Great American Bancorp: A Quality Bank With A Catalyst On The Horizon

| About: Great American (GTPS)

Summary

Management has returned capital to shareholders via consistent share repurchases.

Repayment of FHLB loan will boost net income by ~28% in coming months.

At fair market value the company trades at .54x TBV.

~9% earnings yield post FHLB loan repayment.

Author's Notes:

  • This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Trading volume is low and liquidity is limited. Investments with low liquidity can have significant changes in market value.
  • The independent valuation was done for December 31, 2013.

Background

Great American Bancorp, Inc. (OTCPK:GTPS) is a thrift holding company. The company's principal activity is the ownership and management of its wholly owned subsidiary, First Federal Savings Bank of Champaign-Urbana. The Bank is primarily engaged in providing a range of banking and financial services to individual and corporate customers in Champaign County, Illinois and surrounding counties. The Bank also provides full service brokerage activities through a third-party broker-dealer and engages in the sale of tax deferred annuities. The Bank's subsidiary, Park Avenue Service Corporation (PASC), offers insurance services to customers located primarily in Illinois. GTPS Insurance Agency (The Agency), a division of PASC, sells a range of insurance products to both individuals and businesses, including life, health, auto, property and casualty insurance. The Company grants mortgage, commercial and consumer loans to customers.

Thesis ($23/share)

Management has returned capital to shareholders via consistent share repurchases. On 12/31/03 the company had 911,482 diluted shares outstanding (AR FY 2003 note 17). As of 9/30/15 the company had 460,294 diluted shares outstanding. In total, the company repurchased ~49.5% of outstanding shares during this period, albeit some shares were purchased at high multiples. However, given the discount to my estimate of intrinsic value, repurchases today have an accretive impact on EPS.

At its peak, GTPS had $16mm in FHLB loans outstanding (12/30/05). As of 9/30/15, the company had $4mm in FHLB loans outstanding. The $4mm loan is expected to be paid back sometime in October 2016. The loan carries a 5.17% yield. Once paid, net income should increase by ~$200k/year (~28%).

The company is trading at a P/TBV of .66x. However, based on the fair market value of its balance sheet, the stock looks cheaper at .54x TBV. The reasoning behind this is that the fair value of the net loans are higher than the carrying value by $3.5mm (see valuation section).

Using a normalized earnings power that takes into consideration the repayment of the FHLB loan, the stock seems to provide an attractive and stable yield. Assuming no loan growth/shrinkage, earnings should be $900k-$1mm giving investors a stable ~9% earnings yield.

Although outdated, I think the independent valuation is very relevant as not much has changed since it was rendered. I believe it gives a clear picture into what the company is worth (although I may be wrong). GTPS had contracted with an independent valuation (pp.40-41) company to provide a fair market valuation of the Company's stock for purposes of the put right. In March 2014, the Company received the independent valuation of the estimate of the fair market valuation of the Company's stock to be used for the first put right time period and the estimated price as of the December 31, 2013 valuation date was $30.83 per share. ~28% higher than today's price of $23.

Insurance division & loan servicing

The Bank's subsidiary, Park Avenue Service Corporation offers insurance services to customers located primarily in Illinois. GTPS Insurance Agency, a division of PASC, sells a range of insurance products to both individuals and businesses, including life, health, auto, property and casualty insurance. Insurance sales commission comes in around $1.3-$1.45mm/ year. The revenue from the division is material and makes up ~17% of the bank's total income. From my understanding a portion of the insurance sales commission is reoccurring.

The company also owns mortgage-servicing rights. As of December 31, 2014 GTPS serviced $82.4mm of loans for others which generated $220k in fees in 2014.

Loans

The company breaks down loans at the end of each FY. At December 31, 2014, 44% of the loan book was secured by 1-4 family residential. The bank also has large exposure to other properties (commercial loan, land, multi-family residential, etc), which makes up 34% of the loan book. Click to enlarge

Provisions are slightly elevated but seem adequate. As of December 31, 2014, allowance for loan losses to total loans was 1.22%, slightly higher than the bank's 10 year average of .99% and slightly below all U.S. Banks at 1.49%.

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NPLs are in line with historical averages. At September 30, 2015, the banks NPL/total loans was .33%, lower than the bank's 10 year average of .83% and significantly lower than U.S. Banks ($100-$300mm in assets) at 1.18%

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Deposits

Most of the company's deposits are in the form of checking accounts. My estimate of the cost of funds for 2014 is .24%. Post repayment of the FHLB loan I expect this to decrease to .11%.

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Balance sheet health

The bank is considered "well capitalized" by its regulators. Equity to asset ratio stands at 9.57% at September 30, 2015.

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Insiders holding

The majority of shares are held by the President and Chief Executive Officer of the Company, George Rouse. The late Mr. Atkins, a former director, was the second largest shareholder until his passing. His trust now owns 8.44% of the shares.

On a side note, the KSOP was terminated as of December 31, 2013. The 109,827 shares in the plan were then allocated to the plan's participants (GTPS's employees).

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KSOP

During 2013, the Company had a Savings and Employee Stock Ownership Plan ("KSOP") that covered substantially all Company employees. On December 31, 2013, all 109,827 shares in the plan had been allocated to plan participants. In December 2013, the Company's Board of Directors voted to terminate the KSOP effective December 31, 2013. During 2014, all funds and employee Company shares held by the KSOP trustee were distributed to the participants or their designees as directed by each participant in the KSOP. All Company shares held by each participant on the date of distribution were distributed as shares.

Upon the exercise of a put right, GTPS is required to purchase all or a portion of a participant's shares of Company stock distributed to a participant due to the termination of the KSOP. Each participant is provided two time periods during which they can exercise their put right.

In March 2014, the Company received the independent valuation of the estimate of the fair market valuation of the Company's stock to be used for the first put right time period and the estimated price as of the December 31, 2013 valuation date was $30.83 per share. During the first put right time period, the Company purchased 30 shares related to participants exercising put rights.

Since the valuation date on 12/31/13, book value has increased from $34.6 to $35.8 on 9/30/15.

Valuation

The Annual Report does not explain how the independent valuators arrived at their valuation. There is no indication what multiple [if any] was used. Assuming the independent valuation was based on a P/B ratio (most banks are valued this way or on their TBV), shares should trade at ~.89x book value or $31.9 (~39% upside from today's price).

My own appraisal of the company comes in close to the independent valuation. I believe the company should trade at ~1x TBV ($34.7) for the following reasons:

1) Carrying value of loans on balance sheet are undervalued. The screenshot below was taken from the FY 2014 annual report (FY 2015 is not available). According to the report, the fair value of the net loans are slightly higher than the carrying amount.

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2) Deposit base is good. Low cost of funds. Mostly made of checking and savings accounts.

3) Loan book is good. Allowance for loan losses to total loans has remained stable at ~1% for FY 2014-2004.

4) Balance sheet is well capitalized.

5) Shareholder friendly management.

Disclosure: I am/we are long GTPS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.