United Bancorp: +21% Q1 EPS, 4.4% Dividend Yield, 18% EPS 5-Year CAGR, 35% Upside

Summary

• Q1 strong results with 21% net income growth, after record EPS in FY2020.
• Attractive 4.4% dividend yield, strong 39-year dividend track record, 5 Special Dividends in last 5 years.
• Well capitalized with 18.9% total capital, underleveraged with low loans-to-deposits, solid excess provisioning.
• Revise up target to $20 [total return of 35%]; stock up 19% in 2 months since our February recommendation.
• +18% EPS five-year CAGR, well managed with only five CEOs in 120-year history.

Photo by Dilok Klaisataporn/iStock via Getty Images

21% Net Income Growth in Q1

United Bancorp (NASDAQ:UBCP) reported very strong +21% YoY net income [+18% EPS] growth for Q1 ended March, which was up against a tough comparison [i.e., not impacted by Covid] in last year’s quarter. This continues a string of strong quarterly results for UBCP despite the Covid-19 recession. As mentioned in our initial note, UBCP remains in a solid and comfortable position of having excess provisions, which should set up the bank for strong earnings in 2021 and 2022. We saw this play out in spades in Q1, where UBCP reported a write-back of provisioning expenses. This means negative provisioning for Q1, or actually a positive line item on the income statement. This was a main contributor to the solid earnings, and we suspect this trend will continue for a few more quarters.

Revise upwards Price Target to $20, suggesting over 35% total return

We are revising upwards our price target slightly to $20, up from prior target of $19, based on the strong Q1 results, and also as we look forward to next year. Our new price target implies 35% total return, which is on top of the stock having returned 19% already from our initial recommendation a couple months back in February 2021. We arrive at our $20.00 target price using a 13.3x multiple on our expectation of forward 2022 EPS of $1.50. On a more conservative note, if we were to base our price target on trailing actual earnings, then our $20 target would be a 14.4x P/E on 2020 results. Whether we base our price target on last year’s actual results, or our 2022 estimate, we believe our P/E multiple assumptions are reasonable given the 14.5x P/E multiple of various banking indices, and the overall 23x forward P/E level of various small-cap indices. On today's stock price, UBCP is trading at attractive, and "deep value" levels [all trailing last 12 months] of 11.0x P/E, 1.3x price/book, and 4.4% dividend yield [regular + special dividends declared].

4.4% Dividend Yield, Strong Dividend Record

UBCP has a strong track record with regards to dividends, and it just announced another Special Dividend a couple months back. This is now the 5th Special Dividend declared by UBCP during the past 5 years. Inclusive of this Special Dividend announcement, UBCP has paid out $0.67 over the past 12 months [an increase of 20.7% YoY], representing a trailing actual 4.4% total dividend yield, despite the Covid-19 recession. Management is clearly focused on rewarding shareholders with a handsome yield, and this is an important consideration for many of its retail investors. This dividend focus is evidenced by a 39-year track record of paying dividends, including the aforementioned several special dividends during the past decade.

Currently, the total dividend yield is 4.4% for calendar year on 2021, based on the current regular dividend run-rate plus the Special Dividend. The payout ratio is relatively low at less than 50%, implying both that the dividend is sustainable, and also that there is room for it to continue to grow. Even with the prospect of higher US Treasury yields from today's below-normal levels, UBCP's dividend stands out among the top quartile of all listed US stocks.

UBCP’s attractive Dividend Yield and growth rate in dividends, plus occasional Special Dividends:

Source: Bloomberg Terminal

Strong Provisioning and Asset Quality

One of the most important factors to assess for any bank, especially during times of economic stress, is the level of non-performing [nonaccrual] loans and the trends in stress assets. UBCP scores very highly on this key metric, and UBCP has done remarkably well on the asset quality front in 2020, despite the Covid-19 recession. Although there was a slight uptick in nonaccrual loans to total loans of 0.71% [up from 0.58% last year] in Q1, overall net charge-offs to average loans were 0.09% annualized for Q1, in-line with the 0.08% annualized level from last year’s quarter. Importantly, UBCP’s total allowance for loan losses to nonperforming loans stands at 161%, up YoY from 146% at the same time last year. Total allowance for loan losses to total loans remains at a healthy level of 1.07%, up substantially from last year’s 0.60% level, suggesting further room for low provisioning expense and positive provisioning write-backs.

High 18.9% Capitalization, Low Loans-to-Deposits

Maintaining adequate and surplus capital levels is another key factor to look out for in banks, especially during times of recession. UBCP is in a strong capital position, both in terms of total and tier 1 capital, but also relative to overall leverage, as measured by equity-to-assets and loans-to-deposit ratios. UBCP's total capital ratio is a strong 18.9%, and within this tier 1 capital is 13.9%. Both of these metrics are much higher than regulatory requirements, and provide the bank a great deal of flexibility to grow lending. Interestingly, UBCP's capital ratios have improved during 2020, and are above the levels prior to Covid-19.

Due in part to slower loan growth as a result of the Covid-19 recession, loans-to-deposits currently stand at 74% as of March-end, down from 76.5% at 2020-end as well from 81% as of March 2020. Generally banks strive for a loans-to-deposits level of 100% or more. So there is ample room, supported by a stable deposit base, to grow loans and related interest income. It is interesting to note that UBCP had loan-to-deposits levels of 105% in 2016, and 102% in 2015.

Strong Growth Record & Future Prospects

2020 was a phenomenal year for UBCP in terms of EPS growth, despite the Covid recession which impacted banks severely across the globe. EPS grew +48% during the recently reported December quarter, +17% for full-year 2020, and the 5-year [2016-2020] CAGR was +18%. While we are not going to predict a continuation of such robust growth going forward, in part due to the inherent cyclicality and difficulty of predicting financial company earnings, we do see solid growth prospects for UBCP over time and over the cycle.

UBCP, despite its long operating history, is still relatively early in its life cycle. We believe UBCP has scope to continue to expand geographically within its immediate areas, and add new branches. Indeed, the CEO's letter to shareholders in its Annual Report has articulated an intermediate goal of reaching $1.0 billion in assets, which is 36% higher than today’s asset base. In the Q1 press release, management referred to opportunities to make acquisitions in order to enhance size and growth. UBCP closed out 2020 with year-end total assets $693 million, which have grown by 12.1% CAGR over the past 5 years. UBCP has the advantage of growing from a relatively small base, as far as banks go. This is positive for shareholders, as they can expect solid growth as well as a very high dividend yield!

Conclusion

UBCP is a very attractive mix of deep value metrics, strong 2020 and 5-year growth, solid capital and leverage metrics, and a stable and conservative management team. With a 2021 4.4% dividend yield [including the recent special dividend announcement], and the prospects for continued dividend growth, investors are getting a great mix of both growth plus yield. 2020 was a year of record EPS and growth for UBCP, despite the Covid-19 recession, and the trend of lower QoQ nonaccrual loans last year was impressive. Q1 has continued this trend of solid growth. The stock continues to looks quite undervalued trading at a trailing 11.0x P/E and 1.3x price/book. We see 35% total return potential for UBCP's stock assuming conservative multiples at a discount to the market as well as the financial sector.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.