KBRA Affirms Ratings for Cambridge Financial Group, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Cambridge, Massachusetts-based Cambridge Financial Group, Inc. (“Cambridge” 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 the subsidiary, Cambridge Savings Bank. The Outlook for all long-term ratings is Negative.

Key Credit Considerations

While KBRA acknowledges management’s active efforts to improve regulatory capital ratios at the bank and on a consolidated basis, they continue to trail rated peer levels, as has been the case historically, which, coupled with the relatively recent development of subdued net earnings performance during the past two years, are the key contributors to the Negative Outlook.

FY24 bank earnings, measured on both a ROAA and risk-adjusted (RoRWA) basis, declined modestly compared to FY23, with both years’ results well below the levels generated in earlier years (e.g., 2021 and 2022). The lowered earnings stem from the relatively high interest rate sensitivity of the bank’s deposit and non-deposit funding base compared to its interest-earning assets. Since YE22, relative to AEA, interest expense has increased by about 2.5 percentage points (to 2.90%), compared to a rise in interest income of roughly 1.5 percentage points (to 5.26%). During this timeframe, the volume of earning assets and interest-costing liabilities, including non-deposit funding, has generally been stable. For FY25, management anticipates a modest recovery in bottom line earnings, driven by a reduced cost of funding – deposit and non-deposit – tied to the reduction in short-term interest rates from the Federal Reserve’s policy actions in 2H24. During 2024, management took steps to moderate interest-rate risk given the current environment. While still liability sensitive, it has moved to a more neutral position, and it remains an ongoing focus of management.

Bank regulatory capital has improved notably, since bottoming in 3Q23, aided by retained earnings and nominal asset growth (with RWA shrinkage in 2024). Management expects to manage the CET1 ratio level at the bank above 11% and to continue to improve the consolidated CET1 ratio.

Loans continue to comprise a sizeable percent of total assets (83%) and total deposits (106%). The deposit base is modestly concentrated, as top 20 depositors account for just under 10% of total deposits; estimated uninsured deposits constitute 28% of total deposits or approximately $1.5 billion. On-balance sheet asset liquidity in the form of short-term investments and the securities portfolio has been maintained in the current range – about 11% and 13% of total assets and deposits, respectively. Given the high level of CRE loans in relation to total assets and capital, KBRA believes that on-balance sheet liquidity should be strengthened somewhat over time. Positively, contingent sources of funding appear ample, including $1.3 billion of availability with the FHLB at YE24, which, combined with unencumbered asset liquidity, currently appear sufficient to meet unexpected liquidity and funding needs.

Rating Sensitivities

A return to a Stable Outlook would need to be accompanied by positive trajectory and sustained level in profitability together with a CET1 ratio more consistent with the rated peer group. Conversely, an erosion in regulatory capital ratios or inability to manage the CET1 ratio above 10%, a meaningful degradation in asset quality resulting in credit losses beyond peer trends, or persistent earnings volatility or the inability to improve earnings performance over time could lead to rating pressure.

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Methodologies