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HARRISBURG, Pa. – It was a strong enough year for credit unions that some of them were able to reward members with special dividends, but are they being issued at the expense of better rates? Pennsylvania State Employees Credit Union (PSECU) doesn’t think so. The $2.4 billion credit union recently announced that it will issue $5.8 million in special, year-end dividends. PSECU said it calculated each individual’s dividend amount by taking 5% of dividends earned on shares and the interest paid on loans through November 2005. “After surpassing a reserve target set by our board several years ago, the board felt it was only reasonable to return the surplus to our members,” said Gregory Smith, president of PSECU, which serves more than 300,000 members. PSECU’s reserves now total more than $230 million or more than $1 dollar in reserves for every $10 on deposit. Smith noted that “many financial institutions are reporting record earnings this year, too, but some are sending fee increase notices to their customers.” “The PSECU difference is that when we have a good year, we return those funds to our members,” Smith said. Strong loan growth played a huge part in allowing PSECU to offer the dividend, Smith said. For instance, when auto companies dropped their special financial programs and did employee financing, in one day, the credit union did 450 auto loans. Anytime there’s an increase in loans, PSECU “probably (does) a little bit better with (its) net earnings.” “We reached our capital target and once we blew past that, the board determined 10% was sufficient,” Smith said. Roughly 283,000 members received a dividend. The largest amount a member received was $2,200. Some members were excluded due to delinquent payments, chargeoffs and those “not in good standing” with the credit union, Smith said. For other members with small balances, they probably didn’t see a significant dividend, he added. This is the second time PSECU has issued a dividend. The last one for $2.5 million occurred in 2000 and again was fueled by strong loan growth. As for choosing to offer a year-end dividend versus offering better rates throughout the year, Smith said the credit union has indeed done the latter. “Our deposit rates are already over market and our loan rates are under market,” he said. “We could have added a couple of basis points here or there but we’re already well positioned.” Members of $2.8 billion CEFCU in Peoria, Ill. received their portion of a $7 million dividend in mid-December. The board of directors authorized the dividend to CEFCU members based on their loan and/or savings activity during the first 11 months of 2005. The dividend was deposited to members’ savings accounts in one lump sum, with the savings and loan portions added together. This is the third time since 2000 the credit union has issued a dividend: $4 million in 2000 and 2003 and $7 million in 2005, said Eldon Arnold, president/CEO. With the 2005 issuance, members received an average of $30. Six hundred members saw $600 but the bulk of its 227,000-member base, 127,000, got less than $10. With all three dividend distributions, PSECU had excess capital and in 2005, a high loan-to-savings ratio at 91%, Arnold said. When there’s less in investments and more in loans, earning power is stronger but it surpassed the need for capital, he added. Growing the credit union has become a challenge too. “It’s hard to grow in central Illinois,” Arnold said. “Peoria is smaller than it was in the 1970s” due in part to Caterpillar Inc.’s downsizing. CEFCU was originally chartered in 1937 to serve Caterpillar Tractor Co. employees. Indeed, CEFCU has members in 14 counties that have a total population of one million people, Arnold pointed out. But being able to offer a dividend probably has less to do with the rates the credit union offers. “Your pricing decisions today have long-term implications. We want to be sure we’re priced competitively but we’re priced with a sound financial plan and (keeping in mind) the operation of the credit union,” Arnold said. For CEFCU, it had a “double whammy” this year in that there was a squeeze on margin and growth did not come as fast as anticipated which caused unexpected, rapid capital growth, Arnold said. The alternative was to pay a dividend or hang on to more capital than the credit union needed, he added. “We made the decision to return it to the members and let them decide – spend it, reinvest it with the credit union or somewhere else,” Arnold said. “In hindsight, we wished we could have priced more competitively but because of the economy, we weren’t able to do that.” Last year marked the ninth consecutive year that $1.5 billion Eastman Credit Union (ECU) announced it would issue a dividend. Members will receive their portion of a $4 million dividend on Jan. 24. The “vast majority” of ECU’s 75,000 members will receive a dividend, said Olan Jones, ECU CEO. Typically, members see between $200 and $800 and some could see dividends as high as $1,500, he said. A total of $25.6 million in dividends has been awarded to eligible ECU members since 1998. ECU’s ability to pay a dividend is due to several factors, which include its “solid capital position (and) cost-effective management,” but the primary reason is members’ extensive use of credit union products and services, Jones said. The dividend is made possible through what members paid on deposit or loan interest in 2005. But the extra bonus doesn’t take away from offering better rates throughout the year. “It’s critical to understand that we have good rates every day,” Jones said. “We could have taken that $4 million and built a branch or offered an even more aggressive price on a loan product. But our market surveys have time and time again showed that members and non-members know us for the dividend (among other identifiers).” That recognition has helped ECU build more awareness since converting to a community charter in January 2005 after 70 years as a single-sponsor CU and then a multi-SEG entity. It’s not by accident that ECU, with more than $1 billion in assets, only serves 75,000 members, Jones said. Credit unions in this category tend to have more than 150,000 members. The average member here has $15,000 in loans and deposits, Jones said. “I don’t want to give the impression that we’re a high-wealth credit union. The core of our membership is working in manufacturing and are shift workers. But the majority of them have their entire wallet with us.” The dividend also offers another distinction for the industry. “In these days of tax-exemption attacks, I always tell Congressional leaders and others if taxes were to apply to a credit union, we know that dividends paid out each year would exceed taxes. Instead of paying members, we would have to write a check out to the government.” That wouldn’t sit too well with constituents, Jones said. – [email protected]

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