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 longterm ratings is Positive.

Key Credit Considerations

FBK’s ratings are supported by a reasonably conservative approach to capital management since becoming a public company, with core capital measures such as TCE and CET1 ratios that have trended well north of 9% and 11%, respectively, in recent years. Additionally, supplementing FBK’s solid core capital position is an LLR of 1.5% that remains one of the highest in KBRA’s rated universe and, as such, we view the company as having a higher than peer level of total loss absorbing capacity – one that is necessary considering the company's higher proportionate exposure to perceived riskier areas of lending, namely C&D and manufactured housing (a combined 24% of total loans), and should prove beneficial to the company’s credit profile should an economic downturn materialize. We would note that FBK's multi-year legacy asset quality measures, including through the pandemic, have been quite favorable (recognizing a conducive economic climate). Also supporting the company’s ratings is a sound liquidity position, with the composition of the company’s balance sheet allowing for a greater degree of financial flexibility, highlighted by a modestly lower than peer loan-to-deposit ratio (84% at 1Q23) and the maintenance of strong levels of cash (10% of total assets). Funding dynamics at FBK in the stressed period of 1Q23 (more specifically, March 2023) were mostly in line with KBRA’s expectations, with deposits rising $327 million (+3% sequentially), though, like peers, the company’s deposit base saw a negative mix shift. Still, when accounting for $6.8 billion of available contingent liquidity combined with on-balance sheet sources, FBK’s coverage of its uninsured/uncollateralized deposits (29% of total) is ~258%. The Positive Outlook is consistent with our expectation that FBK’s capital and liquidity positions will remain largely in line with those reflected today.

The Positive Outlook is also supported by the continued execution associated with the company's franchise and strategy, which has seen franchise expansion into high growth MSAs with solid market share positions, stemming from its origins as a more rural, western Tennessee bank. Notably, FBK’s August 2020 acquisition of in-market competitor, Franklin Financial Network, Inc., meaningfully increased the scale of FBK’s operations and enhanced the company’s presence in the growing Nashville market, and the company maintains solid market share in key Tennessee MSAs while expanding deliberately into other attractive, contiguous markets. Partly constraining FBK's ratings is its higher than peer exposure to C&D lending (18% of loans), though we consider the portfolio appropriately managed and recognize the company’s plans to reduce its exposure to space. We also acknowledge the more challenging earnings outlook for FBK and the U.S. banking sector more broadly, and a “higher for longer” interest rate environment will continue to pressure FBK’s funding costs as well as its mortgage banking business (which has historically been a proportionally large contributor to the company’s earnings).

Rating Sensitivities

The maintenance of capital and liquidity profiles largely consistent with those reflected today, if in conjunction with earnings and asset quality performance that is generally in line with that of peers, could result in a rating upgrade. A further diversification of noninterest income sources would also be viewed favorably. Alternatively, a greater than peer deterioration in FBK’s capital position, funding profile, asset quality, or earnings capacity could reverse positive rating momentum.

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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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