Citizens Holding Is Not A Bargain At These Prices

2023-03-21 06:49:22 ET

Summary

• CIZN is a regional bank holding company operating in rural cities in Mississippi.
• Like most regional banks, it is trading at low multiples of earnings and a high dividend yield.
• However, I believe other banks I covered recently are in better conditions and trading at similarly low multiples and high yields.
• In particular, I do not like CIZN's exposure to low yielding securities and fixed-rate commercial real estate.

Citizens Holding Co. ( CIZN ) is the bank holding company of the Citizens Bank of Philadelphia, a Mississippi state-chartered bank.

Like most regional banks, CIZN's shares fell substantially in the last few days. To many investors, this might seem like an investment opportunity.

In my opinion, the bank is not an opportunity because it trades at approximately the same earnings and dividend yield as other banks but has characteristics that render it ill-prepared for the current environment. These include diminishing efficiencies, interest-bearing deposits and repo financing that could become expensive fast, low-yielding security assets, and mostly fixed-rate loan assets.

For these reasons, I do not believe CIZN is an opportunity at these prices.

Note: Unless otherwise stated, all information has been obtained from CIZN's filings with the SEC .

Business description

Regional bank : CIZN is a regional Mississippi bank with most operations in small cities like Jackson, Gulfport, and Hattiesburg, all of them below 200 thousand inhabitants. The company is not particularly strong in the market, with 7.5% of deposits in the counties of Harrison, Jackson, Kemper, Lauderdale, Leake, Neshoba, and Newton.

CIZN's offices in red (Google maps)

Expanding aggressively in 2020/21 period : The main problem with regional banks today is that they expanded their balance sheets in the 2020/21 period and purchased low-yielding, long-duration assets. This is the case with CIZN as well. As seen above, the company has increased its deposits by more than 50% since 2019.

Data by YCharts

Not the best assets : Among the assets that suffered the most because of higher rates are MBS. As of December 2022, 64% of the company's securities book at amortized value was MBS. The average yield on these securities was 0.89% in 2021. In 2022 the registered yield was higher, but only because the company recognized fair-value losses in some AFS securities and registered a higher yield.

CIZN's account in other comprehensive income for unrealized losses was $96 million in December 2022, against a securities book of $630 million in amortized cost. This means the average security is down 15% from when it was purchased.

In terms of loans, the company is concentrated on commercial real estate (63% of the loan book as of 2022), which is common for regional banks. Unfortunately, only 18% of the company's loans were variable-rate. The average yield on the company's loan was 4.6%.

Cost of money : The fears of banks failing or being unable to redeem deposits are mostly gone now that the government has opened a lending facility for securities like the ones the bank holds. The main problem, in my opinion, is the cost of deposits against mostly fixed and low-yielding assets.

The main problem with CIZN is not liquidity (the FDIC dispelled those fears) but rather what happens if the liabilities it has require higher interest while the bank holds mostly fixed low-yielding assets.

In particular, the movement from low-yielding demand deposits toward time deposits could be problematic. As of December 2022, $792 million out of $1.1 billion in deposits were demand deposits that are not expected to yield much.

As can be seen below, since rates started increasing, Americans have been moving deposits towards interest-bearing formats like time deposits, probably attracted by higher rates.

[Link]

Small denomination time deposits, all banks (FRED)

Other components of the bank's balance sheet could also increase its cost of funding. In particular, the bank has $120 million in repo loans that have been much faster to adjust than deposits. These repo loans yielded 0.3% in 2Q22 , but already 1.1% for the average of 2022, meaning that the interest they yield increased significantly in 3/4Q22.

Decreasing efficiencies : On a longer-term perspective, the bank has not been great at managing expenses since the end of the GFC, showing a relatively increasing trend in the bank's efficiency ratio (operating expenses over net interest income). Further, the ratio is above what is considered a good level, of below 0.5.

Data by YCharts

No large owner : The bank's managerial team and BoD own 9.7% of the company's stock, and a single shareholder owns 6.8% of the shares . This indicates no strong owner, which we usually look for in a company.

Strong during the GFC : The company did not register massive allowances or charge-offs during the GFC. Total charge-offs aggregated $8 million between 2008 and 2011, from an original loan book of $380 million in 2007 .

Not a lot of growth : The company has not grown earnings per share in the past (the revaluation of tax allowances under the Tax Cuts and Jobs Act caused the 2018 fall). This is despite CIZN's assets growing significantly, as indicated in the second chart.

Data by YCharts Data by YCharts

Valuation

Low multiples, high yield : Most regional banks, like those I covered in the past few months, are trading at low earnings multiples and high dividend yields. CIZN is the cheapest using both measures (lower multiple, highest yield) among the banks covered in the past two months.

Data by YCharts

However, in my opinion, the yield difference is insufficient to cover for the qualitative differences. UBCP, for example, has avoided purchasing securities since 2020. LSBK's loans are variable-rate. AUBN is a deposit leader in its regional market. All of them have grown EPS faster, and all of them have lower efficiency ratios.

Data by YCharts

Conclusions

Today, most regional banks are cheaper than one month ago, and they are all trading as a population despite having different characteristics. That is an environment where opportunities might appear.

However, I believe CIZN is not one of those opportunities. From the regional banks analyzed in the past month, it ranks lower in most measures of quality: resilience of assets to higher interest rates, market share in its region, efficiency ratio, insider ownership, and EPS growth.

Also, I believe a higher-for-longer environment could damage CIZN's earnings because it is ill-prepared to pay more for its liabilities and capital. Therefore, I prefer to pass on CIZN stock and consider some of the other banks analyzed, all of which are trading at low multiples now.

For further details see:

Citizens Holding Is Not A Bargain At These Prices

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