KBRA Affirms Ratings for Univest Financial Corporation

17 Apr 2024   |   New York


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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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1003965

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