WEST PALM BEACH, Fla. – Awarding an annual dividend or bonus dividend as some CUs like to call it is a historic trait of cooperatives, yet CUs have varying philosophies on the practice. It was certainly the fashionable thing to do back in 2000 when lending was through the roof. Many credit unions which never awarded a dividend before in their history did so for the first time in 2000. On the other hand some CU leaders say no matter what kind of year the CU has financially, a bonus dividend isn't coming. "It's something you should do on an ongoing basis, not something you ought to make a decision on at the end of the year. You never know what's going to come the year to follow or the year to follow that," said Ed Callahan, president/CEO of Patelco CU, San Francisco. Callahan said if a dividend becomes predictable, member backlash could occur if for some reason a dividend isn't feasible in a given year. Or on the other hand if a dividend is unexpected, members could get upset if they just withdrew a big chunk of money for a major purchase like a home. Callahan says his CU gives back as much as it can to members throughout the year in terms of better loan rates and deposit yields. CUNA Chief Economist Bill Hampel said this could be a good year to award a dividend because CUs performed better than they expected. "Not too many credit unions do it any more, but I think this year sort of stands out as an opportunity to do this in that we were approaching the year with so much concern up front. Credit unions managed their bottomlines probably more intently this year, following a recessionary year and following 9/11, but their bottomlines did fine," said Hampel. Hampel said if a CU always awards a dividend and budgets for it, that's fine as long as it doesn't lead it to be uncompetitive during the year. If that's the case, the dividend should be reconsidered. On the other hand, Hampel said CUs that are already the top institutions for rates and yield in their market might get more bang for their buck by awarding a bonus dividend, rather than try and do a little better on its rates. "It's proven that it doesn't really matter by how much you are beating everyone else. You're not going to pick up any more market share by extending the gap," said Hampel. There are PR factors to of course consider as awarding a dividend can promote member goodwill and drum up business. But right now some CUs don't want any new business – at least on the deposit side. "We're not looking for a dividend this year. Even if we had one I'm not sure I'd recommend doling it out. It would likely stimulate deposit growth. Right now we don't have a place to put that money. You give me a dollar today, and I'm losing money on it," said Greg Smith, president/CEO of Pennsylvania State Employees CU, Harrisburg, Pa. Smith's CU doesn't normally award bonus dividends but awarded a $2.5 million one in 2000 because of an extraordinary year. Strategic or Philosophical? The question of awarding a bonus dividend is not as much philosophical as it is strategic say some CU leaders. For instance, where do reserves stand? Does the CU need more capital for expected expansion next year? And on and on. This year there's a lot of rate strategizing to consider. With unprecedented low deposit rates, wouldn't CUs rather tout throughout the year how they are paying "x" amount higher than the local bank on deposit accounts, which have anemic yields because of the Fed's rate cutting onslaught. GTE FCU President/CEO Bucky Sebastian says yes, and he feels it's really helping his fixed-income members while driving home to members the difference between banks and CUs. "There's a real rate gap now. I think it's a very clear graphic demonstration of the difference between banks and credit unions. I can't tell you how many people living on fixed incomes counting on a 4% return on a couple year CD at the local bank, which is now paying 1%, appreciate the 3% we're paying. Their disposable income turns from $1,000 to $3,000 on $100,000. I like to think we're awarding bonus dividends all year long," said Sebastian. His CU does not award year-end dividends, but Sebastian said he's not against the concept. He said the goodwill a bonus dividend could create and marketing potential make sense for some CUs. Callahan & Associates President Chip Filson said CUs have to take the rate environment into consideration in the dividend debate. While some CEOs say they're always adjusting rates to do the most for their members throughout the year, Filson questioned whether CUs are really doing their members a big favor now by cutting loan rates any further. Filson said while CUs may be doing all they can to drum up loan demand, members are probably more concerned with an extra 50 basis points on a deposit account. So maybe a bonus dividend for deposits is more warranted in a year with this type of rate environment. Filson stressed that he's not for or against bonus dividends, but said there are traditional factors to consider. "It helps members understand the benefit of a cooperative with a fairly significant dollar amount in a one-time exercise at the end of the year. It's consistent with the history of cooperatives and how cooperatives operate. I can remember getting a book store refund from a cooperative. It's identifiable," he said. Navy FCU President/CEO Brian McDonnell said Navy FCU used to award a bonus dividend but hasn't done so in the last five years. One reason? With all the products the CU offers it's harder to find an equitable way to reward members, said McDonnell. "We used to do it quite a bit back in the '70s and early `80s. It was one thing to do it when you were a very simple institution with a share savings account and consumer loan account. Now it's difficult to figure out how to do it fairly with the array of products you have," said McDonnell. "We try purposely to give back to our membership throughout the year in various ways. That's the true nature of a cooperative – you're giving back all you can all the time." One CU cashing in on the marketing opportunity of its bonus dividend is Arkansas FCU, which has already announced its bonus dividend. Members of the CU will receive a 2% bonus dividend posted to their share account. The bonus dividend of 2%, when combined with the regular 1.5% dividend, totals a 3.5% Annual Percentage Yield dividend that will be paid to share accounts on January 1, 2003 for the fourth quarter of 2002. This is the sixth year out of the last nine the CU has paid a bonus dividend, and it's taking advantage of the PR opportunities by contacting the press and telling its members about it through mailings and banners at all its branches. Arkansas FCU President/CEO H.C. Klein said the CU has a very structured formula to determine whether or not it awards a bonus dividend. "Obviously we don't do it every year. If we don't have the earnings, if we have too much growth, and if things don't fall into place, we don't do it. Our goal in life right now is to grow reserves by 25 basis points. If we do that, everything left over goes to the members. Last year we only grew reserves by nine basis points, and we didn't have a dividend," said Klein. He said he feels an obligation as a cooperative to give back anything that exceeds the CU's reserves goal. It's what cooperative should do he says. Goals can of course change. The CU's reserves right now stand at about 13.5%. Klein said he doesn't want to rack up too much in reserves, so a year or two from now the bonus dividend goal may be based on a measurement other than reserves. But if you're going to give a bonus dividend, do it right, said Klein. "We told everyone over Thanksgiving. It's a time everyone likes to get gifts. This is certainly a good PR opportunity," he said. Gary Oakland, president/CEO of Boeing Employees CU, Tukwila, Washington, said his CU only awarded a bonus dividend once in his career there, and the PR boon wasn't all that great. "It wasn't a marketing dream when we did it. It's fine to do, but there's a danger if members expect it. A bonus dividend is all well and good as long as it's getting money back into members' hands. I have a problem with credit unions having too high of a reserve ratio. Then where is the money going?" [email protected]