Ameriserv Financial Inc (ASRV, $3.20 as of 4/27/15 or “Ameriserv”) is a small community bank headquartered in Johnstown, PA. It trades at a substantial discount to its tangible book value of $4.41 and is in the midst of an earnings growth trend that should drive the stock from $3.15 to $5.10 for an increase of 62% over the next twelve months as this fact is recognized by bank investors.
ASRV was founded in 1983 and currently operates 17 bank branches under the Ameriserv Financial Bank brand and has a trust operation called Ameriserv Trust and Financial Services Company that manages $1.8 billion in assets. It also owns a small life insurance company that is immaterial to its operations. ASRV serves the central Pennsylvania markets of Johnstown, State College (Penn State University) and Altoona and Hagerstown, MD. ASRV primarily makes commercial (54.6%) and consumer (31.1%) loans backed by real estate. The Company largely avoided the real estate problems during the “Great Recession” that affected the rest of the country due to the stable nature of home and commercial property prices in its region. Ameriserv has no direct, and little indirect, exposure to the shale gas boom happening in Pennsylvania since its markets south of the Marcellus Shale formation.
Earning Growth Rationale
ASRV is one of two banks that I have heard of that have a union representing some of its employees. The Company operates in the rust belt and has a close relationship with its union, which custodies assets of its pension fund at the Bank’s trust department. Over the last couple of years the union agreed to a soft freeze of the Company’s defined benefit pension plan and to allow ASRV to offer early retirement packages to its members. This has allowed ASRV to begin to reign in operating costs. Prior to the effect of these cuts, the Bank’s efficiency ratio was running in the mid to high 80% range. In the first quarter of 2015 ASRV delivered an efficiency ratio of 82% and with expected 2015 asset growth of mid to high single digits the ratio should drop below 80% by year end.
The number of full-time equivalent employees has dropped from 347 in the first quarter of 2014 to 318 at the end of the first quarter of 2015. The employees that left tended to be older, less productive and more highly compensated than the remaining ones. They were not replaced upon their retirement. Operating savings from the early retirements will generate an additional $1,000,000 or more in pretax income for 2015. The Bank had also hired outside professionals to help them analyze and effect this change. ASRV will save an additional few hundred thousand dollars a year in savings from the end of this effort.
The Company is currently experiencing mid to high single digit loan growth. ASRV has used the Federal Government’s Small Business Lending Fund (SBLF) to help drive loan growth of 6% in 2014 and anticipated growth of 6.5% in 2015. The preferred stock provided by the US government required the Bank to show loan growth in this range. As a result of achieving this goal, ASRV’s cost of funding on the SBLF preferred stock is 1% per annum until early 2016. Based on conversations with management, I believe the bank will use a combination of excess cash and subordinated debt to fund the preferred stock’s repayment at that time.
Ameriserv has had a fairly stable net interest margin (“NIM”) relative to many other banks. Competition in its market areas is significantly less than in the large US cities. ARSV is a true community bank and while it does service more competitive areas, there is a competitive advantage in these smaller communities to being local. NIM has ranged between 3.42% and 3.64% since June of 2012. The average NIM over this period has been 3.55% and the swings are largely due to the timing of fees from prepayment and origination fees. For the remainder of 2015 I am looking at an average NIM of 3.52% for the purpose of calculating net interest income. The chart below highlights the NIM for ASRV from 2008 through the first quarter of 2015:
Using the first quarter actual earnings of $0.07 coupled with the asset growth, cost savings and a NIM of 3.52% yields earnings of $0.34 for calendar year 2015. This would generate a return on assets of above 50 basis points and a return on equity of over 5%.
ASRV experienced some increase in non-performing loans during the “Great Recession”; however the magnitude of this was quite low. This is due to the lack of increase in real estate values in its rust belt communities during the period preceding this correction. The Bank has always conservatively provisioned for possible loan losses and traditionally the reserve is well over 100% of non-performing loans despite the fact that the loan book is heavily real estate backed. The table below highlights non-performing loans and loan loss reserve as a percent of loans and loans held for sale, net of unearned income and other real estate.
Comparable Banks and Valuation
Ameriserv currently trades at price to earnings (P/E) multiple of 14.50 times trailing twelve months fully diluted earnings per share (EPS). I used Bloomberg to create a list of small community banks that have similar market capitalizations, return on equity and return of assets characteristics. These banks trade at an average P/E of 19.1 times and a median P/E of 18.3 times. The peer group trades at an average price to book value of 1.1 times and a median value of 1.01 times. For the sake of my analysis, I have assumed that since ASRV is unionized and therefore possibly not acquirable by another bank it will trade at a 15 times P/E multiple for a target price of $5.10 per share. The table below shows where the comparable banks trade.
Ameriserv’s cost cutting coupled with loan growth and stable NIM will lead to earnings growth in 2015 that should drive the stock to $5.10 per share up from its current price of $3.15, for appreciation of 62% when they report their 2015 earnings in January of 2016. Due to ASRV’s strong asset quality and market area, there should be little downside to owning this Central Pennsylvania community bank.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.