Plain Blaine

 In 2015-06

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Not every bank CEO writes a blog that criticizes his main regulator as either “irrationally risky” or “simply irresponsible.” Not every banker thinks that everyone — Warren Buffett or the average Joe down the street — should get the same loan rate.  Jim Blaine is a maverick who relishes picking fights. He’s also among North Carolina’s most successful bankers over the last 40 years, heading an institution that has grown faster than peers while taking less risk. He doesn’t have the brand name of McColl, Crutchfield or other North Carolina banking-industry legends. But none of them expanded his business 80-fold without making a single acquisition or leaving the state borders. None led an institution that wrote off less than one-third of 1% of its loans during the most severe economic downturns. None has offices in each of North Carolina’s 100 counties. Blaine, 65, the CEO of the State Employees’ Credit Union since 1979, hates being called a banker, and under its cooperative ownership structure, he isn’t paid like a bank CEO; he received about $850,000 last year. But collecting consumers’ money and lending it for cars and houses sure sounds like banking, especially to competitors, and particularly when almost $30 billion is involved.
SECU has soared while bucking many of the most basic assumptions underlying finance in 2015. It’s become gospel that people with poor credit should pay higher loan rates than the well-heeled; that someone investing $5,000 should get a higher interest rate than someone putting aside $500; that banks should collect $3 every time a customer from another bank uses their ATMs; that the extra yield of quasi-government agent securities such as Fannie Mae are worth the risk versus sticking to U.S. Treasury securities. Blaine has spent his career debunking those ideas and others, putting him outside the mainstream of the credit-union industry, and farther still from commercial banking. He’ll be the first to tell you: “It’s working. We’ve got loyal members, low costs and universally available service.”
The credit union had 25 offices and $335 million in assets when Blaine took over. It had 254 offices and $29.5 billion in assets as of Dec. 31, second largest nationally among credit unions and bigger than all but three North Carolina-based financial institutions. Virtually every North Carolinian lives within 20 miles of one of SECU’s 1,100 ATMs, which nonmembers may use without a charge from the credit union. (Their own bank usually collects a fee.) It is owned by its 1.9 million members, including more than 500,000 who never worked for the government. It’s roughly the same size as the No. 3 bank, Raleigh-based First Citizens Bancshares Inc., and it is at least five times larger than each of the state’s eight regional banks with assets topping $2 billion, including Raleigh-based Yadkin Financial Corp. and Greensboro-based NewBridge Bancorp. Unlike those companies and many other credit unions, SECU doesn’t make business loans, other than for some duplexes and small real-estate ventures that regulators classify as commercial. That’s why Blaine doesn’t consider his credit union to be a threat to the state’s banks. With their eye on SECU’s $27 billion in deposits, North Carolina bankers vehemently disagree and have fought for decades to limit its membership scope and force it to pay corporate income tax. The bankers have consistently lost, though politicians could change their minds, N.C. Commissioner of Banks Ray Grace says. “Jim has won so far, but it’s like a terrorist who you repeatedly repel. He only has to break through one time.”
Long before the U.S. financial system froze up in 2008 and required a trillion-dollar bailout, Blaine was a critic of bankers, brokers, real-estate agents, car dealers — just about anyone touching money — for putting their interests ahead of customers. He hasn’t mellowed. Unlike many bankers, he opposes efforts to weaken financial-reform laws passed after the crisis and favors the Consumer Financial Protection Bureau’s efforts to require lenders to disclose more information, so borrowers can make better decisions. “We’ve never been able to partner effectively with a for-profit company of any kind,” says Blaine, who grew up in Chapel Hill, the child of a business professor and a schoolteacher. He has an undergraduate degree from UNC Chapel Hill and a Duke University  MBA. “Their goals are just different than ours. They want to charge an extra $10 if they can get away with it. We want to lower your costs by $10. It’s just oil and water.”
Regulators receive equal scorn. A nemesis is the National Credit Union Administration, which provides insurance similar to how the Federal Deposit Insurance Corp. protects bank customers. In May, Blaine threatened to convert SECU’s charter to a bank because of a proposed NCUA rule that may force credit unions to hold more capital than banks. His blog, JimBlaineOnCreditUnions.blogspot.com, “is brutal, pulls no punches and calls [NCUA] every name in the book, using wit and satire,” says Tom Dorety, who worked at SECU for 13 years before joining Tampa-based Suncoast Credit Union, Florida’s largest. Blaine criticized the agency because more than 40% of its $11 billion insurance fund included fixed-income securities that don’t mature for at least five years. Bonds with longer maturities can get slammed as interest rates rise, and if the agency suffers losses, SECU and others would pay more to shore up the fund. Meanwhile, regulators have “been screaming and threatening credit unions to ‘stay short (or die!)’ for the last few years,” Blaine wrote. SECU only invests in U.S. Treasury securities, and its average maturity is less than two years. NCUA spokesman John Fairbanks declined comment.
The credit union may differ the most by offering the same rates to all borrowers. “Ninety- nine percent of the people we deal with do exactly what they say they will do,” Blaine says. “It got kind of rough during the recession, and we had to extend loans and give them some freedom, but most folks want to pay their debts. Our charge offs were two-tenths of 1% even in the recession, when almost everyone else was at 6%.” Since 1980, the credit union has written off 0.17% of its loans, peaking at 0.29% in 2012. Blaine says he doesn’t know of anyone else with a similar approach, though a few U.S. credit unions don’t use risk-based lending, according to Bill Hampel, chief economist at the Washington, D.C.-based Credit Union National Association, the industry’s trade group. Even Durham-based Self-Help Credit Union, which formed to aid low-income borrowers, charges some more than others.
Blaine thinks it’s immoral to levy different rates based on net worth and payment history, the norm in a consumer-lending world that relies on credit scores determined by software-maker Fair Isaac Corp., a San Jose, Calif.-based company better known as FICO. He pulls out five playing cards to make his point: Each represents one-fifth of all borrowers, from the best “A” credits down to the worst, “E” credits. Typically E borrowers are charged the highest interest rate, because statistics show that perhaps 20% of them will default. The A borrowers, who may default at a 1% rate, pay much lower interest. “That means that 80% of my E credits will pay back their loans just like 99% of my A credits, but you are charging the E’s at the highest rate,” Blaine says. “Suddenly I have the opportunity to overcharge 80% of my E credits. There is no justification for that.”
SECU relies on staff to talk with each customer and sniff out problems before extending credit, rather than strictly relying on statistics. “We look at the same credit reports and affordability ratios as everyone else. It’s not brain surgery,” Blaine says. “Hopefully we can spot the guy who’s on drugs or going bankrupt, and even if we deny them, we can work with them on credit counseling. We don’t hassle them, and we listen to their story.” The credit union charges a rate that is typically slightly higher than most banks’ best offer, so the A borrowers pay a bit more while the rest get better terms — producing savings of $700 million compared with what members would be charged elsewhere, according to a May report by William Jackson III, a finance professor at the University of Alabama. “Once people get a good deal like that, they become your loyal members forever, and they tell their friends,” Blaine says.
Risk-based lending enables financial companies to limit their bad loans and therefore offer more loans to more customers, Hampel says. “State Employees’ is an incredible credit union that does good for its members, but there are other ways to do good.” If the strategy was used widely, UNC Charlotte finance professor Tony Plath says, banks and credit unions would make fewer loans to low-income people, forcing them to borrow from other lenders at much higher costs. “We think it’s worth providing access to credit to those members with blemishes on their record, but not at the best rate,” Self-Help spokesman David Beck says. Most lenders also have a more diverse, less stable customer base than SECU, so it faces less default risk, says Plath. “People who work for the state tend to have above-average incomes, they pay their bills on time and they don’t get laid off, even during recessions.”
Blaine contests all of that. He considers his members representative of the state, making up almost 20% of North Carolina’s population. Few state workers may get fired, but they aren’t rich: Median pay in state government is about $40,000. “We are now both the lender of first and last resort for the less affluent,” he says. “If we can’t qualify a member for a loan, the member should not be borrowing anywhere at any rate of interest. How does a consumer’s creditworthiness or ability to repay improve if the institution charges a higher rate? Even a journalist or a Russian major like me can’t make that logic or math make sense.”
SECU also offers a short list of products, the opposite strategy of many financial companies that pledge to match customer needs with lots of options. A required “share” account has a $25 minimum balance and pays 0.75%, a checking account with no required balance pays 0.25%, a money market pays 1% and CDs pay 1% to 1.5%, depending on maturities, as of mid-May. Each account holder must pay $1 a month that is donated to the credit union’s foundation, which gave away $14.5 million in 2014. It won’t make fixed-rate home loans of more than 15 years, though it offers 30-year loans with rates that adjust every five years. It holds its loans to maturity.
The simplicity reduces technology costs and avoids a deal-making style that can sour customers, Blaine says. “When you go into a bank, you need to be aware that what is going on is negotiable. Here, it’s not negotiable.”  Blaine points to Forrester Research Inc.’s annual survey asking customers if they agree with the statement, “My financial provider does what’s best for me, not just its own bottom line.” In 2014, SECU scored 67% — third among more than 70 institutions, trailing Vienna, Va.-based Navy Federal Credit Union and San Antonio-based United Services Automobile Association, which serve military families. (SECU ranked first in 2013.) The banking units at Wells Fargo & Co. and Bank of America Corp. scored 39% and 38%, respectively, in 2014.
Despite its ubiquity, the credit union has worked to keep a low profile, eschewing advertising and self-promotion. Its public relations staff numbers one. But it is becoming harder to ignore after opening a 12-story headquarters across from the North Carolina General Assembly building in downtown Raleigh last year. SECU bought the property for $340,000 in 1963 and operated a branch there. The credit union nixed repeated acquisition offers from state officials, who wanted to add the site to the mile-long, three-block-wide government complex stretching from William Peace University to Morgan Street. The state owns all of that property, except for two small, historic houses and the credit union site. The credit union partnered with the adjacent North Carolina Museum of Natural Sciences, which connects to the new building with three stories of exhibit and office space and a huge Daily Planet-style globe that is one of Raleigh’s most distinctive symbols.
SECU paid for its $50 million building out of reserves, and now almost 400 employees work there. The credit union owns all but 19 of its branches and eventually wants to eliminate all of its leases, Chief Financial Officer Mike Lord says. Those 235 offices and the 1 million square feet of space it occupies in Raleigh had a book value of $566 million as of June 30, 2014 — an absurdly conservative number. “You are correct. We are very conservative,” Lord says.
While perched above a thriving downtown, Blaine worries about regions of North Carolina that are struggling after losing manufacturing employers. (He lives in rural Granville County, as far as he can get from city life without having a terrible commute, he says.) Because of improving telephone technology, the credit union will add several customer-service representatives in each office in the next few years, shifting calls from larger centers that experience high turnover. Someone asking about a loan in Rutherfordton will be routed to the local office. It’s a different tack than lenders such as Bank of America, which sold branches in nine eastern North Carolina cities last year.
“North Carolina complains about losing its textile, tobacco and furniture industries, but it’s also in danger of losing its financial business,” Blaine says. First South Bancorp Inc., a Washington, N.C.-based bank with $886 million in assets, bought the Bank of America branches. “If you are dealing with out-of-state banks, you should know that the interest charged on loans is leaving the state,” he says. “But if you have an account with a community bank or a credit union, that money gets circulated within your area.”
Many credit unions want to make more business loans. SECU doesn’t, making it an ally of in-state banks, Blaine says. “A lot of our members say they want some business services, but we’re not good at that, and I don’t think we can beat the banks’ pricing. If you’re going to make a loan to the local plumber, you better learn about plumbing. That’s wildly expensive, and the banks are already very good at that.”
While Blaine’s personality touches every fiber of SECU, he’s benefited from a talented board of directors, says Tim Clancy, president of Raleigh-based Clancy & Theys Construction Co., general contractor for the new headquarters. “You’d think a credit union like his would have a bunch of guys who were bureaucratic functionaries, but that’s not the case. They are very sharp people, and they are not a rubberstamp board, by any means.”
Nine of the 11 directors have served for at least 10 years, and the last new member joined in 2011. They don’t get paid, just lunch and dinner on monthly meeting days and the annual holiday party at the Angus Barn. Yet the board faces as much regulatory pressure as banks, says Chairman Jim Johnson, retired director of fiscal research at the General Assembly. “There is some back and forth between Jim and the board, but that’s natural,” says Johnson, a director since 2001. “Businesses get into trouble when there isn’t an active debate going on.”
The board’s most important role may be succession planning. SECU hasn’t had a clear No. 2 since Senior Executive Vice President Bobby Hall retired in 2013 after 43 years with the credit union. “We hope Jim will stay as long as he will, but it’s clear he won’t be the CEO 10 years from now,” says Karan Bunn, a director since 1994. Because of Blaine’s style, “the management there doesn’t even know what the management structure is,” Dorety, the former SECU employee, says. Seven executives earned between $270,000 and $330,000 in 2014.
Asked about his plans, Blaine jokes he’s nearing the end of the middle of his career. “You have to be slightly crazy or weird to work here because you have to think backward. We are a nonprofit bank and that’s a classic oxymoron. The whole idea is we aren’t trying to make money, but we’re trying to leave it in people’s pockets.”
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