Credit Union and Cooperative Patronage Refunds - Filene ...

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The CFO’s View; Similarity to Credit Unions If the CFO voted today, he would probably vote in favor of paying a patronage refund. The beneficial effect of paying a patronage refund is that it provides the association with one more mechanism to manage the level of its capital. • • • This debate raises issues similar to those of a credit union board considering a patronage refund. The answer hinges on directors’ philosophies about the need for capital- intensive growth and whether it is better to reward members for their business every day or to declare extraordinary dividends annually. Business challenges remain in paying out a regular refund, but initiating one is likely to build member loyalty and provide opportunities to communicate with members about co-op values. Are AgGeorgia, Badgerland, and the Unnamed Association Capital Hogs? Badgerland is arguably overcapitalized because its core surplus is much stronger than AgGeorgia’s or the FCA guide of 3.5%. Badgerland could, however, quickly counter that surplus by ratcheting up its 100% cash refund allocation from 14% (see Figure 3, row 2a divided by row 4) of its income to 15%, 16%, or even higher. In other words, the strength of Badgerland’s approach to patronage refunds and capital management over AgGeorgia’s is that Badgerland can change directions quickly. If Badgerland encounters prosperity, it can increase the 100% cash patronage refund above 14% of income. Alternatively, if Badgerland encounters financial stress, it can quickly retreat back to distributing 14% of income, or lower, with its 100% cash patronage refund. In contrast, we could argue that AgGeorgia not only is overcapitalized but is diminishing its capital by operating more closely to pure co-op patronage principles. Between redemptions and cash patronage refunds, AgGeorgia is paying out approximately three times the amount of cash as a percentage of total loans as the average of the 81 ACAs in the Farm Credit System, and seven times the amount of cash paid by Badgerland. The issue with AgGeorgia is that its patronage refund approach is difficult to change quickly without affecting member expectations. AgGeorgia’s earnings had been in decline for two years at the end of 2009, so the pressure to conserve capital could be building. But 39
AgGeorgia’s members probably expect AgGeorgia will adhere to its present redemption cycle of approximately seven years. The longer AgGeorgia redeems on a seven- year cycle, the higher and more firm members’ expectations will be. Compared to Badgerland or AgGeorgia, the unnamed association is strikingly overcapitalized. Its core surplus ratio grew from 14% to 16% while it was growing its loan volume by 10% in 2010. The implementation of a cash patronage refund program could be expected to strengthen the association’s effectiveness in managing its capital position. Initiating a patronage refund program is also likely to build member loyalty and provide opportunities to communicate with members about co-op values. 40
Page 1 and 2: Credit Union and Cooperative Patron
Page 3 and 4: Copyright © 2011 by Filene Researc
Page 5 and 6: Acknowledgments We appreciate and a
Page 7 and 8: List of Figures 1. Average of 27 Cr
Page 9 and 10: What Are the Credit Union Implicati
Page 11 and 12: Introduction There are many ways in
Page 13 and 14: to us is a philosophical gulf betwe
Page 15 and 16: CHAPTER 1 Patronage Refunds Are Mor
Page 17 and 18: activities with their credit union
Page 19 and 20: members standing on the basis of ow
Page 21 and 22: epayment, and/or if the asset is on
Page 23 and 24: If the co-op’s earnings are not d
Page 25 and 26: principles. When we discuss other c
Page 27 and 28: A recent post to the Filene Researc
Page 29 and 30: Our response to the blog post quest
Page 31 and 32: The subject of this chapter is a th
Page 33 and 34: CHAPTER 4 Tax Differences between C
Page 35 and 36: Figure 2: Contrast Statutes Governi
Page 37 and 38: Patronage earnings that are allocat
Page 39 and 40: When rural electric cooperatives ar
Page 41 and 42: CHAPTER 5 Use of Patronage Refunds
Page 43 and 44: Figure 4: Present Value of Patronag
Page 45 and 46: y row 9). All in all, this is a ver
Page 47: Badgerland, all of this association
Page 51 and 52: All three credit unions use their p
Page 53 and 54: The capital accumulated through ear
Page 55 and 56: As we visited with Hanson, it was d
Page 57 and 58: on share deposits is not a patronag
Page 59 and 60: Patronage Refunds: A Differentiator
Page 61 and 62: Figure 6: Potential Tax Effects of
Page 63 and 64: ather than later, particularly if t
Page 65 and 66: of the cooperative were deducting t
Page 67 and 68: Patronage Refunds and Capital M ana
Page 69 and 70: Appendix Exhibit A: 2007 Newsletter
Page 71 and 72: Due to careful planning and prudent
Page 73 and 74: Think of how much more you, and oth
Page 75 and 76: contrast, the 27 credit unions paid
Page 77 and 78: to redemptions. Think Diamond Walnu

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