A Guide to Credit Union Member Givebacks
As the year winds down, many credit union members receive a welcome surprise in their accounts: a bonus dividend. While big banks are busy reporting record profits to their external stockholders, credit unions are busy calculating how much of their “surplus” they can return to their member-owners. This is the time of the year when we see many cu members getting checks from these payouts, and so we thought it would be a good time to review credit unions and dividend programs.
This practice, often referred to as a “Member Giveback” or “Patronage Dividend,” is the purest expression of the cooperative movement. But where did it start, and how does a credit union decide to implement one?
The Roots of the Dividend
The concept of returning surplus to members dates back to the Rochdale Principles of 1844, which laid the foundation for modern cooperatives. One of these core principles is “Member Economic Participation.”
In the credit union world, this means that because the members are the owners, any profit made after expenses and required capital reserves are met belongs to them. Unlike a bank, where profit is a “cost” paid to outsiders, in a credit union, profit is a “surplus” to be shared.
Why CUs Give Back
- Reinforcing the Value Proposition: It is a tangible reminder that the member is an owner.
- Member Loyalty: A surprise deposit at the end of the year creates an emotional connection that a standard interest rate cannot.
- Recapitalizing the Community: That money stays in the local economy, often being spent at local businesses during the holiday season.
Why a CU Might NOT Give Back
It’s important to note that not every credit union provides a bonus dividend every year. This isn’t necessarily a sign of poor health; rather, it’s often a strategic choice:
- Lower Rates/Fees: Some CUs choose to provide “dividends” year-round by offering higher savings rates and lower loan rates than the competition.
- Capital Reserves: Regulators (like the NCUA) require CUs to maintain a certain “Net Worth Ratio.” If a CU is growing fast, it may need to keep that surplus to stay financially sound.
- Investment in Tech: A credit union might forgo a dividend one year to fund a major mobile app upgrade or a new branch that better serves its membership.
How to Start a Giveback Program
If your credit union is considering its first member giveback, here is the standard roadmap:
1. Analyze Your Net Worth
Before a single penny is given back, the Board of Directors must ensure the credit union has met its regulatory capital requirements. You want to give from a position of strength.
2. Choose Your Calculation Method
There are three common ways to distribute the “feast of philanthropy”:
- Deposit-Based: Members get a percentage based on the average daily balance of their savings.
- Loan-Based: Members get a “loan interest rebate” based on how much interest they paid during the year.
- Relationship-Based: A hybrid model that rewards members for having multiple services (checking, auto loan, and credit card).
3. Board Approval
The board must formally vote on the total dollar amount to be returned. This usually happens in October or November to allow for December processing.
4. Clear Communication & Documentation
This is where the right disclosures are vital. You must clearly communicate how the dividend was calculated and the tax implications for the member. Ensuring your membership documents and disclosures are up to date is the final step in a successful program.
The Bottom Line
Member dividends are more than just a financial transaction; they are a celebration of the “People Helping People” philosophy. By returning surplus to members, credit unions prove that their primary goal isn’t to make a profit—it’s to make a difference.
