LA JOLLA, Calif. — NCUA Director David Marquis didn't have much good news for WesCorp Future Forum attendees during his presentation on the event's first day. Not only has the agency charged $215 million to NCUSIF reserves so far in 2008, but last year's NCUA employee collective bargaining agreement and Capitol Hill's increased interest in financial institutions will result in higher audit and compliance costs industry-wide.

The reserve expenditure is the highest amount in more than 20 years, up from 2007's total of $40.8 million, and more than all charges combined from 1994 through last year combined.

Not surprisingly, California and Florida are the two biggest recipients of share insurance funds. In response, Marquis, NCUA director of examinations and insurance, said the agency has shifted all of its special action assets team, which focuses on specific risk problems, to the two states. Additionally, examiners in California and Florida will be paying close attention to HELOCs, and the ripple effect foreclosures and consumer debt might have on the popular product.

Marquis said he thinks 98% of credit unions will weather the housing storm just fine, but said those with significant HELOC portfolios could see dark clouds on the horizon. Those with more than 15% of their loans in HELOCs are in the biggest danger.

Credit unions that offered interest-only and other payment option real estate loans will also be under the microscope, he said, as will those that offer member business loans and purchase loan participations.

“A lot of credit unions bought participation loans as investments, and that's not what they're about,” he said. “They must be underwritten.”

However, Marquis predicted the industry won't sour on participation loans the way it did indirect lending, saying he likes the way credit unions can share risk, particularly the way it spreads geographical risk.

“We can sustain a fair amount of pain and suffering as an industry, and we have a lot of track to play with, so to speak, that you don't see in the banks,” he said.

In fact, credit unions have an opportunity to undercut banks and gain deposit market share as the for-profit institutions raise prices. Marquis went so far as to suggest credit unions take a capital hit to capture low-hanging fruit.

The director said he expects performance ratios to fall this year, predicting ROA specifically will fall to 0.50% by year-end. It doesn't have far to go, sitting at 0.60% as of March 31.

“Last year, it was about the net margin squeeze,” he said. “Now, the margin is back, but losses have increased and offset net margin gain.”

However, credit unions have had a great 12-year run, the best Marquis said he's seen in his 30-year career, which has left the industry in top condition to weather a few tough years.

Regional economic issues will also affect the way examiners conduct their audits, he said, explaining that examiners will ask credit union CEOs to explain their strategies before they judge performance ratios.

“Ratios are no longer important, because by the time a ratio shows a problem, it's too late,” he said. “I'm not as concerned with things like ROA as I am the strategy to manage market conditions,” he said.

A credit union sacrificing ROA to take advantage of an opportunity to gain market share, for example, would be something he could support with the right strategic plan. Marquis said in his experience, credit unions that are experiencing losses entered into new markets quickly, without gaining the knowledge and skills needed to effectively manage risk.

“We've got too many cases where the credit union went over the edge so quickly, the NCUA couldn't catch them in time,” he said.

Marquis said the NCUA plans to issue two more letters to credit unions this year, regarding ROA and participation lending.

Merit pay increases, now being implemented as a result of last year's collective bargaining agreement with approximately 750 field examiners and office employees, are also kicking in, increasing the agency's operating costs.

However, Marquis told attendees the cost of an NCUA examination is about half of what banks are paying for similar services from the FDIC. And, the NCUA saves on overhead wherever it can, he said, citing home-based examiners and efficient auditing practices as examples.

Marquis said the NCUA will soon implement a certification program for examiners, and will likely begin managing large credit unions separately, like it does corporates.

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