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Brazos Community Bank. By Kathrine Beakley: Senior VP for Portfolio Management. Brazos Community Bank. Located in Navasota, TX Falls under the Dallas Federal Reserve Established in 1901 as an Agricultural Lender. Brazos Community Bank Today. Personal Banking Business Banking - PowerPoint PPT Presentation
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Brazos Community Bank
By Kathrine Beakley:
•Senior VP for Portfolio Management
Brazos Community Bank• Located in Navasota, TX
• Falls under the Dallas Federal Reserve
• Established in 1901 as an Agricultural Lender
Brazos Community Bank Today• Personal Banking
• Business Banking
• Agricultural Banking
• e-Banking
Where Our Money Comes From
Our Loan Portfolio
Loan Decision Factors
By Katie Parrish:
VP for Credit
Loan Decision Factors
• Financial Indicators– Liquidity– Solvency– Profitability– Debt Repayment Capacity
• Credit Scoring
Financial Indicator:
SOLVENCY• Debt Ratio• Leverage RatioPROFITABILITY• ROA• ROEDEBT REPAYMENT
CAPACITY• Term Debt & Capital
Lease Coverage Ratio• Debt Burden Ratio
The ability to generate cash quickly to meet claims on the business without disrupting the ongoing operations of the business.• Current Ratio
CA/CLAbility to cover CL with
CA without disrupting ongoing operations & still have cash left over.
Should exceed 1.0• Working Capital
CA-CLLiquidity in dollars
instead of ratio.Should be positive.
LIQUIDITY• Current Ratio
• Working Capital
The ability of the firm to convert all its assets, retire all of its liabilities, and have cash left over.• Debt Ratio
Debt/AssetsAbility to liquidate
firm, cover all liabilities out of all assets, and have cash left over.
Should not exceed 0.5• Leverage Ratio
Debt/EquityOften used in loan
decisionsShould not exceed 1.0
Financial Indicator:LIQUIDITY• Current Ratio• Working Capital
PROFITABILITY• ROA• ROEDEBT REPAYMENT CAPACITY• Term Debt & Capital
Lease Coverage Ratio• Debt Burden Ratio
SOLVENCY• Debt Ratio• Leverage
Ratio
Financial Indicator:LIQUIDITY• Current Ratio• Working CapitalSOLVENCY• Debt Ratio• Leverage Ratio
DEBT REPAYMENT CAPACITY• Term Debt & Capital
Lease Coverage Ratio• Debt Burden Ratio
The ability of a firm to generate a level of revenue that exceeds its total costs of production• Return on Assets
NI/TAHow efficient
management is at using assets to generate earnings
Should be positive & high• Return on Equity
NI/EHow much profit company
makes with money from shareholders
Should be positive & high
PROFITABILITY• ROA• ROE
Financial Indicator:LIQUIDITY• Current Ratio• Working CapitalSOLVENCY• Debt Ratio• Leverage RatioPROFITABILITY• ROA• ROE
The ability of the firm to meet its scheduled term debt and capital lease payments and have cash left over.• Term Debt & Capital Lease
Coverage Ratio (EBIT-Taxes)/Term Debt
& Capital Lease Payments
Ability to cover term debt & capital lease payments due
Non-farm income often included
Should exceed 1.0• Debt Burden Ratio
Debt/NINumber of years to
retire debt based on net cash income
Should be low & falling
DEBT REPAYMENT CAPACITY
• Term Debt & Capital Lease
Coverage Ratio• Debt Burden Ratio
Financial Indicator Minimum General Desired Trend
LIQUIDITY•Current Ratio•Working Capital
•1.0•Positive
Increasing
SOLVENCY•Debt Ratio•Leverage Ratio
•<0.5•<1.0
Decreasing
PROFITABILITY•ROA•ROE
•Positive, high•Positive, high
Increasing
DEBT REPAYMENT CAPACITY•Term Debt & Capital Lease Coverage Ratio•Debt Burden Ratio
•>1.0•Low, Falling
Increasing
Credit Scoring•A number that shows us the risk we would be
taking by lending to potential borrower
•Shows histprical ability to repay loan
•Fast, objective way to justify loans
•Use FICO (Fair Isaac Company) scores
FICO Sources:Experian
TransUnionEquifax
Components of Credit Score
National Scores
Character
The 6 C’s of Creditworthines
s
Intention to repay, responsibility, truthfulness,
purpose, intention.
The 6 C’s of Creditworthines
s
Character
CapacityLegal authority to sign contract.
The 6 C’s of Creditworthiness
Character
Capacity
CashAbility to generate cash to
repay loan.
The 6 C’s of Creditworthiness
Character
Capacity
Cash
CollateralAdequate net worth/assets to
provide support for loan.
The 6 C’s of Creditworthiness
Character
Capacity
Cash
Collateral
ConditionsEconomic conditions in
customer’s industry.
The 6 C’s of Creditworthines
s
Character
Capacity
Cash
Collateral
Conditions
ControlWhether changes in the law would adversely affect the
customer.
Weight of Importance•Since this is a large loan, we will consider credit score but place more emphasis on the financial indicators.
•Assuming satisfactory (above 725) credit score for Brad Roberson.
Market Analysis
By Ryan Allen:
VP for Operations & Marketing
Brazos County• 84,000 head of cattle
• 52,000 beef cows• Beef Cattle production is the top
income producing agriculture enterprise in county
Cattle Market
Cattle Market
• Main inputs are feed for cattle
• Pasture grazing, hay, and feed
derived from grains are most
common ways of feeding cattle
• Cattlemen are heavily dependent on
inputs
Feed Prices
• Corn is the most common grain feed used for cattle
• Range cubes used for cattle and creep pellets for calves
• Both of these are made partly of feed grains
• U.S. biofuel production has driven cost of corn up
• Corn prices expected to continue to rise unless the government intervenes
Corn Prices
Grazing and Hay• Pasture grazing and hay usage heavily dependent
on local rain fall
• Brazos county averages 39 inches of rainfall per year
• Limited pasture grazing in winter, must rely more on hay and grain feeds
Drought• A drought causes major problems for cattle
producers
• No grass for cattle in pasture grazing
• Due to a drought, hay becomes scarce and price goes up
• Hay may even have to be trucked in from out of state
Other Inputs
• Vaccinations and medication for cattle
• Fertilizer costs
• Fuel costs
• Labor
Overview of Risk
• Cattle prices dropping due to volatility of market
• Input costs increasing
• Animal health
• Weather related problems
Competition
Overview of Market Analysis
• Market is volatile, buy in winter
• Input costs are most likely to increase
• Having to compete with pork and chicken for smaller market share
• Buy Low Sell High
Costs and Returns
• Estimate bred heifer costs to be between $180,000 and $228,000 for
200 units
• Estimate bull costs to be between $6800 and $7400 for 5 2000 lbs bulls
• Estimate returns per calf cycle if calves raised to 500 lbs and no deaths to be
between $85,000 to $111,100
Evaluating Sleepy B Ranch
By Amanda Fort:
Member of the Board of Directors
Borrower Information:Sleepy B Ranch
President/CEO/Owner:Brad Roberson
Sleepy B Ranch
Background Information:• Location: Brazos County
• Operation: Cow-Calf• Total Acreage Currently Owned: 1,000
acres• Has been in operation for 5 years
• Cattle contracted from stocker operation in Amarillo, Texas
About the Requested Loan
• Type: Small Business Loan•Amount Requested: $135, 520
•Use: Wants to buy 5 bulls & 200 bred heifers
Financial & Shock Analysis
By Bradley Schmidt & Courtney Buerger:
Co-VPs for Research & Credit Analysis
Baseline-Liquidity
0.001.002.003.004.005.006.007.00
2008 2009 2010 2011 2012
Current Ratio
Baseline
Baseline-Profitability
0.00%
10.00%
20.00%
30.00%
40.00%
2008 2009 2010 2011 2012
Return on Assets
Baseline
Baseline-Debt Repayment Capacity
0.00
1.00
2.00
3.00
4.00
5.00
2008 2009 2010 2011 2012
Term Debt and Capital Lease Ratio
Baseline
Baseline-Efficiency
0.00%10.00%20.00%30.00%40.00%50.00%
2008 2009 2010 2011 2012
Variable Expense Ratio
Baseline
---------Baseline Scenario----------2008 2009 2010 2011 2012
2.57% 2.57% 2.57% 2.57% 2.57%5.00% 5.00% 5.00% 5.00% 5.00%1.50% 1.50% 1.50% 1.50% 1.50%9.07% 9.07% 9.07% 9.07% 9.07%
0.91684 0.84060 0.77070 0.70661 0.64785
$48,070 $72,042 $41,664 $83,890 $63,086$4,967 $4,967 $4,967 $4,967 $4,967
$53,036 $77,008 $46,631 $88,856 $68,053
$130,800
$48,626 $64,733 $35,938 $62,787 $128,827
$169,400
$171,511
Required rate of return:1. Risk free rate of return2. Business risk premium3. Financial risk premium4. Required rate of return
5. Present value interest factor:
Expected net cash flow:1. Net income2. Depreciation3. Total net cash flow Terminal value
Present value of net cash flows
Total capital purchased
Net present value
Baseline – NPV
Shock 1-Expected
Lowered 1st year price by $9 per cwt
Increased sales prices by 3% per year
Lowered expected calf crop from 90% to 85%
Increased direct materials expense by 3% per year
Shock 1-Financial RatiosCurrent ratio
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2008 2009 2010 2011 2012
After Shock Before shock
Rate of Return on Assets
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2008 2009 2010 2011 2012
After Shock Before Shock
Debt Repayment Capacity
0.0
1.0
2.0
3.0
4.0
5.0
2008 2009 2010 2011 2012
After Shock Before Shock
Variable Expense Ratio
0.00%5.00%
10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%
2008 2009 2010 2011 2012
After Shock Before Shock
---------Alternative Scenario----------2008 2009 2010 2011 2012
Required rate of return:1. Risk free rate of return 2.57% 2.57% 2.57% 2.57% 2.57%2. Business risk premium 5.00% 5.00% 5.00% 5.00% 5.00%3. Financial risk premium 1.50% 1.50% 1.50% 1.50% 1.50%4. Required rate of return 9.07% 9.07% 9.07% 9.07% 9.07%
5. Present value interest factor: 0.91684 0.84060 0.77070 0.70661 0.64785
Expected net cash flow:1. Net income $36,470 $39,443 $42,459 $45,522 $48,6312. Depreciation $4,967 $4,967 $4,967 $4,967 $4,9673. Total net cash flow $41,437 $44,410 $47,426 $50,489 $53,598 Terminal value $130,800
Present value of net cash flows $37,991 $37,331 $36,551 $35,676 $119,462
Total capital purchased $169,400
Net present value $97,611
Shock 1-NPV
Shock 2-Pessimistic
Lowered expected calf crop to 80%.
Used shock 1’s first year sales price and then decreased sales price by 5% per year.
Increase direct materials expense by 10% per year.
Lowered terminal value by approx. $20,000
Shock 2 – Financial RatiosCurrent ratio
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2008 2009 2010 2011 2012
After Shock Before shock
Rate of Return on Assets
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2008 2009 2010 2011 2012
After Shock Before Shock
Debt Repayment Capacity
0.0
1.0
2.0
3.0
4.0
5.0
2008 2009 2010 2011 2012
After Shock Before Shock
Variable Expense Ratio
0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%
2008 2009 2010 2011 2012
After Shock Before Shock
Shock 2 – NPV ---------Alternative Scenario----------
2008 2009 2010 2011 2012Required rate of return:1. Risk free rate of return 2.57% 2.57% 2.57% 2.57% 2.57%2. Business risk premium 5.00% 5.00% 5.00% 5.00% 5.00%3. Financial risk premium 1.50% 1.50% 1.50% 1.50% 1.50%4. Required rate of return 9.07% 9.07% 9.07% 9.07% 9.07%
5. Present value interest factor: 0.91684 0.84060 0.77070 0.70661 0.64785
Expected net cash flow:1. Net income $33,643 $27,479 $21,161 $14,645 $7,8822. Depreciation $4,967 $4,967 $4,967 $4,967 $4,9673. Total net cash flow $38,610 $32,446 $26,128 $19,612 $12,848 Terminal value $111,100
Present value of net cash flows $35,399 $27,274 $20,136 $13,858 $80,300
Total capital purchased $169,400
Net present value $7,567
Shock 3 – Very Pessimistic
Lowered expected calf crop to 80%.
Used shock 1’s first year sales price and then decreased sales price by 10% per year.
Increase direct materials expense by 10% per year.
Lowered terminal value by approx. $20,000
Shock 3 – Financial RatiosCurrent ratio
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2008 2009 2010 2011 2012
After Shock Before shock
Rate of Return on Assets
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2008 2009 2010 2011 2012
After Shock Before Shock
Debt Repayment Capacity
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2008 2009 2010 2011 2012
After Shock Before Shock
Variable Expense Ratio
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
2008 2009 2010 2011 2012
After Shock Before Shock
Shock 3 - NPV ---------Alternative Scenario----------
2008 2009 2010 2011 2012Required rate of return:1. Risk free rate of return 2.57% 2.57% 2.57% 2.57% 2.57%2. Business risk premium 5.00% 5.00% 5.00% 5.00% 5.00%3. Financial risk premium 1.50% 1.50% 1.50% 1.50% 1.50%4. Required rate of return 9.07% 9.07% 9.07% 9.07% 9.07%
5. Present value interest factor: 0.91684 0.84060 0.77070 0.70661 0.64785
Expected net cash flow:1. Net income $33,643 $23,383 $13,585 $4,131 -$6,7892. Depreciation $4,967 $4,967 $4,967 $4,967 $4,9673. Total net cash flow $38,610 $28,350 $18,552 $9,097 -$1,822 Terminal value $111,100
Present value of net cash flows $35,399 $23,831 $14,298 $6,428 $70,796
Total capital purchased $169,400
Net present value -$18,648
Conclusion & Decision
By Courtney Buerger:
Co-VP for Research & Credit Analysis
Financial Indicator Our Credit Standard
Ratios
Baseline AverageRatios
Expected Averaged
RatiosLIQUIDITY•Current Ratio•Working Capital
•1.25•Positive
•3.88•$119,066
•2.82•$63,326
SOLVENCY•Debt Ratio•Leverage Ratio
•<0.5•<1.0
•.40•.84
•.45•1.04 but decreasing
PROFITABILITY•ROA•ROE
•Positive, high•Positive, high
•23.24%•37.59%
•20.88%•34.72%
DEBT REPAYMENT CAPACITY•Term Debt & Capital Lease Coverage Ratio•Debt Burden Ratio
•>1.25•Low, Falling
•3.57•2.03
•2.6•2.67
YearBeginning Principal
Principal Payment
Interest Payment
Total Payment
Ending Principal
1 $135,520 $22,198 $13,552 $35,750 $113,322
2 $113,322 $24,418 $11,332 $35,750 $88,905
3 $88,905 $26,859 $8,890 $35,750 $62,045
4 $62,045 $29,545 $6,205 $35,750 $32,500
5 $32,500 $32,500 $3,250 $35,750 $0nominal totals $135,520 $43,229 $178,749
Amortization Table
Conclusion
•Borrower’s original baseline numbers are on the optimistic side and fluctuate greatly, but the adjusted numbers are
strong enough to justify the loan
•Cattle markets are volatile, cyclical, and have high input risks
•Outside income of $60,000 will compensate for risks
•We have decided to grant the $135,520 loan for 5 years at a 10%
fixed interest rate
•Land will be used as collateral
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