CORONADO, Calif. — A single-minded focus on watching its expense ratio and building capital over a period of years has now created a competitive phenomenon for one rapidly growing credit union.
DFCU Financial Credit Union in Dearborn, Mich. has used its aggressive management strategy to underwrite $50 million of patronage dividends paid over the past three years. Those dividends allow it to return bonus value to members without locking it into difficult-to-change loan and deposit pricing, and, most of all, create loyalty and extraordinary awareness.
It is projecting it will return to members $19 million this year.
"This is about brand strategy core differentiation and business strategy," said CEO Mark Shobe.
That business strategy is predicated on recognizing the supply of insured financial institutions exceeds consumer demand, especially in the greater Detroit market, which has seen a reduction in population.
In remarks to Credit Union Journal's Grow Show, Shobe stressed the patronage dividend for which DFCU Financial has become known is not an annual return of "above market" loan interest rates and "below market" deposit rates.
"If you really run into trouble, you can cut it off," Shobe said. "If you bake (return of extra capital) into extraordinary high rates on deposits or extraordinary low rates on loans, you can't restructure it. You're locked into that baby. If you like variable costs vs. fixed costs, you will love that."
Just as importantly, that dividend is not a "periodic, one-time payment when the credit union has a good year," Shobe said.
"What it is is an incremental annual financial reward for doing business with our credit union," Shobe continued, explaining DFCU Financial targets a patronage dividend that mirrors publicly held bank advantage of 30% to 40% of average net income.
A Key Brand Element
Shobe said the Patronage Dividend has become a key brand element at DFCU Financial that "really brings the concept of member-ownership to life. Let's face it our members did not make an initial financial investment like they would in an equity. Here they see they have a skin in the game and get a return on investment."
DFCU Financial's ingredients for success, said Shobe, are defined capital management strategy; competitive or better interest rates and fees and "ensuring we're in the game every day;" outstanding service, and operational excellence.
"This is probably the most difficult one," said Shobe. "How do you get the institution to perform at such a high level that with some degree of certainty you know you can pay this out every year."
Shobe said DFCU Financial's Capital Management Strategy has three levels of capital:
1. Regulatory capital.
2. Strategic capital. "We look at the investments we are going to make over the next three-to-five years and ask 'How much cash do we need to make those investments?' We're at 11%," Shobe told Grow Show.
3. Residual Capital. "Everything else is residual capital," said Shobe of the funds that are returned to members as patronage dividends.
DFCU's current capital has been years in the making. When Shobe took the reins as CEO in 2000 capital stood around 7%. Over the past eight years net income has average 12.6% growth, operating income 4.9%, average assets 6.6%, and average capital 15%. But the real key lies in one negative number: non-interest expense. It has averaged -0.2% over that same period, despite DFCU's surging growth.
Shobe emphasized DFCU has gotten to where it is after five years of hard work. "We basically built the strategic capital level by improving the performance of the credit union," he said. "You can't go back to your management meeting and say 'We're going to do this now.'"
Shobe said the $2.5-billion DFCU Financial is "too small to be all things to all people," so it remains "very, very focused" on the "individual consumer." It eschews business lending, and it is on track to produce $36 million in income in 2009 (before the corporate assessment).
Its net income is up 159%, operating revenue 47%, and core non-interest income (mostly mortgage and investment securities fees) are up 79%.
Not Gouging The Member
Shobe said DFCU Financial has not built capital on the backs of members. "It is not gouging the member with NSFs or things of that nature," he said. "We have a much lower fee structure than most of our competitors." Shobe noted DFCU continues to spend the same on expenses today as it did in 2000. The best example? When Shobe joined DFCU it had six branches. Today it has 23, yet its branch staffing is flat. Shobe called branch operations the "low hanging fruit" of expense management.
Over that time its expense ratio has declined to 52.4% from 77.5%. "Just in expense savings that saves us $22 million a year; it pays for our whole dividend. And yet it has not stifled our growth," Shobe related.
Indeed, it has seen $200 million in the last three months. "People are really waking up to this dividend," Shobe said.
"If you have a mortgage (with DFCU) that's 6% or less, we tell them we'll make your January mortgage payment for you. I'm telling you, once you pay this out several times, people say, 'This is way cool.'"
DFCU, which now has 167,000 members, created a microsite at itpaystobelong.org that allows members and prospective members to calculate their bonus dividend every year (the average per member is $462, the minimum paid is $50 providing account balance minimums are met).
Other tips from Shobe:
* DFCU Financial has "unbundled" its business and knows who profitable and unprofitable members are across every product.
* It has benchmarked the institution "ad nauseum," a process that took more than five years.
* In response to a Grow Show audience question, Shobe said members have become the "hungry tiger. But that's what you want. Most members have a lot of money somewhere else. If you create an institutional incentive rather than product incentive, and I'm not opposed to a product level incentive, you get more walletshare."
