C REDIT R ISK 2012: A NSWERS TO INQUIRING QUESTIONS Weekly Columns: Ag Globe Trotter: Road Warrior of Agriculture: Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Virginia Tech, Blacksburg, VA (540) (Alicia Morris) | (540) (Angela Meadows) | November 4, 2011

Trends in Ag Banking  250/500 million mutation  customer too large to finance  3000/1000 family owned  rural community dynamics  young lenders  Dodd-Frank  consumer lending  Rabobank 4 time increase  other 2

Trends in Farm Credit System  national movement  corporate/funding issues  consolidation   three funding banks  young farmers/ranchers  100 th year 3

Lenders’ Top Questions for Dr. Kohl What are the actions of lenders that do risky lending?  collateral-based lending  no sensitivity testing:  cash flow/profitability  liquidity  equity/collateral  concentration  growing too fast - customer & lender  producer/lender fraud  chasing hot markets 4

Lenders’ Top Questions for Dr. Kohl What are the behaviors & actions of successful agricultural lenders?  strong credit culture with sound financial analysis  knows the customers and industries  culture of lifelong learning  the “what if” lender  marketing culture of relationship lending  board and management team understand agriculture 5

Lenders’ Top Questions for Dr. Kohl What are proactive practices of regulators?  staff that are quick learners of the industry, lenders, and customers  encourage strong financials  encourage accrual-adjusted records for producers that are growing, highly-leveraged, or above $250,000 in sales  encourage bank boards and CEO to have employee training metrics  two to six hours of education per week for examiners/regulators  think globally but act locally 6

Family Living Summary 7

Farm Family Living Expense Increases Expense Item% Increase from Food48% Medical/health insurance180% Personal interest, consumer credit cards365% Miscellaneous226% Gifts169% Education29% Recreation40% Social Security and income tax192% 8

Lenders’ Top Questions for Dr. Kohl What are your thoughts on family living costs?  family living withdrawals are like concrete; once set, they are difficult to change  averages:  2011:$80,000  1986:$20,000  1967: $4,000  monthly basis plus 25%  25% of expenses are commingled in the business 9

Financial & Management Benchmarking Dashboard (Top of Cycle) Benchmark Measure Green Green Yellow Yellow Red Red Case Farm Your Business Percent Equity>75%50-75%<50% Working Capital/Revenue >50%25-49%<25% Return on Assets>15%7-14%<7% Coverage Ratio>300% %<125% Operating Expense/Revenue (Excluding Interest & Depreciation) <65%65-75%>75% Know Cost of Production By EnterpriseFarm Ranch Overall None Credit Score> <650 Family LivingLowModestHigh Risk ManagementAll Components SomeNone Business PlanWrittenVerbalizedNone 10