FFSC – Day Two (Session Five)

On purpose, I skipped talking about session four since it was my discussion on income taxes which we have posted on many times already.

Session Five was presented by Tim Ohlde, President of Elk State Bank in Clyde, KS on the applications of the FFSC guidelines to Today’s Ag Lending World.

He stated that what bankers are good at:

• Desire to see customers/community succeed
• Lenders who are bright/capable talent of all ages and stages
• Role of collateral
• Importance of a “Good” loan
• Cash flow pays loans
• Select Sweet 16 ratios (current ratio, solvency, ROA, ROE)
• Understand debt
• Using a tax return for profitability analysis and cash flow analysis
• Bankers want to do a better job with financial analysis

Room for improvement is as follows:

• Understanding double-columned balance statements
• Classifying assets and liabilities correctly
• Role of working capital in the lending process AND in the farm operation
• Basis – Does anyone really know their true basis
• Implications of Deferred Tax on (1) liquidation, (2) business transition, and (3) estate planning

It appears that less than 10% of Ag bankers understand the conversion of cash to farm accural accounting (not true accrual accounting).  Also, bankers sometimes do not understand that a schedule F is not a profit and loss statement.  The joke is that a schedule F is a “highly manipulated profit and loss statement”.

Regulators are highly suggesting that bankers need improved, better financial loan analysis on an individual, global and portfolio basis which the Farm Financial Standards meet.