AmeriServ Financial, Inc. ASRV is the holding company of AmeriServ Financial. Expert community bank stock picker, Tim Melvin, thinks there is upside in stock. In order to gain a better understanding of business conditions and opportunities ahead, Melvin spoke with bank CEO Jeffrey Stopko.

Business Conditions

How would you describe the economic conditions and real estate market in your core Johnstown, Pennsylvania, region right now?

We didn’t bottom as far as a number of the regions in the higher growth areas, in the hour called the Great Recession. So, we didn’t get as low, but correspondingly we haven’t come back quite as much because we didn’t fall as far.

Generally, I would say the Pennsylvania unemployment rate is running a little bit better than the national rate and we’re a little higher than the Pennsylvania average unemployment rate. I would characterize employment conditions in our market as probably fairly close to the national average at this point in time.

The diversification of our lending opportunities outside of the core Johnstown, Pittsburgh has been beneficial to the growth we enjoyed over the past couple of years.

You do have offices in State College [home of Penn State University]. Do you guys do anything special to market to that enormous captive audience of college students?

Here’s what I would tell you, we really aren’t focused on the college students, let me make that point quite clear. We are more focused on business relationships in that market, okay.

We started in that market with one production office; since then we’ve had two branches. That’s one of the best demographic markets in Pennsylvania... I mean it has very good on employment rate.

The negative about that market is that because the demographics are good it is a very competitive market as well from a banking standpoint.

A lot of your markets are very competitive and all the major banks are in your service area. Do you have any special marketing strategies to compete against these guys on both the deposit and on the loan sides?

Within the core Cambria-Sommerset county markets, on the deposit side, we really don’t have the mega-bank presence there. So, on the deposit side we really don’t feel the impact of the ultra-big banks.

We do see PNC in State College… and in Maryland you run into the BBTs of the world. So it’s kind of interesting, for most of our deposit competition, we don’t encounter the big giant banks as much and tend to see it more on the loan side. But, on the loan side, our sweet spots for commercial deals are in the $3 million to $5 million range, so we tend to try to differentiate ourselves in that size range. We tend to focus more on commercial real estate transactions and C&I transactions. We try to set ourselves apart with our responsiveness to getting deals closed and working with the customers.

I think you’ll find that given the competitive nature of the market on the commercial side, our pricing has to be sharp to get the deals.

Loan Portfolio

Commercial and industrial are two of the top three loan classifications in your portfolio. Is that the focus of your loan production offices, just the commercial side?

Absolutely. It’s commercial and commercial real estate. I would tell you the focus of our loan production offices is not consumer in nature. For instance on residential mortgages we sell about 70 percent of those into the secondary market on the production we do each year. We’re not really trying to expand our residential mortgage loans that we hold on our balance sheet; we are looking to sell those.

AmeriServ has an amazing non-performing asset ratio for the last three or four years. It’s almost spectacular. How have you been able to achieve that?

That’s an area where we clearly exceed our peer group. Our asset quality is outstanding and it’s been that way for a few years.

We did see obviously an uptick in 2009 to 2010 in our non-performing asset levels, and we moved very aggressively to identify problem loans and get them out of our portfolio… I think we found that if you keep them in the portfolio and try to nurse them along, usually the result isn’t as good as if you recognize them and move aggressively to try to resolve the issue and get it out of your portfolio. I think that’s been a factor that’s caused our NPAs to come down more quickly.

We put some fairly significant loan loss provisions in 2009 and 2010 and as a result of the success of our workouts, you can see we had negative provisions in 2011 and 2012.

Do you frequently just sell the loans?

Given the nature, most of them have found another bank to take them on. We’ve had some sales, but we haven’t had to really do any bulk sales to reduce our NPAs. We’ve been able to work them out more on a specific loan-by-loan basis.

Per the most recent quarterly report, AmeriServ had loan growth of 7.1 percent year-over-year reaching record levels. You’re one of the few banks to be able to do that. How have you been able to do this?

I think that’s a testament to our strategies of the loan production offices. We’ve had good momentum in the Hagerstown, Maryland, market and the suburban Pittsburgh market. So, I think it’s been just a testament to our approach to try to diversify our lending portfolio into some better growth markets than what we see in our core market for commercial lending opportunities.

You spoke about having to have sharp prices to get deals done, but the bank’s net interest margin is better than your peers. How are you guys pulling that one off?

I think what helps us be a little better than peers is that fact that we do have more of our assets in loans than investment securities than our peer group. I think that is probably the key factor that allows our margins to be a little bit better than peers. Because generally, you’ve found that loans yield more than investment securities, particularly over the past several years.

I think you’ll see that our loans to deposit ratio is running in the low-90s. I think you’ll find our peer group is probably more in the mid-80s, so we’ve had more success in getting loan assets on our books, which has helped that comparison.

Investment Business

Last quarter, AmeriServ did have to take a non-cash charge related to your investment advisory business. Can you explain that?

We had purchased a registered investment advisor called West Chester Capital Advisors in 2007 and since then we have integrated them within our wealth management operations. We have a fairly large trust company, but obviously we like an RIA and we kept that as separate sub because we believe RIAs get more opportunities to manage larger pools of money.

What happened this year is one of the founding principles of that RIA elected to leave our employment. As a result of that, we believe that he had violated some of his non-compete and non-solicitation clauses in his employment agreement. We had some litigation process we went through related to that. That cost us some money and impacted our non-interest expense negatively this year.

At the end of the day, what happened is we did lose some customers from that RIA who were loyal to the original president/CEO of that unit. They basically followed him to his new operation. So, as a result of that, we did have a reduction in revenue and a reduction in customers, which impacted the profitability of that unit and as a result we took a goodwill impairment charge in the third quarter to recognize that. We do believe now that that operation is stabilized. The customer attrition that has occurred, we believe now is behind us.

We do still believe there’s still meaningful value in having an RIA and we’re moving forward to continue and grow that business again. And it was largely related to the customer disruption that resulted from the original founder of that business leaving our employment.

Shareholders

AmeriServ has a 10.6 percent insider ownership and there’s been a little bit of insider buying recently. Do you find that this keeps the board and the officers a little more focused?

They do. Your 10 percent number is a fair number and I would tell you that we’ve had a number of board members and members of management that have tended to be long-term holders of our stock. I think what you’ll see is people who have built positions over time. I think they continue to do so when opportunities present themselves going forward. When you look at us you don’t see a lot of selling by insiders. I think our insiders tend to have more of ‘buy and hold’ mentality and continue to increase their positions.

We do certain things to help that, like our director retainer. We pay for some of our director compensation in terms of shares rather than cash. That again helps build ownership position, so I think we tend to have more of a long-term focus on our company.

AmeriServ seems to have no Wall Street coverage, which is not unusual for a bank your size. Is that a concern of you or you’re just content to focus on banking and let the stock price take care of itself based on results?

I think our best approach is to continue to try and make our bank better and improve our financial performance metrics. I’ll be perfectly frank with you, it’s tough to get coverage from the brokerage firms when your markets cap is under a $100 million [AmeriServ has a market cap of about $58 million]. We’ll try moving forward and I see opportunities where we might be able to present ourselves or try to get more visibility on the company. But, in the near term, I don’t see a Wall Street-type firm picking up coverage with us just because of the size of our market cap and the number of shares we trade each day.

Looking Forward

I found the following quote in the last 10-K. “Usually at about this time it is our want to comment on the national and regional economies. In truth we are less optimistic in the opinions coming from inside the Washington Beltway and we expect 2014 will be a hard scrabble struggle, just as every year has been since 2009.”

Whoever wrote that was dead-on correct. Based on your experience in the banking industry and with AmeriServ, what do you see going forward for your bank and the community banking industry?

I’ll be cautious with this one because, it’s my personal view here, but I [think] they’re fair views of AmeriServ’s position. I think the quote you were reading was from a letter our chairman sent.

Each quarter they send out a letter to our shareholders kind of talking about our performance and the industry and the economy. I think what played out in 2014 and what we were concerned about is the continued relatively low interest rate environment, which makes pricing on the commercial deals we were talking about more competitive and you’re typically not getting as high a price on those loan yields as you normally would. This is because of the Fed’s ongoing efforts to really keep interest rates down. I think most people were expecting the long end of the curve to move up as we moved through 2014 and it really didn’t, it actually as you’re aware came down. So the 10-year’s is about 70 basis points lower today, than it was at the beginning of the year. So, we weren’t really shocked by that unfortunately. We were hoping it would rise because our balance sheet would look better if rates rise.

I think that’s just the factor of what’s happening, domestically where we are seeing better growth numbers, but there’s such an impact from what’s going on internationally with Europe. I think that is having an impact on keeping the intermediate to long end of our interest rate curve low.

That happened in 2014 and as we’re moving into 2015, it looks like the domestic economy may be picking up some steam, but there’s a lot of international factors that are looking like they’re moving the other way. I think the Fed is positioning to begin to increase short-term rates in the second half of the year. It will interesting to see if the long end of the curve is able to move up.

You’ve been in the baking industry for some time and everything’s changed in the last few years. How are you guys dealing with the regulatory environment, the new restrictions of Dodd Frank, and the new cost?

Like any community bank, I think that’s a challenge for us. I think we generally have had what I would consider to be a more conservative approach to managing our company for some years. I think compared to some community banks we might be a little further ahead at the curve on that… I think we have layered in some of that regulatory cost related to Dodd Frank and the ongoing regulatory challenges. And believe me, I’m not saying there’s not more to come because I’m sure there will be. I think generally speaking we’ve been trying to stay up-to-date or as best we can with how the curve is moving there.

But, it is tough for a $1 billion bank. I’ll be frank with you, It’s an ongoing challenge and it doesn’t seem to be getting any easier.

In the community banking industry there’s a school of thought that says, “It’s just too tough for banks of $3 billion in assets to make it on their own and there’s going to be continued consolidation in the industry.” How do you think all that plays out and how does it impact your bank?

Yeah I guess it’s interesting that you use the $3 billion figure. I heard $1 billion a number of times to have enough scale to try to continue to make sense of it. I think there was a real interesting acquisition announced recently with BB&T buying Susquehanna, which was a rather large community bank I believe. So, I’m curious to see if that triggers more consolidation activities in Pennsylvania, because obviously Susquehanna was based in central Pennsylvania.

I would tell you this: it seems like banks are sold, they’re not bought. I think it has to be a realization on the part of sellers that they feel they can no longer compete attractively and they’d rather partner with somebody larger. That’s what usually gets the deal done. What we’re hoping is that within the markets we operate there may be acquisitions that cause disruptions, because what we found is that if there’s disruption in a market, which tends to lead to more opportunities.

I’ll be candid with you, given the fact that our stock we believe right now isn’t trading at a strong enough multiple for us to be acquiring folks. So, our focus continues to be organic growth and continuing to improve our profitability metrics. If we can improve our stock price, that would give us better currency to participate in the acquisition game at some point in the future. But, near-term, I don’t see us being an acquirer or look to be opportunistic.

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