Union Bankshares Delivers Robust Q2 2025 Results Amid Rising Rates

Union Bankshares (NASDAQ: UNB) has reported a standout performance for the second quarter of 2025, showcasing resilience in a challenging interest rate environment. The bank's strong loan growth, disciplined balance sheet management, and sustained dividend payouts highlight its ability to navigate macroeconomic pressures while positioning itself for long-term growth. Below, we dissect the key drivers of its success and assess the sustainability of its dividend.

Loan Growth Fuels Asset Expansion

Union Bankshares reported a 9.8% year-over-year increase in total loans to $1.11 billion, a key contributor to its 5.9% rise in total assets to $1.48 billion. This growth was driven by robust demand for both commercial and residential lending, with secondary market activity also playing a role. The bank sold $31 million in residential loans to the secondary market in Q2—a 60% jump from the same period in 2024—which bolstered fee income and freed up capital for new origination.

The loan portfolio's expansion underscores management's focus on high-quality lending. Nonperforming assets (NPAs) remained minimal at 0.20% of total loans, with net recoveries of $5,000 for the quarter. This strong asset quality, coupled with an allowance for credit losses (ACL) of $175.7 million (0.96% of total loans), suggests the bank is well-insulated against potential defaults.

Net Interest Margin Resilience Amid Rate Pressures

While Union Bankshares did not explicitly report its net interest margin (NIM) for Q2 2025, its 10.1% year-over-year increase in net interest income to $18.7 million signals resilience. This growth occurred despite a 17.1% rise in interest expenses, suggesting the bank successfully managed its cost of funds.

Analysts note that the bank's ability to grow earning assets (driven by loan growth) and manage deposit rates played a critical role. The cost of deposits likely declined as the bank optimized its funding mix, while the accretion income from recent acquisitions (though not explicitly mentioned in 2025 results) may also have provided a tailwind. This resilience is particularly notable given the Federal Reserve's continued rate hikes, which have compressed margins for many banks.

Balance Sheet Strength and Liquidity

Union Bankshares maintained a strong capital position, with equity rising to $71.3 million and book value per share increasing to $15.66—up 11% year-over-year. While the accumulated other comprehensive loss (AOCI) widened to $31.2 million (reflecting unrealized losses on investment securities), this is a non-cash item and does not affect regulatory capital ratios.

Liquidity remains robust: deposits grew to $1.10 billion, and borrowings from Federal Home Loan Bank and Federal Reserve programs totaled $305.7 million. The loan-to-deposit ratio improved, reducing reliance on costlier wholesale funding.

Dividend Sustainability: A Conservative Approach

The bank maintained its quarterly dividend of $0.36 per share, a 12% increase from the same quarter in 2024. With earnings per share (EPS) at $0.53, the payout ratio remains conservative at 68%, leaving ample room for reinvestment.

However, noninterest expenses rose 7.2% to $10.5 million, primarily due to higher personnel costs. This investment in staffing could support future growth, but management will need to balance expense growth with margin preservation.

Key Risks and Considerations

• Interest Rate Sensitivity: While the NIM held up in Q2, further Fed hikes could pressure margins if deposit costs rise disproportionately.
• Securities Portfolio Drag: The AOCI reflects unrealized losses on securities, which could become a cash drain if sold at a loss. Management should prioritize portfolio rebalancing to mitigate this.
• Competitive Landscape: Strong loan growth may draw competition, requiring Union Bankshares to maintain disciplined underwriting standards.

Investment Takeaway

Union Bankshares' Q2 results affirm its position as a well-managed regional bank capable of thriving in a rate-sensitive environment. Its strong loan growth, disciplined balance sheet, and conservative dividend policy make it a solid holding for investors seeking stability in financials.

Recommendation: Investors should consider adding UNB to portfolios seeking exposure to resilient regional banks. While the securities portfolio remains a near-term headwind, the bank's core strengths—asset quality, capital, and margin resilience—position it to outperform peers over the medium term.

Disclosure: This analysis is for informational purposes only and not a recommendation to buy or sell securities.