Credit unions are seeking ways to differentiate their product in increasingly saturated markets. With over 17,000 community financial institutions, increased emphasis on the cooperative spirit could help. Patronage refunds, in the form of interest refunds or bonus dividends may provide credit unions with just such a distinction. When is the last time you read about a bank giving a loan rebate or a bonus dividend?
In 2006, 340 credit unions paid loan interest rebates to members. Many others paid dividend bonuses, however, this data is not separated in the call reports from normal dividends. For some credit unions the loan rebate exceeded 50% of net income. For two credit unions, the rebate occurred in spite of a negative ROA. Credit unions from $179,000 to over $1 billion in assets offered interest rebates in 2006.
Over the past five years, the rebate amounts have varied significantly. In 2006, total loan interest rebates rose by 57.5% to $67.5 million. One major newcomer was DFCU Financial's ($1.9B in Dearborn , MI ) with combined loan and share bonus dividends of over $17 million. DFCU announced a similar bonus dividend for 2007. Do these trends indicate that credit unions find this practice effective?
Patronage refunds can take many forms, from rewards programs on credit cards to a flat percentage of interest paid. First Financial of Maryland ($569M in Lutherville, MD) offers double rewards on their credit card program in November and December of each year, as well as bonus share dividends. CEO Robert Windsor said when describing his program, “The share accounts are the closest thing to a common stock [for credit unions]”. In that spirit, First Financial offers a bonus dividend on all share accounts.
However, only 340 credit unions offered interest rebates in 2006. One reason often stated for not using the practice is to put the rebate in the initial pricing of loan or shares. With a more competitive rate, the volume may increase and further benefit the credit union.
With record levels of capital and the need for differentiation, should more credit unions consider patronage refunds? Join us on December 5 th for Patronage Refunds: A Cooperative Advantage or Unwise Use of Earnings?, a webinar hosted by Chip Filson presenting both sides of the practice. Three credit unions will provide why they use patronage refunds and the rewards they provide.