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. ("Silver Queen"). 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 bank"), the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings continue to recognize Silver Queen's concentrated business model, particularly its reliance on commonly controlled affiliates. While these relationships provide franchise benefits, they also introduce potential funding and reputational risks should the affiliates experience financial or operational challenges. The funding profile remains less favorable than peers, reflecting elevated interest-bearing and noncore funding (wholesale funding represented 39% of total funding at 2Q26), contributing to comparatively high deposit costs (3.27% in 2Q26). This partly reflects the shift toward market-rate escrow deposits from commonly controlled affiliates, some of which transitioned from noninterest-bearing to interest-bearing in recent years (NIB deposits declined from over 40% of total deposits in 2022 to 14% at 2Q26). More recently, the introduction of compensating credit arrangements on remaining NIB balances has also pressured noninterest expenses. Despite the higher-cost funding base, affiliate deposits have demonstrated durability given the common control, although escrow-related seasonality, particularly tax and insurance disbursements, creates periodic funding gaps generally bridged with wholesale borrowings. Notwithstanding these structural funding challenges, liquidity has improved over the past year, supported by deposit growth and reduced wholesale borrowings, the latter partly reflecting a pullback in securities-related trading activities that utilized FHLB advances to purchase longer-duration MBS. However, liquidity remains comparatively weaker than peers, with a loan-to-deposit ratio of 103% at 2Q26.

Profitability remains below peers (ROA of 0.36% in 1H26), reflecting a modest NIM associated with lower-yielding residential mortgages and elevated funding costs. However, the branchless, affiliate-supported model provides a meaningful expense advantage, while residential mortgage runoff and redeployment into higher-yielding commercial assets should support NIM expansion and stronger earnings over time. Nonetheless, fee income remains volatile, reflecting fair value changes in unhedged MSRs as well as securities-related and associated hedging activities.

Asset quality remains a key rating strength, supported by conservative underwriting, minimal historical losses, and a portfolio WALTV of ~38%. While C&D represents a meaningful concentration (19% of total loans; 117% of Tier 1 capital plus LLR at the bank at 2Q26), underwriting remains disciplined (55% LTV; 66% LTC), supported by experienced, repeat developers. The legacy residential portfolio (65% of total loans at 2Q26) reflects substantial borrower equity, while newer multifamily lending is being pursued selectively. Overall, we believe prudent underwriting and a conservative risk appetite should continue to support favorable credit performance. Capital remains strong and supportive of the ratings (CET1 ratio of 15.9% at 2Q26). Management intends to maintain the Tier 1 leverage ratio around 10% (at the bank), which we view as appropriate given the business model and risk profile. With relatively measured balance sheet growth and historically modest, intermittent capital distributions, we expect capitalization to remain above peer levels.

Rating Sensitivities

A rating upgrade is not expected over the medium term, though greater franchise diversification, particularly reduced reliance on affiliates and an improved funding mix and cost structure, which would likely result in stronger profitability, could support positive rating momentum over time. Conversely, a downgrade is unlikely, though rating pressure could arise from an increased C&D concentration, unexpected credit deterioration, or more aggressive capital management.

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