Summary
- Citizen Bancshares is a 100-year-old regional bank getting the attention of big corporations like Morgan Stanley and TD Bank of late.
- It has a Tier 1 capital ratio of 24% and non-performing assets of only 0.27%.
- It has paid dividends consistently for the last 22 years, with a CAGR of 6.7%.
- With an intrinsic value of $48.85, my current opinion on CZBS is that it's a buy.
Thesis
The stock price of Citizens Bancshares Corp. (CZBS), which had lingered within a narrow range of $7-$14 for a decade, has finally demonstrated its potential, breaking through its initial resistance of $14 and soaring to an unprecedented high of $37 within a mere nine months. In addition, the bank received a substantial boost to its aspirations, with a $5 million grant from Morgan Stanley (MS) in 2020 and a $5 million investment from TD Bank (TD) in exchange for preferred shares in 2022. These resources will facilitate the bank's expansion into Texas, Tennessee, and North Carolina. With more than $264 million in cash and cash equivalents as of 2021, the bank is poised to invest these resources to increase its profitability - especially in the current environment of rising interest rates. Ultimately, this will take the stock price higher in the next two to three years.
About the Company
CBZS operates as the holding company for Citizens Trust Bank, a financial institution that goes back 100 years. It was established to foster economic stability and business growth, particularly in making homeownership accessible to minority groups, with an emphasis on African Americans. After 100 years, the company looks ready to spread its wings and fly beyond its home city of Atlanta to make the American dream possible for minorities and more. Despite its modest physical footprint, with only seven branches predominantly in Atlanta, Citizens Bancshares has a substantial digital presence. It serves customers in 48 states, where 70% of all customer interactions take place via online and mobile banking platforms.
Industry Analysis
The commercial banking industry has felt the double-edged sword of rising interest rates. While banks can pass on these rates to customers and thus avoid affecting their profitability, the downside is a reduced growth rate of new loans. At the local level, CZBS has no major peers - it has a different target market than the big players, while other small players are usually credit unions. However, when it comes to performance, CZBS is a worthy rival to century-old regional banks like Chesapeake Financial Shares ( CPKF ), First National Corporation ( FXNC ), and United Bancorp ( UBCP ). CZBS boasts the highest returns over multiple periods - one, two, five, and 10 years - compared to its peers. With ambitious growth plans in the pipeline, the trend of CZBS outshining the competition might well continue.
High Liquidity and Regular Dividends
In the last two years, there has been a substantial increase in both interest-bearing and non-interest-bearing deposits, amplifying the bank's capability to extend loans. This surplus capital has been deployed as interest-bearing deposits with other financial institutions, which is included in the bank's cash and cash equivalents. This has resulted in an upward surge in the bank's Tier 1 capital ratio, which has risen from a solid 17% at the close of 2020 to an impressive 24% in 2021, a vital measure of a bank's financial strength that has been adopted as part of the Basel III accord. The only drawback to this scenario was the reduced service charges, which declined by 50% between 2019 and 2021 - from $3.5 million to $1.6 million - due to the higher balances maintained by customers.
Furthermore, over the past decade, the bank has consistently demonstrated a high degree of asset quality, with an average provision for losses of less than 1% and non-performing assets of only 0.27% as of 2021. After 2021, the bank's book value per share was $27.04, which is expected to increase with the bank's profits and assets. This, in turn, has resulted in a modest price/book ratio of 1.33, suggesting that the bank's shares might be undervalued. To cap off these impressive results, the bank has a long-standing tradition of paying dividends. It has maintained a consistent payout for the past 22 years, with an average payout growth rate of more than 13.2% and a compounded growth rate of 6.7%. This trend is expected to continue as loans and margins reach new heights.
Decrease in Net Loans, but Not a Big Concern
Despite the plethora of opportunities for the bank, a matter of concern has arisen in the form of a decline in net loans in 2021. This could raise questions regarding the operational efficacy of the bank, given the high demand for credit as the economy began to recover in 2021. However, this might be remedied shortly, as the bank intends to extend $200 million in residential mortgages by 2024.
Risks and Caveats
Citizen Bancshares boasts a sturdy financial foundation marked by a coveted capital adequacy ratio, yet some factors might hinder its stock price from reaching greater heights. A primary factor is its listing on a minor stock exchange, which inhibits frequent and effortless trading, resulting in low trade volumes and difficulty buying and selling - particularly during price downturns. Transactions on these registered but unrecognized exchanges necessitate a broker, incurring relatively high commissions. Another item that might hamper Citizen Bancshares' potential is its net income margin, which falls slightly below its industry peers. They typically maintain margins of about 25%, compared to Citizen Bancshares' 19% margin.
Valuation
In evaluating the worth of Citizens Bancshares, I had two options: base it on the P/E ratio or the dividend discount model ((DDM)). I elected to employ the latter for two reasons: the absence of current earnings per share ((EPS)) information and the bank's demonstrated consistency in paying dividends, which is expected to persist. Additionally, CZBS recently declared a dividend of $0.75 per share. To determine the intrinsic value of the share via DDM, I advanced the following assumptions:
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Based on the historical trend of CZBS's dividend growth, which has consistently exceeded 6.7% and has always been above that for most of the years, I anticipate a perpetual growth rate of 6.5%.
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Utilizing the capital asset pricing model (CAPM), I assume a cost of equity of 8.1% with a risk-free rate of 3.7%, an equity risk premium of 8.8%, and a levered beta of 0.5.
Particulars | Value |
Dividend (Latest) | $0.75 |
Cost of Equity | 8.14% |
Perpetual Growth Rate | 6.50% |
Intrinsic Value | $48.85 |
At the time this article was written, shares were trading around $36, which I consider undervalued based on my valuation.
Conclusion
Stock Tracking Opinion
As the financial landscape shifts and evolves, analysts and investors should notice regional banks such as CZBS more. Currently, their niche value proposition and limited visibility are causing them to be relegated to the sidelines. Despite the challenges posed by its status as an over-the-counter traded stock where you need to buy and sell through a broker, I will include CZBS in my investment portfolio due to its prospective capacity to generate substantial value through consistent dividend payments.
Investment Opinion
Based on the expansion plans combined with financial stability and value creation, my current opinion on CZBS is that it's a buy.
For further details see:
Citizens Bancshares: Regional Bank Gets A Huge Capital Boost