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 the company’s solid liquidity and funding profile reflected by a consistent core deposit franchise which has averaged 95% of total funding for the last five years. The company has also conservatively managed its balance sheet leverage with a loan-to-deposit ratio that has generally been maintained between 60%-75% (76% as of YE23). Dissimilar to many similarly rated peers, overall deposit balances remained steady throughout the turbulent liquidity environment in early 2023, and management expects to continue maintaining a higher amount of on-balance sheet liquidity to mitigate future potential volatility within the funding base. Further supporting the ratings is the company's solid market share in its rural East TX markets, which, combined with a healthy proportion of noninterest-bearing deposits (~30% of total as of 4Q23) and virtually no reliance on higher cost FHLB advances or brokered deposits, allows for below average funding costs. VeraBank also has balance sheet flexibility to potentially reduce the size of the balance sheet without material realized losses given the strong on-balance sheet cash position representing ~10% of total assets as of 4Q23. KBRA also recognizes the company’s favorable risk-adjusted returns (RORWA ~2% in 2023), aided by a healthy proportion of noninterest income which has represented approximately 25% of total operating revenue since 2016, which is considered fairly diverse for a bank of its size. In addition, VeraBank’s ratings reflect the company’s modest NPA levels historically (NPA ratio of 0.50% as of 4Q23), though we acknowledge the minor uptick in reported NPAs in 2023. The company also has modest exposures to potentially volatile sectors such as office (6% of total loans) and retail (6%). Furthermore, the reserve level of 1.21% of loans is considered appropriate given the lower levels of classified and criticized loan balances. Capital levels are considered in line with similarly rated peers, notably the TCE and CET1 ratios, which were 7.6% and 11.2%, respectively at the end of 4Q23. KBRA expects positive momentum in capital levels via earnings accretion and measured balance sheet growth.

Rating Sensitivities

Additional scale and geographic diversification, along with the continued maintenance of the strong deposit franchise, solid revenue diversification, sustained lower NPA levels without material charge-offs, and higher levels of core capital could lead to positive rating momentum over time. Conversely, a downgrade is not expected, though more aggressive balance sheet management without corresponding improvement in the capital position could lead to negative rating action. Additionally, material degradation in asset quality or a higher risk M&A transaction could pressure the ratings.

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