Credit Union and Cooperative Patronage Refunds - Filene ...

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to low interest rates, credit union members would hold similar preferences for the payment of annual patronage refunds. • There is something about consistent patronage refunds that matures the cooperative in the eyes of its members. It’s like the co-op has confidence in its membership and in its viability. The co-op is serious about financial success and wants to provide the goods and services that will make it profitable. • We think that co-ops that make money and pay patronage refunds are more likely to survive and flourish as businesses than co-ops that do not have the same emphasis on profitability or accountability to members. • Co-ops have a story to tell, particularly when they pay patronage refunds. The members of the American Bankers Association (ABA) would never willingly operate with the deep member involvement that is encouraged under co-op principles. The relevant audience of an IOF bank is limited to its common stockholders, whereas the relevant audience of a co-op is all of its customers or members. IOF banks do not subject their capital plans to customer scrutiny or think it necessary to explain to customers why the bank was investing in growth rather than in equity redemptions, why the firm did not pay a patronage refund, why the patronage refund decreased in size, or why that product or this service could not be provided at a lower overall price. • IOF banks would never accept as one of their primary objectives the return of surplus capital to customers. The inclination of IOF banks is to hoard and use capital rather than return it. Co-ops are not as glitzy as IOF banks. The discipline that management must execute and the leadership required of a co-op is more onerous than that needed for an IOF. But the rewards—the intangibles— of affiliating oneself with an organization that is operated for the benefit of its members rather than the organization’s own pocketbook are immensely rewarding. We heard as much from Prunty, Hanson, and Mislansky in our interviews for this report. • Timing is everything. With the Basel capital requirements and the state of the economy, boards of directors and management must make educated, wise decisions about when to implement a patronage refund program. Similar to the experience of rural electric cooperatives, the more that regulators and investor- owned competitors see that the cooperative’s membership is vibrant, informed, and supportive of the credit union, the more difficult it is for the tax exemption to be attacked. 57
Patronage Refunds and Capital M anagement In a conversation about patronage refunds, capital management, and the 501(c)(14) tax exemption, it is worthwhile to consider OmniAmerican Credit Union. OmniAmerican completed a conversion from a credit union to an IOF bank on January 1, 2009. Half of its stock is now owned by 60 institutional investors. To us, conversions of cooperatives, and their accompanying loss of member- owned capital, are a significantly larger issue on the horizon than the modification or loss of the 501(c)(14) tax exemption. Patronage refunds could be the difference that thwarts conversions. 33 Arguably the two most important changes in OmniAmerican’s financial metrics between its status as a credit union and its status now as an IOF bank are that (1) its equity capital almost doubled through the conversion and public sale of its common stock, and (2) its income is now an eighth of what it was when OmniAmerican was a credit union. OmniAmerican Credit Union generated $10.0M of net income in its last full year as a credit union (2004), but OmniAmerican Bancorp generated only $1.6M of net income in 2010. OmniAmerican’s average net income as a credit union was $9.2M for the years 2002, 2003, and 2004, and it was on the rise; OmniAmerican generated $8.4M in 2002. If OmniAmerican had remained a credit union and had begun distributing a patronage refund equal to 20% of its earnings (approximately equal to the 27 credit unions in the Callahan study) starting with its 2004 year end, it would have distributed $14.0M in patronage refunds to its members by December 31, 2010. OmniAmerican would already have distributed a fifth of the wealth that was created in its conversion to an IOF. And that wealth would have been distributed to 250,000 members. Do you prefer $2.0M per year being distributed as a patronage refund to 250,000 OmniAmerican Credit Union members, or would you rather have 60 institutional investors benefiting from half of the $50M–$70M of new capital that was raised through the conversion and sale of stock? Do you prefer that those 250,000 members hold an unredeemed lottery ticket worth $50M–$70M pre- conversion, or would you rather those 60 institutional investors chase down and corral $25.0M–$35.0M of capital for their own benefit? 58
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Credit Union and Cooperative Patron
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Copyright © 2011 by Filene Researc
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Acknowledgments We appreciate and a
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List of Figures 1. Average of 27 Cr
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What Are the Credit Union Implicati
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Introduction There are many ways in
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to us is a philosophical gulf betwe
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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
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Page 33 and 34: CHAPTER 4 Tax Differences between C
Page 35 and 36: Figure 2: Contrast Statutes Governi
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Page 45 and 46: y row 9). All in all, this is a ver
Page 47 and 48: Badgerland, all of this association
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Page 57 and 58: on share deposits is not a patronag
Page 59 and 60: Patronage Refunds: A Differentiator
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