31% Net Income Growth in Q2
United Bancorp (NASDAQ:UBCP) reported very strong +31% YoY net income [+18% EPS] growth for Q2 ended June, which was a record quarter for the company. This continues a string of strong quarterly results in 2020 for UBCP despite the Covid-19 recession, and the first half of 2021 is much better than expectations as well. 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 both Q1 and Q2, where UBCP reported a write-back of provisioning expenses. This means negative provisioning for Q2, 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, and management has also alluded to this prospect.
Revise upwards Price Target to $20, suggesting over 35% total return
We are maintaining our $20.00 price target for now, which implies over 50% total return. While the stock performed well following our February 2021 Initial Recommendation, and touched nearly $16.00 in both March and June, the stock has been inexplicably weak during July. Perhaps it’s the “sell in May and go away” phenomenon, and the Russell 2000 was also weak down as much as -8% at one point last month. In any case, following the strong Q2 earnings, a very high dividend yield, and good prospects as the US economy continues to recover – we would encourage investors to use the current stock price as a good buying opportunity.
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 $20.00 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 25x 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 9.4x P/E, 1.1x price/book, and 5.2% dividend yield [regular + special dividends declared].
4.5% Dividend Yield, Strong Dividend Record
UBCP has a strong track record with regards to dividends, and it just announced another Special Dividend a few 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 5.2% total [regular + special] dividend yield, despite the Covid-19 recession. The regular quarterly dividend yield presently is 4.5%. 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 5.2% 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 10% of all listed US stocks.
UBCP’s attractive Dividend Yield and high 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 and YTD, despite the Covid-19 recession. Overall net charge-offs to average loans were 0.04% annualized for Q2, below the 0.08% annualized level from last year’s Q2, as well as from the 0.8% level of Q1 2021. Total allowance for loan losses to total loans remains a comfortable 0.99%. Both Q1 and Q2 results have benefitted from negative provisioning expense, i.e. write-backs which are a positive line-item on the income statement, and we agree with management’s commentary that this trend may continue for a few more quarters.
High 18.1% 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 18.1%, and within this tier 1 capital is 13.3%. 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 76% as of June-end, down from 76.5% at 2020-end as well from 81% as of 2019-end. Management is hopeful that loan demand will rise along with a recovering economy. 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 +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. 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 5.2% total 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. Q2 has continued this trend of solid growth. The stock continues to look quite undervalued trading at a trailing 9.1x P/E and 1.1x price/book. We see over 50% total return potential for UBCP's stock assuming conservative multiples at a discount to the market as well as the financial sector.
