Prepared remarks
Good morning and welcome everyone to the Univest Financial Corporation second quarter 2026 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Jeff Schweitzer, Chairman, President, and CEO of Univest Financial Corporation. Please go ahead.
Thank you, Audra. 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 solid second quarter as we reported net income of $23 million, or $0.82 per share, which was an 18.8% increase compared to earnings per share in Q2 of 2025. Our results for the quarter were impacted by a $5.2 million valuation adjustment on an OREO property due to an updated appraisal, which impacted earnings per share for the quarter by $0.15. Excluding this adjustment, our core operating results for the quarter were strong. Loan growth for the quarter was solid as we grew loans by $101.7 million, or 6% annualized. Total deposits for the quarter increased to $119.2 million or 7.2% annualized. We continue to execute on our initiative to lower our loan-to-deposit ratio, which on average was 180 basis points lower year-to-date than through the first six months of 2025. We also continue to be active with respect to stock buybacks, buying back 425,539 shares of our stock during the quarter.
Year-to-date, we have repurchased 776,677 shares. 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 thank you to everyone for joining us today. I would like to start by touching on three items from the earnings release. First, we saw continued strength and stability in our net interest income and margin during the quarter. Reported net interest margin expanded 16 basis points from the first quarter to 3.49%. In addition, core NIM, which excludes the impact of excess liquidity, increased nine basis points to 3.53%. Net interest income increased $2.9 million, or 4.5% compared to the first quarter, and increased $6.7 million, or 11.3% compared to the second quarter of 2025, driven by continued growth in average loan balances, improved asset yields, and a reduction in our overall cost of funds. Second, as it relates to credit, the quarter included two notable items. First, as Jeff mentioned, we recorded a $5.2 million pre-tax valuation adjustment on an OREO property based on an updated appraisal reflecting the property's estimated fair value less cost to sell.
This reduced earnings by $4.1 million after tax, or $0.15 per diluted share. Second, during the quarter, a commercial loan relationship totaling $28.6 million was placed on non-accrual status and a specific reserve of $9.8 million was established. Net charge-offs for the quarter were $1.9 million or 11 basis points annualized, and our allowance for credit losses coverage ratio remains stable at 1.28% of total loans held for investment. Third, non-interest income was $18.1 million for the quarter, a decrease of $3.4 million compared to the second quarter of 2025, primarily due to the $5.2 million OREO valuation adjustment. Excluding that item, underlying fee income trends remain solid as these businesses continue to perform well. Investment advisory commission and fee income increased $583,000, or 10.7% compared to the prior year, driven by appreciation in assets under management and new customer relationships.
Net gain on mortgage banking activities increased $365,000 or 37.2% compared to the prior year, primarily due to increased saleable volume and improved margins. We also recognized $708,000 of tax-free BOLI death benefit proceeds during the quarter. Turning briefly to our outlook for the remainder of 2026. Based on our performance during the first half of the year and our current assumptions, we are maintaining our outlook for loan growth of approximately 2%-3%, non-interest income growth of approximately 6%-8%, excluding BOLI death benefits and OREO valuation adjustments, non-interest expense growth of 3%-5%, and provisioning of $11 million-$13 million. As I've said in the past, our provisioning is event-driven and may be impacted in the second half of the year depending on the final resolution of the $28.6 million loan that was placed on non-accrual during the second quarter, as well as other charge-off activity, loan growth, changes in economic conditions, and the resulting impact on our coverage ratio.
We are updating our full-year net interest income growth outlook to a range of 8%-10%, reflecting the strength of the first half of the year and continued margin stability. Our effective tax rate is expected to remain in the 20%-21% range. That concludes my prepared remarks. Audra, would you please begin the question and answer session?
Questions and answers
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We'll take our first question from Tim Switzer at KBW.
Hey, good morning. Thank you for taking my questions.
Morning, Tim.
Morning, Tim.
My first one is on the outlook for loan growth. You guys maintained the low single-digit guide here. Could you maybe talk about the competition you're seeing in your various markets and if you're seeing it intensifying in either a specific market or a loan category? Then more specifically on the loan yield, it seems like there's a lot of competition there.
Tim, good morning. We are seeing increased competition on the pricing side of the equation across the board in all of our markets. We still believe there's room for us to get an adequate margin and participate to hit the loan growth numbers that Brian referenced a couple of minutes ago. Certainly, competition is increasing and spreads are narrowing. Many institutions are fighting for asset growth. That's one reason why we pivoted from more long-term CRE to more construction-oriented financing because we believe there's an ability to achieve slightly wider margins and additional fee income with that product offering.
Okay. That's helpful. Then can you discuss what the NIM trajectory looks like for you going forward, especially what would be the impact of rate hikes? Previously, you guys talked about being pretty neutral, obviously that was an environment where we're looking more towards rate cuts.
Hi, Tim. From a rate change perspective, either up or down, we model out fairly neutral at this point. That said, for the next several quarters, assuming nothing drastic occurs, I'd expect NIM to hold in the current range, give or take a couple of basis points. In that 350 basis points range, plus or minus, call it five basis points either way is where I expect us to operate for the next several quarters.
Okay. That's even assuming any changes to the excess liquidity on the balance sheet?
Yeah. That's from a core NIM perspective. Of course, excess liquidity will impact reported NIM. From a core NIM perspective, I expect us to maintain in that 350 basis points range, give or take.
Okay. Very helpful. Then on the credit side of things, can you remind us about this OREO property? I know it was OREO four years ago. Can you remind us what market it's in or the loan category? Is this a CRE loan?
It's a lab-space built office building that is approximately 165,000 square feet, and it's located in the Princeton market. There were significant repairs required on that building. Those were completed first quarter into second quarter of last year. There was a period where the property wasn't being marketed. We started marketing it second quarter last year and continued those efforts. We obtained an updated appraisal, and as a result of comps in the market, both from a sale perspective and a rental per square foot perspective, there was pressure on both of those, which resulted in a decrease in value from an appraised perspective.
Okay. It sounds like this has now been on sale for about a year. Any timeline on when you think a buyer can be found and the deal closed?
That's going to be event-driven and circumstance-driven. We'll continue to market it and see how that plays out over the next couple of quarters.
Okay. The last one on the other credit that moved to non-accrual. Any color you can provide on the industry it's in, maybe what's causing the issues? It sounds like the provision guide for this year is dependent on a resolution. Is this one that could be resolved this year?
Tim, it's an operating business and it's a commercial and industrial loan. It's a seasonal business with more discretionary items. They are both a manufacturer and distributor. The seasonality is strongest late in the third quarter into the fourth quarter. We'll continue to monitor how that evolves. The specific reserve that was recorded was based on indications of interest in the company as a whole and our current financial position relative to that. We will obtain updated 6/30 financial statements and continue our investigation. We are evaluating whether a total sale of the company is required, or whether it could be sold in parts. We'll determine what is the best outcome as we move forward. We still need to gather more information and update our analysis. We would like to see a positive resolution in the remainder of the year, but I can't guarantee that. We will work through this and take the best path forward.
Cool. Yeah, totally understand. Appreciate it.
We'll move to our next question from Jacob Morton at Stephens Inc.
Hey, good morning. This is Jacob Morton on for Matt Breese. I wanted to start out, I'm curious on what was the spot cost of deposits and the spot NIM at the end of the quarter. I'm just curious on how you feel about your ability to maintain or further lower deposit costs from here.
Jacob, spot deposit cost, when you have builds and things like that, there will be some noise, but it generally tracks what we saw for the quarter. Regarding ability to reduce cost of deposits and cost of funds from here, assuming a stable rate environment, I wouldn't expect much opportunity. We have just over $300 million of CDs that mature in the third quarter. Looking at our current offering rates, they are at or slightly above those levels, so there isn't much opportunity to reprice downward. That's why the NIM outlook is stable: there's modest opportunity on the asset side and flat to a bit of pressure on the liability side, which results in a stable core NIM.
Got it. Okay. Thank you. I appreciate the color there. Then thinking about the NIM longer term, when you model it out, how much longer might we see fixed asset repricing benefits to the NIM? I'm particularly focused on 2028, given five years prior in 2023, loan yield spiked for the industry. I'm generalizing, but thinking we start to roll some of those off is what I'm curious about and what the impacts are.
Out to 2028, it's difficult to pin down precisely. Looking through next year, I expect relative stability with slight upside. A lot can change between now and 2028, so I wouldn't put a firm pin in the ground on that today.
Got it. Okay. Thank you. Last from me on deal appetite from here. I'm just curious your perspective on the activity in the market. It's been sluggish from a deal perspective, but curious if conversations are similarly slow.
We're definitely open to conversations on M&A, both on the bank side and also on wealth or insurance organizations. We're always out talking to people. As we always say, something has to be for sale; you can't just go and buy it if it's not available. There are conversations happening. I would say it did slow down for a little while, but there are still conversations occurring in the market that we're participating in. I can't tell you there's anything imminent or that it will result in something in the near term because there has to be something actually for sale and an agreement on terms going forward. I'd say it's active, not as active as earlier periods, but conversations are ongoing and we are open to them.
Got it. Okay. Thank you. Thank you guys for taking my questions.
Yep.
Thank you.
We'll go next to Manuel Navas at Piper Sandler. Mr. Navas, your line is open. You may be muted.
Hey, do you guys hear me? Hello? Hi, I'm Eknor Najjar. I'm in here for Manuel. I had a question about what your deposit pipelines look like, and on the talent side, what is the new wave of talent hires going forward? Any color you could provide on that front?
Yes, we can hear you now.
Yes, we can hear you now. On deposit pipelines, we continue to be active. We have a compelling CD offering and strong appetite. We've discussed initiatives before, such as pursuing union deposits, and our public funds build will happen in the third quarter. Pipelines are strong, and some of that is seasonal with our public funds business, which will build strongly. We have offers in the marketplace working with title companies, law firms, and other sources to grow our deposit base over time. We're pleased with the pipeline and expect a ramp-up where we'll have some excess liquidity and an increase in public funds as we traditionally see. On talent, we've been active in the marketplace and have hired a couple of new relationship managers recently. When talent becomes available, we pursue opportunities to add it to our team. There's not a ton of disruption in the marketplace, but when it occurs, talent becomes available and we're in conversations. Similar to Jeff on M&A, we are always talking to people to attract quality talent to join our organization.
Thank you. That's helpful. When I was looking at your buyback pace, you bought back about 1.5 million shares. Should we expect the same pace to continue going forward?
We intend to continue to be active on our buyback plan. We have a lot of shares still authorized. There's been a run-up in our price, so we want to make sure we effectively use capital while balancing M&A opportunities and balance sheet growth. We're balancing all of that and expect to continue being active on buybacks in the near term.
The guide is that we are not looking to grow our capital ratios significantly from where we started the year. You'll see they grew in the first quarter and then came back down in the second quarter as we did the buyback. We'll look to continue managing in that general range.
Okay. Thank you, guys. Thanks so much.
Thank you.
Thank you.
That concludes our Q&A session. I will now turn the conference back over to Jeff Schweitzer for closing remarks.
Thank you, Audra, and thank you to everyone participating this morning on our call. We've had a strong start to the year through the first six months, and we're excited about the next six months as we continue to execute on our strategic plans and grow our organization for the long term. We look forward to talking to everybody at the end of next quarter. Have a great day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.