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, mortgage banking operation, and insurance agency, which, combined, generate meaningful noninterest income (25%-30% of revenue historically). While the company has not been immune to NIM headwinds following the rapid rise in interest rates, it appears that the margin has troughed in 3Q24, benefiting from slight expansion in 4Q24 following the 100 bps of fed rate cuts. Prospectively, while the company leans asset sensitive, we expect NIM to continue to expand throughout 2025 supported by the repricing of the majority of the CD portfolio, likely at lower rates, combined with continued upward repricing of lower yielding fixed/adjustable-rate loans. UVSP also maintains a solid funding profile comprised primarily of core deposits (85% of total funding). While we recognise that the company carries a higher concentration in public fund deposits, partly contributing to higher than peer deposit costs, these relationships have been long-standing with an average relationship of 16 years for the top 25 largest deposits. Furthermore, management has noted its focus on maintaining a loan-to-deposit ratio between 95% and 100% over time (101% as of 4Q24), targeting low-to-mid single digit loan growth, in line with deposit growth. The company's prudent underwriting and overall conservative operating philosophy has resulted in a strong credit foundation. While NPAs have historically tracked above peers, we note that the company has made improvements in recent quarters with NPAs falling to 0.41% at 4Q24. Additionally, loss content has remained well contained with NCOs averaging just 6 bps over the past five years. Furthermore, both investor CRE and C&D loan concentrations remain comfortably below regulatory guidance. While capital ratios have historically trailed peer averages (4Q24 CET1 at 10.9%), we view the company’s capital management as adequate for its risk profile. Overall, we consider UVSP adequately insulated to absorb reasonable credit costs given reserves of 1.28% of loans as of 4Q24, combined with UVSP’s solid earnings and capital position. The ratings are also supported by UVSP’s experienced management team that is highly knowledgeable of its markets and maintains a relationship driven approach.

Rating Sensitivities

A rating upgrade is not expected over the medium term, though growth and geographic expansion of the franchise, building capital metrics to levels consistent with the higher rating category, credit outperformance, and earnings above peer averages would be viewed favorably. Lower trending capital ratios, or a substantial deterioration in asset quality measures that materially impacts profitability could pressure the ratings.

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