Call it the gift that keeps on giving — and it seems to keep getting bigger every year.
A quick glance at Credit Union Journal's recent coverage shows more than $115 million in bonus dividends returned to members in recent months by a handful of CUs.
Furthermore, many of those stories note that these institutions have upped the ante from previous years, returning more money to members than ever before.
But for all the hoopla over those returns, many credit unions don't issue dividends, on the theory that members — and the CU community as a whole — are better served by reinvesting those funds back into the institution to provide everyday value to the membership instead of an annual windfall.
One "anti-dividender" compared it to a tax refund from the Internal Revenue Service.
"I wonder how many credit unions say to their members 'Adjust your withholding so you don't get a big tax refund at the end of the year'?" suggested Henry Wirz, CEO at $2.1 billion SAFE CU in Folsom, Calif. "Because in my mind, they're a very similar concept.... All of the money being refunded to the members in these great dividend paychecks is the members' money."
The argument espoused by Wirz and others on the anti-dividend side of the argument is that if a credit union has excess funds leftover at the end of the year, they may have been overcharging their members during the preceding 12 months.
But even if that's not the case, the anti-dividenders say, rather than returning those funds to the membership, the credit union could better serve its owners by offering better rates and fees throughout the year or investing any excess profits into more benefits for members, such as expanding the branch network, modernizing the CU's suite of technology offerings or any number of other options.
Sources on both sides of the dividend debate stressed that there neither party is right or wrong, it's just a different way of doing business.
But CUNA VP of Economics and Statistics Mike Schenk reminded that dividends can also play a major role in getting less involved members to become more active CU participants.
"It comes down to letting people know the bonus dividend took place, and was a pretty big number in the scheme of things, and then to let them know that you may not have received a bonus dividend but if you just added one or two more services or did so many more transactions, then you would have had a significant payout," he said. "It's part of an educational process on the program itself — letting people know how it's structured and how they can achieve it."
Many on the pro-dividend side note that their members are active and engaged, but the annual bonus can motivate members to do even more business with the CU. Wright-Patt CU in Beavercreek, Ohio, returned $5.2 million to more than 271,000 members for 2014, the seventh year in a row it has issued dividends.
The payout, said Tracy Fors, VP of marketing and business development at the $3 billion-asset institution, is "a moment of pause where members do take a look at their credit union and say, 'Oh yeah, what else do they have there that I might be able to use that I might have forgotten about in the last six months or year?' It gets people talking. It really showcases who Wright-Patt Credit Union is in comparison to everybody else. It's a differentiator."
The CU Difference?
Some credit unions do occasionally have disgruntled members ask why their CU doesn't give back a dividend while others do, but April Clobes, chief operating officer at $2.7 billion Michigan State University FCU in East Lansing, Mich., said that when that happens MSRs work with that member to do side-by-side comparisons on products and rates and the difference in interest paid each month on loan balances.
"Most of the time we come out ahead," said Clobes, who added that hardly any of the credit unions in MSUFCU's market offer dividends.
Many of the credit unions interviewed for this story that don't offer dividends said they have not done the math to determine how offering one might impact their pricing.
"If you're going to have excess income, if you're going to have money to distribute, that means you need to charge more or pay less somewhere during the year," said Jim Blaine, president and CEO of $29.5 billion State Employees' CU in Raleigh, N.C. (SECU). "Right now we pay a bonus dividend — we just pay it every day by lower rates on loans and higher rates on savings. We would pay the same amount either way. Those credit unions that are distributing a bonus dividend could have paid that out during the year, but they do get excellent publicity and excitement value."
One anti-dividender, however, suggested that all the publicity pro-dividend credit unions get from returning money to their members may be part of the problem.
"I'm not totally against dividends," said John White, director of risk management at $826.1 million Plano, Texas-based InTouch CU. "I'm just against these exorbitant, completely huge amount dividends where every single time you're reading a news story about this or that CU, they're breaking their record dividends form the year before. Here you're talking about millions of dollars like we're seeing over the last few years. To me, that's just... an enormous waste, because you can take those dividends and put that back into the membership every year."
Plus, he said, the high-profile press could draw negative publicity to the movement.
"Having those big numbers out there draws nothing but attention from the [American Bankers Association]," he said.
But many insiders and experts say that high-profile press is doing far more good than harm, suggesting dividends are a key way for credit unions to differentiate themselves from the for-profit banking sector, as well as a concrete example of the CU difference that can be held up when defending the tax exemption.
"Not everybody does this, so it's a real tangible and obvious way to set your institution apart from the for-profit sector," said CUNA's Schenk.
Even some anti-dividenders agree. SECU's Blaine admitted that the good political press CUs get from these bonuses is helpful. "Congress does watch that and see it and say 'This is something different.' It gives you an example to say why you're different."
But MSUFCU's Clobes was quick to note that "I hope that's not our only defense, because to me, I think what we do is significant in terms of how we return value to our members.... A membership dividend may be one very visible way, but our membership dividend happens every month [in the manner of better rates and fees for members]."
When Dividends Decline
One concern the anti-dividend camp expressed time and again was that credit unions are based on the concept of fairness and equity, yet more and more CUs are rewarding their membership based on the depth of the member's relationship with the credit union.
One concern expressed less frequently, however, was what happens when a CU has to stop giving a dividend or scale back.
That was the case in 2014 at Wright-Patt CU, which for six years saw dividends increase all the way up to $7 million before scaling back to $5.2 million in 2014.
WPCU's Fors explained that the decreased dividend was the result of a slow-down in the refi market along with the credit union making investments to expand into the Columbus, Ohio, market. All in all, she said, the reduction "was a non-event. Members didn't notice it. They were just really very grateful to get a little extra at the end of the year, especially right after the holidays."
CUNA's Schenk emphasized that credit unions deliver value in different ways, and while giving a dividend may work for some, it may be out of character for others.
"For example, a credit union whose field of membership is technologically astute and that doesn't seem to want to use in-person transactions... obviously won't want [excess profits invested] to build a more extensive branch network," he said. "Credit union directors make decisions on how specifically they're going to deliver value, and there's a bunch of different ways to do that. Each of those ways is aimed at achieving a different objective. I see this as just another way of delivering value in a vehicle that can help you more effectively achieve goals and objectives that you've set out."
Those that don't pay dividends say they put the focus instead on finding everyday ways to bring value to the membership. At the nation's largest credit union, that means everything from rates to technology and service.
Dave Willis, Navy FCU's SVP of savings and membership, said in a statement that the $63.6 billion-asset institution puts a year-round focus on being highly competitive with both dividends and interest rates. "We continuously improve the way we serve members, including opening more new branches, and enhancing online and mobile function and features. Every aspect of our business plan is to provide meaningful and lasting value."
Similarly, SAFE CU's Wirz said his CU does everything it can to price its products as attractively as possible, even if that means not offering a dividend.
"We don't compete on price; that's not our primary competitive edge," he explained. "We believe that the best way for our credit union to compete is on the basis of exceptional value. One of the reasons for that is we think that's a lot of good benefits we can give members with that kind of professional expertise that comes with good service."
Few Converts, but Some Still Changing Sides
At this point, many in the dividend debate are firm in their beliefs and unlikely to convert to one side of the argument or the other. But not all of them.
"My opinion used to be the opposite," said Tony Hale, president and CEO at $234.2 million Temple, Texas-based Texell CU. "I used to feel 'Hey, if you're so magnanimous, why don't you just give them good rates all year long?' The reason I've changed my mind on that is it doesn't mean you can't give good rates and pay a bonus dividend."
While Texell does not currently offer members a bonus dividend, it is considering it. And Hale is not worried about offering it some years but not others.
"You have the flexibility to not pay it," he said. "You might accrue every month for it in anticipation of paying it, and if you have some sort of cataclysmic event that you need the capital, you can stop paying it, just like a publicly traded company can suspend dividends in much the same way."
So what brought Hale from one side of the debate to the other? It wasn't an overnight process, he said, noting that much of it came down to appreciating that dividends don't create deposit demand.
"Nobody says 'Let me put my money in now so I can get a bigger bonus dividend in 12 months,'" he said, adding "If I run out and increase CD rates by 1%, all of a sudden I've got too much money coming in the door." A dividend, he said, offers members a better rate than they thought they were getting while exceeding member expectations without having to worry about growth diluting net worth.
"I no longer see it as the gimmick I used to think it was."