KBRA Affirms Ratings for First Mutual Holding Co.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Lakewood, Ohio based First Mutual Holding Co. ("FMHC" 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 primary subsidiary, First Federal Savings and Loan Association of Lakewood ("FFL" or "the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the lower-risk nature of the company’s operating strategy, with a focus on maintaining a highly granular, relationship-driven loan portfolio that includes a large concentration in lower-risk conforming residential mortgage loans (residential mortgage loans comprised over 70% of total loans at 3Q24). Moreover, the company employs a highly experienced management team that continues to execute on its well-defined strategy, despite the challenging economic environment, particularly, the historically weak mortgage banking environment that has greatly impacted the company’s profitability. FFL has historically operated with a NIM that runs well below rated peers (2.06% through 9M24), in large part, due to its concentration in lower-yielding, lower-risk residential mortgage loans. The bank experienced a meaningful decrease in NIM in 2023 related to the rise in interest rates and the bank’s limited ability to reprice the loan book due to its loan concentrations. The decrease in NIM, coupled with the significant drop off in mortgage banking activity which has decreased its noninterest income to roughly 0.4% of average assets (though 9M24), has created significant headwinds to company earnings. With that said, more recently, the bank has been able to stabilize its NIM through effective repricing of deposits as interest rates have begun to fall, along with balance sheet hedging to ensure a neutral interest rate sensitivity position. As such, the bank expects more favorable trends in NIM throughout 2025, though mortgage banking revenues are likely to remain muted.

The company has managed its risk-based capital ratios rather consistently in recent years, in part, due to a lack of growth offsetting its more limited earnings. Overall, FMHC's capital position was considered to be in line with the rated peer group with a CET1 ratio at 11.2% at 3Q24. As previously noted, FMHC’s balance sheet is concentrated in lower-risk residential mortgage loans, which has led to peer-leading asset quality metrics, including nominal credit losses over a multi-year period.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a rating change is not expected over the medium term. However, should FMHC manage capital more aggressively, or should an unforeseen credit event create meaningful pressure on the company’s profitability, negative rating action could occur.

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