Patelco CU Applies to Convert to Federal Insurance; $500 Million to Become Uninsured
ALEXANDRIA, Va. -- Patelco Credit Union President/CEO Andy Hunter said the credit union's decision to convert back to federal deposit insurance is just another business decision made.
He explained that the world has changed and the $4 billion dollar credit union's business needs have changed along with that. "The trigger point was when the insurance coverage on IRAs changed from $100,000 to $250,000," Hunter said, referring to the Federal Deposit Insurance Reform Act signed into law last year. The new law increased federal deposit insurance coverage through the FDIC and NCUSIF on certain individual retirement accounts while also allowing the insurers to increase coverage every five years.
However, the version of the Financial Services Regulatory Relief Act that was signed into law around the same time did not include the provision to permit privately insured credit unions to join the Federal Home Loan Bank system. This is an obstacle that Hunter cited as a reason to switch back, in addition to some cost savings.
Finally, he said, while Patelco is not pursuing mergers for growth, the credit union is precluded because of its privately insured status. Hunter said the smaller federally insured credit unions looking to merge are not interested in the extra hurdle of a conversion as well.
"Plusses and minuses--we've made another business decision to go back to federal," he said.
NCUA Executive Director Len Skiles confirmed in an e-mail, "Patelco Credit Union, a state-chartered credit union headquartered in San Francisco, Calif., has applied to the National Credit Union Administration (NCUA) for federal insurance coverage for member accounts through the National Credit Union Share Insurance Fund (NCUSIF).
"The application will be reviewed initially at the Regional level, and a determination of insurability will be made based on the requirements set forth by NCUA Rules and Regulations." The authority to approve the conversion rests with the region.
Hunter said the credit union is prepared and explained, "Certainly we expected to be approved or we would not be doing this."
The credit union, which has been cited numerous times by federal insurance advocates as a concentration risk for American Share Insurance, has been in contact with ASI through the process. ASI President/CEO Dennis Adams said that he has met with Patelco's executives and board members and "They have a changing business model and they have some changes they need to address...We support these choices." He added, "This has nothing to do with the financial character or quality of either organization." He said ASI is working with the credit union and has offered to cooperate with NCUA in the process.
The loss of its largest member will not be "a dramatic loss" financially for ASI, Adams said. Back in the 1990s when United Airlines Credit Union left its flock, the fund recovered in relatively little time.
"There is a positive side," Adams commented: the concentration of business in California will be alleviated. He emphasized that it was Patelco's decision to leave, but "that is a favorable outcome."
The other silver lining is that anytime a member financial institution leaves, the equity ratio gets a boost. Adams estimated that ASI's equity ratio would jump from about 1.33% right now to 1.42% if the conversion is approved.
When asked about the increase in federal deposit insurance coverage, Adams said he is not sure if it will spark a trend. However, as circumstances change, he said, business choices change. "This is proof that choices are good."
Right now private deposit insurance proponents and critics are duking it out in Washington State over whether or not private insurance meets the state statutory requirements, which has sparked anew the controversy over private primary deposit insurance.
While Patelco's Hunter listed a few reasons in favor of the conversion back to federal insurance, he said about $500 million in deposits will become uninsured, similar to the amount uninsured when it converted to private insurance, and Patelco does not plan to subscribe to excess insurance. The credit union does have a plan to notify members of the change in coverage through letters and personal contact.
The then-$2.8 billion Patelco caused a stir five years ago when, headed by former NCUA Chairman Ed Callahan, it converted to ASI. Patelco represents approximately a quarter of ASI's insured shares. At the time 61% of the voting membership voted in favor of the conversion. Conversion requirements to move to federal insurance are up to the state regulator. The California Department of Financial Institutions had not responded to inquiry as of press time.
NAFCU, an opponent of private primary deposit insurance, helped light the flame under the controversy five years ago and again in Washington State this year. A spokesperson said, "NAFCU believes that shares backed by federal insurance is the best means to protect members' savings because it is backed by the full faith and credit of the United States government."
CUNA declined to comment and NASCUS only stated, "Choice of insurance...is one of many business decisions credit unions make."