Terminology & Defintions

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Agricultural Credit Association (ACA)
An organization which obtains funds from a Farm Credit Bank or an Agricultural Credit Bank to provide short-, intermediate-, and long-term credit to farmers, ranchers, producers and harvesters of aquatic products, and to rural residents for housing. An ACA also makes loans to these borrowers for basic processing and marketing activities, and to farm-related businesses.

Average Daily Balance
The average amount that exists in an account over a period of time. The number is calculated by adding the daily balances over a period of time and dividing by the total number of days in that period. Used in the average daily balance method for determining interest.

Adjustable Rate Mortgage (ARM)
Also known as a variable rate mortgage. The interest rate on these mortgages changes periodically.

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Borrowing Entity
A description of the borrowers' legal form of ownership for a Real Estate Property.

Business Administration
A Federal agency which makes loans to small businesses. In most cases, the agency itself does not grant the loans, but rather guarantees the loans from other lenders. The majority of loans provided by the Small Business Agency are to allow the small business to take out loans with longer repayment periods, or with less strict requirements than traditional loans. Since the agency was created in 1953 as part of the Small Business Act, it has helped approximately 20 million businesses. Along with providing loans, the agency also engages in other activities, such as helping businesses affected by natural disasters, running a venture capital program, and educating businesses on various issues.

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Current Assets
Assets that will be converted to cash, sold or consumed during the course of a typical operating cycle, normally 12 months. While there may be a number of different assets in this category, the following lists typical current assets often found on the balance sheet of most of Farm Credit's borrowers

  • Cash in savings, checking, or hedging accounts
  • Marketable securities - publicly traded
  • Account Receivable - properly aged not to include insider accounts
  • Note Receivable - current portion due within the next 12 months
  • Livestock and commodity inventories - typically sold within the next 12 months
  • Prepaid expenses
  • Cash investment in growing crops - The actual cash (borrowed or not) invested in a crop. Typically expenses include fertilizer, labor, seed, irrigation, etc. but not fixed charges such as depreciation, unpaid family labor, etc.
  • Supplies, feed and seed on hand needed to generate the upcoming farm/business revenues.

Current Liabilities
Obligations owed on the date of the balance sheet plus principal on loans that are due during the typical operating cycle, normally 12 months. These liabilities are typically repaid from operational revenues and net earnings generated during a corresponding operating cycle. Current liabilities may typically include the following types of accounts:

  • Accounts payable – Amount outstanding as of the date of the balance sheet.
  • Operating credit – The portion of operating capital outstanding on the date of the balance sheet. Any available commitment balance should be addressed separately [GAAP uses notes to the financial statements].
  • Accrued expenses – Expenses that are included in the accrued income of the business but have not been converted to an accounts payable.
  • Taxes payable – Typically represent a specific expense that is due but unpaid. The reason for showing it separately from other accounts payable is because of the priority of the collection.
  • Accrued interest – The outstanding accrued interest on all debts. This amount is typically not yet due. If an installment of principal, interest or principal and interest is past due, it is usually shown separately.
  • Current portions of term debt – The principal due on all term debts over the next 12 months.
  • Other expenses – Typically these would include rental or lease expenses due over the next 12 months.
  • Demand notes, balloons, etc. – Since these loans are technically due in the next 12 months, GAAP would require them to be shown as current liabilities. The loan officers may reflect them as a term liability in their analysis but should comply with GAAP guidelines in the financial statement presentation.

NOTE: Capital leases should be considered like a term indebtedness. Only the current portion is displayed as a current liability.

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Equal Credit Opportunity Act
A United States law (codified at 15 U.S.C. § 1691 et seq.), enacted in 1974, that makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant's income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The law applies to any person who, in the ordinary course of business, regularly participates in a credit decision, including banks, retailers, bankcard companies, finance companies, and credit unions.

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Farm Credit Leasing
An organization which provides lease financing for vehicles, equipment, machinery, implements and buildings. They support nearly 7,500 customers across the U.S. They also work closely with many Farm Credit associations, including AgChoice, who have become valued Lease Partners, offering FCL-backed leases to their customers.

Farm Credit System
A customer-owned cooperative that provides financial services to farmers, ag-related businesses and rural homeowners. Established by Congress in 1916, the Farm Credit System is the nation's largest source of agricultural financing.

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Home Mortgage Disclosure Act
A federal law requiring some financial institutions to disclose certain information about their home mortgage activities to the government and the public.

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Lifestyle Farmer
A market classification which AgChoice uses to identify an individual or entity whose primary business or vocation is NOT farming, ranching, or producing or harvesting aquatic products and generally has the following characteristics, but is not required to meet all to qualify for this classification:

  • Consistently generates $40,000 or less in annual gross agricultural income.
  • Non-farm income represents 70% or more of the applicant's gross disposable income.
  • Primary purpose of real estate ownership is residential living in the country.
  • Involvement in farming may range from being actively engaged in the management and providing the labor for agricultural production to being minimally engaged in management and or labor.

Lock Box
AgChoice's off-site payment processing facility. This highly-controlled facility takes the utmost care to ensure your payment is processed correctly.

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Non-Qualified Allocated Patronage
The portion of patronage that is retained for a period of time to assure adequate capitalization of AgChoice. It is usually redeemed in October five or more years after it has been declared. AgChoice discontinued Non-Qualified Allocated Patronage in 2009 and moved to an all-cash distribution. All remaining retained funds were distributed in the fall of 2015.  

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A distribution that a cooperative pays to its members or investors. AgChoice Farm Credit is owned by the borrowers who purchase stock/participation certificates in the cooperative. The borrowers become customer-owners when they purchase stock in the cooperative. After each fiscal year, our Board of Directors may choose to retain the net income of the Association to strengthen our capital position, or distribute some or all of the net income to customer-owners with eligible loans by declaring a dividend on stock or a patronage payment.

Payment Application
A breakdown of your payments into interest, principal, late charges and/or fees.

Private Mortgage Insurance (PMI)
Insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults. Generally, lenders require private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80%.

Prime Interest Rate
The lowest commercial interest rate charge by a bank on short term loans to their most credit worthy customers.

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See a variety of business performance ratios at the end of this list.

Revolving Line of Credit
An agreement by a bank to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. Also called revolving credit.

Return on Assets (ROA)
A measure of a company's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.

Return on Equity (ROE)
A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage. It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with returns on equity that are high and growing.

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Truth in Lending
A federal law requiring lenders to fully disclose in writing the terms and conditions of a mortgage, including the annual percentage rate and other charges. Also called Regulation Z.

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Young or Beginning and Small Farmer Programs
AgChoice has special programs in place for customer-owners who are considered young or beginning or small. The definitions for each of these categories follows:

  • Young farmer – a borrower whose age is 35 years or younger.
  • Beginning and Small farmer – a borrower with 10 years or less farming experience and whose annual gross agricultural sales are less than $250,000

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The ability of current assets to meet current liabilities when due. Can be measured by the following two ratios:

  • Working Capital – Total Current Farm Assets - Total Current Farm Liabilities
  • Current Ratio – Total Current Farm Assets ÷ Total Current Farm Liabilities

The ability to meet long-term fixed expenses and to accomplish long-term expansion and growth. Can be measured by the following three ratios.

  • Debt/Asset Ratio – Total Farm Liabilities ÷ Total Farm Assets
  • Equity/Asset Ratio – Total Farm Equity ÷ Total Farm Assets
  • Debt/Equity Ratio – Total Farm Liabilities ÷ Total Farm Equity

The ability of a business entity to generate net income. Can be measured by the following four ratios:

  • Rate of Return on Farm Assets – [Net Farm Income from operations + Farm Interest Expense - Owner Withdrawals for Unpaid Labor and Management] ÷ Average Total Farm Assets
  • Rate of Return on Farm Equity – [Net Farm Income from Operations - Owner Withdrawals for Unpaid Labor and Management] ÷ Average Total Farm Equity
  • Operating Profit Margin Ratio – [Net Farm Income from Operations + Farm Interest Expense - Owner Withdrawals for Unpaid Labor and Management] ÷ Gross Revenues
  • Net Farm Income – Net Farm Income (NFI) is calculated by matching revenues with expenses incurred to create those revenues, plus the gain or loss on the sale of farm capital assets, but before taxes.

Repayment Capacity
The ability of a business to repay borrowed money. Can be measured by two ratios.

  • Term Debt and Capital Lease Coverage Ratio – [Net Farm Income from Operations + Total Miscellaneous Revenue/Expense + Total Non-Farm Income + Depreciation/Amortization Expense + Interest on Term Debt + Interest on Capital Leases - Total Income Tax Expense - Owner Withdrawals (total)] ÷ [Annual Scheduled Principal and Interest Payments on Term Debt + Annual Scheduled Principal and Interest Payments on Capital Leases].
  • Capital Replacement and Term Debt Repayment Margin – [Net Farm Income from Operations + Total Miscellaneous Revenue/Expense + Total Non-Farm Income + Depreciation/Amortization Expense - Total Income Tax Expense - Owner Withdrawals = Capital Replacement and Term Debt Repayment Capacity] - Payment on Unpaid Operating Debt from a Prior Period (loss carryover) - Principal Payment on Current Portion of Term Debt - Principal Payments on Current Portions of Capital Leases - Total Annual Payments on Personal Liabilities (if not included in withdrawals) = Capital Replacement and Term Debt Repayment Margin.

Financial Efficiency
Can be measured by five ratios.

  • Asset Turnover Ratio – Gross Revenues ÷ Average Total Farm Assets
  • Operating Expense Ratio – [Total Operating Expenses - Depreciation/Amortization Expense] ÷ Gross Revenues
  • Depreciation/Amortization Expense Ratio – Depreciation/Amortization Expense ÷ Gross Revenues
  • Interest Expense Ratio – Total Farm Interest Expense ÷ Gross Revenues
  • Net Farm Income from Operations Ratio – Net Farm Income from Operations ÷ Gross Revenues

These ratios are very sensitive to the accuracy and reliability of information used to develop these calculations.

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