Credit quality at the State Employees’ Credit Union is showing some negative trends, which is a notable signal given the institution’s importance.
Raleigh-based SECU has 2.8 million members and assets topping $50 billion, making it the second-biggest U.S. credit union. SECU doesn’t operate outside of North Carolina, and unlike most commercial banks, it doesn’t focus on wealthy clients or make business loans. So its finances tell a story about how middle-income, working-class North Carolinians are faring.
The credit union is well capitalized, and its results don’t suggest any threatening financial problems, everyone agrees. But former CEO Jim Blaine, in his almost daily blog about the credit union he led from 1979 to 2015, questions why SECU is reporting significantly more soured loans than in previous years. For example, the credit union reported losses of $72 million in the first quarter this year, compared with $47 million a year earlier, $20 million in 2022 and $17 million in 2021.
Blaine also notes that SECU has reported a higher loan loss ratio over the past few years than the overall industry, which reverses a decades-old history of fewer chargeoffs than other U.S. credit unions. During the recession years of 2008-10, for example, the industry wrote off about 1% of its loans, while SECU’s ratio never topped 0.3%.
SECU officials have said that a tougher economy for many members has caused an uptick in loan problems. But this is an industry-wide issue and SECU shouldn’t be singled out for unusually poor performance, concludes William Hunt, an analyst with Callahan, an independent consulting firm that does business with many credit unions.
SECU officials referred Business North Carolina questions to Callahan.
Blaine cited data covering all credit unions, including many small ones that have very few bad loans, Hunt says in an email. He says a better comparison is with U.S. credit unions with assets exceeding $10 billion.
SECU’s annualized loan-loss ratio was 0.86% as of March 31, compared with 1.44% for the $10 billion-plus peers, Hunt says. That means the N.C. credit union is charging off $8.60 for every $1,000 it lends, versus $14.40 at the other institutions.
Hunt says that SECU’s loan ratio has benefitted from its 75% concentration in first mortgage loans, which is unusually high for credit unions. Home loans have lower charge-off rates than auto and other consumer loans, he says.
It’s true that losses on those auto and consumer loans are increasing at SECU and many institutions, which also may stem from changing industry accounting rules that started early last year, Hunt says.
From 2010-2020, SECU’s loss ratio averaged 0.31%, or $31 per $10,000 in loans. Since 2019, the ratio has increased 80% at SECU, compared with 60% at the peer institutions, according to Callahan’s statistics. “Most institutions are dealing with worsening asset quality in the current macroeconomic environment,” Hunt says.
Delinquencies at SECU have increased to 2.07% of all loans as of March 31, compared with 1.18% at the large peer group. The rate is 0.95% at Truliant Federal Credit Union, which is North Carolina’s second-largest, and 0.56% at No 3 Coastal Federal Credit Union. Delinquencies refer to borrowers who are at least 60 days behind on their payments.
SECU’s delinquency rates “have historically been far higher than peers,” Hunt says, which “aligns with SECU’s stated mission to serve North Carolinians of all backgrounds.” The credit union works closely with members to avoid charge offs, he adds, calling it “crucial work that keeps struggling members in their homes and cars.”
Blaine’s questioning continues his campaign to spotlight changing policies at SECU that he says have hurt its culture and threaten its future. He’s particularly criticized SECU’s decision to offer better loan terms for members with strong credit histories. Traditionally, it offered the same interest rate on its loans for all members.
Blaine’s efforts helped three dissident board members oust SECU incumbent directors at last year’s annual meeting. With four board seats to be voted on this year, the credit union has revised its rules to enable electronic voting, which it says will encourage greater participation. The board has 11 members.
Mike Lord, who was SECU’s CEO from 2016-21, says changing policies at the credit union have hurt its credit quality. He cites the use of credit scoring to enable risk-based lending and “a terrible, unsuccessful implementation by the SECU Board and management to centralize delinquency collections, rather than have them remain in the branches and handled at the local level.”
Hunt says “SECU has a longstanding reputation as a place where North Carolinians can go for a loan, and they will work to help borrowers of all backgrounds… Of course, when asset quality issues are more pervasive economically, a portfolio with more lower-credit borrowers is likely to see loan losses jump a bit faster than the average, especially on the consumer side.”
SECU earned $65.7 million in the first quarter, compared with $143.6 million a year ago. Net incomes totaled $364 million last year, compared with $626 million in 2022 and $557 million in 2021.
Loans totaled $33.9 billion as of March 31, an 11.3% increase from a year earlier. Home loans accounted for about $26.3 billion, more than two-thirds of the total.
