Patelco CU moves full steam ahead with what would be the largest conversion to private insurance ever

SAN FRANCISCO- Ballots are racing back to Patelco Credit Union from members anxious to vote on the issue of converting from a federally insured state chartered credit union to private deposit insurance coverage. The conversion has caught the attention of the credit union community not only because it is the largest credit union ever to apply for private insurance at $2.8 billion in assets, but also because it will represent 22% of the American Share Insurance (ASI) fund, and take a noticeable chunk (approximately $12 million) out of the NCUSIF. Adding to its newsworthiness is the head of the credit union, former NCUA chairman and strong proponent of federal deposit insurance, Ed Callahan. Though Callahan suggested that summer may not be the best time to ask for a vote with many people taking vacations, as of the morning of July 29, just one week after the ballots were mailed out to Patelco members, 16,746 members had returned theirs. In order to convert to private insurance, Patelco must get the permission of a majority of 20% of the membership, or approximately 38,000 total members voting. That means 44% of the minimum required have already been received. According to Callahan, the split is approximately 70% to 30% in favor of the conversion. “I wouldn’t go through all this if I didn’t think it’s what the members wanted,” he said. ADP of New Jersey is tallying the ballots. About 191,000 of the credit union’s 195,000 members are over the age of 18 and therefore eligible to vote. The deadline to vote is August 20, but votes by mail could arrive after that date. The CEO said what pushed the decision to convert was the institution’s $480 million in uninsured deposits. He did not know how many members this affected. He went on to explain that about eight years ago, Patelco employed ASI’s services for additional insurance over the National Credit Union Share Insurance Fund’s (NCUSIF’s) $100,000, which was very popular with Patelco’s members. For technical reasons related to a secondary insurer of ASI’s, Callahan said, they could not get enough coverage to keep up with the credit union’s growth and eventually dropped the additional deposit insurance coverage. Finally, this past April, after a couple of years of discussing the issue, Patelco’s board decided a conversion was necessary. “The economic splurge we’re going through right now has brought it to the floor,” Callahan said. Many financial institutions have been faced with high levels of deposits in the last two years. While Callahan does not regret Patelco’s decision to pursue a conversion, he still supports the strength and use of the NCUSIF. “My only fear is that it looks like a statement is being made,” the former federal regulator said. Callahan said of the conversion, “We’ve been happy and secure and delighted with federal insurance,” but believe the competitive edge provided by greater coverage from ASI is worth leaving the NCUSIF. Callahan denied that regulation by NCUA through the insurance fund had anything to do with the conversion. However, on Patelco’s Web site, in an explanation of the benefits of converting to private insurance, it says, “As a federally-insured credit union, Patelco is often subject to contrary regulations established under the mantle of `one size fits all’ mandates from Washington D.C. State regulation has proven ample and responsive to local needs, an it is under this regulation that Patelco believes it can best operate.” NCUA General Counsel Bob Fenner said that he objects to the labeling of agency regulation as “one size fits all.” In fact, he pointed to the agency’s efforts to review regulations and create flexibility where possible. He emphasized a proposal currently out for comment for a safe harbor provision in Prompt Corrective Action (PCA) that would not require credit unions to enter a net worth restoration plan due to a large influx of deposits, like the situation credit unions are currently in. Fenner did agree that as a privately insured credit union, Patelco would no longer be subject to PCA, the aggregate member business loan cap, or the requirement that credit unions over $10 million in assets use generally accepted accounting principles. “These are not a matter of NCUA regulation. Those are laws on the books,” he explained. While the attorney said the conversion of such a large credit union does not make the NCUSIF appear weak, the agency does not seem to be very pleased with the application for conversion. NCUA has pointed out to Patelco officials a provision, Section 151 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), requiring non-federally insured depository institutions to inform customers/members through advertising and disclosure notices that the funds deposited in the institution are not backed by the full faith and credit of the federal government. This information has to be included “conspicuously” on every periodic statement, signature card, passbook, CD, or similar instrument. According to the law, new depositors must sign a written acknowledgement and current depositors must sign a card with similar information included. According to Fenner, this potentially expensive disclosure has not, to his knowledge, been raised with any other conversion to private deposit insurance and he does not know if other privately insured credit unions are in compliance. However, the Federal Trade Commission (FTC), which was granted jurisdiction over the matter by Congress, has never written a regulation implementing the law, Fenner explained. Congress has practically nullified its own law by banning the appropriations to the FTC for implementation and enforcement of this provision of FDICIA. Therefore, Fenner said, the law is self-implementing but there is no one to enforce it. “[NCUA] has no intention of trying to prevent them from converting if that is the will of their members,” he said. Still Fenner insists it is the agency’s “responsibility just to obtain their assurance to make sure that the federal law is going to be complied with.” NCUA does have the authority to approve, or not approve, the conversion. NCUA Chairman Dennis Dollar would not comment on Patelco’s conversion because it is a pending board decision. Patelco has chosen ASI, the largest private insurer of credit unions, for its members deposit insurance coverage. ASI provides coverage up to $250,000 per account, whereas federal insurance only allows for $100,000 per person with an account, plus $100,000 for retirement account savings. While combinations of coverage between members (i.e. a man has an account, his wife can open an account in her name, and they can open a joint account) can expand deposit insurance coverage for many members, it pales in comparison to the virtually infinite amount of coverage private insurance can provide. “There is no reason why any member should have any deposits uninsured,” Callahan said. The credit union plans to notify members when they near the limit for insurance for an individual account, he added. Due to the size of Patelco Credit Union at $2.8 billion in assets, ASI plans to examine the credit union at least annually on-site but will also keep closer tabs on it, according to ASI President and CEO Dennis Adams. ASI will launch a pilot electronic auditing program to keep an eye on the mega insurance member. He stressed that while Patelco’s financials are strong, Adams said it would be “irresponsible” of him to say that Patelco does not bring risk along with such a large portion of the insurance coverage devoted to it. In fact, Patelco will represent 22% of the total fund. If, hypothetically, something were to happen to Patelco, the credit union would probably quickly be merged with another. Adams pointed out, “In the history of credit union insurance, institutions of that size don’t get liquidated.” “I would expect people to keep an eye on us,” Callahan said, just as Patelco plans to be vigilant over other members of ASI. He added that Patelco does not wish to put any of its members or ASI members at risk. Adams pointed out that Patelco has between 10% and 11% capital with 30% to 40% liquidity and a very “plain vanilla” loan portfolio. To become insolvent, the Patelco would first have to go through $290 million in capital, he said. If Patelco is successful in its conversion, Adams said it could encourage other credit unions to convert to private insurance or it may not. Only time will tell. [email protected]