January was, once again, dividend distribution season forDow Chemical Employees' Credit Union, just as it had been forthe past 50 years.

However, this year, the $1.4 billion Midland, Mich., institutionmade headlines for the amount of wealth it redistributed to its57,000 members. On Jan. 1, members in good standing were set toreceive a rebate of 75% of the total interest they paid on eligibleloans during 2014, an additional 75% of dividends earned on sharesand deposits during 2014 and check card rebates that included0.125% of signature-based transactions and one cent for eachPIN-based transaction made last year.

In real dollars, that meant a member payday of some $13.2million, according to Dennis Hanson, DCECU's president/CEO. Thisamount was ahead of both 2012, when the credit union issued totalrebates of $11.6 million, and $11.3 million in 2013.

This year's figure translates to an average payback of $231 permember, Hanson said. “We think that's a lot.”

Redistributing excess funds to members through year-enddividends is a time-honored credit union tradition, but some havelong ago abandoned the practice in favor of finding other ways touse the funds to increase and improve member service.

“We don't do special year-end dividends, but it certainly is agreat marketing technique,” Jim Blaine, president/CEO of $29.5billion State Employees' Credit Union in Raleigh, N.C., said.

“We simply pay higher deposit rates and charge lower loan ratesthroughout the year,” Blaine explained. “We like the year-enddividend concept for the positive member reaction, but have neverbeen able to easily determine which member should get how much atyear-end.”

Although once a service, year-end dividends are now no longeroffered to members of the $485 million Air Academy Federal Credit Union in Colorado Springs, Colo.,according to Glenn Strebe, AAFCU's president/CEO. Once again, thereluctance is based on how much of a rebate to issue to whichmembers, he said.

“I am not an advocate of dividends because some of your bestcustomers may not provide as much net income as other members,”Strebe said. “I'm not sure there is a truly equitable way to givethe money back and I'm not sure whether it would be impactfulanyway.”

If Strebe had his way, excess funds would be invested to createlocal small business incubators, build affordable housing or insome other way, help financially strengthen and grow the creditunion's community, thereby, extending the institution's influenceand helping members as part of the bargain. The creditunion–sponsored Air Academy Education Foundation, which supportsfinancial literacy, could be a springboard for other suchorganizations with similar social missions, Strebe said.

“I don't know if that's operationally or legally possible, but Ithink I know what NCUA would say,” he said.

Year-end dividends have never been a part of the benefitsscenario and still aren't for the 886,677 members at the $12billion Boeing Employees Credit Union in Tukwila, Wash., accordingto Kathy Elser, BECU CFO and SVP of finance and administration.

“We have chosen to give back to our members throughout theentire year via better rates,” she said.

Read more: Aren't dividends more memberfriendly?

Whether it's an annual dividend or simply moremember-friendly rates, philosophically, credit unions strive tooperate in the best interest of their member-owners. Sometimes,it's simply a matter of different strokes for different creditunion folks, but it should be up to credit union management andboards to determine how excess funds are best managed to providemaximum member returns, according to Dennis Dollar, principalpartner with consulting firm Dollar Associates LLC in Birmingham,Ala., and himself, a former credit union CEO.

“There are a number of ways that credit unions demonstrate theethos of the movement by returning to the members any earnings thatare beyond those required to be maintained by law, ranging fromhigher monthly dividend rates, lower loan rates, paying dividendson checking accounts to expanding service options, utilizing moremember-friendly technology or building closer branches,” Dollarexplained.

“Certainly, an end-of-year special dividend is another one ofthose options, but I cannot see any of the ways credit unionsreturn excess earnings to their members as being more'credit-union-like' than another,” he added.

Member benefits take on multiple forms, including reinvestmentin expansion, new technology and increased services designed tomake the credit unions more efficient and provide better memberservices, but some benefits aren't as visible to members asothers.

“An important point here is that capital belongs to the membersand is primarily used as a safety net for the current and futurerisk inherent on and off the balance sheet and income statement,”William Kennedy, CFO for the $152 million Interior Federal Credit Union in Washington. “Any excessesbeyond that should be considered in infrastructure improvements forthe benefit of the members.”

Interior Federal does not normally issue year-end memberdividends, but would if there were significant excesses beyond thecredit union's financial goals, Kennedy said. But like other creditunions, determining which members received what level of dividendscan be a challenge for institutions that want to issue rebatesequitably. Interior Federal maintains a position of having some thebest member rates among its peer group, which Kennedy considers amore than adequate return to members.

Read more: What if members feel entitled to thepayout?

Another of Kennedy's concern is the time whenyear-end dividends become an expected member benefit, and theabsence of such dividends sends the wrong signal to members.

“Credit unions trumpet these dividends as just one moredifferentiating factor of who we are by returning back to themember,” Kennedy said. “The challenge I see is when members come toexpect this. If for any reason a credit union decided not to pay adividend, it could create a red flag that something might be wrong,when in fact it really isn't.”

Such potential misperceptions don't concern DCECU, which hasgiven annual members rebates for more than five decades, Hansonsaid. It's part of the credit union's individual ethos and aguiding principle, he added. The board expects to pay an annualdividend as much as the membership expects to receive it.Establishing the right net income ratio is the first step.

“We require a minimum of 10% with a target of 11%,” Hanson said.“We want to be well-priced to begin with, so we shoot for pricingin the upper quartile of our pricing landscape. If we have moneyleft over we give it back to members.”

Hanson said while DCECU has a closed field of membership andisn't really growing and operates efficiently with one office andat about 50% of the average cost of its peer group institutions.Reduced expenses help fuel the dividends program and maintain alow-rate, high-service environment that gives the credit union thebest of both worlds.

“Patronage dividends and rebates are a differentiator,” Hansonsaid. “The members come first and that's the way we try to conveythat message. You won't find this in the for-profit world.”

Dividends also have a practical application that can help creditunions balance their books in a very member-friendly way, accordingto financial consultant Mike Higgins Jr., a partner with consultingfirm Mike Higgins and Associates in Kansas City, Mo.

“This is real simple. The credit union board should have defineda range of how much capital it wants to maintain relative to thecredit union's risk and the ROA range in which it wants to operate,” he explained. “Onceyou start operating outside of those ranges, you have to startgiving back to the members.”

Credit unions with more than 13% ROA for an extended period oftime are what he calls hoarders, Higgins said. Some situations mayrequire more capital and the NCUA's new risk- based capital rulescould change the face of the dividends landscape entirely. Thecurrent approach is something that can help balance the scales whenit comes to income versus member service, he noted.

“It's a way of truing up member benefits,” Higgins said. “Creditunions sometimes say one thing and then don't back it up. If we'vefound we've extracted too much money from members, we're going tomake it right.

“It's a way to absolutely maximize member benefits,” he added.“This stuff is blindingly obvious and I wish more credit unionswould approach it this way.”