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 te v e n A . W i t g e s
Re g i o n a l V i c e President
Fa r m C r e d i t S e r v i c e s
of Illinois
WORD ASSOCIATION
 Bonnie &
 Fish &
 Burger &
 Cheese &
 Peanut Butter &
 Clyde
 Chips
 Fries
 Crackers
 Jelly
Farmer
 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
LENDING ENVIRONMENT
80’S VS TODAY
80s
Today
Land Values
Interest Rates
Collateral Advance Rates
Politics
Aggressive
Russian Embargo
More disciplined
Ethanol, Farm Bill
LENDING ENVIRONMENT
80’S VS TODAY
80s
Today
Loan Documentation
Weak financial analysis
5 C’s of Credit: Capital,
Character: good guys, good Capacity, Conditions,
family
Collateral, Character
Farm Income
Weak commodity prices
Weak earnings
Risk Management
Basic production guarantee Revenue products
crop insurance
Fixed interest rates
Risk profiles of loan
Portfolio
Limited knowledge of
Portfolio quality
Strong commodity prices
Strong earnings
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 dif ferences 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: [email protected]