There’s more to the story that Patelco Credit Union, a $2.9 billion state-chartered CU based in San Francisco, converted from NCUSIF to private insurance (ASI) than the fact that they actually did it. For one thing, Patelco’s recent bold action (following two years of studying such a move) may have put a bee in the bonnet of other large federally insured, state-chartered credit unions. Many of them are also concerned about the substantial uninsured shares on their books as well as about some of the same unspoken issues that may have played a role in the Patelco decision. To cite just one example: rather than simply grumble about a 62% (a new high) overhead transfer rate (OTR) that virtually every federally insured state charter feels is exorbitant and unfair, Patelco’s conversion demonstrates that even very large CUs can do something about their dissatisfaction. Bidding adieu to the much heralded “full faith and credit of the federal government” was obviously not a decision that was made lightly by Patelco. Nor is it one that was left up to the credit union CEO, or the board of directors. It required approval (under strict and specific NCUA guidelines) from the membership. In Patelco’s case, at least 20% (38,241) of the credit union’s 193,000 total membership, had to cast votes on the conversion issue. More than 66,000 members ended up voting of which 61% approved the switch. Patelco members apparently liked being able to obtain $250,000 coverage per account, especially those holding the $480 million of uninsured funds. Granted only 16 states currently have language on the books allowing private insurance although others such as Colorado are considering it. But one of those states is California which has more large federally insured, state-chartered credit unions than any other state. How many of these would have to follow in Patelco’s footsteps to make a sizeable dent in NCUSIF? Patelco’s leaving reportedly forced NCUSIF to pony up approximately $12 million to Patelco as it departed the fund. If only a handful follow Patelco’s lead and if a few more FCU billionaires convert to state-charters in order to then dump NCUSIF, the impact on both NCUSIF and NCUA could be significant. Think OTR, investment income, premiums, staffing, budgets, CU expansions, etc. Interestingly, NCUA has stated publicly that it won’t oppose insurance conversions. How can they, legally or otherwise? Yet it is strange that out of the blue they started running public service ads touting the benefits of federal insurance in California and elsewhere. No connection to Patelco’s move they said. Really? NCUA Chairman Dennis Dollar has been noticeably silent on this matter apparently preferring instead to let Board Member Deborah Matz be the outspoken spokesperson. Some of her comments have inferred that credit unions leaving NCUSIF may be getting on shaky safe and soundness ground. What Dollar has said privately is that the best way to curb insurance conversions is to not give federally insured CUs any reason to do so. Dollar has been spearheading a number of popular changes at NCUA. They have helped slow charter conversions. But the state-charters’ unhappiness over NCUSIF and more specifically the OTR continues to fester like a sore that will not heal. Dollar’s initiatives as chairman may have come too late. Plus, his term on the board expires next April. Then the NCUA Board leadership becomes a crap shoot once more. Will the new chairman be a Dollar II or a D’Amours II? Meanwhile, on the political front, the senator expected to become chairman of the powerful senate banking committee next year, Republican Richard Shelby of Alabama, is on the record as being concerned that credit unions have become quite large. He also doesn’t like what he has previously described as “wide open fields of membership.” Too bad! In light of current developments, such an attitude could lead to an even further disenchantment with the federal charter to the point where charter and insurance conversions might accelerate. Ironically, not only is there no language at the state level prescribing a size limitation for credit unions, but nowhere in the federal credit union act does it set forth size limits either. Patelco is by no means the first credit union to ever decide to convert from NCUSIF to private insurance (reportedly 27 have since 1994). But it is by far the largest CU to do so. It is also the first credit union to make the switch that is headed by a high-profile and respected CEO, Ed Callahan. Among other things, Callahan is a former NCUA Board Chairman where he made several gut wrenching decisions that some CU veterans have said not only shaped credit unions but guaranteed their future. Because he will retire at year’s end, some observers have speculated that the Patelco insurance conversion may have been timed to be Callahan’s last hurrah, his final opportunity to send a strong message to NCUA/NCUSIF. It is no secret that he feels the OTR is “unconscionable,” and that the federal regulator is not being held accountable to those paying the freight. And that the compensation levels for senior executives of NCUA are out of whack with much larger counterpart regulators. And that the agency’s staffing levels need to come down a lot faster than current budgeted projections. Of course he and all other officials at Patelco claim vehemently that their move was not about those things. It was all about the members. Those who know Callahan and his board will not doubt this sentiment for a second. Yet, just below the surface there does appear to be additional motivation behind the decision. But of one thing there is no doubt: a growing number of credit unions are not afraid to make any decisions, no matter how controversial, that they feel will benefit their memberships. And as it should be, the ultimate decision making body will be the credit union members themselves. Who can argue with that? Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail [email protected].

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Peter Westerman


Credit Union Times

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