Over the years, some credit unions have prompted splashy headlines by issuing big annual dividends, and the number of CUs mining that opportunity for positive press seems to have grown, but the number of CUs that actually issue dividends is relatively small, according to a recent study.
While 40% of credit unions surveyed by Callahan & Associates said they plan to issue dividends to their members based on the achievement of certain targets, only one-in-ten credit unions actually follow up on it, the consulting firm reported.
Specifically, only 10.7% of respondents issued patronage dividends to members, while a whopping 89.3% did not.
Callahan surveyed both CEOs and CFOs of credit unions concerning their attitudes towards dividends, with a total of 466 executives from CUs of varying asset sizes and from all geographic regions participating.
Generally, credit unions monitor their budget and net worth ratios before deciding whether or not to issue a dividend—they they also consider such parameters as return on assets and return on equity. Also, when calculating how much to give back to each member, factors weighed include loan interest, relationship level/number of accounts, mortgage loans, and auto loans.
Among the survey findings:
- Sixty percent of credit unions make a dividend decision based on the previous year's financials—with such items as net worth ratio, ROA and ROE as the top "trigger points"—rather than including the dividend payment in their annual budgets.
- Ninety percent of credit unions do not discuss paying a patronage dividend with their regulator prior to implementing the program.
- Among those credit unions that pay dividends to members, 91% use direct deposit, while another 8% use a mix of paper checks and rate rewards.
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"We've been doing this [paying a dividend] for more than 30 years," one survey respondent stated. "Patronage dividends help explain how we grew to over $1-billion in assets despite being headquartered in a city of less than 9,000."
Similarly, Jim Blaine, president & CEO of the State Employees' Credit Union, a $38-billion institution based in Raleigh, N.C., said he believes annual dividends create "positive press" and member goodwill, while also re-emphasizing the cooperative structure of the credit union.
Among the potential negatives discussed in the Callahan report, dividends could be open to misinterpretation, can be difficult to track, and can lead members to expect more such payments in the future, which can be problematic if the CU isn't in a position to offer an annual dividend consistently.
There are also some bonus dividend critics who suggest that it's better to focus on offering everyday value—lower rates on loans, higher rates on deposits and fewer and lower fees on products and services every day, rather than "saving it up" for a splashy year-end bonus.
"Credit unions have historically returned to their members—above that required to maintain their safety and soundness by regulation—what would have otherwise been profit," said Dennis Dollar, an Alabama-based credit union consultant and former chairman of the National Credit Union Administration (NCUA). "All credit unions base their member return on lower loan rates, higher dividend rates, lower fees, enhanced services, more branches and technology. Some add an annual lump sum dividend to the mix, while others spread what would be an annual lump sum over the months through the traditional return mechanism of lower loan rates, higher monthly dividends, lower fees and expanded services."
Dollar cautioned that there is no "right or wrong" approach as all methods of return to members are consistent with the credit union philosophy and help build the credit union brand.
"Some like the 'PR bang' of an annual dividend announcement, and others see a PR advantage in spreading the return out over the year," Dollar added.
