President’s Message
This is close to the mid point in my tenure as the President of the Chesapeake Chapter. There are a couple of critical strategic initiatives that the Chapter has undertaken this year that require your strong support. First the Chapter continues to build local programs to bring value to the Chesapeake Chapter membership. In addition to our Regulator Panel and Annual Senior Executive Forum, we started an annual Wine Tasting Event. While this event contains an educational component, it is primarily a social occasion. This is the only social event that the Chesapeake Chapter sponsors for the entire year. Since I am a wine collector, my perspective is biased, but the wines at the first tasting were excellent, reasonably priced and paired with an appetizer to emphasize each wine’s unique flavors. Our goal is to make this an annual event. Secondly, I am very pleased to announce that in the long tradition of innovative and timely programming at CCRMA, we organized a new program, “A Real Estate Forum” to be held in March, 2007. It is a very comprehensive update on real estate in for our region. I cannot tell you how excited I am about this upcoming program. The Board and particularly the Programming Committee has done a tremendous job in organizing this event. Fliers are currently being circulated outlining the specifics. Please sign up early, as we are expecting a full house!Finally, we are focusing the Board’s efforts this year on strengthening our relationships with our member institutions and the senior associates. Our goal over the next 3 months is to have a Board member to sit down with each senior associate at each member institution. The meeting’s goals are to gather information on the following topics: What are the training needs of your institution? RMA National has substantially expanded their training programs to include operational and compliance risk training; who at your institution is best positioned to inform associates and nonmembers about upcoming training opportunities in these areas? We would suggest designating this person as the institution’s Ambassador with RMA. Finally, are all the individuals in your respective institutions that could benefit from our training opportunities both aware of RMA and Premier Associate Members? When you get a call from a Board member, please make every effort to schedule a time to meet with them. This calling program is extremely important to the continued growth and expansion of both Chesapeake Chapter of RMA and RMA National. I look forward to seeing many of you in the New Year. Charlie Ruch
RMA Chesapeake Chapter President
Back to top
Q&A with Glenn Wilson
 Glenn Wilson started in banking in 1977 as a college intern at Maryland National Bank where he remained after graduation eventually becoming a team leader in the client area and assistant senior credit officer. After his long tenure at Maryland National and its successor, NationsBank, Glenn joined Citizens National Bank in 1996 as the senior lending and credit officer. He was promoted to president and CEO in 2004. Today, Citizen National is a $1.4 billion community bank and is an affiliate of Mercantile Bankshares Corporation, a $17 billion regional bank holding company.Glenn has been active in RMA on both the local and national level throughout his career. He served on the Chesapeake Chapter Board of Governors for 15 years, holding numerous leadership positions including Treasurer and Chapter President, and remains active as an ex-officio board member today. Glenn is also generous enough to frequently serve as the moderator or as a panelist at Chesapeake Chapter events, including the Senior Executive Panel held on November 8, 2006. On the National level, Glenn has served as the chair of RMA's Community Bank Council, a member of the board of directors, and RMA vice-chair. He has recently assumed the prestigious role of RMA’s 2006-2007 Chair. The Chesapeake Chapter is very proud to have one of their own take on such a prominent role on the national level. Glenn has been featured as the lead article twice in the RMA Journal (in April 2005 and October 2006) where he shared his insights banking, risk management, and RMA. The Chesapeake Chapter wanted to recognize Glenn’s accomplishments with RMA on the national level, thank him for his continued support on the local level, and draw on his unique insights on issues related directly to Chesapeake Chapter.Below is a series of questions and answers with Glenn: 1. What initially spurred your interest in RMA? My initial interest in RMA was spurred through my employer, Maryland National Bank. Maryland National had a very strong credit culture and was very active in RMA. They encouraged my participation.2. During your 15 years on the local Chesapeake Chapter Board, you had the opportunity to hold multiple offices including Treasurer and President. What positions that you held in the local chapter were the most beneficial/exciting or meaningful?The most rewarding position that I held was President of the Chesapeake Chapter Board, which was both rewarding and fun. I was lucky to work with great Board members to achieve our goals. The Chapter was awarded the Platinum award during my term as president due to our efforts.3. How did being an Officer of the Chesapeake Chapter benefit your personal development and your career? (Glen- we will include the Past President quote from the October 2006 Journal - any other items that you want to elaborate on?) RMA was the first volunteer leadership role that I had. It is a much different challenge to lead volunteers than your employees. Having that experience, leading other volunteers, helped me a great deal over my career as I became more involved in other community based volunteer organizations.My active participation and leadership roles in the Chesapeake Chapter also provided me with the opportunity to meet people whom I would not have had the opportunity to meet otherwise. RMA is great for networking. My current position at Citizens National is a direct result of my RMA involvement. When the senior lender position, the number-two position at bank, became open here, RMA contacts called me and said, “Here is a role that you might want to look at.” So I can, in fact, say that RMA has greatly enriched my career. I’m in the position I am today, in no small part, because of RMA. 4. With your long involvement with RMA and the Chesapeake Chapter, you have had the opportunity to observe the chapter evolve and grow over time. How does the Chapter compare today compared to, say, 10 years ago? The biggest change that I have seen on the Board level is less involvement by senior management. Without having the active involvement and influence of these senior executives in their respective banks, this has made it significantly more difficult to attract event attendees and volunteers.Additionally, it seems as if people are just busier in their jobs than they were in the past, which negatively impacts their ability to volunteer and attend Chapter events. On a positive note, the Chapter has reached out to younger members through its Young Financial Professional affinity group. The involvement of these young members will strengthen the Chapter over time. 5. Based on your observations of their involvement on a national level, what do you think that the newest market entrant, PNC Bank, will bring to the local chapter?PNC is very involved in RMA. Currently two members of senior management serve on the National Board: Tom Whitford, Chief Risk Officer and Jack Wixsted, Chief Compliance Officer. I expect them to support RMA on the local level in the Chesapeake Chapter.The chapter network has long been a strength for RMA as a national organization. How do you view the future of local chapters and do you see any changes in their role going forward? The local chapters continue to be the “backbone” of RMA. In the U. S. RMA’s focus will be to continue to strengthen the local chapters, while internationally, the focus is to continue expansion and development of new chapters.As Chair of RMA what do you envision as current opportunities and threats facing RMA on a national and local level? Today, every industry is faced with more and more competition. RMA continues to offer members relevant and leading edge programs and services. Additionally, RMA is focused on expanding products and services involving Enterprise Risk Management.If someone was interested in learning more about volunteering for RMA on a National or local basis, what would be their first step and what advice would you give them?My advice is to first, get involved by participating in chapter events, become a volunteer on a local committee, and challenge themselves by pursing a role on a chapter board.
Back to top
Cash Based Income Tax Returns
A Credit Refresher from Shockproof! TrainingQ. Isn’t it true that cash flow from business operations is our preferred source of cash for debt service? Q. And isn’t it true that a cash based income statement clearly shows if a borrower had sufficient business cash flow to service debt? Q. Further, isn’t it true that many companies elect to file income tax returns on a cash basis if their revenues are less than $5 million? Q. In addition, isn’t it true that we can review these cash based income tax returns and quickly spot whether a borrower had sufficient business cash flow to service debt? Q. Therefore, isn’t it true that we no longer need accrual financial statements if we get cash based income tax returns instead? The answers are yes, yes, yes, maybe, and no. Partnership Income Tax Returns
Let’s begin exploring these issues by examining the income tax returns for Carter Mill Works, a small St. Louis company. Exhibit I provides the income statement information
from the tax returns as well as the distributions reported on Schedule M-2.
Keep in mind that a Subchapter S corporation, a partnership, and a limited liability company file information-only income tax returns. The owners of these business organizations are personally responsible for the federal income tax obligation on company profit, not the companies themselves. Yet the companies file income tax returns to establish the amount of company profit that owners must report as personal
income on Schedule E in their income tax returns, which flows through to Line 17 on the Form 1040. Exhibit I Form 1065 Return of Partnership Income |
| Income Statement Information | 2005 |
| 1a | Gross receipts or sales | 1a | 638,426 | | 2 | Cost of goods sold | 2 | 358,541 | | 3 | Gross profit | 3 | 279,885 | | 8 | Total income (loss) | 8 | 279,885 | | 9 | Salaries and wages | 9 | 34,555 | | 11 | Repairs and maintenance | 11 | 5,873 | | 13 | Rent | 13 | 71,277 | | 14 | Taxes and Licenses | 14 | 11,414 | | 15 | Interest | 15 | 19,606 | | 16a | Depreciation | 16a | 21,088 | | 20 | Other Deductions | 20 | 52,494 | | 21 | Total Deductions | 21 | 216,307 | | 22 | Ordinary business income (loss) | 22 | 63,578 |
Income Tax Returns and Financial Analysis
By reference to the information in Exhibit I, we can immediately determine that Carter Mills generated sufficient business cash flow in 2005 to cover all operating expenses, including interest expense. After we deduct depreciation expense but include the amount of cash distributions to the owners, the company’s business cash flow in 2005 was a positive $17,719, i.e., $63,578 + $21,088 – $66,947. Whether the $17,719 cash surplus was enough to repay any scheduled long-term debt is usually unclear, even by reference
to information at Line 19 on Schedule L. Amounts reported for mortgages, notes, and bonds payable in one year or more at Line 19 do not break-out current maturities, unless the accountant provides a separate statement that lists current maturities at the beginning of the tax year. Other than this single issue, the income tax returns provide
all we need to identify whether business cash flow was sufficient to service debt.
So why bother with accrual financial statements?A Different Look
Even though it isn’t necessary, we might quickly glance through the company’s accrual financial statements to confirm our comfort level – which reveals the following: - Accrual sales were $575,373 in 2005;
- Cost of goods sold was $400,101 in 2005;
- Instead of a profit, the company reported a $41,035 loss in 2005;
- Accounts receivable decreased from $100,487 in 2004 to $37,434 in 2005;
- Inventory decreased from $78,311 in 2004 to $62,828 in 2005; and
- Accounts payable increased from $47,347 in 2004 to $73,424 in 2005.
The loss for the year should get our immediate attention. Note, too, that the loss is the reported loss on the partnership’s income statement, which does not include the impact
of $66,947 in distributions to the owners. Those distributions are cash payments to the owners to 1) satisfy personal income tax obligations on company profit and 2) provide compensation. Both are truly company operating expenses.In effect, Carter Mill Works’ actual loss in 2005 was an alarming $107,982 when we add a further $66,947 of expenses to the reported loss of $41,035. Reconciling Cash and Accrual Results
So where did the cash come from that provided those comforting results on the company’s income tax returns? The answers lie with the balance sheet and very effective balance sheet management by Carter Mill Works. Let’s refer to Exhibit II to reconcile the accrual and cash income amounts for 2005. There are several things to note: - The company aggressively collected its receivables in 2005, driving down the receivables balance by $63,053. That $66,053 reduction was a cash inflow to the company that precisely explains the difference between accrual sales of $575,373 and gross cash receipts of $638,426.
- The company drew down its inventory by $15,483, a cash inflow, and ran up its accounts payable by $26,077, an additional cash inflow. The sum of those two cash inflows was $41,560, which precisely explains the difference between accrual cost of goods sold of $400,101 and cash cost of goods sold of $358,541. Gross accrual profit was $575,373 – $400,101 = $175,272. Gross cash profit was $279,885. The $104,613 difference between the accrual and cash amounts is the sum of the three cash inflows from effective balance sheet management – $63,053 plus $15,483 plus $26,077.
Observations and Conclusions
Carter Mill Works is really a company in trouble, in spite of its strong 2005 cash flow performance.- It lost $107,982 in 2005;
- It ran its receivables down to 24 days in 2005, so it has little remaining wiggle room to help resolve a 2006 crisis, if one emerges; and
- It ran its payables up to 67 days in 2005, which suggests it may come under supplier pressure in 2006 to pay more rapidly and drain away cash.
The cash based income tax returns may be helpful, but they can also be seriously misleading. Bottom line? Get the accrual financial statements. They’re critical to financial analysis.Exhibit II Carter Mill Works Business Cash Flow |
| 2005 | | Sales | 575,373 | | • less 2005 uncollected sales | – 37,434 | | • plus 2004 sales collected in 2005 | 100,487 | | 2005 Gross receipts per Exhibit I | 638,426 | | 2005 Cost of goods sold | – 400,101 | | • plus 2004 inventory used up in 2005 | 78,311 | | • less 2005 remaining inventory | – 62,828 | | • less 2004 accounts payable paid in 2005 | – 47,347 | | • plus 2005 accounts payable outstanding | 73,424 | | 2005 Cost of goods sold per Exhibit I | – 358,541 | | 2005 Gross profit per Exhibit I | 279,885 | | • less 2005 Total deductions per Exhibit I | – 216,307 | | • plus 2005 Depreciation per Exhibit I | 21,088 | | • less 2005 Distributions per Exhibit I | – 66,947 | | Cash flow from business operations | 17,719 |
Reprinted with permission from Shockproof! Training, www.shockproof.biz
Back to top
|
