Vision Statement by rlb27893

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									Navy Federal 2004 Annual Report
Vision Statement
N    avy Federal will perform with such excellence that
all present and potential members will choose Navy
                                                                         A    t Navy Federal, we measure
                                                                         success by how well we take
Federal as the preferred source for their primary, lifetime              care of our more than 2.5 mil-
financial services.                                                       lion members—the men and women of
                                                                         the Navy and Marine Corps and their families—in the
                                                                         day-to-day relationships we establish with them. Service
                                                                         has been our byword since we made our first loan in
                                                                         1933, but keeping up with members’ changing expecta-
                                                                         tions over the years requires constant re-invention.

                                                                         We know that when it comes to their financial well-
                                                                         being, members want peace of mind and service they
                                                                         can trust.To earn that trust, we strive to provide service
                                                                         that is reliable, responsive, caring, accessible and of value.
                                                                         That means ensuring that we can be counted on day or
                                                                         night to give members access to their accounts online or
                                                                         get cash at an ATM in an emergency. It means responding
                                                                         to members’ needs with new products, such as small
                                                                         business, investment and trust services. It’s granting a
                                                                         first loan to a young Sailor or Marine and providing
                                                                         custom support wherever they’re deployed. It’s building
                                                                         lifetime value in our savings and lending programs.And

 2004 Financial Summary
 Dollars in millions
                                                                         it’s providing resources that help members make smart
                                                                         financial decisions.

                                                                         Navy Federal’s degree of success is reflected in our mem-
 As of 31 December                  2004        2003      % Change       bers’ sense of belonging, in the families who preserve
 Assets                           $22,896.9   $20,039.8    14.25%        their membership from generation to generation.Year
                                                                         after year, thousands of new members place their trust in
 Loans Outstanding                $14,785.6   $13,244.3    11.64%        Navy Federal’s commitment to service. It’s a commitment
 Shares, Sharechek® MMSAs, IRAs
                  ,               $12,772.2   $11,371.6    12.32%        that translates into our continued success.

 Share Certificates                 $4,846.5    $4,406.9     9.98%
 Reserves                          $2,426.1    $2,152.3    12.72%
 Gross Income                      $1,360.3    $1,291.9     5.29%
 Non-interest Expenses              $541.6      $475.4     13.93%
 Dividends                          $363.0      $361.5      0.41%
 Mortgage Loans Serviced          $15,403.9   $13,186.7    16.81%

 Members                          2,515,174   2,451,165     2.61%


                                                                     Page 1
                                          Report from the
             Chairman & the President
2  004 was a year in which
our country was repeatedly
                                                              Troops in and enroute to the Middle East continued
                                                              to have access to MSCs in Bahrain and Crete, and our
                                                              Diego Garcia, Singapore and Hong Kong offices provided
                                                              options for members helping with relief efforts for tsunami
                                                              victims. In 2004, Navy Federal added four new MSCs,
reminded of the service com-                                  raising our total to 106.We installed 20 new ATMs for a
                                                              new worldwide total of 292.
mitment made by the men and women in our
armed forces.Whether risking, and sometimes giving,
                                                              The telephone is another key access point for members,
their lives in Operation Iraqi Freedom or bringing lifesav-
                                                              and our one-year-old Heritage Oaks call center in
ing aid to those devastated by natural disasters at home
                                                              Pensacola greatly enhanced our capability to respond
and abroad, members of the Navy and Marine Corps and
                                                              more quickly to the 7.8 million calls received in 2004.
their families continue to make sacrifices on our coun-
                                                              By December, more than half of the credit union’s calls
try’s behalf.A heartfelt “thank you” only begins to express
                                                              were being handled by the Florida call center team.
our gratitude.
                                                              In a world increasingly dependent on the Internet, it is
Since 1933, we have shown our support by providing
                                                              not surprising that Navy Federal Online® Account Access
financial services and products that make life a little
                                                              enrollments grew 29%. Members logged on 92 million
easier for our members.We succeed when we’re able to
                                                              times in 2004, up 33% from 2003, and conducted more
deliver the quality service that our 2.5 million members
                                                              than 14.4 million transfers, a 29% increase.The number
have a right to expect. Service that focuses on enhancing
                                                              of enrollees in Web Bill Pay, offered free for the first time
member access, providing reliability and value, staying
                                                              in 2004 with a minimum of three payments per month,
responsive and caring about the member.
                                                              increased 69%.A popular feature—showing an almost
                                                              200% increase—was the option for members to receive
In 2004, Navy Federal experienced success on many
                                                              their account statements online.
levels. It was an outstanding year for greater account
access and product value that produced record numbers
                                                              Also very popular is the Visa® Sharechek Card, which
in both lending and savings.As a result, assets increased
                                                              can be used at merchants and ATMs worldwide that
by 14.3% to $22.9 billion, and reserves, a measure of                                                                        nationwide appreciation in home values and snapped         Total consumer loans outstanding grew by $258 million,
                                                              display the Visa debit card logo.The debit card is so
financial safety and soundness, increased 12.7%, to $2.43                                                                     up Navy Federal’s attractive products.We offered aggres-   to an all-time high of $5.6 billion.Auto loans contributed
                                                              popular with members that Navy Federal is among Visa’s
billion.We are well-positioned for enhancing future serv-                                                                    sive pricing, with rates as low as 1.9% APR for Home       a record-setting $3.9 billion to that total. Eight tent sales
                                                              top 10 debit card issuers in the nation. Both the number
ice, even as we continue to add record numbers of new                                                                        EquityLines of credit and 4.9% for fixed equity loans.We    and 21 Enterprise lot sales and special promotions con-
                                                              and dollar amount of member transactions increased
members to our rolls—over 237,000 in 2004.                                                                                   closed $1.8 billion in equity loans, more than doubling    tributed to this record. New features also increased the
                                                              32% in 2004, reaching almost 136 million and $5.5
                                                                                                                             the previous record of $881.7 million set in 2002.         attractiveness of our car loans: we introduced a 96-month
Member Access and Reliability                                 billion, respectively.
                                                                                                                                                                                        term for new cars with a minimum purchase price of
The pivotal component of today’s member service is                                                                           Credit card account balances increased by 10.7% to their   $30,000; created a late model used vehicle loan; and
account access, and much of that access comes from
                                                              Providing Value
                                                                                                                             highest level ever, $1.78 billion.The portfolio grew by    offered a limited-time 1.9% APR new car rate.
                                                              New products, competitive rates and special promotions
our worldwide network of member service centers                                                                              $171.2 million, easily surpassing the 2003 record of
                                                              contributed to an 11.6% increase in loans outstanding,
(MSCs) and ATMs.This access was particularly critical                                                                        $145.6 million. Growth was fueled in part by the new       Beginning in October, members taking out new Navy
                                                              up to $14.8 billion. Record-setting growth was achieved
after Hurricane Ivan devastated Pensacola, Florida, in                                                                       nRewards card, with 10,000 new accounts opened             Federal consumer loans were given the option of pur-
                                                              in both equity loans and credit cards.
September.Although we lost three of our ATMs in the                                                                          following the card’s introduction in October. Members      chasing the credit union’s new payment protection plan.
Pensacola area, four others provided uninterrupted                                                                           earn one point for every dollar in purchases, redeemable   Thirty percent of members taking out consumer loans
                                                              Equity loan balances grew an unprecedented 67.5% in
account access, and we also brought in two mobile                                                                            for merchandise, gift certificates and dining and travel    purchased the coverage.
                                                              2004, to $2.07 billion, as members took advantage of the
ATMs.The MSC at our Heritage Oaks location was up                                                                            discounts. Enhancements to the TravelValue® Visa pro-
and running in just four business days after the storm.                                                                      gram allowed members to start earning rewards with
                                                                                                                             as few as 10,000 points, down from 15,000 points.


                                                          Page 2                                                                                                                    Page 3
                  Net Income
                  (dollars in millions)
                                                                    Total Assets
                                                                    (dollars in billions)
                                                                                                              Total Loans/Savings
                                                                                                                  (dollars in billions)
$350                                                $25                                                $20
                                                                                                                 Loans




                                                                                            $22.90
 300

                                $314.20




                                                                                                                            $17.6
                                          $273.84
                                                    20                                                           Savings




                                                                                 $20.04




                                                                                                                         $15.8
                                                                                                         15
 250




                                                                                                                       $14.8
                                                                                                                      $14.1
                                                                       $17.60




                                                                                                                    $13.2
                                                    15




                                                                                                                 $12.3
 200




                                                                                                                 $12.2
                                                           $15.10
                                                                                                         10




                                                                                                              $10.3
                      $181.20




 150                                                10                                                                                        In addition to the new trust services, we were pleased to     enhanced products and convenient account access, this
        $157.30




                                                                                                                                              introduce a second large program in April 2004—Small          has been one of our most successful years ever.
 100                                                                                                                                          Business Services. Small Business Services became avail-
                                                                                                          5
                                                     5                                                                                        able on a limited basis, with plans to expand throughout      It would also be easy to feel good about the job we do at
  50                                                                                                                                          Navy Federal’s service area in 2005. Under the pilot pro-     our member service centers. Our Parris Island MSC was
                                                                                                                                              gram in metro Washington, DC, members using these             named the Department of the Navy Credit Union of the
  $0                                                $0                                                   $0                                   services had $2.4 million on deposit, closed $30.2 million    Year for the outstanding performance of its team.As a
       2001 2002 2003 2004                                2001 2002 2003 2004                                 2001 2002 2003 2004             in real estate investment loans and secured several hundred   matter of fact, a record 26 of our MSCs were nominated
                                                                                                                                              thousand dollars in business loans.                           to compete for this prestigious award.
Mortgage loans closed reached their second highest level                         past two years, supported by the deposits of almost
                                                                                                                                              On a more personal level, members see headlines almost        However, we believe we have just laid the groundwork
ever of $5.6 billion for the year. Our Veterans Choice                           87,000 of our youngest members.
                                                                                                                                              every day on the threat posed by identity theft. Navy         for the increased level of service and success we hope to
mortgage, an attractive alternative to VA loans, increased
                                                                                                                                              Federal received a perfect score in the category of iden-     achieve in coming years. How will we improve? We will
in popularity, with loans disbursed growing 21.7% to                             We continued to expand services to members with great
                                                                                                                                              tity theft prevention in a 2004 survey and online review      continue to enhance our capability to respond more
$1.07 billion. Navy Federal provided members more                                success in Insurance,Trust, Investment and Settlement
                                                                                                                                              of large financial institutions conducted by the inde-         quickly to more members’ telephone inquiries.We will
options with the introduction of additional mortgage                             Services. In 2004, gross revenue from these operations
                                                                                                                                              pendent firm of Javelin Strategy & Research. Part of our       begin construction of 28 new MSCs and 81 ATMs over
products in 2004. Interest-only options on both adjustable                       was $14.2 million, a 10% increase.Assets under manage-
                                                                                                                                              overall program to help members protect themselves is         the next three years.We will constantly challenge our-
rate mortgages (ARMs) and 30-year fixed rate loans                                ment in Investment Services reached $318 million, up
                                                                                                                                              a new service offered this past year that makes Equifax       selves to raise the level of service we provide members
allowed members to afford more home with less money.                             from $233.3 million, a 36% increase. Representatives of
                                                                                                                                              credit monitoring services available at special member        and look for creative, new ways to succeed as we serve
Additional terms for ARMs offered more choices;ARMs                              this group met with 12,297 members to discuss their
                                                                                                                                              discounted rates.                                             the unique needs of our Department of the Navy spon-
comprised 9.5% of our mortgage loan closings in 2004,                            financial goals, an 18% increase. Mutual funds remained
                                                                                                                                                                                                            sor. Our goal of providing service excellence to members
up from just 1% a year ago.                                                      the investment of choice for members, comprising 71%
                                                                                                                                              Whether they’re just starting out on their own, or dealing    has driven our strong performance for over 70 years and
                                                                                 of their securities investments. GEICO auto insurance
                                                                                                                                              with a crisis later in life, members sometimes need help      will continue to guide us as we set service goals in the
On the other side of Navy Federal’s financial house, total                        policies at year’s end totaled 41,594, a 3% increase.
                                                                                                                                              getting back on their feet financially. Over the years, Navy   years ahead.We look forward to meeting the challenge.
savings increased $1.8 billion, or 11.7%, the second high-                       Accidental Death and Dismemberment Insurance ended
                                                                                                                                              Federal has offered budgetary counseling at no charge,
est annual growth rate ever, ending 2004 at $17.6 billion.                       the year with $8.63 billion of coverage in force, a 22%
                                                                                                                                              and in 2004 we provided ongoing counseling to 27,000
Contributing to that growth was a 21.8% increase in                              increase. Settlement Services, which provides competi-
                                                                                                                                              members, of which 5,744 contacted us for the first time.
Money Market Savings Account balances, up to $1.7 billion.                       tively priced real estate settlement services in some Navy
                                                                                                                                              We also published Getting out of debt!, a handbook that
                                                                                 Federal locations, remained very popular with members.
                                                                                                                                              shows members how to take charge of their own finances.
Also contributing to the total savings increase was the                          Trust Services, introduced in 2004, became available
growth in Share Certificate balances, which increased                             nationwide to all members, regardless of asset size.
                                                                                                                                              In times of crisis, Navy Federal is also there to help mem-
10%, up $440 million to $4.8 billion. Contributing to                            Members can now receive assistance with testamentary,                                                                      John A. Lockard
                                                                                                                                              bers get on with their lives.The credit union made over
that growth were higher rates and a special one-time                             revocable and irrevocable, charitable, bypass and other                                                                    Chairman
                                                                                                                                              824 emergency relief loans totaling more than $5.4 mil-
5% Annual Percentage Yield (APY) offer on 5-year,                                trust instruments.
                                                                                                                                              lion to victims of the hurricanes that devastated Florida
$20,000-minimum certificates. Balances in all $20,000-
                                                                                 Caring and Staying Responsive                                and other East Coast locations. Navy Federal also donated
minimum share certificates jumped 26.5%, to $4.1 billion.
                                                                                 At Navy Federal, we realize members want to do business      $261,000 to the Florida Credit Union Foundation’s
Additional savings incentives included limited-time offers
                                                                                 with someone who has their best interests in mind,           Hurricane Relief Fund.
to add funds to existing balances in share, IRA and                                                                                                                                                         Brian L. McDonnell
Education Savings Account certificates without changing                           someone they can rely on to help them throughout
                                                                                 various life stages, with the added convenience of “shop-
                                                                                                                                              How successful are we?                                        President and CEO
the rate or term.                                                                                                                             If we were to evaluate Navy Federal’s success based on
                                                                                 ping” for all their financial needs in one place.As in pre-
                                                                                                                                              the level of service we provided our members in 2004,
Even young children had a reason to save more in 2004.                           vious years, Navy Federal worked hard in 2004 to earn
                                                                                                                                              it would be tempting to feel as though we had done a
As Kids Club members, they became eligible to receive                            that trust by providing products and services that help
                                                                                                                                              pretty good job. Certainly all the numbers look good—
the third character in Sammie the Sea Otter’s circle of                          members deal with daily challenges.
                                                                                                                                              growth in all areas reflects a level of member satisfaction
family and friends—Sammie’s little sister Sallie. Balances                                                                                    that comes with good service. In terms of new and
in Kids Club accounts have more than doubled over the


                                                                     Page 4                                                                                                                            Page 5
             Introducing                                                                                                                                    2004 Volunteers
Cutler Dawson
I     am Cutler Dawson, the
new President of Navy Federal,
                                                                                                                        Board of Directors Committee Members
and I’m proud to join the outstanding                                                                                   John A. Lockard . . . . . . . . . . . . . . . .4   John T. Blake . . . . . . . . . . . . . . . . . . .6    Patrick J. McClanahan . . . . . . . . . . . .7
                                                                                                                                                                                                                                   Lieutenant Commander, SC, USN
Navy Federal team serving you throughout the world.                                                                     Vice Admiral, USN (Ret.)                           Rear Admiral, USN
I’ve recently completed a 34-year career in the U.S. Navy,                                                              Chairman of the Board
                                                                                                                                                                           John T. Boggs . . . . . . . . . . . . . . . . . .7      Sean Paul McGurk . . . . . . . . . . . .3, 10
during which time I became part of the Navy Federal                                                                                                                                                                                Master Chief Petty Officer
                                                                                                                        Mary Jane Miller . . . . . . . . . . . .4, 5, 8    Colonel, USMC
family and later served as a volunteer official and on the                                                                                                                                                                         (SS/AW/SW), USN
                                                                                                                        First Vice Chairman
board of directors.                                                                                                                                                        Rex Cobb . . . . . . . . . . . . . . . . . .2, 11
                                                                                                                        Bruce B. Engelhardt . . . . . .4, 5, 8, 11         Commander, USN                                          Daniel W. McKinnon Jr. . . . . . . . . .6, 9
Following a superb leader                                                                                               Rear Admiral, USN                                                                                          Rear Admiral, SC, USN (Ret.)
                                                                                                                        Second Vice Chairman                               Edward R. Cochrane Jr. . . . . . . . . . .6
I am fortunate to be able to follow Brian McDonnell—a                                                                                                                                                                              Terry D. Scott . . . . . . . . . . . . . . .3, 10
superb leader—who retired in December 2004. During                                                                                                                         Joan C. Cox . . . . . . . . . . . . . . . . . . .1      Master Chief Petty Officer
                                                                                                                        Brian L. McDonnell . . . . . . . .2, 4, 6, 9
his watch, Navy Federal expanded its membership,                                                                                                                                                                                   of the Navy (SS/AW)
                                                                                                                        Treasurer                                          Peter H. Daly . . . . . . . . . . . . . . . . . .7
the number of member service centers and ATMs and
launched innovative services such as Navy Federal                                                                       Kenneth R. Burns . . . . . . .1, 4, 5, 6, 8        Rear Admiral, USN                                       Alan S.Thompson . . . . . . . . . . . . . . .2
Online Account Access, investment and insurance pro-                                                                    Colonel, USMC (Ret.)                                                                                       Rear Admiral, SC, USN
                                                                                                                                                                           Regina F. Eagle . . . . . . . . . . . . . . . . .1
grams, business and trust services. He kept our focus                                                                   Secretary
on our members and their families. I thank Mr. McDonnell                                                                                                                                                                           Frank Thorp IV . . . . . . . . . . . . . . . . .3
                                                                                                                                                                           Robert J. Griffin . . . . . . . . . . . .1, 3, 11
for his 35 years of service to the credit union, including                                                              Sharon R. Chapman . . . . . . . . .3, 7, 8                                                                 Captain, USN
more than eight years as president. His skilled leadership                                                              Commander, SC, USN                                 Gary W. Harris . . . . . . . . . . . . . . .3, 10
                                                                                                                                                                                                                                   William G.Timme . . . . . . . . . . . . . . .5
will have a lasting impact on both Navy Federal and the                                                                                                                    Sergeant Major, USMC
                                                                                                                        Vernon Hutton III . . . . . . . . .9, 10, 11                                                               Rear Admiral, USN
credit union movement.
                                                                                                                        Captain, USN                                       Denise S. Holmes . . . . . . . . . . . . .1, 8
                                                                                                                                                                                                                                   Michael C.Wholley . . . . . . . . . . .8,10
                                                                                                                                                                           Chairperson, Credit Committee
Proud to be aboard                                                                                                      Sheila K. McCoy . . . . . . . . . . . .2, 8, 9                                                             Brigadier General, USMC (Ret.)
I intend to lead Navy Federal with enthusiasm, continuing    a benchmark for performance, we will strive to develop     Captain, USN                                       Mark W. Honecker . . . . . . . . . . . . .10            Chairman, Supervisory Committee
our commitment to providing the best possible service        new ways to help members manage their finances so
                                                                                                                        Henry J. Sanford . . . . . . . . . . . .2, 5, 8    Walter M. Kreitler . . . . . . . . . . . . . . .2
to our members and anticipating their needs.This strategy    that their lives will be richer and more successful. On
                                                                                                                        Captain, USN (Ret.)                                Captain, USN
has made Navy Federal an organization that we can all be     behalf of the 4,500+ team members at Navy Federal, we
proud of, contributing to our growth, safety and sound-      look forward to a future of serving you where you serve.   W. Scott Slocum . . . . . . . . . . . .7, 8, 9
ness.We now have over 2.5 million members and almost
$23 billion in assets, and we’re able to provide world-                                                                 Frances C.Wilson . . . . . . . . . . .6, 8, 9
wide service to all Department of the Navy personnel                                                                    Major General, USMC
and their families.
                                                                                                                                                                           Committee Assignments
Looking forward                                              Cutler Dawson                                                                                                 Credit Committee . . . . . . . . . . . . . . .1        Investment Committee . . . . . . . . . . .6
I have witnessed firsthand how much some of our mem-          President and CEO                                                                                             Data Processing Committee . . . . . . .2               Personnel Policies Committee . . . . .7
bers count on Navy Federal overseas and when they return
home.We will do all that we can to continue deserving                                                                                                                      Education and Marketing                                Planning Committee . . . . . . . . . . . .8
their trust, and that of all our members. Using service as                                                                                                                 Committee . . . . . . . . . . . . . . . . . . . .3
                                                                                                                                                                                                                                  Retirement Program Committee . . .9
                                                                                                                                                                           Executive Committee . . . . . . . . . . . .4
                                                                                                                                                                                                                                  Supervisory Committee . . . . . . . . .10
                                                                                                                                                                           Financial Plan Review
                                                                                                                                                                                                                                  Volunteers’ Education
                                                                                                                                                                           Committee . . . . . . . . . . . . . . . . . . . .5
                                                                                                                                                                                                                                  Committee . . . . . . . . . . . . . . . . . . .11

                                                         Page 6                                                                                                                               Page 7
Many of our members endure                                  young children take this form of account access for granted.
                                                            By 1990, we had 96 machines, and since then the number
                                                                                                                           Anytime access at navyfcu.org
                                                                                                                           Wherever there’s a computer with internet access—
                                                                                                                                                                                        the latest information on our products, current rates,
                                                                                                                                                                                        news and special offerings. Non-members can even sign
frequent relocations, family                                has tripled to 292 Navy Federal ATMs, with a physical
                                                            presence on or near most Department of the Navy instal-
                                                                                                                           whether in port or while deployed, at a cyber cafe or
                                                                                                                           from the comfort of their own living rooms—members
                                                                                                                                                                                        up to join.

                                                                                                                                                                                        When you need to speak with someone
separations, deployment on                                  lations worldwide.Those ATMs are augmented by thou-
                                                            sands of additional machines in the PLUS® System and
                                                                                                                           can access their accounts with Navy Federal Online
                                                                                                                           Account Access. From 100,000 members five years ago,          Making the personal connection with members world-
                                                                                                                                                                                        wide remains a priority in meeting their needs. Our
short notice and life in a foreign country,                 CO-OP Network.                                                 Account Access users have grown to more than 1.2 mil-
                                                                                                                           lion enrollees today.We continually upgrade online tech-     one-year-old call center in Pensacola, Florida, enables
sometimes in combat areas. Other members may be hold-
ing down a job, chauffeuring the kids to soccer practice
                                                            Ease at the checkout counter                                   nologies to improve the ease, speed and usefulness of        us to respond more quickly by augmenting the service
                                                            Even faster than the growth of ATMs has been the transi-       the site. In 2004, we made Web Bill Pay free (with a mini-   provided at headquarters. It handled over half of the
and piano lessons, or even taking a class in the evening.
                                                            tion from writing checks to using debit cards. More than       mum of three transactions a month), and enrollment in        7.8 million calls received in 2004.We’ve also focused on
These unique lifestyles require members to manage their
                                                            1.3 million members carry Navy Federal’s Visa Sharechek        the program increased by 69%. Plus members can now           bringing more member service centers (MSCs) closer to
finances under somewhat less than ideal conditions.We
                                                            Card, making the credit union one of the top 10 debit          log on to both Account Access and Web Bill Pay with just     the communities where members live and work, both
continuously invest resources to provide 24-hour service
                                                            card issuers in the nation. Cardholders swiped their cards     a single sign-on and can instantly reset their passwords     stateside and abroad.We’ve grown from 63 MSCs in
to members in any time zone.
                                                            almost 136 million times last year, making convenient          online.The site is an expanding resource for members         1980, to 106 today. Four MSCs were added in 2004—
                                                            purchases and ATM cash withdrawals both at home and            needing information about the car they’re planning to        at Chula Vista, California; Panama City and Pensacola,
A growing ATM presence
                                                            overseas while in port.                                        buy, determining loan payments with calculators, learn-      Florida; and Germantown, Maryland. Plus we now offer
It was a major breakthrough in convenience when Navy
                                                                                                                           ing consumer tips for avoiding identity theft and getting    more extensive hours at all our offices. Next year calls
Federal installed its first ATM in 1981, but today even
                                                                                                                                                                                        for even greater expansion efforts.

                                                       Page 8                                                                                                                      Page 9
Navy Federal’s more than 2.5                                     existing Share and IRA Certificates.At midyear, dividend
                                                                 rates increased for all certificate products. Popular for the
                                                                                                                                 for hassle-free vehicle purchases and held special promo-
                                                                                                                                 tions with Enterprise Car Sales.And for our members
                                                                                                                                                                                             Your mortgage advantage
                                                                                                                                                                                             We know that when it comes to matching a member with
million member-owners are the                                    combined benefits of higher dividends and easy account
                                                                 access, Money Market Savings Accounts grew 22% to $1.7
                                                                                                                                 who seek escape in the water or on the trails, we offered
                                                                                                                                 special rates on boat and motorcycle loans.
                                                                                                                                                                                             the right mortgage, you can’t have too many options.We
                                                                                                                                                                                             offer fixed and adjustable rate loans, monthly and biweekly
credit union’s most valuable                                     billion, almost 10% of our total savings portfolio.
                                                                                                                                 More credit card choices
                                                                                                                                                                                             payment plans, even our customized Veterans Choice.
                                                                                                                                                                                             Our Interest-Only mortgage loan and expanded selection
                                                                 Affordable auto loans                                           Our credit cards are real money-savers, with low fixed
assets. Because members’ collective savings form                 Prices for new autos have jumped nearly 50% in recent           rates and no annual fees (except for TravelValue Visa)
                                                                                                                                                                                             of adjustable rate mortgages (ARMs) provide even more
                                                                                                                                                                                             ways to purchase more home with less money.And our
the basis for providing loans, we continually monitor all
                                                                 years, while those for used autos have virtually doubled.       along with special offers for balance transfers.Value       settlement services provide convenience at a good price.
savings and lending programs for high quality and fair
                                                                 More than ever, members are counting on us for affordable       also comes in the form of having options, and at Navy       Closing costs are now guaranteed up front, along with
rates and focus on bringing value and an array of choices
                                                                 payment options, starting with the continued availability       Federal, there’s a card to fit every lifestyle, from Visa    our service for the life of the loan.And members who buy
to meet their changing needs throughout life.
                                                                 of discounted rates on GEICO auto insurance. In 2004, we        Classic and Standard MasterCard®, to Gold and Platinum      or sell homes through MemberMovesm relocation services
                                                                 added value by reducing loan rates for new and used cars        options. Last year, we lowered the minimum number of        now earn even higher bonuses.
Safe, secure and competitive savings
                                                                 and trucks and lengthening terms on loans for higher-           points required to earn rewards with TravelValue Visa,
A broad scope of federally insured savings plans is essential,
                                                                 priced autos. For more flexibility, we also offered a limited-   and we introduced our nRewards card, which allows           At the same time, equity loan closings reached a record
from our EasyStartsm Certificates that help beginning savers
                                                                 time deferred payment option, not only on auto but on all       members to earn points with every purchase that can         $1.8 billion, due in large part to our 1.9% introductory
experience success, to competitive alternatives for educa-
                                                                 consumer loans, provided refinancing of vehicle loans from       be redeemed for merchandise, gift certificates and dining    offer on new lines of credit.
tion and retirement savings. In the first quarter of 2004,
                                                                 other financial institutions, sponsored numerous tent sales      and travel discounts.
we offered special rates and opportunities to add funds to


                                                           Page 10                                                                                                                      Page 11
It’s comforting to know that                               Keeping our systems running
                                                           Delivering quick and reliable account access to members
                                                                                                                        We serve where you serve
                                                                                                                        Navy Federal representatives meet regularly with the
                                                                                                                                                                                   We are grateful for the safety, resilience and dedication of
                                                                                                                                                                                   all our 4,500 employees who pull together both in times
you can count on something                                 round-the-clock is a priority.We not only track the daily
                                                           performance of all our computer,ATM and telecommuni-
                                                                                                                        commands at our 64 on-base locations to discuss their
                                                                                                                        needs, such as providing special operating hours when
                                                                                                                                                                                   of crisis and in performing the day-to-day tasks that make
                                                                                                                                                                                   a difference to our members all over the world.
happening just the way you                                 cations systems but also maintain extensive backups.
                                                           Our testing simulates a variety of emergency conditions
                                                                                                                        ships are in port or even maintaining service in combat
                                                                                                                        areas. Service was critical to thousands of sailors who
expect. From the security of direct deposit of your        to make sure these systems can be counted on. In the
                                                           aftermath of Hurricane Ivan in Florida, for example,
                                                                                                                        arrived in Bahrain with the John F. Kennedy Carrier
                                                                                                                        Battle Group.
pay, to getting emergency cash at an ATM, applying for a
loan online, 24/7 telephone access or being welcomed at    Navy Federal’s ATMs in Pensacola provided members
a member service center overseas, you can count on         with continuous access to their accounts during a critical
Navy Federal for the right service at the right time.      period when the community experienced area-wide
                                                           power outages.




                                                     Page 12                                                                                                                  Page 13
                                                               We hear what you have to say




Our members are the heart of                               looked by the financial services industry.We launched
                                                           Navy Federal Small Business Services in select locations
                                                                                                                         financial resources for growth and security, acting on your
                                                                                                                         behalf at your death, distributing your estate holdings
                                                                                                                                                                                      Your one-stop resource for investments
                                                                                                                                                                                      Perhaps you’re on track with your savings and spending,
the credit union, the very rea-                            especially with these members in mind.We offer busi-
                                                           ness checking accounts, all with dividends, no minimum
                                                                                                                         according to your wishes and helping your heirs by man-
                                                                                                                         aging your inheritance.
                                                                                                                                                                                      and your latest raise or promotion has you thinking
                                                                                                                                                                                      about broader opportunities for investing your money.
son for its existence. So you can                          balance and free Web Bill Pay. Business loans are available
                                                           for vehicle purchases, credit cards and investment prop-      Protecting your good name
                                                                                                                                                                                      The financial counselors of Navy Federal Investment and
                                                                                                                                                                                      Insurance Services will work with you to map out a plan
                                                                                                                         Identity theft has become the fastest-growing crime in the
be sure we pay attention when you                          erties. Participants in the program work with one of our
                                                           business account representatives, so you’ll have individu-    United States.To combat this problem, we’ve put together
                                                                                                                                                                                      that matches your individual goals, and provide annuities
                                                                                                                                                                                      and life, auto and long-term care insurance. Plus, you’ll
have a question, fill out one of our surveys or tell us
                                                           alized attention whether you’re self-employed, running a      an Identity Theft Prevention program that includes both      have your investments conveniently in one place, along
about a financial concern. It’s why we take the time to
                                                           small business on the side for extra income or just start-    employee awareness and member education.The booklet,         with the Navy Federal savings, lending and transaction
answer every single letter and email—in 2004, that was
                                                           ing a new business.                                           When Bad Things Happen to Your Good Name, provides           services you use every day. Last year, our registered repre-
963,000 letters and 260,000 online inquiries.
                                                                                                                         tips on how to protect your personal information and         sentatives met with 12,297 members to discuss their
Helping small-business owners                              New tools for building a sound estate plan                    what to do if you’re a victim.We’ve also teamed with         financial goals.
                                                           With America’s senior population expected to double in        Equifax to offer a credit monitoring service to members
A recent survey showed that approximately 25% of our
                                                           25 years, there’s a growing awareness of the advantages       at discounted rates, so it’s easier for you to review your
members are owners of small businesses, the majority
                                                           of estate planning. Navy Federal Trust Services can help      credit report and spot irregularities.
being sole proprietors with fewer than 10 employees
                                                           protect your assets and your family by managing your
and under $1 million in assets.While these companies
make up 80% of the business market, they are often over-


                                                     Page 14                                                                                                                    Page 15
Just like you, all Navy Federal                            reopened, our mobile ATM was there to dispense cash,
                                                           and we waived all surcharge fees for non-members using
                                                                                                                        2004, Navy Federal representatives reached more than
                                                                                                                        80,000 individuals at financial presentations that ranged
                                                                                                                                                                                     For our youngest members, there’s Navy Federal’s Kids
                                                                                                                                                                                     Club, and over 86,700 children belong.As they add to
employees are members, too.                                Navy Federal’s six ATMs in the area.The credit union
                                                           also contributed $261,000 to the Florida Credit Union
                                                                                                                        from military indoctrinations and pre-deployment briefings,
                                                                                                                        to community events, school and shipboard visits. Our
                                                                                                                                                                                     their savings, they earn special rewards like the new
                                                                                                                                                                                     stuffed toy, Sallie the Sea Otter, who joins a growing
And like a family, we take pride                           Foundation’s Hurricane Relief Fund.                          new Getting out of debt! booklet is geared to helping
                                                                                                                        members recognize signs of trouble, get assistance and
                                                                                                                                                                                     collection that already includes her brother Sammie
                                                                                                                                                                                     and friend Bernie the Polar Bear.
                                                           Making your voice heard
in looking out for your best                               We made it more convenient for our overseas members
                                                                                                                        get back on track.
                                                                                                                                                                                     We’re part of your community
                                                           to participate in the 2004 national elections by setting                                                                  As a credit union, we share in activities that assist naval
interests, whether it’s providing information that         up our Web site, navyfcu.org, with a link to voter infor-
                                                                                                                        Some members may face financial hurdles or become tar-
                                                                                                                        gets of unscrupulous lenders because they lack a credit      families and benefit our communities, such as the annual
gives you an edge in managing your money or granting a
                                                           mation for all 50 states.Thousands of members used the       history. Navy Federal’s Moderate Income Auto Loan pro-       Marine Corps Reserve Toys for Tots campaign. In partner-
loan in an emergency.
                                                           link to access registrars in various states and obtain       gram uses special guidelines to grant auto loans to these    ship with the Navy and the Family Literacy Foundation’s
                                                           absentee ballots.                                            members at fair rates when they wouldn’t otherwise           Ship-to-Shore Book Drives, we collect thousands of chil-
Support during a crisis
                                                                                                                        qualify. In the five years since the program’s inception,     dren’s books which are sent to deployed Navy and
Sometimes it’s a weather catastrophe that brings us
                                                           Special programs                                             we’ve served 15,550 members, and we’ve now broad-            Marine Corps parents. Parents are videotaped reading the
together. Hundreds of members and employees suffered
                                                           Because we believe that smart money management is            ened terms and loan amounts to keep abreast of rising        books, then send the videos home so their children can
losses when Hurricane Ivan hit Pensacola, Florida, last
                                                           an important life skill, we offer free financial education,   auto prices. Our Home Ownership Opportunity Program          have mom or dad read them a story.
year, and we made over $4.5 million available in emer-
                                                           budgetary counseling and debt management services. In        provides similar assistance to prospective homebuyers.
gency loans to that area alone.As soon as the roads were


                                                      Page 16                                                                                                                  Page 17
                     From left to right: Kenneth R. Burns, Secretary, John A. Lockard, Chairman, Frances C.Wilson, Mary Jane Miller, First Vice


Board of Directors   Chairman,Vernon Hutton III, Sheila K. McCoy, Henry J. Sanford,W. Scott Slocum, Bruce B. Engelhardt, Second Vice Chairman,
                     Brian L. McDonnell,Treasurer, Sharon R. Chapman




       Page 18                                                              Page 19
                                         Report from the
                            Credit Committee
Y  our Credit Committee meas-
ures success by how effectively
                                                            tives brought in over 29,000 loans for another $510 mil-
                                                            lion. Plus, our 1.9% APR special offer for new autos resulted
                                                            in 4,277 loans for $85.0 million.

members’ collective savings are                             Members responded enthusiastically to our first-time
                                                            promotion on loans for boats and motorcycles.The
being used to meet the borrowing needs of                   boat loan portfolio increased 42%, and the motorcycle
                                                            loan portfolio increased 11%, for a total increase of
fellow members, and 2004 was a year of outstanding
growth in loans. More than 665,000 member loan requests     $27.6 million.
were approved for a total of $15.8 billion. Growing
consumer confidence spurred loan demand, and Navy            Credit cards ended the year with outstanding balances
Federal responded with special rate promotions for auto     of $1.78 billion, growth of more than $171 million over
and equity loans coupled with new features in our           2003 and the highest annual gain since the inception
mortgage and credit card programs.                          of our credit card program.A new nRewards card
                                                            earns members one point for every dollar in purchases,
Highlighting the year, equity loan closings totaled $1.8    redeemable for merchandise and gift certificates. Plus,
billion, an extraordinary increase of 119% over 2003.       our new Credit Builder plan uses special guidelines to
This resulted in our Fixed Equity Loan portfolio jumping    grant affordable credit cards to members who would
more than 100% to $1.2 billion, and the Home EquityLine     not otherwise qualify. Overall, more than 156,000 new
portfolio increasing 38% to nearly $899 million. Record     credit card accounts were approved in 2004.
growth was driven by rates as low as 4.9% APR for the
fixed-rate loan and 1.9% for the line of credit.We also      The total consumer loan portfolio grew by $258 million,
introduced a new Interest-Only option for the line of       a 4.8% increase over last year, reaching $5.6 billion.We
credit product.                                             processed over 736,000 consumer loan requests, and
                                                            90% received a decision within two hours or less.Almost
Continued low rates contributed to strong performance       30% received instant decisions. Currently, 20% of all con-
in mortgage loans, and closings reached their second        sumer loan and 65% of all mortgage loan applications are
highest level ever of $5.6 billion. Our Adjustable Rate     submitted via Navy Federal Online.                              From left to right: Denise S. Holmes, Chairperson, Joan C. Cox, Kenneth R. Burns, Robert J. Griffin, Regina F. Eagle
Mortgage (ARM) was expanded to include five-, seven-
and ten-year terms, and these new offerings resulted in     Your Credit Committee’s responsibility to preserve the
loans for $194 million.We added an Interest-Only option     safety and soundness of the credit union parallels our
for 30-year fixed rate loans and for all ARM products.       commitment to member service. Our success continues
ARMs represented 9.5% of our mortgage loan portfolio in     to be reflected in the quality and scope of our lending
2004 compared to 1% for the previous year.We continue
to service all the mortgages we make, a key benefit to
                                                            programs and in the volume of loans granted to help
                                                            members afford reliable transportation, become home-
                                                            owners and improve the quality of their lives.
                                                                                                                              2004 Approvals
our members.                                                                                                                  Type of loan                       $ Approved       % Change
                                                                                                                                                                    (Millions)
A variety of promotions resulted in our reaching a total
                                                                                                                              Consumer                              $4,857.9           3.7%
of $3.9 billion in the new and used auto loan portfolio.
An eight-year loan was introduced for new autos with                                                                          Mortgage                              $8,784.7          -13.8%
a minimum purchase price of $30,000.Another new
product, the late model used auto loan for current year     Denise S. Holmes                                                  Equity                                $1,710.5          48.2%
and one-year-old used autos, generated over 14,000 loans    Chairperson
                                                                                                                              Credit Cards                            $390.9          26.4%
for $278 million.We sponsored eight new and used auto
tent sales, which produced almost 1,900 loans for nearly                                                                      Federal Education                        $40.8           0.04%
$36 million, a record for these events. Refinancing incen-

                                                      Page 20                                                                                                                       Page 21
                                         Report from the
                   Supervisory Committee
T  he Supervisory Committee
provides the membership with
                                                            Committee is pleased to announce that, as a result of the
                                                            2003 examination, Navy Federal once again received
                                                            NCUA’s highest rating.

an independent appraisal of the                             The Supervisory Committee acts as your ombudsman by
                                                            reviewing and responding in writing to letters and emails
safety and soundness of Navy Federal’s operations           it receives from Navy Federal members. By maintaining
                                                            an open line of communication with the membership,
and activities. It does so in compliance with the Federal
                                                            the committee helps to ensure that you are provided the
Credit Union Act, the rules and regulations of the
                                                            quality of service that you deserve as member-owners
National Credit Union Administration (NCUA) and Navy
                                                            of your credit union.
Federal’s bylaws.The Supervisory Committee ensures
that Navy Federal’s financial statements provide a fair
                                                            Based on the results of the quarterly audit procedures
and accurate representation of its financial condition and
                                                            and the annual Report of Independent Accountants and
that management establishes and maintains sound inter-
                                                            the Examination Report of NCUA, it is the opinion of
nal controls to protect the assets of the credit union.
                                                            your Supervisory Committee that Navy Federal continues
                                                            to be financially strong and well-managed, with sound
The Supervisory Committee employs the independent
                                                            policies and programs.
accounting firm of PricewaterhouseCoopers LLP to
assist in meeting its responsibilities.The committee
meets regularly with PricewaterhouseCoopers LLP to
evaluate audit results and to plan future audit work.
PricewaterhouseCoopers LLP conducts quarterly proce-
dures related to selected operations and performs a com-
                                                            Michael C.Wholley
prehensive audit of the credit union’s year-end financial
                                                            Chairman
statements.Their comprehensive year-end audit,The
Report of Independent Accountants, appears in this
Annual Report.
                                                                                                                        From left to right:Terry D. Scott, Michael C.Wholley, Chairman,Vernon Hutton III, Gary W. Harris, Mark W. Honecker
Periodic supervisory examinations are also performed
by NCUA, the regulatory agency for all federally char-
tered credit unions.The NCUA evaluates Navy Federal’s
financial condition, safety and soundness.The Supervisory




                                                      Page 22                                                                                                                 Page 23
         Accomplishments for 2004
                                                              • temporarily provided a link to absentee ballot voter     to combine all IRA contributions, direct transfers and   • members received a three-month payment deferral

Service Enhancements                                            registration info prior to the presidential election
                                                              • temporarily provided links members could use to
                                                                support tsunami disaster relief efforts
                                                                                                                         rollovers into existing certificates without changing
                                                                                                                         the term or rate
                                                                                                                       • a limited-time offer to add on to existing share
                                                                                                                                                                                    on items charged during a limited time period

                                                                                                                                                                                  Mortgage and Equity Loans
Member Service Centers (MSCs)—106 total                                                                                  certificates with new money only, $1,000 minimum          Enhancements/offers included:
 New                                                          Member Service                                           • posting of dividends now monthly instead of quarterly    • interest-only loans introduced for Adjustable Rate
   California—Chula Vista; Florida—Panama City,               Enhancements included:                                   • the introduction of Sallie, Sammie the Sea Otter’s         Mortgages (ARMs) and 30-year fixed rate loans
   Pensacola; Maryland—Germantown                             • introduction of Small Business Services, including       little sister, who is awarded to Kids Club members       • additional terms added for ARMs
                                                                checking, retirement, insurance services and a           meeting deposit requirements
                                                                                                                                                                                  • a guarantee on mortgage closing cost amounts
  Renovated/Relocated                                           variety of loan products, including investment
                                                                                                                       Loans                                                      • higher bonuses now offered for using the
   California—San Diego; Hawaii—Kailua, Pearl                   property mortgage loans and credit cards
                                                                                                                       Enhancements/offers included:                                MemberMove relocation service
   Harbor; Florida—Pensacola; Virginia—Arlington,             • more extensive hours for MSCs
   Dale City, Portsmouth,Virginia Beach;                                                                               • boat and motorcycle loan rates lowered                   • equity rates lowered
                                                              • improved call-handling capability as a result of
   Washington—Oak Harbor; JAPAN—Okinawa;                                                                                 for extended period                                      • special introductory rates made available on new
                                                                support provided by the one-year-old Heritage Oaks
   GUAM                                                                                                                • 8-year new-auto loan introduced, with a 5.9% APR,          home equity lines for first six months of loan
                                                                call center in Pensacola, Florida
                                                                                                                         for vehicles costing more than $30,000                   • Navy Federal now pays closing costs on all home
                                                              • partnered with Equifax to provide members with
New ATMs—292 total                                                                                                     • introduced the optional Payment Protection Plan,           equity lines, regardless of loan amount
                                                                a discounted Credit Monitoring Service
California—Chula Vista (2), Miramar (2);                                                                                 which covers loan balances on death, disability and
Connecticut—Groton; Florida—Panama City,                      • made available the booklet, When Bad Things
                                                                Happen to Your Good Name, which provides tips            unemployment                                             Other Products and Services
Pensacola (3); Hawaii—Pearl Harbor; Maryland—                                                                                                                                     Enhancements included:
                                                                on how to protect your personal information and        • offered a 1% rate reduction with 36 timely payments
Germantown; South Carolina—Beaufort; Virginia—
                                                                what to do if you’re a victim of identity theft          on Education Consolidation Loans                         • the introduction of Trust Services, providing a variety
Chesapeake, Newport News, Norfolk (2), Portsmouth,
                                                              • introduced Getting out of debt!, a new publication     • on Moderate Income Auto Loan, raised maximum               of trust instruments, the management of custodial
Virginia Beach; GUAM (2)
                                                                that shows members how to take charge of their           loan amount from $15,000 to $20,000, and maximum           accounts and serving as member’s agent on invest-
Navy Federal Online and                                         own finances                                              loan term from 48 to 60 months                             ment management accounts—available to all
                                                                                                                       • Emergency Relief Loans made available for Hurricane        members regardless of their asset size
Account Access Enhancements
Enhancements to the site included:                            New or Used Auto Tent Sales/Enterprise                     Ivan victims featured a 6% APR, a 5-year term and no     • Settlement Services now offered in more locations—
                                                                                                                         payment for 90 days                                        refinancing in 17 states and the District of Columbia,
• members can now enter both Account Access and               Lot Sales—29 total                                                                                                    home purchases in Virginia, Maryland and Florida
  Web Bill Pay with a single sign-on                          California—3; Connecticut—2; Florida—4;                  • limited-time offer of 1.9% APR on new cars
                                                              Georgia—1; Illinois—1; Maryland—3; North                 • incentives offered throughout the year for               • made available prepaid Visa gift cards
• passwords for Account Access can now be reset
  instantly online, without having to wait for written        Carolina—3; Ohio—1; South Carolina—1; Texas—1;             purchasing Enterprise cars with Navy Federal loans
  verification by U.S. mail
• link now provided to Visa Rewards, allowing mem-
  bers to access valuable merchant discounts
                                                              Virginia—7; Washington—2                                 • members received $100 when they refinanced
                                                                                                                         another financial institution’s vehicle loan with
                                                                                                                         Navy Federal
                                                                                                                                                                                  Special Recognition
• Web Bill Pay now available at no charge when
  making a minimum of three payments per month
• 12-month statement history, instead of 3-month,
                                                              Products
                                                              Savings
                                                                                                                       • for a limited time, members received a two-month
                                                                                                                         payment deferral on all new consumer loans
                                                                                                                                                                                  • Navy Federal received a perfect score in the category
                                                                                                                                                                                    of identity theft prevention in a survey and online
                                                                                                                                                                                    review conducted by Javelin Strategy & Research
  now available
                                                                                                                       Credit Cards                                               • Heritage Oaks facility in Pensacola, Florida, awarded
                                                              Enhancements/offers included:                            Enhancements/offers included:                                LEED (Leadership and Energy and Environmental
• members can now make transfers from their Home              • raised Annual Percentage Yield (APY)                   • the introduction of the nRewards card—members              Design) Gold certification—first building in Florida
  EquityLine to their savings, checking or Money                on all certificates                                       earn one point for every $1 spent, can apply points to     to be so recognized
  Market Savings Account.
                                                              • for a limited time, offered a 5% APY on $20,000,         get merchandise and discounts on dining and travel       • Parris Island MSC named Department of the Navy
• the download of information from Quicken                      5-year certificates                                     • TravelValue Visa benefits enhanced, members now             Credit Union of the Year—26 other Navy Federal
  software is now faster and easier, requiring just
                                                              • a limited-time offer on IRA/Education Savings            earn rewards with as few as 10,000 points                  MSCs also nominated
  one step to complete
                                                                Account allowed members a one-time opportunity

                                                         Page 24                                                                                                             Page 25
                     Products and Services
Navy Federal Online                                         Savings for now and later                                 Consumer loans                                                                       Investments and Insurance
navyfcu.org                                                 •    Share savings                                        •   For virtually any purpose                                                        •   Stocks, bonds, mutual funds and annuities
• Secure 24-hour Account Access                             •    Money Market Savings Accounts                        •   Home improvement                                                                 •   Trust services
• Online statements                                         •    Traditional, Roth and SEP IRAs                       •   Electronics and appliances                                                       •   GEICO Auto Insurance group discounts
• Web Bill Pay                                              •    Education Savings Accounts                           •   Education                                                                        •   Group dental program
• Applications for membership and products                  •    Fixed- and variable-rate Share and IRA certificates   •   Payment protection plans                                                         •   Accidental Death & Dismemberment Insurance
• Auto buying services and pricing guides                   •    Custodial Accounts                                   •   Apply online or by phone, 24 hours a day                                         •   Mortgage and Equity Settlement Services
• Calculators and workbooks                                 •    Trustee and Estate Settlement Accounts                                                                                                    •   Term Life Insurance
• Rates and product/service descriptions                    •    Kids Club                                            Credit cards
• Worldwide member service center and ATM locators                                                                    • Standard, Gold and Platinum MasterCard                                             Additional services
• Sign up to receive emails on news and special offers      New and used auto, boat                                   • Classic, Gold, Platinum, Student and                                               •   Identity theft protection program
• Order checks                                              and motorcycle loans                                        TravelValue Visa                                                                   •   Discounted tax services
• Place certificate maturity instructions                    •    Low interest rates, flexible terms and refinancing     • nRewards Visa and Mastercard                                                       •   Enterprise Rent-A-Car discounts
• Family Zone®—tips for parents and kids                    •    100% financing, including taxes, tags and title       • Low annual percentage rates                                                        •   American Express Travelers Cheques
• The latest member news, consumer tips and                 •    Preapprovals                                         • Competitive $49 annual fee on TravelValue Visa                                     •   Budgetary Counseling
  product promotions                                        •    Auto leasing                                         • 25-day grace period on purchases                                                   •   Correspondent Credit Union Program
                                                            •    Apply online or by phone, 24 hours a day             • CardGuard Program offers account security                                          •   Federal Education Loans
Touch-Tone Teller                                                                                                     • Apply online or by phone, 24 hours a day                                           •   U.S. Savings Bonds
• Toll-free 800 number                                      Mortgage and equity loans                                                                                                                      •   Prepaid Visa gift cards
• 24-hour automated account information                     • Programs nationwide                                     Small Business Services
  and transaction service                                   • Low rates and points                                    •   Checking
• Get account balances and checks paid                      • Loan options—conventional,ARMs, interest-only,          •   Credit cards
• Make transfers and loan payments                            balloons, jumbos                                        •   Investment property mortgage loans
                                                            • No PMI on most conventional programs                    •   Vehicle loans
Sharechek checking                                          • Special programs for active duty personnel              •   Other loans
•   No monthly service charges                                and veterans                                            •   Retirement and insurance services
•   No minimum balance requirement                          • Programs for low- to moderate-income borrowers
•   Earns dividends                                         • Zero down payment and rate-lock programs
•   NAVchek® Line of Credit and overdraft protection        • Preapprovals
•   Trustee and Estate Settlement Accounts                  • Lifetime servicing
                                                            • MemberMove relocation service
Visa Sharechek debit card                                   • Navy Federal mortgage settlement services
• Combination debit and ATM card                            • Fixed equity and equity lines of credit programs
• Pay for purchases wherever Visa debit cards               • Apply online 24 hours a day or by phone
  are accepted
• Transactions are automatically deducted from
  your Sharechek account
                                                                                                                      Representatives are registered through, and securities are sold through, CUNA Brokerage Services, Inc. (CBSI), member NASD/SIPC, 2000 Heritage Way, Waverly,
                                                                                                                      IA 50677, toll-free (866) 512-6109. Insurance sold through licensed CUNA Mutual Life Insurance Company Representatives, and in New York, licensed insurance
                                                                                                                      representative of other companies. Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of or
                                                                                                                      guaranteed by the credit union.

                                                       Page 26                                                                                                                                 Page 27
         Tribute                                                                     Report of Independent Auditors
W     e salute the men and women
serving in our armed forces all
                                                                                                       To the Board of Directors, Supervisory Committee and Other
                                                                                                       Members of Navy Federal Credit Union:

                                                                                                       We have audited the accompanying consolidated statements
                                                                                                       of financial condition of Navy Federal Credit Union as of
around the world and remain                                                                            December 31, 2004 and 2003, and the related consolidated
                                                                                                       statements of operations, of changes in reserves and undivided
ever mindful of those in combat,                                                                       earnings, and of cash flows for the years then ended.These
                                                                                                       financial statements are the responsibility of the credit union’s
especially in Operation Iraqi                                                                          management. Our responsibility is to express an opinion on
                                                                                                       these financial statements based on our audits.
Freedom and Operation Enduring
                                                                                                       We conducted our audits in accordance with auditing stan-
Freedom.We extend our gratitude                                                                        dards generally accepted in the United States of America.Those
                                                                                                       standards require that we plan and perform the audit to obtain
and respect for their unswerving                                                                       reasonable assurance about whether the financial statements
                                                                                                       are free of material misstatement.An audit includes examining,
dedication and courage, and we                                                                         on a test basis, evidence supporting the amounts and disclo-
                                                                                                       sures in the financial statements.An audit also includes assess-
pay tribute to those who have                                                                          ing the accounting principles used and significant estimates
                                                                                                       made by management, as well as evaluating the overall finan-
given their lives in service to                                                                        cial statement presentation.We believe that our audits provide
                                                                                                       a reasonable basis for our opinion.
their country.                                                                                         The industry audit guide for depository and lending institu-
                                                                                                       tions, issued by the American Institute of Certified Public
      It is an honor to serve the                                                                      Accountants, indicates that members’ accounts are liabilities.
                                                                                                       As further described in Note 1, Navy Federal Credit Union
men and women of the Navy and                                      U.S. Navy Photo
                                                                                                       considers members’ accounts to be members’ equity and has
                                                                                                       presented as such.The presentation followed by Navy Federal
Marine Corps and their families.We will continue our support to those                                  Credit Union has no effect on the total amount or classifica-
                                                                                                       tions of assets or on the determination of income, expenses
troops who must persevere until their work is done, and we await their                                 or net income.
safe return.                                                                                           In our opinion, except for the classification of members’
                                                                                                       accounts as described in the third paragraph of this report, the
                                                                                                       consolidated financial statements referred to above present
                                                                                                       fairly, in all material respects, the financial position of Navy
                                                                                                       Federal Credit Union at December 31, 2004 and 2003, and the
                                                                                                       results of its operations and its cash flows for the years then
                                                                                                       ended in conformity with accounting principles generally
                                                                                                       accepted in the United States of America.



                                                                                                       Washington, DC
                                                                                                       March 15, 2005



                                 Page 28                                                          Page 29
Consolidated Statements of Financial Condition                                                                      Consolidated Statements of Operations
(dollars in thousands)                                                                                              (dollars in thousands)

December 31                                                                               2004              2003    Years Ended December 31                                                                 2004              2003
ASSETS                                                                                                              Interest income
Cash and cash equivalents                                                       $    3,879,589    $    3,447,703    Interest on loans to members                                                   $    931,909       $    908,653
Securities available-for-sale                                                           12,915            12,953    Interest on securities available-for-sale                                               222                218
Securities held-to-maturity                                                          2,591,845         1,827,098    Interest on securities held-to-maturity                                             126,067             97,132
Mortgage loans awaiting sale                                                           321,268           242,492    Total interest income                                                              1,058,198          1,006,003
Loans to members, net of allowance for loan losses of $161,889                                                      Dividend and interest expense
     at December 31, 2004 and $116,037 at December 31, 2003                         14,302,380        12,885,785
                                                                                                                    Dividends to members                                                                362,960            361,468
Investment in FHLB-Atlanta                                                              26,458            36,320
                                                                                                                    Interest on securities sold under repurchase agreements and notes payable            32,140             20,196
Interest bearing deposits                                                              655,369           492,168
                                                                                                                    Total dividend and interest expense                                                 395,100            381,664
Other investments                                                                        2,226               244
Accounts receivable                                                                    403,823           481,939    Net interest income                                                                 663,098            624,339
Accrued interest receivable                                                             82,562            72,230    Provision for loan losses                                                           149,750            120,665
Fixed assets                                                                           237,712           223,522    Net interest income after provision for loan losses                                 513,348            503,674
NCUSIF deposit                                                                         150,979           130,060    Non-interest income
Mortgage servicing assets, net of                                                                                   Gain on mortgage loan sales, net                                                       6,992            50,895
     accumulated amortization and impairment                                           102,384            79,533    Mortgage servicing                                                                    36,383            35,725
Prepaid expenses                                                                       102,728            79,326    Credit card interchange                                                               60,259            51,964
Other assets                                                                            24,689            28,382    Sharechek card interchange                                                            66,272            52,064
Total assets                                                                        22,896,927        20,039,755    ATM interchange                                                                       27,892            16,544
LIABILITIES AND MEMBERS’ EQUITY                                                                                     Overdrawn Sharechek fee                                                               71,894            35,639
Liabilities                                                                                                         Mortgage loan origination                                                              3,641             8,185
Securities sold under repurchase agreements                                          2,578,674         1,831,192    Other                                                                                 28,774            34,925
Notes payable                                                                           32,400            32,400    Total non-interest income                                                           302,107            285,941
Drafts payable                                                                         138,979           150,647    Non-interest expense
Dividends payable                                                                          780               659    Salaries and employee benefits                                                       266,068            244,255
Accrued expenses and accounts payable                                                   97,128            89,879    Office operating                                                                     85,844             85,594
Accrued interest payable                                                                 3,551             1,315    Loan servicing                                                                       71,983             58,659
Other liabilities                                                                          529             2,802    Professional and outside services                                                    25,521             19,835
Total liabilities                                                                    2,852,041         2,108,894    Office occupancy                                                                     26,119             23,738
Members’ Equity                                                                                                     Loan protection life insurance                                                        9,548              8,867
Members’ accounts                                                                                                   Life savings insurance                                                                1,504              1,278
Share savings accounts                                                               6,170,403         5,552,077    Education and marketing                                                               9,783              9,036
Money market savings accounts                                                        1,707,364         1,402,315    Federal supervision and examination                                                     482                547
Sharechek accounts                                                                   2,843,768         2,532,961    Impairment/(recovery) of mortgage servicing assets                                    4,320            (14,884)
Business accounts                                                                        2,425                 0    Amortization of mortgage servicing assets                                            19,033             23,384
Share certificate accounts                                                            4,846,540         4,406,937    Unrealized loss on mortgage loans awaiting sale                                         550                 59
Individual retirement accounts                                                       2,048,269         1,884,252    Unrealized loss/(gain) from derivative and hedging activities                         2,199             (2,072)
Total members’ accounts                                                             17,618,769        15,778,542    Other                                                                                18,665             17,163
Reserves and undivided earnings                                                                                     Total non-interest expense                                                          541,619            475,459
Regular reserve                                                                        349,406           349,406    Net income                                                                     $    273,836       $    314,156
Capital reserve                                                                      2,056,796         1,782,960
                                                                                                                    The accompanying notes (beginning on page 34) are an integral part of these consolidated financial statements.
Undivided earnings                                                                      20,000            20,000
Accumulated other comprehensive income                                                     (85)              (47)
Total reserves and undivided earnings                                                2,426,117         2,152,319
Total members’ equity                                                               20,044,886        17,930,861
Total liabilities and members’ equity                                           $ 22,896,927      $ 20,039,755

The accompanying notes (beginning on page 34) are an integral part of these consolidated financial statements.




                                                          Page 30                                                                                                                   Page 31
Consolidated Statements of Changes in Reserves and Undivided Earnings                                                            Consolidated Statements of Cash Flows
(dollars in thousands)                                                                                                           (dollars in thousands)

                                                                                        Accumulated Other       Total Reserves   Years Ended December 31                                                               2004                2003
Years Ended                                Regular            Capital       Undivided      Comprehensive        and Undivided
December 31, 2004 and 2003                 Reserve           Reserve         Earnings             Income              Earnings   Cash flows from operating activities
                                                                                                                                 Net income                                                                  $     273,836      $       314,156
Balance at December 31, 2002          $   349,406    $    1,468,804     $    20,000                         $    1,838,210       Adjustments to reconcile net income to net cash
                                                                                                                                    provided by operating activities:
Net income                                                                  314,156                                 314,156
                                                                                                                                 Provision for loan losses                                                          149,750             120,665
Net unrealized loss
   on available-for-sale securities                                                                 ($47)                 (47)   Depreciation of fixed assets                                                         35,802              32,605
Transfers                                                                                                                        Amortization of mortgage servicing rights                                           19,033              23,384
   Statutory                                    –                 –                –                   –                    –    (Gain)/Loss on disposal of fixed assets                                                (759)                 43
   Discretionary                                –           314,156         (314,156)                  –                    –    Mortgage loans originated for sale                                              (4,451,241)         (4,717,073)
                                                                                                                                 Mortgage loan sales proceeds                                                     4,345,233           4,716,066
Balance at December 31, 2003          $   349,406    $    1,782,960     $    20,000                ($47)    $    2,152,319
                                                                                                                                 Increase in mortgage servicing assets                                              (41,884)            (51,017)
Net income                                                                  273,836                                 273,836
                                                                                                                                 Increase in accrued interest receivable                                            (10,332)             (3,642)
Net unrealized loss
   on available-for-sale securities                                                                 ($38)                 (38)   Increase in prepaid expenses                                                       (23,402)            (25,086)
Transfers                                                                                                                   –    (Increase)/decrease in accounts receivable                                          89,279            (173,119)
   Statutory                                    –                 –                –                   –                    –    (Increase)/decrease in other assets                                                  3,694              (8,580)
   Discretionary                                –           273,836         (273,836)                  –                    –    Increase/(decrease) in dividends payable                                               120             (19,224)
Balance at December 31, 2004          $   349,406    $    2,056,796     $    20,000                ($85)    $    2,426,117       Decrease in drafts payable                                                         (11,669)               (939)
                                                                                                                                 Increase in accrued expenses and accounts payable                                   11,721              13,064
The accompanying notes (beginning on page 34) are an integral part of these consolidated financial statements.                    Decrease in accrued interest payable                                                (2,236)               (809)
                                                                                                                                 Increase/(decrease) in other liabilities                                            (2,274)              4,432
                                                                                                                                 Net cash provided by operating activities                                   $     384,671      $       224,926
                                                                                                                                 Cash flows from investing activities
                                                                                                                                 Net increase in Federal funds and other short-term investments                    (502,301)           (353,201)
                                                                                                                                 Purchase of HTM investment securities                                           (1,568,184)         (1,263,678)
                                                                                                                                 Proceeds from maturity of HTM investment securities                                647,917             384,902
                                                                                                                                 Net increase in loans to members                                                (1,550,277)         (1,088,071)
                                                                                                                                 Purchase of fixed assets                                                            (81,232)            (90,241)
                                                                                                                                 Sale/retirement of fixed assets                                                      31,999              36,982
                                                                                                                                 Increase in deposit to NCUSIF                                                      (20,919)            (16,876)
                                                                                                                                 Net cash used in investing activities                                           (3,042,997)         (2,390,183)
                                                                                                                                 Cash flows from financing activities
                                                                                                                                 Net increase in members’ accounts                                                1,840,227           1,640,166
                                                                                                                                 Net increase in securities sold under repurchase agreements                        747,484             515,539
                                                                                                                                 Net cash provided by financing activities                                         2,587,711           2,155,705
                                                                                                                                 Net decrease in cash                                                              (70,615)              (9,552)
                                                                                                                                 Cash at beginning of year                                                         326,497              336,049
                                                                                                                                 Cash at end of year                                                         $     255,882      $       326,497
                                                                                                                                 Additional cash flow information:
                                                                                                                                    Interest paid                                                                  395,099              381,664
                                                                                                                                   Transfers from loans to other real estate                                         6,443                6,152

                                                                                                                                 The accompanying notes (beginning on page 34) are an integral part of these consolidated financial statements.




                                                         Page 32                                                                                                                            Page 33
Note 1: Nature of Operations and Summary                         Securities classified as available-for-sale are carried at fair   statements, Navy Federal does not accrue an estimated             over the lease term or the useful life of the improve-
of Significant Accounting Policies                                value, with any unrealized gains and losses recorded as          loss regarding the credit enhanced mortgage loans for it is       ment, whichever is shorter.
Navy Federal Credit Union (Navy Federal) is a member-            a separate component of members’ equity. Gains and               less than probable that a liability had been incurred at the
                                                                 losses on dispositions are computed using the specific            date of the financial statements.Any liability reasonably              Useful Life
owned, not-for profit financial institution formed to
                                                                 identification method. Resale and repurchase agreements           expected to result from this agreement is not expected to             Buildings . . . . . . . . . . . . . . . . . . . . .24 to 40 years
provide a variety of savings and lending programs to
                                                                 are treated as financing transactions and are carried at          be material to Navy Federal.                                          Furniture and equipment . . . . . . . . . .5 to 7 years
those individuals in its field of membership. Navy
                                                                 the amounts at which the securities were initially acquired                                                                            Computer equipment . . . . . . . . . . . . .3 to 5 years
Federal’s chartered field of membership includes military
and civilian personnel who are or were employed by               or sold. Navy Federal takes title to securities purchased        Loans                                                                 Computer software . . . . . . . . . . . . . . . . . . .5 years
the Department of the Navy and their families.                   under resale agreements, monitors the fair value of the          Loans, except for mortgages held for sale, are stated at the
                                                                 underlying securities, which are primarily U.S. Government       amount of unpaid principal less an allowance for loan losses.     NCUSIF Deposit
                                                                 and federal agency securities, and requests additional           Interest on loans is recognized on an accrual basis except for    The deposit in the National Credit Union Share Insurance
Navy Federal Financial Group (NFFG), a wholly owned
                                                                 collateral when appropriate.                                     credit card interest which is recognized on the member’s          Fund (NCUSIF) is in accordance with the Federal Credit
credit union service organization, provides investment,
                                                                                                                                  statement date. Interest on loans is calculated using the sim-    Union Act and the National Credit Union Administration
insurance, mortgage settlement and other financial services
                                                                 Declines in the fair value of held-to-maturity and available-    ple-interest method on the principal amount outstanding           (NCUA) regulations, which require the maintenance of a
to Navy Federal’s members. Mortgage settlement services
                                                                 for-sale securities below their cost that are deemed to be       except for credit cards. Interest on credit cards is calculated   deposit by each insured credit union in an amount equal
are offered by NFRES, a wholly owned subsidiary of NFFG.
                                                                 other than temporary are reflected in earnings as realized        by applying the periodic rate to the average daily balance        to one percent of its insured shares.The deposit would be
                                                                 losses. In estimating other-than-temporary impairment            outstanding.Accrual of interest on all loans is discontinued      refunded to Navy Federal if its insurance coverage is termi-
The significant accounting policies are:
                                                                 losses, management considers (1) the length of time and          where management believes collectibility is uncertain or          nated, it converts to insurance coverage from another
                                                                 the extent to which the fair value has been less than cost,      payments of principal or interest are past due by more than       source, or the operations of the fund are transferred from
Basis of Accounting
                                                                 (2) the financial condition and near-term prospects of the        90 days.All interest accrued but not collected on loans that      the NCUA Board.
Navy Federal maintains its accounting records on the accrual
basis, which is in accordance with accounting principles         issuer, (3) the intent and ability to retain the investment      are placed in non-accrual status is reversed against interest
                                                                 for a period of time that is sufficient to allow for any         income.The interest on these loans is accounted for on the        NCUSIF Insurance Premiums
generally accepted in the United States of America.
                                                                 anticipated recovery in fair value and (4) materiality.          cash-basis until the loans return to accrual status. Loans are    Navy Federal is required to pay an annual insurance pre-
                                                                                                                                  returned to accrual status when all the principal and interest    mium equal to one-twelfth of one percent of its total
Consolidation
The consolidated financial statements include Navy Federal
                                                                 Mortgages Held for Sale                                          amounts contractually due are brought current and future          insured shares, unless the payment is waived or reduced
                                                                 To be in compliance with FAS 65, Accounting for Certain          payments are reasonably assured.                                  by the NCUA Board.The NCUA Board waived the 2004
and NFFG.All significant intercompany transactions have
                                                                 Mortgage Banking Activities, mortgage loans held for sale                                                                          and 2003 insurance premium.
been eliminated.
                                                                 are carried at the lower of original cost or market value.       Allowance for Loan Losses
Use of Estimates                                                 Market value is determined on a loan-by-loan basis. Net          Navy Federal accrues estimated losses in accordance with          Goodwill and Other Intangible Assets
                                                                 unrealized losses are recognized through a valuation             FAS 5, Accounting for Contingencies. The allowance for            Goodwill represents the excess of purchase price over the
The preparation of consolidated financial statements in
                                                                 allowance by charges to income.All sales are made with-          loan losses is established through a provision for loan losses    fair value of identifiable net assets of acquired companies.
conformity with accounting principles generally accepted
                                                                 out recourse. Mortgage loans held for sale are sold with         charged to expense. Loan principal is charged against the         On January 1, 2002, Navy Federal adopted Statement of
in the United States of America requires management to
                                                                 the mortgage servicing rights retained by Navy Federal.          allowance for loan losses when management believes that           Financial Accounting Standards No. 142, Goodwill and Other
make estimates and assumptions that affect the reported
                                                                                                                                  the collectibility of the amount is unlikely; subsequent          Intangible Assets, (FAS 142). FAS 142 addresses the initial
amounts of assets, liabilities, revenues and expenses and
                                                                 Credit Enhanced Mortgage Loans                                   recoveries are credited to the allowance for loan losses.         recognition and measurement of intangible assets acquired
the disclosure of contingent assets and liabilities in the
                                                                 In February 2004, Navy Federal entered into an agree-            Navy Federal’s loan portfolio consists mainly of large            outside of a business combination and the accounting for
consolidated financial statements and accompanying
                                                                 ment with Charlie Mac, LLC, an investor subsidiary of            groups of smaller balance homogeneous loans that are col-         goodwill and other intangible assets subsequent to their
notes.Actual results could differ from those estimates.
                                                                 U.S. Central Credit Union, and NFFG in which Charlie             lectively evaluated for impairment.The allowance for loan         acquisition. FAS 142 provides that intangible assets with
                                                                 Mac purchases up to $200 million of credit enhanced              losses is maintained at a level that, in management’s judg-       finite useful lives be amortized and that goodwill and
Cash and Cash Equivalents                                        mortgage loans from Navy Federal while Navy Federal              ment, is sufficient to absorb losses inherent in the portfo-      intangible assets with indefinite lives not be amortized,
For purposes of the consolidated financial statements,
                                                                 retains the mortgage servicing rights. Should a credit           lio, based on evaluations of the collectibility of loans and      but rather be tested at least annually for impairment.
cash and cash equivalents include cash and balances due
                                                                 enhanced loan default, Charlie Mac will recover the loan         prior loan loss experience.The evaluations take into con-
from banks and other credit unions, federal funds sold
and securities purchased under agreements to resell, all
                                                                 amount from NFFG.The maximum total credit enhancement            sideration such factors as changes in the value of loans out-     Mortgage Servicing Assets
                                                                 liability allowed in this agreement is $8.5 million. Of that     standing, prior history of charge-offs and recoveries, overall    Mortgage servicing assets retained are recognized at
of which have original maturities of 90 days or less.
                                                                 total, $1 million is set aside by NFFG as non-current            delinquency and delinquencies by loan product, and cur-           the date of the related loan sale by allocating the previous
                                                                 restricted cash with a designated financial institution.          rent economic conditions and trends that may affect the           carrying amount between the loans sold and the servicing
Securities                                                       For the remaining amount of $7.5 million, Navy Federal           borrowers’ ability to pay.The allowance for loan and lease        assets retained based on their relative fair values in
Investment securities are classified as held-to-maturity or
                                                                 issued an irrevocable transferable standby letter of credit      losses is reviewed on a quarterly basis and the provision         accordance with FAS 140, Accounting for Transfers
available-for-sale in compliance with Statement of Financial
                                                                 to Charlie Mac as part of the agreement.As of the date of        that is charged to expense is adjusted accordingly.               and Servicing of Financial Assets and Extinguishments
Accounting Standards No. 115, Accounting for Certain
                                                                 the financial statements, the aggregate amount of credit                                                                            of Liabilities. The fair value of mortgage servicing assets
Investments in Debt and Equity Securities, (FAS 115).
                                                                 enhanced mortgage loans purchased by Charlie Mac has             Fixed Assets                                                      is based on the current market price for similar prod-
Investments classified as held-to-maturity are carried at cost,
                                                                 reached $200 million.All loans purchased pursuant to the         Land is carried at cost. Building, leasehold improvements,        ucts. Significant assumptions include future prepayment
adjusted for the amortization of premiums and accretion
                                                                 agreement have FICO credit score, loan-to-value ratio and        furniture, fixtures and equipment are carried at cost, less        rates based on current interest rate levels, other economic
of discounts. Management has the ability and intent to
                                                                 debt-to-income ratio greater than those required by the          accumulated depreciation and amortization. Buildings              conditions and market forecasts, and relevant character-
hold these securities to maturity.
                                                                 agreement. In the accompanying consolidated financial             and furniture, fixtures and equipment are depreciated              istics of the servicing portfolio, such as loan types,
                                                                                                                                  using the straight-line method over their estimated useful        interest rate stratification, delinquencies and recent
                                                                                                                                  lives.The cost of leasehold improvements is amortized             prepayment experience.



                                                            Page 34                                                                                                                           Page 35
Amortization of mortgage servicing assets is based on a        Income Taxes                                                      Note 3: Investments
method which approximates the ratio of net servicing           Pursuant to the Federal Credit Union Act, Navy Federal is         A summary of held-to-maturity and available-for-sale securities is as follows (dollars in thousands):
income received in the current period to total net servicing   exempt from payment of Federal and state income taxes;
income projected to be realized from the mortgage serv-        however, NFFG is subject to Federal and state income                                                                Weighted                            Gross             Gross
icing assets. Mortgage servicing assets are evaluated for                                                                                                                           Average        Amortized       Unrealized       Unrealized       Estimated
                                                               taxes. NFFG paid $116,000 and $463,000 in Federal and             December 31, 2004                                    Yield            Cost            Gains           (Losses)      Fair Value
impairment based on the excess of the carrying amount          state taxes in 2004 and 2003, respectively.
of the mortgage servicing assets over their fair value. For                                                                      Held-to-maturity
                                                                                                                                   U.S. Government and federal agency securities      2.96%     $ 2,259,738    $       1,915    $    (16,531)     $ 2,245,122
purposes of measuring impairment, mortgage servicing           Deferred Income Taxes
assets are stratified on the basis of loan type and term.       Deferred income tax assets are recognized to the extent             Mortgage-backed securities                         2.81%         332,107              726             (72)         332,761
                                                               that it is probable that future taxable profit will be available   Total held-to-maturity                                           2,591,845           2,641          (16,603)       2,577,883
Derivative Financial Instruments                               against which the temporary differences can be utilized.          Available-for-sale
In compliance with FAS 133, Accounting for Derivative          NFFG reported a deferred tax asset of $437,000 in 2004.             Common trust investments                           2.07%          10,000                –                –          10,000
Instruments and Hedging Activities, all derivative finan-                                                                           Mutual funds                                       2.70%           3,000                –              (85)          2,915
cial instruments are recognized on the balance sheet at        Dividends                                                         Total available-for-sale                                           13,000                 –              (85)        12,915
fair value. Changes in the fair value of derivative financial   Dividend rates on members’ accounts are set by the
                                                                                                                                 Total securities                                               $ 2,604,845    $      2,641     $    (16,688)     $ 2,590,798
instruments are recorded in current earnings. See Note 5       Board of Directors and dividends are charged to opera-
for further information on Navy Federal’s use of deriva-       tions. Dividends on share savings and IRA share accounts
tive financial instruments.                                                                                                                                                         Weighted                            Gross             Gross
                                                               are accrued on a monthly basis and are paid quarterly.                                                               Average        Amortized       Unrealized       Unrealized       Estimated
                                                               Dividends on Sharechek, Money Market, IRAs and share              December 31, 2003                                    Yield            Cost            Gains           (Losses)      Fair Value
Members’ Accounts                                              certificate accounts are paid monthly.                             Held-to-maturity
Members’ accounts are classified as equity to denote the
                                                                                                                                   U.S. Government and federal agency securities      2.98%     $ 1,617,874    $     21,113     $      (1,656)    $ 1,637,331
ownership interest of the members in Navy Federal.The          Reclassifications                                                    Mortgage-backed securities                         1.69%         209,224             202              (874)        208,552
American Institute of Certified Public Accountants opined       Certain amounts in the 2003 Consolidated Financial
that credit union savings accounts should be classified as                                                                        Total held-to-maturity                                           1,827,098          21,315            (2,530)      1,845,883
                                                               Statements have been reclassified to conform to the
liabilities consistent with the prevailing practice in mutu-   2004 presentation.                                                Available-for-sale
ally owned savings and loan associations and banks. Navy                                                                           Common trust investments                           0.96%          10,000                –                –          10,000
Federal does not agree with this opinion and believes that     Note 2: Restrictions on Cash                                        Mutual funds                                       3.43%           3,000                –              (47)          2,953
the AICPA did not consider that credit unions are funda-       Navy Federal is required to maintain balances with cor-           Total available-for-sale                                            13,000                –              (47)        12,953
mentally dissimilar to such institutions, which (for exam-     porate credit unions that are classified as membership             Total securities                                               $ 1,840,098    $     21,315     $      (2,577)    $ 1,858,836
ple) accept deposits from the general public and are not       shares that are uninsured and require a three-year notice
democratically controlled by their “owners.”                   before withdrawal.The required balance for Navy Federal           At December 31, 2004, Navy Federal’s securities, excluding $332,107,000 in mortgage-backed securities and $78,716,000
                                                               at December 31, 2004 and 2003 was $21,554,000 and                 in other securities, were predominantly short-term in nature; $4,244,068,000 maturing within one year and $2,257,629,000
Reserve Requirement                                            $20,907,000, respectively.                                        maturing from one through three years. Navy Federal held $26,492,000 and $36,336,000 of Federal Home Loan Bank of
In 2001, the NCUA no longer required credit unions that                                                                          Atlanta (FHLBA) stock and deposits at December 31, 2004 and 2003, respectively. FHLBA stock is a restricted investment
are classified as “well capitalized” (7% or higher net worth    The Board of Governors of the Federal Reserve System              and is carried at cost, which is par value.As a member of the FHLBA, Navy Federal has access to a $3.4 billion line of
ratio) to make statutory transfers to the regular reserve.     (FRB) requires Navy Federal to maintain a cash reserve            credit facility.The FHLBA stock paid a 3.75% and 3.50% dividend in the 4th Quarter of 2004 and 2003, respectively.
The regular reserve is not available for the payment of        balance to cover transactions processed by the FRB
dividends.The capital reserve has been established at          for Navy Federal.At December 31, 2004 and 2003, Navy              U.S. Government and federal agency debt securities were reviewed individually to determine whether the unrealized
the discretion of the Board of Directors to protect the        Federal’s clearing balance requirement was $180,000,000           losses associated with them were caused by a decline other-than-temporary in the value of such investments.At
interests of the members.                                      and $206,550,000, respectively.                                   December 31, 2004 and 2003, there was no decline considered “other-than-temporary” in the value of U.S. Government
                                                                                                                                 and federal agency securities owned by Navy Federal.
Retirement Benefits and Pension Accounting                      In February 2004, Navy Federal Financial Group set aside
Navy Federal has defined benefit pension plans, 401(k)           $1 million as non-current restricted cash as part of the          Other Investments represent capital required to maintain partnerships with credit union organizations.
and 457(b) savings plans and a non-qualified supplemen-         agreement it entered into with Charlie Mac, LLC. See
tal retirement plan. Navy Federal also provides a contrib-     Note 1 for further information.                                   Investments pledged as collateral for borrowed funds were $2,591,132,000 and $1,826,240,000 at December 31, 2004
utory group medical plan for retired employees.                                                                                  and 2003, respectively.

Navy Federal accounts for its defined benefit pension
plans in accordance with FAS 87, Employers’ Accounting
for Pensions. Non-pension postretirement benefits are
accounted for in accordance with FAS 106, Employers’
Accounting for Postretirement Benefits Other Than
Pensions. In 2004, Navy Federal adopted FAS 132,
Employers’ Disclosures about Pensions and Other
Postretirement Benefits.




                                                          Page 36                                                                                                                             Page 37
Navy Federal’s investments in corporate credit unions at          A summary of the changes in the allowance for loan loss-      Note 5: Derivative Instruments and                             Note 6: Legal Contingencies
December 31, 2004 and 2003 were as follows:                       es is as follows (dollars in thousands):                      Hedging Activities                                             Navy Federal is a party to various legal actions normally
December 31                              2004              2003   Years Ended December 31                2004           2003    Navy Federal is an active participant in the production        associated with financial institutions, the aggregate effect
Certificates of deposit           $ 632,804,379    $ 470,000,000   Balance, beginning of year        $ 116,037    $    85,307    of mortgage loans which are sold to investors in the sec-      of which, in management’s and legal counsel’s opinion,
Overnight investments              300,000,000      200,000,000   Provision charged to operations     149,750        120,665    ondary market.This mortgage banking activity involves          would not be material to the financial condition or results
                                                                                                                                making mortgage loan commitments to members at                 of operations of Navy Federal.
Membership, capital shares          21,553,506       20,906,572   Loans charged off                  (110,578)       (95,535)
Share deposits                           1,130            1,115   Recoveries                            6,680          5,600    specified interest rates. Navy Federal is exposed to
                                                                                                                                changes in the value of its mortgage loan commitments          Note 7: Commitments
Total                            $ 954,359,015    $ 690,907,687   Balance, end of year              $ 161,889    $ 116,037                                                                     Navy Federal is a party to conditional commitments to
                                                                                                                                as interest rates may change between the time that it
                                                                                                                                enters into a mortgage loan commitment and the time            lend funds in the normal course of business to meet the
                                                                  Loans on which the accrual of interest has been discon-                                                                      financing needs of its members. Unused commitments for
Note 4: Loans to Members                                                                                                        that it ultimately delivers mortgage loans to investors.To
                                                                  tinued amounted to $67,573,000 and $42,249,000 at             protect against this interest rate risk, Navy Federal enters   loans to members are amounts which Navy Federal has
The composition of loans to members is as follows
                                                                  December 31, 2004 and 2003, respectively. If interest on      into forward sales contracts at specified prices to deliver     agreed to lend a member as long as the member does not
(dollars in thousands):
                                                                  those loans had been accrued at original contracted           mortgage loans to investors.These forward sales commit-        default on existing loans or violate any condition of the
December 31                               2004            2003    rates, interest income would have been approximately          ments act as an economic hedge against the risk of             loan agreement. Commitments generally have fixed expi-
Consumer loans                                                    $2,925,000 and $1,850,000 higher for 2004 and 2003,           changes in the value of both the mortgage loan commit-         ration dates or other termination clauses. Since many of
   Auto                        $ 3,932,658 $ 3,657,914            respectively.To ensure the availability of a broad range of   ments and mortgage loans held for sale.As required by          the commitments are expected to expire without being
   Other                         1,679,437   1,695,626            mortgage products for its members at the lowest possi-        Statement of Financial Accounting Standards No. 133,           drawn upon, the total commitment amounts do not nec-
                                                                  ble cost, Navy Federal sells certain originated mortgages,    Accounting for Derivative Instruments and Hedging              essarily represent future cash requirements. Navy Federal
          ®
NAVchek lines of credit            218,374     222,212
                                                                  primarily to U.S. Government sponsored enterprises,           Activities, as amended and interpreted (“FAS 133”), Navy       uses the same credit policies in making commitments
Federal education loans            276,234     272,104
                                                                  while retaining the rights to service these mortgages         Federal accounts for both the mortgage loan commit-            as it does for all loans to members and, accordingly, at
Vehicle leases                     138,601     140,575
                                                                  for its members. Navy Federal retains negligible risk         ments and the forward sales contracts as derivative            December 31, 2004, the credit risk related to these
Credit card loans                1,775,298   1,604,038                                                                                                                                         commitments was similar to that on its existing loans.
                                                                  of principal loss for mortgage-backed securities and          instruments on its Consolidated Statements of Financial
Mortgage loans
                                                                  mortgages sold.                                               Condition at fair value with changes in fair value includ-
   Mortgage Loan Investments                                                                                                                                                                   The following financial instruments were outstanding in
                                                                                                                                ed in current earnings.These derivative instruments are
     Fixed rate                  4,377,371   4,180,145            Navy Federal originates mortgage loans both for sale          economic hedges to which Navy Federal does not                 2004 and 2003 (dollars in thousands):
     Variable rate                   3,119           0            and for its own portfolio. Navy Federal originated,           receive hedge accounting treatment.                            Unused commitments
   Mortgage Loans                                                 both for sale and for its own portfolio, approximately                                                                       for loans under:                       2004           2003
     Awaiting Sale
                                                                  $5,636,767,000 and $6,695,495,000 of first mortgage            The notional value of Navy Federal’s mortgage loan             Credit cards                    $ 3,504,353   $ 3,139,968
     Fixed rate                    217,554     209,007            loans for its members in 2004 and 2003, respectively.         commitments at December 31, 2004 and 2003 was                  NAVchek lines of credit             511,654       492,998
     Variable rate                  92,630       6,424            Approximately $4,345,233,000 and $4,716,066,000               $208,999,000 and $280,658,000, respectively.The                Home equity lines of credit         839,361       613,485
   Mortgage Loans in Process                                      of mortgages were sold or securitized in 2004 and             notional value of Navy Federal’s forward sales contracts       Preapproved auto loans              122,960       108,380
     Mortgage Loan                                                2003, respectively.At December 31, approximately              at December 31, 2004 and 2003 was $382,751,000 and
     Investments                                                                                                                                                                               Utility deposit guarantee
                                     1,914       5,896            $15,403,916,000 and $13,186,703,000 of originated             $343,725,000, respectively.The fair value of Navy Federal’s       programs                           2,594          2,862
     Mortgage Loans                                               mortgages were being serviced by Navy Federal in 2004         mortgage loan commitments derivative of ($1,205,000)
     Awaiting Sale                                                                                                                                                                             Letter of credit                      7,500              0
                                    11,084      27,061
                                                                  and 2003, respectively.                                       and $3,609,000 is reflected in the total of “Other liabili-     Total                           $ 4,988,422   $ 4,357,693
   Unamortized Discount Points     (13,623)    (15,311)
                                                                                                                                ties” in the Consolidated Statement of Financial Condition
Equity loans
                                                                                                                                as of December 31, 2004 and as “Other assets” in the
   Fixed equity                  1,174,693     586,523                                                                          Consolidated Statement of Financial Condition as of
   Home equity lines of credit     900,193     652,100                                                                          December 31, 2003, respectively.The fair value of Navy
                                    14,785,537      13,244,314                                                                  Federal’s forward sales contracts derivative of $1,117,000
Less:Allowance for loan losses        (161,889)       (116,037)                                                                 and ($1,498,000) is reflected in the total of “Other assets”
Total loans to members             $14,623,648     $ 13,128,277                                                                 in the Consolidated Statement of Financial Condition as
                                                                                                                                of December 31, 2004 and as “Other liabilities” in the
                                                                                                                                Consolidated Statement of Financial Condition as of
                                                                                                                                December 31, 2003, respectively.The net change in the
                                                                                                                                fair value of these derivative financial instruments was
                                                                                                                                ($2,199,000) and $2,072,000 during the years ended
                                                                                                                                December 31, 2004 and 2003, respectively, and was
                                                                                                                                included in earnings.




                                                             Page 38                                                                                                                     Page 39
Note 8: Fixed Assets                                          Note 9: Intangible Assets                                       Note 10: Members’ Accounts
Premises and equipment is summarized as follows               On January 1, 2002, Navy Federal adopted FAS 142,               Member deposit accounts are summarized as follows (dollars in thousands):
(dollars in thousands):                                       Goodwill and Other Intangible Assets. In accordance
                                                                                                                                                                                                   Weighted
                                                              with the adoption of FAS 142, Navy Federal discontinued                                                                           Average Rate               Amount at                     Amount at
December 31                        2004               2003                                                                                                                                          for 2004        December 31, 2004             December 31, 2003
                                                              its amortization of indefinite lived intangibles with an
Land and buildings         $    199,861    $       187,728    estimated carrying amount of $13,700,000 that resulted          Money market                                                             1.52%        $        1,707,381        $          1,402,315
Equipment, furniture                                          from membership expansions in 2000. In December                 Share savings                                                            1.25%                 5,973,990                   5,326,047
   and fixtures                  288,227            259,314
                                                              2003, Navy Federal entered into another membership              Member escrow                                                            0.48%                    66,583                      52,755
Leasehold improvements           37,778             31,109    expansion which resulted in an intangible of $2,250,000.        Sharechek                                                                0.51%                 2,845,671                   2,532,961
Subtotal                        525,866            478,151    The intangible asset that resulted from this transaction        Share and IRA certificates                                                4.02%                 6,382,252                   5,765,979
Less:Accumulated                                              was determined to be finite and based on that decision,
   depreciation                (288,154)       (254,629)                                                                      IRA shares                                                               1.47%                   512,779                     525,210
                                                              Navy Federal amortized $225,000 and $19,000 of the
Total fixed assets              $237,712        $223,522                                                                       Investor custodial accounts                                              0.00%                   130,113                     173,275
                                                              intangible asset in 2004 and 2003, respectively, and will
                                                              continue to amortize it at the rate of $225,000 per year        Total deposits                                                                        $       17,618,769        $         15,778,542
At December 31, 2004, Navy Federal was obligated              over its estimated useful life of 10 years.
under operating leases for office space. Rent expense,                                                                        The aggregate amounts of members’ accounts over $100,000 were approximately $2,224,099,000 and $3,533,901,000
was $5,645,000 and $4,747,000 in 2004 and 2003,               Navy Federal prepares a quarterly analysis to test indefi-       at December 31, 2004 and 2003, respectively.
respectively. Income from sublease contracts totaled          nite lived intangibles for impairment in accordance with
$115,000 and $119,000 in 2004 and 2003, respectively.         FAS 144, Accounting for the Impairment or Disposal of           At December 31, 2004, scheduled maturities of share certificates and IRA certificates are as follows
                                                              Long-Lived Assets. Navy Federal did not realize any             (dollars in thousands):
The required minimum rental payments under the terms          impairment in 2004 and 2003, respectively.
                                                                                                                                                                                     Years Ending December 31
of the leases at December 31, 2004 are as follows
                                                                                                                                                            2005                  2006                2007                 2008               2009       Thereafter
(dollars in thousands):                                       The carrying value of intangible assets was $15,693,000
                                                                                                                                 0 – 2.00%      $      305,994        $        8,142       $         1,195      $           327    $           137               –
                                                              and $15,918,000 at December 31, 2004 and 2003, respec-
Years Ending December 31                                      tively and is included in the total for “Other assets” in the   2.01 – 3.00            1,412,353               299,651                32,111                   42                  –               –
2005                                           $      7,135   Consolidated Statements of Financial Condition.                 3.01 – 4.00               80,070               337,398               289,445              246,328              1,653               –
2006                                                  7,349                                                                   4.01 – 5.00              155,028                45,903               397,960              433,186          1,238,323               –
2007                                                  7,569                                                                   5.01 – 6.00               24,533               101,565               151,663                    –             44,026       $      89
2008                                                  7,797                                                                   6.01 – 7.00              333,326               104,468                     –                   17                  4              72
2009                                                  8,030                                                                   7.01 – 8.00%             249,077                88,165                     –                    –                  –               –
Thereafter                                            8,271                                                                   Total             $    2,560,381        $      985,292       $       872,374      $       679,900    $     1,284,143       $    161
                                               $     46,151
                                                                                                                              Dividend expense on members’ deposit accounts is as follows (dollars in thousands):

                                                                                                                              December 31                             2004               2003
                                                                                                                              Money market                   $      23,458    $      20,688
                                                                                                                              Share savings                         70,477           67,854
                                                                                                                              Sharechek                             11,759           12,757
                                                                                                                              Share and IRA certificates            249,813          252,479
                                                                                                                              IRA shares                             7,453            7,690
                                                                                                                              Total dividends                $     362,960    $     361,468




                                                         Page 40                                                                                                                           Page 41
Note 11: Loan Protection Life and Life                         Navy Federal 401(k) Savings Plan                              Medical cost trends do not impact the determination of the postretirement benefit, as the benefit amount is a fixed
Savings Insurance                                              This is a defined contribution plan where employees            monthly amount based on the number of years of continuous service.
Navy Federal purchases loan protection and life savings        can contribute pre-tax money to a 401(k) retirement
insurance on the lives of its qualifying members. Navy         account and receive employer matching contributions.          The following table sets forth the funded status of the pension and other postretirement plans (dollars in thousands):
Federal pays the premium for the group policies with no        The matching contributions are based on participation in
                                                                                                                                                                                    Pension Benefits                         Postretirement Benefits
charge to its members for the insurance. Premiums paid to      a defined benefit retirement plan. Employees participating                                                             2004                     2003              2004                       2003
the insurer, CUNA Mutual Insurance Society, are based on a     in the Cash Balance Plan receive a 100% employer match
                                                                                                                             Benefit obligation                              $    334,358         $        279,295       $   16,708            $         14,254
premium rate per thousand dollars on insurable account         on the first 6% of pay they contribute to their 401(k)
                                                                                                                             Fair value of plan assets                           310,370                  253,284                –                           –
balances and are adjusted semiannually based on actual         account, and employees participating in the Traditional
                                                               Plan receive an employer match of 50% on the first 6%          Funded status                                  $    (23,988)        $        (26,011)      $   (16,708)          $      (14,254)
claims experience.Total premiums paid were approxi-
mately $11,051,000 and $10,145,000 in the years ended          of pay they contribute to their 401(k) account.
December 31, 2004 and 2003, respectively.                                                                                    The weighted-average assumptions used to determine the projected benefit obligation for the pension and other postre-
                                                               Deferred Compensation Plan (457)                              tirement benefits were:
To provide more options to its members regarding               This is a non-qualified deferred compensation plan as
                                                                                                                                                                                    Pension Benefits                         Postretirement Benefits
credit life insurance, Navy Federal implemented Payment        allowed under Internal Revenue Code Section 457(b).                                                                  2004                     2003              2004                       2003
Protection Plans in November 2004.These plans offer            This plan offers a before-tax savings opportunity to highly   Discount rate                                          5.75%                    6.25%             5.75%                      6.25%
members the opportunity to purchase an insurance plan          compensated employees in the Executive and Professional
                                                                                                                             Expected return on plan assets                         8.75%                    8.75%                –                          –
that will pay their loan in full or will cancel their loan     compensation programs.The annual deferral amount
                                                                                                                             Rate of compensation increase                          4.50%                    4.50%                –                          –
payments during specific “life events”. All new consumer        allowed mirrors the 401(k) plan and contributions are
and credit card loans that are made after the implementa-      held by Navy Federal and earn monthly interest based
tion of the new plan are no longer covered by Loan             on Navy Federal’s gross income for the month divided          The following table sets forth the net benefit cost, contributions received and benefits paid for the benefit plans
Protection Insurance, but members are eligible to enroll       by the average earnings on assets (loans and investments)     (dollars in thousands):
for a Payment Protection Plan. Existing loans covered by       for the month.                                                                                                       Pension Benefits                         Postretirement Benefits
Loan Protection Insurance will continue to be covered                                                                                                                               2004                     2003              2004                       2003
by the same insurance plan until the loan is paid off          Non-Qualified Supplemental Retirement                          Benefit cost                                    $     13,491         $         17,076       $    2,205            $          1,945
or refinanced.                                                  Plan (SERP)                                                   Employer contribution                          $     36,127         $         36,853       $      606            $             85
                                                               This non-qualified plan is designed to “make up” for bene-
                                                                                                                             Plan participants’ contributions                          –                        –                –                           –
Note 12: Retirement Benefits                                    fits not paid through the defined benefit retirement plan
                                                                                                                             Benefits paid                                   $      7,219         $          6,774       $      606            $             85
                                                               as a result of limitations imposed by the IRS.The Internal
Navy Federal Credit Union Employees’                           Revenue Code Section 401(a)(17) limits the amount of
Retirement Plan                                                compensation that can be used in the defined benefit            The weighted-average assumptions used to determine the net periodic benefit cost for the pension and other postretire-
This is a defined benefit retirement plan which means            retirement plan’s annuity calculation and Internal Revenue    ment benefits were:
that benefits are based on a set formula. Navy Federal’s        Code Section 415 limits the amount of monthly annuity                                                                Pension Benefits                         Postretirement Benefits
plan converted to a Cash Balance Plan design as of             that can be paid by the defined benefit retirement plan.                                                               2004                     2003              2004                       2003
January 1, 2001, but still retains the Traditional Plan                                                                      Discount rate                                          6.25%                    6.75%             6.25%                      6.75%
design for those employees who opted to remain in              All benefits are paid from the plan trust. Navy Federal        Expected return on plan assets                         8.75%                    8.75%                –                          –
the Traditional Plan.The following describes how the           makes all contributions to the trust in accordance with
                                                                                                                             Rate of compensation increase                          4.50%                    4.50%                –                          –
benefits are calculated:                                        the company’s funding policy and in compliance with all
                                                               federal laws and regulations.
• Cash Balance Plan – This plan provides either a                                                                            The following table discloses the benefits expected to be paid in the next ten years:
  single sum payment upon retirement or a monthly              Navy Federal accrued $1,935,000 and $1,192,000 to cover                                                                                     Pension                     Postretirement
  annuity option depending on the amount of the                this expense at December 31, 2004 and 2003, respectively.
                                                                                                                             2005                                                                     $         8,838,190              $            457,320
  accrued benefit.
                                                               Retiree Medical Plan                                          2006                                                                               9,695,597                           513,251
• Traditional Plan – This plan is designed to provide
                                                               Navy Federal provides postretirement benefits to retired       2007                                                                              10,803,263                           576,717
  a lifetime of monthly retirement benefits, determined
                                                               employees in the form of a contributory group medical         2008                                                                              12,009,014                           648,203
  by a set formula, to vested employees.The formula is
  based on the final average earnings (average from the         plan and supplemental retirement income to offset the         2009                                                                              13,645,792                           730,044
  three highest consecutive years of income) multiplied        cost of medical insurance premiums or out-of-pocket           2010–2014                                                                         95,147,687                         5,139,608
  by 2% multiplied by the length of service.                   medical expenses (Medical Plan). Under the provisions of      Total benefits expected, next ten years                                   $       150,139,543              $          8,065,143
                                                               the Medical Plan, the retirees are responsible for the full
                                                               payment of the medical insurance premiums.The supple-
                                                                                                                             The anticipated employer contribution in 2005 is $8,500,000 for the pension plan and $457,320 for the postretirement
                                                               mental retirement income benefit is an annual benefit of
                                                                                                                             benefit plan.The accumulated benefit obligation for the pension plan was $256,637,578 at December 31, 2004.
                                                               $75 multiplied by the number of years of continuous
                                                               service the retiree had with Navy Federal.There are no
                                                                                                                             The measurement date used for the pension plan and postretirement benefit plan in 2004 and 2003 was December 31.
                                                               assets set aside to pre-fund the liability associated with
                                                               the Medical Plan.



                                                          Page 42                                                                                                                  Page 43
Navy Federal’s pension plan asset allocations by asset           Note 13: Related Party Transactions                                Note 15: Members’ Equity                                        As of December 31, 2004, the most recent call reporting
category for 2004 and 2003 and the target allocations            In the normal course of business, Navy Federal extends             Navy Federal is subject to regulatory capital requirements      period, the NCUA categorized Navy Federal as “well
for 2004 were as follows:                                        credit to directors, supervisory committee members and             administered by the NCUA. Failure to meet minimum               capitalized” under the regulatory framework for prompt
                                                                 executive officers.The aggregate loans at December 31, 2004        capital requirements can initiate certain mandatory—            corrective action with a net worth of 10.60%. Net worth
                         December 31               2004
                                                                 and 2003 were $17,487,000 and $13,183,000, respectively.           and possibly additional discretionary—actions by regula-        for this calculation is defined as undivided earnings plus
                        2004         2003   Target Allocation
                                                                 Credit union officials are defined as volunteer members             tors that, if undertaken, could have a direct material effect   regular and capital reserves.To be categorized as “well
Equity securities         71%         70%                 70%                                                                                                                                       capitalized,” Navy Federal must maintain a minimum net
                                                                 of the Board of Directors and board committees, and                on Navy Federal’s consolidated financial statements.
Debt securities           29%         30%                 30%                                                                                                                                       worth ratio of 7% of assets.There are no conditions or
                                                                 employees with the title of Vice President and above               Under capital adequacy regulations and the regulatory
                        100%         100%               100%     for the loan amount reported as of December 31, 2004               framework for prompt corrective action, Navy Federal            events since that notification that management believes
                                                                 and 2003, respectively.                                            must meet specific capital requirements that involve             have changed the institution’s category.
Navy Federal employs a total return investment approach                                                                             quantitative measures of Navy Federal’s assets, liabilities
whereby a mix of equities and fixed income investments            Note 14: Mortgage Servicing Assets                                 and certain commitments as calculated under generally           The Credit Union’s actual capital amounts and ratios
are used to maximize the long-term return of plan assets         In accordance with FAS 140, Accounting for Transfers               accepted accounting principles. Navy Federal’s capital          as of December 31, 2004 and 2003 are also presented
for a prudent level of risk.The intent of this strategy is to    and Servicing of Financial Assets and Extinguishments              amounts and net worth classification are also subject to         in the table.
minimize plan expenses by outperforming plan liabilities         of Liabilities, the following changes in the balance of            qualitative judgments by the regulators about compo-
                                                                                                                                                                                                                                         Minimum Net Worth to be
over the long run. Risk tolerance is established through         mortgage servicing assets are disclosed                            nents, risk weightings and other factors.                                     Actual Net Worth           “Well Capitalized”
careful consideration of plan liabilities, plan funded status    (dollars in thousands):                                                                                                                          Amount         Ratio      Amount            Ratio
and corporate financial condition.The investment portfo-                                                                             Quantitative measures established by regulation to ensure       Dec 31,
                                                                 Years Ended December 31                     2004           2003
lio contains a diversified blend of equity and fixed income                                                                           capital adequacy require Navy Federal to maintain mini-         2004      $ 2,426,117,000   10.60% $ 1,602,785,000        7.00%
investments. Investment risk is measured and monitored           Balance at the beginning of
                                                                    the year                           $ 79,533       $ 51,900      mum amounts and ratios (set forth in the following table)       Dec 31,
on an ongoing basis through annual liability measure-                                                                               of net worth to total assets. Credit unions are also required   2003      $ 2,152,319,000   10.74% $ 1,402,783,000        7.00%
                                                                 Servicing assets recognized
ments, periodic asset/liability studies and quarterly invest-       during the year                       46,204          36,133    to calculate a risk-based net worth (RBNW) requirement
ment portfolio reviews.                                                                                                             that establishes whether the credit union will be consid-
                                                                 Amortization of servicing assets        (19,033)        (23,384)
                                                                                                                                    ered “complex” under the regulatory framework. Navy
                                                                 (Impairment)/Recovery of
The cost recognized for the 401(k) Plan including match-            mortgage servicing assets             (4,320)         14,884    Federal’s RBNW requirement as of December 31, 2004,
ing contributions and administrative costs was $6,026,000                                                                           was 4.60%, which is less than the regulatory threshold
                                                                 Balance at the end of the year        $ 102,384      $ 79,533
and $5,159,000 for the years ended December 31, 2004                                                                                of 6% that would place Navy Federal in the “complex”
and 2003, respectively.                                                                                                             category. Management believes as of December 31, 2004,
                                                                 At December 31, $9,395,000 and $5,075,000 were                     that Navy Federal met all RBNW capital adequacy require-
                                                                 maintained as an allowance for impairment of mortgage              ments to which it is subject.
                                                                 servicing assets in 2004 and 2003, respectively.

                                                                 The key economic assumptions used in determining the
                                                                 fair value of mortgage servicing assets at December 31,
                                                                 2004 and 2003, are as follows:

                                                                 Years Ended December 31                    2004           2003
                                                                 Weighted average life (years)              5.50           4.63
                                                                 Prepayment speed (1)                         17%            22%
                                                                 Yield to maturity discount rate              10%            10%

                                                                 (1) Prepayment speed is the constant prepayment rate (CPR) that
                                                                 results in the weighted average life disclosed above.




                                                            Page 44                                                                                                                           Page 45
Note 16: Fair Values of Financial Instruments                    Cash and Cash Equivalents                                       The estimated fair values of the credit union’s financial instruments are as follows (dollars in thousands):
Navy Federal discloses fair value information of its finan-       Cash and cash equivalents include cash and balances due
                                                                                                                                                                                         2004                2004                2003                  2003
cial instruments, whether or not recognized in the               from banks, federal funds sold and securities purchased                                                      Carrying Amount          Fair Value     Carrying Amount             Fair Value
Consolidated Statements of Financial Condition, for              under agreements to resell, all of which mature within          Financial assets:
which it is practicable to estimate that value. In cases         ninety days.The carrying amount reported approximates
                                                                                                                                    Cash and cash equivalents                 $    3,879,589     $    3,879,589      $     3,447,703     $      3,447,703
where quoted market prices are not available, fair values        fair value for vault cash and demand balances from other
                                                                                                                                    Securities available-for-sale                     12,915             12,915               12,953               12,953
are based on estimates using present value or other              financial institutions. Fair value for short-term securities
valuation techniques.Those techniques are significantly           is based on quoted market prices.                                  Securities held-to-maturity                    2,591,845          2,577,883            1,827,098            1,845,883
affected by the assumptions used, including the discount                                                                            Interest-bearing deposits                        655,369            654,475              492,168              492,168
rate and estimates of future cash flows. In that regard,          Members’ Accounts                                                  Other investments                                  2,226              2,259                  244                  195
the derived fair value cannot be substantiated by com-           The fair value of Share Savings, Money Market Savings,             Investment in FHLB—Atlanta                        26,458             26,469               36,320               36,320
parison to independent markets and, in many cases,               Sharechek and Individual Retirement Account (IRA)                  Mortgage servicing assets                        102,384            102,384               79,533               79,533
could not be realized in immediate settlement of the             share accounts is the amount payable on demand at the              Mortgage loans awaiting sale                     321,268            321,268              242,492              242,492
instrument. Certain financial instruments and all non-            reporting date. For IRA Certificate and Share Certificate            Loans, net of allowance for loan losses       14,302,380         14,379,587           12,885,785           12,932,224
financial instruments are excluded from disclosure                accounts, fair value is estimated using the discounted          Financial liabilities and equity:
requirements.Accordingly, the aggregate fair value               value of future cash flows based upon market interest               Securities sold under
amounts presented do not necessarily represent the               rates and remaining maturity.                                         repurchase agreements                       (2,578,674)        (2,579,129)         (1,831,192)           (1,831,192)
underlying fair value of Navy Federal.The following                                                                                 Members’ accounts                             (17,618,769)       (17,594,131)        (15,778,542)          (15,961,539)
methods and assumptions were used in estimating the              Derivative Instruments and Hedging Activities
fair value disclosures for financial instruments:                 Navy Federal does not receive loan commitment fees.
                                                                 The fair value of loan commitments is based upon differ-        Note 17: Recently Issued Accounting                             In December 2003, the FASB revised FAS 132, Employers’
                                                                                                                                 Pronouncements                                                  Disclosures about Pensions and Other Postretirement
Loans to Members                                                 ences between the contracted rate and the current mar-
                                                                                                                                 In March 2004, the Emerging Issues Task Force (EITF)            Benefits. The revised FAS 132 requires additional disclo-
For certain residential mortgages, fair value is estimated       ket rate of comparable mortgage loans.The fair value of
                                                                                                                                 meeting provided guidance for evaluating whether an             sures about the assets, obligations, cash flows and net
using the quoted market prices for securities backed             forward contracts is based on the quoted market price
                                                                                                                                 investment is “other-than-temporarily” impaired and             periodic benefit cost of defined benefit pension plans
by similar loans.The fair value of other types of loans,         of contracts with similar characteristics. It is the estab-
                                                                                                                                 was effective for “other-than-temporary” impairment             and other defined benefit postretirement plans. Navy
such as consumer and equity loans, is estimated by               lished practice of Navy Federal to only purchase forward
                                                                                                                                 evaluations made in reporting periods beginning after           Federal has adopted the requirements of the revised
discounting the future cash flows using the current               contracts to cover mortgage loans in process which are
                                                                                                                                 June 15, 2004. However, this EITF Issue No. 03-1, The           FAS 132 and the additional disclosures are included in
market rates at which similar loans would be made to             anticipated to close for delivery into these forward con-
                                                                                                                                 Meaning of Other-Than-Temporary Impairment and Its              Note 12 to these consolidated financial statements.
borrowers with similar credit ratings and for the same           tracts.Accordingly, the cost to terminate existing contracts,
remaining maturities.                                            which is based on current market prices, is not material        Application to Certain Investments, has been deferred
                                                                 to Navy Federal.                                                as of December 31, 2004. Navy Federal is evaluating
Investments, including Mortgage-backed Securities                                                                                the potential impact this may have on its consolidated
Fair value is based on quoted market price, if available. If a                                                                   financial statements in the future.
quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. For resale                                                                    In December 2004, the Financial Accounting Standards
and repurchase agreements, due to their short-term nature,                                                                       Board (FASB) issued Statement of Position (SOP) 03-3,
the carrying amount is a reasonable estimate of fair value.                                                                      Accounting for Certain Loans or Debt Securities
                                                                                                                                 Acquired in a Transfer. This Statement of Position
                                                                                                                                 addresses accounting for differences between contrac-
                                                                                                                                 tual cash flows and cash flows expected to be collected
                                                                                                                                 from an investor’s initial investment in loans or debt
                                                                                                                                 securities acquired in a transfer if those differences are
                                                                                                                                 attributable, at least in part, to credit quality.This SOP
                                                                                                                                 is effective for loans acquired in fiscal years beginning
                                                                                                                                 after December 15, 2004. Navy Federal does not expect
                                                                                                                                 the adoption of this SOP will have a material impact on
                                                                                                                                 its results of operations or financial condition.




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