How A Bank Can Strengthen Farming Communities Through Innovative Lending
In Edible-Alpha™ podcast #37, Tera interviews William J. Kitsch, Vice President and Agricultural Lending Manager with Ephrata National Bank in Lancaster County, Pennsylvania. Founded in 1881, the bank is a $1 billion community bank with 25% of their portfolio funding agricultural entrepreneurs, from farmers to value-added processors and food manufacturers, including many of the Amish and Mennonite owned and operated businesses in that area. Many of their loans might be considered micro-loans (less than $50,000) but they also have large loans to value-added processors and food manufacturers, often in partnership with government lending/guarantee programs. Bill’s experience is that methodical growth for the bank over a long period of time has built profitability and equity for their shareholders, without having to sell the bank or lose their community focus.
Bill believes that his bank’s model of community lending is replicable nationally if the right conditions are present. He advocates community banks interested in doing similar work to shift their philosophy in a variety of ways, including by not seeing regulation/regulators as an insurmountable hurdle. In his bank’s experience, once people are trained and equipped on the front lines of lending to use business acumen in addition to credit indicators to evaluate potential businesses, this can lead to more successful lending relationships rather than a pure credit analysis approach. However, he adds that his bank’s unique history and the Mennonite and Amish communities (because of their cultural emphasis on a strong work ethic/early saving and their agrarian history) give’s his bank’s service area a distinct advantage in generating food and farm economic activity.
With farms in Lancaster County selling for $25,000 per acre, it is hard to make commodity agriculture work financially due to the low return on assets, especially when trying to transition the farm. To help with this, repayment periods could be extended (to say, 40 years for full repayment) but that saddles the farmer with interest payments their entire working career. Bill prefers the standard repayment horizon nationally on farmland (20 years) while advocating changing the price the farmers receive via new business models or premium offerings through things like organic production or value-added processing (ex. cheese making). But, these options often require additional capital availability to achieve profitably at efficient scale once the concept is proven. With young farmers trying to purchase farmland, both Bill and Tera advocate for “leveraging up” i.e. saving to build equity to take the big leap into buying farmland sooner rather than later and not renting too long.
Tera and Bill discussed how partnerships with government programs from the FSA, SBA and USDA are essential to make many of these lending relationships work. But, there is a lack of technical assistance nationally to help more lenders understand (and underwrite) the cross-disciplinary business models (ex. a farming operation with a cheese plant that resembles food manufacturing). There is also a lack of training on how entrepreneurs and lenders can leverage all of the different sources of capital and programs available to entrepreneurs to make more high value-added agriculture deals happen.
Bill describes lending as a “high-contact sport” and encourages people to develop relationships with lenders, interviewing multiple lenders when considering applying for a loan. His bank will often work with loan applicants if they don’t have enough equity or will “counter offer” if they have an application that will likely not be approved for another reason. Bill encourages people to see opportunities in the economic challenges they face. He sees Ephrata National Bank as an example of how our financial system can work to better serve more food and farm businesses through high quality business lending.