KBRA Affirms Ratings for Mutual Bancorp

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Hyannis, Massachusetts-based Mutual Bancorp (“Mutual” or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Cape Cod Five Cents Savings Bank (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Mutual Bancorp’s ratings are supported by the company’s expansion into central Massachusetts following the acquisition of Fidelity Mutual Holding Company, parent company of Fidelity Co-operative Bank, which resulted in diversification by geography as well as in the loan portfolio and deposit mix. In addition, the company's credit profile is bolstered by strong senior and mid-level management with extensive knowledge of the footprint along with years of banking experience. Given the rapid rise in the interest rate environment, earnings have been pressured (core ROA 0.44% at 2Q24) as Mutual reflects a concentrated loan portfolio, notably in residential mortgage representing 71% of total loans as of 2Q24. As such, the balance sheet is slower to reprice due to the longer duration of 1-4 family mortgages with a WAM of ~25 years and WAY of 4.03%. However, nearly 36% of the residential book is hedged through a floating interest rate swap improving the average loan yield to 5.31% at 2Q24, thus supporting the margin as it has improved in 1H24 (2.38%), albeit remains below similarly rated peer averages. The earnings profile is supported by solid fee revenue generation, namely in wealth management and retail services, with a five-year average of 21% of total operating revenue. Mutual has historically displayed an elevated efficiency ratio, though noninterest expense is more in line with peers at 2.3% of average assets, contributing to the improvement in the efficiency ratio to 77% as of 2Q24. The ratings are also supported by conservative credit management as Mutual has displayed minimal credit losses evidenced by an average NCO ratio over the last five years of 0.0% with a peak of just 19 bps in 2009. Despite a lower loan loss reserve when compared to similarly rated peers (0.52% vs 1.15%), the ratings are supported by strong capital levels, evidenced by a CET1 ratio of 12.2% at 2Q24, in part, due to the lower risk loan mix (risk-weighted density of 62%). That said, KBRA acknowledges the decline in capital metrics as a result of the acquisition, though expects metrics to improve to be more in line with historical levels over the medium term.

Rating Sensitivities

Positive ratings movement is not expected over the intermediate term, though continued credit quality outperformance, stronger capital levels, and a sustained improvement in earnings more in line with peers would be viewed positively. Conversely, a downgrade is unlikely, though any material deterioration in the credit or liquidity profile, or a more aggressive stance with capital management may negatively pressure the ratings.

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Methodologies