The Temporary Corporate Credit Union Stabilization Fund madeprogress against legacy asset losses in 2011, improving the fund’snet position from 2010,according to audited financial statements released by the NCUA. Thefund also received a clean report from outside auditors.

NAFCU President/CEO Fred Becker and CUNA Senior Vice Presidentof Research and Policy Analysis Bill Hampel both praised theNCUA for releasing the financial reports earlier than last year’sreports, when the agency waited until Dec. 27.

“We’ve been encouraging them since the beginning forever-increasing transparency,” Becker said.

The Stabilization Fund ended the year with a nearly $2 billionnet income, primarily due to revenue from assessments on natural person credit unions that equaled $1.956billion. Assessment revenue was just shy of $1 billion in 2010.

The net income improved the stabilization fund’s net position tonegative $5.25 billion, compared to negative $7.46 billion as ofDec. 31, 2010.

That’s good news, Hampel said , because it means loss estimateson legacy assets are unchanged from 2010. Hampel noted that NCUAhad reduced loss estimates by $1.5 billion in a corporateresolution report published in August 2011, but appear to havereversed that rosier picture in the fund’s 2011 financialreports.

“I don’t know if the valuation methods they use for year-endaudited financial statements is different than those used forinterim periods, like the report last August, or if theexpectations were looking better during the first half of last yearand didn’t look as good during the second half,” he said. “I can’ttell which is which. Credit unions need to remember these estimatesare just guesses that depend upon unknowns future events.”

Industry analyst Marvin Umholtz said he reviewed the financialstatements and found no new revelations. He said he expects theNCUA to assess credit unions between 8 to 11 basis points forcorporate stabilization in 2012, as the agency had previouslyestimated.

Guaranteed notes generated $82.6 million in fees. Expensestotaled $125 million, including administrative expenses totaling$8.2 million, a $3.5 million increase over 2010.

The Stabilization Fund’s assets increased during 2011 to $1.2billion, up from $377 million as of year-end 2011. Much of theincrease is due to $627 million in receivables from assetmanagement estates, which include the assets and liabilities ofliquidated corporates. The net receivables represent $5.6 billionin gross receivables, less a $5 billion allowance for losses.

A $279 million distribution receivable from the NCUSIF alsoincreased assets contributed to the improvement in the fund’s netposition. Distribution from the share insurance fund is required toequal the maximum amount possible that does not reduce the fund’sequity ratio below 1.3% and available assets below 1.0%.

“That $279 million is what would have otherwise been a shareinsurance fund dividend,” Hampel said.

The share insurance fund is required to pay a dividend to creditunions when the fund’s equity ratio rises above 1.3%, and creditunions have received such a payout before, he said.

The NCUA would have done it again in 2011, he said, exceptbecause the stabilization fund had a borrowing from the U.S.Treasury, available funds must be used to pay down the accountinstead of paying it out to credit unions in the form of adividend.

“At the end of the game, credit unions will have $280 millionless of an assessment than they would have to pay otherwise, soit’s a good thing,” he said.

The outstanding principal balance of NCUA Guaranteed Notes was$24.7 billion as of year-end 2011 and represents the maximumpotential future guarantee payments the NCUA could be required tomake, not considering any possible recoveries.

That amount is an increase from 2010’s year-end balance of $17.3billion, due to eight resecuritizations in 2011 with net proceedsof $10.5 billion. The majority of these proceeds were used to repaymedium-term notes and the promissory notes owed by the assetmanagement estates to the surviving bridge corporates. As of 2011year end, the aggregate outstanding amount of the promissory noteswas zero, reduced from $18.2 billion at year-end 2010.

The NCUA added that the estimated losses from the guarantee ofNGNs were zero at year-end.

Total legacy assets collateralizing the 13 guaranteed notes havean aggregate unpaid balance of $34.3 billion, with a recovery valueof $24.5 billion, as of Dec. 31, 2011. Credit ratings on thesecurities included in legacy assets fell during 2011.

The majority of legacy assets, 79% of unpaid principal balances,are residential mortgage backed securities. The percentage of RMBSbelow investment grade as of year-end 2011 was 88% for the 13resecuritizations, compared to 73% for the first fiveresecuritizations that had been completed as of year-end 2010.

Hampel said that while the credit quality of the underlyingassets may have fallen during 2011, it’s more likely the eightresecuritizations completed during 2011 represented securities oflower credit quality, which dragged down aggregate creditratings.

“I don’t think it’s a change of quality, it’s differentcomposition,” he said. “What’s most likely is that first deals wereof higher quality.”

KPMG LLP, the independent firm that audits the StabilizationFund’s books, issued an unqualified audit opinion with noreportable findings.

“For the second year in a row, NCUA has received a clean auditopinion for the Stabilization Fund from our independent auditor,”said NCUA Board Chairman Debbie Matz. “As a regulator of financialinstitutions, NCUA is committed to producing financial reports ofthe highest quality year after year for each of our funds. KPMG’sdetermination that we achieved this standard for the StabilizationFund in 2011 is, therefore, very welcome news.”

In the 2010 audit, the NCUA and Stabilization Fund wasdetermined to have a “significant deficiency” resulting from a“lack of sufficient preparation of the accounting and reporting ofthe Corporate System Resolution Program.” According to KPMG, thestatus of that finding is now closed.

In its release, the NCUA said it has continued to strengthen thesystems needed to handle the Stabilization Fund’s many complextransactions, including those related to the NCUA guaranteed notes.The NCUA reported it had also improved its internal controlenvironment, which allowed the 2011 audited financial statements tobe completed six months earlier than the 2010 statements.