By Ray Birch
MIDLAND, Mich.—Many members of Dow Chemical Employees’ CU effectively paid about 1.2% APR for their 30-year mortgage in 2017, thanks to a patronage dividend program that returned 70% of interest paid to borrowers in good standing.
DCECU’s Credit Union Member Giveback paid back more than $17.6 million last year to members—including $4.5 million in additional deposit interest—meaning an additional 70% of interest savers earned was deposited into their accounts. It was largest-ever giveback for DCECU, which has returned a share of its earnings to members every year since 1980.
CEO Dennis Hanson acknowledged that a 70% interest giveback is eye-opening to members and the community, and it is not impossible that someone could pay that low 1.2% effective mortgage rate as long as rates remain low.
“If everything remained equal, as things stand today, that would be possible,” said Hanson, referring to the performance of the economy and the credit union. From 2014 through 2016, the credit union returned 75% of interest paid.
“It’s a lot of money we give back, but we are a cooperative,” said Hanson. “Let’s say you paid $1,000 last year in interest on a car loan; you would have received $700 back.”
Members Have A Choice
When members apply for an auto loan or first mortgage, they are given the choice of taking the “rebatable” rate, which tends to be about one percentage point higher than the “non-rebatable” rate—a rate that’s generally about the best in the market, said Hanson.
“But members are far better off with the rebatable rate,” explained Hanson, noting it’s the option most members choose.
Other types of loans only come with a rebatable rate, said Hanson.
Dennis Hanson
Hanson believes credit unions are missing an opportunity that is unique to them when it comes to marketing.
“I don’t think enough credit unions use the patronage dividend as a differentiator,” he said.
DCECU is able to offer such a generous giveback because of its operating efficiency. The CU’s operating-expense-to-average-assets ratio is about 1.55%. Hanson noted most CUs in its peer group come in at about 3.1%-3.3%. The CEO said its efficiency ratio is driven by its model, which is virtually branchless, as DCECU has one main office and 98% of transactions are conducted electronically.
80% Checking Penetration
Moreover, Hanson said DCECU also benefits from having few single-service members and a whopping 80% checking penetration among its member households. On top of all that, member attrition is extremely low, with DCECU reporting a 98% retention rate among its 60,000 members.
Those attributes, said Hanson, dramatically lower the credit union’s costs for marketing, including new member acquisition.
“The loan interest rebate also incents members to make their payments on time, thus keeping net charge-offs on DCECU loans at very low levels, typically under 10 BPs,” Hanson added.
Not having a community charter helps DCECU as well, said Hanson, who believes at least for his credit union it’s better to stay focused on its main sponsor and a group of 50 SEGs that support Dow Chemical.
While about 30% of its members are spread nationally, the credit union zeroes in on its local region, said Hanson.
“I have nothing against a community charter, but we don’t have the desire to acquire one,” said Hanson. “We find that we are more effective and efficient focusing on our niche. There seems to be a lot of marketing costs that come with a community charter, and we have been doing very well with word-of-mouth referrals. We have grown very well organically and that has been a recipe for success for us.”
The credit union has steadily grown assets from $1.4 billion at the close of 2013 to $1.7 billion today.
10%-12% Capital
Hanson said that before the giveback DCECU’s ROA is generally about 1.1%, but then falls to about 10 basis points post-rebate.
“That’s fine, we give pretty much all of it back,” said Hanson, who added DCECU isn’t focused on achieving a final ROA target, but instead pays attention to capital. Hanson said the credit union likes to keep its net worth above 10%, but not much higher. Capital stood at 10.68% through September, according to call report data.
“We feel a 10%-12% net worth is right for us, and if we get to 12% we feel we are keeping too much of our members’ money,” said Hanson. “We are growing assets at 3%-5% each year, which is fine.”
Hanson acknowledged that the Credit Union Member Giveback has benefitted from a “tailwind” created by the low rate environment. He said that low rates allow the credit union to offer a higher percentage giveback than if rates were markedly higher—which looks good in promotions.
“If rates moved up 300 to 400 basis points, for example, we’d have to ratchet the giveback down to 15% to 25%,” said Hanson. “That will probably happen as rates normalize. But the amount, in tangible dollars we return to members, won’t change.”