KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Terrell, Texas-based The ANB Corporation (“the company” or “ANB”). Additionally, 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 the lead subsidiary, The American National Bank of Texas ("the bank"). The Outlook for all long-term ratings was revised to Negative from Stable.

Key Credit Considerations

The Negative Outlook is largely predicated on the company’s weakened earnings profile due to a concentration of longer term, low-yielding investment securities (~40% of earning assets) and rising funding costs experienced in 1Q23. Also, earnings are expected to be lower throughout the remainder of 2023. In addition, ANB is deploying the cash flow from the investment securities into higher yielding loans over the shorter term which has broadly impacted their overall capital positioning (9.7% CET1 and 0.8% TCE including AOCI adjustments at 1Q23), further increasing the disparity between similarly rated peers. However, the ratings are supported by the company’s tenured senior management, highlighted by the durability of an exceptionally low-cost deposit franchise and a lower risk profile on the earning asset base. Total deposit costs have historically run well below peers (cost of total deposits were ~25 bps through 1Q23) supported by over 40% of total deposits in NIB at 1Q23.

The historically strong funding profile was adversely impacted by ANB’s recent advances on wholesale funding sources accounting for nearly 15% of total funding at 1Q23. However, the company has not experienced material deposit outflows since 1Q23. KBRA further notes the relatively manageable level of uninsured deposits (excluding collateralized deposits) which totaled ~$1.4 billion, or near 30% of total deposits at 1Q23. The company had sufficient coverage of these deposits with primary and secondary sources of liquidity comprising 150% of uninsured/uncollateralized deposits. KBRA evaluates ANB’s capital position as adequate for the rating category (TCE of ~8% excluding adjustments within AOCI), taken in the context of its overall risk profile, and has comfortably supported growth. Additionally, the company has historically been able to generate sufficient levels of capital and reflects significant cash levels at the holding company. Liquidity management has been conservative with a loan-to-deposit ratio consistently below 70% since 2018 (63% at 1Q23). The proportionally lower percentage of loans to earnings assets leads to a noticeably lower risk profile for the bank (risk-weighted density ~68% in 1Q23). NPA and NCO ratios have also tracked better than peers both historically and in recent periods. Although partially attributable to the benign credit environment, the company’s favorable loss history is reflective of disciplined underwriting practices, solid borrower credit profiles, and robust economies of operation within the Dallas-Fort Worth, TX MSA.

Rating Sensitivities

A rating upgrade is unlikely over the short to medium term. The rebuild of capital metrics to reflect a more peer-like profile, which are integral to the ratings (specifically a CET1 ratio above 10%), sustained over several periods combined with the continued maintenance of stable asset quality metrics and a durable low-cost deposit franchise could result in a return to a Stable Outlook. A lack of capital rebuild over the medium term, with risk-based measurements below peer averages, or material deterioration in asset quality metrics, including elevated charge-off activity, could result in a rating downgrade.

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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

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.

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