Just How Special Are Special Dividends?

Credit union executives say special dividends are unusual. But how unusual/?

For the year-end season of special dividends, CU Times has found 38 credit unions that provide them, and have provided information about their total value and when they were paid.

The announcements gathered by CU Times are by no means a complete survey of the nation’s nearly 5,400 credit unions. Some are from news releases sent to CU Times, others are from notes to members tucked away on websites.

To get an idea how unusual special dividends are, CU Times looked at rebates on members’ interest payments on loans. While NCUA doesn’t collect data on special dividends on savings, it does collect data on interest rebates.

Several of the credit unions announcing special dividends in the past three months are also among the relatively few credit unions that provide these interest rebates.

For example, Beacon Credit Union, Wabash, Ind. ($1.3 billion in assets, 45,598 members as of Sept. 30), which serves a rural swath of Indiana, announced it is paying nearly $1.7 million to members as interest rebates.

Arizona Federal Credit Union, Phoenix ($1.7 billion in assets, 127,888 members) announced this month that it had paid members $5.8 million Dec. 31 as Plus Payouts. The special dividends included $3.8 million in the form of interest rebates.

Members received an 11.7% refund of loan interest they had paid in 2019, plus a bonus divided of 40% of the dividends they had earned in the year, Arizona FCU EVP/COO Jason D. Paprocki said.

“While the mechanics may change a bit, we remain committed to returning earnings to our members when our cooperative does well,” Paprocki said. “We believe it to be one of the primary ways we demonstrate the value we create for our membership.”

Beacon CU and Arizona FCU also gave interest rebates in the 12 months that ended Sept. 30, 2019, making them two of only 234 of the nation’s 5,394 credit unions that gave interest rebates during those 12 months before the current special dividend season—and the latest period with NCUA data.

Altogether the 234 credit unions rebated $72.5 million, representing 0.10% of their average assets over the 12 months. In the prior 12-month period, 211 credit unions rebated $69.5 million, or 0.11% of average assets. In both periods, members received about $13 each.

The credit unions making interest rebates tend to have higher returns on average annual assets. In the period ending September 2019, their ROA was 1.02%, which was 9 basis points higher than all credit unions.

Lisbon Farmers Union Credit Union of Lisbon, N.D. ($4.3 million in assets, 255 members) had the largest per member rebate in the year ending Sept. 30: $70,891, or $278 per member.

On other end, many of the rebates are so small they appear to be bookkeeping entries rather than rewards programs. There were only 128 credit unions that paid at least $5 per member, and 99 of them made at least half the payment in the fourth quarter, when special dividends are most common.

Among the 128 with at least $5 worth of interest rebates, the average rebate per member was $28, and the payments were 0.18% of average assets against ROA of 1.01%.

Beacon CU rebated nearly $1.7 million in the year ending Sept. 30, or about $36 per member. In the previous year the rebate was $1.6 million. For both 12-month periods, the rebate equaled 0.13% of average assets. ROA was 0.69% in the year ended Sept. 30, and 0.84% in the prior 12 months.

Arizona FCU rebated nearly $2.2 million in interest payments in the year ending Sept. 30, or $17 per member.

Like Beacon CU, Arizona FCU’s interest rebate worked out to 0.13% of average assets in both the year ending Sept. 30, when its ROA was 2.04%, and the prior 12 months, when ROA was 1.62%.

Like about half the credit unions providing interest rebates, Arizona FCU pays them in them once a year in the fourth quarter.

Like other credit unions, Arizona FCU’s board decides whether to pay a special dividend, and how much it will be.

Arizona FCU now sets aside 20% of net income throughout the year to fund its special dividends, and its board approves the yearly payment if it meets strategic targets such as ROA and maintaining surplus net worth well beyond regulatory requirements.

“Our target is to pay approximately two-thirds of the funds back to members through a loan interest refund, and the remaining one-third through a bonus dividend,” Paprocki said. “We’ve used this general formula since 2012, and in that time period we’ve returned over $42 million to our members.”

For the next round, he said the formula might be tweaked in the wake of the credit union’s purchase of Pinnacle Bank of Scottsdale, Ariz. The bank added $269 million in assets and 2,200 members when the deal closed in December, pushing the credit union to close to $2 billion in assets and 130,000 members.