“Navigating Uncertainty”

How is your banking relationship?

6th Annual AGOLOGY Conference, Ag Ventures LLC

About the presenters…..

Ron Markham – Market President, Sr. Vice President Ag & Commercial Lender 

Ron has over 20 years experience as an agribusiness and commercial lender. He has a bachelor degree in business/ administration with an emphasis of management and finance from UW Lacrosse. Ron and his family live in Monroe.

Kevin Raisbeck - Market President,Ag & Commercial Lender

Kevin has over 18 years experience in the agricultural industry, including 7 years of banking experience.  He has an associate degree in Agri-business from Southwest Wisconsin Technical College and a Bachelor Degree in Business / Administration from Upper Iowa University. Kevin and his family live in rural Lancaster.

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About Wisconsin Bank & Trust

Owned by Heartland Financial USA, Inc. Independent Board of Directors Local Decision Making Superior IDC Rating* Mid-Market Bank

• Personality and high-touch service of a community bank

• Capital and additional funding sources of a mid-size, publicly traded financial institution

• Backroom resources and expertise of Heartland Financial

Competitive Advantage

• Experienced team that will make bold recommendations and advocate for their clients

• Sophisticated and client-convenient technology

• Capabilities and capacity equivalent to the large banks

• Breadth of products and deep, mature back room

• Loan capacity of $40 million per borrower*IDC’s analysis is based on a series of financial ratios. Each ratio, in turn, tells us something important about how well-

managed the institution is and how well they are positioned to deal with potentially adverse economic conditions…or to profit from good times. IDC’s method of evaluating financial institutions is based on the acronym CAMEL- capital adequacy, asset quality, margins, earnings returns, and leverage/liquidity.

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About Heartland Financial USA, Inc.

Listed on Nasdaq. It’s trading symbol is HTLF

$5.9 billion multibank holding company, headquartered in Dubuque, IA www.htlf.com

9 independent charters

States of banking operations

• Illinois, Iowa, Wisconsin, Minnesota, New Mexico, Arizona, Colorado, Montana, Kansas and Missouri

• 86 Banking Centers in 62 communities

The Heartland vision is to differentiate itself by highlighting its uniqueness as a commercial banking organization supported by a strong retail delivery system. As one of the top 100 bank holding companies nationwide, Heartland delivers high-quality financial products and service to clients in the Midwestern, Southwestern and Western United States.

“Navigating Uncertainty”

“Navigating Uncertainty”

Have you identified your risks?

What are they?

“Navigating Uncertainty”Identified risks……

Production risk Price or market risk Financial risk Institutional risk (Government policy,

laws etc.)

Human & personal risk

“Navigating Uncertainty”

More Specifically…

Lower projected margins in 2015... 2016… Steady or higher cropland rents for 2015…

2016… Production costs steady or climbing… Interest rates – where will they go? Land prices… Intergenerational transfers Etc. Etc. Etc.

Best Management Practices during certain & uncertain

times… Know your cost of production Know your break-even costs Accrual accounting

Year end balance sheets Accurate record keeping

Know your financial ratio’s Use the risk management tools available Strategies on government programs Alternative plans (Plan B) Communicate with your lender and team!

o Identify your “TEAM” member for financial risk

Cost of production / break even cost

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http://www.uwex.edu/ces/farmteam/budgets/fieldcrop.cfm

http://www.extension.iastate.edu/agdm/crops/html/a1-20.html

http://www.farmdoc.illinois.edu/manage/

http://www.finbin.umn.edu/

Local supplier

Cash vs. Accrual accounting

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Farm record keeping is on a “cash basis” Need to have an accurate accounting of all

transactions, the more detail the better December 31 (FYE) balance sheet is needed to

analyze your financial performance. Yield & production information is also helpful

Know your financial ratio’s

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Where are they? What should they be?

Why are they important?

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Risk management tools

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Crop & livestock insurance Marketing & hedging – price risk management Government programs Interest rate risk tools – USDA/FSA/SBA Life insurance Other

198

0

195

5

201

4

What direction are rates likely to

go?

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Why Government Guaranteed Financing & Long Term Fixed rates?

Risk Mitigation – Bank and Borrower Cash Flow/Recession Friendly Debt Committed/Stable Financing (No Balloons) Long Term Fixed Rates, NO risk to higher rates.

Jan Dec Jan Dec Jan Dec

Philosophy: Finance long-term assets with long-term debt

Current

Assets

Fixed

Assets

Line of

Credit

Trade

Payables

Net

Worth

Net

Worth

Trade

Payables

Long-Term

Debt

Line of Credit

Typical asset section of a balance sheet

Poor debt structure Proper debt structure

Noncurrent

Assets

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Budgeted Profitability

-3-2-10123456789

'09 '10 '11 '12 '13 '14 '15 '16 '17

Year Ends

Pro

fits

23

24

-3

-2

-1

0

1

2

3

4

5

'09 '10 '11 '12 '13 '14 '15 '16 '17

Year Ends

Pro

fits

Real World Profitability

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Real World Example

USDA If Conv.Reviewed Reviewed Reviewed Reviewed Reviewed Reviewed

12 12 12 12 12 12 09/30/08 09/30/09 09/30/10 09/30/11 09/30/11 09/30/12

Net Income / (Loss) 139 44 (370) 43 43 778 Add: Depreciation/Amortization 663 702 702 700 700 636 Add: Interest 285 289 238 240 240 178 Less: Distributions (105) - - (16) (16) (423)

Cash Flow Available 982 1,035 570 967 967 1,169 Less: Debt Service (Interest + PYCPLTD) 1,028 1,298 1,066 339 1,068 366

Cash After Debt Service (46) (263) (496) 628 (101) 803 Debt Coverage Ratio 0.96 0.80 0.53 2.85 0.91 3.19

Rate sensitivity analysis

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How sensitive is your operation to interest rates?

Example

$1,000,000 of debt with a 20 year amortization

Rate – Scenario 1

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Rate fixed at 5%, 20 year amortization with balloon payment in 5 years.

• Rates increase 1% at the end of the first 5 year maturity. Then stay the same for the remaining term.

• Payment increases by $5,325 per year.• Total interest paid $663,500

Rate – Scenario 2

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Rate fixed at 5%, 20 year amortization with balloon payment in 5 years.

• Rates increase 2% at the end of the first 5 year maturity. Then stay the same for the remaining term.

• Payment increases by $10,825 per year.• Total interest paid $746,120

Rate – Scenario 3

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Rate fixed at 5%, 20 year amortization fixed for the full term.

• Rates increase 0% at the end of the first 5 year maturity. Then stay the same for the remaining term.

• Payment remains the same for the full term.• Total interest paid $583,760

Side by side comparison

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Total interest paid

5 year fixed, rate increase 1%$663,500

5 year fixed, rate increases 2% $746,120

Fixed for 20 year term $583,760

Which option will help you manage your cash flow & reduce risk?

Government programs

Federal Crop Insurance Disaster payments PLC (Price Loss Coverage Program) ARC (Agricultural Risk Coverage) MPP LGM Other

Communication & building a team

Keep your lender in the loop!o Open & honest conversationo Realistic & proactive approach

Identify who should be on your teamo How often should you meet?o What should you discuss?

LEGAL risk Do you have a will?

Do you have a living will?

Do you have a farm transfer plan?

Do you understand your contracts? o Leases, contracts, land contracts, loans

Other

HUMAN Risk

Do you have medical & disability insurance?

Do you have life insurance? How much should you have?

Do you have written goals?

Do you have employees?o What risks do you have with employees?

Give us a call…We want to be your partner.AgriBusiness BankersOur Team of seasoned AgriBusiness Bankers help you craft unique financial solutions, while offering educational opportunities on a variety of topics.

Kevin A. RaisbeckMarket President Platteville, Lancaster Banking Centers608.348.1426

Shari A. ZenzVice President, AgriBusiness BankerLancaster Banking Center 608.723.1400

Tim HardymanSenior Vice President, AgriBusiness BankerPlatteville Banking Center608.348.1445

Ron MarkhamMarket PresidentMonroe Banking Center608.328.4080

John EdgingtonVice PresidentMonroe Banking Center608.328.4022

Nick FelderAgriBusiness BankerPlatteville Banking Center608.348.1465