Rural Banks to Benefit From Agricultural Boom

Between the subprime meltdown, potential losses from banks getting stuck on the LBO bridge and losses from loans to builders, investors are beginning to wonder if there is any part of the financial services sector worth serious consideration. Perhaps the place to look is down on the farm, where rural banks are bound to benefit from good times for farmers. They may not be in hog heaven just yet, but rural banks at least have some upside, to reward investors for risking the downside. And of course there is a downside, because even in rural areas a lot of loans have been made to home builders and home owners, some of whom will run into trouble.

But for the investor who has watched the potash miners and the agricultural chemical and equipment suppliers soar to ever new heights, and who is wondering if there are any stocks related to agriculture that are not so expensive that one must think once, twice, three times before purchasing, rural banks represent an inviting opportunity. They are a reasonably priced way to get in on the price of corn, which is as high as an elephant’s eye, right now.

One of my favorites is Bank of the Ozarks (OZRK), which is headquartered in Little Rock, Arkansas. Now, I know that Little Rock is not immune to the suburban problems of falling home prices that have beset banks across the country. But I have it on the authority of the Bank of the Ozarks' website, that they do make agricultural loans, too. They have offices all around the state of Arkansas, and a few in north‑east Texas and North Carolina. After getting pummeled in the recent pummeling of regional banks they made a statement on Friday, June 20^th that they expected to hit their previously announced financial targets, amid mild write downs, and continued to be well capitalized. Their stock went up again, from 15.79 to 17.88. But now it’s down to 14.86, with a trailing P/E of 7.83. Does somebody know something bad, like they did for Bear Stearns (BSC)?

I feel it is a risk worth taking, because the strength of the farm economy both minimizes risk and, together with the exceptionally low price, creates the possibility of real reward. More money for farmers means more to save at the local bank. And people with more money have more confidence to use the credit cards issued by the local bank. Banks, as much as any business, rely on the health of their local area economy. And Arkansas will be a major beneficiary of high crop prices. Plus, if Arkansas has suffered from flooding, it certainly has not been damaged to the extent that Iowa and Wisconsin have been.

Another stock I like is Simmons First National Corporation (SFNC). This banking corporation is headquartered in Pine Bluff, Arkansas. Now I can guarantee you that this is not a company that is paying too much for office rent. Simmons has not been driven down to the extent that Bank of the Ozarks has, but it has fallen a little and represents a good value, with a trailing P/E of 13.41. And Simmons is even more rural then Bank of the Ozarks.

So shuck that suit and tie for a pair of overalls. And shuck the complexity and opacity of big city banks, for the simplicity and semi transparency of their country cousins, the rural banks.

Disclosure: I do own some OZRK in my own portfolio and have both OZRK and SFNC in my mFolio portfolio, which has been receiving investments.

Comments

[buyitcheap:]

ARe there any regional bank ETFs around that one could use? Calling State Street and Powershares....

2008 Jul 01 12:14 PM

[TKTK53:]

TIM THIS IS FOR YOU
If you re-read your own page you say one thing and then come back and say the something else complety different
I know you have a page to write every day - but let's get the facts straight.Is it this or is it that
TERRY
TKTK53

2008 Jul 01 04:14 PM

[DaveinHacke...:]

I haven't looked at these specific banks, but the general idea of Mr. Siegel's post is consistent with a point Jim Rogers has made: that there may be investment opportunities in non-commodity businesses operating in regions benefiting from the secular boom in commodities.

2008 Jul 01 05:26 PM

[Timothy Siegel:]

TKTK53 - OK, where do I contradict myself?? I don't see any contradiction whatsoever. I do point out both weaknesses and strengths of the position of rural banks, and OZRK in particular. But there is no contradiction, just a recognition of both the negative and the positive.

2008 Jul 01 05:55 PM

[Timothy Siegel:]

DaveinHackensack,

Thank you for your comment. Sounds like on a higher conceptual level I'm in good company (Jim Rogers). One great thing about banks is that there are a lot more relatively local, publicly-listed banking companies that there are retailers, or others dependent on local economic strength. But, interestingly enough, in the retail sector there is another agricultural boom play, and that is Wal-Mart, the biggest of the big. There is may be no publicly traded retailer more closely associated with the rural economy than Wal-Mart. With the boost from the farm belt and international operations, Wal-Mart may be worth considering (don't own any myself, or in my mFolio). I would have a hard time investing in any U.S. based retailer, however, because they will be squeezed by rising import prices.

2008 Jul 01 06:05 PM

[fatcat:]

In the past,these banks get caught by farmers overbuying equipment and overpaying for land when commodities are hot...then about crop harvest time,the bottom falls out and the farmers and the bank gets screwed.Anyone outside N.Y.City knows this...thats why they look attractive now.I wouldn't touch them with a long pole!

2008 Jul 01 06:05 PM

[Timothy Siegel:]

This increase in agricultural commodities prices is not an annual harvest cycle phenomenon. Everyone should know that, whether in NYC, or the heart of Kansas.

2008 Jul 01 06:14 PM

[P. M.anull:]

Tim, When these kind of observations are made, it seems all focus is on the great price of the crops that the farmers are growing. But what about the farmer's net profit. I can assure you that the farmer's inputs are much, much higher than anytime in the past....seed, fertilizer, fuel, chemicals, equipment, and labor are all up and most are up drastically.

2008 Jul 02 11:55 AM

[JimWe:]

As a small town banker, I can assure you that I don't wear overalls to work. I usually wear a pinstriped suit and a tie and even a starched white shirt.

Even more surprising, I wear both shoes and socks - wingtips and black socks, not white ones. That's just in case you were going to make a comment about barefoot bankers in small towns...

2008 Jul 04 07:00 PM

[trueview:]

One should look at a few things before jumping in on this stock...the board of directors..the outrageous stock options granted to management..take a look at insider trading...huge amounts have been acquired by top mgmt with no hard earned cash required..options exercised enough sold to pay for stock and then hold for dividend..it's amazing..if one mgr is that astute what happens when he leaves..obscene..do the math..over 170k shares held by one!
trueview

2008 Jul 09 01:44 PM

[Timothy Siegel:]

JimWe,
I meant to create a colorful picture, and I'm sorry if I ended up making you feel insulted. I did not mean to imply that rural bankers dress in overalls, but that the investor contemplating investing in a financial institution should put himself in a rural state of mind.

Tim

2008 Jul 09 04:46 PM

[trueview:]

Timothy

Have you looked into or given any thought to my comments? Or is this pretty much par for the course in the banking world today.

Trueview

2008 Jul 13 06:36 PM

[trueview:]

Timothy
Sorry I should have stated the stock symbol SFNC

Trueview

2008 Jul 14 09:12 PM

[trueview:]

Tim
Maybe I should be insulted by your choosing not to respond to my comments..of course I should expect silence with it being contrary to your opinion.
True

2008 Jul 21 04:09 PM