Univest Financial - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 diluted EPS was $0.69, slightly above Wall Street consensus of $0.685; “revenue” (S&P Global definition) was $75.3M versus $79.35M consensus, a miss. Net interest margin (FTE) expanded 11 bps sequentially to 3.20% on improved asset yields and reduced funding costs. Values marked with an asterisk are retrieved from S&P Global estimates data.*
• Asset quality was impacted by a single commercial relationship placed on nonaccrual due to suspected fraud; Univest recognized a $7.3M charge-off and ended with nonperforming assets of $50.6M (0.64% of assets).
• Deposits fell $75.8M q/q on seasonal public funds and brokered declines, but excluding those, core deposits increased $77.5M; noninterest-bearing deposits rose to 22.2% of total.
• 2025 guidance updated: loan growth 1–3%, net interest income growth 10–12%, provision unchanged at $12–14M, noninterest income growth 1–3%, and expense growth reduced to 2–4% (down from 4–5% intra-quarter); management characterized the aggregate impact as accretive to EPS and PPNR.
• Capital returns: declared a $0.22 quarterly dividend and repurchased 172,757 shares at $28.45 average during Q2; management intends to remain active on buybacks (earn-back still 2–3 years).

What Went Well and What Went Wrong

What Went Well

• Net interest income rose 16.7% y/y to $59.5M and 4.9% q/q, with NIM (FTE) up to 3.20% (core NIM 3.24% excluding excess liquidity).
• Noninterest income saw positive mix in service charges (+13.9% y/y), investment advisory fees (+4.2% y/y), and SBA gains (+$0.3M y/y).
• Strong capital/liquidity: cash and equivalents of $160.4M; committed borrowing capacity $3.6B ($2.3B available) plus $469.0M uncommitted lines; CET1 11.19%, leverage 9.94%, total risk-based capital 14.58%.

Management quotes:

• “We expect core NIM to contract by a few basis points in the third quarter due to the repricing of our 2020 sub-debt issuance and the seasonal build of higher cost public funds. However, we expect NII to be relatively in line with the second quarter.”
• “Production remains strong…we’re looking for prepayment activity to slow in the second half, which should lead to growth.”
• “We will continue to be active on buybacks…the earn-back period…is still within a two to three-year range.”

What Went Wrong

• “Revenue” missed consensus (actual $75.3M vs $79.35M*) as mortgage banking gains fell $0.73M y/y on lower salable volume, partially offset by fee growth in other lines. Values marked with an asterisk are retrieved from S&P Global estimates data.*
• Credit hit from suspected fraud: $23.7M relationship to nonaccrual, $7.3M charge-off; NPA rose to $50.6M; provision increased to $5.7M (vs $2.3M in Q1).
• Headline deposits down $75.8M q/q (seasonal public funds, brokered), though underlying core flows were positive (+$77.5M).

Transcript

Speaker 2

Morning all, and thank you for joining us. Univest Financial Corporation, second quarter 2025, at Banning School. My name is Kylie. I'll be coordinating the call today. If you'd like to ask a question during the call, you can do so by pressing the star followed by one on your telephone keypad. If you're ready to ask that line of questioning, press star followed by two. I'd now hand it over to our host, Jeff Schweitzer, to begin. The floor is yours.

Speaker 3

Thank you, Kylie. 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 Co., 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 Law. Univest Financial Corporation'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 reported net income of $20 million during the second quarter, or $0.69 per share. While loan outstandings contracted by $31.9 million during the quarter, production has remained solid through the first six months of the year. However, we continue to be impacted by early payoffs and paydowns. Overall, year-to-date commercial loan production through June 30, 2023 was $507 million compared to $402 million in the prior year. However, this has resulted in a contraction in loan outstandings year to date of $25.4 million compared to growth of $117.6 million in the prior year. While deposits decreased $75.8 million during the quarter, this is predominantly due to the seasonal decline of public funds deposits and the decline in brokered deposits. Excluding these declines, deposits increased $77.5 million during the quarter.

During the quarter, we recorded $7.8 million of net charge-offs, predominantly related to one credit relationship, which accounted for $7.3 million of the charge-off. The remaining balance of this relationship of $16.4 million has been placed on non-accrual and is supported by the appraised value of the real estate collateral. As this is still an active situation where fraud is suspected, we will have no further comments at this time. Absent this one relationship, credit quality continues to remain strong. 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.

Speaker 5

Thank you, Jeff. 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, during the quarter, reported NIM of 3.2%, increased by 11 basis points from 3.09% in the prior quarter due to increased yield on assets and a reduction in our cost of funds. Core NIM of 3.24%, which excludes the impact of excess liquidity, expanded by 12 basis points compared to the first quarter. We expect core NIM to contract by a few basis points in the third quarter due to the repricing of our 2020 sub-debt issuance and the seasonal build of higher cost public funds. However, we expect NII to be relatively in line with the second quarter. Second, non-interest income increased by $521,000, or 2.5% compared to the second quarter of 2024.

This was primarily driven by increases in investment management fees, gains on sale of SBA loans, and treasury management fees, partially offset by a decrease in net gains on mortgage payments due to elevated interest rates, environment, and competition. Third, non-interest expense increased $1.6 million, or 3.3% compared to the second quarter of 2024. The increase was primarily driven by compensation costs, specifically annual merit increases, medical costs, and variable incentives. I believe the remainder of the earnings release is straightforward, and I would now like to provide an update to our 2025 guidance. First, for the full year, we expect loan growth of approximately 1% to 3%, and we expect net interest income growth of 10% to 12% compared to 2024. Second, our provision for credit loss guidance remains unchanged at $12 million to $14 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 non-interest income totaled $84.5 million when excluding the $3.5 million gain on sale of MSRs and $245,000 of BOLI death benefits. For 2025, we expect non-interest income growth of approximately 1% to 3% off the $84.5 million basis. Fourth, we reported non-interest expense of $198 million for 2024. For 2025, we expect growth of approximately 2% to 4%. Lastly, as it relates to income taxes, our guidance remains unchanged at 20% to 20.5% based on current statutory rates. The aggregate impact of these guidance updates when compared to our most recent guidance is accretive to both EPS and PPNR. That concludes my prepared remarks. We will be happy to answer any questions. Kylie, would you please begin the question and answer session?

Speaker 2

Of course. Thank you very much. Good night. I'd like to open the round for Q&A. If you'd like to ask a question, please do that on the front of the staff followed by one on your telephone keypad. To remove yourself or any questioning, it will be star followed by two. As a reminder, to raise a question, it will be star followed by one. Our first question comes from Timothy Switzer from Keefe, Bruyette & Woods, Inc. Timothy, the line is now open.

Speaker 0

Hey, good morning, guys. Thank you for taking my question. I apologize.

Speaker 2

Go ahead.

Speaker 0

You broke up a little bit on my end on some of the guidance numbers. Can you give me your update for loan growth and expenses?

Speaker 5

Sure. Loan growth is 1% to 3%, and the corresponding non-interest income growth is 10% to 12%, and then expenses is 2% to 4%.

Speaker 0

Okay. Great. I guess, could you maybe talk about some of the changes there? It looks like both those numbers are down a little bit. Could you just talk about, you know, what you're seeing from the loan environment? Is there a lot of, is demand kind of faltering a little bit, or is it more about competition?

Speaker 3

No, actually, as Jeff referenced at the beginning of his remarks, Tim, loan activity and loan origination activity is strong or consistent with what it has been in the prior year. We were impacted fairly significantly by payoff activity in the first half of the year. We predict that and forecast that and are interacting with our customers to the best of our ability. We're looking for that to slow down, that being prepayment activity in the second half of the year, and we'll continue to produce at the level that we have, and therefore, that'll lead to growth.

Speaker 5

On the expense side, we just continue to see the benefit of our prudent expense management and discipline on that side. Of course, with some variable expenses like medical costs and some things like that that aren't directly controllable, as you trend through the first six months of the year, that's what's causing us to ratchet the expense growth down from 4% to 5% down to 2% to 4%.

Speaker 0

Gotcha. Okay. You guys are sitting with very healthy capital levels. You haven't seemed all that determined to execute in M&A deals. You guys have been doing a little bit of share repurchases, but you know that with the share price coming up, it's going to be a longer earning back. Can you kind of talk about what your strategy is going to be to efficiently deploy capital and whether you're going to return to shareholders or find some opportunities to reinvest into the business?

Speaker 3

Yeah. Tim, you know, we will continue to be active on buybacks, and even with the rise in our share price, the earning back period, while it's gotten longer, is still well within, you know, it's within a two to three-year range, even as we go up from here. We'll continue to stay active on the buyback front and see if that's a good use of capital. You know, while M&A isn't an immediate strategic priority of ours, we always want to have our eyes open and see what's available out there. There's nothing that's overly exciting right now, but we also look at, on the insurance side, wealth management side, we're always keeping our eyes open there too. We're not opposed to M&A. I would say it's probably more on the non-bank side than the bank side at this point that we would be more interested.

In lieu of opportunities like that, we're going to continue to also do share buybacks.

Speaker 0

Okay. I'm curious what you guys are hearing or seeing in terms of deposit competition out there. There's been some reports from some competitors that are starting to, you know, step up a little bit. With the Fed not lowering rates this year so far, it sounds like a lot of the deposit repricing has, you know, kind of already ran through.

Speaker 3

Yeah, I would say that that's consistent with what we've seen, especially on the consumer side, with money market rates and TD rates. It is a tough environment out there. People continue to fight for the deposit and to generate the liquidity necessary to support their growth. We've identified certain things, certain campaigns, and certain niches that we continue to push forward with. We look forward to continuing to grow our deposits as the year moves forward. As you well know, or most people know, as they follow us, the third quarter will be a peak quarter for us on public funds. That would be expected. We will continue to man through. It is a tough environment from a competitive perspective.

Speaker 0

Okay. Gotcha. Last question for me. Could you guys talk about your outlook in terms of the NIM trajectory going forward over the next couple of quarters? You mentioned public funds are going to be seemingly higher. Where's that impact a little bit? What kind of impact did you expect from one or two rate cuts in the back half of the year?

Speaker 5

Sure, Tim. As I had guided, for the third quarter, we expect core NIM to pull back. We're reporting NIM to pull back for sure. Core NIM to pull back slightly just, again, due to the repricing of our sub-debt issuance as well as those higher cost public funds coming on. We expect it to be flat to slightly up thereafter, assuming a relatively stable, interesting environment for the next several quarters. If the one or two rate cuts really did not expect it to be impactful over a longer term, there might be noise within a given quarter just based on how the timing of when assets and liability were repriced. Once that kind of lends itself through, you're not expecting that to be overly impactful due to our relative neutrality from an A1 perspective.

Speaker 0

Okay. Great. Thank you, guys, for taking all my questions. Appreciate it.

Speaker 3

Thank you, Tim.

Speaker 5

Thanks, Tim.

Speaker 2

Thank you very much. As a reminder, to raise a question, it will be star followed by one. Our next question comes from Tyler Cacciator from Stephens Inc. Tyler, your line is now open.

Speaker 3

Good morning. This is Tyler Cacciator from Stephens Inc.

Speaker 0

Morning, Tyler.

Speaker 3

Morning, Tyler. I just wanted to start. Last week, Senator Dave McCormick held the Energy and Innovation Summit in Pittsburgh, outlining a number of projects totaling around $90 billion in data centers, energy and power infrastructure, and some other projects, some of which are expected in Eastern Pennsylvania. Just curious if you've heard anything on these projects and if you think there could be some positive benefit in your footprint.

Speaker 4

I mean, anytime that there's investment in our state, we're obviously very supportive of that and excited to see the money flowing into Pennsylvania. We'll benefit more from our customers being able to participate in any projects that are being built out. We have a very diversified customer base, a lot of which are in electrical contracting and construction and things of that nature that could potentially benefit from this. I think it's a little early stages right now as far as that we've heard any significant chatter from our customers in market, but I know that everybody's excited, obviously, to see the investment made in Pennsylvania.

Speaker 3

I would just add, wouldn't it be Eastern Pennsylvania for us? We're obviously active in Central Pennsylvania, and we have a presence in Western Pennsylvania. To Jeff's point, we'd be certainly pleased to participate across our footprint.

Speaker 1

All right. Thanks. I just have one more. I know you talked about the pipeline a little bit. I was just wondering how yields are holding up. I know you cited some increase in competition, but in terms of spread compression, how much are you seeing there?

Speaker 5

We really haven't. New loan yields on the commercial side especially have been relatively stable for the last quarter or two. As we said, production remains strong. The lack of loan growth is really driven by the payoff headwinds.

Speaker 1

Okay. Great. Do you think, doubt any rate cuts as the pace of loan yield expansion is repeatable?

Speaker 5

Not repeatable. I think that'll definitely start to slow down from an expansion perspective because we have a repricing of the book occurs. Of course, as that pace gets higher, just on a notional basis, that expansion will start to slow down even if you can remain with consistent production volumes. I think it would slow down a little bit, and things remain competitive for sure, but nothing that would suggest at this point that it's going to start pulling back in anyway.

Speaker 1

Great. That's all for me. Thanks for answering my questions.

Speaker 5

Thank you, Tyler.

Speaker 3

Thank you, Tyler.

Speaker 2

Thank you very much. We currently have no further questions, so I'd like to hand back to Jeff Schweitzer for any further remarks.

Speaker 3

I'd just like to thank everyone for participating today. Hope you're having a great summer, and we look forward to talking to everybody after the end of the third quarter.

Speaker 2

As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.