<p>As a longtime reader of Credit Union Times, I continue to be impressed with publisher Mike Welch’s knowledge and understanding of the credit union movement, along with credit union issues and operational practices. However, after reading his column of February 20th, entitled “Bonus dividends might have downsides,” I respectfully disagree that the positives of bonus dividends outweigh the downsides. There are several insights and downsides that should be added to his list. I am convinced that, except for rare and unusual circumstances, bonus dividends should not be paid at all. Bonus dividends undermine the basic principles of fairness and sound business practices that should dominate all credit union operational practices. Acceptable situations could include the receipt of a large and unexpected windfall of revenue or perhaps a decision by a credit union board of directors that its capital ratio greatly exceeds a prudent and reasonable level and thus decides to return the excessive funds to those who own the money, the members. Bonus dividends should not be an expected pay out. From my 40 years of experience, I am positive that competent credit union executives can forecast the amount of net income that will be available for payment of dividends with great accuracy. The result of such forecasting is that rates can be optimized throughout an entire year, a practice that enhances the credit union’s image and adds value to membership. A major effort should continuously be made to maintain a fair balance between dividend rates for various types of share accounts, interest rates for all loan categories, and fees charged for special services or such things as returned checks, money orders, cashiers checks, etc. Once the correct amount is determined that should be retained for transfer to reserves at the end of each month, dividend rates can then be determined that will pay out all available funds to members in the form of share dividends. Adjustments can be made in subsequent periods, including interest rates on loans and fees, if projections are missed or if changes are mandated due to increases or decreases in investment income or general changes in the state of the nation’s economy. The reward for the practice described above is that dividends can be kept as high as possible and loan rates kept as low as possible throughout the entire year. Members can then accurately, and hopefully favorably, compare both dividend rates and interest rates for loans with rates paid or charged by other financial institutions. A bonus dividend cannot be factored into such comparisons. There are at least two other downsides to the payment of bonus dividends. Such payments at the end of the year can be unfair to members who find it necessary to withdraw funds prior to payment since the calculation would likely be based only on deposits on hand at a given time. Also, the same unfair treatment would carry over to members who might find it desirable or necessary to close their accounts during the year, or in the event that executors of deceased member’s estates closed share accounts prior to the posting of a bonus dividend. Even if software is written or purchased that might avoid such unfairness issues, the whole process would be burdensome and could be costly. Some readers may recall that many years ago, at Suncoast Schools FCU, I advocated and carried out the practice that interest rebates on loans be discontinued and be replaced with lower rates up-front when loans were granted in order for members to know exactly what rate they would pay. Also, for fairness purposes, I fought for the right to calculate dividends on a daily basis and did so at Suncoast 22 years ago, long before truth and savings regulations made the practice universal. I hope that the points made by Mike Welch, along with the points made in this letter will prompt credit union executives and their directors to look very carefully at the concept of the payment of bonus dividends before adopting the practice. The downsides far outweigh any possible upsides for such a practice. Perry M. Dawson President Emeritus Suncoast Schools FCU Tampa, Florida</p>

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