The Board of Directors can elect to retain all of the net income to strengthen the association's capital position, or distribute a portion of, or all, of the net income to members by declaring a dividend on stock or declaring a patronage refund. A patronage refund is a way of distributing the association's net income to its member-stockholders. A member's refund is based on the proportion of interest earned on his or her loan to the total interest earned by the association. A patronage refund may be paid in cash, allocated surplus, stock, or any combination of these items. A patronage refund is a way to refund a portion of the interest you paid on your loan.
Patronage refunds benefit borrowers by reducing their cost of borrowing.
However, a major difference between Farm Credit and other lenders is that Farm Credit returns its profits to its borrowers. When you receive a patronage refund from Farm Credit, your effective cost of borrowing is reduced. Since Farm Credit distributes refunds based on the amount of interest earned on each member's loan, the more business you do with Farm Credit, the larger your potential patronage refund. Patronage refunds can help Farm Credit reduce its tax expense and maintain a strong capital position. This helps the entire membership because an association with a strong capital position is better able to offer competitive interest rates, ensure a constant supply of credit and provide for the retirement of member equity held in the form of allocated surplus.