Ameriserv, a bank with a not quite hidden asset

One of the great things about being a bank investor is that banks are all very similar.  They all make money by participating in the same activities, and they fund those activities by similar methods of funding.  The advantage for investors is that once you understand how to analyze one bank there are suddenly over 1,200 traded banks that can be compared.  The disadvantage is that since most of these banks are similar there are few rarities, and often rare situations can be bastions of value.

Ameriserv Financial (ASRV) is a bank holding company located in Johnstown Pennsylvania.  Johnstown is about an hour east of Pittsburgh, where I live.  The common stereotype of Pittsburgh is that it's a dirty, smoggy, industrial city laden with manufacturing.  The reality is that manufacturing left Pittsburgh in the mid-1980s and since then the city has cleaned up.  The main industry here now is finance (PNC), education (Pitt & Carnegie Mellon), and health care (UPMC & Highmark).  While the industrial stereotype has moved on from Pittsburgh it still fits Johnstown.  Johnstown has a legacy of steel manufacturing, railroading, and other heavy industry.  A lot of the area's steel mills shuttered around the same time they shuttered in Pittsburgh, but Johnstown unfortunately never recovered.

It's in this setting that Ameriserv is located, they are headquartered in Johnstown, and have branches throughout the area.  The bank is fairly unique in the sense that their workforce is unionized.  Out of their 374 employees 188 belong to the Steelworkers Union.  According to the company there are only ten unionized banks in the country.  A unionized staff comes with collective bargaining, the current contract expires this month, although that's worrying the bank hasn't had a work stoppage since 1979.

The bank takes advantage of their union connection with information on their website decrying Wall Street and other large banks.  They consider themselves a Main Street bank that's helping to create union employment in their area.  As a result of their strong union connections the bank's trust subsidiary has specialty union services, and manages $1.5b of Steelworkers money.

While it's always nice to learn about interesting companies that's not the ultimate purpose of this post.  There are a few aspects of Ameriserv that make it a potentially compelling investment.

• The bank is trading for 78% of TCE (tangible common equity)
• Troubled assets are a very small percentage of total assets; the bank is safe
• Relatively high equity to assets ratio, they are well capitalized.
• Two strong subsidiaries that provide ballast to earnings in this low rate environment.
• A valuable asset management firm that could be worth up to 50% of the current market cap.

Here is highlight of the bank's metrics:

The bank itself is a fairly standard bank, I compared them to 13 other banks that are all traded that are all very close to the same size:

The first thing I noticed is that Ameriserv is in the middle of the pack regarding the yield they generate from their earning assets.  This means they have a fairly average loan portfolio, and considering the low rate of non-performing assets this is good.  What is not good is their funding cost, they have a high funding cost.

The majority of the bank's deposits are retail non-demand deposit accounts which is why their cost is so high.  Of the bank's $840m in deposits $680m is interest-bearing.  The bank doesn't have any brokered deposits which is good, brokered deposits are one of the costliest types of deposits.

The second item that caught my eye in the comparison is Ameriserv's high efficiency ratio.  A bank's efficiency ratio is a measure of their non-interest expenses to revenue.  It's calculated by dividing a bank's non-interest expenses by their total income, both interest and non-interest.  A lower efficiency ratio is better, an easy way to think of the efficiency ratio is an inverse gross margin.  If you subtract the efficiency ratio from one you have a gross margin for the bank.

The largest non-interest expense for Ameriserv is salaries, which is not surprising, banking is an asset-lite service business.  Instead of reducing costs many banks try to outgrow a low efficiency ratio by growing deposits and lending.  In the current low rate environment that's difficult and often banks are resorting to cost-cutting as a way to increase profits.  In Ameriserv's case cost-cutting will be hard because of their union employees.

In general Ameriserv's bank is nothing more than an average Mid-Atlantic bank.  They have a healthy loan portfolio and a low level of non-performing assets.  The bank doesn't hold excessive OREO (Other real estate owned), and they're profitable.  Overall there isn't much of a reason for Ameriserv's bank to be valued at less than their tangible common equity, which is $76m.

Before discussing the company's asset management operations I want to take a quick detour and talk about why I'm using tangible common equity and not book value, or tangible book value.  Ameriserv participated in the Small Business Lending Fund and took on $21m worth of preferred stock from the fund.  The goal of the fund was to increase lending in small banking institutions.  This preferred stock is counted as equity capital for regulatory purposes, but to investors it's better viewed as a loan.  If the bank were to sell the preferred would need to be paid off at par, which is $21m.  Equity holders would have a claim on what's left.  Book value includes preferred stock, whereas tangible common equity removes preferred stock, goodwill and intangible items.  In most cases tangible common equity is the number equity investors should be interested in.  The following picture shows their capital structure:

The holding company owns three subsidiaries, Ameriserv Bank, Ameriserv Trust & Financial, and a life insurance subsidiary that I couldn't find the name of.  The asset management subsidiary has $1.5b in AUM that generated $7m in revenue and $840k in profit last year for the holding company.  As mentioned above the company is deeply affiliated with unions, and their asset management company is no different.  Most of the firm's AUM is union pension funds, which is somewhat of a niche business.

The asset management subsidiary's earnings are passed through to the holding company, meaning there is no hidden value with their earnings stream.  The value lies in what the firm might be worth apart from Ameriserv.  Based on their revenue and assets last year they are charging .47% of assets in fees.  Typically asset management firms are valued as a multiple of AUM.  I spent a long time searching for the number, but was only able to find a range from 2% of AUM to 7% of AUM as a valuation guideline.  If we use a conservative range of 1%-3% of AUM the asset management subsidiary alone could be worth $15m-45m.  Given that the company's market cap is only $59.7m, this is significant!

The trouble with a sum of the parts for Ameriserv is figuring out how the value could be unlocked.  It's unlikely the bank would sell, integrating a union with a non-union workforce would be problematic, especially because Ameriserv derives so much of their identity from their union roots.  Separating off the asset management firm would be much easier.  The company could spin it off as a separate company, or could sell it to a larger asset manager.  The company's asset managers have expertise with union assets, but that expertise could travel, along with the relationships to a company like Vanguard, which is similarly priced, and also located in Pennsylvania.

Ameriserv is a unique niche bank, and while their banking operations are pedestrian they have a valuable asset with their asset management subsidiary.  If the market were to recognize the true value of both of these companies Ameriserv's market cap could be anywhere between 58%-108% higher than it currently is.

Disclosure: No position