Fitch Affirms First National of Nebraska at 'BBB-'/'F3' Following Peer Review; Outlook Stable

Fitch Ratings has affirmed First National of Nebraska, Inc. (FNNI) ratings at 'BBB-/F3'. The Rating Outlook remains Stable. A full list of rating actions is at the end of this rating action commentary.

The rating action follows a periodic review of the mid-tier regional banking group, which includes BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corp. (FHN), First National of Nebraska, Inc. (FNNI), First Republic Bank (FRC), Fulton Financial Corp (FULT), People's United Financial Inc. (PBCT), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Webster Financial Corp. (WBS), Wintrust Financial Corp (WTFC), and UMB Financial Corporation (UMB).

Company-specific rating rationales for the other banks are published separately.

KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT

Today's affirmation of FNNI's rating and maintenance of the Stable Outlook reflect Fitch's view that its operating performance remains stable and in-line with similarly rated peers and the general improvement in asset quality. These aspects have allowed FNNI to maintain adequate capital levels over the last year.

FNNI continues to generate reasonable earnings for its rating level and business model. Earnings, measured by return on average assets (ROAA) have been stable year over year. The company generated an ROAA of 1.02% through third quarter 2014 (3Q14) 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 (5.9% YoY) and its regional bank franchise (6.2%). Fitch views this level of growth as reasonable and points toward adequate risk management controls and systems.

Similar to most in the peer group, FNNI's asset quality continues to experienced positive trends. Both past-due loans and non-accrual loans were down noticeably over the past year. Non-accruing loans-to-total loans dropped to 0.75% from 1.03%, while 30-89 days past due (a useful, forward-looking metric for credit card issuers) were down to 0.64% from 0.82%. As expected, net charge-offs (NCOs) have levelled off over the last year. NCOs as a portion of gross loans were 1.52% through 3Q14 compared to 1.51% through the same period in 2013. 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. This expectation is reflected in today's affirmation as well as the Stable Outlook.

Fitch views capital levels and capital management as appropriate for FNNI's current rating and its 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 8.91% while risk-based capital ratios remain well-above regulatory minimums. Fitch views these levels as adequate when considering 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).

Liquidity risk management remains sound. With a loan-to-deposit ratio of 84%, FNNI continues to be primarily core-deposit funded and holds solid market share throughout its geographic footprint. This should aid the company in absorbing potential market risk as rates potentially rise over the next year. Fitch notes that the holding company's financial profile continues to be adequate and in line with expectations given its level of cash and other contingent sources of liquidity. The company has accumulated over $100 million in cash and has no short-term debt outstanding.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

Fitch views FNNI's ratings as solidly placed at 'BBB-'over the near term. However, given its relatively large credit card portfolio, Fitch expects FNNI to generate above-peer profitability over time. To the extent that profitability improves commensurately, and converges with those banks at higher ratings on a consistent basis while asset quality remains solid, upward movement could result for FNNI's VR or the Outlook could be revised to Positive.

Fitch's current rating and Outlook are sensitive to capital management. As noted above, Fitch views current levels and management as appropriate. However, should capital levels be more aggressively managed either through outsized growth (organic or through acquisitions) or through a material increase in dividend payouts to the private, family ownership (greater than 50%), negative ration action could ensue. Furthermore, should asset quality metrics reverse their current trend and deteriorate (particularly on the non-card book), potentially revealing relaxed underwriting standards, an adverse rating action would likely be the result.

KEY RATING DRIVERS - HOLDING COMPANY

The IDR and VR of FNNI is equalized with its primary operating subsidiary 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.

RATING SENSITIVITIES - 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. This is viewed as unlikely though for FNNI given the strength of the holding company liquidity profile.

KEY RATING DRIVERS - 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. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

FNNI's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by FNNI and by various issuing vehicles are all notched down from FNNI or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by FNNI and its subsidiaries are primarily sensitive to any change in FNNI's VR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

FNNI's uninsured deposit ratings are rated one notch higher than the company'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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by FNNI and its subsidiaries are primarily sensitive to any change in FNNI's long- and short-term IDRs.

Fitch has affirmed the following ratings with a Stable 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'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--U.S. Banking Quarterly comment: 4Q14 (Jan. 28, 2015)

--U.S. Banks: The Risks with Energy Slide (Jan. 16, 2015)

--U.S. Basel III and Dodd Frank Act Regulatory Guide (Nov. 21, 2014)

--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)' (Nov. 12, 2014);

--'U.S. Banks: Implications of an Interest Rate Shock Scenario' (Oct. 30, 2014)

--U.S. Banks: Liquidity and Deposit Funding (Aug. 08, 2013);

--U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (June 18, 2013);

--U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? (July 11, 2013);

--'Index Trend Analysis - 4Q14 (Fitch Fundamentals Index Remains Neutral)' (January 2015);

--'Risk Radar Global 3Q14' (Sept. 15, 2014);

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'Rating Considerations for U.S. Bank Holdco & Opcos' (Update on Position Outlined in 1Q14) (Dec. 1, 2014)

Applicable Criteria and Related Research:

Rating Considerations for U.S. Bank Holdco & Opcos (Update on Position Outlined in 1Q14)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821068

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Risk Radar Global 3Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875

U.S. Banks: Liquidity and Deposit Funding

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

U.S. Banks: Implications of an Interest Rate Shock Scenario

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=800748

2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809228

U.S. Basel III and Dodd Frank Act Regulatory Guide (Applicability of New Bank Regulations in the U.S.)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=798848

U.S. Banks: The Risks with Energy Slide

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=854268

U.S. Banking Quarterly Comment: 4Q14 (All Eyes on Oil Prices and Interest Rates)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=849388

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978968

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