2-3 pages and calculations needed. It's a loan evaluation. Whether we should accept or decline the loan.
iamnickok
5_cs_of_credit_9-20-2016-2.pptx
Agricultural Loan Analysis
Bobby Carnley – Regional Lending Manager
Kyle Eagerton – Principal Credit Analyst
September 20, 2016
We know Ag. We love Ag. We Are Ag.
Farm Credit of Florida
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www.farmcreditfl.com
Liquidity
Current ratio - range desirable > 1.15 (FCF)
Working capital
Working capital/gross revenues ratio
Solvency
Debt/asset ratio
Equity/asset ratio - range desirable > 0.4 (FCF)
Debt/equity ratio
Profitability
Net farm income
Rate of return on farm assets
Rate of return on farm equity
Operating profit margin
EBITDA
Farm Financial Ratios and Guidelines
Farm Financial Ratios and Guidelines
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Repayment Capacity
Capital debt repayment capacity
Capital debt repayment margin
Replacement margin
Term debt coverage ratio - range desirable > 1.25 (FCF)
Replacement Margin Coverage Ratio
Financial Efficiency
Asset turnover ratio
Operating expense ratio
Depreciation expense ratio
Interest expense ratio
Net farm income ratio
Farm Financial Standards Council
Farm Financial Ratios and Guidelines
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How do we apply these ratios and guidelines?
The five C’s of credit are generally the guiding principles of credit analysis:
Character
Conditions
Capital
Capacity
Collateral
The 5 C’s of Credit
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Character (Primary Lending Factor):
Credit Scores – one of the best indicators of future performance is past performance
Reputation – an applicant’s favorable reputation in the business community is critical
Experience – can applicant manage the business they are wanting to finance
Legal Structure – what is the ownership structure of the borrowing entity
Succession – is the borrower looking ahead with a defined succession plan
Conditions (Industry):
What is the condition of the industry that provides the majority of the applicant’s income – current & future outlook
What is the condition of the industry that the applicant wants to finance – current and future outlook
Applicant should take the initiative in explaining why the loan request is constructive for applicant & lender
What programs are available to support the applicant’s primary industry – USDA, ASCS, FSA, tax credits, etc.
The 5 C’s of Credit
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Capital (Financial Position):
Does applicant have strong equity or are they highly leveraged – attitude toward debt – prefer over 40% equity
Does applicant have a strong liquidity position – can they continue to perform in the event of adversity – cash is king – prefer at least a 1.15:1 current ratio
Are applicant’s debts properly structured – does repayment match depreciation
Are debts constructive – Any killer toys
What is the applicants financial trend – positive, negative or stable
Quality of financial information – compiled, reviewed, audited - good quality information is critical for managing a business
Frequency of information provided – applicant can’t properly manage a rapidly changing business with annual financials and tax returns.
Financial analysis is an area that can be more or less complicated based on applicant’s ownership structure. For tax planning, estate planning and other reasons, complicated ownership structures are becoming more and more common. Financial analysis typically only includes those assets & income sources that are owned & controlled by parties liable on the loan. Some examples are as follows:
Applicant is married and spouse is not party to the loan, we do not show any values for jointly held assets, but show all jointly held liabilities
Assets have been moved into a legal entity (trust, LLC, Partnership). These are handled on a case by case basis depending on ownership, control, history
The 5 C’s of Credit
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Capacity (Ability to Repay):
Typically want at least a 1.25 coverage
What is the trend – positive, negative, stable
Is applicant heavily dependent upon new sources/ projections –proven or unproven income
Does applicant have multiple sources or only one source of income
Are applicant’s projections reasonable – supported by historical information
How much adversity can they withstand – typically use 5-5-3 stress test or break-even analysis
Collateral (If All Else Fails):
Is the collateral highly specialized – highly depreciable
How liquid is the collateral
Is the collateral marketable in normal conditions
What is applicant’s commitment to the collateral
What is the income producing capacity of the collateral
Are there any environmental concerns
Realities of Agricultural Lending
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Can be more of an art than a science
Credit standards reflect precise values, but they are derived from imprecise numbers
The financial trend is rarely consistent – wide swings in prices and yields
Most operations are constantly changing – difficult to project
Many applications are for new ventures with no historical trend
Applicants rarely have a written business plan
Financial information
is typically not high quality/complete
is typically dated – prefer within 6 months
cash basis vs. modified cash basis vs. accrual
cost vs. fair market value
We realize that a borrower may be weaker in some areas than desired, but we do consider compensating strengths. Considering all of the credit factors, we have to determine if the credit is safe and sound.
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Real World Example:
Albert & Alberta Angus, LLC
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Albert & Alberta Angus Farms, LLC is requesting a loan to finance 75% of the purchase price of a $200,000 piece of equipment.
Take a look a the financials we have provided. What are some questions you might ask? What kind of information should you look for?
We know Ag. We love Ag. We Are Ag.
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