KBRA Upgrades Ratings for FB Financial Corporation

KBRA upgrades the senior unsecured debt rating to BBB+ from BBB, the subordinated debt rating to BBB from BBB-, and short-term debt rating to K2 from K3 for Nashville, Tennessee-based FB Financial Corporation. (NYSE: FBK or “the company”). In addition, KBRA upgrades the deposit and senior unsecured debt ratings to A- from BBB+ and the subordinated debt rating to BBB+ from BBB, while affirming the short-term deposit and debt ratings of K2 for the company's principal subsidiary, FirstBank. The Outlook for all long-term ratings is revised to Stable from Positive following the upgrade.

Key Credit Considerations

The upgrade of FBK’s ratings reflects the company’s continued strong operational performance since its Outlook was revised to Positive from Stable in June 2021. In this sense, we believe the company’s favorable core earnings in recent years (TTM 1Q25 adjusted ROA of ~1.2%), having been generated in a less conducive interest rate environment for U.S. banks more broadly, to have been a function of FBK’s strategic execution that has seen the franchise grow from its origins as a rural community bank into a larger, more diversified institution with solid market share in key MSAs in its demographically attractive home state of Tennessee. FBK’s recent earnings trends have been especially solid, considering the dampened performance of the company’s mortgage banking unit, unsurprisingly impacted by the rising interest rate environment, and typically reflecting a segment specific efficiency ratio of 90%+. We believe FBK has significant earnings leverage to a decline in mortgage rates, and future ROA could be boosted if a decline in rates leads to an uptick in purchase/refinance activity.

The upgrade of FBK's ratings is also supported by a conservative financial profile that we think is more aligned with its new rating category. More specifically, though the pending acquisition of Southern States Bancshares, Inc. (NASDAQ: SSBK) is expected to result in a 60 – 70 bp decline in FBK’s core capital ratios, given their strong relative starting points, the SSBK related capital depletion merely adjusts FBK’s capital profile to one more in line with peers, and we consider the pro-forma CET1 and TCE ratios of 12.1% and 9.9% as metrics well situated for the rating category. We also note that, unlike many peers, FBK holds no held-to-maturity securities on its balance sheet and features a proportionally smaller available-for-sale securities portfolio, meaning its core capital ratios likely compare favorably to peers on an adjusted basis if including related unrealized losses.

FBK’s asset quality, at least with respect to NCOs, has been near pristine for essentially its entire contemporary operating history, recognizing that the company’s modern-day profile has overlapped with some of the most benign credit conditions ever experienced by the U.S. banking industry. FBK, like peers, has experience a normalization in NPA levels from their historically (and unsustainably) low levels of the pandemic-era, though KBRA does not view the climb in FBK’s NPAs as anything other than consistent with both the late stage of the economic cycle and industry trends. If credit conditions do prove to be more disruptive, we think FBK is well positioned to absorb anticipated credit losses considering a 1Q25 LLR of 1.54% that is one of the highest in KBRA’s publicly rated bank universe. From a qualitative perspective, we view positively FBK’s intentional reduction of its C&D exposure over the past several years, which, at one point, represented 18% of total loans. KBRA views C&D lending as an inherently riskier lending segment given its naturally speculative nature, and we think the reduction in FBK’s C&D balances (1Q25 balances are 38% lower than YE22) de-risks the company’s overall loan portfolio to a degree.

Rating Sensitivities

Given the upgrade, we do not anticipate further rating momentum for FBK over the short-to-intermediate term. A more aggressive capital management policy, greater than peer credit degradation, or a failure to integrate SSBK and achieve expected cost savings/synergies would be viewed negatively.

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