Rural Banks to Benefit From Agricultural Boom

Includes: OZRK-OLD, SFNC
by: Timothy Siegel

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 (NASDAQ:OZRK-OLD), 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 20th 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 (NYSE: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 (NASDAQ: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.