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 (“MB” 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

MB's ratings are supported by the company's recent expansion into a strong geographic area within the central Massachusetts MSA, following the announcement of the acquisition of Fidelity Co-Operative Bank in 3Q23. This acquisition will add ~$1.5 billion in total assets (pro forma total assets of ~$7 billion and 37 branches combined) and improves the company's funding profile, reducing the loan-to-deposit ratio to near 100%. The combination also bolsters senior and mid-level management. KBRA has a positive view of the experienced management team and believes the addition of senior management from Fidelity will help support execution and management of stable organizational growth while maintaining sound financial performance. Moreover, the combination enhances the company's earnings profile with greater diversification of its earning asset mix. Historically, Cape Cod Five has demonstrated a consistent earning profile, strong asset quality, and solid capital metrics. These trends are expected to continue post-merger as Fidelity’s key operating metrics are relatively in line with MB’s and capital management has been similar, with the pro forma CET1 ratio expected to be near 11.5% at closing. The funding profile has experienced some challenges regarding deposit outflows, similar to industry trends, but are expected to be supported by Fidelity's stable deposit franchise, which includes nearly 20% in noninterest bearing deposits. Recently, MB has utilized FHLB and brokered deposits, which together accounted for ~15% of the total funding base as of 2Q23. The recent increases in total deposits costs (1.63% at 2Q23) and additional borrowings appear to be impacting NIM, moving it near historic lows at 2.30% as of 2Q23 (5-year average: 3.11%). Earnings have also been partially impacted by the slower asset repricing of the balance sheet, given that 85% of total loans are in 1-4 residential mortgages. However, 35% of the residential book is hedged through a floating interest rate swap. The company has generated solid fee revenue generation through trust services, treasury management services, and mortgage servicing and management (~20% since 2015). This revenue diversification is considered a core driver and a differentiating characteristic relative to the bank’s peer group. However, ROAA and RoRWA are considered below peer averages, both trending below 1% since 2015, given the preponderance of residential mortgages. While the existing bank footprint is directly impacted by tourism and the retirement industry, the company reflects moderately low exposures to pandemic impacted industries and contains minimal exposure to CRE categories. As a function of the lower risk and loan yield mix, the company’s charge-offs have historically been negligible and immaterial. Moreover, the company significantly outperformed peers during the GFC as NCOs peaked at just 19 bps in 2009. The Stable Outlook reflects the lower risk balance sheet composition along with consistent, albeit comparatively below peer earnings power, strong capital levels, and adequate reserve/loans (0.53%), which, altogether, appear to comfortably position MB to absorb potential credit losses.

Rating Sensitivities

Positive ratings momentum is unlikely at this juncture. However, sustained low-cost deposit inflows, resulting in a reduced reliance on wholesale funding combined with strong asset quality and capital metrics would be viewed positively. Deposit outflows that negatively alter the funding profile, a material deterioration in asset quality, or with substantial decreases in capital levels may lead to negative ratings momentum.

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