KBRA Affirms Ratings for Fidelity Financial Corporation

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Wichita, Kansas-based Fidelity Financial Corporation ("FFC", "Fidelity" 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 K2 for its subsidiary, Fidelity Bank, National Association (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are highlighted by FFC's strong management team, deeply rooted within its primary operating markets, which has demonstrated success in executing its strategy, including maintaining market share in its legacy primary operating footprint. Additionally, FFC has ample access to secondary sources of liquidity, covering the uninsured deposit balances by over 2.0x. However, FFC has historically experienced challenges within risk adjusted returns and, more recently, due to increases in funding costs. Additionally, FFC has lower than peer levels of capital, but management expects improvements during 2H23. The expected improvements within FFC’s earnings are integral to the rating but have historically been moderately below peer averages with ROA trending near 1%, including modest levels of noninterest income and an efficiency ratio tracking in the 65% to 75% range. Earnings are also relatively dependent on spread-derived income (~80% of revenue). RORWA has been trending lower given the elevated risk weighted density of ~90% at 2Q23, partially impacted by the capital treatment of the MSR exceeding 25% of regulatory capital guidance. However, profitability is expected to be maintained at slightly under 1% despite significant repricing within the deposit base (total cost of deposits at 1H23: 2.38%). Loans are expected to marginally reprice upward, and rapidly rising funding costs could continue to somewhat compress NIM heading into 2H23. Overall deposit levels are relatively stable, hovering near 80% of total funding. FFC currently has an ample level of available liquidity, representing over 20% of total assets as of 2Q23. FFC is focused on reducing operating expenses and rationalizing non-essential costs, thus improving potential earnings capacity. Additionally, FFC’s loan portfolio gains some benefit of geographic diversification from its national CRE lending business. However, the balance sheet is highly correlated to commercial real real estate, representing over 350% of risk based capital as of 2Q23. As a result, KBRA expects improvements to FFC’s core capitalization, which is currently managed to levels at the lower end of the peer rating category. KBRA notes that double leverage of ~120% at 2Q23 is elevated and the company plans on reducing double leverage via retained earnings.

Rating Sensitivities

A rating upgrade is unlikely at this time. The inability to prudently manage capital at peer-like levels over the medium term, or any material deterioration within the earnings profile or asset quality metrics could lead to a rating downgrade. Additionally, KBRA expects the gradual migration to peer like capital ratios such as a CET1 ratio above 10% by 2Q24, supported by improvements within the earnings profile and balance sheet management.

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Methodologies