SECU Risk-based Lending # 5

 To: SECU Board of Directors

 

Dear Chairman Ayers,

Good Morning! Well, here we go again! Know you're eager to hear more about why risk-based lending (RBL) is financially detrimental to the entire SECU membership - and to the hard won reputation for fairness which SECU enjoys.

Recognize that it's hard to "eat crow" when you are in error. Personally, I have had extensive past experience in dining on that cuisine! Yep, we all make mistakes - admit them, correct them, and then move on - that's "just life". But, if after being given notice of a potential, seriously significant strategic mistake - which may adversely impact 2.7 million North Carolinians - you and the SECU Board continue to refuse to pause and review the RBL issue, that's not "just life", that has a not so subtle whiff of hubris.

RBL #1 pointed out that errors do occur (with the resulting doubling of delinquency and a 175% increase in loan losses last year). RBL # 2 demonstrated the assertion that RBL is "a must" because SECU doesn't serve "A" paper borrowers is "wildly fictitious". And that, most any internet savvy 8-year old can easily beat your new, super 5.75% "A"- paper rate, with just one or two clicks. Basically, the SECU Board's proposed "tiered-rate strategy" achieves just two things: 1) it insults the intelligence of your "A" paper members and 2) it insults the integrity of all the other members - including the SECU staff.  But hey, don't believe me, just find yourself an 8-year old and check it out!

RBL # 3 quantified the extra interest cost to SECU members of the Board's proposed RBL strategy - compared against the existing used auto portfolio. The unnecessary extra cost was estimated to exceed $121 million - that's not a "rounding error" for SECU members. RBL #4 showed that RBL tiers - and interest rate surcharges are arbitrarily assigned by the SECU Board - nothing mathematically precise nor Biblical about those tiers and extra interest costs. "Whimsical" would probably be an unfair description of SECU's tiers, "artificial" would be entirely accurate. But, it is clear that a mere 1-point difference in a credit score could cost a state employee or teacher a paycheck over the life of the used auto loan. That's not fair.

But, need to stop this rambling and cut to the chase, because word has it that Chairman Ayers and the SECU Board are going to impose RBL upon the SECU membership - without further examination - as early as next month (March, 2023). Time grows short.

Why exactly Chairman Ayers are you and the entire SECU Board so hellbent on jumping off a cliff?

Any harm in reviewing your due diligence on the risk-based lending issue and sharing your analysis with the member-owners of the cooperative you represent? Go an extra step or two to assure everyone - including yourselves - that you have met your fiduciary responsibility to 2.7 million North Carolinians?

What if someone gave you a suggestion which would give you "an easy-out" of this dilemma? One of those "win-win-win face savers" which calms the waters, unruffles some feathers - would you and the SECU Board not be wise enough to "jump on it'?

Why not try this?

BusinessNC Article - LGFCU Going All Digital, No Branches

 Local Government credit union going all-digital, cutting ties with SECU

By David Mildenberg

02/15/2023

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Local Government Federal Credit Union has developed into one of the state’s biggest financial institutions with $3.8 billion in assets, while being tied at the hip of the much-larger State Employees’ Credit Union. There are no Local Government branch offices; instead, members use SECU’s 273 branches as needed.

It’s worked well, with Local Government membership soaring more than 35% to about 400,000 since 2016. It had a 1% return on assets and 11.6% return on equity last year, both solid measures for financial institutions.

But over the coming year, the Raleigh-based credit union plans to sever its financial ties with SECU in a shift that means some big changes for its members.

Starting in March 2024, Local Government won’t be directing 25% of its revenues to SECU, or more than $40 million annually. As a result, its members won’t have full-service access to the $50 billion credit union’s branches across North Carolina. Instead, Local Government’s members will transact their business exclusively through digital channels, operating similar to Charlotte-based Ally Financial, a public company that doesn’t have branches.

“We aren’t running from State Employees’,” says CEO Dwayne Naylor. “We are running to our members.”

N.C. state and local government employees were part of the same credit union until 1983, when a new structure was set up after complaints from some N.C. bankers. The new Local Government credit union served city and county employees and had its own management and board, but it didn’t operate branches or have loan officers. Members used SECU’s facilities and worked with its staffers for auto or home loans.

Over the last decade, however, Local Government’s board has discussed a split that would allow for new services and a more notable brand, says Ken Noland, the board chair and town manager of Wilkesboro. That led to the 2019 charter for the new Civic Federal Credit Union, which operates as a digital-only operation and has essentially the same leadership as Local Government.

Civic now has $100 million in assets and about 5,000 members. But its technology infrastructure is capable of growing to as large as $50 billion, Naylor says, providing the structure to allow for the split from SECU.

There’s no financial pressure to change. Local government’s assets have doubled in the last six years. But the credit union’s board thinks change is necessary to stay relevant in a fast-changing market, Noland says. He notes that Wells Fargo has closed all but one of its Wilkes County offices, while Bank of America no longer has a branch there.

While he hopes State Employees’ keeps its two Wilkes offices open, Noland says he’s confident that other town staffers are willing to do their banking business through Local Government’s website instead.

Local Government expects to add about 150 workers to complement its 215 existing staffers with a goal of providing better customer service than ever, Naylor says. They’ll absorb the extra cost with revenue that previously went to State Employees’

“It takes courage and a strategy to run to our members when things are already looking perfect,” he says. “We know we are asking for some behavioral change here.”

The impact on SECU is expected to be minimal because Local Government’s contribution makes up a fraction of its $1.5 billion-plus in annual revenue.

Naylor worked at SECU for 17 years before joining Langley Federal Credit Union in Virginia. He joined Local Government in 2013 and became Civic’s president in 2018. He succeeded longtime Local Government CEO Maurice Smith earlier this year.

Local Government has its annual meeting on March 24 in Raleigh

 Since "things are already looking perfect" I've decided to eliminate branches for LGFCU members - should be an interesting annual meeting!

David Mildenberg

David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.