Citizens Bancshares Corporation
Ticker: CZBS
Statistical Data:
Diluted Market cap: 2,039,117 shares @ 50.70=103,383,232
Preferred shares: 27,000 1% non-cumulative preferred
ECIP preferred shares: 95,700 non-cumulative preferred shares at 2% interest rate
Total capitalization: 226,083,232
Net tangible assets: 159,077,718
5 year average of earnings: 9,843,188.2
5-year average on common equity: 9.52%
5-year average earned on net tangible assets: 6.19%
Plain English reason for buying: I am buying CZBS for 103,974,576 dollars because it has 159,077,718 in net tangible assets, net cash at the parent company of 92,200,000, and pretax earnings in 2023 of 20,039,000 The real purchase price for the bank is 103,974,576-92,200,000= 11,774,576 and the average implied earnings yield for the last 5 years is 83.8%. The margin of safety is 83.80-5.02= 78.79%.
Overview:
Citizens Bancshares corporation is a regional bank based out of Atlanta Georgia. The bank primarily operates a commercial lending business in Alabama and Georgia. The bank was a recent recipient of the Emergency Capital Investment Program. CZBS received 95,700,000 dollars from the US treasury at a 2% noncumulative interest rate with very few stipulations. The bank trades at a 53% discount to net tangible assets without placing any value on the amount of cash at the parent company.
Background on the ECIP Bank program:
The ECIP Bank program is an initiative started by the US treasury to provide capital to certain regional banking institutions. The treasury gives funds to selected banks and receives equity in the form of a perpetual non-cumulative preferred stock with a variable dividend rate. The dividend rate is set based on the amount of “qualified lending” that the bank engages in. I’ve attached the document from the US treasury stating the terms of the program. Assuming the highest possible dividend rate, CZBS would pay a non-cumulative preferred interest rate of 2%. In going private transactions, the value of the ECIP funds has been about 20% on the dollar. These funds can be used for dividends and share buybacks.
The Banking Business:
CZBS average interest expense is .13%, and the bank has a net interest margin of 4.80%. The return on equity is 22.51% and the banks return on assets is 1.93%. The management of the bank has consistently been conservative in their lending practices and has generated good value for shareholders. The banks deposit costs are lower than their peers and I have included a brief table summarizing deposit cost data.
Managements Capital Allocation:
CZBS management has employed most of the new ECIP funds to buy back shares and increase the dividend. As of March 7th, CZBS announced that they are paying a cash dividend of 1 dollar a share and have purchased about 10% of their common stock. The management has been extraordinarily conservative with their approach and will likely use the funds to make an acquisition.
Risks:
· The banking sector is particularly vulnerable during times of recession and can be exposed to bank runs.
· The leverage employed in banking makes them particularly susceptible to poor capital allocation decisions.
· There is a reason the treasury initiated this program as the regional banking sector is particularly weak. Any bank serving a particular region that runs into touble could be a reflection of the credit risk of the county. Viewed from the standpoint of a municipal bond investor any county that need’s additional capital is likely to be a poor credit risk.
Summary:
On a quantitative basis CZBS screens extremely cheap and the bank represents an opportunity to earn a good return on the preferred shareholders’ capital. In short, if a rational businessman were to purchase the bank he would be paying 103,974,576 for a business that is earning 20,039,000 pretax and would instantly recoup 92,200,000 dollars off his purchase price.
Sources:
View Facsimile - FFIEC Central Data Repository's Public Data Distribution
Senior_Preferred_Stock_Term_Sheet.pdf (treasury.gov)
View -- Uniform Bank Performance Report (ffiec.gov)
BankFind Suite: Institution Financial Reports (fdic.gov)
ReturnFinancialReportPDF (ffiec.gov)
Disclosure: I have a position in CZBS. Do your own homework. This is not financial advice.