By Christian Mullins
The term patronage dividend, defined by investorwords.com as ‘a taxable distribution made by a cooperative to its members or patrons’, has slowly worked its way into the public lexicon over the past several years. Today, it’s become a rallying cry for credit unions in their continued efforts to differentiate themselves from banks. But the path a credit union takes that allows for a patronage dividend may, in the long run, do more harm than good.
The Good:
A credit union’s patronage dividend, stripped of all its fancy jargon, is a cash payment to their members. The credit union decides that its net income was out of line in that fiscal year, or perhaps the reserve account is swelling faster than needed, and a cash payment to members is the easiest way to get that money off the books.
It’s a wonderful goodwill gesture to your membership, and the prospect of “free money” is as good as it gets when it comes to word of mouth promotion. It also reminds members that each of them is a shareholder, further entrenching the member-owner philosophy. On the surface, it is nothing short of a win-win situation.
The Bad:
There will always be members that take issue with how the dividend was distributed. Generally, dividend’s are distributed based on a formula that considers: account balances, number of services used (including loans), and member longevity. Regardless of how the formula is devised, it will alienate some members, generating some hard feelings and, as a result, some bad-mouthing of your credit union, especially if it’s employment based.
Members with Certificates and/or Loans that were opened in the prior fiscal year may also take exception. Since a patronage dividend is generally achieved through excess net income, members may take exception that their APY wasn’t adjusted to benefit them, but left as it was for the entire membership to benefit.
The Ugly:
Given the goodwill created by a patronage dividend, credit unions may be tempted to work a patronage dividend into their yearly budget. Since a patronage dividend is not possible without the funds to supply it, measures must be taken to ensure that there will be enough excess funds at the end of the fiscal year.
Typically, this is achieved through three measures: Lowering dividend rates, raising loan rates, and delaying technological upgrades. Sound familiar? It should, because this is exactly what banks do each year. With different members given varying distributions, it encapsulates the bank/shareholder relationship; the antithesis of what it means to be a credit union.
A patronage dividend is a wonderful thing, as long as it doesn’t become habit. Budgeted expectations always differ from results, and an accounting staff may have made conservative estimates, leading to a net income that far exceeds expectations. A yearly patronage dividend, however, feeds into the notion that credit unions are nothing more than tax exempt banks, and that’s a moniker that few credit unions can live with.
Posted by christianmullins
