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 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

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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