Mergers of financial institutions may be as common as sweet tea and breakfast biscuits in North Carolina, but that doesn’t mean the deals’ executions are simple.
The latest example is this summer’s troubled transition involving a trio of Raleigh-based credit unions. The upshot is that the emergent Civic Federal Credit Union is reporting significant financial losses and mounting levels of soured loans. It has lost 10% of its members in a matter of months.
Since opening in 1983, the Local Government Federal Credit Union has been joined at the hip of the State Employees’ Credit Union of North Carolina, or SECU, which grew into a $50 billion institution. Amid pressure from banks, courts ruled SECU couldn’t accept city and county employees as members, so a separate arrangement was developed. Local Government grew into a $4 billion asset institution, ranking fourth-largest among the state’s credit unions.
SECU provided back office support and kept track of members’ account information, in return for an annual fee that has approached $40 million annually in recent years. Under the arrangement, Local Government members could use SECU offices when they need to do some banking.
Starting several years ago, Local Government leadership concluded that separating from SECU into a more independent organization made sense. Saving the SECU fee was a key benefit, overriding the end of member access to its branchees. Local Government also developed a new affiliate, Civic Federal Credit Union, which opened in 2018 as an online-only operation that also makes small business loans, unlike SECU or Local Government.
After years of preparation, accounts of more than 400,000 Local Government members transferred on June 3, which was called “Civic Day.” That’s when the proverbial stuff hit
the fan.
About 500,000 complaints about various account issues overwhelmed Civic’s customer-service hotline, with wait times sometimes exceeding three hours. Confused, scared and angry members asked CEO Dwayne Naylor and his team why they hadn’t received new debit and credit cards in the mail.
Long lines of customers showed up at the 11 offices across North Carolina that Civic had set up in the past two years in anticipation of the merger. Civic originally planned to
operate without branches, but officials adapted after hearing from members.
Meanwhile, thousands of Civic members asked why their credit scores had suddenly declined after the merger date.
Partly due to the chaos, Civic reports its membership count has declined 10%, while posting a $75 million net loss during the first nine months this year.
“The best thing about the last 130 days is we don’t have to live it again,’’ Naylor, 65, says. “And the members don’t, either.’’
He is fighting back from the unexpectedly rough start. He envisions building an organization with an array of online services to compete in the increasingly digital
financial world.
“As these fintechs continue to take over and drive down costs in the commodity banking market, it’s where financial services is going,’’ says Nayor, whose family moved to Goldsboro when he was a teenager.“ You have to have a different model. We’re carving out differentiation.’’
That model included Civic’s decision to pay some of the highest CD rates of any N.C. financial institution, including some offers in the 5% range for one-year maturities. It’s a strategy similar to other online-oriented enterprises such as Ally Financial, Live Oak Bank and Sofi Financial.
When members’ calls to Civic’s hotline soared, Naylor and other managers joined 50 employees assigned to help with the transition, along with 500 employees of a contract call center.
“We were expecting 15,000 calls and 500,000 came in,’’ the CEO says. “When I’d get a member on the phone, I’d go, `We are horrible. What can I do to help you?’’’
OUT OF CONTROL?
What caused the undelivered cards and inaccurate credit scores is in dispute. Naylor and Civic board Chair Aaron Noble say the problems originated with SECU. Noble is a retired human resources director for the city of Burlington.
Civic’s leadership concluded “some things out of our control made it very difficult for our members,” the CEO says.
For starters, the addresses of about 35,000 Local Government members were inaccurate, Naylor says. Those members didn’t receive new Civic debit and credit cards, disrupting their ability to bank. In response, Civic spent more than $1 million overnighting cards to correct addresses, he says.
“We did have problems with some of the data that we got from State Employees’ Credit Union,’’ Noble says. “There were some incorrect addresses, incorrect phone numbers, which led to the improper mailing of credit and debit cards.’’
SECU also provided inaccurate demographic information about some members, Naylor adds. In some cases, that impeded efforts to authenticate member identities, which was required to allow folks to start banking with Civic.
Some members calling the hotline were told, “I’m sorry, that’s not your birthday. We cannot authenticate you,’’ Naylor says. “Can you imagine? I would’ve been going nuts.’’
Another snafu involved SECU’s inaccurate classifications of 180,000 Local Government loans as paid off, Naylor says.nThey emerged as new loans at Civic, dinging the credit reports of borrowers.
“It’s not a payoff, but it was reported as a payoff,’’ Naylor says. “When the file came over from State Employees’, it was wrong. It looked like new credit, and as soon as we reported it to the credit bureaus, every credit score dropped overnight. State Employees’ did the last reporting.’’
Once Civic informed the credit rating agencies about the errors, it took them 45 days “to finally clean that up,” he says.
SECU wasn’t aware of the problems identified by Naylor and Noble until Business North Carolina asked questions about them in October, says spokeswoman Sandra Jones.
“At five months post-transition, this is the first we have heard that credit reporting of consumer loans or SECU’s provision of (Local Government) member addresses are
in any way related to Civic’s service issues,’’ Jones says in
an email.
“The teams from both organizations worked together on the transition plan, and while SECU offered guidance and recommendations, we respected (Local Government/Civic’s) leadership decisions on how all transition processes would be handled,” Jones says.
Leading up to the transition, SECU gave Local Government/Civic a file containing members’ addresses, she says. Aside from sending debit and credit cards, Civic sent mailings about the merger to members as part of its campaign.
In cases of returned mail, Civic “would have had the opportunity to update their address records based on mail returned to them,’’ Jones says.
In preparation for reporting to the credit bureaus, SECU and Local Government/Civic reviewed the data multiple times, according to Jones. She acknowledged that on June 4, SECU was “notified of an issue’’ related to the submission of the final file a day earlier.
Two days later, she says, SECU “resubmitted the information to the credit bureaus … which corrected any inaccuracies that were contained” in the original submission.
When the transition concluded, Civic “had sole control over their members’ experience and the infrastructure it would use to provide service,” Jones says. “SECU could no longer offer services or service-related support as these accounts were no longer on our systems.”
CONFUSING TIMES
The blowback from members waiting for cards and stunned by lower credit scores was fast and furious, Naylor says. In addition to overwhelming Civic’s hotline, members reported miscues to the Better Business Bureau and reporters, prompting stories on TV stations in Greenville and Charlotte.
As complaints mounted during the summer, Civic sought to allay confusion among
its members.
“Waiting time will get better — soon,” Naylor said in a message to members in July. “We are working on call wait times and card activation. This transition is challenging for both members and staff.”
The deluge of complaints interfered with Civic’s handling of calls from members with problems unrelated to cards and credit scores, according to the CEO.
Hotline delays were maddening to members such as Tom Downing, an Asheville employee who lost online access to his credit card during the transfer of accounts.
“My credit card just disappeared,” Downing says, leading to about 10 hotline calls, with some waits exceeding an hour, before he was able to make a payment. “It’s fundamentally wrong for them to say you’re going to have access to your money and then you don’t.”
Downing considered switching financial institutions, but is giving Civic “a second chance. They pledge that they’re going to do better,’’ he says.
Others have been less forgiving. Civic’s membership tumbled from 405,040 as of March 31 to 366,134 as of Sept. 30. Naylor cites reasons other than customer service glitches for the decline.
Some members don’t want to lose access to SECU’s 275-branch network, despite a desire for more online tools. “I hate to lose any member, but if they believe they’ve got to go in that branch three days a week and they’re in a rural community, then that’s fine,” the
CEO says.
Some Local Government members were surprised they’d been shifted to Civic, even after the credit union had publicized the transition for months on social media, TV and billboards, gasoline pump messages and letters, emails and texts to members.
Others were wary of the change, according to Barry Overman, who retired as deputy chief of the Elizabeth City Fire Department in 2019 and is executive director of the N.C. State Firefighters’ Association in Raleigh.
“Why are they doing this? Why are they changing their name? What am I going to do if I don’t have a drive-through?” were typical questions Overman fielded from firefighters. As a 30-year Local Government member who is on Civic’s fire advisory board, he urged doubters to “just hang on” during the transition.
“When you’ve been with a company for so long, and now you divorce from it, there’s expected to be complications,’’ says Overman, 56. After learning how to use Civic’s digital tools, such as depositing checks with his cellphone, he says, “the transition has been a beautiful thing.”
Those are encouraging words for Civic’s leadership who say they’re moving past the early glitches and focusing on helping members transition to the mostly online platform.
“So much happened that we have not been able to focus on improving the member experience,’’ Naylor says. “But now that’s all we’re doing.”
“I wish we did have all 400,000 of our members that we brought over, but we knew the online model would not suit everyone,” says Noble, the board chair.
Despite the rough start, Civic’s leadership retains the backing of its board, according to Noble. “Our staff has done an outstanding job,” he says. “They stepped up, working overtime and triple time. Overall, while there have been some issues that we need to clean up, I think it’s gone very well.”
Naylor has frontline staff to about 150. “Civic is still on firm financial footing,” Noble says. “While we have lost some members and some members have withdrawn their funds, we’ve still got about 90% of our members who are still with us.”
Civic remains classified as “well capitalized” with a net worth ratio topping 8%, of assets, Naylor says.
Rising expenses related to the merger are contributing to widening quarterly losses, though increasing numbers of soured loans are also a factor. Civic reported a net loss of $75 million for the first nine months of the year, including a $42 million loss in the most recent quarter. That compares with combined losses of nearly $17 million in the previous two years.”
The credit union is also dealing with $211 million of loans that were at least 60 days delinquent as of Sept. 30. That is nearly 7% of its total loan pool of $3.09 billion. Delinquent rates of less than 1% are common at most banks and credit unions.
“Our members in general have lessor means,” Naylor says, noting Civic is a Certified Development Financial Institution, or CDFI, with a commitment to lend to people with modest incomes and net worth. It doesn’t expect late-payment ratios to match other financial institutions, though 7% is higher than its historic rate, he says.
“The delinquency is moving down and will continue to do so,” Naylor says, noting that Civic changed its collections structure and payments systems this year. “It is higher than anticipated, but we are spending more time in solving the members’ problems.”
Civic is making investments for future success and has no plans for legal action related to the transition. “This bold move wasn’t made for this year. It was made for the next 40 years,” the CEO says. ■
