KBRA Downgrades Ratings for Spend Life Wisely Company, Inc.; Outlook Stable

KBRA downgrades the senior unsecured debt rating to BBB- from BBB, downgrades the subordinated debt rating to BB+ from BBB-, and affirms the short-term debt rating of K3 for Durant, Oklahoma-based Spend Life Wisely Company, Inc. (“SLW” or “the company”). In addition, KBRA downgrades the deposit and senior unsecured debt ratings to BBB from BBB+, the subordinated debt rating to BBB- from BBB, and the short-term debt and deposit ratings to K3 from K2 for its primarily subsidiary, First United Bank and Trust Company (“the bank”). The Outlook for all long-term ratings is revised to Stable from Negative.

Key Credit Considerations

The downgrade of the ratings primarily reflects SLW’s capital levels that have been managed below KBRA’s previously stated expectations, including a CET1 ratio below 8.5%. The company’s outsized loan growth in recent years (~20% annual loan growth over the past 5 years) coupled with the weakened bottom line profitability in recent periods, has resulted in a CET1 ratio significantly below the similarly rated peer group average. Management has stated that loan growth is expected to moderate over the near term, though it is KBRA’s view that earnings will remain under pressure by a continued weak mortgage banking environment and NIM compression, resulting in limited upside to capital levels over the near-to-medium term.

SLW’s bottom line earnings performance has been rather volatile in recent periods, partly driven by the company’s sizeable mortgage banking operation which is highly correlated to the overall interest rate environment. Since FRB reversed its ZIRP and QE monetary policies in mid-2022, the rapidly rising interest rates not only have a negative impact on the demand for mortgage loans, but also creates a challenging environment for loan sales in the secondary market, resulting in the bank retaining the majority of the newly originated loans on its balance sheet. This has resulted in materially lower noninterest income (0.78% of average assets) (noninterest income to total revenue still remains generally above peer, supported by other relatively robust sources of fee revenue) as well as higher reliance on expensive wholesale funding sources (vis-à-vis brokered deposits and FHLB borrowings) that has caused significant NIM compression (3.03% for 2023, compared to 3.56% for prior year), leading to much lower profitability for the company despite credit costs remaining near historical lows.

The bank’s loan quality performance remains strong, with its generally below-peer level NCO ratio over a multi-year basis, demonstrating its strong underwriting practices and relationship-based lending model. SLW’s exposure to office CRE remains modest, representing around 6% of total loans. In addition, the management team’s efforts to reduce the company’s exposure to C&D (132% of total RBC as of YE23, compared to 177% as of YE21) and investor CRE (312% of total RBC as of YE23, compared to 377% as of YE21) are viewed favorably by KBRA.

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term. However, if consolidated regulatory capital ratios were to improve (and be maintained) at levels more commensurate with similarly rated peers along with a reduction in reliance on wholesale funding could drive positive rating momentum. Conversely, rating pressure would develop if loan quality deterioration emerged such that bottom line profitability remained under pressure, or if consolidated regulatory capital ratios were to decline (and likely maintained) at levels below the current range.

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Methodologies