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 has been revised to Negative from Stable.

Key Credit Considerations

The Negative Outlook is predicated on the company’s weakened earnings profile and the expectation that profitability will continue to be challenged by a combination of NIM compression and higher reserve build caused by credit quality deterioration. As such, we believe the ability to build capital levels in the near to medium term will be constrained. The weakness in the company's earnings profile is evidenced by a decline in profitability metrics with 1Q24 ROA at 0.22% and a 3-year average of 0.62%. Notably, profitability metrics have been pressured since 2023 consistent with industry operating challenges, but are well below rated peer averages, including a rated peer average ROA of 0.91% during the same period. FFC's regulatory and core capital levels have exhibited a declining trend and range between 200 and 250 bps below peer capital metrics. As of 1Q24, CET1 declined 70 bps to 8.3% from 9.0% in 1Q23. KBRA expects Fidelity’s core capital ratio, reflected by CET1, to remain below 10% over the medium term, positioning the company with a lower cushion to manage credit quality challenges. Fidelity’s asset quality has shown some signs of credit normalization with metrics tracking closely with industry trends. A net charge-off of $2.6 million related to an idiosyncratic C&I loan led to the higher loan loss provisioning in 1Q24, contributing to earnings pressure. Although FFC has above peer investor CRE exposure, accounting for 49% of total loans or ~370% of risk-based capital, overall asset quality remained manageable with a NPA ratio at 0.64% (NPLs totaled $13.4 million or 0.53% on the total $2.5 billion book), though was up from 0.32% in the linked quarter, and NCOs totaled 0.48% with no office charge-offs. FFC maintains adequate reserve coverage with ACL/loans at 1.21% as of 1Q24.

Rating Sensitivities

A return to a Stable Outlook could be considered if the company were to materially build capital ratios, specifically the CET1 ratio, to levels more closely aligned with similarly rated peers in combination with improved profitability metrics, including ROA trending closer to 1%. Conversely, in the event that FFC continues to demonstrate inability to increase capital levels closer to peer levels over the next 12-18 months, in combination with profitability challenges due to higher credit costs from further credit deterioration, negative rating action could result.

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