KBRA Affirms Ratings for CRB Group, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Fort Lee, New Jersey-based CRB Group, Inc. (“CRB”) (“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 K2 for its subsidiary, Cross River Bank. The Outlook for all long-term ratings is revised to Negative from Stable.

Key Credit Considerations

The revision of the Outlook to Negative is primarily due to the company’s weakened capital position stemming from a rather challenging year financially in 2023. CRB’s capital ratios have fallen below rated peers, tracking 100 – 200 bps below average, including a CET1 ratio of 10.2% at 4Q23. It is KBRA’s view that CRB should maintain above-average capital levels for the rating category due to the perceived riskier nature of the company’s business model that includes significant concentrations in both its revenue mix (CRB’s MPL business line comprised more than 60% of its revenue mix in 2023) and balance sheet (in terms of both its loan portfolio as well as funding mix). With that said, the company's management team has expressed a commitment to rebuilding capital, with a plan that includes multiple transactions in process/pending that would provide a boost to capital ratios. Moreover, CRB's capital stack includes approximately $412 million in preferred stock. While it is considered unusual for a bank to operate with over 40% of its capital in preferred equity, the provisions are rather unique, holding no coupon (unless a dividend is declared on the common stock) and appearing to be loss absorbing.

The net loss of $34 million reported by CRB in 2023 was primarily driven by the rise in the interest rate environment and increasing funding costs as well as credit challenges within the MPL business resulting in an increase in the negative valuation marks on its loans HFS (up 21% in 2023). Additionally, CRB reported an approximate $50 million provision for loan loss (roughly 0.6% of average assets) related to a single loan. While the company expects this large provision charge to be an isolated event, the higher interest rate environment along with credit challenges in the MPL business are expected to remain as headwinds to earnings over the near to medium term.

KBRA maintains a favorable view towards CRB’s management team, particularly given its ability to sufficiently manage through various economic events, including the pandemic, and more recently, the highly publicized bank failures in 1Q23. Despite its highly concentrated funding profile, CRB experienced no material loss of deposit partners, reflective of the company’s strong relationships and importance to its client base. Furthermore, the company has carved out meaningful market share within its core operating business lines, particularly within the MPL space where CRB is a leading originator with approximately $20 billion in originations in 2023. Nonetheless, KBRA recognizes the lingering uncertainties with regard to regulatory oversight of the MPL business as reflected by the recent consent order CRB was placed under related to the fair-lending program. While the company was not assessed any fines or restitution and admitted to no wrongdoing, KBRA views the consent order to be reflective of the increased scrutiny associated with marketplace lending as well as the lack of clarity regarding the regulatory environment within the industry.

Rating Sensitivities

A return to Stable Outlook could occur if CRB rebuilds and sustains above-average capital levels, including a CET1 ratio above the rated peer average of 11%, as well as stabilizes earnings through continued diversification of the balance sheet and, more importantly, revenue streams. Should CRB be unable to execute on the rebuild of its capital levels, to include above-average risk-based measures , or if CRB continues to experience volatility of earnings, a downgrade of ratings could occur.

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