Union Bankshares' Q2 Surge Masks Underlying Challenges: Can Dividend Payouts Continue?

The Q2 2025 results from Union Bankshares (UNB) reveal a paradox: robust net income growth clashes with troubling signs of rising operational costs and liquidity risks. While the 18.6% jump in net income to $2.4 million and a 17% rise in loans to $1.11 billion highlight strong momentum, the 7.2% surge in noninterest expenses, reliance on costly brokered deposits, and a sharp drop in six-month EPS to $0.53 from $1.08 in 2024 underscore vulnerabilities. This article assesses whether the bank's dividend declaration signals confidence or overextension, and what investors should watch next.

The Net Income vs. EPS Dilemma

Union Bankshares' net income growth to $2.4 million (up from $2.0 million in Q2 2024) reflects effective management of loan portfolios and rising interest rates. However, the six-month EPS decline to $0.53 from $1.08 in the prior year raises questions. This drop suggests either dilution from share issuance or an accounting anomaly, such as one-time gains in 2024. Investors should scrutinize the company's capital structure and earnings quality in upcoming filings.

Loan Growth: A Double-Edged Sword

The 9.8% increase in loans to $1.11 billion, driven by commercial and residential lending, bolsters asset growth. This aligns with Union Bankshares' focus on community banking, where it maintains an “Outstanding” CRA rating. Yet, the surge in loans must be balanced against potential defaults as regional economic conditions evolve. The bank's minimal past-due loans and net recoveries of just $5,000 in Q2 signal strong credit discipline. Still, investors should monitor how rising rates might strain borrowers' repayment capacity.

Liquidity Risks: Brokered Deposits and Cost Pressures

A critical concern is the $65.3 million in brokered deposits, which now account for ~6% of total deposits. While these funds support loan growth, they come with higher costs and less stability than core deposits. If market rates rise further, Union Bankshares could face margin compression as it competes for deposits. Meanwhile, noninterest expenses jumped 7.2% to $10.5 million, largely due to higher salaries and benefits. This trend threatens future profitability unless cost controls improve.

Dividend Sustainability: Confidence or Overextension?

The board's decision to maintain a $0.36 per share dividend (payable in August) reflects confidence in short-term liquidity. However, the dividend payout ratio for H1 2025—calculated as $0.72 (total dividends) divided by $1.08 EPS—was a manageable 67%. Yet, if earnings slip further due to margin pressures or loan losses, sustaining this payout could become problematic. Investors should watch for any signs of dividend cuts, which would signal financial strain.

Institutional Sentiment: A Mixed Picture

Institutional investors are divided. Funds like Millennium Management and Jane Street added shares, while others like 683 Capital and Citadel Advisors exited entirely. This divergence hints at uncertainty about Union Bankshares' long-term prospects. Insider purchases—like Patricia N. Hogan's 6-share buy—were minimal, offering little reassurance about executive confidence.

Investment Considerations

• Valuation: The stock's P/E ratio of 13.85 is deemed “fairly valued” by analysts, but this assumes stable earnings growth. If costs and deposit costs rise further, the P/E could expand uncomfortably.
• Dividend Yield: At 5.39%, the yield is attractive but historically elevated. This may reflect investor skepticism about growth, or a bid to retain shareholders amid risks.
• Regulatory Risks: The bank's small size ($1.48 billion in assets) makes it vulnerable to regulatory scrutiny, especially if brokered deposits grow.

Conclusion: Proceed with Caution

Union Bankshares' Q2 results reflect a bank in transition: it is growing loans and maintaining asset quality but faces mounting cost and liquidity challenges. The dividend declaration suggests short-term stability, but investors must weigh the risks of margin compression and deposit volatility. For now, the stock's high yield offers income appeal, but growth-oriented investors may want to wait for clearer signs of cost control and reduced reliance on brokered deposits. Monitor the bank's Q3 results closely, particularly its net interest margin and noninterest expense trends, before committing capital.

Investment Advice: Consider a small position in UNB for dividend income but set strict stop-losses. Avoid aggressive buying until operational costs stabilize and loan growth remains sustainable without excessive deposit costs.