Monday, December 12, 2011

Bonus Dividends

It is that time of the year when credit unions begin announcing bonus dividends.

For example, Founders FCU of Lancaster, S.C. on November 11 announced a bonus dividend of $10 million. The amount of the bonus dividend paid to each member is based upon the account balances as of October 31, 2011.

While credit unions like Founders are using these bonus dividend announcements to generate good publicity, the reality is that these credit unions probably mispriced their products and services.

In other words, these credit unions charged too much on their loans, paid too little on their deposit accounts, or collected too much in fee income.

I believe it would be preferable to pay a higher interest rate or APY on deposits than to pay a bonus dividend. This would encourage people to save more and they would receive the benefits of compounding interest.

A bonus dividend based upon balances on a specific date in the past, while it will put cash into peoples' pockets, will not affect the financial decisions of individuals.

Also, if a credit union is going to pay a bonus dividend, it should be based upon the level of patronage by the credit union member over the course of the year, not a snapshot of balances on a specific date.
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2 comments:

  1. AnonymousDecember 13, 2011 at 11:30 AM

    This article continues the fact that Dr. Leggett does not get credit unions. Without the ability to obtain alternative capital, credit union boards of directors must be cautious about distributing capital in the form of dividends throughout the year. Thus, when the business plan of the credit union is more successful than planned, the board returns additional dividends to the members.

    Seems like these boards are being good stewards of the members' money while protecting the health of the financial cooperative.

    ReplyDelete
  2. AnonymousDecember 23, 2011 at 4:23 PM

    Anonymous, why can't you pass on the successful plan throughout the year, like we do, instead of only at year-end? I'm a credit union CEO and see these bonus dividends as lazy budgeting and CEOs not having a handle on their credit union's finances.

    ReplyDelete

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