A LOOK AT THE LENDING
ENVIRONMENT TODAY VERSUS
THE 80’S AND WHY
CHARACTER IS THE
FOUNDATION OF THE 5 C’S OF
CREDIT
S teve n A . Wit g e s
Re g iona l Vice -
P r e side nt
Far m C r e dit S e r v ice s of I llinois

 Bonnie &
 Fish &
 Burger &
 Cheese &
 Peanut Butter &
 Farmer
WORD ASSOCIATION
 Clyde
 Chips
 Fries
 Crackers
 Jelly
 CEO

OBJECTIVES
 Challenge our Thinking
 Who is FCS of Illinois
 Mid-80’s overview
 Lending environment today versus 80’s.
 The character factor of the 5 C’s of credit
 Are we in a farm real estate bubble?
 Closing thoughts

INTRODUCTION
 FCS of Illinois - Southern 60 Counties of
Illinois
 15 Branch offices
 Headquarter office – Mahomet
 199 employees
 $3.3 Billion assets
 49M crop insurance premium; 1.2 million acres

Farm
Credit
Services of Illinois

THE MID 80’S
 Typical Day
 Calling and/or meeting with delinquent accounts
 Reconstructing financial statements
 Occasional operating loan renewal
 Busy work as required by regulator
 Credit quality – well below 25% acceptable paper
 Frequent acquired property land auctions

Land Values
Interest Rates
Collateral Advance Rates
Politics
LENDING ENVIRONMENT
80’S VS TODAY
80s Today
Aggressive
Russian Embargo
More disciplined
Ethanol, Farm Bill

LENDING ENVIRONMENT
80’S VS TODAY
Loan Documentation
Farm Income
Risk Management
Risk profiles of loan
Portfolio
80s Today
Weak financial analysis
Character: good guys, good family
Weak commodity prices
Weak earnings
5 C’s of Credit: Capital,
Capacity, Conditions,
Collateral, Character
Strong commodity prices
Strong earnings
Basic production guarantee crop insurance
Revenue products
Fixed interest rates
Limited knowledge of
Portfolio quality
Annual financials
More sophisticated measurements

THE 5 C’S OF CREDIT
 Character
 Capital
 Capacity
 Collateral
 Conditions

CHARACTER (CEO) – KEY QUALITIES
 Financial Management
 Risk Management
 Marketing Skills
 Production
 Relationship Management

FINANCIAL MANAGEMENT
 Annual financial statements coinciding with tax year-end.
 Accrual based income statements
 Understanding of how decisions impact balance sheet.
 Historical information = tremendous value
 Financial GPS

RISK MANAGEMENT
 Crop insurance
 Revenue products/GRIP
 Cost of doing business
 Fixed rate interest products
 Be aware of greed factor?
 Liquidity management
 Managing volatility
 Self reliance

MARKETING
 Break Evens; written plans
 Eliminating emotions
 The search for right advice
 Use of trusted market advisors
 Remove emotion?
 Consistent approach
 Discipline, focus
 Singles, & doubles vs home runs

PRODUCTION
 Adaptation to technology
 Cost effectiveness
 Efficiency of operations
 Cost to produce a $1 of revenue

RELATIONSHIP MANAGEMENT
 Communication
 Lender
 Suppliers
 Landlords
 Life Skills
 Employee Management
 Coaching up or down?
 Emotional Intelligence Quotient (EQ)
 Self assessment
 Empathy
 Little things
 Feedback

Are we in a Farm
Land Real
Estate
Bubble?

ASSET BUBBLES
 Asset Bubble: When the value of an asset isn’t supported by economic fundamentals. Accelerated by the availability of capital to ‘inflate’ the bubble.
 Bubble Burst: When it’s recognized that factors don’t support asset value. Debt capital cannot be repaid ‘according to terms’, and equity capital, wealth, is erased.

ARE WE THERE?
 Real estate values are high, but is it a bubble?
 Current debt is supported by consistent & strong earnings.
Debt to income multiple is at historic lows.
 Interest rates are low. Increases will decrease profits and will most likely lead to contracting values.
 If not, what are the influencing factors around a potential bubble?
 How well will we manage a potential return to more moderate profit levels?
 Political impact?
 Other investment opportunities?

CLOSING THOUGHTS
 Remain optimistic about agriculture
 Land values have climbed to levels many thought was unimaginable
 Today there are differences from the 80’s:
 Much improved revenue protection products
 Fixed rate interest options
 A more business minded clientele
 We need to be prepared for some degree of adversity; working capital is king!!
 What we do during the good times can prepare us for tougher times
 Some unbeknownst to us today will likely surface

CONTACT INFORMATION
 FCS of Illinois Association Website: www.fcsillinois.com
 Email: steve.witges@fcsillinois.com