OREANDA-NEWS. 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'.