KBRA Affirms Ratings for Silver Queen Financial Services, Inc.

KBRA affirms the senior unsecured debt rating of BBB- and the short-term debt rating of K3 for privately-owned Silver Queen Financial Services, Inc. ("SQFS", "Silver Queen", 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 K3 for Colorado Federal Savings Bank, the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings continue to recognize Silver Queen’s reliance on noncore funding, driven largely by the variability of mortgage servicing and escrow deposits associated with Provident Funding Associates (PFA). This dynamic, alongside a comparatively high mix of time deposits sourced through the bank’s national digital channels, contributes to a higher cost of funds (total cost of deposits of ~4% for 1H25). As such, the funding profile, coupled with a lower‑risk loan book still anchored by first‑lien residential mortgages (about two‑thirds of loans), continues to pressure earnings capacity. NIM was ~1.5% for 2Q25, while ROA was ~0.3%. That said, management’s margin outlook has improved as deposit costs begin to migrate lower and as the Federal Reserve initiated rate cuts in September 2025, with further potential for expansion as short‑duration CDs reprice and escrow balances rebuild seasonally. Mortgage banking activity is also recovering - the wholesale channel funded ~$300 million through 9M25. Positively, operating efficiency remains a differentiator. The company’s simplified, branchless model and shared‑services infrastructure support a very low expense base (approximately 0.8% of average earning assets), providing flexibility to absorb revenue variability. Elsewhere, the hedged agency MBS strategy continued to contribute, though earnings are still susceptible to fair value movements in mortgage servicing assets; management does not hedge MSR exposure. With that said, the weighted average coupon on the servicing portfolio is significantly below current market rates and would likely have to decrease meaningfully to attract heightened payoff levels.

One of the main supporting factors of the ratings has been SQFS' pristine credit quality over the years, which is reflective of the company’s lower risk loan portfolio, including an average LTV of 35%. We remain mindful of concentration in C&D lending; representing 25% of total loans, with ~$600 million in commitments; commitments equated to 226% of regulatory capital. Mitigants include a tight credit box, repeat‑borrower orientation (about 80% of fundings), and conservative underwriting (typical LTVs in the mid‑50s), together with active project monitoring. Capital remains at favorable levels (CET1 ratio of 15.3% as of 2Q25), with recent improvements attributable to the company shrinking its MSR asset (including sales to an affiliate) while loans contracted, reducing total risk-weighted assets. Additionally, the Tier 1 leverage ratio was ~10% at 2Q25, with management intending to maintain consistent with recent levels, which we view as adequate for its business model and risk profile. The liquidity position is managed more aggressively with respect to the loan-to-deposit ratio, which has consistently tracked above 100%, though has displayed improvement more recently following 15% deposit growth through 1H25, and we believe that the company has ample liquidity sources available, including a securities portfolio that reflects minimal unrealized losses and a comfortable level of contingent funding.

Rating Sensitivities

A rating upgrade is not expected, though continued diversification of the franchise, most notably on the funding side, including a higher level of core deposits, could result in positive momentum over time. A downgrade is unlikely, though further C&D growth beyond expectations, any unanticipated credit deterioration, or a more aggressive stance with capital could pressure the ratings.

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Methodologies