KBRA Affirms Ratings for VeraBank, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Henderson, Texas-based VeraBank, Inc. (“VeraBank” or “the company”). In addition, 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 its subsidiary, VeraBank, National Association. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

VeraBank’s ratings are supported by its strong core deposit base, which has historically accounted for nearly all of its funding. The company benefits from a favorable deposit mix, including a relatively high proportion of noninterest-bearing deposits (27% of total), and solid market share in its rural East Texas footprint, all of which are factors that have contributed to a healthy NIM across various interest rate cycles. The current higher-rate environment has further highlighted VeraBank’s low deposit beta (average cost of deposits of 1.81% in 2024), and, when combined with competitive loan yields that are partially driven by its slightly higher exposure to C&D lending and pricing power in legacy markets, has resulted in a stronger-than-peer NIM and earnings outperformance in recent years. Notably, this has been achieved alongside a conservatively managed balance sheet, featuring a below-average loan-to-deposit ratio, lower loan-to-earning asset levels, and a sizable on-balance sheet cash position. While the interest rate risk profile reflects a modestly asset-sensitive balance sheet, management remains confident in their ability to sustain a comparatively resilient NIM through 2025, even amid potential Fed rate cuts. As such, we expect VeraBank’s earnings to remain among the strongest in its rating category. We also favorably view the revenue diversification, including a solid amount of noninterest income, which has contributed 20% of total operating revenue since 2016 (21% during 2024), primarily derived of durable fee income sources including service charges, interchange, and wealth management fees. The ratings consider VeraBank’s modest NPA levels historically, which persisted during 2024. In addition, the company has demonstrated minimal credit losses, which we attribute to management’s conservative underwriting and proactive credit practices.

With respect to potential challenges in the loan portfolio, we acknowledge that VeraBank exhibits some geographic concentration risk, with operations largely based in Texas—typically, a higher-beta market. The state's strong population growth has contributed to supply/demand imbalances in certain sectors, resulting in modest headwinds across some asset classes. This dynamic could pressure C&D loans, particularly if property values decline or lease-up activity slows. That said, we view positively the reduction in C&D exposure in recent years, which stood at a more manageable 70% of total risk-based capital as of YE24, down from a peak of 118% at YE22. Additionally, despite the moderately elevated C&D concentration, overall investor CRE exposure remains well below average at 198% of total risk-based capital at YE24. The company does exhibit above-average exposure to the office sector, representing 7% of total loans. However, we take comfort in the disciplined underwriting standards, the granular nature of the portfolio, and its focus on suburban markets, which helps mitigate associated risks. Moreover, strong population growth and the associated rise in property values across much of Texas have created headwinds in the single-family residential portfolio, which accounts for 35% of total loans. Notably, delinquencies (30–89 days past due) rose to 0.96% at YE24, up from 0.40% the year prior, largely due to higher property taxes and insurance premiums increasing borrowers’ payment burdens. However, we take comfort in the strong track record in this segment, including minimal defaults, foreclosures, and credit losses over time. Moreover, the loss absorption capacity is appropriate for its overall risk profile when considering the LLR (1.24% at YE24) and core capital position (CET1 of 12.2% at YE24).

M&A has somewhat been a source of growth over the years, and management indicated the potential to participate in additional transactions opportunistically, focusing on expansion into adjacent markets. Despite the inherent risk of merger integrations, we acknowledge the company’s successful M&A track record to date.

Rating Sensitivities

Additional scale and geographic diversification, along with continued maintenance of the strong deposit franchise, favorable noninterest income levels, sound credit performance, and continued positive momentum in capital levels could lead to positive rating momentum over time. Conversely, a rating downgrade is not expected, though unanticipated deterioration in the funding profile, outsized growth or a higher risk M&A transaction that materially impacts the core capital position, or elevated credit issues, could pressure the ratings.

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