SAN FRANCISCO-Within the next year, members of San Francisco Fire Credit Union may own capital shares in the credit union.
The $620-million credit union has been considering creating a "Member Capital Account" for more than a year, according to CEO Diana Dykstra, who said SFFCU will likely pull the trigger on the concept within the next six to 12 months. The purpose is to help members clearly see the credit union difference and understand their ownership stake in the cooperative and how they play a role in the CU's success.
"Members have lost a sense of what the credit union difference is," contended Dykstra. "We talk about ownership and one member one vote. But ask the average credit union member and they don't understand that. I think the Member Capital Account, or whatever we end up calling it, instills a sense of ownership. It brings us back to some of the basic tenets of credit unions - that we are benefiting our members in many different ways. I want members to think about how doing business with the credit union isn't just good for the credit union, it's good for everyone."
Relationship-Based Capital
Members will be paid capital based on their relationship with SFFCU, both for loans and deposits. The CU will take the total paid in interest and dividends per member. Each member's percentage of contribution to that total will be determined. "Let's say that's .02% for a particular member," Dykstra said. "When the board declares we are moving $2 million into member capital, for example, that member is allocated .02% of that $2 million we declared."
Members can't access the money in their capital account, but will see the total grow on their statements. The capital will be invested in higher-earning instruments, since the account is not insured. But the Membership Capital Account is not all show; it will earn dividends on a quarterly basis, which will be deposited into members' regular share accounts. The plan also calls for paying members a cash distribution at some point based on the tenure of the account or if the member becomes disabled.
Dykstra, who said her credit union prefers to pay above-market rates on loans (4.99% for 48-month auto loan at press time) and deposits (2.02% for a six-month CD) year-round as opposed to paying lower rates and a year-end dividend, shared strong opinions on how to give back to members. "Bonus dividends may be great public relations events, but it's not clear whether this approach generates more loyalty or additional business," she offered. "Many credit unions are using 'excess' capital to improve their distribution system, especially branch deployments. The danger, of course, is that long-term fixed costs become embedded in the expense structure."
With its capital dropping two percentage points to 8.21% as a result of the economy and the costs related to the corporates, SFFCU is waiting for the economy to improve and the costs of the corporate bailout to stabilize before launching the Membership Capital Account.
"One of the biggest reasons we have not introduced the account is because we have not gotten 100% buy-in from the regulator that the Member Capital Account will count toward our regular growth capital," Dykstra said. "Let's say we bring our capital down to 7.5% and another shoe drops. Then all of a sudden our capital falls below 6%. Even though we have a 1.5% or 2% that's allocated to members, but the regulator does not allow us to count that, then we would have to tell members we are taking back some of that capital for operations purposes, and we do not want to do that."
Asked about the difference in the impact of a bonus dividend and the Membership Capital Account, Dykstra said, "The bonus dividend is a one-time event and it does not instill ownership. Most people don't understand how it is earned. We are modeling the Membership Capital Account after USAA's Subscriber Account. USAA has the highest consumer advocacy, trust, and service ratings. And when you ask people about USAA, they tend to talk about their Subscriber Account and how they personally share in the financial success of the organization."
