One of the most important financial benefits of being a AgCredit member-borrower is having the opportunity to share in the association's profits.
Most businesses return their profits to their owners, not their customers. When you borrow from AgCredit, you become an owner of the business and are therefore entitled to share in the profits of the association.
At the end of each fiscal year, AgCredit determines its total income and expenses. Income remaining after all expenses are deducted (the net income) can then be distributed in accordance with the association's bylaws. 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. AgCredit charges competitive rates on its loans/rates comparable to those charged by other lenders for similar loans.
However, a major difference between AgCredit and other lenders is that AgCredit returns its profits to its borrowers. When you receive a patronage refund from AgCredit, your effective cost of borrowing is reduced.
Since AgCredit distributes refunds based on the amount of interest earned on each member's loan, the more business you do with AgCredit, the larger your potential patronage refund.
Patronage refunds can help AgCredit 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.
Unlike other corporations where profits are taxed twice, when earned by the corporation and when distributed to owners as dividends, a cooperative's profits are taxed only once when they are distributed as a patronage refund.
AgCredit is allowed a tax deduction for the amount of net income that it distributes in the form of a qualified patronage refund. Therefore, to effectively manage the association's tax expense and maintain a strong capital position, the Board of Directors may elect to distribute taxable earnings to members as a qualified patronage refund. A qualified patronage refund is one in which at least 20 percent is paid in cash and the remainder in either stock or qualified allocated surplus.
Members, through the board, usually elect to leave a portion of the patronage refund in the cooperative to help keep its operation on a sound financial basis. The retained portion of each member's patronage refund is recorded on the books of the association, or allocated to each member's equity account. This retained patronage refund is called allocated surplus.
Qualified allocated surplus is a portion of the patronage refund retained for the purpose of providing for the capital needs of your cooperative. AgCredit operates with a minimal stock requirement. This stock requirement is not adequate to maintain the levels of capital which are required to operate a safe and sound financial institution. Allocated surplus now provides that source of capital.
AgCredit's goal is to operate efficiently and maintain a strong permanent capital base. It is the board's responsibility to continually monitor the financial position of the association. The board can vote to retire allocated surplus when it determines the association does not need it for capital.
The cash portion of your patronage refund may be issued to you by check or recorded on the association's books in a special account.
When any portion of a patronage refund is paid in cash, your Board of Directors may elect to set a minimum check amount as a means of controlling expenses. Cash distributions below the minimum check amount are recorded in a special account called patronage payable. On notification of patronage refund, refunds placed in patronage payable appear under "Not Distributed."
Members may request a check for monies in their patronage payable accounts, request that these amounts be applied to their loans, or leave these distributions "on account" with the association.
Patronage refunds issued in the form of allocated surplus can only be retired, or paid to members, upon approval of the board. Under the bylaws, the association cannot honor requests from members to retire the individual allocated surplus accounts.
Each time a patronage distribution is issued, AgCredit will notify eligible members of their patronage refunds. The notification will include a breakdown of the amount paid in cash (by check or patronage payable entry) and the amount paid in allocated surplus or stock.
Yes. In January, AgCredit will send you an IRS Form 1099. This form will show the total of all taxable patronage refunds issued to you during the previous year. The portion of the patronage refund paid in qualified allocated surplus will also be reported as taxable income.
The use of patronage refunds makes a significant reduction in your effective interest cost and saves you money. The next time you sit down and write a check to another lending institution, ask yourself a question: "How much of this interest payment will the bank be returning to me?" If your answer is "none," then maybe you should consider doing more of your business where you are a stockholder—AgCredit. Remember, you own the bank, and you share in the profits.