UNB - Union Bankshares: A Strong Income Stock

Summary

• Long-term portfolios should have some income, and Union Bankshares, Inc. pays a strong 5.5% yield, and raises its dividends.
• Continued loan growth is a strength.
• Union Bankshares is growing deposits and enjoys strong margins, but noninterest income is falling.
• We like Union Bankshares, Inc. shares in the low $20s.

Looking for some income? Sometimes you can find income within the regional bank stocks. 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. We believe yields on loans will continue to improve, but competition for deposits will only grow, which may cap net interest margin. While net interest margin exploded wider for banks in 2022, margin expansion should stall in 2023 as costs of funds catch up to rates. Most banks we have covered are also preparing for losses on loans this year.

We believe banks, and particularly regionally focused banks will continue to enjoy strong quarters in 2023 thanks to the return of higher rates. Even with the threat of a looming recession, banks are well-positioned for growth over the next few years. Today we continue our bank coverage with Union Bankshares, Inc. ( UNB ) The bank just reported its fiscal Q4 earnings . This is an income stock that is operationally healthy and yields about 5.5%, and continues t o raise its dividend every year . Let us discuss the key trends in the just-reported Q4 earnings.

Union Bankshares saw a 10% growth in net interest income. Overall, Union reported net interest income of $12.4 million for the quarter compared to net interest income of $1.0 million a year ago. On a per share basis, overall net income was $0.77 this quarter, up from $0.76 a year ago.

Loans grew but noninterest income took a hit

Union Bankshares, Inc. loans are up from Q3 and from a year ago. Growth in loans and deposits is key for any bank to see longer-term growth. Total loans were up 20% from a year ago and now total $0.961 billion. Despite the rising rate environment, loan demand for loan products remained strong. Despite strong competition for deposits, there was an increase in deposits to $1.2 billion from $1.1 billion a year ago. With that said, noninterest income was down and that is why Union Bankshares, Inc. earnings slipped from a year ago. Why did that happen?

The decrease in noninterest income was from a decrease in the gain on sale of residential loans of $0.73 million compared to last year, while noninterest expenses were higher. Keep in mind the farther we go this year, the more companies will need to compete with each other. What that means is that the cost of funds is on the rise for banks as they have to pay more on deposits. Still, despite paying more on deposits, there are strong yields on loans, and so net interest margin remained strong and led to interest income rising as we saw.

No loan loss provisions

What we found here is that there were no provisions for losses this quarter, completely bucking the trend of other banks. This means that the bank believes it is in strong shape on its loan repayment outlook. That is really strong.

SEC filings

We will have to wait for the more detailed SEC filings to dig deeper into the return metrics. The most recent filing was the 8-K for this quarter and earnings release, and it does not detail quality or return metrics. Now, what is interesting in the filing is that not only is the company raising its dividend, again, but Union Bankshares, Inc. instituted a limited repurchase program which will reduce the float marginally.

Final thoughts

This was a good quarter for Union Bankshares, Inc. The bank's operations are stable. Wait for a pull back and then add Union Bankshares, Inc. stock for income and stable dividend growth.

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