KBRA Affirms Ratings for Univest Financial Corporation

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Souderton, Pennsylvania-based Univest Financial Corporation (NASDAQ: UVSP) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Univest Bank & Trust Co., the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by UVSP’s diversified loan portfolio, both by lending category and industry, augmented by fee-based business lines, including a sizable wealth management division ($4.7 billion of AUM), mortgage banking operation, and insurance agency, which, combined, generate meaningful noninterest income (25%-30% of revenue historically). While earnings have been pressured by higher funding costs associated with increased deposit competition paired with NIB deposit migration amid the high rate environment (NIM down 25 bps in 2023), strong noninterest income contributions support earnings durability. UVSP maintains a solid funding profile comprised primarily of core deposits (85% of total funding), though strong loan growth (7% in 2023) pushed the loan-to-deposit ratio higher in recent periods (peak of 108% at 2Q23, though we note this is, in part, due to seasonality as the bank typically sees municipal deposit outflow peak during the second quarter before resetting). Management intends to lower the loan-to-deposit ratio over time (103% as of 4Q23), targeting the 95%-range, by slowing loan growth in 2024 to ~4% annually while growing core deposits by focusing on full relationships. UVSP’s prudent underwriting and overall conservative operating philosophy has resulted in a strong credit foundation. While the company has experienced isolated credit events, NCOs have been generally contained – averaging just 6 bps over the past five years. Additionally, both investor CRE and C&D loan concentrations remain comfortably below regulatory guidance. We consider UVSP adequately insulated to absorb reasonable credit costs given reserves of 1.30% of loans as of 4Q23, combined with the company’s solid earnings and capital position. While capital ratios have historically trailed peer averages (4Q23 CET1 ratio of 10.6%), we view the company’s capital management as adequate for its risk profile. Going forward, we expect management to maintain the CET1 ratio near current levels. The ratings are also supported by UVSP’s experienced management team that is highly knowledgeable of its core markets and maintains a relationship driven approach.

Rating Sensitivities

A rating upgrade is not expected, though growth and geographic expansion of the franchise, building capital metrics to levels consistent with the higher rating category, credit outperformance, and earnings that track above peer averages would be viewed favorably. Furthermore, lower trending capital ratios, substantial deterioration of asset quality measures, or a material decline in profitability beyond expectations could pressure the ratings.

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