The Strategic Tradeoffs of an Extraordinary Dividend

[ 4 ] December 31, 2014 |

There’s something very special about beginning a new year.   It’s a time to consider the successes and challenges of the past and to make a fresh start.  While we respect what has brought us success, we also need to keep moving forward to consider better ways to advance the financial well-being of our members.  J.J. Watt put it this way: “Success is not owned it is leased and rent is due every day.”  What a great perspective as we strive to continually increase value to our members!

One consideration we have investigated to increase value to our members is an extraordinary dividend.    There is however a trade-off related to giving this dividend that challenges the credit union co-operative focus of driving down fees and giving higher than market savings rates and lower than market loan rates.

Let me explain the tradeoff by first explaining the concept; an extraordinary dividend, or special patronage dividend, is a payment to credit union members representing the money left after operating expenses, regular dividends and reserve requirements are met.  Typically the amount each member receives is based on a percentage of the total annual amount of interest they earned on savings, and a percentage of the total amount of interest they paid on loans.   The more you use the cooperative, the more your share of the extraordinary dividend.

Money 2015

One of the key indicators of a financial institution’s overall strength is the capital-to-asset ratio.  The more assets managed by an institution the more capital, or member’s equity they must hold.  To keep the ratio constant, capital must increase proportionally with asset growth.  Because credit unions are not-for-profit cooperatives they cannot raise capital by selling stock, they must earn it through net profit.  So, in order to get excess money to pay an extraordinary dividend a credit union must make more profit than they need through higher than needed loan rates and fees and lower deposit rates.

I know how good it feels to get an unexpected check in the mail.  I remember getting an extraordinary dividend from my credit union many years ago.  It was only $7.00 – but I still remember it!  I don’t know how competitive that credit union’s rates were or how low their fees were because I never shopped around.   What I didn’t realize then was that in order for that credit union to give me a $7.00 dividend, they had to overcharge all or some of their members throughout the year.

IAA Credit Union’s strategy has been to give all our members the lowest loan rates and fees and the highest deposit rates possible in order for us to make just enough income to cover expenses and capital requirements.   Recently I’ve noticed some other credit unions advertising their 2014 extraordinary dividend and wanted to communicate our strategy.  Perhaps one day we will give an extraordinary dividend, I would truly like to do so.  I am not advocating that these dividends are good or bad only that there is a strategy involved and there are costs and tradeoffs associated.

Thank you for your continued support,

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Category: CEO Corner

About the Author ()

Sean has held the position of Chief Executive Officer at the IAA Credit Union since June of 2005. In this position, he is responsible for the overall management of the $200 million financial institution, assuring financial strength while providing maximum value to its members. Also, he ensures that the Credit Union complies with all State and Federal laws and operates within the policies and expectations of the IAACU Board of Directors. He is a 1986 graduate of Illinois State University where he received a Bachelor of Science Degree in Agribusiness with a minor in Economics. He has also completed the coursework and received the CPCU, ChFC and CLU insurance industry designations. Sean served a combined 20 years in the United States Air Force and Air National Guard as an Aircraft Maintenance Officer retiring in 2002 at the rank of Major. Sean and his wife Kim have five children and reside northeast of Eureka, Illinois in Woodford County.

Comments (4)

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  1. Don Engelkes says:

    Sean: Thanks for the excellent comments regarding extraordinary dividends. Providing quality products and excellent service is what I expect and receive from the IAA Credit Union.

  2. Sean Wells says:

    Thank you for your comments Don, I greatly appreciate your continued support and membership at IAA Credit Union,

  3. Robert G. Hinshaw says:

    Amen!

    You see, my parents taught me to say “Amen” at the end of a prayer.

    And that’s what this is, a prayer! We can even give it a name. Let’s call it the “I hope the members don’t do any research” prayer or the “I hope the members don’t leave us” prayer.

    I have been a member of this CU for 30 years and I remember the days when the checking and savings accounts offered a nice dividend but that has been 20+ years ago. They don’t exist today. There used to be a feeling of gratitude when you walked into the CU. A “Thanks for bringing your needs to us” attitude. That, too, has been lost in the growth. The only reason I didn’t move all of my money out of this institution was because of the family atmosphere that used to be there and the hope that it would return.

    I looked at the CU that was advertising their extraordinary dividend 10 years ago. They were rude. They were slow. They were not my family. They were not the organization for me. However, when I talk with their members of 10 years or less and hear of $300+ dividends that are being deposited into their accounts, well, it makes a person wonder. When I review the loan rates and cost structures and see how they are the same or better, well, that makes me wonder, too. Perhaps the other CU is better at managing costs. Perhaps their management is savvy. I don’t know.

    What I would like to know is what is my current CU going to do to keep me as a member? A 30 year member! I don’t recall EVER getting an extraordinary dividend from this CU.

    I’ve already moved most of my money out. The question is should I move it all out or move it back. It’s your move! Choose wisely!

    • Sean Wells, CEO says:

      I sincerely appreciate your feedback, it is only when I know the expectations and concerns of our members that I can address them. My purpose in writing this article was to explain IAA Credit Union’s strategy with regard to an extraordinary dividend and to solicit feedback. We have chosen to keep our fees and rates at the point which most precisely supports our regulatory capital requirements while providing the very best rates and lowest fees for all our members. Regarding researching our rates and fees, that would be our greatest desire but please do so thoroughly, don’t rely on the “rates as low as” advertisement, look at the total yield on loans for an institution and the total noninterest income (fees) per member for a true picture. I would recommend you take a look at the National Credit Union Administration’s website (NCUA.gov) and look at the “performance reports” for comparisons.

      My intention is not to discredit others’ pricing strategies, extraordinary dividend practices, etc. Each is a separate business with separate goals which are well-thought through, I just want to let our members know our strategy. As a member-owned institution, our focus is not on maximizing profits and revenue, our strategy is to provide the very best value we can for the day-to-day, week-to-week and hopefully long range financial needs of those who use us. Regarding the family atmosphere, that is our goal and I am discouraged to hear you feel it is fading. I invite you to stop by my office or give me a call to discuss in more detail. Thank you for your long-term support of IAA Credit Union – 30 years of ownership is certainly a reason for you to care.

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