Fitch Affirms First Nat'l of Nebraska Following Midtier Regional Bank Review; Outlook Positive

First National of Nebraska

28/01/2016 19:31

(The following statement was released by the rating agency)

CHICAGO, January 28 (Fitch) Fitch Ratings has affirmed First National of 
Nebraska Inc.'s (FNNI) and First National Bank of Omaha's ratings at 'BBB-/F3'. 
The Rating Outlook has been revised to Positive from Stable. 

 

The rating action follows a periodic review of the midtier regional banking 
group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay 
General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), 
First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), 
Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial 
Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial 
Corp. (UMBF) and Wintrust Financial Corp. (WTFC). 

Company-specific rating rationales for the other banks are published separately, 
and for further discussion of the midtier regional bank sector in general, refer 
to the special report titled 'US Banks: Midtier Regional Bank Periodic Review,' 
to be published shortly. 

KEY RATING DRIVERS 

IDRs, VRs, AND SENIOR DEBT

Today's affirmation of FNNI's ratings reflects the company's continued stable 
operating performance, additional improvement in asset quality ratios, as well 
as the maintenance of reasonable regulatory capital ratios. 

Fitch's Positive Outlook reflects the view that FNNI's operating performance 
could strengthen further over the near to medium term and potentially warrant a 
higher rating. This view is based on Fitch's expectation that FNNI's earnings 
and profitability should improve as it continues to build out additional 
strategic partnerships in its credit card portfolio. Moreover, Fitch expects 
FNNI's overall credit quality continues to remain solid going forward as much of 
its more volatile business lines have been reduced significantly since the 
crisis such as national credit card lending along with construction and land 
development lending.

Fitch believes these potential positives should also allow FNNI to continue to 
enhance its returns while maintaining a reasonable credit risk profile and solid 
capital ratios. This could allow FNNI to compare more favorably with higher 
rated entities over the rating horizon.

FNNI has been generating a relatively higher level earnings compared to 
similarly rated peers over recent periods. The company generated a return on 
average assets (ROAA) of 1.10% through third quarter 2015 (3Q15) compared to 
1.04% the year prior. Earnings stability has been accomplished through continued 
improvement in overhead expense as well as the company's ability to maintain an 
above-average net interest margin (NIM).

FNNI's ability to maintain its margin in the ongoing low rate environment is a 
rating strength and is primarily due to continued, balanced growth in both its 
credit card portfolio (9.7% YoY) and its regional bank franchise (4.6%). Fitch 
views FNNI's level of growth as reasonable and points toward not only sound risk 
management controls but also the company's strengthening franchise in the 
partnership credit card space.

FNNI's asset quality continues to improve. Both past-due loans and non-accrual 
loans have come down over the past year. From 3Q'14 to 3Q15, non-accruing 
loans-to-total loans dropped from 0.75% to 0.64% while 30-89 days past due (a 
forward-looking metric useful in evaluating for credit card issuers) were down 
to 0.54% from 0.64%. Both measures are at some of their lowest levels dating 
back to before the financial crisis. 

Meanwhile, net charge-offs (NCOs) have more or less levelled off under 1.50% 
Fitch continues to expect asset quality improvements to be nominal over the 
near- to medium-term as card performance across the industry has reached its 
peak and non-card credit losses remain stable. However, as noted above, Fitch 
expects FNNI's card portfolio to behave differently in a more stressed cycle 
compared to 2007-2010. This is due to management pivoting away from growing the 
bank's national card portfolio that is typically lower credit quality. Instead, 
focus has been placed on more transaction-oriented, co-branded cardholders that 
tend to produce relatively lower levels of credit losses through a cycle. This 
continued rebalancing of the portfolio all while maintaining good capital levels 
is reflected in the Outlook revision to Positive from Stable.

Fitch views capital levels and capital management as appropriate relative to 
FNNI's overall risk profile. FNNI's core capital ratios (measured by Fitch Core 
Capital  FCC  to total assets) was augmented by nearly 50 basis points (bps) 
over the last year to 9.36% while risk-based capital ratios remain well-above 
regulatory minimums. Fitch views these levels as adequate when considering the 
bank's relatively more limited access to the capital markets given its private 
ownership, the bank's exposure to the consumer through its credit card book and 
to the fairly stable economies in which its regional bank operates (primarily 
Nebraska, Colorado and Kansas). Fitch's expectation that capital will continue 
to be maintained in a prudent manner such that dividend payout ratios remain 
reasonable and regulatory capital ratios are augmented is reflected in the 
rating affirmation and Positive Outlook.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

FNNI's subordinated debt is notched one level below its VR of 'bbb-' for loss 
severity. These ratings are in accordance with Fitch's criteria and assessment 
of the instruments non-performance and loss severity risk profiles.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of First National of Omaha are rated one notch 
higher than FNNI's IDR and senior unsecured debt because U.S. uninsured deposits 
benefit from depositor preference. U.S. depositor preference gives deposit 
liabilities superior recovery prospects in the event of default.

HOLDING COMPANY 

FNNI's IDR and VR are equalized with those of First National Bank of Omaha, 
reflecting its role as the bank holding company, which is mandated in the U.S. 
to act as a source of strength for its bank subsidiaries. The entities' ratings 
are also equalized reflecting the very close correlation between holding company 
and subsidiary failure and default probabilities.

 

SUPPORT RATING AND SUPPORT RATING FLOOR

FNNI has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's 
view, FNNI is not systemically important and therefore, the probability of 
support is unlikely. The IDRs and VRs do not incorporate any support. 

RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT

Today's Outlook revision to Positive from Stable reflects Fitch's view that 
there is potential upside to FNNI's current ratings over the rating time 
horizon. 

Upward rating movement is predicated on FNNI maintaining sound, consistent 
earnings at levels similar to higher rated peers. To the extent that the bank 
accomplishes this while sustaining solid credit quality, including relatively 
better NCOs in its credit card book, and capital levels above peer averages, 
Fitch would likely take positive rating action. 

Alternatively, factors that could negatively weigh on FNNI's ratings include 
stagnant or worsening operating performance, deterioration in the loan portfolio 
outside of current expectations, as well as any significant shareholder capital 
distributions. 

The latter could constrain upward ratings momentum to the extent that 
distributions either slow FNNI's capital build relative to similarly rated 
institutions or even cause the company's capital ratios to decline on an 
absolute basis.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for FNNI and its operating companies' subordinated debt are 
sensitive to any change to FNNI's VR. 

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to FNNI's 
long-and short-term IDR. 

HOLDING COMPANY 

Should FNNI's holding company begin to exhibit signs of weakness, demonstrate 
trouble accessing the capital markets, or have inadequate cash flow coverage to 
meet near-term obligations, there is the potential that Fitch could notch the 
holding company IDR and VR from the ratings of the operating companies. 

SUPPORT RATING AND SUPPORT RATING FLOOR

Since FNNI's Support and Support Rating Floors are '5' and 'NF', respectively, 
there is limited likelihood that these ratings will change over the foreseeable 
future. 

 

The rating actions are as follows: 

Fitch has affirmed the following ratings with a Positive Outlook:

First National of Nebraska, Inc.

--Long-term IDR at 'BBB-';

--Viability at 'bbb-'.

--Short-term IDR at 'F3';

--Support Ratings at '5';

--Support Rating Floor at 'NF'.

First National Bank of Omaha

--Long-term IDR at 'BBB-'; 

--Viability at 'bbb-';

--Long-term deposits at 'BBB';

--Short-term deposits as 'F2';

--Short-term IDR at 'F3';

--Subordinated debt at 'BB+';

--Support Ratings at '5';

--Support Rating Floor at 'NF'.

Contact:

Primary Analyst

Bain Rumohr, CFA

Director

+1-312-368-3153

Fitch Ratings, Inc.

70 West Madison St.

Chicago, IL 60602

Secondary Analyst

Justin Fuller, CFA

Senior Director

+1-312-368-2057

Committee Chairperson 

Christopher Wolfe

Managing Director 

+1-212-908-0771

Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: 
hannah.james@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Global Bank Rating Criteria  (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

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