The 5 C's of Credit: CCO, Kip Ellington's Agricultural Credit Advice

[00:00:00.750] - Chris Griffin
Welcome to Back to your Roots, a podcast that provides insight into all things farming, financing, and farm life, guiding you Back to your Roots. Thanks for joining us. I'm your host, Chris Griffin.

[00:00:19.920] - Jordan Turnage
Hey, guys. My name is Jordan Turnage, and thanks for listening to us on the Back to your Roots podcast. Well, today, I know we've mentioned him several times in podcast. We finally roped him. We had to come in here and get him freshed. While we're all here, we're bright out and bushy tail. Got him here first thing in the morning. We got him in the office. We got him in the studio. The man, the myth, the legend. That is our Chief Credit Officer, Mr. Kip Ellington. Kip, thank you so much for coming in this morning.

[00:00:44.620] - Kip Ellington
Good morning, Jordan, Chris. Appreciate you guys having me on today. I don't know if I can match up to that introduction you gave me there. You hyped me up, but I appreciate it.

[00:00:53.320] - Jordan Turnage
You got the stats to back it up.

[00:00:56.580] - Chris Griffin
We're laughing because the next line says, Shea wrote this. It says, You've been here for a long time. How long have you been here? Tell us a little bit about your time at River Valley and what you've seen through the years.

[00:01:08.260] - Jordan Turnage
I feel like it should have been underlined.

[00:01:09.580] - Kip Ellington
I appreciate Shea. She loves that adjective, long time. She actually asked me to be on a commercial a couple of years ago, and I was like, I'm not even a loan officer. Why do you want me on a commercial? She said, Well, we want someone who's been here a long time. It talks about how good a place is to work.

[00:01:25.960] - Chris Griffin
That's hilarious.

[00:01:26.680] - Kip Ellington
I was like, Okay, I understand where I stand in this association now.

[00:01:29.470] - Jordan Turnage
You go back to the Jackson Purchase days. If you can just give us your start with River Valley and where all you've been as far because you've touched about every office, I think, in our region.

[00:01:44.450] - Kip Ellington
I have.

[00:01:44.900] - Kip Ellington
You had a funny story. When I interviewed originally at Jackson Purchase as a loan officer, that's back in Tommy Murphy, Malinda Scoggins days. Tommy Murphy was the CEO. I actually didn't get hired. That position went on. I don't know, it was a couple of months after I'd interviewed, I was literally getting ready to start a position at a retail store in a management program. A week before I was supposed to start, Tommy called me. He said, Hey, you've been on my heart. We want to call you back in for another interview. Long story short, they offered me a job right there on the spot. I had to call my position I was going to and say, Hey, I'm not going to be there Monday. This happened on a Thursday. That was a tough call. But looking back, God really had his hand in that. Oh, yeah. I'm thankful to say I've been here, started in '93, looking to retire next year. I don't really have a whole lot to put on my resume. I've got a lot of college work, but as far as positions, River Valley, Jackson Purchase has been my only employer. Started out as a loan officer, and then I had the opportunity to move up as...

[00:02:50.740] - Kip Ellington
We had branch managers at the time, and then became a regional manager, and then eventually evolved into the credit department as chief credit officer back in 2020, right there at the front of COVID.

[00:03:02.330] - Jordan Turnage
Oh, yeah. I was wet behind the ears here. I had just gotten hired on when all that transition happened. For the folks out there and for my borrowers, the person to blame is the man we got in here today because he was the one that hired me. I'm just going to have to say, too, that it was definitely a divine connection to have the opportunity myself to come here and work here and to have Kip as a mentor, It has been just mountain moving efforts. It's just been great to work with you. I know that it was a shock to me to see the email come across, and I read it wrong first, and I was like, Oh, my gosh, this December? I'm not ready for that. We've got you till December next year, and we need to try to make sure we soak up as much Kip tidbits and those little pearls of wisdom that you give us daily. I know that you've literally touched just about at one time, it seems like you go into all the offices. I know that I've halfway married you with some of the offices that I've had to go into.

[00:04:12.480] - Jordan Turnage
It doesn't matter wherever you go, every office that we have, someone is going to ask about you, guaranteed.

[00:04:20.670] - Kip Ellington
Well, that's a good thing about this place is you never know what's going to happen during the day. You never know what's going to happen next year. You've been down this path, as you mentioned, and even Chris yourself, you're hiring in a position, but in reality, you're hiring into this association because you could be at any office.

[00:04:36.640] - Jordan Turnage
Oh, yes sir.

[00:04:37.580] - Kip Ellington
Transition occurs and opportunities come up. As you mentioned, I was able to work pretty much in every office in Western Kentucky that we've had. The time I spent there, you definitely develop relationships with your customers. There's good days and bad days. But a lot of times, even those tough conversations you have to have with customers, that's your actual opportunity to develop a relationship beyond just an acquaintance or, hey, you're just my lender. You get in those trenches with your borrower. Exactly. That's what I was going to say. They're not fun going through. But once you get out of them, your relationship is at a different level.

[00:05:15.090] - Chris Griffin
Could you explain, because I know that I get this question a lot, and I think a lot of people are curious, but at River Valley, what is considered an eligible borrower a lot of times? I think people have a misconception all the time on what exactly we offer. It's not to full-time farmers, but can you go into that a little more in-depth?

[00:05:32.950] - Kip Ellington
Yeah, well, obviously, most people... Our brand is agriculture, right? People think, Well, you've just got to be a farmer to borrow money from from River Valley. And that's not true. We are a government sponsored enterprise, basically meaning that we got our kickstart from the government in the fact that they wanted to have avenues for people to get financing in agriculture. And that was where we were seated. But in that, as an enterprise, we actually provide agriculture and rural communities with financing. If you live in a rural area, you can get a home loan. You may not have an active farming operation, but you're an eligible borrower. Obviously, anything agriculture-related, whether it's purchasing an agricultural asset or you have a farming operation, we can finance that. Operating, equipment, real estate. We do have a little box we got to check as far as the eligibility as compared to commercial lender. But more people will be able to check that box than they realize, especially in the times we live now. A lot of people like to be in that rural area. They want to be out of the city, out of the hustle and bustle, have a little land around them, and they may work a W2 job at a public place.

[00:06:45.040] - Kip Ellington
But guess what? You're an eligible borrower for River Valley.

[00:06:48.070] - Chris Griffin
I'm probably run into this a little more than Jordan, just because I cover McCracken as well, but piggyback on what you're saying. I mean, it's the same deal. I get a lot of people that call here. They don't really know for sure where they can borrow money from us, but they're wanting to lot of land. They may be W2 income, no ag asset at all, but they're buying 50 acres or a piece of recreational property or hunting property or whatever that is. They're all perfect fits for us, honestly. That's a really good way to put that.

[00:07:14.430] - Jordan Turnage
I know that we'll get the cold calls there at the office and stuff, and a lot of folks will ask us, how many acres do I have to have to qualify for this? I'm like, no, it's not so much that. That transitions over into our next question. We look at different facets, especially on the ag loan side. Our hoop's pretty wide, and we try to find ways to make it work. But one thing that we definitely try to look at, and that's what we got the chief credit officer in here today, is we're going to pull the credit report on folks, and Kip, if you mind just tell us, what are the key points that we're looking at as far as eligibility and the high points on a yay or nay as far as credit report for them to be eligible for a loan?

[00:07:56.140] - Kip Ellington
Good question. Obviously, most people know, general public knows credit report is going to give you a credit score. But you guys can attest that credit score does not always tell the whole story. I've seen low scores with someone that's very creditworthy, and maybe there was just a lack of credit. They didn't have enough active accounts, or maybe there was a small collection that occurred on a utility bill, maybe $100 or less, and that really brought their score down. But they might have several hundred thousands of dollars of credit that they've paid like clockwork. So one One good thing about River Valley is that we do look beyond the score. We look at the why behind it. And obviously, score does play a part, a repayment history. We even look at dates of when those credit lines were opened. On the history of it. We call it open accounts. Most people think of credit cards. In other words, they're unsecured type lines of credit. We do look at that. That tells a little bit of a story of if there's cash flow problems. A lot of times, the easy thing to do is basically, I think of a credit card as a loan.

[00:09:03.630] - Kip Ellington
I mean, you're just going to the bank, and every time you swipe it, you've made yourself a loan. If you have a lot of open accounts, then that's something we look at, trying to look, determine what might be causing that. That's not uncommon, especially if you got a small business that's trying to expand. That's easy credit. A lot of times we come in there and look at, Okay, let's try to restructure some of that to help you take the next step. But another thing we look at on those debts is we obviously want to make sure an applicant or borrower can repay it. We take those debts and analyze the repayment ratio because we want to make sure we're not putting them in a situation where they can't afford it. There's a lot to it than just more than just the score. Oh, yeah. I'm sure you guys see that in your role.

[00:09:47.370] - Chris Griffin
For sure. Well, you were talking about a lot of times people who maybe don't have an established credit score, what would be some good recommendations or info for people, for our younger borrowers that want to try to establish good credits. When they are ready to get a loan someday, they're set up and ready to go.

[00:10:02.650] - Jordan Turnage
Because it could be a dawning task.

[00:10:03.630] - Chris Griffin
It could look like a mountain. Yeah, I mean, sometimes you do get people. It's a series of credit scores. I mean, it's great, but it is always the best because I've had times people have good credit scores, and I look at what they actually have. I'm They're actually a bit of debt. Then you have other people just don't have that much debt or maybe just haven't had that long. I'm like, Well, they've actually done a good job not to have that much debt, but their credit score isn't that great.

[00:10:24.030] - Kip Ellington
Yeah.

[00:10:24.320] - Kip Ellington
You take an applicant that's got... They've been blessed. They've made profits through their W2, their operation. They pay cash. They're like, I don't use credit cards. That's great from a credit standpoint. But like you said, a credit score, it's like, well, wait a minute. Either you're not rated or you may have a low score. I'll tell you a little story with my own children, I've got three kids that are actually in their early 20s now. About the time they got out of high school, I literally would help them open up a credit card. You get all these mailers in on the mail offers, and I just open them up on, help them apply for it. Sometimes I might even have to sign on there, but just use that every now and then. It helps build up a credit score. Obviously, getting loans, a lot of people, their first loan is usually a vehicle, their first car. If they're eligible to get it on their own, a lot of times they'll have to get a parent or a grandparent or family member to cosign or be a co-applicant with them. Basically, building that credit score is just at some point you're going to have to take out a loan and obviously focus on excellent repayment history and paying is obligated.

[00:11:30.240] - Kip Ellington
That's going to build up your score. It's one of those things where you just have to... I mean, literally, even your insurance, they pull your credit score. The world we live in today, credit score affects a lot of the things that you do financially.

[00:11:44.420] - Jordan Turnage
It's the gateway. It's that opening door, whether it's locked or not, it's going to account on that credit rate. But I will say, though, for some of our bigger row crop operations, poultry operations, some of those guys sometimes they may not have the best credit report. And that's why we do a little more deep diving on things. And that's where we talk about trying to get a... For the folks out there, in the lending, we love our acronyms and initials for stuff. We've got, it's called a three-year CDRC that we do for folks, a lot of times for our full-time farmers, because it helps to tear away from just looking at that credit report. But it does play a huge key part, and that's one of the main parts for an approval for our pillars, for our qualifying things with AgFirst, for our loans to be eligible. But we also have outlets to help mitigate risk. With the CDRC, as far as taking a three-year tax trend with their assets and expenses, and that helps open the gate and sometimes put a lipstick on a pig for some of those loans that we try to do with our, quote-unquote creative accounting with our narratives that we write and we send in to turn in for you for approval.

[00:13:05.060] - Kip Ellington
Yeah. Well, one good thing, not every lender reports to the credit bureau. River Valley, we do. For the most part, that's a beneficial thing to our borrowers is that when they borrow money from us, we're helping them build their credit and establish their credit. But to your point, we have an AgScore program where primarily just you get a yes or a no based on their credit score. But another benefit of River Valley is when we get those nos to your point, say, well, for whatever reason it declined it. It didn't hit the target score. But we don't always just send it back, hey, it was declined. We try to take a deeper dive. We look at, we get into financial statements and repayment ratios. And more times than that, we're able to find a way to make that loan with them. We may have to get some additional collateral, or we may have to get another applicant. But we're not cookie cutter from the standpoint that it's just red light or green light. We do look at the whole financial picture. We can talk about that a little bit as far as what all we do look at when we get an applicant.

[00:14:05.470] - Chris Griffin
Well, not being a cookie cutter, I think, because I do the home side as well, as long as the ag. On secondary market, if you don't meet that credit score minimum, it's just you're out. I mean, it just doesn't matter. There's no trying to get around it, where I've had some situations here. Because I came from a larger bank, a national bank, and that was the way it was. If you didn't meet it, you're done. Came here, and there was a few times I had some situations where some people had some personal situations, whether it was a divorce or a medical issue or something like that. Let's say their credit score was a little bit lower, and I was able to sit down with you and say, Hey, let's talk through this. They were pretty open and honest with me. They have good repayment. Their credit score is just lower than what it should be. There was ways for us to do that loan for them. Honestly, some of those have been some of my best borrowers, have been some of my most... Have the best correspondence and pay on time every time. It's almost like they want to get their credit back up, and they're really responsible.

[00:14:57.830] - Chris Griffin
They just had some situations out of control. That's what I do like here. I think people need to know that, that like you said, there's just not a cookie cutter way. We definitely look at it from all angles and not just black and white.

[00:15:10.100] - Kip Ellington
A lot of your applicants nowadays, I've seen in probably the past 10 years, is they'll have a little side business. They got a sole proprietorship and obviously any farming operations of business. But when they go to some of these commercial banks, they don't look at the repayment ratios like we do. We add back depreciation. We look at their schedules and say, Okay, you've already deducted interest. We'll give you credit for that when we're factoring your ratios, versus some lenders will just say, look at the bottom line. It's a yes or no.

[00:15:37.440] - Chris Griffin
Dti, they're out.

[00:15:38.620] - Kip Ellington
That's a benefit of us for River Valley. We have analysts We have loan officers and analysts, credit department. Again, we look beyond the numbers.

[00:15:49.210] - Jordan Turnage
What's funny is you'll find, and it's a double-edged sword, with pulling a credit reports for some folks. I've had this happen a few times, and it's puzzling. They'll have medical collections, and that's what's tanking their credit report. I'll call them and be like, hey, you've got this medical report out here.

[00:16:09.400] - Chris Griffin
Sometimes they don't even know about it.

[00:16:10.430] - Jordan Turnage
Then nine times out of 10, they don't.

[00:16:12.660] - Chris Griffin
Sometimes it's not even that much. Sometimes it's even like 50, 60 dollars from something that maybe they moved and maybe the mail got missed and they just didn't realize it or whatever it is. But that happens. You get that quite a bit. That's, I think, something we try to do as well is try to make sure that We tell them, hey, you've got these collections. Would you like to try to clean it up? Because it'll help your credit. Because sometimes if they haven't pulled credit in a long time, they have no idea.

[00:16:37.470] - Kip Ellington
Yeah.

[00:16:37.900] - Kip Ellington
We'll see it a lot, too, where their score may be low. It's because they had some slow pays. But you look, it was 2018. Then Let me go back to the bar and say, hey, what was going on? Maybe occasionally it's a divorce, or like you said, it could have been a medical situation where they were just trying to get through that tough time. But hey, you've got the past three or four years, you got back on track. Again, that's a benefit of us having local lending authority and credit approvals is once we have that understanding of the situation, a lot of times we're able to go ahead and make that loan, even though the score may not have been what would have been our guideline.

[00:17:11.430] - Jordan Turnage
We've danced around it, so we're going to go ahead and jump into it. As For vendors, when we're preparing a credit narrative to submit either through AgScore or for full analysis, we have to hit what us in the biz call the five Cs of credit. I'll list them out, and we'll just go through them all here. This is our order of doing things, our order operations, when we send up a narrative package for folks, and for folks listening, that this is the story of your loan. This is what we're trying to piece together to help show why you're here, what you've got available, and how we're going to make this work. From the beginning, like in every story, you have to have a character. The character, that's just pretty much what the loan is. Then our next step we go into is the capital, the capacity, and collateral. Then we make sure we've got conditions in there, too, to help make sure everything's kosher. But since we've got the chief in here, we figured we'd dance on all five of those topics and just give you an idea, not to steal Kip's use here, but I picked up on that when I was in training with you.

[00:18:26.130] - Jordan Turnage
It's a 30,000-foot view of things. We'll just kinda go into talking about the five C's real quick and just get what we look for and look at. Starting out our first ones, our conditions, and that's pretty much just talking about what the loan is.

[00:18:44.890] - Kip Ellington
You're just the terms of the loan, the loan amount, what terms you're looking for, how many years, frequency of payment, what's the deal we're getting into. That's pretty much even on the first phone call a borrower makes, you're going to get that information.

[00:19:00.580] - Jordan Turnage
Yeah, this is the frame.

[00:19:01.630] - Kip Ellington
That's the easy part of it, is finding the conditions. But you need to know that because that can dictate a lot of things for the approval side of it. Character is something we look at. It's one of the Cs there. It's That's what it says. It's the character of that person, their integrity. It's also, to me, it's also their credit philosophy. Everybody has a personality. You also have your own credit philosophy. Trust me, I've got three kids and a wife, and they're all different personalities. They all have different credit philosophies. That's something you try to pick up on, and you can usually look at their pay history and their balance sheet to determine what the credit philosophy is. Another C is capacity. Are they able to make the payments on that loan, not only with their existing loans, but with this new proposed request. Because one thing that we do as a lender, I always tell our lending staff, we're a partner with our borrower. We're not just a bank. We're loaning money because we want to see them succeed. We don't want to put them in a situation that's going to cause financial stress or a situation where they're not able to afford it.

[00:20:08.140] - Kip Ellington
The analysis of the repayment is very important. I feel like a lot of our borrowers, especially our core ag borrowers, they're going to come in and talk to their lender, to their loan officer and say, hey, what do you think about this, Jordan? This is what I'm thinking about doing. They respect our opinion on the analyzing of their financial situation. Repayment is a big one. Obviously collateral. Most borrowers say, okay, I've We got X amount of down payment. That's something that's very important. That dictates the term. If we go 10 years or beyond, we've got to have a certain percentage down payment. We do have the flexibility on real estate loans. If they're less than 10 years, we can go literally up to 100% on some of these deals. The collateral is a big piece of it. That's the second line of defense. I call that from a credit standpoint. The first line is repayment. That loan, you hope to receive the loan proceeds back in interest through repayment. But if something happens or a situation occurs where they're not able to, then the collateral comes into play. That's why you want equity there. When you're looking at the Cs of credit, it's not just one of the five.

[00:21:18.890] - Kip Ellington
You really got to incorporate all five of those when you look at them.

[00:21:22.850] - Jordan Turnage
It's not a one is stronger than the other. It really are they are support being to one another. If one gives, then it's just all be a domino effect of it. I will say the character portion is where we really get to stretch our English years, taking English classes and writing to help juge up some of the loan requests that we send in.

[00:21:53.630] - Chris Griffin
Yeah, because you're not trying to send any character like, he's a good person. That's not a great narrative. So you got to explain. I always try to put how long have they lived in the area, maybe what some previous employers were, how many kids they have.

[00:22:11.370] - Kip Ellington
Well, one of the Cs is a capital. I look at people, most people know what a balance sheet is. That's where you list your assets and your debts. To me, that's financial report card.

[00:22:23.070] - Chris Griffin
Like a snapshot. That's right.

[00:22:24.420] - Kip Ellington
What you've done with your earnings over the years. If you're just making enough money just to pay bills and get by, you're probably not going to build a lot of equity or net worth on your balance sheet. Obviously, a younger borrower, and we get a lot of young farmers coming in, we don't expect to see a large net worth, but that's going to come in time. But you take a more mature applicant that's 50, 60 years old, you expect to see some asset equity there. That's important for a person seeking credit is they need to look at their financial statement. I would encourage them to write that out or meet with their loan officer and just do a financial checkup each year and see, hey, you want to see that gain each year, that improve each year, that net worth and that equity percentage. Equity percentage is of your total assets. How much of them do you own as a borrower versus your lender? You want to see as a borrower, you want to see that equity go up. In other words, if I've got $100,000 of assets, I want to own 80% of those. I want to own a higher % to my lender.

[00:23:21.110] - Kip Ellington
Those are things we encourage our lending staff when they meet with their customers is explain to them, hey, here's your balance sheet, and here's some of the ratios we look at. Working capital, that's the current assets minus your current liabilities. Those are liquid funds. Think of it as savings account or money you have on hand to be able to cover an emergency or maybe use that cash to buy an asset that you have equity in or use it as a down payment. Those are important things that we look at, but I think it's good for the borrowers to understand it so they can track their own progress financially.

[00:23:50.920] - Jordan Turnage
It's all about, and what you've taught us, is we try to get away from this being a transactional enterprise. We're folks that, like we talked about at the first of this podcast, and I'm sure we've mentioned it in the past, is we're people that pride ourselves on getting in the trenches with our customers. In my four years of being here, the interest rates were fantastic when we first started, but time passes, things change, and we've really had to have some harder conversations with some borrowers, just with the change and increase in interest rates. I think it's from having mentors like you out there that have shown that a calm, steady hand goes a long way with people. I thank you for that in your leadership and taking the time to answer the phone. You're super busy, but you never act like you're too busy to take a phone call from us or answer an email.

[00:24:56.830] - Chris Griffin
That's for sure. You were actually talking about rates. I feel like I never had the benefit of the lower rates when I started because I basically feel like I walked in on June. I think it was June the 20th of 2022, and basically the rates started increasing. But I will say for the listeners, I think to show that we're not just transactional and it's not just about the rate is we've still grown as an association over the last two years.

[00:25:21.690] - Jordan Turnage
Our best years.

[00:25:22.420] - Chris Griffin
Some of our best years in some of our highest rate environment we've had in a long time. I think, to me, that's a perfect example of, okay, well, our borrowers were not just rate sensitive, they were also relationship sensitive, and they still wanted to do business with us, and they still trusted us to still continue to do business with us with higher rates. I think when it's just transactional and it's just based on price or whatever, whatever enterprise you're in, if it's just based on a number, it's easy for people to leave. When it's based on a relationship, it makes it a lot harder. I think that's a perfect example of, hey, we're a relationship business.

[00:25:57.130] - Chris Griffin
Rates were higher. We still grew. We're still doing great as an association. I think that's a testament to everybody who works here, our credit department, everybody. It's a team effort.

[00:26:07.590] - Kip Ellington
Well, that's a good point, Chris and Jordan, because that's where I grew up, so to speak, at River Valley, back in Jackson Purchase, is I was taught early on, we are a relationship lender, not just a transaction lender. And you're right. I mean, especially in agriculture, we know that it's lots of peaks and valleys. It's a trended type business where there's going to be ups and downs. So that relationship should be the flat line that just stays the whole time. That's key that you have that relationship. And again, I refer back to we're a partnership. So when we make decisions or make recommendations, our borrower should know, and I feel like most of them know over time that, hey, we're making that decision for their best interest. They respect that, and they appreciate that. Like you said, that's what keeps them coming back, because they know that you're always going to have their best interest at heart.

[00:26:55.560] - Jordan Turnage
Oh, yeah. Well, Kip, thank you so much for coming in. I sincerely appreciate it. Thank you for your time. Thank you for your service.

[00:27:02.970] - Kip Ellington
Well, I appreciate the time. Like I said, you have to work here a very long time to finally get in here.

[00:27:08.020] - Chris Griffin
A very long with extra o's, long time.

[00:27:11.070] - Kip Ellington
I'm glad I've paid my dues, but now this place has been good to me. And like you're talking about, my relationship is more with my staff now. Back when I was a loan officer, it was with my customers. That's what you guys see day to day. But now you guys are my customers, so to speak. I do. I enjoy the opportunity to help you do your job so you can help our customers.

[00:27:30.840] - Chris Griffin
Oh, we appreciate you a lot.

[00:27:31.960] - Kip Ellington
Thank you. I appreciate you guys. And how you all doing a great job with this podcast.

[00:27:35.940] - Chris Griffin
Thanks.

[00:27:36.880] - Jordan Turnage
Got to be good at something. Well, thank you so much for joining us today on the Back to your Roots podcast. For Chris, I'm Jordan. Thanks for listening.

[00:27:45.140] - Chris Griffin
Thanks for tuning in to Back to your Roots, where we dish the dirt on all things ag. Be sure to never miss an episode by following and subscribing. While there, leave us a review about what you want to hear next. Stay in the know between episodes by following us on Facebook, LinkedIn, and TikTok. For more resources, go to our website at rivervalleyagcredit.com.