Bonus time at the credit unions:
The benefits of membership
By Michelle Samaad • Bankrate.com

Would you like free cash added to your savings account? How about a lower rate on a car loan? Credit union members reap these benefits during any strong financial years their credit union may experience.

Credit unions are not-for-profit cooperatives owned by their members. They give back to their members through lower rates and cash bonuses any leftover money in the budget, either at the end of the year or a certain quarter. As for where the money comes from, it's surplus cash that results from investments and loan revenue.

Credit unions that meet their targets for building financial reserves can choose ways to reward members with improved pricing. Some credit unions offer slightly lower loan rates and modestly higher savings rates. Others offer bonus dividends or interest rebates.

With that approach, the credit union can pay an extra dividend to savers at the end of the year or calendar quarter, or refund some of the interest that borrowers paid. If the credit union falls behind with its financial goals for the year, it can skip the bonus pay.

"Members own the credit union, and the money -- the capital -- belongs to them," says Robert Kimmett, senior vice president of marketing and public relations for the Massachusetts, New Hampshire and Rhode Island Credit Union Leagues. "Why accumulate it if there's no need for it and no plan to use it to improve the credit union?"

A December bonus
For three consecutive years, members of the Motorola Employees Credit Union West in Scottsdale, Ariz., have received bonus dividends totaling $5 million. The latest reward consisted of the total interest a member earned on deposit accounts throughout the year and the total interest paid on loans. The bonus was applied to the member's savings account last December.

"The majority of our members received a refund for both deposit and loan accounts," says Lenore Froehlich, vice president of marketing and training. "We're always looking for ways to reward our members."

The credit union has more than $450 million in assets, and serves Motorola employees and their families in Austin, Texas, and Phoenix.

Regardless of the credit union's size, any bonus dividend or interest rebate should be distributed evenly, says Mike Schenk, vice president of economics and statistics at the Credit Union National Association, a Washington-based trade group.

"Sometimes, there's a philosophical discussion that takes place involving whether everyone should benefit from the bonus or just those who do a lot of business with the credit union. It's just common sense to reward everyone," Schenk says.

He adds that roughly 5 percent of all credit unions provide refunds on interest earned on loans during a given year or quarter. Most credit unions, however, offer some form of bonus dividend to their members.

Expectation and disappointment
It's hard to predict from year to year whether a credit union will be able to reward members with a bonus dividend, and that can sometimes be a curse, Kimmet says.

"What is a pleasant surprise the first time, quickly can be viewed as an entitlement," Kimmet says. "The 'Wow!' factor may fade quickly if the credit union isn't careful about handling its message."

He adds that if a credit union offers a bonus dividend for three or four years, then experiences an ordinary year with no bonus, members will think something was taken away from them. "They even may interpret the absence of a bonus dividend as a sign the credit union is experiencing difficulties," he explains. "Members should receive clear communication about why they're receiving a bonus and what factors fell into place to allow the credit union's board to disperse the rewards."

Schenk agrees: "One of the obstacles credit unions face is advertising the bonus dividends. Like most people, I rarely read my statements from cover to cover. We see some credit unions making an effort to get the word out through radio advertisements and big signs in the lobby."

Navy Federal Credit Union is the largest credit union in the nation, with more than 1.6 million members worldwide and $10 billion in assets. Its members get word of any bonus dividends through newsletters and separate statement stuffers.

"We can't predict from year to year whether we will be able to give bonus dividends because it always depends on the financial success of the credit union," says Loren Moeller, Navy Federal's public relations specialist. "We tell our members upfront that this bonus is for a particular time period and it's not something that will last forever."

Expenses cut into bonuses
Moeller adds that lately it's harder to make any predictions about bonus dividends because of the cost of the credit union's work on upgrading computer equipment and meeting Year 2000 compliance needs.

The latest bonus dividends for Navy's members occurred in the fourth quarter of 1996 and the first quarter of 1997. The credit union eliminated the annual fee on one of its credit cards and reduced the interest rates on new and used car loans.

"More members were saving more, our capital/asset ratio was really high and we wanted to reward our members," says Moeller.

"A bonus dividend rewards and reinforces behavior because existing members may retain or even expand their deposits in the credit union as a result of it," Kimmet says.

At Delta Employees Credit Union in Atlanta, members were rewarded with a 6 percent bonus on their savings account during the last quarter of 1997, says Mary Olson, vice president of marketing and training. The credit union paid out $300,000 to 110,000 members.

Who gets the reward
Many credit unions, through a recommendation and vote by board members, determine if a certain year or quarter was profitable enough to reward members with bonuses. The decision comes down to rewarding members across the board -- which means rewarding everyone with a savings account -- or rewarding only those who have loans.

"Not everyone has loans but everyone has a savings account with us, so we figured everyone would benefit," Olson says. "We've done it a number of times and we're constantly looking for ways to eliminate or keep fees low. If we can absorb those costs, we will."

Olson adds that while no one complained about the bonus, some members wondered if that money could have gone toward the purchase of more ATMs. It may not make much of a difference to members who don't have that much money in their account, she explains, but the credit union is "always looking for ways to balance what we give back to members vs. making our services more convenient for them."

"I liken a credit union's bonus dividend or interest refund to buying sports equipment (at a well-known sporting goods store)," Schenk says. "I can buy sporting goods anywhere, but here (they give me) a significant rebate at the end of the year -- it reminds me there's a benefit to shopping here and it's a good place to do business."

Coming soon

Be sure to check out Bankrate.com's special week-long report on credit unions starting April 5. We'll provide an in-depth look at credit unions, including an overview of how they work and the financial services they offer their members.

-- Posted: March 17, 1999