Lifestyle Lending for Farm Credit

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Lifestyle Lending for Farm Credit

• New Ideas in New England
• 2006 RAAW Conference
• Boston, Massachusetts

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Many Names For This Market

• Retail
• Lifestyle
• OTFT or PT Farming
• Agri-Consumer or Agri-Professional
• Recreational
• Community
• Rurapolitan
• Investor Oriented

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How is it Segmented?

• The Gross Farm Income (GFI) Approach
• Rural Residents (Housing) No or very little GFI
• Lifestyle or OTFT Farmers GFI lt10k
• Part Time Farmers GFI gt10k lt100k
• Potential vs. actual farm income

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How is it Segmented?

• Income Composition Approach
• 30/70 (Farm Income/Total Income)
• Hinges on how farm income is defined
• Again, potential vs. actual

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How is it Segmented?

• The Acreage Approach
• Rural Residents - lt10 acres
• OTFT / PT Farmers - gt10 ac lt100 ac
• Varies tremendously, even within a district

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How is it Segmented?

• The Transaction and/or BE Relationship Size
  Approach
• Transactions lt100k
• BE Relationships lt250K
• Both of these thresholds are increasing

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What is the Common Thread?

• There is a high reliance on non-farm income to
  repay our loans
• In 1930s about 30 of farm household income came
  from non-farm sources
• Today that number is about 85
• In the AgFirst District, more than half of our
  more than 82,000 customers can be classified as
  OTFT or PT farmers (retail level basis)

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Growth in this Market

• One of the fastest growing business lines
• One that attracts outside attention
• Magnification intensified with Horizons
• More non-traditional customers
• Implications for FC lenders/analysts
• Lenders analyzing non-farm businesses
• Need to develop additional lending skills

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Who are these Customers?

• Professionals seeking recreation/quality of life
• Couples raising children
• Investors seeking an alternative to the stock
  market
• Retirees looking for the amenities of a city, and
  quality of rural area
• The S Word

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Marketing

• Traditional marketing techniques may not reach
  this group
• Different social/civic organizations
• Different spheres of influence
• Targeted ad campaigns
• Escape
• When was the last time you saw stars
• Come home to the country

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Whats Important to these Customers?

• Convenience
• Flexibility
• Speed
• Price
• Much more transactional, which tends to
  de-emphasize relationship and expertise which are
  critically important to commercial customers

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Lifestyle Lending Underwriting

• Heavy reliance on repayment (ratios)
• Heavy reliance on credit bureau reports
• Balance sheet analysis not as prominent
• Credit scoring widely used
• Limited information, standardized underwriting
• Speed and efficiency drive the process
• In Farm Credit however, many of our retail loans
  have commercial characteristics

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New Ballgame for Lenders

• Non-traditional businesses
• Increasingly complex ownership structures
• Outside business interests
• Large amounts of consumer debt
• Non-recurring income/repayment sources
• Projecting cash from closely-helds
• Non-traditional competition sources

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Unique Risks

• Consumer debt (variable rate, universal default)
  and availability of easy credit
• Contingent liabilities
• Conditions in non-ag industries
• Reliance upon non-recurring income
• False security built around increasing RE values
• The 3 Ds
• Killer toys and extreme lifestyles
• Unreported liabilities (on reports)

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How do we Address these Risks?

• Understand the inherent limitations of credit
  scoring
• Think differentially, but think appropriately
• Dont ignore the balance sheet
• Understand asset ownership
• Look behind the ratios
• Get a handle on ALL liabilities
• Ask questions if things dont look right, or if
  you dont understand
• Dont get pushed into a closing

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In Summary

• This is, and will remain, a critically important
  market for us
• Its fairly untested, for us, in down economic
  times
• We have to operate efficiently to serve these
  customers, so new delivery tools are warranted
• Often dealing with industries we have no
  expertise in
• Beware of competitive euphoria
• Still need to know our borrowers

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Questions?