Banking & Finance

Agriculture Lending Yields Specialty for Small Bank

ORRVILLE, Ohio — Farming has become as high-tech as manufacturing. Robotics are just as integral to raising livestock as to the autoworkers who produce Cruzes at the General Motors Co. complex in Lordstown.

Agricultural lending, on the other hand, is quite different than what bankers call “C&I lending,” commercial and industrial lending.

The majority of banks are wary about lending to the people who raise livestock and plant and harvest crops. Despite its name, less than 1% of Farmers National Bank of Canfield’s loan portfolio consists of agricultural loans, says Kevin Helmick, its president and CEO.

That will change sometime before June 30 when Farmers completes its acquisition of First National Bank of Orrville, which has enjoyed considerable success by serving farmers across Ohio and western Pennsylvania. Its agricultural lending portfolio holds $75 million in loans, says Mark R. Witmer, president and CEO. Total loans at Dec. 31 were $396.1 million.

One reason First National Bank of Orrville has been so successful is that Witmer has a master’s degree in agribusiness from Virginia Polytechnic Institute; its senior vice president for agricultural lending, Thomas R. Stocksdale, holds a B.S. in agricultural economics from Cornell University; and another lender, a vice president in the Salem office, Jim Rhodes, earned his B.S. in agriculture (major, agricultural lending) at Ohio State University. All three live on farms and were farmers before they became bankers. Stocksdale continues to run a working farm outside Wooster.

The headquarters of the bank and the bulk of its 12 other offices sit in the midst of some of the best farmland in the country. Wayne County is the largest agricultural county in the state, Witmer points out. In Wayne and Holmes counties are an abundance of dairy farms with a mix of swine, chickens and grain, Stocksdale says.

So five years ago, the board of directors set a new course. “This bank got involved in agriculture,” Witmer says. “Our board looked at the fact that we’re based in one of the top dairy-farm counties in the state. They also knew it took a special expertise to lend in agriculture.”

The board hired Witmer as CEO – he officially assumed his post Jan. 1, 2012 – and in October 2011, Stocksdale as vice president for agricultural lending. He had a quarter century in the field working for Wayne County National Bank and National City/PNC Bank, including a dozen years with the Farm Credit system.

Ag lending is different from other lending, Stocksdale begins. “It’s very individualized,” he explains, “because each farmer is unique. Each farmer does things their way.” And weather affects farming as it does no other business.

Farmers take great pride in their ability as animal husbands, Stocksdale says. “There’s peer pressure to have the straightest rows of corn they use to feed their livestock,” for example. “You know when you walk on a farm how well they care for it,” he says.

Ag lending consists of providing credit to food processing plants, for livestock and machinery (including robotics), dairies, cattle feed lots, cold storage, artificial insemination equipment, crop insurance and dairy-margin insurance, warehouses and forest products. “It is a diverse market with unique requirements that require special research and attention,” the bank website says.

And farming is expensive as a visit to the Raygor Farms LLC in Dalton illustrates. There the Sprunger family owns 116 acres and rents another 400 to raise a herd of dairy cattle that numbers more than 300. First National Bank of Orrville is its source for loans to finance six-figure capital expenditures.

On a cold day in early February, the cattle were sheltered in three barns. Bob Sprunger, soft-spoken and the fourth generation in his family of dairy farmers, and his wife, Barb, can oversee the operations of their farm on their tablets and smartphones.

Bob Sprunger introduces their son, Scott, 28, and daughter, Amy, 30, and her husband, Mark Ostarchvit, as “the fifth generation,” and their daughter, Avery, 2, “as the sixth generation, hopefully.” All adults participated in 4-H clubs as they grew up and Amy studied agriculture at Ohio State.

Amy is typical of the younger farmers. As Stocksdale notes, “A fair number of farmers have gone to college, the younger generation mostly.”

Barns are needed to shelter the cattle against summer heat, not winter cold, Bob Sprunger explains, as he displays the robotics that track the cows and keep them on their milking schedules.

The system he has in place, which cost $250,000, came from DeLaval in Sweden, he relates, as he shows photos on his smartphone of DeLaval employees installing the equipment. It was two months between arrival and installation.

A robotics system allows a dairy farm to increase its milk production between 10% and 15%, Stocksdale says, and to milk cows three times a day instead of twice. It has a life of 10 to 12 years and one system can milk 50 to 60 cows.

Cows are worth $2,500 to $3,000 but the expense of replacing a heifer can run up to $5,000.

Sprunger spent $600,000 on the hay baler, hay being a major component of the diet he feeds his cattle. Sprunger makes his own forage because “of the cost of the equipment.”

Diligent farmers are creatures of habit who adhere to the rigid schedules they set, Stocksdale relates. For example, each year, the Sprungers harvest their first hay crop May 20 – the start date never varies – and the successive harvests every 28 days into the fall. Rain might cause the Sprungers to deviate by a day.

Farming requires huge commitments of time, knowledge, capital and a love of the way of life.

“I was born into it,” Sprunger says. “It’s got to be in your heart.”

In the barn one sees the cattle taking turns to be milked with all the information appearing on computer screens that identify and weigh the cow as she enters the stall and how much milk she gave in earlier visits as the screen measures her yield.

The arms sterilize the teats before attaching teat cups at the end of the vacuum pumps. They can milk a cow is about a tenth the time it would take to milk by hand.

Wayne County is also home to “some Mennonite farmers who still milk by hand,” Witmer notes, and whom the bank also counts among its customers.

The Raygor Farms cows, which wear collars with computer monitors, enjoy the feed they eat as they’re milked. So much so that some become “cheaters,” as Sprunger calls them. Intervals between milkings are six hours. Should a cow enter too early, it’s denied food and pushed outside the stall.

“There are high capital requirements to milk cows,” Stocksdale says. First National Bank serves dairy farmers with herds as small as 35 to as many as 3,000 as well as swine and poultry farmers. The bank also does a “little lending” to goat farmers.

It also serves what Witmer calls “hobby farmers” or “gentlemen farmers” – those who raise small numbers of exotic animals such as llamas, emus and ostriches.

Chicken farming is no less advanced or complex than dairy farming. “We finance chicken houses,” Stocksdale says.

Witmer identifies some of the chicken farms his bank serves as he explains briefly what’s involved: 25,000 birds to a building for anywhere from 33 or 34 days to six months, depending on how heavy the birds will be at the time of slaughter. Farmers keep 75,000 birds in three buildings that cost $350,000 to $400,000 each and the farmers stagger the maturities.

They buy peeps from a hatchery when they’re two days old and take them to their farms where they’re fed a high-protein diet high in corn. “Within minutes [of arriving at the chicken houses], they’re pecking at food and drinking water,” Witmer says. The percentage of protein is reduced as they grow.

First National Bank also serves farmers that raise cage-free chickens, Witmer says. “You have to train the peeps to jump up and get feed,” he explains, “and to jump up to their nests.”

Peculiar to ag lending – and one of its risks, as Stocksdale points out – is, “Farmers buy everything retail but they sell wholesale.”

To manage risk, a banker must understand the nature of that risk. How well First National Bank manages the risks associated with ag lending is reflected in the quality of that portfolio. “We have better performance than on the average loan,” Witmer says. “A farmer keeps his word to pay you back.”

First National Bank is no less optimistic about agricultural lending than the farmers to whom they lend. “Most farmers are eternal optimists,” Stocksdale says. “Tomorrow will be better. Next year will be better.”

Published by The Business Journal, Youngstown, Ohio.