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 the company’s business model which incorporates robust risk management practices covering its rather diverse set of business lines for a bank of its size. This includes FINN’s sizable credit card business where the company has a long history of success as a upper mid-tier 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 (above 11% through 1H23, with historical levels generally ranging between 8% - 9%).

While the company has experienced similar funding pressures that have been ubiquitous throughout the industry in recent periods, FINN employs a broad retail banking operation that is complemented by its small business banking and commercial segments, providing a durable core funding base. However, recent loan growth, particularly in 2Q23 (~18% annualized growth), added to funding pressures with the company's cost of interest-bearing deposits pushing above rated peer averages (2.53% for 2Q23).

The decrease in earnings in recent periods was driven by various factors, with 2Q23 results impacted by NIM compression stemming from rising funding costs, as well as increased credit costs as losses within the credit card portfolio returned to more normalized, pre-pandemic levels. Conversely, FINN reported a $28 million sequential increase in noninterest income (0.38% of average assets) folowing a steady decline in preceding quarters, in part, due to seasonally higher interchange fees and the company's acquisition of Northland Capital Holdings, a full-service brokerage firm, completed in 2Q23. The acquisition added approximately $9 million in brokerage fees to FINN's top line. FINN’s diverse business lines generate meaningful fee income (noninterest income was 1.4% of average assets through 1H23), with interchange fees and investment/trust fees representing >50% of total noninterest income.

The decrease in capital ratios from peak levels seen at YE21 has largely been driven by growth (including the acquisition of a $500 million credit card portfolio from Synchrony Bank along with other acquisitions in 2022), though, historically, FINN has managed its capital ratios rather consistently, with a CET1 ratio generally tracking between 11% - 12%. Additionally, FINN has maintained a solid liquidity position with cash assets representing 6% of total assets at 2Q23 as well as a highly liquid, high quality $5.2 billion AFS securities portfolio.

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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Methodologies