Episode 34 Financials Beyond the Balance Sheet
Join the Loan Officers from our Lexington branch as we dive into financials beyond the balance sheet. Listen to Ben talk about the balance sheet and the 5 C's of Credit.
- Character
- Conditions
-Capital
-Capacity
-Collateral
Learn more about Central Kentucky Ag Credit: AgCreditOnline.com
- View Transcript
(00:01)
Welcome to Beyond Agriculture, the podcast that.Takes you beyond the scope of ag and into the real life. Stories, conversations, and events taking place in our community. Who we are and what we do is beyond agriculture.
Ben VanHook (00:20)
Welcome to Beyond Agriculture. This is Ben Vanhook with Central Kentucky Ag Credit loan officer here in our Lexington office. And I've got a full house with me today at our office. We've got Chuck Canter, loan officer, Cassie Johnson, marketing. Lisa Yeager, loan officer here as well. And we've got a new guest first timer on the podcast today. Ms. Shelby, you just started with the marketing team. And just tell me what your title is, where you're from, a little bit about yourself.
Shelby Terrell (00:52)
All right. My name is Shelby. I am from Paris, Kentucky. I graduated high school in 2022 from Nicholas County. I currently raise a sheep operation in Paris, and that's pretty much about it.
Ben VanHook (01:10)
Yeah.
Cassie Johnson (01:11)
And you're the new marketing assistant.
Shelby Terrell (01:12)
I am the new marketing assistant, yeah.
Ben VanHook (01:14)
How long have you been with us?
Shelby Terrell (01:17)
Three days.
Ben VanHook (01:17)
Three days. Three days.
Cassie Johnson (01:19)
So she's got to get her broke in.
Ben VanHook (01:21)
That's right. That's. That's right. Well, we're happy to have everybody with us today. And we just want to get started here talking about a couple of events coming up. Well, first, Chuck, let's talk about what we've already done. Some recent events that we've attended. Where have you been lately?
Chuck Canter (01:37)
So back in May, of course, May was beef month, and there were a lot of events. I think Ben's going to talk a little more about that, but with correlated with beef month. But I personally have been to FFA banquets in Clark county and Jessamine County.
Ben VanHook (01:52)
Yeah. What did you do there?
Chuck Canter (01:53)
Well, we gave away some awards, funded some scholarships, and just some good fellowship.
Ben VanHook (02:01)
Yeah, yeah. Good time. I attended the middle and high school FFA banquets in Harrison county and the Harrison County Beef Cattlemen's association helped cooked burgers and steaks and served the meal. And so I got to see all the youngsters. And great to see that involvement, you know, at both middle and high school levels. The FFA advisors have done a great job.
Chuck Canter (02:25)
Absolutely. It's good, good to promote ag credit at these FFA events. The way I see it, that's our future.
Ben VanHook (02:35)
It's great to come in contact with those kids and their families, and I'm happy to be there. We've. We've got a lot coming up too. This summer, it's here in June, time flies by, but we're just gonna get busier and busier. We've got all the local county fairs coming up, and also you mentioned seeing an ad in the Fayette county brochure. Tell me about that.
Chuck Canter (02:59)
Fayette county extension is having a meeting this month. It's June 23rd, I believe. It's an equine field day event in Woodford County. It's at Endeavor Farm, and it will have consists of different equine information on pastures and other specific things that are correlated with the equine industry.
Ben VanHook (03:27)
Yeah, right, right.
Chuck Canter (03:29)
And there'll be a free meal with that, too. Yeah, that's always good. You have to sign up for it, though.
Ben VanHook (03:36)
Yeah, yeah. Sign up for that field day over in Woodford County. I'm sure one of our loan officers will be there.
Chuck Canter (03:44)
I will. I've signed up for it. Yeah.
Ben VanHook (03:46)
So we look forward to seeing you all out at Endeavor Farm.
Lisa Yeager (03:50)
One of the things I want to mention, Ben, is we've got be looking for us at the farmer's markets.
Cassie Johnson (03:55)
Oh, yeah.
Lisa Yeager (03:56)
We've got some bags to give away to bring your fruits and vegetables home in. So just be looking for us to be attending the farmers markets.
Cassie Johnson (04:05)
Yeah. So far I know that we've handed them out at Madison, Berea, Clark Bourbon. Even in Lexington. We've got in Jessamine. Ym. So be looking for them Ag Credit reusable grocery bags at the farmers market.
Ben VanHook (04:20)
Another event we've got coming up is the FFA State Convention right here in Lexington. It'll be at the central bank center, slash Rupp Arena. We've attended. We've never not attended. That I know of. We always have several loan officers and other staff marketing.
Cassie Johnson (04:43)
And this year, Shelby has created a hashtag board so the FFA members can come to our booth. They can get their photo op with us and do #AgCredit4u.
Chuck Canter (04:57)
Yeah. Awesome.
Ben VanHook (04:58)
Awesome. That's neat. I know. We've done a podcast in the past.
Cassie Johnson (05:02)
Are we gonna definitely have this out there? We're gonna be. We've already come in contact with a couple of people that are gonna stop by the booth and we're gonna interview them, and we'll. We'll even have some. Well, do you want to speak about this, since it is your idea about the real. Yeah.
Shelby Terrell (05:18)
Okay. Yeah. Okay. So we actually have three different. We actually have three different real ideals. So one is we are going to do, like, a karaoke thing. So we're gonna play, like, a song, and we're gonna, like, just randomly pause it, and the students have to finish the lyrics. It's just something, like, cool idea. The other one was the hashtag board that Cassie mentioned. So pretty much they tag us on their Facebook Instagram page. That way we can kind of get out there more. Maybe younger kids can kind of see. And then lastly, we're going to ask them random questions. So we had, I think we decided on FFA questions and Ag Credit questions. So I remember one of the questions was how many counties do we represent? They probably won't know the answer to it, but it's just a cool way for them to kind of get to know us in a sense. So it's gonna be really fun.
Ben VanHook (06:17)
Some good stuff. Yeah, yeah, I like that. We always have a lot of attendees stop by the booth. So it's another way for us to get them involved and have a little bit of fun.
Cassie Johnson (06:29)
I just had a thought, Shelby. I think we should also do this with the loan officers and quiz them over it.
Ben VanHook (06:35)
Oh, you're gonna put us on the spot?
Cassie Johnson (06:36)
Yeah. You gonna come work the booth?
Ben VanHook (06:38)
Ben, thanks for the heads up. I might have to some into our history.
Chuck Canter (06:44)
I thought maybe you were talking about Ben doing karaoke.
Cassie Johnson (06:47)
We can do that too.
Ben VanHook (06:48)
We don't want that. I think you're a better proponent for that, Chuck. Well, moving on here, we want to talk today about the balance sheet. What the balance sheet is better help our customers understand, or anyone who might be applying for a farm loan or a rural home loan on how to be prepared and how to set themselves up down the road for maybe some intermediate long term plans that they've got in the pipeline. And so first we just want to. We're going to go through some questions here regarding the balance sheet and just kind of have a conversation about what it is and maybe some signs that your balance sheet might be giving you on your farming operation. So Chuck, what is a balance sheet? Just kind of give us a general baseline of what it is and what details go on that.
Chuck Canter (07:50)
So it consists of short term assets, intermediate term assets and long term assets, short term liabilities and long term liabilities. So yeah, it's a good starting indicator of what your operation, how financially sound your operation is basically right.
Ben VanHook (08:13)
You've given us some terms here, Lisa, and I want you to pitch in here. He mentioned current assets. What does it mean to be current?
Lisa Yeager (08:23)
Current is within one year. So anything that is liquid within a one year period, checking account, savings account, cash, you may have, you know, baby calves you might be selling at the, at the market, you know, things like that. And Chuck, that's very important to what you know, your comments, where it led is so many times people that we talk to don't see the need for the balance sheet. They don't understand why we need that information and why it is so important looking at their operation. So some good points brought out there about why. Why it's important to us.
Ben VanHook (08:59)
Yeah, yeah. Those current assets, you know, some of those are going to be investment in growing crops. We're right here in June, so a lot of our farmers have invested a lot of money in either stocker cattle or corn, soybeans, tobacco. So that that asset is, is in production and will be marketed here in the next 12 months. So that's why it is current. More an intermediate asset. Can you give us example of what that might be?
Chuck Canter (09:30)
Yeah, sure. You're looking more along the lines there of breeding livestock like cows, anything basically that's probably has a life of 10 years or less is what we're looking at there mainly.
Ben VanHook (09:46)
Right?
Chuck Canter (09:47)
Yep.
Ben VanHook (09:47)
Right. And then long term assets. Chuck mentioned that I think when he gave his initial brief on the balance sheet. You're being real estate holdings. Another example of that could be retirement accounts, accounts that like 401k or an IRA that you don't intend on utilizing in the shorter intermediate time frame. Those are our assets that will be sitting on your balance sheet and hopefully be growing in value over a longer, longer than 10 years, over a longer period of time. So that's kind of on the asset side. I want to talk too about the liabilities. Kind of work down the balance sheet from top to bottom there too. What about current liabilities?
Chuck Canter (10:37)
Yeah, current liabilities would consist of credit card debt, any kind of accounts payable that you may have, say like at a feed store or a farm supply store. You know, it could also consist, I guess of home equity lines of credit, any revolving line of credit that you might have that's going to. Anything with 12 months or less basically is what that is going to consist of.
Ben VanHook (11:06)
So a lot of these farming enterprises might have an operating line of credit or a stocker line of credit to purchase those calves. That, that top portion of the balance sheet is where those liabilities would be represented. Intermediate liabilities. Lisa, what, what might you see there?
Lisa Yeager (11:25)
It kind of plays opposite of what Chuck said. You know, when you're looking at your, your breeder lines, the notes for those, maybe even, you know, some vehicle loans, equipment loans, anything like I said, that typically runs, you know, up to 10 years is, is what we see. Also included in that could be student debt. You know, even if you're not making payments on the loan Right now, whether it's in deferment, we still have to show that on the balance sheet and a payment for that as well, right?
Ben VanHook (11:57)
Right. Yeah, that's exactly right. And moving there on as well, long term liabilities are oftentimes tied to farm, real estate or your home mortgage. So those, those are going to be long term investments and also long term liabilities there. One misconception that I see a lot, and I also want you all to bring some value in here too, if, if you all have something that you see. But a lot of times when I request a applicant to complete the balance sheet, they might only put a item down if they own it free and clear. They oftentimes fail to show the asset value of something that they still owe money on. And that leaves some equity on the table. So just because you have a vehicle, it might be worth $30,000 and you owe $20,000 on it, you still can show it as both an asset and a liability because you've got $10,000 worth of equity in that vehicle. And that's something that I see a lot that folks will forget to represent and something that, you know, might be good to include as you annually or semi annually update your financials.
Lisa Yeager (13:22)
One of the things that I see that typically gets left off is if you're a cosigner on a loan, you know, even though the person that you co sign for may be making the payment, we still have to show that on the balance sheet as a payment because, you know, if they stop making that payment, you know, you're responsible for it. So that's something too that is typically, you know, left off or lease if they're leasing a vehicle that a lot of times will get left off.
Ben VanHook (13:49)
Right, right. Yeah, that's a good point. Another piece of the financial process as you apply for a loan is the five Cs of credit. We'll work through the five Cs and what they are. First one here on the list is character. What is character and how might it.
Chuck Canter (14:12)
Yeah, so character plays a big part in this because you want to make a loan to a person that has solid morals and good integrity. Basically, you know, if, if you see something out there that doesn't look right that that person's doing, then most of the time it's not going to be a good loan for you to make. You know, all that falls in that just do the right thing is the bottom line.
Ben VanHook (14:44)
Capital is also part of the five Cs of credit and that really is tied back to the balance sheet. And all of the details that we've already cover earlier. Capacity being the next one. Capacity is basically the repayment of the loan and how that loan is structured as income, whether that income might be annually or monthly, but it's basically the earnings that you have on an annual basis in comparison to the liabilities. Everything from term debt to family living expense and any other liabilities that you've got in that year. The next being collateral. How does collateral play into the five C's of credit?
Chuck Canter (15:34)
Yeah, so collateral is another important part. Of course, you want to see that we have more collateral than we do loan amount. That helps to ensure that we are secured basically for real estate. We typically on a conventional real estate loan, we'll work off of an 80% loan to appraise value. With some FSA guarantee, we can go as little as 5 to 10% down. Working off of a 90 to 95% loan to AV, you know, with equipment, breeding cattle, that type of stuff, we, we may want to see 50 to 75% loan to appraise value, depending on what the equipment or cattle consist of and the size of the loan and all that. There's a lot that plays into that. But yeah, collateral is a very important piece and we want to make sure that we are well secured with the association.
Ben VanHook (16:38)
Yeah. And lastly here on the five Cs of credit is conditions of approval. And there could be various conditions for approval depending on the loan product. This is more specific to the operation. So we want to structure the condition of approval whether this loan is monthly pay to correspond with off farm W2 income or annual pay to correspond with maybe the sale of cattle or the sale of tobacco or grain. Other conditions could be maybe you plan to utilize a 1031 exchange or a reverse 1031 exchange. And we can approve a loan now with the intent that down the road you sell additional property to finalize and execute that transaction. So there are any number of conditions that could be placed on a loan for approval, but it just gives us as the lender and you as the borrower, more flexibility to qualify.
Cassie Johnson (17:47)
So I have a question from a marketing person who has nothing to do with this. Why are the five Cs so important to you guys when you're looking at it as far as the borrowers? You know, if I'm a borrower coming in, why is that important?
Chuck Canter (18:02)
Because it's a total package. It's the total analysis of what we base our decisions on to make the loan.
Cassie Johnson (18:11)
So if I'm, you know, like a younger, you Know, beginning type of farmer that wants to get started. And maybe my balance sheet doesn't look the part of somebody who's had the experience for 10 plus years. You consider those five C's and that's, that's part of how you guys are able to help some of those younger beginnings farmers.
Chuck Canter (18:31)
Right.
Ben VanHook (18:31)
And we aren't looking for you to be a slam dunk in every factor or every sea of credit. You know, a young beginning borrower might not have the collateral or the, the assets, but if their character is strong and maybe their recent earnings, their capacity has shown good earnings, we can move forward with alternative strengths.
Chuck Canter (18:56)
Yeah. Because we have tools such as FSA guarantee loans and utilizing KT.
Ben VanHook (19:05)
Kafc.
Chuck Canter (19:05)
Kafc. I say I'm thinking of thoroughbred farm manager. Had that on my brain, but yeah, Kafc. Yeah. Utilizing that product as well to help with that. Yeah.
Cassie Johnson (19:16)
So what are maybe some other things that you guys will look at besides the balance sheet and the 5C's
Chuck Canter (19:23)
Management experience and reputation. Absolutely. Yeah. You know, you want to see good management practices out there in the operation. Of course, you know, you go out to make a farm visit, that'll tell you everything, a lot that you will need to know. And as you get more experience and tenured as a loan officer, you can tell pretty much within 15 minutes to half an hour of what kind of operation is going on out there. You know, you walk up on a farm and you see a lot of equipment sitting around that's maybe not maintained as well and it's sitting outside and that's not good management practices. You go on a farm, you see things neat and orderly and kept up. Well, that tells a lot right there.
Ben VanHook (20:13)
Yeah. And another thing is a plan. You know, we like to see that an individual comes into the office or has a phone call with you and they've got a plan in place with what's coming down the pipeline for them in the next couple of months, what they might want to do next year. So just having a structure and having that in writing or in a business plan with, with maybe future risks or future challenges that they might be facing and how they're gonna work around those is also a good strength.
Lisa Yeager (20:49)
Another good thing that we look for is record keeping skills. You know, do you have QuickBooks that you keep account of all of your transactions in a log that keeps when your calves or your foes are born, and even if you don't, aren't the one keeping the books, that you've got a good bookkeeper that's keeping that for you so that you, you know, where you are. A lot of times we can remember this in our head as farmers. I can remember in their head. But having it on paper is, is something we like to see as well.
Chuck Canter (21:22)
Absolutely.
Cassie Johnson (21:23)
How far back do you guys look as far as credit history goes?
Chuck Canter (21:28)
Well, typically three years.
Ben VanHook (21:30)
Yeah. When, when you first apply for a loan. Depending on size, it will vary, but typically three years with a new customer. Of course, we will pull a credit score as part of that application and that will show any creditors that report will show long term history. You know, a delinquency or a bankruptcy is going to stick on that credit file for a while. And so we will utilize that information too, if, if that were to show up.
Cassie Johnson (22:05)
So Chuck, you mentioned the, you know, going on the farm and how well they manage, you know, the place and everything. What about like the conservation programs that, you know, do you look into that and, you know, advise on that?
Chuck Canter (22:18)
Yeah, it, you know, most, most of the people that you deal with are doing most of that pretty good. But yeah, that, that comes into play. Used to a lot when tobacco was being produced because you didn't want to see fields that were being plowed, that were on steep ground or erosion or anything like that. But, you know, now that tobacco is not as big a part in operation, you know, that doesn't come into play as much with some of these cattle operations with the manure and the pits and the cleanup with that. Sure. You want to see, you want to see something that's environmentally sound? Absolutely. Because we have to fill out environmental questionnaires with the loan to make sure that there are no big environmental concerns.
Ben VanHook (23:10)
And one thing I've noticed of recent is there's become more and more incentive. Most farmers in general care about the land and want to preserve the land because that's the future not only for them, but their, their children and for generations to come. So there's some natural incentive to take care of the land in itself there. But also some other entities like NRCS, FSA are getting involved and carbon credits. I know a lot of that's a hot topic here, but there's other ways and monetary benefits to, to taking care of the land.
Chuck Canter (23:52)
Utilize the programs that are being offered.
Ben VanHook (23:55)
Right.
Chuck Canter (23:55)
Yeah, that's it.
Ben VanHook (23:56)
Right.
Cassie Johnson (23:58)
So you mentioned a little bit about, you know, the next generation and stuff like that. Do you guys take into consideration if, you know, your customers have a succession plan or anything like that, or is that kind of something that you just. It's up to them to decide yeah.
Chuck Canter (24:14)
You know, that's a good question, because typically we don't focus on that as much. You know, younger people, I mean, you know, that's not going to be as big of a benefit to do right now, but with some of these older producers. Absolutely. Yeah. That's something that needs to be looked at down the road. What's going to happen here?
Ben VanHook (24:39)
It's a hard conversation to have for a lot of folks, and I know we've had meetings about it, that a lot of people kick the can down the road and then they wish they hadn't. You never know what life might throw at you. So it's always good to be prepared. Even if you are younger, you know, there could be something happening. So having some sort of plan even early on is good. But I think it is becoming more and more common to have something structured as far as the succession plan, because we're trying to preserve family farms. And if we don't, you know, we've seen so much urbanization and growth and development that if you don't have a plan in place, you're leaving yourself at risk for it to not be a farm moving forward.
Chuck Canter (25:28)
Right.
Lisa Yeager (25:28)
So I think one of the things that's hard to. Being probably one of the older ones in the group here today is having that conversation. If you farm with your parent and having that conversation about what your plans are, what your father's plans are for the farm or your mother's plans for the farm. And sometimes older generations don't like to talk about that. It's hard for them to talk about and having that discussion with them and how to approach them and.
Chuck Canter (25:55)
And it's hard for the older generation sometime to give up that control.
Lisa Yeager (25:59)
Yes.
Chuck Canter (25:59)
And that's what's tough.
Lisa Yeager (26:01)
Yeah.
Cassie Johnson (26:01)
I tell you what, if you want to listen to somebody give advice on how to talk about that stuff from a, you know, from a young person and an older person standpoint. Renee Carico with Kentucky Farm Bureau.
Chuck Canter (26:14)
Absolutely. I was gonna mention Farm Bureau.
Cassie Johnson (26:17)
She does a great job. We've had her at Annie's Project. We had her at a Lunch and Learn in Lebanon. And she does a really great job of just keeping it simple and keeping the emotions out, but sticking to the facts.
Chuck Canter (26:29)
Aleeta Botts, she's doing some stuff with Farm Bureau too, as well. Farm Bureau is a really good, good advocate for that right now. That is a big push for them.
Cassie Johnson (26:38)
Yeah, well, yeah, because we're losing.
Chuck Canter (26:40)
Right.
Cassie Johnson (26:40)
We're losing farmland.
Ben VanHook (26:42)
Right, Right.
Cassie Johnson (26:43)
Quite probably a little bit more than people would actually want to admit.
Chuck Canter (26:47)
Absolutely.
Cassie Johnson (26:47)
And I believe Farm Bureau's got a website that you can look that information up on per county to see. It gets a little bit scary when you start thinking about it.
Ben VanHook (26:57)
Well, with that, I think that was a great conversation. Chuck, Lisa, Cassie, Shelby, we appreciate your time and if you have not listened to previous episodes, please look us up on Beyond Agriculture. We certainly appreciate your participation. Please like, comment and subscribe to the podcast. And until next time, thank you.
(27:21)
This episode of Beyond Agriculture is brought to you by Central Kentucky Ag Credit. Thanks for listening to the podcast. Be sure to visit agcreditonline.com/BeyondAgriculture, access the show notes and discover our fantastic bonus content. Also, don't forget to hit the subscribe button so you can join us next time for Beyond Agriculture.