Fitch Affirms First National of Nebraska, Inc. at 'BBB'; Outlook Stable

First National of Nebraska

13/05/2019 21:06

(The following statement was released by the rating agency)


Fitch Ratings-Chicago-May 13: Fitch Ratings has affirmed First National of 
Nebraska, Inc.'s (FNNI) Long- and Short-term Issuer Default Ratings (IDRs) at 
'BBB' and 'F2'. The Rating Outlook is Stable. 

A full list of rating actions follows at the end of this press release.

The rating action follows a periodic review of the mid-tier banking group, 
including: First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation 
(FULT), Community Bank System, Inc. (CBU), Trustmark Corp. (TRMK), Hilltop 
Holdings Inc. (HTH) and Cathay General Bancorp (CATY). 

Company-specific rating rationales for the other banks are published separately. 
For further discussion of the mid-tier regional bank sector in general, refer to 
the upcoming special report "Mid-tier Regional Bank Periodic Review," to be 
published at www.fitchratings.com.

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND SENIOR DEBT

FNNI's rating affirmation is supported by the company's solid financial profile, 
including strong earnings performance, a stable funding profile and sound asset 
quality, largely in-line with its mid-tier regional peers. Fitch views favorably 
FNNI's decision to discontinue marketing its national mailing credit card 
portfolio, which has historically been a driver of volatility, in favor of 
growing its agent bank and co-branded credit cards. 

FNNI's earnings performance is strong relative to its similarly rated peers. 
Return on average assets in 2018 was 1.36%, an improvement over prior years and 
above the mid-tier regional peer median. The bank's solid credit card franchise 
generates high margins and fee income, helping drive profitability at the bank. 
The inherent asset sensitivity in the balance sheet, driven largely by the 
ability to quickly reprice the credit card book, resulted in expansion in the 
net interest margin, on top FNNI's already high spread. However, NIM expansion 
is expected to begin to slow as rates stabilize. Fitch expects that any further 
improvements in the earnings profile will likely be due to improvements in 
expense control.

FNNI's asset quality, excluding the credit card portfolio, is in line with the 
peer group average. While continued pressure from commodity prices has had some 
impact on the bank's agricultural portfolio, it has been limited to row crop 
producers which only make up a quarter of this book. Overall, NPAs were flat 
year-over-year and remain in line with the peer group median at 83 bps. Loan 
growth remains slightly above the peer group median but has moderated slight 
from last year. Growth in the credit card portfolio slowed over the past year, 
as FNNI changed focus from growing the national mailing portfolio to building 
agent bank and cobranded business. One of the primary drivers of growth in 2018 
was the C&I loan book, in line with management's goal to diversify the loan 
portfolio.

Net-charge offs (NCOs) increased by 12bps, year over year, representing what 
Fitch views as a normalization in credit card performance. Fitch has observed 
similar normalization at other rated issuers with a strong presence in credit 
card lending. Fitch believes that NCO levels will remain more stable than in 
prior cycles due to the aforementioned decline in the national mailing portfolio 
and the growth in partnership card relationships. These relationships have 
demonstrated lower loss content and should result in a more stable operating 
performance for FNNI through the cycle.

During 2017, FNNI repurchased $155 million in shares from a large private 
shareholder. Fitch expects that this was a one-time event and does not 
anticipate any similar transactions in the near- to mid-term. This transaction 
resulted in an 81bps decline in CET1 from 11.26% at year-end 2016 to 10.45% at 
year-end 2017. Since that time, FNNI has rebuilt CET1 to 11.15% as of Dec. 31, 
2018 and is expected to continue to accrete capital through strong earnings and 
a relatively low payout ratio.

FNNI's liquidity profile remains solid, with a loan to deposit ratio just below 
the mid-tier regional peer median of 92% and relatively low usage of wholesale 
funding. Likewise, the bank's total cost of deposits is directly in line with 
the peer median at 72bps. The profile is supported by FNNI's leading market 
share in Nebraska, as well as parts of Colorado and Illinois. Deposit costs did 
increase by 32bps year over year, both due to repricing and some rotation of 
noninterest bearing deposits into time deposits.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

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

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of First National Bank of Omaha are rated one 
notch higher than the bank's IDR and senior unsecured debt as 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 VR is equalized with that of its operating company, 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 IDRs are also equalized, reflecting the 
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, the probability of support is unlikely. IDRs and VRs do not incorporate 
any support.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

Fitch believes that FNNI's ratings currently reside at the high end of their 
potential range and upside pressure is unlikely given the sizable exposure to 
credit card lending.

Should asset quality deteriorate beyond that of peers with significant credit 
card portfolios, it could result in negative rating pressure. A material decline 
in profitability below peer median over an extended period could also result in 
downside pressure.

Fitch expects that capital ratios will continue to increase incrementally over 
the near- to mid-term, following the decline from the share repurchase 
transaction in 3Q17. If FNNI were to begin managing capital more aggressively 
and these ratios were to decline instead, negative rating action could occur.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of FNNI and its operating company's subordinated debt are sensitive 
to any change to the 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 IDRs, respectively.

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 potential that Fitch could notch the 
holding company VR from the ratings of the operating company.

SUPPORT RATING AND SUPPORT RATING FLOOR

As 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.

Fitch has affirmed the following ratings: 

First National of Nebraska, Inc.

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

--Short-term IDR at 'F2';

--Viability Rating at 'bbb';

--Subordinated debt at 'BBB-';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

First National Bank of Omaha

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

--Short-term IDR at 'F2';

--Viability Rating at 'bbb';

--Long-term deposits at 'BBB+';

--Short-term deposits at 'F2';

--Subordinated debt at 'BBB-';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

Contact: 

Primary Analyst 

Brian Thies

Associate Director

+1-312-606-2316

Fitch Ratings, Inc.

70 West Madison St.

Chicago, IL 60602

Secondary Analyst

Bain K. Rumohr, CFA

Senior Director

+1-312-368-3153

Committee Chairperson 

Christopher Wolfe

Managing Director

+1-212-908-0771

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

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044408

Short-Term Ratings Criteria (pub. 02 May 2019)

https://www.fitchratings.com/site/re/10073011

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10075329

Solicitation Status 

https://www.fitchratings.com/site/pr/10075329#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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