KBRA Affirms Ratings for FB 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 Nashville, Tennessee-based FB Financial Corporation. (NYSE: FBK 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 the company's principal subsidiary, FirstBank. The Outlook for all long-term ratings is Positive.

FBK’s ratings are supported by the continued execution of the company’s strategy that has seen the franchise grow from its origins as a rural community bank into a larger, diversified institution with solid market share in key MSAs in its demographically attractive home state of Tennessee. Notably, FBK’s August 2020 acquisition of in-market competitor, Franklin Financial Network, Inc., meaningfully increased the scale of FBK’s operations and solidified the company’s presence in the growing Nashville market. FBK’s growth has been well managed, in our opinion, coinciding with a conservative capital profile and competitive core earnings performance through varying interest rate cycles. Regarding the former, FBK has historically operated with higher than peer capital, and as of 1Q24, the company’s CET1 and TCE ratios of 12.6% and 10.0%, respectively, were ~140 bps and ~210 bps higher than rating category peer averages. FBK's capital profile is also reinforced by a 1.6% LLR that is one of the highest in KBRA’s rated universe. As such, we view the company as having a high level of loss absorbing capacity – which is necessary, in our view, considering the company's higher proportionate exposure to perceived riskier areas of lending, namely C&D and manufactured housing – and this buffer should serve the company well if an economic downturn materializes.

Additionally, FBK’s core earnings, including FY23 adjusted ROA of 1.11%, have held up relatively well despite the more challenging operating environment for the industry more broadly. Certainly, the company’s returns are distinctly lower than the cyclical highs of 2020 – 2021, when FBK’s sizable mortgage banking unit benefited from record origination levels; however, proactive initiatives undertaken by management in 2H22 have allowed for a comparatively stable NIM in more recent quarters, and we think the worst of NIM compression is behind the company. The company continues to display favorable asset quality performance with a FY23 NCO ratio of 0.01%. Furthermore, though NPAs have been rising somewhat over the past year after hitting cyclical lows in 2022, NPA migration has been seemingly isolated to a select few idiosyncratic loan relationships. Additionally, when evaluating more comprehensive indicators of bank asset quality, we find that criticized and classified loans within FBK’s commercial loan book remain lower than pre-pandemic levels and total 2.3% of total commercial loans. Delinquencies in FBK's CRE portfolio also remain contained at 0.32% of CRE loans. Partly constraining FBK's ratings is its higher than peer exposure to C&D lending (14% of loans/77% of risk-based capital). That said, we appreciate the company’s deliberate moderation of its C&D exposure, noting that C&D exposure and unfunded commitments are down meaningfully over the past 12 - 18 months, and we recognize that the company’s C&D portfolio is inherently a function of its footprint in growth markets.

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