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 Outlook for all long-term ratings is Negative.

Key Credit Considerations

The maintenance of the Negative Outlook reflects our expectation that FFC must establish a sustained track record of profitability aligned with rated peers, while continuing to rebuild capital levels to be consistent with peer benchmarks. Nonetheless, we recognize the favorable profitability trends over the past year, with ROA improving to 0.74% in 1Q25, up from 0.44% at year-end 2024. Notably, this positive trajectory has been supported by solid NIM expansion, with 1Q25 NIM rising to 3.49% from 3.38% in the prior quarter. The improvement largely reflects favorable deposit repricing dynamics following the 100 bp reduction in the federal funds rate during the second half of 2024. Given its liability-sensitive balance sheet, FFC has benefitted from the magnitude of recent rate cuts and remains well positioned to benefit from further potential easing in interest rates. FFC’s CET1 ratio increased from 8.9% in the year-ago quarter to 9.3% in 2Q25, narrowing the gap with the rated peer average, though it still trails the benchmark by approximately 200 bps. According to Fidelity’s projections, the CET1 ratio at the holding company level is expected to continue its gradual ascent from 8.9% in 2Q24 to 9.7% by fiscal year 2026. While we acknowledge the progress in capital enhancement, we believe a higher level of loss-absorbing capacity remains necessary given FFC’s comparatively elevated exposure to CRE. In our view, maintaining a more robust capital buffer is essential to safeguard against potential stress arising from an economic downturn. Despite some negative credit migration, FFC continues to exhibit healthy asset quality, reflected in a low NCO ratio of 0.07% for 1Q25. While NPAs have increased to 1.27% in 1Q25 following cyclical lows in 2022, this uptick appears to be concentrated in a limited number of idiosyncratic loan relationships. An evaluation of the criticized and classified loans within the commercial portfolio indicates a contained level relative to total loans, suggesting that broader credit deterioration remains limited.

Rating Sensitivities

A return to a Stable Outlook could be considered if the company continues to improve its capital position, particularly by increasing its CET1 ratio to above 10% or aligning more closely with BHC-rated peers at approximately 11%, along with demonstrating stronger and sustained profitability, including ROA trending closer to 1%. If FFC is unable to strengthen its capital position to levels more in line with the aforementioned rated peers over the next 12–18 months through effective capital management, and if profitability is pressured by elevated credit costs stemming from further credit deterioration, negative credit action may result.

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Methodologies