Banking Terms for Agriculture Financing (short notes)

Short Notes for Agriculture Financing.

Abstract:

A written, chronological summary of all deeds, mortgages, foreclosures and other transactions affecting the title to a tract of land. Also called abstract of title.

Acceleration clause: 

A common provision of a mortgage or note providing the lender with the right to demand that the entire outstanding balance be immediately due and payable in the event of default.

Adjustable-rate loan: 

An adjustable rate loan has provisions to change the interest rate at pre-specified points in time based on changes in a market index, a lenders cost of funds or other factors as determined by the lender.

Administrative costs: 

A lenders operating and fixed costs charged for completing and servicing a loan.

Agricultural bank: 

A bank that has a significant involvement in agricultural lending. Three methods are commonly used to identify an agricultural bank: 

1) location in an agricultural community; 

2) a specified proportion of agricultural loans to total loans (e.g., above the average ratio for all banks or greater than 25% agricultural loans to total loans); 

3) a specified amount of agricultural loans (e.g., $5 million).Annual percentage rate (APR): The term used in the Truth and Lending Act. It is an actuarial representation of the total financing cost of credit expressed as a percent per annum. The annual percentage rate (APR) is calculated similarly across different institutions.

Appraisal: 

The written summary by a qualified individual setting forth an estimated value of a specific asset or group of assets, usually used in reference to real estate.

Appreciation: 

The increase in value of an asset over time.

Assets: 

The items and property owned or controlled by an individual or business that have commercial or exchange value. Items may also include claims against others. All assets are reported on a balance sheet at market or cost value less accumulated depreciation.

Assignment: 

The transfer of title, property, rights or other interests from one person or entity to another.

Average cost of funds: 

A method of determining the cost of funds at a lending institution. This Method uses an average cost of existing funds. In contrast, the marginal cost of funds uses cost of new funds only.

Balance sheet: 

The financial statement that reflects the values of an individual or business as assets and the financial claims on these assets at a specific point in time.

Balloon payment: 

A lump-sum final payment of a loan. It reflects the entire remaining balance of a shorter term loan (e.g., 5 years) which is amortized over a longer term (e.g. 10 to 20 years).

Bankruptcy: 

The federal court proceeding by which a debtor (individual or corporation) may obtain protection from creditors.

Certificate of bankruptcy

The two general types of bankruptcy are voluntary and involuntary. A voluntary bankruptcy is initiated when the debtor voluntarily files a petition. In an involuntary bankruptcy, the creditor forces the debtor into bankruptcy. Debtors qualifying as a farmers may not be involuntarily forced into bankruptcy. Bankruptcy proceedings involving farmers are declared under one of the several chapters of the federal bankruptcy code: Chapter 7 - liquidation; Chapters 11 and 12 -reorganizations; Chapter 13 - adjustment and workouts of debt.

Base rate: 

An interest rate used as a basis to price loans. A margin reflecting the riskiness of the individual or operation is added to or subtracted from the base rate to determine the loan rate. The bank funding, operating cost and required return are reflected in the base rate.Basis point: Usually used in describing interest rate movements or interest costs. One basis point is 1/100 of 1%. For example, 50 basis points is 0.5%.

Blanket mortgage: 

A lien on more than one parcel of real estate.

Blanket security agreement: 
A security interest in favor of the lender covering all chattels.

Bridge loan: 

A temporary, single-payment loan used by creditors to ãbridgeä the time period between the retirement of one loan and the issuance of another. An example is a loan used for the down payment on a new real estate purchase.

Cap: 

Used with variable- or adjustable-rate loans. Refers to the maximum allowable adjustment in interest rate.

Capital debt repayment capacity (CDRC): 

Capital debt repayment capacity is a borrower as projected amount of funds available to repay principal and interest on intermediate- and long-term loans. Capital debt repayment capacity adjusts for non cash depreciation and accounts for net income, commitments for capital items and withdrawals.

Cash flow budget: 

A financial statement reflecting the projected sources and uses of cash. Items on the statement are usually categorized as business or non business with subdivisions for funds from business operations and funds from financing.

Chattel: 

Tangible personal property (e.g., tractors, grain, livestock, vehicles).

Closing: 

Process by which all fees and documents required by a lender prior to disbursing loan proceeds are executed and filed. Usually used in reference to the completion of a real estate transaction that transfers rights of ownership in exchange for monetary considerations.

Closing costs: 

The costs incurred by borrowers and sellers in completing a loan transaction. Included are origination fees, inspections, title insurance, appraisals, attorney as and realtor as fees, and other costs of closing a loan.

Collateral: 

Property pledged to assure repayment of debt.

Commitment: 

A formal agreement between a lender and borrower to lend up to a specified amount of money at a specified future date subject to specific performance criteria and repayment terms.

Commitment fee: 

The fee associated with the establishment of a loan commitment. The fee is usually expressed as a percentage of the loan commitment.

Commodity Credit Corporation (CCC): 

The Commodity Credit Corporation is a wholly owned federal corporation within the U.S. Department of Agriculture formed to finance price supports for agricultural commodities. The objectives of the CCC are to stabilize and support income and commodity prices. In addition, the CCC facilitates the distribution and the balanced supply of agricultural commodities.

Compensating deposit balance: 

A minimum deposit balance that is sometimes required by a bank from a borrower. The balance is usually expressed as a percentage of the total loan commitment and/or a stipulated percentage of the amount of commitment actually used by the customer. In some cases, compensating balances can be used as a negotiating device by the borrower.

Compound interest: 

Compound interest means that each time interest is paid, it is added to or compounded into the principal and thereafter also earns interest. For example, a new deposit balance is estimated each day for daily compounding. Common compounding periods are daily, monthly, quarterly, annually and continuously. The more frequent the compounding, the higher the effective rate of interest.

Contract sale: 

A sale of property directly between buyer and seller. An agreement is made between the buyer and seller determining price, payment terms and title transfer.

Cooperative: 

An organization that is owned by and operated for the benefit of its patrons. An example is the Farm Credit System, in which member borrowers are the owners of the system.

Correspondent bank: 

A bank that performs specific functions for another bank (respondent bank). Functions may include loan participation, check clearing, data processing, cash management and consulting services.

Co-signer: 

An individual in addition to the borrower who signs a note and thus assumes responsibility and liability for repayment.

Cost of funds: 

Refers to the interest and non interest cost of obtaining equity and debt funds.

Covenant: 

A legal promise in a note, loan agreement, security agreement or mortgage to do or not to do specific acts; or a promise that certain conditions do or do not exist. A breach of a covenant can lead to the injured party pursuing legal remedies and can be a basis for foreclosure.

Credit scoring: 

A quantitative approach used to measure and evaluate the creditworthiness of a loan applicant. A measure of profitability, solvency, management ability and liquidity are commonly included in a credit scoring model.

Credit verification: 

The process involved in confirming the creditworthiness of a borrower.

Creditworthiness: 

The ability, willingness and financial capability of a borrower to repay debt.

Current ratio: 

A liquidity ratio calculated as current assets divided by current liabilities.

Debt-to-asset ratio: 

A solvency ratio calculated as total liabilities divided by total assets.

Deed of trust: 

A written instrument that conveys or transfers property to a trustee. Property is transferred by the borrower to a trustee, who holds it as security for the payment of debt, and upon full payment of the debt is re-conveyed to the borrower. In some states, a deed of trust is used in place of a mortgage.

Default: 

The failure of a borrower to meet the financial obligations of a loan or a breach of any of the other terms or covenants of a loan.

Delinquency: 

The status of principal and/or interest payments on a loan that are overdue.

Demand loan: 

A loan with no specific maturity date. The lender may demand payment on the loan at any time.

Depreciation: 

A decrease in value of real property caused by age, use, obsolescence and physical deterioration. A non cash accounting expense that reflects the allowable deduction in book value of assets such as machinery, buildings or breeding livestock.

Down payment: 

The equity amount invested in an asset purchase. The down payment plus the amount borrowed generally equals the total value of the asset purchased.

Draft: 

An order for the payment of money drawn by one person or bank on another. Often used in the dispersal of an operating loan to a borrower for payment of bills.

Earnest money: 

Upon negotiation of the terms of sale, the portion of a down payment given to the seller (or escrow agent) as evidence of good faith in following through with the transaction.

Effective interest rate: 

The calculated interest rate that may take account of stock, fees and compounding, in contrast to a quoted rate of interest.

Employment verification: 

The confirmation of conditions of employment of a potential borrower.

Encumbrance: 

A claim or interest that limits the right of property. Examples include liens, mortgages, leases, dower rights of easements.

Escrow: 

The process of an agent providing safe keeping of cash, securities and documents and handling the paperwork and transfer of funds for the borrower and seller.

Farm Credit System (FCS): 

A system of federally chartered, but privately owned, banks and associations that lend primarily to agricultural producers and their cooperatives. The System is organized as a cooperative. The System is supervised and regulated by the Farm Credit Administration, an agency in the executive branch of the U.S. government.

Farmers Service Agency (FSA): 

A U.S. government agency operating under the authority of the U.S. Department of Agriculture. Programs principally provide or guarantee credit for agricultural and rural borrowers who show promise for financial viability but are unable to independently obtain financing from commercial sources. Loan programs include direct loans and partial guarantees of loans made by commercial 

lenders.

Fees: 

A fixed charge or payment for services associated with a loan transaction.

Filing: 

Giving public disclosure of a lenders security interest or assignment in collateral. In many cases this includes notice to certain government agencies.

Financial statement: 

A written report of the financial condition of a firm. Financial statements include balance sheet, income statement, statement of changes in net worth and statement of cash flow. A statement filed by a lender with a public official. The statement reports the security interest or lien on the borrower as assets.

First mortgage: 

A real estate mortgage that has priority over all other mortgages on a specified piece of real estate.

Fixed-rate loan: 

A loan that bears the same interest rate until loan maturity.

Foreclosure: 

The legal process by which a lien against property is enforced through the taking and selling of the property.

Graduated payment mortgage: 

A type of delayed payment mortgage where the payments increase over time.

Grantor: 

A person or entity conveying an interest in real property.

Guarantor: 

A person or entity that takes the financial responsibility of another person as debt or other obligations in the case of default.

Income statement:

Summary of the revenue (receipts or income) and expenses (costs) of  a business over a period of time to determine its profit position. The income statement is also referred to as a profit and loss statement, earnings statement or an operating statement.

Intermediate-term loan: 

A loan to be repaid (or amortized) over a period of 18 months to 10 years, with 3 to 5 years being most common. Intermediate-term loans typically are used to finance machinery, equipment, automobiles, trucks, breeding livestock, improvements, and other durable, yet depreciable, assets.

Land trust: 

Legal entity by which a interest in real property is converted to an interest in personal property.Owners deed real property to the trust and receive an interest in the 

trust in return.

Lease: 

Acquiring the control of an asset (e.g., land machinery) by renting for a specified period of time. A rental payment is made by the lessee (or tenant) to the lessor (or landlord) to cover the lessor as cost of ownership. Examples include operating leases, financial leases, real estate leases and custom hiring.

Lease-purchase: 

A financing arrangement in which an asset (e.g., a tractor) is leased for a period of time and then purchased at a price specified in the lease-purchase contract. Legal lending limit: A legal limit on the total amount of loans and commitments a financial institution can have outstanding to any one borrower. The limit usually is determined as a specified percentage of the financial institution as own net worth or equity capital. Its purpose is to avoid excessive exposure to credit risk of an individual borrower.

Lien:

A claim by a creditor on property or assets of a debtor in which the property may be held as security or sold in satisfaction (full or partial) of a debt. Liens may arise through borrowing transactions where the lender is granted a lien on the borrower as property. Other examples of liens include tax liens against real estate with delinquent taxes, a mechanic as lien against property on which work has been performed, and a landlord as lien against crops grown by a tenant.

Line-of-credit: 

An arrangement by a lender to make an amount of credit available to a borrower for use over a specified period of time. It is generally characterized by a master note, cash flow budgets, and periodic and partial disbursements and repayments of loan funds. A formal agreement of similar characteristics is a credit commitment.

Liquidation: 

The sale of assets to generate cash needed to meet financial obligations, transactions or investment opportunities.

Liquidity: 

The ability of a business to generate cash, with little risk of loss of principal value, to meet financial obligations, transactions or investment opportunities.

Loan agreement: 

Typically refers to a written agreement between a lender and borrower stipulating terms and conditions associated with a financing transaction and in addition to those included to accompanying note, security agreement and other loan documents. The agreement may indicate the obligations of each party, reporting requirements, possible sanctions for lack of borrower performance, and any restrictions placed on a borrower.

Loan commitment: 

A formal agreement to lend up to a specified dollar amount during a specified period.

Loan committee:

A committee of loan officers, executive personnel and/or directors of a financial institution who establish lending policies and /or approve loan requests that exceed the lending authority of individual loan officers.

Loan conversion provision: 

An option provided by a lender to a borrower to change loan terms at a future date. For example, at loan origination a lender may provide a borrower with an option to convert from a variable- to a fixed-rate loan. Usually, the lender charges the borrower a fee for this option.

Loan guarantee: 

An agreement by an individual, a unit of government, insurance firm, or other party to repay all of part of a loan made by a lender in the event that the borrower is unable to repay. An example is the loan guarantee program available to agricultural lenders from the Farm Service Agency in which up to 90% of an qualified loan may be covered by the guarantee.

Loan participation: 

A loan in which two or more lenders share in providing loan funds to a borrower. An example is a loan participation between a local bank and a correspondent bank in which the loan request exceeds the local bank as legal lending limit. Generally, one of the participating lenders originates, services, and documents the loan.

Loan-to-asset value: 
The ratio of loan balance to the value of assets pledged as collateral to secure a loan. London Inter-bank Offered Rate.

LIBOR: 
A worldwide base borrowing and lending rate between lenders. Often used as an index or a base for defining a borrowing rate for customers.

Long-term loan: 
A loan to be repaid (or amortized) over a period of time exceeding 10 years, with 20- to 30-year loans being common when financing real estate.

Marginal cost of funds: 
A loan pricing policy by a financial institution in which interest rates on new loans are based on the cost of new funds acquired in financial markets to fund the loans. This pricing policy contrasts with loan pricing based on the average cost of funds already acquired by the lending institution.

Master note:
A note (promise to repay) often used in combination with line-of-credit financing to cover present and future borrowing needs through periodic disbursements and repayments of loan funds.

Maturity: 
Amount of time until the loan is fully due and payable. For example, a 5-year intermediate-term loan has a maturity of 5 years.

Mediation:
Resolution of problem loans, disagreements, or conflicts between borrowers and lenders by means of a third party serving as a mediator.

Mortgage:
A legal instrument that conveys a security interest in real estate property to the mortgagee (i.e., a lender) as an assurance that a loan secured by the real estate mortgage will be repaid.

Net income: 
A measurement of the net return to unpaid labor, management and equity capital. Also called accrual net income. The primary difference between cash and accrual net income is that accrual income includes adjustments for changes in inventory and changes in accrual items like prepaid expenses, accounts payable and accounts receivable. Accrual net income more accurately reflects the profitability of a business over an accounting period.

Net worth: 
The financial claim by owners on the total assets of a business, calculated as total assets minus total liabilities equals net worth. Also called equity capital and ownership equity.

Non-revolving line-of-credit:
A line-of-credit in which the maximum amount of a loan is the total of loan disbursements. Repayments do not make loan funds available again as in a revolving line-of-credit.

Note: 
A written document in which a borrower promises to repay a loan to a lender at a stipulated interest rate within a specified time period or upon demand. Also called a promissory note.

Off-farm income: 
Income earned by a farmer operator or member of the operator as family from employment off the farm or from investments made in non-farm activities or ventures.

Operating loan:
A short-term loan (i.e., less than one year) to finance crop production, livestock production, inventories, accounts receivable and other operating or short-term liquidity needs of a business.

Origination fee: 
A fee charged by a lender to a borrower at the time a loan is originated to cover the costs of administering the loan, evaluating credit, checking legal records, verifying collateral and other administrative activities.

Over-line loan: 
A loan in excess of a financial institution as legal lending limit to any one borrower in which the institution has enlisted the services of another lender to participate in the loan.

Partial release: 
Release of a portion of collateral to the borrower.

Personal property:
Any tangible or intangible property that is not designated by law as real property. Personal property is not fixed or immovable.

Points: 
A form of loan fee generally charged by long-term lenders at loan origination to cover a portion of the lender as administrative and funding costs. Points typically are expressed as a percentage of the total loan. For example- 3 points equals 3% of the loan amount.

Prepayment penalty: 
An amount charged by a lender on a loan paid prior to its maturity.

Prime rate: 
A nationally quoted rate believed to represent the interest rate charged by U.S. money-center banks to their most creditworthy corporate borrowers. Prime rate may also refer to an individual lender as interest rate charged to its most creditworthy borrowers, although the term base rate is more commonly used.

Principal: 
The dollar amount of a loan outstanding at a point in time, or the portion of a payment that represents a reduction in loan balance. Principal is distinguished from interest due on a loan or the interest portion of a loan payment.

Profitability: 
The relative profit performance of a business, enterprise or other operating unit. Profitability comparisons often occur over time, across peer groups, relative to projections, and relative to norms or standards.

Pro forma statement:
A projection into the future. Examples are a pro forma balance sheet and a pro forma income statement.

Rate adjustment: 
A change in interest rate on an existing loan. Rate adjustments may occur on variable- or adjustable-rate loans.

Rate of return on assets (ROA): 
A profitability measure representing the rate of return on business assets during an accounting period. ROA is calculated by dividing the dollar return to assets during the accounting period by the value of assets at the beginning of the period or the average value of assets over the period.

Rate of return on equity (ROE):
A profitability measure representing the rate of return on the equity capital which owners have invested in a business. ROE is calculated by dividing the dollar return to equity capital during an accounting period by the value of equity capital at the beginning of the period or the average value of equity capital over the period.

Real property: 
Land, buildings, minerals and other kinds of property that are legally classified as real.

Refinancing:
A change in an existing loan designed to extend and/or restructure the repayment obligation or to achieve more favorable loan terms by transferring the financing arrangement to another lender or loan type.

Working capital:

The differences between current assets and current liabilities. Often used as a measurement of liquidity of a business.

Renewal: 

A form of extending an unpaid loan in which the borrower as remaining unpaid loan balance is carried over (renewed) into a new loan at the beginning of the next financing period.

Repayment ability: 
The anticipated ability of a borrower to generate sufficient cash to repay a loan plus interest according to the terms established in the loan contract.

Revolving line-of-credit:
A line-of-credit made available to a borrower in which the borrower can usually borrow, repay and re-borrow funds at any time and in any amounts up to the credit limit, but not above, during a specified period of time.

Right of rescission: 
A provision of the Truth in Lending Act which gives a borrower the right to rescind a borrowing transaction (i.e., change his or her mind) within three business days on any transaction in which the principal residence is used to secure the loan.

Risk assessment: 
The procedures a lender follows in evaluating a borrower as creditworthiness, repayment ability, and collateral position relative to the borrower as intended use of the loan proceeds. Risk assessment is similar to credit scoring and risk rating.

Risk premium:
The adjustment of a lenders base interest rate in response to the anticipated level of a borrowers credit risk in a loan transaction. Higher risk loans may carry higher interest rates, with the rate differential representing the risk premium.

Risk rating: 
The relative amount of credit risk associated with a loan transaction. The lender may use credit scoring or risk assessment procedures to evaluate loan requests and group borrowers into various risk classes for purposes of loan acceptance or rejection, loan pricing, loan control, degree of monitoring and level of loan documentation.

Risk tolerance: 
The degree of safety an investor wished to have. Also called risk aversion or risk attitude.

Schedule F: 
The Internal Revenue Service form used to report farm income and expenses as a part of filing federal income tax returns.

Second mortgage: 
The use of two lenders in a real estate mortgage in which one lender holds a first mortgage on the real estate and another lender holds a second mortgage. The first mortgage holder has first claim on the borrowers mortgaged property and assets in the event of loan default and foreclosure or bankruptcy.

Secondary market: 
An organized market in which existing financial assets are bought and sold. Examples are the New York Stock Exchange, bond markets, over-the-counter markets, residential mortgage loans, governmental guaranteed loans, and the more recently formed secondary market for buying and selling farm mortgage loans.

Secured loans: 
Loans in which specific assets have been pledged by the borrower as collateral to secure the loan. Security agreements and mortgages serve as evidence of security in secured loans.

Security agreement: 
A legal instrument signed by a debtor granting a security interest to a lender in specified personal property pledged as collateral to secure a loan.Seller financing: A loan provided by the seller of property to its buyer.

Share lease: 
A leasing arrangement for real estate in which the landlord receives a share of the production as rent, and pays a share of the business as variable expenses. The landlord often shares in the management decisions with the tenant.

Shared appreciation mortgage: 
A financing arrangement for real estate in which the lender reduces the interest rate on the loan in return for a stipulated share of the appreciated value of the land being financed at a designated time in the future. The risk of land value appreciation is shared between lender and borrower, and the lenders compensation from value appreciation generally occurs through refinancing in which the loan balance is increased by the amount of the shared appreciation.

Simple interest: 
A method of calculating interest obligations in which no compounding of interest occurs. Interest charges are the product of the loan principal times the annual rate of interest, times the number of years or proportion of a year the principal has been outstanding.

Solvency: 
A business condition of financial viability in which net worth is positive and the business is expected to meet its financial obligations as they come due. An insolvent business has a zero net worth and questionable viability. Solvency indicators include the debt-to-asset ratio, debt-to-equity ratio and the equity-to-asset ratio.

Split line-of-credit:
 A financing situation in which a borrower obtains operating credit from two or more lenders.

Stock requirement: 
A method of capitalizing lending institutions such as the cooperative Farm Credit System. The borrower is required to purchase stock in the lending association to obtain a loan. The stock requirement generally is specified as a percentage of the loan or as a dollar amount. The stock requirement may be a low as 2% of the value of the loan or a maximum of $1,000. The purchase of stock is a financial investment in the issuing institution which is typically paid back at loan maturity, but the lender is not obligated to do so.

Surety: 
Person or entity that has been requested by another (principal) and agrees to be responsible for the performance of some act if the principal fails to perform as promised.

Tiered loans: 
Loans grouped according to the risk characteristics of borrowers. Higher risk classes generally are charged higher interest rates to compensate the lender for carrying the credit risk.

Title insurance: 
Insurance which protects a purchaser or mortgage lender against losses arising from a defect in title to real estate, other than defects that have been specifically excluded. A clear title is free of any claims, mortgages, liens and other encumbrances and has no ownership interest other than that of the owner of record.

Title opinion: 
A legal opinion rendered regarding the abstract of title.

Title search: 
The process of tracing all events and transactions affecting the title to a tract of real estate. Title search is essential to the preparation of an abstract.

Trend analysis:
The use of financial measures or ratios over several time periods to evaluate business performance.

Truth in Lending:
The federal Truth in Lending Act is intended to assure a meaningful disclosure of credit terms to borrowers, especially on consumer loans. Lenders are required to inform borrowers precisely and explicitly of the total amount of the finance charge which they must pay and the annual percentage interest rate to the nearest .01%. Excluded transactions include loans for commercial or business purposes, including agricultural loans; loans to partnerships, corporation, cooperatives and organization; and loans greater than $25,000 except for owner-occupied, residential real estate mortgages where compliance is required regardless of the amount.

Unsecured loans: 
Loans for which there are no guarantors or co-signors and no specific assets have been pledged by the borrower as collateral to secure the loan.

Usury laws: 
Laws which establish legal ceilings on the interest rates charged for various types of loans. In states where usury laws exist, most usury limits are well above market interest rates and often are indexed to change with changes in market interest rates or other leading rate indicators.

Variable-rate loan:
A loan transaction in which the interest rate may be changed within the period of the loan contract. Generally, rate changes occur in response to changes in the lenders cost of funds of a specified index. The frequency and level of rate adjustments may or may not be established in the loan contract.

Warehouse receipt: 
A receipt issued by a warehouse-man providing evidence of title to stored goods (especially commodities) and thus validating the existence of collateral which may be pledged to secure a loan. Negotiable warehouse receipts are documents of title. A warehouse may be used to transfer ownership of the goods or commodities it represents.