If you want to increase the blood pressure of any agricultural lender, mention “review by the federal examination team.” Tension mounts as lending regulation and compliance intensifies due to the Dodd-Frank Act’s mandates as a result of the recent financial crisis. This, in turn, will impact the amount and depth of financial reporting required by you as a producer in the upcoming loan renewal season, and when you request loans for long-term financing of land or expansion.
At the 59th ABA National Agricultural Bankers Conference in Indianapolis, IN, a session led by the FDIC provided insight on what you can expect in financial documentation requirements. The session was well conducted by two experienced regulators. They were quick to point out that agricultural loans, for the most part, are performing quite well in many regions of the country. That being said, here are some topics on their radar screens.
- First, they are examining the concentration of portfolios, i.e. grain, dairy, hogs and beef. Within each area of concentration, they are identifying large customers that could cause major disruption of the lender’s total agricultural portfolio if they face financial difficulty.
- The examiners are looking for evidence of economic shock testing for revenue declines, cost increases, interest-rate increases and land-value changes to ascertain the soundness of individual loans.
- They are fans of evidence of a borrower’s profits that can be turned to cash flow to service debt. They want to see some degree of financial liquidity and working capital as a backup with collateral as a secondary or tertiary backup in the case of adversity.
- They are looking for breakeven prices on commodities, strong credit scores, and evidence of risk-management plans by producers. Financial trend analysis with reasonable family living withdrawals and positive earned net worth were on the radar screen as well.
- Finally, get used to making accrual adjustments to your income statement from your tax records, and understanding their implications on business decisions, loan terms and arrangements.
Folks, it is not going to be business as usual for loan requests and decision-making. Similar to air travel, plan to buckle up and take a deep breath because turbulent times could be coming!
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at email@example.com.