CREDIT IN A CHANGING ENVIRONMENT. Rick Nelson Vice President, Agribusiness

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1 CREDIT IN A CHANGING ENVIRONMENT Rick Nelson Vice President, Agribusiness 1

2 Who is 100,000 member co-op Headquartered in Louisville Kentucky 1,100 employees 95 offices in Kentucky, Tennessee, Ohio, Indiana $20.3 Billion in assets Loans (operating, equipment, mortgage, homes) Leases, Crop Insurance to Farmers, Ranchers, Agribusinesses and Rural Residents Part of the largest Agriculture lending network in the US Celebrating 100 years of service in

3 Agribusiness Unit 11 teams of 2, VP and analyst GFI of $5 million and up or 5,000+ acres Small number of relationships (30 to 50) Focused on risk management, complex financial structure, growth goals, constant transition, need access to capital Why? Concentration of debt: According to USDA, in 2012, 4% of farmers held 68% of US debt-about the same share held by 30% of farmers in

4 Looking Back Record net farm income Extraordinary margins per acre Strong cash positions Producers upgraded entire equipment lines now over-equipped Working to defer income tax - Prepaids, equipment purchases Chased land values upward 4

5 Today Record corn crop Significant carry-over Lower commodity prices Fed tapering discontinuing Input prices still high Strong balance sheets Tremendous uncertainty 5

6 Grain cycle at a trough Why change? Commodity prices at multiyear low Lower or negative earnings margins for 15/16 Different lending environment than past years 6

7 Producer Considerations & Options Liquidity first buffer against adversity Solvency risk bearing ability; earned or appreciation Management ability efficient, technology, manage risks, marketing skills Are you able and willing to make changes to become or stay viable: reduce family living expenses, sell noncritical assets, reduce capital expenditures, reduce or exit high rent land Can you add or increase off-farm income or additional enterprises to increase income 7

8 Producer Cont d Risk mitigators: marketing plan, crop insurance, irrigation, life insurance, succession plan Offer a plan that is realistic and reasonable: Start the conversation with: I lost xxxx amount of money this year, here s what I d like to do with the shortfall and here is what I have done or here is what I am going to do to ensure that this will work for us. COMMUNICATION IS KEY!!!!! 8

9 Lender Considerations & Options Lender will get back to basics: - gather quality information - exercise due diligence with other creditors, input suppliers, FSA, etc. - ask for a marketing plan - detail crop insurance coverage - planned capital expenditures Is the customer s plan realistic and viable? Does the customer have the management ability and willingness to execute the plan? 9

10 Lender Cont d If answer is yes, then consider: - Asking customer to pay from investments, CDs, etc - Asking customer to sell non-critical assets to pay - Terming out losses - Extending terms on IT and LT debt - Replenishing working capital for Term Expenditures - Reamortizing loan payment to get through ST cycle - Asking customer to sell farm assets to reduce leverage - Sharing risk with a 3 rd party; bank, FSA, input supplier - Communications and expectations are key: customer, credit/sales departments 10

11 Grain Markets Second chance? Corn 11

12 Grain Markets Second chance? Soybeans 12

13 Our Goal To Be Dependable Understands impact of industry cycles Proactively identifies risks and opportunities with customers Is patient, allows for adjustments Maintains realistic, long-term outlook 13

14 What Dependable Doesn t Mean Every producer will make it through these tough times Ignoring constructive credit for both Farm Credit and the producer Taking undue risk Farm Credit making all the adjustments 14

15 Our Dependability Statement Lending to production agriculture is our core mission and as such we will be an accountable, dependable, collaborative and competitive lender: disciplined and responsible in good times so we can be courageous in difficult times. 15

16 New 2015 Opportunities Improved margins in livestock industries New loans from banks who are exiting ag lending Cross-sales with customers who utilize multiple lenders Grain markets Second chance? Customer selection is CRITICAL 16