On April 27, 2023, KBRA affirmed 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 affirmed 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.

VeraBank’s ratings are supported by the company’s prudent approach to liquidity management, evidenced by a loan- to-deposit ratio that has been generally maintained between 60%-70% resulting in a correspondingly high level of cash and securities on-balance sheet (+40% of total assets at 1Q23). Given this, the company has been able to consistently reflect a strong core deposit franchise, which has averaged 96% of total funding for the last five years. Additionally, overall deposit balances have remained steady throughout the turbulent liquidity environment in 2023 and management expects to continue maintaining a higher amount of on-balance sheet liquidity prospectively to mitigate against any future volatility in the funding base. VeraBank’s proportionally lower percentage of loans to earnings assets lends to low risk-weighted asset density (65% of total assets) and, in our opinion, suggests a more conservative balance sheet relative to many similarly rated peers. 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) and virtually no reliance on CDs and 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. Relatedly, VeraBank advanced $500 million in FHLB as an abundance of caution in 1Q23, but has not historically utilized "noncore" funding sources since 2007. KBRA also recognizes the company’s favorable risk-adjusted returns (RORWA ~2% in 2022), aided by a healthy proportion of noninterest income which has represented approximately 25% of total operating revenue since 2016, and is considered fairly diverse for a bank of its size. VeraBank’s ratings also reflect the company’s modest NPA levels historically (0.28% of total loans as of 1Q23), though we acknowledge the sustained improvements in reported asset quality in 2022. The company also has modest exposures to potentially volatile sectors such as office (6% of total loans) and retail (7%). Furthermore, the reserve level of 1.27% of loans is considered appropriate given the current levels of classified and criticized loan balances. Capital levels are somewhat weaker than peers, notably the TCE ratio which was 6.1% at 1Q23. Relatedly, risk-weighted capital ratios are slightly below peer levels as well, however, KBRA expects positive momentum in capital levels via earnings accretion and slower balance sheet growth moving forward.

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