UNB - Dividend Growth Investors: Big Income With Union Bankshares

2023-10-23 09:01:02 ET

Summary

• Regional banks have been heavily impacted by the economic downturn, but their actual performance remains relatively strong, not all banks are created equal.
• Union Bankshares, Inc. offers a high and growing dividend income source and share prices have increased in the past two months while the market has been crushed.
• The bank has a strong track record and is expected to weather the margin storm and continue to be attractive to investors.

One of the sectors that has been absolutely crushed over the last year is banking, and many regional banks have taken it on the chin. We have covered a number of the regional banks each earnings season to get a feel for just how painful it has been. And what we have found is that despite the wreckage in share prices, actual performance of many of the banks is holding up. The stocks however have priced in pressures on margins and decreased loan demand at these higher rates. But folks, we are a debt driven economy. These high rates cannot last, or it will cause recession. Regional banks are largely being priced for a recession. We contend that the rate hiking campaign is pretty much at an end, and rates will hold steady for a few quarters then be cut in late 2024. With that said, we are revisiting one of the little known community banks that we cover, and it is offering big income, and believe it or not, share prices are up significantly in the last two months while the stock market, and regional banks as a whole, have been decimated. The name in question is Union Bankshares, Inc. (UNB).

UNB is a pretty nice chart to look at considering the broader ETF that looks at regional banks, the SPDR S&P Regional Banking ETF ( KRE ), has moved in the opposite direction.

Now, as we have been covering regionals, we can tell you that the income offered by some of the better run regional banks is getting too lucrative to ignore. We have been covering the banking sector earnings results this season, and while we see a mild recession as likely, we think banks will perform well in 2024. We believe yields on loans will continue to improve, but the cost of funds will start to hit its peak. As such, while margins have been crimped, we anticipate expansion in 2024, provided the rate hikes are complete.

Union Bankshares just reported its Q3 earnings . This is an income stock that is operationally healthy and yields about 5.6% here. One of the things we would like to point out is that this small bank should be on the radar of dividend growth investors. The bank continues to be a serial dividend raiser.

In the last 10 years, the dividend payout has nearly doubled. While there are sector pressures of course, the bank will weather the storm and continue to be attractive for dividend growth investing. It should treat you well in the next few years. Let us discuss the key trends in the just-reported Q3 earnings.

Union Bankshares is not immune to what is happening more broadly, but we do see a peak in cost of funds rates approaching. Net interest income was $9.1 million in Q3, down from $10.4 million or 12.4%, a year ago. However, the overall interest income collected was $14.8 million up nicely from the $11.5 million, or up 29.5%, due to the larger earning asset base and higher interest rates on new loan volume. But the cost of funds is up nearly 25%, and noninterest income was down slightly. On a per share basis, overall net income was $0.56 this quarter, down from $0.84 a year ago. While that is certainly painful on paper, we believe earnings will be troughing out next quarter as margins start to expand. The wildcard question is near-term new loan origination.

Loans grew

Union Bankshares, Inc. loans are up from Q2 and from a year ago. Total loans were up 5% from a year ago and now total $1.0 billion. Despite the rising rate environment, loan demand for loan products remained strong. Despite strong competition for deposits, there was a very slight increase in deposits to $1.22 billion from $1.20 billion a year ago. With that said, it was the $1.3 million decline in net interest income that drove down earnings, while there was a slight $0.073 million decline in noninterest income.

This release does not detail quality or return metrics. So we will need to wait for a later SEC filing to get that information, but the bank has remained highly efficient in early 2023, though you can be sure that the dip in earnings and margin income led to declines in those return metrics and efficiency. If there is one risk here, it is that the tangible book value is about $10, so you are paying a premium, but with the ongoing dividend growth and the fact that we see performance on margins hitting a trough next quarter, we think investors will be rewarded handsomely here.

Final thoughts

As we have detailed in many other columns, the banking industry is under a period of significant volatility this year. There are concerns industry-wide with liquidity, fears of deposit outflows, and interest rates hurting loan demand and causing the costs of funds to rise. So far, we have not seen evidence of real pain on loan demand or deposit outflows, but margins for UNB took a hit, just like the entire sector. The prolonged and steep yield curve inversion has been painful, but we are now seeing an un-inversion starting to take hold. Overall this bank's financial position remains strong, with a remarkable liquidity position, excellent asset quality in 2023 so far, and ongoing loan growth. The market has bid the stock up for a reason. We think dividend growth investors should have this on their radar.

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