Univest Q3 2025 Earnings Call - Public funds surge inflates deposits and excess liquidity, muting reported NIM while core margin expands

Call Operator/Moderator: Thank you for joining today’s call. Can I take your first and your last name, please? Thank you. What company are you calling from today? Thank you. I’ll get you transferred into a call now.

Jeff, Executive (likely CFO or Senior Finance Leader), Univest: 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 to $162 million during the quarter. During the second quarter of this year, we recorded a $7.3 million charge related to a commercial loan relationship that had been placed on non-accrual 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 receiver. The receiver has entered into an agreement with 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 further charge-offs. With regards to the $1.4 million 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.

Brian, Financial Executive, Univest: 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 bill. However, core NIM of 3.33%, which excludes the impact of excess liquidity, expanded by nine 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. The average ratio was 1.28% at September 30, consistent with June 30. Net charge-offs for the core NIM of $480,000 were three basis points annualized. Third, non-interest 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, non-interest expense increased $2.1 million or 4.4% compared to the third quarter of 2024. This increase was primarily driven by compensation costs, specifically annual merit increases and variable incentives. Additionally, increases in bank shares tax and loan workout fees. As mentioned, through the first nine months of the year, expenses were up 2%. 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 2024 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 to $13 million for 2025.

However, the provision will continue to be event-driven, including loan changes and 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 $3.4 million gain on CMSRs 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 base. There is a risk to this guidance if the government shutdown continues or unable to originate and sell SBA loans during the fourth quarter. Fourth, we reported non-interest expense of $100 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 the current statutory rates. This concludes my prepared remarks. We will be happy to answer any questions. Would you please begin the question and answer session?

Call Operator/Moderator: Thank you. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, ensure your device is unmuted locally. We have a question from Tyler Cacciatori from Stephens Inc. You’re live now with Stephens. Please go ahead.

Good morning. This is from Aberry. Yes.

Tyler Cacciatori, Analyst, Stephens Inc.: Morning. Thanks, Tyler.

If you could just walk me through the public funds commercial deposit inflows, what’s going to be there versus coming out going forward? I guess, kind of the same question for cash balances.

Brian, Financial Executive, Univest: Yeah. We would expect a normal season outcome would be $75 million to $100 million of outflows of public funds per month in the fourth quarter, and we see that trend continue the first quarter. The commercial deposit bill that we saw, there’s a couple one-timers in there that are transaction-based, so we’ll see some of them flow out as well. We will see, kind of consistent with three years, that excess liquidity start to diminish, potentially cut in half, call it, through the fourth quarter, and then see it continue to wind down in the first quarter.

Great. Thank you. My next question is just on the margin. If you could add some more color on the NIM outlook, the NIM, would also love to hear about incremental loan yields and when the cost of deposits settle out once the seasonal items roll.

Yeah. As it relates to NIM, as I said, I expect the core NIM to be relatively flat. Reported NIM, just based on the timing of excess liquidity outflow, that’ll be within a couple of basis points over here in the third quarter. We continue to see strong new loan yields hovering around just the 7% range on the commercial side. Those had been north of 7% for the last several quarters, but with Fed rate action and the like, you see those ticking down a little bit. On the cost of funds side, I mean, we still have the opportunity for certificates of deposit to be repricing as they mature and come through. An opportunity that’ll continue to lead a little bit of it there. Again, as we see the higher cost public funds, we expect that to tick down a little bit as well.

Great. If I could just squeeze one more, 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 in the next few quarters and what the main drivers are there. That’ll be it for me. Thank you.

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 a growth last year. We are expecting some level of growth, consistent with the guidance that Brian provided, in the fourth quarter. It’s subject to what happens on the prepayment activity, but we feel 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. That continues to be the governor. The other part of what’s going on on our loan growth story is, from a CRE perspective, we’re much more focused on construction commitments.

Those are going to ebb and flow based upon draw activity, whereas we are doing permanent takeout finance as well. We’re actually keeping 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 profit ratios. On the mortgage side, we have returned over the last, back to more traditional mortgage banking, which has also led to a decline in the level of residential mortgages we’re putting on. There’s a balance as we move forward here, but pipelines on the commercial side are healthy and continue to be strong.

Call Operator/Moderator: Thank you. Our next question comes from Emily Lee from Boston University. Emily, your line is now open. Please go ahead.

Emily Lee, Analyst, Boston University: Hi there. This is Emily stepping in for Timothy Switzer. Congratulations on the quarter.

Brian, Financial Executive, Univest: Morning, Emily.

Emily Lee, Analyst, Boston University: Thanks for taking my question.

Brian, Financial Executive, Univest: Thank you.

Emily Lee, Analyst, Boston University: I wanted to kind of ask about, you mentioned in terms of the cost of funds and opportunity for certificates of deposit to reprice as they come through. I was wondering what amount of certificates of deposit are set to reprice over the next few quarters, and also more generally, how has deposit competition been looking in your markets? I know last quarter you mentioned it’s been a little fierce, so I was wondering if you’re still seeing that and if there’s any opportunity to bring down those deposit costs further outside of certificates of deposit too.

Brian, Financial Executive, Univest: Yeah. No, this is Brian, Emily. On the CD side, we have a couple hundred million dollars a quarter of CDs that are maturing and churning, and we had that throughout this year, and that continues to be the case for the foreseeable future. As it relates to the 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 attractively and cost-effective deposits.

Executive, Univest: What we’re seeing on the CD side specifically from a competitive nature is that a lot of credit unions are, we would offer that rate for maybe a seven-month term, and they’re extending that into 24 months and beyond terms. Given what we’re seeing and anticipating subsequently from Fed movements, that’s just not realistic, and not just not good for us from a net interest margin perspective. That’s where you see the biggest and strongest competition.

Emily Lee, Analyst, Boston University: Understood. Thank you. In terms of the NIM, as it relates to Fed rate cuts, what’s the exact impact or, I guess, the range of the impact for each 25 basis point rate cut that would have on NII and the NIM?

Brian, Financial Executive, Univest: For the first, the next couple of cuts, we’ll call it, not expected to be overly impactful. There may be some timing within a quarter depending on when your variable rate loans and deposits may reset and the expectations of that leading up to a cut. All things equal, over a couple-month time horizon, it’d be relatively neutral for the first couple of cuts here. As you get deeper into a cut cycle, you’d start to see potentially a little bit of pressure. Again, that all gets back to the competitive environment at that point in time and what occurs. Our balance sheet models out relatively neutral at this point.

Emily Lee, Analyst, Boston University: Okay. Got it. Thank you. Can you also remind us what portion of the loan book is floating rate? I believe a few quarters ago it was roughly one-third of the book, and I was wondering if that was still correct.

Brian, Financial Executive, Univest: Yes, correct. It continues to be right in that range.

Emily Lee, Analyst, Boston University: Okay. Got it. Just two more questions, if that’s okay. On capital deployment, you’ve continued to be active on the buyback front, and I was just wondering how we should think about the buyback story going forward. If you anticipate kind of sticking around the $6 to $7 million range quarterly, or if you kind of intend to pull back a little bit.

Brian, Financial Executive, Univest: 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 to deploy and return it to shareholders via things like the buyback. 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 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 would potentially be deploying more via buybacks.

Emily Lee, Analyst, Boston University: Okay. Understood. Also, just wondering how you kind of think about M&A given kind of a regulatory easing environment, and if your appetite for M&A has changed at all.

Executive, Univest: Yeah, Emily. 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. 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 we would basically be doing an M&A transaction, so I’d 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 really 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.

Emily Lee, Analyst, Boston University: Okay. Understood. Congratulations on the great quarter, and thanks for taking my questions, guys.

Brian, Financial Executive, Univest: Thank you.

Jeff, Executive (likely CFO or Senior Finance Leader), Univest: Thank you.

Call Operator/Moderator: Thank you. As a reminder, to ask a question, please press star followed by one on your telephone keypad now. We currently have no further questions, so I’ll hand back to Jeff for any closing remarks.

Executive, Univest: 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.

Call Operator/Moderator: This concludes today’s call. Thank you for joining. You may now disconnect your lines.