KBRA Affirms Ratings for VyStar Credit Union and Revises Outlook to Negative

KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Jacksonville, Florida based VyStar Credit Union (“VyStar” or “VCU”) (“the credit union”). The Outlook for all long-term ratings is revised to Negative from Stable.

Key Credit Considerations

The change to Negative Outlook is primarily related to VyStar’s diminished earnings profile reflected by a 0.15% ROAA for 9M23, driven by weak NIM, relatively high noninterest expense, and additional provision expense required to offset higher levels of NCOs and NPAs through 9M23. Should credit conditions become more challenging, VCU’s weakened earnings power would provide less of an ability to absorb higher credit costs. However, VyStar’s ratings are supported by its well-executed credit union model that benefits from its extensive membership base, granular deposit base, and solid capital levels. VyStar has an experienced and seasoned management team that includes both credit union and banking experience. The granular/diversified risk nature of the consumer-oriented balance sheet and reasonable level of historic credit losses further bolster VCU’s credit profile. The credit union has a diversified revenue stream complemented by solid fee revenue with a 5-year average noninterest income to total revenue of 35% primarily generated through interchange fees (although Durbin Amendment has negatively impacted this since 2022), mortgage banking, financial services income, and account fees. VCU’s strong consumer banking profile is a key driver to a sound funding profile that is 91% core funded by member shares. The credit union’s cost of interest bearing deposits has trended well throughout various interest rate cycles, which has helped to offset higher funding costs from borrowings and wholesale funding sources (26% of total funding as of 3Q23) and has been supportive of NIM. The benign credit loss history is reflective of VCU’s asset quality performance over time and has been manageable more recently, although NPAs and NCOs have shown some level of deterioration. VCU has maintained a stable regulatory capital profile reflected in its net worth ratio, ranging between 9.0% – 9.5% since its $200 million subordinated debt offering in 2022 which accounts for 160 bps of the NWR. The NWR has also been growing as the company has slowed its loan growth and has shrunk its overall balance sheet by 2% since 4Q22. VCU adopted the total risk-based capital metric in 1Q22 which was 13.0% at 3Q23. KBRA believes that VCU will maintain capital levels at more contemporary levels with retained earnings and secondary capital.

Rating Sensitivities

A return to Stable Outlook could occur from a stabilized credit environment and NIM expansion that results in improved profitability to more normalized levels. Given the Negative Outlook, a rating downgrade is possible, which could result from material deterioration in credit that further weakens the profitability of the company and negatively impacts the credit union’s ability to generate capital.

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Methodologies