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