KBRA Affirms Ratings for First National of Nebraska, Inc.

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, and the short-term debt rating of K2 for First National of Nebraska, Inc. (OTC: FINN or “the company”), a closely-held bank holding company headquartered in Omaha, Nebraska. KBRA also affirms the deposit and senior unsecured debt ratings of A, the subordinated debt rating of A-, and the short-term deposit and debt ratings of K1 for First National Bank of Omaha, the lead subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by FINN’s differentiated earnings profile which includes a more diverse business model generating greater revenues (though partially offset by a higher operating expense base). An important aspect of its business model is the company’s rather robust risk management practices that cover its diverse set of business lines and are well-managed by an experienced leadership group. FINN’s various fee generating business lines (credit cards, wealth/trust and investment advisory services, IT managed services, mortgage banking, etc.) have consistently provided above-average noninterest income, totaling $275 million through 1H24. This includes revenues from FINN's sizable credit card business, where the company has a long history of success as a meaningful national card issuer. FINN’s leadership is well-experienced within the space and has demonstrated its ability to manage the risk within this business as reflected by the strong risk adjusted yields generated over a multi-year period from its credit card loans (near 11% through 1H24, with historical levels generally ranging between 8% - 9%) on top of the noninterest income generated from interchange fees ($77 million through 1H24). As such, FINN's NIM (6.18% for 1H24) consistently tracks meaningfully above rated-peers, which coupled with its greater fee revenues (1.7% of average assets) helps drive its above-average earnings performance.

FINN maintains a durable, primarily core deposit comprised funding base, supported by a broad retail branch network of over 100 branches across eight states, complemented by its small business and commercial banking segments. Moreover, its liquidity position is viewed as suitable with an above-average level of cash assets (5% of total assets) and a highly liquid, $5.3 billion AFS investment portfolio.

The company’s higher credit loss content is largely reflective of its concentration in credit cards and consumer loans. As previously noted, FINN has demonstrated its ability to sufficiently price and manage this risk, with strong earnings and robust reserve levels. Finally, after decreasing in 2023 due to reserve build and loan growth, FINN has quickly rebuilt its capital ratios, tracking within targeted ranges at 2Q24 including a CET1 ratio that has expanded roughly 90 bps since YE23 to 11.8%.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a rating change is not likely over the medium term. However, should FINN experience a material shift in credit quality, including risk-adjusted yields within the credit card portfolio falling measurably below historical norms, impacting the profitability of the company, or should FINN become more aggressive with regard to its capital management strategy, with capital ratios tracking below peer levels, negative rating action could ensue.

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