TEXT-Fitch Upgrades First National of Nebraska, Inc. to 'BBB-' Following Mid-Tier Regional Peer Review

Thu Feb 14, 2013 6:34pm EST

CHICAGO, February 14 (Fitch) Fitch Ratings has upgraded the long-term Issuer Default Ratings (IDRs) of First National of Nebraska, Inc. (FNNI) to 'BBB-' from 'BB+'. The Rating Outlook has been revised to Stable from Positive. A full list of ratings follows at the end of this release.

Fitch reviewed FNNI as part of a peer review that included 16 mid-tier regional banks. The bank's included in the peer review include: Associated Banc-Corp., Bank of Hawaii Corporation, BOK Financial Corporation, Cathay General Bancorp, Cullen/Frost Bankers, Inc., East West Bancorp, Inc., First Horizon National Corporation, First National of Nebraska, Inc., First Niagara Financial Group, Inc., Fulton Financial Corporation, Hancock Holding Company, People's United Financial, Inc, Synovus Financial Corp., TCF Financial Corporation, UMB Financial Corp., Webster Financial Corporation. Refer to the release titled 'Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following Industry Peer Review' for a discussion of rating actions taken on the entire mid-tier regional bank group.

The mid-tier regional group is comprised of banks with total assets ranging from $10 billion to $36 billion. IDRs for this group is relatively dispersed with a low of 'BB-' and a high of 'A+'. Mid-tier regional banks typically lag their large regional bank counterparts by asset size, geographic footprint and product/revenue diversification. As such mid-tier regional banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations.

Fitch's mid-tier regional bank group has fairly homogenous business strategies. The institutions are mostly reliant on spread income from loans and investments. With limited opportunity to improve fee-based income in the near term, Fitch expects that mid-tier banks will continue to face greater earnings headwinds in 2013 than larger institutions with greater revenue diversification.

Share repurchases is common theme amongst the mid-tier banks. As mid-tier banks face earnings headwinds, institutions have begun repurchasing common shares to improve shareholder returns. Fitch anticipates continued repurchase activity in 2013 as the return on equity lags historical norms for the group.

In addition to share repurchases, Fitch has observed that some mid-tier banks have looked to their investment portfolio to improve returns. Most notably, CLOs and CMBS have become more popular amongst mid-tier banks. Although such securities are beneficial to yields and returns, Fitch notes that such purchases can be a negative ratings driver if the risks are not properly measured, monitored and controlled.

Asset quality continues to improve throughout the banking sector. Both nonperforming assets (NPAs) and net charge-offs (NCOs) are down significantly year over year. Fitch anticipates further asset quality improvement as nonperforming loan (NPL) inflow slows. Reserve levels have also declined as asset quality improves, which has been beneficial to earnings in 2012. Fitch expects further reserve releases in 2013 but at a slower pace.

RATING ACTION AND RATIONALE

Today's action reflects the company's more stable operating performance, improvements in asset quality ratios, as well as stronger regulatory capital ratios. FNNI's earnings profile has improved, as it has recorded fewer one-time gains and more recent earnings metrics are reflective of core operations.

FNNI's earnings and profitability have improved as the company has pursued strategic partnerships in its credit card portfolio, which has allowed it to create alliances with the largest national and local retailers. The company's PPNR, as a measure of core performance, has improved 152 basis points (bps) over the last 12 months. FNNI's loan portfolio has experienced positive credit trends as both past due loans and non-accruals loans were down significantly year-over-year. Absolute levels of NPLs have decreased 60% since year-end 2009 (YE09), while classified and special mention assets have also experienced a similar trend. These trends have been noted throughout FNNI's loan book, including the credit card portfolio which accounts for roughly 40% of loans. Although NPAs remain elevated, relative to other mid-tier peers, Fitch expects asset quality to continue improving, albeit at a slower pace, in the near-to-medium term. Average 5Q NPAs were 4.08% compared to the mid-tier average of 3.48%.

Historically, Fitch has considered FNNI's capital management to be aggressive; however, the company has since improved its capital ratios which have been boosted through retained earnings, the sale of FNNI's merchant processing business, and more optimal levels of risk-weighted assets. FNNI's risk based Tier 1 ratio was in excess of 13% at fourth quarter of 2012 (4Q'12) compared to 10.50% in fiscal year 2010 (FY10). Although capital levels are closely aligned to the mid-tier peer averages, Fitch will closely monitor any capital erosion resulting from distribution to shareholders.

RATING DRIVERS AND SENSITIVITIES - VRs and IDRs:

With today's action, further upward movement of the company's ratings are considered limited. Significant improved in asset quality, and earnings would result in further movement of the rating, however, Fitch does not anticipate this to be the case in the medium term. Alternatively, factors that could negatively weigh on FNNI's ratings include stagnant operating performance, a reversal of the currently positive credit trends, as well as any significant shareholder capital distributions. The latter could put pressure on FNNI's ratings, if capital build significantly slows or even cause the company's capital ratios to decline on an absolute basis.

RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Floor Ratings:

All of the mid-tier regional banks in the peer group have Support Ratings of '5' and Support Floor Ratings of 'NF'. In Fitch's view, the mid-tier banks are not considered systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any government support for any of the banks in the mid-tier regional bank peer group.

RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Other Hybrid Securities:

Subordinated debt and hybrid capital instruments issued by the banks are notched down from the issuers' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' VRs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation.

RATING DRIVERS AND SENSITIVITIES - Holding Company:

All of the entities reviewed in the mid-tier regional bank group have a bank holding company structure with the bank as the main subsidiary. All subsidiaries are considered core to parent holding company supporting equalized ratings between bank subsidiaries and bank holding companies. IDRs and VRs are equalized with those of its operating companies and banks 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 DRIVERS AND SENSITIVITIES - Subsidiary and Affiliated Company Rating:

All of the entities reviewed in the mid-tier regional bank group factor in a high probability of support from parent institutions to its subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.

Fitch has taken the following rating actions: First National of Nebraska, Inc.

--Long-term IDR upgraded to 'BBB-' from 'BB+'; Outlook Stable;

--Short-term IDR upgraded to 'F3' from 'B';

--Viability rating upgraded to 'bbb-' from 'bb+';

--Support rating affirmed at '5';

--Support rating floor affirmed at 'NF'. First National Bank of Omaha

--Long-term IDR upgraded to 'BBB-' from 'BB+'; Outlook Stable;

--Short-term IDR upgraded to 'F3' from 'B';

--Viability rating upgraded to 'bbb-' from 'bb+';

--Support rating affirmed at '5';

--Support rating floor affirmed at 'NF';

--Long-term deposits upgraded to 'BBB' from 'BBB-';

--Short-term deposits upgraded to 'F2' from 'F3';

--Subordinated debt upgraded to 'BB+' from 'BB'.

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