One Non-Interest Income Leader Says Its Position Is No Accident

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ST. LOUIS — No one had to tell Patrick Adams that the $193.5-million St. Louis Community Credit Union is among the top 10 CUs nationally when it comes to non-interest income as a percentage of total income.

"We are way up on that list, by design," said Adams, CEO of St. Louis Community, noting his credit union has what NCUA calls a LMI, or low- to moderate-income designation. It is also designated as a community development financial institution (CDFI) by the Treasury Department.

"The majority of our members are low or moderate income," he said. "When you serve that membership, you don't work off the spread. For the average credit union, 20% to 23% of income comes from non-interest income. Our average member only has $4,000 in savings and the average loan is only $4,000, meaning we cannot generate substantial revenue on taking deposits and making loans. Knowing we can't make money off the spread, we decided to go into the transaction business."

By not working off the spread, he continued, St. Louis Community hedges against an interest rate environment that is low or stagnant.

"A lot of credit unions trying to generate income off the spread today have one arm tied behind their back because rates are so low," he observed.

The strategy employed by St. Louis Community, Adams said, it to "go out and get as many members as it can, and we provide to every member a checking account and a debit card." The result: its checking penetration is 68%.

As Adams put it, "You can leave our office without ordering checks, but you cannot leave without a debit card."

That focus on debit income puts Illinois Sen. Richard Durbin squarely on Adams' bad list after the Assistant Majority Leader became the name behind the Durbin amendment to last year's Dodd-Frank Act. As every credit union leader knows, the Durbin amendment seeks to cap debit interchange fees. Adams said St. Louis Community has been active at every event seeking to halt implementation of the amendment, and he hinted Durbin's handiwork is more likely to help large retailers than consumers. SLCCU's website includes a prominent banner urging members to contact their representatives over the issue.

"If the Durbin amendment passes as is, we will become a shell of ourselves," Adams declared. "And if we become a shell of ourselves it will impact the community very negatively." Referring to the retailer that is in Durbin's home state and which is credited as being the force behind his amendment, Adams added, "Senator Walgreens is killing us. He is doing consumers, small businesses, credit unions and small community banks no service."

The credit union's net income for 2010, excluding NCUA assessments, was $2.5 million. It paid $0 to the NCUSIF and $601,384 to the corporate stabilization fund, leaving it with net income of $1.9 million. Its net worth ratio was 15.41%, making it "Well Capitalized."

Total non-interest income for 2010 was $9.2 million, of which nearly $8.3 million was fee income. But Adams asserted St. Louis Community CU has a policy "to create bridges, not obstacles."

"We have the lowest fees in the region, and in some cases the lowest in the country," he said. "We have not moved our fees in years. An example is our overdraft fee, which is still $15. Our members can't afford it to be any higher than that. Their behaviors might be such that they use it, but we don't need to pile on. We say let's get members, let's give them the transactions they need, and then either direct fees or indirect fees add to our revenue stream. Our members need financial literacy to help them avoid paying fees, but when they do we avoid piling on."

St. Louis Community's business model is to stay inside and be loyal to those who have been loyal to it for 60 years, Adams said. That means products that are "considerate" of members' lifestyle and the problems they might have had in the past.

For example: the average balance on its "second chance" checking product is less than $150. St. Louis Community has 5,500 such second chance checking accounts, and Adams said if his CU was not serving those members they would be going to check-cashing vendors.

"We have shrunk our capital in the last three years, by design," Adams said. "But we've continued to expand our product offerings to make our members' lives easier. If you look at our earnings picture during what people were calling a terrible recession, our earning power has remained strong."

St. Louis Community opens approximately 700 to 800 checking accounts per month, and closes about 100. Many of these accounts have overdraft protection, which Adams noted is referred to in the low- to moderate-income community as "the credit line."

One of the most important issues, Adams said, is managing losses on the deposit side of the ledger.

"Let's be honest, fraud exists in the marketplace," he stated. "Our staff does a fantastic job in making sure we are diligent in making sure we don't stretch our limits but still serve our members. There are no banks in our marketplace. They long since left for the suburbs to take deposits. There are very few credit unions who embed themselves in the low/mod footprint. So in a sense it is a very fertile field to cultivate."

A Money Retailer

The business model St. Louis Community employs does not attract a large number of financial institutions, but, Adams said, "it works for us."

"We think of ourselves not as a financial institution but as a retailer who happens to sell money."

Adams' advice to other CUs looking to make a similar plunge: "Credit unions have to change their business model thinking, which is hard for them. You can't serve the low/mod community halfway. You either have to commit to them or not. There is an admission by lack of presence that financial institutions don't want to serve those of a lower economic status."

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