Summary
- Citizens Bancshares Corporation (CZBS) is a community bank based in Atlanta, Georgia that received a $95.7 million capital infusion under the U.S. Department of the Treasury’s Emergency Capital Investment Program (ECIP) in 2022.
- Under the ECIP, the US Department of Treasury invests in preferred stock with a dividend of 0 to 2 percent, providing the bank with a significant amount of cheap equity.
- The company trades at a market cap of ~$90 million which is still lower than this capital infusion and slightly less than 6 times it’s 2024 earnings.
- The bank has used the extra capital to increase their net income from $4 million in 2021 to $12 million in 2023, but it can easily still be increased to more than $20 million by 2025 due to there still being large amounts of excess capital.
- The management has kept expenses low, increased dividends and buybacks significantly.
- Keep in mind trading liquidity, expense and non-performing loans ratios should you choose to invest in this company
Introduction
Citizens Bancshares Corporation (CZBS) is the holding company for Citizens Trust Bank, a Minority Depository Institution (MDI) based in Atlanta, Georgia. Founded in 1921, Citizens Trust Bank has a longstanding history of serving underrepresented communities, with a focus on providing financial services to individuals, small businesses, and underserved populations. Due to it being an MDI, CZBS has benefited from federal programs such as the Emergency Capital Investment Program (ECIP).
What is the ECIP?
In March 2021, the US Department of The Treasury launched the ECIP, an initiative designed to “support access to capital in communities traditionally excluded from the financial system and that have struggled the most during the COVID-19 Crisis.” As part of the program, up to $9 billion would be invested into Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs).
Key characteristics of the program include:
- Under ECIP, Treasury invested in preferred stock or subordinated debt issued by participating CDFIs or MDIs.
- Dividends and interest do not accrue and are not payable le during the first 2 years after issuance.
- After the first two years, the investments carry a maximum dividend or interest rate of 2 percent.
- Dividend or interests rates may be reduced depending on qualified lending.
Shareholders of ECIP banks were basically given a windfall
CZBS was awarded the ECIP in June 2022, when the company sold 95,700 shares ($95.7M cash injection) of Series G preferred stock to the US department of treasury. Considering that the bank only had a total shareholder’s equity of ~$75M at end 2021, the bank basically received more than its entire book value as a grant in 2022. Given that the US T-Bill rate has been above 2% for the last 2 years and has been hovering between 4 to the mid 5% range for that last 18 months, ECIP recipients paying a dividend of 0-2% are virtually guaranteed increased profits.
Additionally, the ECIP dividends are non-cumulative perpetual preferred stock, which basically means that they are able to have access to the ECIP capital with a cost of capital of 2% or less indefinitely. Furthermore, unpaid dividends do not accrue.
As such, most ECIP recipients received a significant capital injection with only minimal conditions attached, such as having to pay the preferred stock dividend before doing dividends and buybacks) and executive compensation (no excessive compensation or luxury expenditures).
How has the company performed since?
Ever since, the bank has been steadily increasing their total loans, with the impact of the ECIP becoming immediately apparent - the bank’s net interest income increased by more than 100% from 2021 to 2023, with net income attributable to shareholders increasing by 200% to $12M for 2023.
1. CZBS has increased their loan book and profits (up 200+%) significantly since 2021:
2. Meanwhile, the company has kept their expenses in check, resulting improved efficiency ratios. However, their non-performing loans ratio has increased, albeit to a level that is still acceptable.
3. The company has bought back almost 11% of its outstanding shares in 2023, and projected share dilution is not expected to be significant.
4. A combination of the above factors have resulted in per share metrics of CZBS increasing extremely significantly from 2021 to 2023.
As you may expect, this has resulted in the share price of the stock increasing more than 300% since their ECIP until today
Is there further upside for CZBS stock?
Currently, although the stock has already increased by nearly 400% over the last 2-3 years to the $50 range, the company is trading at a market capitalization of about $90 million. This is still below the ECIP preferred capital.
In 2024, the bank continued to increase its net income, and would likely generate close to $16 million of net profit available to common shareholders in 2024. This represents a P/E of ~6.
Additionally, the bank remains overcapitalised, and have continued increasing their profits through increasing their loans. Yet, their Tier 1 capital to risk weighted assets remains at 43%. Assuming that they target a similar ratio of 24% as 2021 (pre-ECIP levels, which is still well within regulatory requirements), the bank still has 70-80 million of tier 1 capital to further increase its profits by another 4 million.
Furthermore, based on shareholder letters of people who attended their annual meetings, the bank still has over $90 million (about 1X the current market cap!) at the holding company, which they are interested to grow through the strategic acquisition of another minority owned ECIP bank, similar to how in Jan 2023, $BFCC purchased Mechanics Bank (Water Valley, MS).
As such, even if CZBS pays out all their profits going forward, it will be quite likely the company would be able to grow its profits by more than 50% to about $25 million over the next 2 years.
Valuation of $CZBS
There are two simple ways to estimate the fair value of CZBS:
Method 1: Valuation using ECIP adjusted book value
The first and rather simplistic way to estimate it is using an ECIP adjusted book value:
While relatively simplistic, this method is exceptionally usefulbecause the ECIP preferred is essentially a $53.5 per share free capitalinjection to the bank.
Method 2: Using a modified dividend discount model
One way we can translate CZBS’s buybacks and dividends into an equityvalue is using a modified dividend discount model, where share both buybacksand dividend distributions are used to calculate CZBS’s fair value.
A simple table showing the modeled earnings and cashflows would be included in the annex.
Catalysts
Given that the bank is currently trading at half its adjusted book value per share and approximately 5-6 times it’s forward earnings, it only makes sense that shareholder value be realized through continuing large buybacks that are well supported by CZBS’s robust balance sheet and earnings.
Additionally, there are also ECIP recipients that have been acquired by other ECIP recipients. CZBS can look to either acquire another company, ECIP recipient or look to be acquired by another bank at a fair value.
Other considerations if you choose to invest in this stock:
CZBS represents a classic value investment that is available only to smaller investors, with low valuation probably arising due to it’s low market cap and low trading volumes making it inaccessible to larger investors.
However, because of the fact that trading volumes are lower, there are two common mistakes to avoid as retail investors:
- If the price of the stock increases sharply, do not give in to possible fear of missing out and rush out and buy the stock as you may end up buying it a price much higher than that it would normally trade for. As Buffett always says, “there are not called strikes on wall street”, so it is better to try and accumulate shares at a lower price or just pass on this opportunity if the ship has already sailed. It would be advisable not to use a market order to execute your trades for such thinly traded stocks.
- Similarly, if you are already invested in this stock and you observe that the price has dropped by 6% or 10% for nothing, do not panic and instead look at the trading volume. Often, you may find that there is just one transaction of about 100 shares changing hands at a lower price, and this normally resolves itself during the trading day.
Given that this is a loan for underbanked communities such as minorities, it is important to keep an eye on the non-performing loans and assets. Furthermore, it is important to monitor the efficiency ratio of the banks to see if operating expenses are rising faster than the interest income, as bad management easily destroys shareholder value that ECIP provides (See Harbor Bankshares, OTCMKTS: HRBK).
Conclusion
In conclusion, the ECIP represented a special situation that resulted in many banks being extremely overcapitalized relative to both their existing book values and and market caps. CZBS is one example that has a competent management that has put their received capital to good use, and we expect that this has not been fully priced in due to its low trading volume and small market cap. However, we expect the company to continue growing its earnings and return value to shareholders through increasing its dividends and conducting large share buybacks. This stock also provides a considerable margin of safety given that it is still trading at a market cap below the ECIP cash infusion given by the US Treasury Department.
Annex
