TO: Bill Cheney, CUNA President and CEO FM: Mary Dunn, CUNA SVP and Deputy General Counsel, and Bill Hampel, Chief Economist RE: NCUA Board Meeting Today DT: November 15, 2012

Today, the National Credit Union Administration (NCUA) Board approved a budget for 2013 that represents an increase of 6.1% from 2012, to $251.4 million. CUNA is outraged by this increase and will be pursuing our concerns with other policymakers to achieve greater accountability and transparency in NCUA's budgetary process. The Board indicated the range of the 2013 National Credit Union Share Insurance Fund premium will be from 0 to 5 basis points (bps; it will likely be 0) and an estimated 2013 Stabilization Fund assessment of 8 to 11 bps. This Stabilization Fund assessment range appears to be very high relative to the latest estimates of losses on the legacy assets. The approved budget will require an increase in the operating fee rate for natural person federal credit unions of .24%. The Board also approved a modification to the NCUSIF Overhead Transfer Rate for 2013 from 59.3% to 59.1%. NCUA 2013 Budget Employee pay and benefits account for 73%, or $183.6 million, of the 2013 budget, which does not call for any changes in the number of full time employees (FTEs). Of the $14.53 million budget increase from 2012, $12.8 million is attributable to NCUA employee pay and benefits. However, NCUA indicated some of these increases are conditional, based on whether the President approves salary increases for federal agency workers. The remainder of the budget increases from 2012 to 2013 result from an increase in contract service expenses of about $.98 million and an increase in the travel budget of $.8 million, along with $.15 million for administrative expenses.

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CUNA continues to have many concerns about the increases in NCUA’s budget, in light of the fact that costs in other federal regulatory agencies are being contained and we will be following up with other federal policymakers to raise serious questions about the need for much greater accountability at NCUA regarding its budget. NCUSIF/Stabilization Fund Estimated Assessments Factors NCUA staff indicated they considered with respect to determining the amount of the 2013 NCUSIF assessment estimate include:

The NCUSIF’s investment income;

Growth in insured shares;

Insurance loss expense; and

The projected NCUSIF equity ratio which is estimated to be at 1.3% of NCUSIF funds to insured shares.

We are surprised by NCUA’s announcement that the expected 2012 Stabilization Fund assessment range is as high as 8 bp to 11 bp of insured shares. Based on the latest estimates of total remaining losses to be covered on the legacy assets posted by NCUA just last month, annual assessments of 8 bp to 11 bp would cover the midpoint of expected losses in just 3.5 to 4.5 years. That seems unnecessarily short considering the Stabilization Fund has nine years remaining. CUNA had suggested a 2013 assessment of closer to 5 bp as adequate. NCUA expects to set the assessment next July, as it has done in the past. Overhead Transfer Rate to 59.1% The NCUA Board modified the Overhead Transfer Rate (OTR) from the current 59.3% to 59.1% for 2013. Under the Federal Credit Union Act, NCUA may transfer funds from the NCUSIF to fund its administrative and other expenses related to federal share insurance. NCUA uses the OTR to allocate those expenses. The agency will be reviewing the definition of what is "insurance-related" and may incorporate any changes in that definition when it sets the OTR for 2014.

According to the agency, the modification in the OTR is due to the following factors:

Modification of the state supervisory authority (SSA) Imputed Value calculation to include certain costs;

The 2013 workload budget for federal examination and supervision was reduced by over 1,794 hours;

The 2013 workload budget for state examination and supervision increased by over 8,191 hours;

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Examiners reported spending 67.3% of their examination and supervision time on insurance related procedures for the time survey ending in 2012, compared to 65.1% in the previous survey cycle; and

The 2013 budget of $251.4 million for the cost of NCUA resources and programs increased over the previous year’s budget of $236.9 million.

Operating Fee Scale for 2013 The NCUA Board approved an increase in the natural person federal credit union operating fee rate for 2013 by .24% and a 6.5% increase in the asset dividing point for the 2013 operating fee scale that the agency uses to determine the fee assessed to federal credit unions. The corporate federal credit union rate scale remains unchanged. In addition, federal credit unions with assets less than $1 million will not be assessed an operating fee for 2013. The operating fees for federal credit unions, which will be assessed based on assets as of December 31, 2012, will be due to NCUA no later than April 30, 2013. Next Board Meeting The next NCUA Board meeting is scheduled for December 6, 2012.