UNIVEST FINANCIAL Corp Q3 FY2025 Earnings Call

Hello, everyone, and thank you for joining the Univest Financial Corporation Third Quarter 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. I will now hand over to Jeff Schweitzer, President, Chairman and CEO of Univest Financial Corporation. Please go ahead.

Thank you, Claire, and good morning, and thank you to all of our listeners for joining us. Joining me on the call this morning is Mike Keim, our Chief Operating Officer and President of Univest Bank and Trust; and Brian Richardson, our Chief Financial Officer. Before we begin, I would like to remind everyone of the forward-looking statements disclaimer. Please be advised that during the course of this conference call, management may make forward-looking statements that express management's intentions, beliefs or expectations within the meaning of the federal securities laws. Univest's actual results may differ materially from those contemplated by these forward-looking statements. I will refer you to the forward-looking cautionary statements in our earnings release and in our SEC filings. Hopefully, everyone had a chance to review our earnings release from yesterday. If not, it can be found on our website at univest.net under the Investor Relations tab. We had a strong third quarter, reporting net income of $25.6 million or $0.89 per share. This was an increase of $7.1 million or 38% compared to the same quarter in the prior year, primarily due to continued growth in our net interest income and margin, combined with prudent expense management as expenses are only up 2% year-to-date compared to the prior year. While loan outstandings contracted slightly during the quarter by $15.7 million, production has remained solid through the first 9 months of the year. However, we continue to be impacted by early payoffs and paydowns. Year-to-date, new commercial loan commitments through September 30 were $808 million compared to $659 million in the prior year. However, this has resulted in contraction in loan outstandings year-to-date of $41.1 million compared to growth of $163.5 million in the prior year. Deposits increased significantly during the quarter by $635.5 million, predominantly due to the seasonal build of public funds deposits of $473.2 million. Excluding the build in public funds deposits, deposits increased $162.3 million during the quarter. During the second quarter of this year, we recorded a $7.3 million charge-off related to a commercial loan relationship that had been placed on nonaccrual and had a $16.4 million carrying balance as of June 30, 2025. As of September 30, 2025, the carrying balance of loans and other real estate owned related to this relationship totaled $13.9 million and $1.4 million, respectively. The $13.9 million of loans is secured by commercial real estate, which is under the control of a court-appointed receiver. The receiver has entered into an agreement to sell the property, which is subject to court approval. If the sale is approved by the court and consummated in accordance with the executed agreement, we expect the proceeds will adequately cover our carrying balance, resulting in no further charge-offs. With regards to the $1.4 million residential OREO asset, the carrying balance is supported by an appraisal and eviction proceedings are underway. Before I pass it over to Brian, I would like to thank the entire Univest family for the great work they do every day and for their continued efforts serving our customers, communities, and each other. I'll now turn it over to Brian for further discussion on our results.

Thank you, Jeff, and I would also like to thank everyone for joining us today. I would like to start by highlighting a few items from the earnings release. First, reported NIM for the quarter was 3.17%, down slightly from 3.20% last quarter due to increased excess liquidity during the quarter from our seasonal public funds build. However, core NIM of 3.33%, which excludes the impact of excess liquidity, expanded by 9 basis points compared to the second quarter. We expect core NIM to be relatively flat in the fourth quarter. Second, during the quarter, we recorded a provision for credit losses of $517,000. Our coverage ratio was 1.28% at September 30, which was consistent with June 30. Net charge-offs for the quarter totaled $480,000 or 3 basis points annualized. Third, noninterest income increased $1.8 million or 8.8% compared to the third quarter of 2024. This includes a $987,000 increase in BOLI death benefits. Fourth, noninterest expense increased $2.1 million or 4.4% compared to the third quarter of 2024. The increase was primarily driven by compensation costs, specifically annual merit increases and variable incentives. Additionally, we saw increases in bank share, tax, and loan workout fees. As Jeff mentioned, through the first 9 months of the year, expenses were up 2% as we remain focused on prudent expense management. I believe the remainder of the earnings release was straightforward, and I would now like to provide an update to our 2025 guidance. First, for the full year, we expect loans to be relatively flat when compared to December 31, 2024. We expect net interest income growth to be 12% to 14% compared to 2024. Second, we expect our provision for credit losses to be $11 million to $13 million for 2025. However, the provision will continue to be event-driven, including loan growth, changes in economic-related assumptions, and the credit performance of the portfolio, including specific credits. Third, 2024 noninterest income totaled $84.5 million when excluding the $3.4 million gain on sale of MSRs and $245,000 of BOLI death benefits. For 2025, we expect noninterest income growth of approximately 1% to 3% off the $84.5 million base. However, there is a risk to this guidance if the government shutdown continues and we are unable to originate and sell SBA loans during the fourth quarter. Fourth, we reported noninterest expense of $198 million for 2024. For 2025, we expect growth of approximately 2% to 3%. As it relates to income taxes, our guidance remains unchanged at 20% to 20.5% based on current statutory rates. This concludes my prepared remarks. We will be happy to answer any questions. Claire, would you please begin the question-and-answer session?

We have our first question from Tyler Cacciator from Stephens.

This is Tyler on for Matt Breese. If you could just walk me through the public funds, commercial and broker deposit inflows, what's going to be there versus coming out going forward? And then I guess, kind of the same question for cash balances.

Yes. We would expect that normal seasonality would be $75 million to $100 million of outflows of public funds per month in the fourth quarter, and then we see that trend continue into the first quarter. And the commercial deposit build that we saw had a couple of one-timers in there that are transaction-based, where we'll see some of that flow out as well. So we'll see, consistent with prior years, that excess liquidity start to diminish, potentially cut in half, through the fourth quarter and then continue to wind down in the first quarter.

Great, thank you and then my next question is just on the margin. If you could add some more color on the NIM outlook, the NIM and the outlook from there, I would also love to hear about incremental loan yields and where you think the cost of deposits settle out once the seasonal items roll off.

Yes. So as it relates to NIM, as I said, I'd expect the core NIM to be relatively flat and then reported NIM just based on the timing of excess liquidity outflows and the like, that will be within a couple of basis points of where we were here in the third quarter. We continue to see strong new loan yields hovering around just below the 7% range on the commercial side. Those have been north of 7% for the last several quarters. But with Fed rate action and the like, you start to see those ticking down a little bit. And on the cost of fund side, I mean, we still have the opportunity for CDs to be repricing as they mature and come through. So that's an opportunity that will continue to lead to a little bit of benefit there. And then again, as we see the higher cost public funds run out, you'd expect that to tick down a little bit as well.

Great. And then if I could just squeeze one more in. You may have talked about it a little bit in the prepared remarks, but if you could just talk about the loan pipeline a little bit, what expectations are there for the next few quarters and kind of what the main drivers are there? That will be it for me.

Sure. Loan pipeline is healthy at this point in time, as Jeff referenced in the opening remarks, commitment and new activity actually exceeded last year. But this year, we're in a decline versus the growth last year. We are expecting some level of growth consistent with the guidance that Brian provided in the fourth quarter. It's always subject to what happens on the prepayment activity, but we feel good with the activity that we have in front of us and as we move forward here in the fourth quarter. We need to continue to match our loan growth with our deposit activity to keep our loan-to-deposit ratio in the range that we're targeting. So that continues to be the governor. And the other part of what's going on in our loan growth story is from a CRE perspective, we're much more focused on construction commitments. So those are going to ebb and flow based upon draw activity, whereas in the past, we were doing permanent takeout financing as well. So we're actually churning the same dollar of capital for construction activity multiple times and generating increased fee income, which is actually leading to some of the rationale behind our improvements in our profitability ratios. And on the mortgage side, we have returned over the last year plus back to more traditional mortgage banking, which has also led to a decline in the level of residential mortgages we're putting on our books. So there's a balance as we move forward here, but pipelines on the commercial side are healthy and continue to be strong.

Our next question comes from Emily Lee from KBW.

This is Emily stepping in for Tim Switzer. Congratulations on the quarter and thank you for taking my questions. I wanted to ask about the cost of funds and the opportunity for CDs to reprice as they come through. How many CDs are set to reprice over the next few quarters? Additionally, how has deposit competition been in your markets? Last quarter, you mentioned it was somewhat fierce, so I'm curious if you're still experiencing that and if there's any chance to reduce deposit costs further outside of CDs.

Yes. This is Brian, Emily. On the CD side, we have a couple of hundred million dollars a quarter of CDs that are maturing and churning. We had that throughout this year, and that continues to be the case for the foreseeable future. As it relates to rates, competition continues to be fierce, while at a lower absolute level just based on the interest rate environment, things still remain very competitive on the deposit pricing side for attractive and cost-effective deposits. Yes. What we're seeing on the CD side, specifically from a competitive nature, is that a lot of credit unions are offering rates for maybe a 7-month term, and they're extending that into 24 months and beyond. Given what we're seeing and anticipating subsequently from Fed movements, that's just not realistic and not good for us from a net interest margin perspective. So that's where you see the biggest and strongest competition.

Understood. Also regarding the net interest margin and its relation to Federal rate cuts, what is the specific impact or the range of the impact for each 25 basis point rate cut on net interest income and the net interest margin?

So for the first few cuts, we don't expect them to have a significant impact. There might be some timing issues within a quarter depending on when your variable rate loans and deposits adjust and the expectations leading up to a cut. But in general, over a couple of months, it should be relatively neutral for the first few cuts. As we progress further into a cycle of cuts, we might start to see some pressure. However, that depends on the competitive environment at that time and what happens then. Currently, our balance sheet model appears to be relatively neutral.

Okay. Got it. And can you also remind us what portion of the loan book is floating rate? I believe a few quarters ago, it was roughly 1/3 of the book. I was wondering if that was still correct.

Yes, correct. It continues to be right in that range.

Okay. Got it. And then just two more questions, if that's okay. On capital deployment, you’ve been active on the buyback front. I was just wondering how we should think about the buyback story going forward. If you anticipate kind of sticking around the $6 million to $7 million range quarterly or if you kind of intend to pull back a little bit?

So this is Brian again. As it relates to capital deployment, as we've said in the past, we're not looking to meaningfully grow our regulatory capital ratios, and we look at any capital that we do generate, we look at deploying and returning it to shareholders via things like the buyback. So we look to toggle our buyback activity based on our forward forecast of earnings growth and balance sheet growth accordingly. There's no anticipation at this time to cut back from that $6 million to $7 million per quarter, but we would look to opportunistically deploy. If we're in a position where capital is going to be growing, we could potentially be deploying more via buybacks.

Okay. Understood. And then also just wondering how you think about M&A given the regulatory easing environment and if your appetite for M&A has changed at all?

Yes, Emily. So our appetite really hasn't changed at this point. Part of the problem is when we look at the landscape, given that we're at the $8 billion range, to buy something to bump up right to the $10 billion doesn't make a lot of sense. And also when we look around, there just isn't much that we're seeing out there that we feel is something that we would really want to go after at this point, especially considering we have a lot of internal initiatives we're doing on the efficiency front and with digital that we really don't want to take our eye off the ball on what we're accomplishing there and what we're working on because if we were to do an M&A transaction, we would have to put a lot of that on pause. We see some good efficiency paybacks continuing to go forward as we continue to lower our efficiency ratio and manage expenses; we don't really want to take our eye off that ball and we'd like to continue to work through those projects before we start meaningfully looking at M&A. We're always open to it. If something popped that was very interesting and looked like it could be really helpful to our franchise, but it's not one of our, I would say, top strategic priorities at this point.

Okay, understood. Well, congratulations on the great quarter and thanks for taking that questions, Jeff.

We currently have no further questions. So I'll hand back to Jeff for any closing remarks.

Thank you very much, and thank you to everybody for participating today. We're excited about the quarter that we were able to print for the third quarter and look forward to finishing the year strong and talking to you in January. Have a good day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.