By Ray Birch
DOTHAN, Ala.—For Five Star Credit Union, it all comes down to the gross income. So much so, it has received a Raddon Crystal Performance Award six of the last seven years, and one of the biggest reasons for the success is the credit union is good at making money.
CEO Bob Steensma said that while Five Star pays attention to operational efficiencies, it’s the top line that makes the credit union perform so well, taking ROA to about 1.5% last year.
“We are very strong from a gross income standpoint,” said Steensma. “We don’t do it by expense control. Many in our industry feel if you can control expenses, that will make you more efficient and therefore successful. But the expense-driven model is really driven by economies of scale, and we feel that does not work best for us.”
The $388-million Five Star has 15 branches.
“While we don’t staff our branches heavily, our expenses are simply higher than many due to the large number of offices for our asset size,” Steensma said.
It costs the credit union 68 cents to make a dollar, and Steensma re-emphasized that it is the CU’s income—primarily checking income from overdraft fees—that is driving that performance.
OD Revenue
The credit union averages $271 per household in checking non-interest income, the highest in the nation, explained Steensma, saying the average credit union earns $124.
Five Star charges $35 per overdraft, which is at the top end of overdraft charges among FIs nationally, according to data from Moebs $ervices.
“We have charged that price for many years and our members feel it is fair for the service,” said Steensma. “Many of our members depend on overdrafts to manage their monthly balance sheets.”
A large number of Five Star members are low- to moderate-income workers who depend on being able to overdraw their accounts, and pay much less than they would taking a payday loan from a local check casher. Steensma explained that Five Star is the only mainstream financial services provider in a number of the areas it serves.
Five Star was the first U.S. credit union to make two bank buys. The CU has purchased the $23-million Flint River National Bank in Camilla, Ga., and closed a deal with $47-million Farmers State Bank in Lumpkin, Ga. Steensma said the buys align with the credit union’s focus on serving the underserved, saying that in both of the buys Five-Star became the only financial in the former banks’ small towns.
Bob Steensma, Five Star
The credit union opens a large number of checking accounts, often giving members the chance to re-enter mainstream financial services.
“All we offer is a free checking account. We don’t offer second-chance checking. We don’t do car loans with GPS devices on them. But what we do offer is a checking account for people who can’t get a checking account elsewhere. We do have parameters and controls and watch these accounts closely from a risk management standpoint, but we don’t turn our backs on these members,” said Steensma, who added that net new membership growth was tracking toward 5% in 2017.
He added that checking account charge-offs are “miniscule” compared to the overall profitability of the accounts.
Big Net Interest
The type of members Five-Star serves also leads to a big net interest margin, said Steensma.
“Our margin is 4.49%, and the national credit union average is 3.44%,” said Steensma, who said that spread comes from the higher rates charged to lower credit tier borrowers. “We still make more A paper loans that C paper, but compared to other credit unions we lend more to the lower scores.”
Mike Bridges, VP of marketing and communications, emphasized that Five Star doesn’t lead with rate.
“We work with members on rate, and while our rates are still very good, our goal is to get members the loan that works best for them,” explained Bridges. “We don’t draw them in with a .99% offer and then tell them they don’t qualify. We work with them to get them a loan that fits into their monthly budget. We do very well with auto loan recapture.”