United Bancorp : November Stock Analysis

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	Target Price	US$ 20.00
	Current Price	US$ 15.05
	Total Return	34%
	Rating	BUY
	Market Cap.	US$88 mn
	Shares Outstanding	5.5 mn
	Free Float (%)	Appr. 82%
	52 Week Range (US$)	11.80 - 16.82
	Avg. Daily Value	US$ 19k
	Russell 2000 Index	2,362
	Insider Holding %	18%

Risk: Above Average

Forecasting and Valuations

	(US$mn except ratios)	2020A	2021E
	Net Interest Income	22.9	22.0
	Profit Before Tax	8.6	10.0
	EPS (US$)	1.39	1.56
	EPS Growth	16.8%	12.6%
	PE	10.8	9.6
	Dividend Yield	3.8%	4.5%
	Price/Book	1.3	1.1
	ROE	11.5%	12.4%

Analyst :

Sandy Mehta,CFA [e-mail] 1-617-848-8279

November 03, 2021

United Bancorp Inc. [UBCP]

Q3FY2021 Earnings Update

Industry: Banking Regional

Q3: Stellar +41% EPS Growth, 92% Above our Estimate

United Bancorp [UBCP] reported exceptionally strong +41% YoY EPS growth for Q3 ended September, which is fully 92% ahead of our estimate. This is the fifth straight quarter where UBCP has meaningfully surpassed our estimates, despite the challenging economic environment the past one year. It should be noted last year's Q3 was itself a record quarter, and thus not an easy comparison by any means. In fact, the last six quarters in a row have all been record EPS quarters for UBCP. Overall earnings continue to benefit from write-backs [i.e., positive income statement impact] of provisioning expenses as UBCP remains in an enviable position of being over-provisioned, a conservative and prudent position to be in, while asset quality remains strong with low levels of non-accrual loans.

With these strong results, we are increasing our 2021 EPS sizably by 26% to $1.56, up from our prior estimate of $1.24. We are maintaining our $20.00 price target for now, implying over 35% total return potential. Our price target suggests a P/E multiple of 12.8x on our 2021 estimate, which is quite reasonable in our view. UBCP's YTD earnings performance continues to be exceptional especially in light of the past Covid-19 recession, and with the bank's EPS growth and three positive dividend surprises [including a Special Dividend] in 2021, it is clearly fundamentally outperforming almost all small and large banks in the USA and globally.

We recently visited with the senior management of United Bancorp at their headquarters in Martins Ferry, Ohio one month ago. Specifically, we met CEO Scott Everson, CFO Randy Greenwood, and COO Matt Branstetter, the top three executives at UBCP. The visit reaffirmed several key tenets of our investment thesis in UBCP, specifically management's focus on organic [as well as possible acquisitions] long- term growth, prudent monitoring of costs, rewarding shareholders with regular and special dividends - all while maintaining a conservative approach which is appropriate for any banking organization. More details on our corporate visit in this report.

UBCP's asset quality has remained pristine, thus enabling the bank to be in a comfortable and enviable position of being overprovisioned in the face of below-expectations nonaccrual levels, which is leading to strong earnings growth in 2021. In fact, we expect this positive trend of write- backs of provisioning to persist for several more quarters, thus providing

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earnings growth tailwinds for most of fiscal year 2022. It is remarkable in hindsight that despite Covid-19, UBCP experienced sequential declines in nonaccrual loans throughout 2020. For Q3, nonaccrual loans [loans past due 30 days] stood at 0.67% of loans at September-end, down a tick sequentially from 0.68% of total loans at June-end, but up from 0.37% level one year ago. More importantly, the one-off $2.5 million hospitality loan that had been reported as non-accrual the past two quarters, was in fact paid off subsequent to September quarter-end, and will no longer be part of the non-accrual total going forward. Without this loan, non- accruals have actually declined YoY, despite the Covid impact on the economy this year as well as last. Finally, net charge-offs for the nine months YTD, excluding overdrafts, were a minimal 0.03% annualized. Even after the provisioning expense write-back in the last three quarters, UBCP's total allowance for loan losses to nonperforming loans stands at 143%. Total allowance for loan losses to total loans remains at a very comfortable level of 0.89%, suggesting further room for write- backs in provisioning expense for a few more quarters, in our opinion.

UBCP remains underlevered and well capitalized with a 19.1% total risk-based capital ratio, excess liquidity and a low loans-to-deposit ratio. With record earnings YTD in 2021 and a sharp increase in our estimates, UBCP is trading at only 9.6x P/E on our 2021 estimate, with an attractive 3.9% current run-rate regular [4.6% total including the Special Dividend paid earlier in 2021] dividend yield, and a forward 10.0x P/E on our 2022 estimates. UBCP continues to be focused on becoming a $1.0 billion bank in terms of total assets, which would imply 37% further growth. According to UBCP, "we are optimistic that as our economy starts to recover more fully, as we are starting to see in recent months, that we will have better opportunities to leverage our securities portfolio more in-line with our previous level and ramp-up our loan production to levels at which we are more historically accustomed; therefore, increasing our level of higher yielding earning assets and generating more interest and loan fee income."

Conclusion: Raise Estimates; $20 Target, Reiterate Buy at 9.6x P/E, 1.3x P/B & 4.6% Yield

We reiterate our Buy rating and our unchanged price target of $20.00 based on the stock trading at 1.3x trailing tangible price/book, and 9.6x P/E with a high 4.6% total dividend yield [3.9% yield on regular dividend] based on our 2021 estimates. Given that we are now close to the end of this year, and thus rolling forward to next year's estimates, the stock is trading at an 10.0x P/E, 4.0% regular dividend yield, and 1.1x price/book based on our 2022 estimates. Our target price suggests over 35% total return potential.

Our $20.00 price target implies a forward P/E multiple of 13.2x on our forward 2022 estimate, which is a huge discount to the overall market's [S&P 500 and Russell 2000 small-cap indices] current multiple of 21.5x and 28.1x P/E on 2022 consensus forecasts. Our target price also suggests a 3.1% dividend yield and a 1.4x price/book on our 2022 dividend and year-end book value estimates. We believe the P/E of 13.2x and dividend yield of 3.1% implied by our $20 target is reasonable, given the P/E multiples and dividend yields [based on consensus 2022 estimates] of the following key indices: S&P Financial Index at 15.4x P/E and 2.0% dividend yield, the S&P Bank Index at 13.9x and 2.3%, the NASDAQ Bank Index at 14.6x and 2.2%, the KBW Bank Index at 13.4x and 2.4%, and UBCP's peers are at 14.5x and 2.6%, respectively.

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Headquarters Visit: Investment Thesis Reaffirmed

We visited with the senior management of UBCP at their corporate headquarters in Martins Ferry, Ohio last month. The two hour meeting touched upon many key short-term and long-term issues, and management's overall vision and direction for the bank. In addition to UBCP's official declared goal of reaching $1 billion in assets in a few years, management is also keen on reaching the billion dollar mark in terms of stock market capitalization, which admittedly is a much longer-term target. The focus of the growth is primarily organic, but as witnessed by the Powhatan deal a few years back, the board is also open to acquisition opportunities that may present itself. Within small and mid-cap banks, issues such as succession planning, keeping up with technology upgrades and spending, struggling to attain critical mass, etc. all can lead to insiders looking to sell. This can result in accretive deals for UBCP. Of course, UBCP does not have any specific acquisition targets, and the timing of any possible future deal depends upon many factors, including overall market conditions.

Operationally, UBCP continues to proactively invest in technology, both in terms of hiring the right people to manage and enhance the bank's tech capabilities, but also to make sure they are keeping up with the latest customer service online trends within the broader industry. While this prudent investment and expenditure is taking place, UBCP is also mindful of cost control, and looking to pare excess or redundant expenses which do no not impact operations and the overall customer experience. This is perhaps most recently evidenced by UBCP closing down its Wheeling, West Virginia [just a few miles away from UBCP's corporate headquarters, hence the redundancy] loan processing facility and its Dillonvale, Ohio branch. Earlier this year, a new branch was also opened at Moundsville, West Virginia. Thus UBCP is constantly striving to optimize physical infrastructure and capital deployment.

Another aspect of management's operating style which stood out during our meeting was a prudent and conservative approach to running the firm. This is essential for a banking organization, and it is reflected in UBCP's credit quality, conservative provisioning stance, and excess capital ratios which we have seen during the past two year Covid-19 turmoil.

Finally, as we have mentioned previously in our reports, management remains focused on rewarding shareholders with its proactive dividend policy. We discuss this further in this report.

ROE jumps to 13.3%; Significant Scope to Increase Loans-to-DepositAnnualized ROE for Q3 jumped impressively to 13.3%, and was a considerable improvement QoQ from the 11.80% annualized level of Q2, and up YoY from the 10.6% level of last year's Q3. ROA was correspondingly also strong at 1.3% annualized in Q3, up YoY from 1.0%. UBCP's book value per share increased 4% YoY to $11.74 as of September-end.

Management has hinted that they feel demand for loans should soon start to increase with growth in the economy. For Q3, gross loans did grow 4.3% YoY which, while not robust, was still nonetheless stronger growth than prior periods,

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and hopefully a sign of increasing loan demand as Covid-19 continues to diminish. Loans-to-deposits stood at 76% as of September-end, flat QoQ as well as YoY, but down considerably from 81% at 2019 year-endpre-Covid. As we have mentioned previously, a slowdown in lending due to the overall economy and Covid- 19, as well as the low loan-to-deposit ratio of the Powhatan acquisition, gives UBCP tremendous headroom to increase lending and interest income going forward. The current level of loans is abnormally low, and below the bank's more optimal level of around 90%. By way of reference, UBCP had loan-to-deposit levels of 105% in 2016, and 102% in 2015.

While loan growth did uptick in Q3, there are numerous factors which could lead to further loan growth. Most parts of the US are experiencing a residential housing boom, driven by work-from-home, people fleeing big cities, consumers spending more on their homes in lieu of vacations, millennials reaching home-buying age, etc. With mortgage rates still at low levels, lumber prices now down some 15% YTD [after being up over 100% YTD earlier this year in spring], a recovering economy, and employment gains, we are hopeful UBCP will see an uptick in lending in various areas such as consumer, commercial real estate, residential housing, etc.

3 Dividend Hikes, 1 Special Dividend Announced in 2021

In August, the dividend rate was increased to a $0.59 annualized run-rate, up from the prior $0.58 level. While the increase is not large, it is nonetheless significant given that UBCP has increased its dividend thrice this year, including a 10 cent Special Dividend announcement which took place in February. This amounts to three positive dividend surprises during the past nine months! There are not many banks globally that have maintained their dividend in 2020 during maximum Covid-19 uncertainty, and increased it this year. We continue to forecast a dividend increase for next year 2022 as well, with the possibility of another Special Dividend.

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One of the tenets to our positive thesis on UBCP has been management's and the board's keen focus on growing their dividend over time, and the current Annual Report highlights this track record going back to 1983:

The 2021 regular dividend payout ratio remains moderate, and therefore imminently sustainable in our opinion, at 38% of expected annual EPS. This payout level is lower than the ~46% level of the past several quarters, suggesting room for likely dividend hikes. As a reminder, UBCP had paid out as high as 63% of EPS via dividends as recently as 2018. Our $0.61 dividend forecast for 2022 may also prove to be conservative, given it implies only a 40% payout ratio.

With the benchmark US 10-year Treasury yielding around 1.6%, and the Fed Funds rate still near zero, UBCP's dividend yield is very attractive in our opinion, and among the top 10% of all US equities, and higher than the dividend yields of various bank/financial indices.

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