LA JOLLA, Calif. — NCUA Director David Marquis didn't have muchgood news for WesCorp Future Forum attendees during hispresentation on the event's first day. Not only has the agencycharged $215 million to NCUSIF reserves so far in 2008, but lastyear's NCUA employee collective bargaining agreement and CapitolHill's increased interest in financial institutions will result inhigher audit and compliance costs industry-wide.

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

Not surprisingly, California and Florida are the two biggestrecipients of share insurance funds. In response, Marquis, NCUAdirector of examinations and insurance, said the agency has shiftedall of its special action assets team, which focuses on specificrisk problems, to the two states. Additionally, examiners inCalifornia and Florida will be paying close attention to HELOCs,and the ripple effect foreclosures and consumer debt might have onthe popular product.

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

Credit unions that offered interest-only and other paymentoption real estate loans will also be under the microscope, hesaid, as will those that offer member business loans and purchaseloan participations.

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

However, Marquis predicted the industry won't sour onparticipation loans the way it did indirect lending, saying helikes the way credit unions can share risk, particularly the way itspreads geographical risk.

“We can sustain a fair amount of pain and suffering as anindustry, 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 andgain deposit market share as the for-profit institutions raiseprices. Marquis went so far as to suggest credit unions take acapital hit to capture low-hanging fruit.

The director said he expects performance ratios to fall thisyear, 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 margingain.”

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

Regional economic issues will also affect the way examinersconduct their audits, he said, explaining that examiners will askcredit union CEOs to explain their strategies before they judgeperformance ratios.

“Ratios are no longer important, because by the time a ratioshows a problem, it's too late,” he said. “I'm not as concernedwith things like ROA as I am the strategy to manage marketconditions,” he said.

A credit union sacrificing ROA to take advantage of anopportunity to gain market share, for example, would be somethinghe could support with the right strategic plan. Marquis said in hisexperience, credit unions that are experiencing losses entered intonew markets quickly, without gaining the knowledge and skillsneeded to effectively manage risk.

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

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

Merit pay increases, now being implemented as a result of lastyear's collective bargaining agreement with approximately 750 fieldexaminers and office employees, are also kicking in, increasing theagency's operating costs.

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

Marquis said the NCUA will soon implement a certificationprogram for examiners, and will likely begin managing large creditunions separately, like it does corporates.

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