KBRA Affirms Ratings for The ANB Corporation

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 is Negative.

Key Credit Considerations

The ratings remain supported by the company’s credit quality that has tracked above peers; a trend of asset quality outperformance that we expect to continue. 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-Forth Worth, Texas MSA. We acknowledge that ANB exhibits some geographic concentration risk, with operations largely based in Texas—typically, a higher-beta market. Moreover, despite a slightly elevated C&D lending exposure, when compared to similarly rated peers (14% of total loans at 1Q25), we positively view the reduction in exposure in recent years (80% of total risk-based capital as of 1Q25). Additionally, despite the moderately elevated C&D concentration, overall investor CRE exposure remains well managed at 230% of total risk-based capital. With regard to 'riskier' loan sectors such as office, hotel, and healthcare and social assistance, the company's exposure is minimal and 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, KBRA views positively the company's strong track record in terms of credit quality given historically low levels of NPAs and minimal loss content, in addition to loan loss reserves of 1.21% of total loans at 1Q25, covering NPAs by 134%.

The maintenance of the Negative Outlook is largely predicated on the company’s weakened earnings profile due to a concentration of longer term, low-yielding investment securities book (~33% of assets) and NIM compression due to the competitive deposit market environment causing headwinds to funding costs. Given the company’s concentration in time deposits (16% of total deposits) and utilization of wholesale funding sources, funding costs have repriced higher at a faster rate than earning asset yields resulting in ~43 bps of NIM compression since 4Q21. As such, ANB’s total funding costs (2.88% at 1Q25) have been negatively impacted by its growth in noncore funding (15% of total funding) to support loan growth as deposit balances have been stable excluding seasonality. However, the ratings are supported by the company’s tenured senior management, lower risk earning asset base and a durable branch-based deposit franchise which reflects a lower interest rate sensitivity (1.70% total costs of deposits as of 1Q25), which is aided by noninterest bearing deposits accounting for 35% of the total deposit mix. Moreover, more recently, given the elevated exposure to C&D lending, pricing power in legacy markets and increased loan growth increasing the loans to earning assets ratio (58% in 1Q25), ANB has seen improvements in its margin, expanding 41 bps since, what we believe, was the company's trough at 2.13% at 3Q24.

Additionally, ANB has more recently maintained capital levels (2.5% TCE and 9.8% CET1 at 1Q25) well below peer averages due to the large AOCL associated with the aforementioned investment securities portfolio and the increase in risk weighted density - though we note is well contained at 72% at 1Q25 - as the company remixes its earning assets into higher yielding loans to boost the NIM. Given the company’s weakened earnings power, internal capital rebuild has been limited, and should a more challenging credit environment arise, lower aggregate loss absorbing capacity – loan loss reserves plus core capital – would provide less of a buffer against potentially rising credit costs. That said, the capital profile is somewhat supported by a solid level of risk-based capital taken in the context of its overall risk profile and strong reserve levels attributable to the company's conservative underwriting. M&A has been a source of growth over the years allowing the company to expand into adjacent markets, though we do not anticipate any potential transactions in the medium term, given the company's current earnings position and the impact a transaction would have on the company's capital base.

Rating Sensitivities

A revision to a Stable Outlook would require improvement in the company’s earnings profile, with earnings that track near 1% ROA and a rebuild of its capital ratios to be more consistent with rated peers, including CET1 near 11%, while maintaining solid credit quality with minimal loss content over time. Conversely, given the Negative Outlook, a rating downgrade is possible in the near to medium term, which could transpire from failure to return to a peer like earnings profile or unexpected deterioration in asset quality further weakening the bank’s earnings profile, further erosion in regulatory capital management, or inability to manage the CET1 ratio near 11% and a TCE ratio above 3%. Moreover, the ratings could be negatively impacted if the company begins to take outsized risk in terms of loan underwriting to grow loans.

To access ratings and relevant documents, click here.

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), one of the major credit rating agencies (CRA), is a full-service CRA 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 (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.

Doc ID: 1009370

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