To Dividend or Not?


Toward Understanding Credit Union Special Dividend Policy

As the books closed on 2021, the industry was treated to the traditional flurry of credit union special dividend awards announcements. Against this backdrop, we asked a fundamental question: what should motivate a credit union’s special dividend policy?

The theory of corporate finance can be applied to credit union special dividend policy, albeit with certain adjustments to account for the uniqueness of the credit union structure and its regulation.

When a corporation decides to return capital to shareholders, it has several arrows in its quiver, ranging from paying dividends, stock buybacks, to the redemption of other securities (e.g. warrants, convertible bonds, etc.) linked to shares of the company. Every such case represents a distribution of capital from the company’s coffers – an acknowledgment that the company believes its shareholders can find a better use of the funds than the company itself.

Aside from offering lower rates on loans and higher rates on deposits, credit unions, by contrast, have a single mechanism of distributing capital – special dividends to members. Unlike in the case of the corporation, foregoing a special dividend and reinvesting the funds in the credit union business will not increase the firm’s value for its shareholders. A credit union’s members are not shareholders, and they do not share in the upside of the credit union’s enterprise value. Instead, paying special dividends to members can be an effective way for a credit union to attract new members.

While a corporation has a fiduciary duty to its shareholders, a credit union exists to provide affordable access to credit, with members enjoying the benefits of this mission.

So, is a credit union’s declaration of a special dividend an acknowledgment of its inability to provide affordable access to credit? It may be. It might also result from the lack of demand for such credit, or more recently, an admission that deposit growth is outstripping loan growth. Adding to the equation is a credit union’s requirement to maintain an adequate net worth ratio, which deteriorates when deposits grow faster than the historical ratio of net income to assets.

A higher net worth ratio equates to lower leverage and thus a lower net income to net worth ratio. The opposite is also true – a lower net worth ratio implies greater leverage and a higher ratio of net income to net worth. All of this must be considered when deciding on the appropriate special dividend policy, as the delicate balance should be maintained at an optimal level. Of course, this will vary by credit union, depending on asset profile and risk appetite.

At Credit Union of Texas (CUTX), we donot pay a special dividend to our members because we believe that CUTX can return member and community value in other ways. More specifically, we offer more competitive interest rates on loans and shares throughout the year and provide meaningful support to the charitable and community causes in the areas that we serve.

When considering whether or not to pay out special dividends to members, CUTX first considers the impact that those funds could have on making positive changes in the community. At Credit Union of Texas, commitment to the communities we serve isn’t just a promise; it’s our purpose. That’s why we’ve invested millions of dollars over the past several years into groups that directly address the needs of our community. Together with our community partners, we’ve witnessed firsthand that these investments offer a much stronger, long-term return than special dividends ever could. Over the years, we’ve created a lasting impact in our communities, making a difference where it’s needed most.

CUTX focuses its local community efforts on making a difference in severalkey areas: suburban homelessness, food insecurity, assistance to victims of domestic violence, the special needs community, first responders, educators, and children’s advocacy. This includes donations to organizations like Dallas Children’s Advocacy Center (DCAC), which helps improve the lives of abused children; Streetside Showers, which provides personal hygiene care to those in need; and CUTX’s special needs greeter initiative that offers job opportunities at CUTX to special education high school students in Dallas-Fort Worth. 

Recently, a large credit union distributed $7 million to its nearly 1 million members, providing approximately $7 in dividends per member. While we respect the credit union tradition of returning a modest dividend to members, we can’t help butimagine the impact this money could’ve made had it been reinvested in our communities! We firmly believe CUTX makes a far more significant impact as an organization by partnering with groups directly assisting the most vulnerable among us and we are grateful to our members for sharing this view. Over the past two years alone, CUTX has donated more than $4 million to the Children’s Advocacy Center of Collin County (CACCC) and Trusted World, which addresses situational poverty. As one example of this impact, the money donated to CACCC is earmarked toward constructing an additional facility that will serve a rapidly growing portion of Collin County and allow CACCC to accommodate its increasing demand and serve up to 10,000 clients a year.

In many ways, the special dividend exercise is not unlike the decision to raise subordinated debt, the only other means by which a credit union can improve its net worth ratio outside of keeping a larger proportion of retained earnings.

CUTX, for example, recently decided to raise subordinated debt. We were spurred by the belief that our credit union is stronger with a broader set of options for our members, increased market share, and poised for continuous growth. At this time in our history, the subordinated debt will allow us to (1) diversify and bolster our capital position, (2) improve our resiliency following the pandemic, (3) target a long term 9% level for our Net Worth Ratio, and (4) support future growth through the expansion of our geographic footprint into East Texas.

Again, we view ourselves as fortunate in that we do not have to pay more special dividend monies out to our members. Instead, based on our record of success, they trust that we can continue improving the products and services we offer, expanding our geographical footprint, and bringing meaningful support to a wider and wider field of membership. 

While we list some of the factors to consider, there is no right answer on what dividend a credit union should pay its members, how often it should be adjusted, and if it should be measured compared to its peers.

An ongoing consultative approach involving management, the board, and external advisors can often be the best course, as the regulatory and economic environment can change rapidly and dramatically, sometimes with little notice.

Mr. Pointer is the President and CEO of the Credit Union of Texas (CUTX), a state-chartered and federally insured credit union headquartered in Allen, Texas. CUTX has more than 145,000 members and total assets of nearly $2 billion.

Mr. Macchiarola is the CEO of Olden Lane Inc., the leading advisor on credit union subordinated debt.


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