SECU Board nominees challenged over new direction in annual election

In what is usually a smooth affair, this year’s election to the State Employees’ Credit Union (SECU) Board of Directors is unexpectedly competitive. Six candidates are running for just three seats. At the heart of the election is disagreement over recent changes and the direction of one of the nation’s largest credit unions.

“It’s extraordinarily rare for any credit union, and certainly large credit unions, to have an open election like this,” Chip Filson, a consultant who’s followed credit unions since the 70’s, said.

Filson runs a blog following nationwide trends in the industry. This historic election for the nonprofit rose from employees and members who question changes made over the last two years, under former CEO Jim Hayes.

With Hayes at the helm, SECU made changes that brought it more in line with banks and other credit unions – centralizing operations, the use of credit scores, commercial lending, and a focus on digital services – changes SECU has long resisted.

Filson frames these changes as a choice between two business models.

“I know the arguments on both sides, but I think it’s part of a broader conversation about what type of institution do we want to be as opposed to what type of cooperative credit union?” he said.

The State Employees’ Credit Union of North Carolina serves more than 2.6 million people and holds more than $53 billion in assets. It has grown into the nation’s second largest credit union because of its unique culture.

“The thing that made the organization great is its single focus on what is best for our members,” Michael Clements, a member-nominated candidate from Winston-Salem. “That’s been the mantra from the very beginning, and I fell for it. I drank the Kool-Aid.”

Clements is one of three member-nominated candidates challenging the three incumbents. Clements, Filson and Blaine said SECU saw major growth because of its customer service. With branches in every county, SECU focused on building local relationships and placed a lot of authority at the branch level.

"What [Jim Blaine] did is what I would call ‘radical decentralization’,” Filson said about former CEO Jim Blain, who served in that position from 1979 to 2016. “SECU was looked upon as an anachronism . . . The idea was complex understanding of what it takes to remain small, while at the same time growing big.”

Individual branches made and collected loans, whereas most other financial institutions view that as an inefficiency and choose to centralize those functions. Each branch has a local advisory committee tasked with gathering members’ feedback. Members even had the option of appealing loan denials before a local volunteer Loan Review Committee.

Another defining mark of the credit union is its simple financial products, tailored to help people of average incomes build wealth.

“The idea was to provide these affordable services that address folks' basic financial needs,” Blaine, who is in retirement and runs a blog following SECU, said. “Services they probably couldn’t get anywhere else.”

These include life insurance, college savings plans, tax preparation, and low-cost brokerage accounts designed for families of low to moderate incomes.

Credit unions are nonprofits owned by their members, but only certain people can join. Membership is limited. In the case of SECU, only state employees and their families can join. This means the credit union serves a very distinct population. Blaine says knowing the population you serve is an advantage to the credit union model.

“When you’re a coop, you’re owned by the members. They’re state employees, teachers, prison guards, DOT workers. They make on average $48,000 a year,” Blaine said. “It’s a powerful model to be a co-op serving a defined group of people because you can know those folks really well.”

Some members feel the credit union is moving away from its “radical decentralization” model. At last year’s annual meeting, Blaine put forth a resolution, asking the board to justify some recent changes.

“At the request of a whole lot of folks, I presented what I thought was a polite resolution, which had 6 points,” Blaine said. “I said I think the members don’t understand what you’re trying to do, and it would probably be worthwhile to explain what you’re doing more clearly and tell membership why these moves are in the best interest of the membership.”

The resolution asked the board why it eliminated tax preparation services, sought to enter commercial lending, and changed its lending approval process, among other things. These changes were implemented under former CEO Jim Hayes, who assumed the role in 2021 and left earlier this year. He was a rare outside hire to the position – an historic move given SECU’s preference for internal hires. Hayes did not respond to a request for comment.

For some, the annual meeting was the first they heard of these changes.

“I had no idea before the meeting that things were being done,” Barbara Perkins, another candidate challenging the board’s incumbent nominees, said.

Perkins says she didn’t receive notice of policy changes in the members’ monthly newsletter or as a member of her local advisory board. After the annual meeting, SECU’s Board of Directors released its response to the resolution and hosted “fireside chats,” as Perkins puts it, across the state to explain its rationale and its vision.

“I was not satisfied with the answers,” Perkins said.

SECU says it regularly shares product and service changes with members through its website, newsletters, and branches.

“Communication with our members and staff is vitally important to us,” Jo Anne Sanford, an incumbent nominee to the board, said.

One of Perkins’s concerns has to do with loan review committees, of which she was a long-time volunteer. The committees were disbanded about a year ago. Previously, a member who was denied a loan by a loan officer could appeal the decision before a local loan review committee. A loan was approved based on whether a person had the ability to pay and didn’t consider credit score.

“Our charge off rates were low,” Perkins said, adding the debts written off were below a 0.25%. “There was no need to increase rates because of credit score because our philosophy had been that the branches were in the community and they knew the people.”

Perkins says the loan review committee hardly ever reversed a loan officer’s decision, and that the committee was also an opportunity to connect with members to their local branch and offer services and advice so the member could receive a loan later. Clements, too, once served on a loan review committee.

“I don’t know any commercial bank that does that for the people they serve,” Clements said. “I thought it was very unique, and I was very proud to serve on that committee. It was ideal.”

At its annual meeting last year, board member Chris Ayers spoke briefly about the board’s decision to end the long-standing practice.

“As SECU loan approval process has evolved with the establishment of additional review measures, member loan review committee requests were dramatically reduced,” Ayers said. “After careful evaluation of SECU’s internal review process, the decision was made to phase out the member loan review committee on Oct. 1, 2022.”

Those committees were dissolved last year as SECU began another practice – risk-based lending, or the use of credit scores to help determine loan terms and interest rates. It’s an industry-wide practice, and for a long time SECU was a holdout. Previously, for more than 80 years, SECU applied the same interest rate for a given loan to every member. Now, people with poorer credit scores pay higher rates. Clements said he, too, first learned of this change at the annual meeting.

“How come we weren’t aware of this?” Clements said. “This is a drastic change. Another tenant of the credit union was that every member is equal. No member is more important than another, whether you're the president of an organization or a janitor. You were equal. Well, that’s not true anymore.”

SECU says the change offers more competitive rates across all credit situations, and that it will benefit the credit union as a whole. Since 2019, its members have begun borrowing more and more from other institutions, especially higher income earners, who tend to have better credit scores. Risk-based lending is an attempt to attract more highly rated borrowers.

SECU says it’ll keep the spread of rates to a minimum, and that lower credit borrowers can still find competitive rates at the union.

Another disagreement among the candidates is the elimination of tax preparation services. SECU says employees were tied up during tax season and that the service costs too much for too few members, some 100,000 members annually. Others see the change as a move away from SECU’s members-first focus.

“There was a level of dissatisfaction when we eliminated the tax preparation because we did that at a very low cost for our members and significant number of our members took advantage of that,” Clements said.

SECU is also seeking to move into commercial lending — that is, loans for businesses. The move puts the credit union in more direct competition with banks. Critics say the move antagonizes banks and adds more risk.

“I spent a lot of time in commercial lending, and I know the credit union doesn’t have that [expertise]. I would not delve into commercial lending. I don’t think the majority of our members are interested.”

Karlyn Mitchell, an NC State Finance Professor, says it would take time for SECU to build up its commercial lending practice and that it'll likely be a relatively small portion of its business.

“Credit unions have not been as sophisticated lenders as banks,” Mitchell said.

Mitchell has taken a look at SECU’s recent policy changes. She says they bring SECU more in line with other financial institutions.

Mitchell said a bill in the general assembly could expand credit unions’ footprint in the state.

“The long and the short of it is the changes that are going on are seeming to put regional banks in closer competition with credit union,” Mitchell said. “In this House Bill 410, the banking industry of course is fighting against it, and rightly they perceive that credit unions would use its passage to try to expand their share.”

H.B. 410 passed the North Carolina House in April but has stalled in the Senate. It would allow credit unions to serve people with incomes below the federal poverty level and those in rural areas who live more than 8 miles from a bank. The bill is promoted by the Carolinas Credit Union League, a lobbying group for credit unions in North and South Carolina. SECU was part of a working group that informed the bill.

"Credit unions wish only to serve the populations that banks have left behind,” Dan Schline, CEO of the Carolinas Credit Union League, said in a statement.

Current law restricts credit union membership to those with a common bond: geographically or professionally. The pending bill hangs over the election. Perkins, Clements, and Blaine believe it could move the union’s focus away from its core constituency – state employees.

“It’s not just SECU changing, it’s the credit union movement,” Blaine said. “It’s moving toward what appears like a more open, bank-like corporate model as opposed to the traditional cooperative model.”

In its response to Blaine's resolution, SECU said the bill would allow it to “thoughtfully expand membership, as SECU has done in the past,” and allow the union to serve people in financial deserts. It added additional membership would better position the union to offer better rates and services, as well as lower fees.

“My main goal as a leader at SECU is to constantly keep in mind both the employees and our members as we forge ahead with seriously needed changes,” Alice Garland, an incumbent nominee to the board said.

This is the first board election under new rules. Previously, SECU’s nominating committee put forth candidates, and at the annual meeting in Greensboro, members could nominate themselves and put their names on the ballot. Votes were tallied that day.

Now, candidates running without an endorsement from the nominating committee must collect 500 signatures from members within 10 days to appear on ballots.

“That’s 50 unique people every day that you have to talk to, and it’s not a short conversation,” Perkins said.

Perkins interviewed with the nominating committee but did not expect to be recommended. The nominating committee recommended the board’s three incumbents: Alice Garland, Thomas Parrish, and Jo Anne Sanford.

The other three candidates, Perkins, Clements and Chuck Stone, received more than 4,000 signatures from credit union members, according to reporting from Business North Carolina.

Perkins and Clements said collecting signatures was exhausting.

“It was very, very challenging,” Clements said. “It is not a great incentive for someone to try to even be on the board.”

At the core of this election is the direction of SECU. Should it continue its ‘modernization’ to be more in line with other institutions, or should it return to the practices that made it unique and defined its success?

“I think the consequences of this election extend far beyond SECU,” Filson said. “The election shows, number one, that a large institution can hold an election and that there can be a contest, and I think there will be reverberation around other credit unions that have gone to great lengths to prevent self-nomination.”

Online voting for the Board of Directors opened September 1st and continues until October 3rd. Members can vote in-person at the annual meeting on October 10th, when results will be announced.