AmeriServ: An Undervalued Micro-Cap Bank

Feb.19.14 | About: AmeriServ Financial (ASRV)

Editor’s Note: This article covers a stock trading with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Background: Headquartered in Johnstown Pa., AmeriServ (NASDAQ:ASRV) is a small regional banking company with a market cap around $60 MM. The company accepted some TARP-related money during the financial crisis; $21 MM of preferred stock is on the books, paying the lowest possible rate of 1%. ASRV has been in a generally successful turnaround mode since the crisis. Recent results suggest that corporate results and the stock price could be poised for a breakout. If so, the low valuation placed by the market on this company's assets allows for the possibility of strong multi-year returns should the company become more efficient and continue to grow its loan and wealth management businesses.

Introduction: AmeriServ is one of the relatively few profitable banking companies still selling under tangible book value. In its fourth (December) quarter, it earned 9 cents per share. The earnings quality was good, with strong loan growth.

This article serves as a brief discussion of the company and its shares, and does not purport to be comprehensive.

The company: AmeriServ is very, very small; its market cap is just under $60 MM. Total trade volume daily can be under $100,000; thus, many individual trades in high-priced stocks by affluent individual investors often exceed the total value of all trades in ASRV in a given day.

The Federal government has been involved with AmeriServ since the 2008 bailout period, but as a sign of financial progress, the company has been allowed to pay dividends to common shareholders. This is quite a positive portent given the tiny size of ASRV: when a bank in an ongoing Federal support program is allowed to pay dividends, investors may have hopes of a strong payout stream down the road.

AmeriServ has had its troubles over the years, not limited to the 2007-9 period, as the chart suggests:

Chart forAmeriServ Financial, Inc. (<a href=

But that may be in the past. The recent corporate results are much sunnier. From the latest earnings release:

JOHNSTOWN, Pa., Jan. 21, 2014 /PRNewswire/ -- AmeriServ Financial, Inc. reported fourth quarter 2013 net income available to common shareholders of $1,789,000 or $0.09 per diluted common share. This represented a 125% increase in earnings per share from the fourth quarter of 2012 where net income available to common shareholders totaled $683,000 or $0.04 per diluted common share. For the year ended December 31, 2013, the Company reported net income available to common shareholders of $4,984,000 or $0.26 per diluted common share. This represented a 23.8% increase in earnings per share from the full year 2012 where net income available to common shareholders totaled $4,211,000 or $0.21 per diluted common share...

Fourth Quarter
2013

Fourth Quarter
2012

Year Ended

December 31, 2013

Year Ended

December 31, 2012

Net income

$1,841,000

$735,000

$5,193,000

$5,039,0 00

Net income available to common shareholders

$1,789,000

$683,000

$4,984,000

$4,211,000

Diluted earnings per share

$ 0.09

$ 0.04

$ 0.26

$0.21

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Glenn L. Wilson, President and Chief Executive Officer, commented on the 2013 financial results: "I was pleased that AmeriServ Financial finished 2013 with a strong fourth quarter that demonstrated both increased revenue and improved asset quality. This performance contributed to 23.8% earnings per share growth and 5.7% tangible book value per share growth during the full year of 2013. Specifically, an increase in net interest income resulted from continued strong growth of our loan portfolio, as total loans grew by $55 million, or 7.5%, during the past year. Non-interest income also increased by $801,000 or 5.4% between years, due largely to fee growth within our trust and wealth management businesses as a result of increased assets under management. Finally, we ended 2013 with excellent asset quality as our non-performing assets are only 0.52% of total loans and our allowance for loan losses provided 327% coverage of non-performing loans, even after a negative loan loss provision during the fourth quarter."

Tangible book value exceeds the stock price at $4.24 per share at year-end 2013, with book value at $4.91 per share. Note that in calculating book value, preferred stock worth $21 MM received through the Small Business Lending Fund (Federal program of TARP era vintage) is excluded from coverage. Book value should be meaningful as a guide to possible future earnings potential at the current time, because the regulators have scrubbed ASRV's balance sheet very carefully. For this reason, I agree with management that book value is a very relevant parameter for investors to consider.

With a poor (high) efficiency ratio in the mid-80s, and with book value highly "scrubbed" these days due to intrusive oversight of banks by regulators, there may be a great deal of operational upside for AmeriServ as management takes the presumably good assets that are part of book value and creates/unlocks shareholder value with them.

There are 18 AmeriServ branches across Pennsylvania. Total assets were $1,000,000,000 at year-end. On the optimistic side, there is lots of room for growth with low incremental cost, given the high book value and poor efficiency ratio. As the company states on its website:

Business Loans? AmeriServ is open for Business!

The AmeriServ Business team is personally committed to the success of local businesses. All of us at AmeriServ are very excited to be designated by the U.S. Treasury Department to participate in the exciting Small Business Lending Fund program. In fact, in most of our communities, AmeriServ is the ONLY bank designated to participate in this "business-friendly" loan program.

Millions of dollars are available, with very favorable rates, and its our job to get these funds into the hands of business owners in our communities.

Insider action is favorable, though we must note that the dollars involved in the purchases tabulated below are small:

Insider Transactions Get Insider Transactions for:
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Net Share Purchase Activity
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Insider Purchases - Last 6 Months
Shares Trans
Purchases 12,504 15
Sales N/A 0
Net Shares Purchased
(Sold)
12,504 15
Total Insider Shares Held 1.94M N/A
% Net Shares Purchased
(Sold)
0.6% N/A
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Net Institutional Purchases - Prior Qtr to Latest Qtr
Shares
Net Shares Purchased
(Sold)
(376,236)
% Change in Institutional Shares Held (4.92%)
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Again, this is a $3 stock, so the purchase of 12,000 shares by insiders in the past 6 months is not in and of itself persuasive for the bull case.

There are 19 MM common shares outstanding, so about 2 MM shares held by insiders shows there is over 10% insider ownership. Overall, though, insider ownership and ongoing purchases do represent clear positives in my view for outside investors. Management's interests are well-aligned with those of outside shareholders.

Special situation: Unions: AmeriServ is a unionized company. It plays up this uncommon situation by making it a virtue. From the website:

BUY UNION, BANK UNION.
Now You Can Do Both With AmeriServ Financial Bank and AmeriServ Trust and Financial Services Company

Actions on Wall Street have led all of us to take a harder look at the banks we use. It seems to make sense for all Americans to do their banking business on Main Street rather than Wall Street.

Within the ranks of the United Steelworkers is a Union bank with the resources and the strong Union structure necessary to meet the specific needs of the each Union member, Local and Union organizations.

AmeriServ Financial Bank, and AmeriServ Trust And Financial Services Company, qualify as a "first-consideration" option for all decisions involving banking or investing...

The word "Union" is used more than a dozen times in the entirety of the above brief passage (which is excerpted from the full statement).

Johnstown and fracking: Johnstown is strategically located by the Marcellus Shale. Unconventional drilling techniques are controversial locally. Discussions include a 2010 article on the technology and this article from ShaleStuff, which discusses the potential impact of these techniques on jobs. This article begins and ends as follows:

Johnstown, PA is booming with new jobs. Especially in an old steel plant - Environmental Tank and Container. Drilling companies are impressed by the quality of work and so is governor Tom Corbett...

Many others will have an opportunity to be hired at Johnstown Welding and Fabrication with 70 additional jobs opening up in 2012. This area is very thankful for the Marcellus Shale boom and looks forward to more jobs and a boost in the economy.

Disclaimer: Yours truly is neither a bank analyst nor an expert on the economy of any part of Pennsylvania. I have never been to an AmeriServ branch and have not interviewed anyone related to the company. If you are interested in ASRV, please do your own research.

Negatives: ASRV is a very small competitor and lacks economies of scale. Its unionized status may or may not be a net plus now, or in a future economic environment. There are numerous risks to its success, and liquidity in the shares is poor. The stock is not a widows and orphans stock, to be sure. Investors in ASRV should in my opinion be in it for the long term. Success is far from guaranteed.

General market and local microeconomic conditions will tend to bear down on ASRV, which is not large enough to be a master of its own fate to a material degree in times of adversity, I believe.

Summary: ASRV is a special situation. It is so small and lightly traded that interest in it is limited to individual investors or perhaps very small funds. With only 18 branches, it is unclear whether it has the critical mass to be a takeover target to a larger potential acquirer looking to enter ASRV's markets.

The above said, ASRV has accelerating profitability, a cheap stock selling about 1/4 below tangible book value, a reasonable dividend yield by today's standards, steady share buybacks (approved by regulators) and insider buying. A modest improvement in efficiency could jump start earnings and perhaps help send the stock much higher. Faster growth in nominal GDP in the local economy could accomplish the same thing. A move toward more normal interest rates could allow operating margins to expand and would also tend to be bullish.

ASRV's exposure to the fracking revolution is a wild card that in my view has more upside than downside, given the cheap valuation of the shares.

All in all, AmeriServ looks to be a bank that is turning operations around under newer management and under the many watchful eyes of regulators. The stock has several valuation catalysts that provide the potential for the shares to sell at a premium to book value in the future, with said book value and earnings able to move much higher if the company follows through on recent sales and earnings acceleration. Therefore I own ASRV shares for the chance to collect modest current income but with the hope for multi-year double digit share price appreciation. If earnings and book value increase significantly, then Mr. Market might increase his valuation of these parameters, allowing patient investors in ASRV shares to reap the benefit of both a rising P/E ratio on nicely higher earnings.

Given generally high stock market valuations in well-followed stocks, I therefore believe that many individual investors may want to look into lightly-traded ASRV to see if it is appropriate for their portfolios.

Disclosure: I am long ASRV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser.