would be refunded to Navy Federal if its insurance coverage is terminatedor the operations of the fund are transferred from the NCUA Board.
GoodwillGoodwill represents the excess of purchase price over the fair value of net assets acquired in businesscombinations. ASC 350-20, Intangible –– Goodwill and Other, provides that intangible assets withfinite useful lives be amortized and that goodwill and intangible assets with indefinite lives not beamortized, but rather be evaluated at least annually for impairment. Navy Federal evaluates goodwill
Useful Life
Buildings 40 years
Equipment, furniture and fixtures 5 to 7 years
Computer equipment 3 years
Computer softw are 5 years
Capitalized IT projects 5 years
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for impairment at the reporting unit level on an annual basis, or more frequently should events orchanges in circumstances occur that would more likely than not reduce the fair value of a reportingunit below its carrying amount. Impairment exists when the carrying amount of goodwill exceeds itsimplied fair value. See Note 14 for details.
Derivative Financial InstrumentsIn accordance with ASC 815, Derivatives and Hedging, all derivative financial instruments arerecognized as Other assets or Other liabilities on the Consolidated Statements of Financial Conditionat fair value. See Note 10 for details.
Pension Accounting and Retirement Benefit PlansNavy Federal has defined benefit pension plans, 401(k) and 457(b) savings plans and a non-qualifiedsupplemental retirement plan. Navy Federal also provides a contributory group medical plan forretired employees. Navy Federal accounts for its defined benefit pension plans in accordance withASC 715, Compensation –– Retirement Benefits. See Note 17 for details.
Income TaxesPursuant to the Federal Credit Union Act, Navy Federal is exempt from the payment of federal andstate income taxes. NFFG is a limited liability corporation, and thus is an entity “disregarded forfederal tax purposes” under the Internal Revenue Service Revenue Ruling.
DividendsDividend rates on members’ accounts are set by the Board of Directors and dividends are charged toexpense. Dividends on all share products are paid monthly.
ReclassificationsCertain amounts in the prior year have been reclassified to conform to the current year presentation.
New Accounting PronouncementsIn April 2011, the FASB issued Accounting Standards Update (ASU) 2011-02, A Creditor’sDetermination of Whether a Restructuring Is a Troubled Debt Restructuring, effective for the yearended December 31, 2012. The purpose of this ASU was to address diversity in practice issues andhelp creditors in determining whether a creditor has granted a concession and whether a debtor isexperiencing financial difficulties for the purpose of determining whether a restructuring constitutes aTDR. The adoption of this ASU did not significantly impact Navy Federal’s consolidated financialstatements.
In April 2011, the FASB issued ASU 2011-3, Transfers and Servicing: Reconsideration of EffectiveControl for Repurchase Agreements, effective for the year ended December 31, 2012. This ASUremoved one of the criteria considered to meet FASB’s definition of effective control, one of thefactors required for sales accounting treatment of repurchase agreements. The adoption of this ASUdid not impact Navy Federal’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair ValueMeasurement and Disclosure Requirements in U.S. GAAP and IFRSs, effective for the year endedDecember 31, 2012. The adoption of this ASU did not impact Navy Federal’s consolidated financialstatements.
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In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, effective forthe year ended December 31, 2012. It requires that all items that meet the definition of comprehensiveincome be reported in a financial statement for the period recognized. Navy Federal has chosen toreport its components of comprehensive income in a separate statement. See the ConsolidatedStatements of Comprehensive Income.
Note 2: Restrictions on Cash
Navy Federal maintained a cash balance of $6.7 million as of December 31, 2011 with corporate creditunions in the form of membership shares. These shares were not insured by the National Credit UnionShare Insurance Fund and required three years notice prior to withdrawal. Navy Federal made arequest to withdraw these shares in 2009 and subsequently closed out its membership with thecorporate credit unions during 2012, leaving a zero balance of membership shares as of December 31,2012. As of December 31, 2011, Navy Federal still maintained a cash balance of $50,000 as collateralfor a line of credit with a corporate credit union, which was also withdrawn during 2012, leaving azero balance as of December 31, 2012.
All restricted cash amounts except membership capital shares are classified as Other assets on theConsolidated Statements of Financial Condition.
NFFG had $1.0 million and $1.1 million set aside in restricted cash at December 31, 2012 and 2011,respectively, as part of the agreement it entered into with Charlie Mac, LLC. See Note 8 for details.
Note 3: Investments
Navy Federal's HTM and AFS securities as of December 31, 2012 and 2011 were as follows:
(dollars in thousands)
December 31, 2012
Held-to-maturity
U.S. government and federal agency securities 2.47% 440,256$ 15,612$ -$ 455,868$
Residential mortgage-backed securities 0.62% 29,496 126 - 29,622
Total held-to-maturity 469,752 15,738 - 485,490
Available-for-sale
U.S. government and federal agency securities 2.30% 5,998,082 304,812 (1,106) 6,301,788
Residential mortgage-backed securities 2.12% 4,512,747 163,130 (1,884) 4,673,993
Commercial mortgage-backed securities 2.90% 13,969 1,019 - 14,988
Bank notes 2.33% 1,525,505 55,037 (791) 1,579,751
Municipal securities 3.33% 95,952 2,412 (289) 98,075
Mutual funds -0.07% 10,939 - (11) 10,928
Total available-for-sale 12,157,194 526,410 (4,081) 12,679,523
Total securities 12,626,946$ 542,148$ (4,081)$ 13,165,013$
Weighted
Average
Yield Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
(Losses)
Estimated Fair
Value
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(dollars in thousands)
December 31, 2011
Held-to-maturity
U.S. government and federal agency securities 2.42% 743,312$ 19,694$ -$ 763,006$
Residential mortgage-backed securities 0.68% 51,217 121 (26) 51,312
Total held-to-maturity 794,529 19,815 (26) 814,318
Available-for-sale
U.S. government and federal agency securities 2.35% 5,480,308 248,096 - 5,728,404
Residential mortgage-backed securities 2.95% 4,392,581 194,872 (2,229) 4,585,224
Commercial mortgage-backed securities 2.90% 13,964 817 - 14,781
Bank notes 2.67% 855,608 8,902 (6,233) 858,277
Total available-for-sale 10,742,461 452,687 (8,462) 11,186,686
Total securities 11,536,990$ 472,502$ (8,488)$ 12,001,004$
Estimated Fair
Value
Weighted
Average
Yield Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Navy Federal sold $2.0 billion and $0.8 billion of AFS securities during the years ended December 31,2012 and 2011, respectively. Gross proceeds from those sales totaled $2.1 billion and $0.9 billion forthe years ended December 31, 2012 and 2011, respectively. Gross realized gains of $42.6 million andgross realized losses of $2.0 million were included in earnings for the year ended December 31, 2012.Gross realized gains of $32.4 million and gross realized losses of $10.0 million were included inearnings for the year ended December 31, 2011.
The maturities of Navy Federal's securities as of December 31, 2012 and 2011 were as follows:
(dollars in thousands)
December 31, 2011 Amortized Cost Fair Value
Securities:
Due in one year or less 402,536$ 404,607$
Due after one year through five years 3,277,547 3,378,149
Due after five years through ten years 3,524,883 3,694,429
Due after ten years 4,332,024 4,523,819
11,536,990$ 12,001,004$
(dollars in thousands)December 31, 2012 Amortized Cost Fair Value
Securities:
Due in one year or less 489,599$ 495,428$
Due after one year through five years 4,170,393 4,397,135
Due after five years through ten years 3,363,763 3,506,540
Due after ten years 4,603,191 4,765,910
12,626,946$ 13,165,013$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Navy Federal held $403.8 million and $374.4 million, respectively, of the Federal Home Loan Banks(FHLB) of San Francisco and Atlanta stock as of December 31, 2012 and 2011. FHLB stock is arestricted investment and is carried at cost, which is par value. As a member of the FHLB, NavyFederal has access to a $9.5 billion line of credit facility.
All debt securities were reviewed individually to determine whether the unrealized losses associatedwith them were caused by an other-than-temporary decline in the value of such investments. NavyFederal makes a determination of whether unrealized losses are other-than-temporary based on thefollowing factors: whether Navy Federal intends to sell or hold the security until its costs can berecovered, the nature of the security, the portion of unrealized losses that are attributable to creditlosses, and the financial condition of the issuer of the security.
Navy Federal does not intend to sell nor would Navy Federal be, more likely than not, required to sellthese securities before recovering its amortized cost basis. The unrealized losses associated with theseinvestments are not a result of a change in the credit quality of the issuer; rather, the losses arereflective of changing market interest rates. Therefore, Navy Federal expects to recover the entire costbasis of these securities.
There were 32 and 45 AFS securities in an unrealized loss position at December 31, 2012 and 2011,respectively. Navy Federal did not hold any HTM securities in an unrealized loss position atDecember 31, 2012, but had four as of December 31, 2011. The following table presents theseinvestments at fair value and their associated gross unrealized losses broken down by the amount oftime the investments have been in a loss position:
During the years ended December 31, 2012 and 2011, there were no declines in the fair value ofsecurities held by Navy Federal that were considered other-than-temporary.
As of December 31, 2012, Navy Federal had $53.5 million in investments pledged as collateral forborrowed funds under repurchase agreements. As of December 31, 2011, Navy Federal had no
(dollars in thousands)
December 31, 2012 Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses
Available-for-sale securities 790,095$ (3,873)$ 30,853$ (208)$ 820,948$ (4,081)$
Held-to-maturity securities - - - - - -
Total securities 790,095$ (3,873)$ 30,853$ (208)$ 820,948$ (4,081)$
Less than 12 months 12 months or longer Total
(dollars in thousands)
December 31, 2011 Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses
Available-for-sale securities 926,683$ (8,018)$ 40,377$ (444)$ 967,060$ (8,462)$
Held-to-maturity securities 6,547 (23) 1,333 (3) 7,880 (26)
Total securities 933,230$ (8,041)$ 41,710$ (447)$ 974,940$ (8,488)$
Less than 12 months 12 months or longer Total
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outstanding repurchase agreements.
As of December 31, 2012, Navy Federal did not maintain any deposits or membership capital shares incorporate credit unions. The following table shows Navy Federal's deposits and membership capitalshares in corporate credit unions as of December 31, 2011:
Note 4: Loans to Members and Allowance for Loan Losses
Navy Federal originates mortgage loans both for sale and for its own portfolio. During 2012 and2011, Navy Federal originated $10.3 billion and $5.1 billion, respectively, of first mortgage loans forits members, of which $5.5 billion and $2.8 billion, respectively, were sold.
Gains and losses on the sale of MLAS are classified on the Consolidated Statements of Income asGain on mortgage loan sales, net. $63.2 million and $31.7 million of unrealized gains on MLAS forthe years ended December 31, 2012 and 2011, respectively, are included in Gain on mortgage loansales, net.
$32.3 billion and $29.8 billion of originated mortgages were being serviced by Navy Federal atDecember 31, 2012 and 2011, respectively.
(dollars in thousands) 2011
Membership capital shares 6,741$
Cash on deposit in money market accounts 7
Cash collateral 50
Total 6,798$
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The composition of Navy Federal's loans to members as of December 31, 2012 and 2011 was asfollows:
(dollars in thousands ) 2012 2011
Consumer loans
Auto 6,868,357$ 5,538,341$
Unamortized cost 13,861 12,655
Other 2,590,064 2,334,204
Checking lines of credit (CLOC) 273,888 265,833
Federal education loans 399,303 469,773
Credit card loans 6,801,251 5,783,198
Mortgage loans
Mortgage Loan Investments
Fixed rate 13,652,956 12,686,959
Variable rate 492,450 405,877
In process 182 7,468
Unamortized deferred income (84,295) (86,174)
Mortgage Loans Aw aiting Sale
Fixed rate 1,379,681 653,951
Unrealized gains/losses 63,242 31,734
In process (55) 7,055
Unamortized deferred income - -
Equity loans
Fixed equity 2,085,339 2,526,383
Unamortized cost 4,031 7,692
Home equity lines of credit 712,064 837,060
Unamortized cost 4,809 4,628
35,257,128 31,486,637
Less: Allow ance for loan losses 643,336 602,388
Total loans to members 34,613,792$ 30,884,249$
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The following tables present credit quality indicators by loan product type: consumer loans, credit cardloans, mortgage loans and equity loans.
Navy Federal uses collateral type and FICO score as the credit quality indicators for its consumerloans, which consisted of the following as of December 31, 2012 and 2011:
Navy Federal uses delinquency status and FICO score as the credit quality indicators for its credit cardloans, which consisted of the following as of December 31, 2012 and 2011:
(dollars in thousands)
Collateral Group Less than 610
Greater than or
equal to 610 Grand Total
Auto 1,411,322$ 5,455,114$ 6,866,436$
Other Collateral 188,675 502,893 691,568
Unsecured 409,987 1,476,162 1,886,149
Total 2,009,984$ 7,434,169$ 9,444,153$
As of December 31, 2012
FICO Score
* Excludes fair value adjustments associated with the acquired portfolio of $(1.3) million, deferredexpense of $13.9 million, business, net of $16.0 million, CLOC of $272.6 million, lease, net of$0.3 million and federal education of $399.3 million
(dollars in thousands)
Collateral Group Less than 610
Greater than or
equal to 610 Grand Total
Auto 1,208,278$ 4,334,268$ 5,542,546$
Other Collateral 186,297 495,840 682,137
Unsecured 339,457 1,298,576 1,638,033
Total 1,734,032$ 6,128,684$ 7,862,716$
* Excludes fair value adjustments associated with the acquired portfolio of $(5.4) million, deferredexpense of $12.7 million, business, net of $10.4 million, CLOC of $265.3 million, lease, net of$2.4 million and federal education of $469.8 million
As of December 31, 2011
FICO Score
(dollars in thousands)
Delinquency Status Less than 610
Greater than or
equal to 610 Grand Total
<=60 days 1,035,974$ 5,701,130$ 6,737,104$
>60 days 62,682 4,552 67,234
Total 1,098,656$ 5,705,682$ 6,804,338$
As of December 31, 2012
FICO Score
* Excludes fair value adjustments associated with the acquired portfolio of $(3.1) million
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Navy Federal uses estimated current LTV ratios and FICO score as the credit quality indicators for itsmortgage loans, which consisted of the following as of December 31, 2012 and 2011:
(dollars in thousands)
Delinquency Status Less than 610
Greater than or
equal to 610 Grand Total
<=60 days 842,934$ 4,886,657$ 5,729,591$
>60 days 52,591 4,579 57,170
Total 895,525$ 4,891,236$ 5,786,761$
* Excludes fair value adjustments associated with the acquired portfolio of $(3.6) million
As of December 31, 2011
FICO Score
(dollars in thousands)
Estimated Current LTV Less than 610
Greater than or
equal to 610 Grand Total
Indeterminate ** 107,608$ 114,464$ 222,072$
<80% 232,576 6,295,655 6,528,231
80%-100% 190,414 4,294,133 4,484,547
100+% 206,398 2,727,492 2,933,890
Total 736,996$ 13,431,744$ 14,168,740$
As of December 31, 2012
FICO Score
* Excludes MLAS of $1,442.9 million, fair value adjustments associated with the acquiredportfolio of $(23.3) million, deferred income, net of $(84.1) million and loans in process of $0.2million
** For Indeterminate category, 65% of the loan balances are associated with the acquiredportfolio
(dollars in thousands)
Estimated Current LTV Less than 610
Greater than or
equal to 610 Grand Total
Indeterminate ** 92,156$ 146,683$ 238,839$
<80% 281,759 6,979,739 7,261,498
80%-100% 186,673 3,511,636 3,698,309
100+% 157,143 1,729,231 1,886,374
Total 717,731$ 12,367,289$ 13,085,020$
** For Indeterminate category, 80% of the loan balances are associated with the acquiredportfolio
As of December 31, 2011
FICO Score
* Excludes MLAS of $692.7 million, fair value adjustments associated with the acquired portfolioof $(22.1) million, deferred income, net of $(85.9) million, loans in process of $7.5 million andparticipation loans of $30.1 million
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Navy Federal uses delinquency status and FICO score as the credit quality indicators for its equityloans, which consisted of the following as of December 31, 2012 and 2011:
(dollars in thousands)
Delinquency Status Less than 610
Greater than or
equal to 610 Grand Total
Performing 318,057$ 2,422,559$ 2,740,616$
60+ days & foreclosure 58,429 15,135 73,564
Total 376,486$ 2,437,694$ 2,814,180$
As of December 31, 2012
FICO Score
* Excludes fair value adjustments associated with the acquired portfolio of $(17.2) million, deferredexpense of $8.8 million and loans in process of $0.4 million
(dollars in thousands)
Delinquency Status Less than 610
Greater than or
equal to 610 Grand Total
Performing 387,553$ 2,896,058$ 3,283,611$
60+ days & foreclosure 81,965 18,645 100,610
Total 469,518$ 2,914,703$ 3,384,221$
As of December 31, 2011
FICO Score
* Excludes fair value adjustments associated with the acquired portfolio of $(20.9) million, deferredexpense of $12.3 million and loans in process of $0.1 million
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Changes in the allowance for loan losses during the years ended December 31, 2012 and 2011 were asfollows:
(dollars in thousands) Consumer Credit Cards Real Estate Other TOTAL
Allowance for credit losses:
Balance, beginning of year 210,161$ 217,269$ 174,714$ 244$ 602,388$
Provision charged to operations 181,431 167,280 106,478 - 455,189
Loans charged off (195,995) (161,468) (115,254) 3 (472,715)
Recoveries 42,747 9,263 6,464 - 58,474
Balance, end of year 238,344$ 232,344$ 172,402$ 247$ 643,336$
Ending balance: individually
evaluated for impairment 63,864$ 51,906$ 58,389$ -$ 174,159$
Ending balance: collectively
evaluated for impairment 166,784$ 180,438$ 105,888$ 247$ 453,356$
Ending balance: loans acquired
deteriorated credit quality 7,696$ -$ 8,125$ -$ 15,821$
Loan amount (excluding allowance):
Ending balance: individually
evaluated for impairment 254,513$ 142,756$ 465,964$ -$ 863,233$
Ending balance: collectively
evaluated for impairment 9,881,154$ 6,658,495$ 17,791,561$ -$ 34,331,210$
Ending balance: loans acquired
deteriorated credit quality 9,806$ -$ 52,879$ -$ 62,685$
As of December 31, 2012
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Accrual of interest on loans is discontinued when management believes collectability is uncertain orpayments of principal or interest are past due by more than 90 days. Navy Federal had non-accrualloans totaling $261.3 million and $297.9 million in unpaid principal balance at December 31, 2012and 2011, respectively. If interest on those loans had been accrued at original contracted rates, interestincome as reported on the Consolidated Statements of Income would have been approximately $24.6million and $21.4 million higher for 2012 and 2011, respectively. Loans on non-accrual status bycollateral type as of December 31, 2012 and 2011 were as follows:
The aging of delinquent loans by collateral type as of December 31, 2012 and 2011 was as follows:
(dollars in thousands) Consumer Credit Cards Real Estate Other TOTAL
Allowance for credit losses:
Balance, beginning of year 228,353$ 228,226$ 159,319$ 242$ 616,140$
Provision charged to operations 162,589 166,879 121,193 - 450,661
Loans charged off (221,934) (187,153) (110,747) 2 (519,832)
Recoveries 41,153 9,317 4,949 - 55,419
Balance, end of year 210,161$ 217,269$ 174,714$ 244$ 602,388$
Ending balance: individually
evaluated for impairment 7,141$ 32,873$ 41,343$ -$ 81,357$
Ending balance: collectively
evaluated for impairment 195,704$ 184,396$ 126,733$ 244$ 507,077$
Ending balance: loans acquired
deteriorated credit quality 7,316$ -$ 6,638$ -$ 13,954$
Loan amount (excluding allowance):
Ending balance: individually
evaluated for impairment 84,053$ 150,067$ 439,356$ -$ 673,476$
Ending balance: collectively
evaluated for impairment 8,522,590$ 5,633,131$ 16,581,637$ -$ 30,737,358$
Ending balance: loans acquired
deteriorated credit quality 14,163$ -$ 61,640$ -$ 75,803$
As of December 31, 2011
(dollars in thousands) 2012 2011
Consumer 60,388$ 60,995$
Real estate 200,950 236,925
261,338$ 297,920$
(dollars in thousands) 1 to < 2 months
delinquent
2 to < 6 months
delinquent
6 to < 12 months
delinquent
>= 12 months
delinquent Total
Consumer 104,243$ 97,900$ 4,349$ 427$ 206,919$
Credit card 48,834 63,007 3 - 111,844
Real estate 121,760 92,013 49,287 60,253 323,313
Total 274,837$ 252,920$ 53,639$ 60,680$ 642,076$
As of December 31, 2012
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Navy Federal acts as servicer on loans sold to investors. Navy Federal’s responsibilities as servicerincludes remitting monthly principal and interest payments, maintaining escrow deposits, lossmitigation activities, foreclosure activities, and funding servicing advances that have not yet beencollected from the borrower. Navy Federal recognizes advances that are reimbursable as Accountsreceivable on its Consolidated Statements of Financial Condition. Advances as of December 31, 2012and December 31, 2011 were as follows:
Note 5: Troubled Debt Restructurings (TDRs)
TDRs are individually evaluated for impairment beginning in the month of restructuring. Impairmentis measured as the difference between the net carrying amount of the loan (less any fees received toaffect the restructuring) and the modified future expected cash flows discounted at the loan’s effectiverate.
The following table summarizes the financial impact in terms of year-end impairment recognized onTDRs during the years ended December 31, 2012 and 2011:
In subsequent periods, income is recognized based on a loan’s modified expected cash flows andrevised effective rate. Additional impairment is recognized for TDRs that exhibit further creditdeterioration after modification. For the year ended December 31, 2012, TDRs that were more than 60days delinquent within the first 12 months totaled $5.3 million, which included $0.2 million of real
(dollars in thousands) 1 to < 2 months
delinquent
2 to < 6 months
delinquent
6 to < 12 months
delinquent
>= 12 months
delinquent Total
Consumer 102,316$ 98,506$ 3,781$ 346$ 204,949$
Credit card 46,384 52,907 9 - 99,300
Real estate 154,990 127,287 58,879 52,865 394,021
Total 303,690$ 278,700$ 62,669$ 53,211$ 698,270$
As of December 31, 2011
(dollars in thousands ) 2012 2011
Escrow advances 13,896$ 13,207$
Principal and interest advances 2,395 1,474
Other advances 14,988 13,444
31,279$ 28,125$
(dollars in thousands)
2012 2011 2012 2011 2012 2011 2012 2011
Consumer 4,198$ 1,928$ 18,576$ 83$ 26,200$ 1,138$ -$ -$
Credit card - - 28,845 17,626 - - 3,120 771
Real estate 15,931 9,232 2,493 2,015 683 35 - -
Total 20,129$ 11,160$ 49,914$ 19,724$ 26,883$ 1,173$ 3,120$ 771$
Due Date Extension
Impairment Amount at Year EndInterest Rate Reduction &
Term ExtensionInterest Rate Reduction Term Extension
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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estate loans, $4.3 million of consumer loans and $0.8 million of credit card loans. For the year endedDecember 31, 2011, TDRs that were more than 60 days delinquent within the first 12 months totaled$1.3 million, which included $0.1 million of real estate loans, $0.5 million of consumer loans and $0.7million of credit card loans, respectively.
Cumulative total loan amounts, related impairment, average loan balances and interest recognized onNavy Federal’s TDRs for the years ended December 31, 2012 and 2011 were as follows:
At December 31, 2012 and 2011, the amount of loan commitments available to members that hadpreviously been through a TDR was $43.0 million and $28.4 million, respectively.
Note 6: Acquired Credit-Impaired Loans
Navy Federal applies ASC 310-30, Loans and Debt Securities Acquired with Deteriorated CreditQuality, to account for the credit-impaired loans in connection with the acquisition of USAFCU onOctober 1, 2010. The carrying value of these acquired credit-impaired loans is included in Loans tomembers on the Consolidated Statements of Financial Condition, and their outstanding balances atDecember 31 were as follows:
For the years ended December 31, 2012 and 2011, Navy Federal recognized $3.1 million and $3.5million, respectively, of interest on acquired credit-impaired loans. The average balance of acquiredcredit-impaired loans as of December 31, 2012 and 2011 was $43.2 million and $55.6 million,respectively.
Decreases in cash flows expected to be received on these loans resulted in increases in the allowancefor loan losses of $0.9 million and $6.1 million as of December 31, 2012 and 2011, respectively.During 2012 and 2011, previously established allowances were reduced by $4.4 million and $5.0million, respectively, because either cash flow received was significantly greater than previously
(dollars in thousands)
Interest Impairment
Consumer 254,513$ 169,283$ 24,433$ 63,864$
Credit card 142,756 146,411 13,354 51,906
Real estate 465,964 452,660 13,400 58,389
Total 863,233$ 768,354$ 51,187$ 174,159$
Average
BalanceLoan Amount
2012
(dollars in thousands)
Loan Amount
Average
Balance Interest Impairment
Consumer 84,053$ 106,659$ 6,742$ 7,141$
Credit card 150,067 127,623 8,322 32,873
Real estate 439,356 406,515 9,908 41,343
Total 673,476$ 640,797$ 24,972$ 81,357$
2011
(dollars in thousands) 2012 2011
Outstanding balance $ 81,067 $ 81,516
Carrying amount 38,814 47,560
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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expected or it was probable that there would be a significant increase in expected cash flows.
Accretable yield activity for acquired credit-impaired loans was as follows for the years endedDecember 31, 2012 and 2011:
Note 7: Mortgage Servicing Rights
Navy Federal capitalizes mortgage servicing rights (MSRs) when mortgage loans are sold and NavyFederal retains the right to service the loans. Navy Federal records MSRs at fair value with changes infair value recorded and separately disclosed in the Consolidated Statement of Income. MSR valuationis sensitive to interest rate and prepayment risk.
The changes in fair value of MSRs during 2012 and 2011 were as follows:
Navy Federal obtains the fair value of its MSRs from a third-party service organization. The serviceorganization determines the fair value by discounting projected net servicing cash flows of theremaining servicing portfolio. The valuation model used by the service organization considers marketloan prepayment predictions and other economic factors. The fair value of MSRs is mostly affected bychanges in mortgage interest rates since rate changes cause the loan prepayment acceleration factors toincrease or decrease.
Navy Federal received $61.7 million and $57.5 million during the years ended December 31, 2012 and2011, respectively, in mortgage loan servicing fees. Navy Federal's servicing fees are priced based onagency-required minimums. Late charges and miscellaneous fees are recognized as income whenreceived and totaled $1.4 million and $1.1 million during the years ended December 31, 2012 and2011, respectively.
As of December 31, 2012 and 2011, the amount of loans serviced by Navy Federal for outsideinvestors was $16.7 billion and $15.9 billion, respectively.
(dollars in thousands)2012 2011
Balance, beginning of period $ 28,770 $ 38,328
Accretion (4,524) (4,889)
Net reclassif ications* 2,566 (1,446)
Removals (4,106) (3,223)
Balance, end of period 22,706$ 28,770$
* Includes transfers between accretable and non-accretable as well asNavy Federal and USAFCU loan IDs.
Accretable Yield
(dollars in thousands) 2012 2011
Balance, beginning of period 142,368$ 161,150$
Originations 52,773 32,476
Payoffs/Maturities (39,642) (21,426)
(Loss) on changes in value of MSRs (11,410) (29,832)
Balance, end of period 144,089$ 142,368$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The key economic assumptions used in determining the fair value of MSRs at December 31, 2012 and2011 were as follows:
Note 8: Credit-Enhanced Loans
In February 2004, Navy Federal entered into an agreement with NFFG and Charlie Mac, LLC, aninvestor subsidiary of U.S. Central Credit Union, in which Charlie Mac could purchase up to $200.0million of credit-enhanced mortgage loans from Navy Federal, on which Navy Federal retained theMSRs. Should a credit-enhanced loan default, Charlie Mac will recover the loan amount from NFFG.At inception, Navy Federal's maximum total exposure under the credit enhancement agreement was$8.5 million. Of that total, $1.0 million is set aside by NFFG as non-current restricted cash with adesignated financial institution. For the remaining amount of $7.5 million, Navy Federal issued anirrevocable, transferable standby letter of credit to Charlie Mac as part of the initial agreement. As ofDecember 31, 2012, the remaining maximum total exposure was $6.0 million. In 2004, the aggregateamount of credit-enhanced mortgage loans purchased by Charlie Mac had reached the $200.0 millionlimit. All loans purchased pursuant to the agreement had better FICO credit scores, loan-to-valueratios and debt-to-income ratios than required by the agreement at the time of origination. During 2012and 2011, no new loans were sold to Charlie Mac under this agreement.
The total principal balance of these loans as of December 31, 2012 and 2011 was $28.7 million and$46.3 million, respectively. Navy Federal has not accrued an estimated loss regarding the credit-enhanced mortgage loans, for it is not probable that a liability had been incurred at the date of thefinancial statements. Any liability reasonably expected to result from this agreement is not expected tobe material to Navy Federal.
Navy Federal sold mortgage loans to Freddie Mac under a loss-sharing agreement whereby NavyFederal agreed to indemnify Freddie Mac for losses related to higher loan-to-value (LTV) loans nothaving private mortgage insurance. Under this agreement, Navy Federal received proceeds of $618.9million and $745.4 million from the sale of mortgage loans during the years ended December 31, 2012and 2011, respectively. The balance of these loans as of December 31, 2012 and 2011 was $595.7million and $715.9 million, respectively. Under this contract, Navy Federal paid Freddie Mac $0.3million and $4.4 million in 2012 and 2011, respectively. As of December 31, 2012 and 2011, NavyFederal had accrued an estimated loss of $2.6 million and $3.1 million, respectively, to coveranticipated payments to Freddie Mac in 2013 and 2012. Navy Federal's estimated maximum futureexposure to Freddie Mac as of December 31, 2012 and 2011 was approximately $23.1 million and$17.0 million, respectively.
In August 2008, Navy Federal entered into a loss-sharing agreement with Fannie Mae whereby NavyFederal must indemnify Fannie Mae for certain loans having high LTVs. The balance of these loans asof December 31, 2012 and 2011 was $0.7 billion and $1.0 billion, respectively. Under this contract,Navy Federal paid Fannie Mae $20.3 million and $13.6 million in 2012 and 2011,
2012 2011
Weighted average life (years) 4.40 4.60
Prepayment rate 18.72% 17.93%
Yield to maturity discount rate 10.38% 10.37%
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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respectively. As of December 31, 2012 and 2011, Navy Federal had accrued an estimated loss of $25.3million and $16.6 million, respectively, to cover anticipated payments to Fannie Mae in 2013 and2012. Navy Federal's estimated maximum future exposure to Fannie Mae as of December 31, 2012and 2011 was approximately $87.3 million and $105.0 million, respectively.
Note 9: Real Estate Owned
Navy Federal obtains real estate owned (REO) through foreclosure proceedings or when a delinquentborrower chooses to transfer a mortgaged property in lieu of foreclosure. Navy Federal recognizesforeclosure expenses as incurred.
REO is classified as held-for-sale and initially recorded at fair value less estimated costs to sell (e.g.,brokers’ commissions, legal expenses, title transfer fees, and closing costs) at the time of acquisition.After acquisition, REO is carried at lower of cost or fair value. Holding costs such as insurance,maintenance, taxes and utility costs are expensed as incurred. Holding gains and losses are included inOther non-interest expense on the Consolidated Statements of Income.
The cumulative total balances of REO at December 31, 2012 and 2011 were as follows:
Note 10: Derivative Instruments and Economic Hedging Activities
Navy Federal is an active participant in the production of mortgage loans which are sold to investors inthe secondary market. This mortgage banking activity involves making mortgage loan commitments tomembers at specified interest rates. Navy Federal is exposed to changes in the value of its mortgageloan commitments as interest rates may change between the time that it enters into a mortgage loancommitment and the time that it ultimately delivers that mortgage loan to an investor. To mitigate itsinterest rate risk, Navy Federal enters into forward sales contracts at specified prices to delivermortgage loans to investors. These forward sales commitments act as an economic hedge against therisk of changes in the value of both the mortgage loan commitments and MLAS. As required by ASC815, Derivatives and Hedging, Navy Federal accounts for both the mortgage loan commitments andthe forward sales contracts as derivative instruments on its Consolidated Statements of FinancialCondition at fair value, with changes in fair value included in current earnings. These derivativeinstruments are economic hedges to which Navy Federal does not receive hedge accounting treatment.
The notional value of mortgage loan commitments totaled $1.7 billion and $0.7 billion, respectively,as of December 31, 2012 and 2011. The net unrealized gains and losses on these derivatives atDecember 31 were as follows:
(dollars in thousands) 2012 2011
Real Estate Ow ned (REO) 32,187$ 49,515$
Holding period gains/(losses) (16,943) (16,704)
Balance, end of period 15,244$ 32,811$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The mortgage loans awaiting sale totaled $1.4 billion and $0.7 billion as of December 31, 2012 and2011, respectively.
The notional value of forward sales contracts was $2.4 billion and $1.1 billion, respectively, as ofDecember 31, 2012 and 2011. All of these forward sales contracts are scheduled to settle within athree-month period and their note rates range between 2.5% and 4%. Management has the intent andability to fill the incremental balance of forward sales contracts over the open mortgage loancommitments with the balance of closed loans classified on the Consolidated Statements of FinancialCondition as Mortgage loans awaiting sale.
The unrealized gain or loss on these derivatives at December 31 was as follows:
(d o l la r s inth ous a nds ) 20 12 2011
G a in 1 ,4 02$ 25$
Lo s s (3 ,1 15 ) ( 7 ,337 )
Ne t (1 ,7 13 )$ ( 7 ,312 )$
Net unrealized gains of $33.4 million and net unrealized losses of $2.6 million during 2012 and 2011,respectively, are included in Gain on mortgage loan sales, net on the Consolidated Statements ofIncome.
Note 11: Legal Contingencies
Navy Federal is a party to various legal actions normally associated with financial institutions, theaggregate effect of which, in management’s and legal counsel’s opinion, would not be material toNavy Federal’s financial condition or results of operations.
Note 12: Commitments
In the normal course of business, Navy Federal enters into conditional commitments to meet thefinancing needs of its members. Unused commitments for loans to members are amounts which NavyFederal has agreed to lend a member as long as the member does not default on existing loans orviolate any condition of the loan agreement. Commitments generally have fixed expiration dates orother termination clauses. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cash requirements. NavyFederal uses the same credit policies in making commitments as it does for all loans to members and,accordingly, at December 31, 2012, the credit risk related to these commitments was similar to that onits existing loans.
(dollars inthousands) 2012 2011
Gain 39,858$ 16,172$
Loss (18) -
Net 39,840$ 16,172$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Unused commitment balances as of December 31, 2012 and 2011 were as follows:
Note 13: Property, Plant & Equipment
The following is a summary of Navy Federal's property, plant and equipment at December 31, 2012and 2011:
Navy Federal has obligations under a number of non-cancelable operating leases for premises. Thefuture minimum payments under the terms of the leases as of December 31, 2012 were:
Rent expense was $21.6 million and $20.9 million for the years ended December 31, 2012 and 2011,respectively.
Note 14: Goodwill and Other Intangible Assets
GoodwillNavy Federal recognizes the net assets acquired and liabilities assumed of acquired entities at
(dollars in thousands) 2012 2011
Credit cards 9,480,072$ 7,760,576$
Checking lines of credit 770,056 707,678
Home equity lines of credit 923,661 973,931
Pre-approved auto loans 249,953 187,930
Utility deposit guarantee programs 1,817 2,035
Letters of credit 7,870 7,820
Total 11,433,429$ 9,639,970$
(dollars in thousands) 2012 2011
Land and buildings 731,925$ 709,360$
Equipment, furniture and f ixtures 365,418 376,350
Computer softw are and capitalized IT projects 424,745 326,421
Leasehold improvements 106,599 110,088
Subtotal 1,628,687 1,522,219
Less: Accumulated depreciation (786,402) (692,356)
Total 842,285$ 829,863$
(dollars in thousands) Amount
2013 16,653$
2014 12,915
2015 10,195
2016 8,668
Thereafter 11,995
Total 60,426$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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estimated fair value as of the acquisition date, and those fair values are subject to refinement asinformation relative to the fair values at the date of acquisition becomes available. Navy Federalrecognized the excess of consideration over the fair value of net assets acquired in its acquisition ofUSAFCU on October 1, 2010 as goodwill in the amount of $43.7 million.
In accordance with the requirements of ASC 350-20, Goodwill and Other, goodwill is evaluated forimpairment at the organizational reporting level annually and upon any changes in circumstances thatcould likely result in reducing the fair value of a reporting unit below its carrying amount. NavyFederal performed qualitative assessments of goodwill as of September 30, 2012 and 2011, pursuant toASU 2011-08, Testing Goodwill for Impairment, and concluded that it was not likely that the fairvalue of any reporting unit was below its carrying amount, and therefore did not recognize anyimpairment charges.
The following table summarizes the carrying amount of goodwill that is classified as Goodwill andother intangible assets, net, on the Consolidated Statements of Financial Condition:
Other Intangible AssetsNavy Federals acquisition of USAFCU resulted in the recognition of a $2.0 million core depositintangible asset at October 1, 2010. Core deposit balances represent a favorable source of financing forfinancial institutions and a “core deposit intangible” asset represents the fair value of cost savingsderived from available core deposits acquired relative to the cost of alternative funding. The fair valueof $2.0 million recorded at October 1, 2010 was associated with money market accounts acquired fromUSAFCU.
The core deposit intangible is being amortized on a straight-line basis over its estimated remaininguseful life of four years. Amortization expense was $0.5 million during each of the years endedDecember 31, 2012 and 2011. The gross carrying amount, accumulated amortization and net carryingamount of the core deposit intangible were as follows at December 31st:
(dollars in thousands) 2012 2011
Gross carrying amount 2,040$ 2,040$
Accumulated amortization (1,148) (638)
Net carrying amount 892$ 1,402$
Amortization expense of the core deposit intangible for the years ended December 31, 2013 and 2014is estimated to be $0.5 million and $0.4 million, respectively.
(dollars in thousands)Carrying Value of
Goodw ill
December 31, 2010 58,650$
Post acquisition adjustment 9/30/2011 254
December 31, 2011 58,904
Other adjustment during 2012 1
December 31, 2012 58,905$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Note 15: Members’ Accounts
Interest rates on members' share accounts are set by Navy Federal's Board of Directors, based on anevaluation of current and future market conditions.
Member deposit accounts as of December 31, 2012 and 2011 were as follows:
Overdrawn accounts totaled $23.7 million and $11.0 million as of December 31, 2012 and 2011respectively, and are classified as accounts receivable in the Consolidated Statements of FinancialCondition.
The Helping Families Save Their Homes Act of 2009, signed into law May 20, 2009, includes aprovision extending the $250,000 share insurance coverage provided by the National Credit UnionShare Insurance Fund through December 31, 2013. Previously, this level of coverage was set to expireon December 31, 2009. As such, the total uninsured amount of members' accounts was $2.8 billionand $2.3 billion at December 31, 2012 and 2011, respectively. Based on the original insurancecoverage of $100,000 per non-IRA account and $250,000 per IRA account, the amount of members’accounts exceeding the original coverage limits was $7.7 billion and $6.5 billion at December 31,2012 and 2011, respectively.
At December 31, 2012 and 2011, scheduled maturities of share certificates and IRA certificates wereas follows:
(dollars in thousands)Weighted Average
Rate for 2012 2012
Weighted Average
Rate for 2011 2011
Money market 0.61% 7,672,947$ 0.71% 6,822,286$
Savings 0.27% 8,436,922 0.32% 7,321,444
Member escrow 0.16% 143,181 0.22% 126,180
Checking 0.21% 6,217,947 0.27% 5,601,077
Share and IRA certificates 2.36% 13,887,953 2.63% 12,941,363
IRA shares 0.27% 517,224 0.32% 470,038
IRA MMSA 0.61% 176,471 0.69% 167,381
Investor custodial accounts 0.00% 312,787 0.00% 190,296
Total deposits 37,365,432$ 33,640,065$
(dollars in thousands)
2013 2014 2015 2016 2017 Thereafter
0–2.00% 4,486,411$ 1,503,492$ 598,254$ 79,670$ 500,828$ 841$
2.01–3.00 1,170,643 39,198 346,027 407,897 86,246 582,776
3.01–4.00 98,504 473,181 130,097 15,519 620,434 611,569
4.01–5.00 814,947 14,551 299,612 456,868 5,375 -
5.01–6.00 242,029 302,679 23 - 11 -
6.01–7.00% - 271 - - - -
Total 6,812,534$ 2,333,372$ 1,374,013$ 959,954$ 1,212,894$ 1,195,186$
As of December 31, 2012
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Dividends on members’ deposit accounts totaled as follows:
(dollars in thousands) 2012 2011
Money market 44,565$ 46,386$
Savings 21,611 22,545
Checking 11,093 12,591
Share and IRA certificates 318,470 337,009
IRA shares 2,279 2,330
Total dividends 398,018$ 420,861$
Note 16: Borrowed Funds
Navy Federal's short-term and long-term borrowings at December 31, 2012 and 2011 were as follows:
Maturities
Fixed or
Floating Payment Outstanding
Weighted
Average
Rate Coupon
Short term
Other FHLB short-term borrow ings
2013 Fixed Monthly 2,300,000 0.19% - 0.27%
2013 Floating Quarterly 100,000 Variable*
2,400,000 0.22%
FHLB long-term borrow ings maturing in next 12 months
2013 Fixed Monthly 613,750 2.63% - 4.91%
2013 Fixed Quarterly 216,600 1.21% - 5.78%
830,350 4.11%
Total short-term borrowings 3,230,350
Long term
FHLB long-term borrow ings
2014 - 2032 Fixed Monthly 2,592,035 0.63% - 5.10%
2014 - 2032 Fixed Quarterly 2,531,800 1.65% - 6.04%
5,123,835 4.19%
Securities Sold under Repurchase Agreements
2019 Fixed Quarterly 50,000 1.88% 1.88%
Total long-term borrowings 5,173,835
Total borrowed funds 8,404,185$
*Variable coupon is a spread to 3-month LIBOR and is determined quarterly.
(dollars in thousands) As of December 31, 2012
(dollars in thousands)
2012 2013 2014 2015 2016 Thereafter
0–2.00% 4,336,170$ 697,706$ 257,806$ 21,720$ 610$ -$
2.01–3.00 1,031,139 903,452 39,340 355,905 421,380 50,037
3.01–4.00 212,177 - 479,323 131,505 16,152 1,202,025
4.01–5.00 4,329 800,299 14,265 290,255 448,863 4,360
5.01–6.00 705,420 233,016 283,774 22 - 11
6.01–7.00% 21 - 281 - - -
Total 6,289,256$ 2,634,473$ 1,074,789$ 799,407$ 887,005$ 1,256,433$
As of December 31, 2011
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The following table displays the amount of borrowed funds by maturity for each of the next five yearsas of December 31, 2012:
At December 31, 2012, Navy Federal had $9.5 billion available to be used as collateral for FederalHome Loan Bank (FHLB) borrowings, which was comprised of $0.4 billion in various securities and$9.1 billion in mortgage loans held for investment. At December 31, 2011, Navy Federal had $9.2billion available to be used as collateral for FHLB borrowings, which was comprised of $0.9 billion invarious securities and $8.3 billion in mortgage loans held for investment.
Maturities Fixed or Floating Payment Outstanding
Average
Rate Coupon
Short term
FHLB borrowings for purpose of positive arbitrage
2012 Fixed Monthly 252,500$ 0.14% 0.13 - 0.14%
Other FHLB short-term borrowings
2012 Fixed Monthly 1,500,000 0.14%
2012 Floating Quarterly 40,000 Variable*
1,540,000 0.14%
FHLB long-term borrowings maturing in next 12 months
2012 Fixed Quarterly 156,500 5.28 - 5.58%
2012 Fixed Quarterly 45,000 0.63 - 0.79%
2012 Fixed Monthly 57,000 4.31%
258,500 4.34%
Total short-term borrowings 2,051,000
Long term
FHLB long-term borrowings
2014 Fixed Monthly 100,000 0.63 - 0.65%
2013-2025 Fixed Monthly 3,005,785 2.04 - 5.09%
2013-2030 Fixed Quarterly 2,448,400 1.21 - 6.04%
Total long-term borrowings 5,554,185 4.23%
Total borrowed funds 7,605,185$
*Variable coupon is a spread to 3-month LIBOR and is determined quarterly.
(dollars in thousands) As of December 31, 2011
Amount
2013 3,230,350$
2014 731,635
2015 541,500
2016 656,700
Thereafter 3,244,000
Total 8,404,185$
(dollars in thousands)
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Navy Federal had the following unused lines of credit as of December 31:
Note 17: Retirement Benefit Plans
Navy Federal Credit Union Employees’ Retirement PlanNavy Federal’s Employees’ Retirement Plan is a defined benefit retirement plan with benefits basedon set formulas. Navy Federal transitioned to a Cash Balance Plan design as of January 1, 2001, butretained the Traditional Plan design for those employees who opted to remain in the Traditional Plan.The following describes how the benefits are calculated:
Cash Balance Plan – This plan provides either a single sum payment upon retirement or amonthly annuity. The annuity option is available for Cash Balance Plan participants who havea benefit value of more than $5,000.
Traditional Plan – This plan is designed to provide a lifetime of monthly retirement benefits,determined by a set formula, to vested employees. The formula is based on the final averageearnings (an average of the three highest consecutive years of income) multiplied by 2% timesthe length of service.
Retiree Medical Plan (the Plan)Navy Federal provides postretirement benefits to certain retired employees in the form of acontributory group medical plan and supplemental retirement income to offset the cost of medicalinsurance premiums or out-of-pocket medical expenses. Under the provisions of the Plan, the retireesare responsible for the payment of most of the medical insurance premiums. The supplementalretirement income benefit is an annual benefit of $75 or $100 (depending on the retiree's age onSeptember 1, 2008), multiplied by the number of years of continuous service the retiree provided NavyFederal. There are no assets set aside to pre-fund the liability associated with the Plan.
Medical cost trends have a negligible impact on the determination of the retiree medical benefitobligation. Employees hired on or after January 1, 2009 will not receive the medical supplement butwill be eligible for medical coverage at age 55 with 10 years of service by paying full cost.
The following table sets forth the funded status of the pension and retiree medical benefit plans:
(dollars in thousands) 2012 2011
FHLB 1,151,828$ 1,596,997$
Federal Reserve 3,974,823 3,395,595
Fed Funds 202,500 212,500
Corporate Credit Unions - 120,000
(dollars in thousands) 2012 2011 2012 2011
Funded status, end of year:
Fair value of plan assets 973,676$ 833,785$ -$ -$
Benefit obligations 936,457 788,572 50,090 42,562
Funded status 37,219$ 45,213$ (50,090)$ (42,562)$
Pension Retiree Medical
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The weighted-average assumptions used to determine the projected benefit obligation for the pensionand retiree medical benefit were:
2012 2011 2012 2011
Discount rate 4.10% 4.95% 4.10% 4.95%
Rate of compensation increase 4.25% 4.25% N/A N/A
Pension Retiree Medical
The following table sets forth the net periodic benefit cost, contributions received and benefits paid forthe benefit plans:
During 2011, Navy Federal offered an Early Retirement Window (ERW) for employees who wereeligible. Navy Federal has set forth net periodic benefit costs as special/contractual terminationbenefits for this purpose.
The weighted-average assumptions used to determine the net periodic benefit cost for the pension andretiree medical benefit were:
The long-term rate of return assumption represents the expected average rate to be earned on planassets and future plan contributions to provide for the benefits included in the benefit obligations. Theassumption is based on several factors including the anticipated long-term asset allocation of planassets, historical market index and plan returns and a forecast of future expected asset returns.
The amounts recognized in Accumulated other comprehensive income for the years ended December31 consist of:
(dollars in thousands) 2012 2011 2012 2011
Other comprehensive income:
Prior service cost/(credit) 15,872$ 19,938$ 3,834$ 4,581$
Unamortized net loss/(gain) 325,557 288,764 13,631 8,626
Other comprehensive income 341,429$ 308,702$ 17,465$ 13,207$
Pension Retiree Medical
(dollars in thousands) 2012 2011 2012 2011
Benefit cost 30,268$ 21,600$ 4,949$ 4,441$
Cost of special/contractual termination benefits - 21,125 - 777
Employer contribution 55,000 99,600 1,680 1,341
Plan participants' contributions - - 720 734
Benefits paid 30,035 22,808 2,400 2,095
Pension Retiree Medical
2012 2011 2012 2011
Discount rate: for benefit cost/(income) 4.95% 5.80% 4.95% 5.80%
Discount rate: for cost of special/contractual termination benefits N/A 4.95% N/A 4.95%
Expected return on plan assets 7.40% 7.50% N/A N/A
Rate of compensation increase 4.25% 4.25% N/A N/A
Pension Retiree Medical
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The amounts in Accumulated other comprehensive income expected to be recognized as a componentof net periodic benefit cost during 2013 are as follows:
The following table discloses the benefits expected to be paid in the next ten years:
The anticipated employer contribution for 2013 is $25.0 million for the pension plan and $2.0 millionfor the retiree medical benefit plan. The accumulated benefit obligation for the pension plan was$828.5 million and $701.3 million at December 31, 2012 and 2011, respectively.
The measurement date for the pension and retiree medical benefit plan for 2012 and 2011 wasDecember 31.
The investment strategy of the Navy Federal Credit Union Employees’ Retirement Plan is to employan investment approach whereby a mix of equity and fixed income investments are used to maximizethe long-term return of plan assets at a prudent level of risk that includes consideration of benefitobligation volatility. The intent of this strategy is to minimize plan expenses and keep the Plan wellfunded over the long run. Risk tolerance is established through careful consideration of plan liabilities,plan-funded status and Navy Federal’s financial condition. Investment risk is measured and monitoredon an ongoing basis through annual liability measurements, periodic asset/liability studies, andquarterly investment portfolio reviews.
At December 31, 2012, the target allocation of plan assets was 32.5% U.S. equity securities, 32.5%global equity securities, and 35.0% fixed income securities. Most of the U.S. equity assets are investedin a large company index fund with the balance invested in mid- and small-company equity securities.Most of the global equity allocation is in developed markets around the world, but investmentmanagers are allowed to invest in emerging markets which make up about 13% of global equitymarkets. The fixed income allocation is comprised of a small allocation to cash to provide liquidity forbenefit and expense payments with the balance invested in intermediate and long-term bonds, themajority of which are investment grade.
The fair values of the Navy Federal Employees’ Retirement Plan assets, disclosed within theirrespective fair value hierarchy (as described further in Note 21) at December 31, 2012 and 2011 byasset category were as follows:
(dollars in thousands) Pension Retiree Medical
Expected Amortization Amounts in 2013:
Prior service cost/(credit) 3,053$ 746$
Unamortized actuarial loss/(gain) 23,967 662
Total 27,020$ 1,408$
(dollars in thousands) Pension Retiree Medical
2013 36,232$ 2,035$
2014 38,297 2,150
2015 40,754 2,252
2016 43,379 2,371
2017 46,162 2,519
2018-2022 278,242 14,803
Total 483,066$ 26,130$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The following is a description of the valuation methodologies used for the Plan’s financial instrumentsmeasured at fair value.
U.S. Equity Securities & Global Equity Securities (Level 2) – As of December 31, 2012, the
Plan invested in one common collective trust. As of December 31, 2011, the Plan invested in one
common collective trust and one 103-12 investment entity. The trusts are valued at net asset value
(NAV), which is calculated based on the fair value of the underlying investments of the trusts.
Most of the underlying investments in these trusts are traded in markets that are considered to be
active, but the trusts themselves are not actively publicly traded, as they are marketed principally
to institutional investors. For those underlying investments that are not considered actively traded,
the values are based on quoted market prices, dealer quotations or valuations from pricing sources
supported by observable inputs. As such, the trusts are classified within Level 2 of the fair value
hierarchy.
Interest in the trusts can generally be purchased and sold at regular intervals. The trusts can bepurchased daily, monthly or quarterly, and can be redeemed daily or monthly, depending on theinvestment. Contribution or redemption transaction requests for each of the trusts generally requireadvance notice of two to 30 business days, depending on the investment. Trades are usually settledno later than three business days after the trade date.
Intermediate-Term Fixed Income Securities (Level 2) – the intermediate-term fixed income
securities are generally valued using benchmark yields, reported trades and broker/dealer quotes
for similar assets in an active market.
(dollars in thousands)Quoted Prices in
Active Markets for
Identical Assets
Significant
Observable
Inputs
Significant
Unobservable
Inputs
Asset Category Total (Level 1) (Level 2) (Level 3)
U.S. equity securities 420,843$ 66,730$ 354,113$ -$
Global equity securities 191,726 191,726 - -
Intermediate-term fixed income securities 179,401 45,492 133,909 -
Long-term fixed income securities 142,464 142,464 - -
Cash 39,242 39,242 - -
Total 973,676$ 485,654$ 488,022$ -$
Fair Value Measurements at December 31, 2012
(dollars in thousands)Quoted Prices in
Active Markets for
Identical Assets
Significant
Observable
Inputs
Significant
Unobservable
Inputs
Asset Category Total (Level 1) (Level 2) (Level 3)
U.S. equity securities 270,241$ 57,995$ 212,246$ -$
Global equity securities 271,242 156,789 114,453 -
Intermediate-term fixed income securities 144,513 33,188 111,325 -
Long-term fixed income securities 124,810 124,810 - -
Cash 22,979 22,979 - -
Total 833,785$ 395,761$ 438,024$ -$
Fair Value Measurements at December 31, 2011
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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There were no significant concentrations of risk within plan assets at December 31, 2012 and 2011 asequity and fixed income assets are broadly diversified.
Navy Federal 401(k) Savings PlanThe Navy Federal 401(k) savings plan is a defined contribution plan where employees can contributepre-tax money to a 401(k) retirement account and receive employer matching contributions. Thematching contributions are based on participation in a defined benefit retirement plan. Employeesparticipating in the Cash Balance Plan receive a 100% employer match on the first 6% of pay theycontribute to their 401(k) account and are vested after completing two years of service. The employeesparticipating in the Traditional Plan receive an employer match of 50% on the first 6% of pay theycontribute to their 401(k) account.
The cost recognized for the 401(k) Plan, including matching contributions and administrative costs,was $20.4 million and $17.3 million for the years ended December 31, 2012 and 2011, respectively.
Deferred Compensation PlanNavy Federal deferred compensation plans are non-qualified, deferred compensation plans which offera before-tax savings opportunity to highly compensated employees. The annual deferral amountallowed mirrors the 401(k) Plan, and contributions are held by Navy Federal and earn monthly interestbased on Navy Federal’s gross income for the month divided by the average earnings on assets (loansand investments) for the month.
Non-Qualified Supplemental Retirement PlanThis non-qualified plan is designed to “make up” for benefits not paid through the defined benefitretirement plan as a result of limitations imposed by the IRS. The Internal Revenue Code Section401(a)(17) limits the amount of compensation that can be used in the defined benefit retirement plan’sannuity calculation and Internal Revenue Code Section 415 limits the amount of monthly annuity thatcan be paid by the defined benefit retirement plan.
All benefits are paid from Navy Federal assets and are in compliance with all federal laws andregulations. Navy Federal accrued $2.9 million and $1.3 million in the years ended December 31,2012 and 2011, respectively.
Note 18: Related Party Transactions
In the normal course of business, Navy Federal extends loans to credit union officials. The totalprincipal amount of loans extended to officials during 2012 and 2011 was $35.3 million and $33.2million, respectively. Credit union officials are defined as volunteer members of the Board ofDirectors and board committees, and employees with the title of Vice President and above.
Navy Federal's wholly owned subsidiary, NFFG, had $25.5 million and $29.6 million on deposit withNavy Federal as of December 31, 2012 and 2011, respectively.
Note 19: Reserves and Undivided Earnings
Navy Federal is subject to regulatory capital requirements administered by the NCUA. Failure to meetminimum capital requirements can initiate certain mandatory and possibly additional discretionary
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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actions by regulators that, if undertaken, could have a direct material effect on Navy Federal'sconsolidated financial statements. Under capital adequacy regulations and the regulatory frameworkfor prompt corrective action, Navy Federal must meet specific capital requirements that involvequantitative measures of Navy Federal's assets, liabilities and certain commitments as calculated underGAAP. Navy Federal's capital amounts and net worth classification are also subject to qualitativejudgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Navy Federal tomaintain minimum amounts and ratios of net worth to total assets. Credit unions are also required tocalculate a risk-based net worth (RBNW) requirement that establishes whether the credit union will beconsidered “complex” under the regulatory framework. A credit union is defined as "complex" if thecredit union's quarter-end total assets exceed ten million dollars ($10,000,000) and its RBNWrequirement exceeds six percent (6%). Navy Federal's RBNW requirement as of December 31, 2012and 2011 was 6.09% and 6.35%, respectively, which exceeds the regulatory threshold of 6% andplaces Navy Federal in the “complex” category. There is no impact to Navy Federal based on thecomplex designation because their statutory net worth ratio qualifies us as "well capitalized" byNCUA standards and our statutory net worth exceeds their RBNW requirement.
The NCUA categorized Navy Federal as “well capitalized” under the regulatory framework for promptcorrective action with a net worth-to-assets ratio of 10.93% and 10.59% as of December 31, 2012 and2011, respectively. Net worth for this calculation is defined as undivided earnings plus regular andcapital reserves. To be categorized as “well capitalized,” Navy Federal must maintain a minimum networth ratio of 7%. There are no conditions or events since that notification that management believeshave changed the institution's category.
Note 20: Fair Value Measurement
Effective with the adoption of ASC 820-10, Fair Value Measurements and Disclosures, Navy Federaldetermines the fair values of its financial instruments based on the fair value hierarchy established inthat standard, which requires an entity to maximize the use of quoted prices and observable inputswhen measuring fair value. A description of the fair value hierarchy is as follows:
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based upon observable inputs such as quoted prices for similar instrumentsin active markets, quoted prices for identical or similar instruments in markets that are not active,and model-based valuation techniques for which all significant assumptions are observable in themarket.
Level 3 – Valuation is based upon unobservable inputs that are supported by little or no marketactivity and that are significant to the fair value of the instrument. Valuation is typically performedusing pricing models, discounted cash flow methodologies, or similar techniques, whichincorporate management’s own estimates of assumptions that market participants would use inpricing the instrument or valuations that require significant management judgment or estimation.
Certain assets and liabilities may be required to be measured at fair value on a non-recurring basis.These non-recurring fair value measurements usually result from the application of lower of cost ormarket accounting or the write-down of individual assets due to impairment.
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The following is a description of the valuation methodologies used by Navy Federal for the assetsmeasured at fair value:
Securities Available-for-Sale (AFS)
Navy Federal receives pricing for AFS securities from a third-party pricing service. These securitiesare classified as Level 2 in the fair value hierarchy. The following is a description of the valuationmethodologies used for these securities:
Residential and Commercial Mortgage-backed Securities - Residential and commercial
mortgage-backed securities are valued either based on similar assets in the market place and the
vintage of the underlying collateral, or at the closing price reported in the active market in which
the individual security is traded.
Federal Agency Securities, Treasury Securities, Municipal Securities and Bank Notes -
Federal agency securities, treasury securities, municipal securities and bank notes are valued based
on similar assets in the market place and the vintage of the underlying collateral or at the closing
price reported in the active market in which the individual security is traded.
Mortgage Servicing Rights (MSRs)
MSRs do not trade in an active, open market with readily observable prices. Accordingly, NavyFederal obtains the fair value of the MSRs using a third-party pricing provider. The provider uses acombination of market and income valuation methodologies. All assumptions are market driven. Oncethe preliminary results are complete, they are further calibrated to observable market transactions,when they exist. Therefore, MSRs are classified within Level 3 of the fair value hierarchy as thevaluation is model driven and primarily based on unobservable inputs.
Derivative Commitments – Assets and Liabilities
Navy Federal uses derivative commitments to hedge against interest rate risk. These derivatives (assetsand liabilities) are valued using quoted market prices of similar assets and are classified within Level 2of the fair value hierarchy.
Mortgage Loans Awaiting Sale (MLAS)
Mortgage loans awaiting sale comprise those loans that Navy Federal intends either to sell or tosecuritize. The initial loan level basis is equal to unpaid principal balance plus or minus originationcosts and fees. Navy Federal has elected the fair value option for MLAS. The fair value of MLAS isdetermined based on an evaluation of best execution forward contract prices sourced from the TBAmarket, by agency (Ginnie Mae/Freddie Mac/Fannie Mae). As such, MLAS are classified as Level 2in the fair value hierarchy.
Real Estate Owned (REO)
Navy Federal acquires residential properties as a result of foreclosure or forfeiture and those propertiesare classified as REO properties. REOs are recognized at the lower of cost or fair value less costs tosell. Navy Federal utilizes Broker Price Opinions (BPOs) to estimate the fair market value of REOs. ABPO considers the value of similar surrounding properties, sales trends in the neighborhood, anestimate of any of the costs associated with getting the property ready for sale, and/or the cost of anyneeded repairs. Navy Federal evaluates reasonableness by obtaining multiple BPOs on REO properties
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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and also by analyzing significant fluctuations on a period-by-period basis. Fair value less costs to sellis an estimated value based on relevant recent historical data that are considered unobservable inputs,and as such, REO is classified as Level 3 in the fair value hierarchy and valued on a non-recurringbasis.
During the holding period, BPOs are updated to reflect changes in fair value and the REO is carried atthe lower of the amount recorded at acquisition date or estimated fair value less costs to sell. Holdingcosts such as insurance, maintenance, taxes and utility costs are expensed as incurred. Navy Federalmarkets the REO properties for sale to the public and generally does not hold properties for longerthan one year. Valuation adjustments on these assets as well as gains or losses realized fromdisposition of such properties are reflected in Other non-interest expense on the ConsolidatedStatements of Income.
The tables below present the items recognized at fair value on the Consolidated Statements ofFinancial Condition on a recurring basis at December 31, 2012 and 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,
2012
Available-for-sale
U.S. government and federal agency securities -$ 6,301,788$ -$ 6,301,788$
Residential mortgage-backed securities - 4,673,993 - 4,673,993
Commercial mortgage-backed securities - 14,988 - 14,988
Bank notes - 1,579,751 - 1,579,751
Municipal securities - 98,075 - 98,075
Mutual funds 10,928 - - 10,928
Total available-for-sale 10,928 12,668,595 - 12,679,523
Mortgage loans aw aiting sale - 1,442,868 - 1,442,868
Mortgage servicing rights - - 144,089 144,089
Other assets - Derivative commitments - 51,842 - 51,842
Total assets at fair value on a recurring basis10,928 14,163,305 144,089 14,318,322
Other liabilities - Derivative commitments - 7,597 - 7,597
Total liabilities at fair value on a recurring
basis -$ 7,597$ -$ 7,597$
Fair Value at December 31, 2012
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The following tables summarize the changes in fair value for items measured at fair value (Level 3) ona recurring basis using significant unobservable inputs at December 31, 2012 and 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
Available-for-sale
U.S. government and federal agency securities -$ 5,728,404$ -$ 5,728,404$
Residential mortgage-backed securities - 4,585,224 - 4,585,224
Commercial mortgage-backed securities - 14,781 - 14,781
Bank notes - 858,277 - 858,277
Total available-for-sale - 11,186,686 - 11,186,686
Mortgage loans aw aiting sale - 692,740 - 692,740
Mortgage servicing rights - - 142,368 142,368
Other assets - Derivative commitments - 20,748 - 20,748
Total assets at fair value on a recurring basis- 11,900,174 142,368 12,042,542
Other liabilities - Derivative commitments - 7,636 - 7,636
Total liabilities at fair value on a recurring
basis -$ 7,636$ -$ 7,636$
Fair Value at December 31, 2011
Fair Value at
December 31, 2012
(dollars in thousands) Mortgage
servicing rights
Balance, beginning of year 142,368$
Originations 52,773
Payoffs/Maturities (39,642)
(Loss) on changes in value of MSRs (11,410)
Balance, end of year 144,089$
Change in unrealized gains/(losses)
related to financial instruments still held at December 31, 2012 (12,650)$
Fair Value at
December 31, 2011
(dollars in thousands) Mortgage
servicing rights
Balance, beginning of year 161,150$
Originations 32,476
Payoffs/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)$
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The tables below present the items measured at fair value on the Consolidated Statements of FinancialCondition on a non-recurring basis when certain assets are measured at the lower of cost or market thatwere recognized at fair value below cost at the end of the period at December 31, 2012 and December31, 2011:
Note 21: Fair Values of Financial Instruments
ASC 825-10-50, Fair Value of Financial Instruments––Disclosure, requires the disclosure of theestimated fair value of the financial instruments, including those financial instruments for which NavyFederal did not elect fair value treatment. The financial instruments that are accounted for under ASC820-10, Fair Value Measurement, are disclosed separately in Note 20. Navy Federal discloses fairvalue information for its financial instruments, whether recognized at fair value on the ConsolidatedStatements of Financial Condition or not, and for which it is practicable to estimate that value. In caseswhere quoted market prices are not available, fair values are based on estimates using present value orother valuation techniques. Those techniques are significantly affected by the assumptions used,including the discount rate and estimates of future cash flows. In that regard, the derived fair valuecannot be substantiated by comparison to independent markets and, in many cases, could not berealized in immediate settlement of the instrument. Certain financial instruments and all non-financialinstruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amountspresented do not necessarily represent the underlying fair value of Navy Federal. The followingmethods and assumptions were used in estimating the fair values disclosed for financial instruments:
Loans to MembersFor certain residential mortgages, fair value is estimated using the quoted market prices for securitiesbacked by similar loans. The fair value of other types of loans, such as consumer and equity loans, isestimated by discounting the future cash flows using the current market rates at which similar loans
(dollars in thousands)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Signif icant
Unobservable
Inputs
(Level 3)
Balance as of
December 31,
2012
Other Real Estate Ow ned -$ -$ 15,244$ 15,244$
Total assets at fair value on a non-recurring basis -$ -$ 15,244$ 15,244$
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)
Signif icant
Unobservable
Inputs
(Level 3)
Balance as of
December 31,
2011
Other Real Estate Ow ned -$ -$ 32,811$ 32,811$
Total assets at fair value on a non-recurring basis -$ -$ 32,811$ 32,811$
Fair Value at December 31, 2011
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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would be made to borrowers with similar credit ratings and for the same remaining maturities.
Investments, including Mortgage-Backed SecuritiesFair value is based on quoted market price, if available. If a quoted market price is not available, fairvalue is estimated using quoted market prices for similar securities.
Cash and Cash EquivalentsCash and cash equivalents include cash and balances due from banks and credit unions, all of whichmature within 90 days. The carrying amount reported approximates fair value for vault cash anddemand balances from other financial institutions. Fair value for short-term securities is based onquoted market prices.
Members’ AccountsThe 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 andShare Certificate accounts, fair value is estimated using the discounted value of future cash flowsbased upon market interest rates and remaining maturity.
Derivative Instruments and Hedging ActivitiesNavy Federal does not receive loan commitment fees. The fair value of loan commitments is basedupon differences between the contracted rate and the current market rate of comparable mortgageloans. The fair value of forward contracts is based on the quoted market price of contracts with similarcharacteristics. It is the established practice of Navy Federal to only purchase forward contracts tocover mortgage loans in process, which are anticipated to close for delivery into these forwardcontracts. Accordingly, the cost to terminate existing contracts, which is based on current marketprices, is not material to Navy Federal.
Mortgage Servicing Rights (MSRs)Mortgage servicing rights do not trade in an active, open market with readily observable prices.Accordingly, Navy Federal obtains the fair value of the MSRs using a third-party pricing provider.The provider uses a combination of market and income valuation methodologies. All assumptions aremarket driven. Once the preliminary results are complete, they are further calibrated to observablemarket transactions, when they exist.
Borrowings, including Federal Home Loan Bank (FHLB) Borrowed FundsFHLB debt is comprised of both short-term (operational) and long-term (strategic) debt. The fair valueof FHLB borrowings is based on the present value of future discounted cash flows using impliedforward rates.
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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The estimated fair values of financial instruments at December 31, 2012 and 2011 were:
ASC 825-10 also requires the disclosure of all significant concentrations of credit risk arising fromfinancial liabilities, whether from an individual counterparty or groups of counterparties. Navy Federalhas assessed the counterparty credit risk on its financial liabilities and has determined that it is notmaterial to the financial statements.
Note 22: Loan Securitizations and Continuing Involvement in Assets Transferred
Residential mortgage loans are transferred in securitizations or sale transactions in which NavyFederal may have continuing involvement through retained servicing, credit enhancement (see Note 8)or provisions that allow or require the transferred loans to be reacquired. These transfers occur throughagency (i.e., Federal National Mortgage Corporation (FNMA), Federal Home Loan MortgageCorporation (FHLMC), and Government National Mortgage Association (GNMA) securitization andwhole-loan sale transactions.
Navy Federal sells loans to FNMA and FHLMC that are generally securitized into mortgage-backedsecurities for sale on the secondary market to third-party investors through special purpose entitiesthese agencies sponsor.
Navy Federal originates and securitizes qualifying mortgage loans into GNMA mortgage-backedsecurities. Prior to securitization, the loans are classified as mortgage loans awaiting sale. NavyFederal retains servicing rights for these loans and any resulting securities retained are held in itsavailable-for-sale portfolio. The securities are carried at fair value with changes recorded inAccumulated other comprehensive income.
(dollars in thousands) 2012 2012 2011 2011
Carrying Amount Fair Value Carrying Amount Fair Value
Financial assets:
Cash and cash equivalents 2,151,499$ 2,151,499$ 1,747,857$ 1,747,857$
Securities available-for-sale 12,679,523 12,679,523 11,186,686 11,186,686
Securities held-to-maturity 469,752 485,490 794,529 814,370
Interest-bearing deposits 100,940 101,069 8,781 8,781
Investment in FHLB 403,797 403,797 374,359 374,359
Mortgage servicing assets 144,089 144,089 142,368 142,368
Mortgage loans aw aiting sale 1,442,868 1,442,868 692,740 692,740
Other assets 56,941 56,941 26,175 26,175
Loans, net of allow ance
for loan losses 33,170,924 38,725,919 30,191,509 34,780,381
Financial liabilities and equity:
Securities sold under
repurchase agreements 50,000 51,116 - -
FHLB debt 8,354,185 9,055,340 7,605,185 8,318,018
Other liabilities 7,597 7,597 7,636 7,636
Members’ accounts 37,365,432 37,013,982 33,640,065 33,305,116
Navy Federal Credit UnionAnnual ReportNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2012 and 2011_____________________________________________________________________________________________________________________
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Navy Federal has the option to repurchase pooled loans out of GNMA securities when members fail tomake payments for three consecutive months (via the GNMA Early Pool Buyback Program). SinceNavy Federal has the unilateral ability to repurchase these delinquent loans, its effective control overthe loans has been retained. Navy Federal recognizes an asset and a corresponding liability, regardlessof whether it has an actual intent to repurchase the loans. At December 31, 2012, balances recognizedin MLAS and Other liabilities associated with the Early Pool Buyback Program totaled $24.5 million.
Navy Federal uses a third party to value its securities with a single cash flow stream model and marketprices of similar assets to value the securities. The fair value of Navy Federal’s on-balance sheetsecuritizations at December 31, 2012 and 2011 was $2.2 billion and $2.1 billion, respectively.
The unpaid principal balance of the securitized loans was $2.2 billion and $2.3 billion at December 31,2012 and 2011, respectively. The delinquent loans associated with the securitized assets totaled $25.2million and $21.5 million at December 31, 2012 and 2011, respectively. At December 31, 2012 and2011, the fair value of the MSRs associated with the securitized loans was $8.0 million and $3.0million, respectively.
Key Assumptions
In accordance with ASC 860-30-50, Secured Borrowing and Collateral, the effect of two negativechanges in each of the key assumptions used to determine the fair value of its GNMA securities mustbe disclosed. The negative effect of each change must be calculated independently, holding all otherassumptions constant.
The tables below show the key assumptions used and the effect of a ten percent (10%) and twentypercent (20%) adverse change to the constant prepayment rate (CPR). The adverse change reflects thepotential impact to the fair value of the securitizations if these changes occurred. However, thesensitivities in the table below are hypothetical and may not be indicative of actual results. The effectof a variation in a particular assumption on the fair value is calculated independently of changes inother assumptions. Further, changes in fair value based on variations in assumptions generally cannotbe extrapolated because the relationship of the change in assumption on the fair value may not belinear.
(1) CPR is based on the average of the CPR for all of the GNMA securities.(2) Ginnie Mae securities are explicitly backed by the federal government, thereforethere are no anticipated credit losses.
2012 2011
Constant prepayment rate(1) 8.6% 12.2%
Anticipated credit losses (2) 0 0
Weighted average life 6.28 years 5.82 years
GNMA mortgages
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Continuing Involvement
In addition to retained servicing on loans transferred through securitizations or sales transactions,Navy Federal has continuing involvement with certain loans pursuant to provisions that allow for orrequire transferred loans to be reacquired.
In connection with the sale of loans to FNMA and FHLMC, Navy Federal has made representationsand warranties that the loans sold meet certain requirements. These representations relate to type ofcollateral, underwriting standards, validity of certain borrower representations in connection with theloan and the use of the GSE's standard legal documentation. Navy Federal may be, and has been,required to repurchase loans and/or indemnify FNMA and FHLMC and other investors for losses dueto material breaches of these representations and warranties.
The following table provides a summary of the cash flows exchanged during the years endedDecember 31, 2012 and 2011 between Navy Federal and transferees on loans previously transferredwith continuing involvement:
(dollars in thousands) 2012 2011
Constant prepayment rate
Adverse fair value change of 10% 7,166$ 12,813$
Adverse fair value change of 20% 13,929 24,664
GNMA mortgages
(dollars in millions) 2012 2011
Cash from sale of mortgage loans and mortgage-backed securities 5,167$ 2,948$
Repurchase of previously transferred loans 19 9
Contractual servicing fees received 62 58
Total 5,248$ 3,015$