Presentation on theme: "Steven A. Witges Regional Vice- President Farm Credit Services of Illinois A LOOK AT THE LENDING ENVIRONMENT TODAY VERSUS THE 80’S AND WHY CHARACTER IS."— Presentation transcript:
Steven A. Witges Regional Vice- President Farm Credit Services of Illinois A LOOK AT THE LENDING ENVIRONMENT TODAY VERSUS THE 80’S AND WHY CHARACTER IS THE FOUNDATION OF THE 5 C’S OF CREDIT
Bonnie & Fish & Burger & Cheese & Peanut Butter & Farmer Clyde Chips Fries Crackers Jelly CEO WORD ASSOCIATION
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 OBJECTIVES
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 THE MID 80’S
Land Values LENDING ENVIRONMENT 80’S VS TODAY 80sToday Interest Rates PoliticsRussian EmbargoEthanol, Farm Bill Collateral Advance RatesAggressiveMore disciplined
Loan Documentation Weak financial analysis Character: good guys, good family 5 C’s of Credit: Capital, Capacity, Conditions, Collateral, Character LENDING ENVIRONMENT 80’S VS TODAY 80sToday Farm Income Weak commodity prices Weak earnings Strong commodity prices Strong earnings Risk Management Basic production guarantee crop insurance Revenue products Fixed interest rates Risk profiles of loan Portfolio Limited knowledge of Portfolio quality Annual financials More sophisticated measurements
Character Capital Capacity Collateral Conditions THE 5 C’S OF CREDIT
Financial Management Risk Management Marketing Skills Production Relationship Management CHARACTER (CEO) – KEY QUALITIES
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 FINANCIAL 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 RISK MANAGEMENT
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 MARKETING
Adaptation to technology Cost effectiveness Efficiency of operations Cost to produce a $1 of revenue PRODUCTION
Communication Lender Suppliers Landlords Life Skills Employee Management Coaching up or down? Emotional Intelligence Quotient (EQ) Self assessment Empathy Little things Feedback RELATIONSHIP MANAGEMENT
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
FCS of Illinois Association Website: CONTACT INFORMATION