A Hard Dollar Difference: Patronage Refunds and the CU Model

Interest refunds and bonus dividends offer members additional value, extend the cooperative model, and differentiate your CU from the neighborhood bank.


As the year comes to a close, some credit unions have been giving back to their members. Recent announcements include Citizens Equity First Credit Union ($3.3B in Peoria, IL) returning $6 million to members, SB1 Federal Credit Union ($409M in Philadelphia, PA) giving a special dividend of $1 million and DFCU Financial Credit Union ($1.8B in Dearborn, MI) announcing "17 million ways" that the credit union values membership.

A Banker's View
Interest refunds or bonus dividends are more than just a deposit in your member's account. The simple act of giving back reinforces the cooperative model. The publicity and work by the credit union's marketing team can provide differentiation in the increasingly saturated financial services market. In a December 2007 special edition of American Banker on Community Banking, John Pearson of Butler Bank (MA) had this to say on patronage refunds: "We compete with Jeanne D'Arc Credit Union and they're about $800 million...What they do is they'll pay the regular dividend, which is usually at least what we pay, and then every December they come out with an extra dividend, and they pay a fifth quarter. I've got to say, it's really tough to compete with this. Are we going to pay fifth-quarter dividends? I don't think so." A recent Callahan & Associates event explored the topic of patronage refunds and provided examples of three practices.

Lessons from Credit Unions
Atlantic Financial ($59M in Hunt Valley, MD) gave a 10% bonus dividend and a 10% interest refund to members in 2006. Each member has a new non-interest bearing share account created expressly for the bonus dividend and/or interest refund. Statements are sent to account holders for six months before the funds are transferred into the member's primary account. Members have become familiar with the practice, offered in varying levels over the past five years, and now question tellers at the end of the year as to the percentage to be refunded.

Boulder Dam ($473M in Boulder City, NV) has 90% penetration rate in the SEG. Their field of membership, all those who live, work, or own property in Boulder City, has provided the credit union a solid base of members. In turn, the credit union has proved to the members a high degree of trust in both providing member value and managing the credit union's financial performance. Boulder Dam charges a 12% interest rate on all loans, and 13% on credit cards. Each quarter, the credit union refunds - on average - 48% of interest income to their members, effectively declaring a competitive rate on loans. How can we tell if this strategy works? The credit union has 72% market share of the deposits in Boulder City, NV. For Nevada, the total CU market share is 2.2% as of June 30, 2007.

Dow Chemical Employees Credit Union ($1.05B in Midland, MI) will give back over $10 million this year, continuing in an over 50 year practice. For 2007, both the bonus dividend and interest refund were calculated at 15%. President/CEO Dennis Hanson views the givebacks as being consistent with credit union philosophy and a natural outgrowth of the cooperative model. Returning money to members enhances loyalty and promotes financial stewardship.

3,363 credit unions, including five with over $1B in assets, have over 15% capital, doubling what NCUA defines as well-capitalized. The excess capital currently tops $34B, providing vast resources should credit unions decide to return additional value to members. Tom Miller, CEO of Affinity Group Credit Union ($95M in Pontiac, MI) offered this view: "As an industry, we can tout this as the credit union difference in action. We don't need to talk about vague concepts. These are hard dollar differences between credit unions and banks."




Dec. 17, 2007


  • I''m curious how interest rebates are handled for tax purposes. Is there an adjustment to year-to-date interest paid reducing it by the amount of the rebate or is it considered miscellaneous income to the member and 1099-MISCs are issued for rebates greater than $600?