NEW YORK, June 20, 2023–(BUSINESS WIRE)–KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Lowell, Massachusetts based Enterprise Bancorp, Inc. (NASDAQ: EBTC or “the company”). Moreover, 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 bank, Enterprise Bank and Trust Company. The Outlook for all long-term ratings is Stable.
Key Credit Considerations
The ratings are underpinned by EBTC’s historically strong funding profile that has proven to be comparatively stable, despite continued industry-wide deposit pressure since the beginning of the interest rate hike cycle. Over the past five years, the company’s core deposits averaged ~95% of total funding. We consider EBTC’s consistently above peer NIB deposits (~30%) that support a low cost of deposits (60 bps at 1Q23) as evidence of the bank’s well positioned deposit franchise, especially in a highly competitive market of operations. The company’s high touch relationship-based business model within a well-established local footprint remains the driver of its successful low cost deposit gathering strategy, in our view. Still, net uninsured deposits (36%) at 1Q23 could be covered 1.5x by primary and secondary liquidity sources, which represented 50% of total assets at 1Q23. Enterprise’s post pandemic asset quality performance has been favorable relative to peers and reflected nominal net recoveries at the end of 1Q23. However, the company’s exposure to C&D lending (~100% of RBC at 1Q23), is considered elevated relative to peers, though remained essentially in line with historical levels. KBRA acknowledges management’s experience in this lending segment, as well as its conservative underwriting and monitoring standards. Further, more than 50% of the C&D book consists of multifamily and residential condominium construction projects, within the bank’s footprint and are backed by long term customers. EBTC has demonstrated consistency in its operating performance over time, with ROAA generally in the 1% range, supported by a resilient and above average NIM driven by the low-cost deposit franchise. However, in line with industry trends, we anticipate moderate NIM pressure moving forward. We expect a relatively stable contribution from fee income base (~10% of total revenues)— primarily from sources uncorrelated to lending activities, which will bolster earnings stability in 2023. With that said, it should be noted that EBTC’s noninterest income contribution has historically been below peer average. EBTC’s regulatory capital measures have been generally consistent in recent years, and the CET1 capital ratio (10.6%), was largely in line with peer average at the end of 1Q23. While we consider EBTC’s total capital protection as currently sufficient, in conjunction with the LLR/loans ratio at 1.70% as of 1Q23, it is KBRA’s view that continued growth in capital intensive assets, such as investor CRE and C&D, would require stronger regulatory capital levels, going forward, especially given the potential for rising credit costs in a less constructive economic climate.
Rating Sensitivities
A rating upgrade is not expected in the near term barring an exogenous event. While regulatory capital is in line with the rated peer group on a RWA basis and has been consistently managed within the current range, it is less robust when compared to commercial real estate loan exposures, especially the C&D portfolio. In view of the still fragile funding environment for regional and community banks, including the expectation for sharply higher cost deposit funding, which on average remains well below market rates for non-deposit sources of funding, modest pre-provision earnings pressure is likely in the near-term. In addition, there is an increasing likelihood of weaker macroeconomic output in the coming quarters from higher unemployment and interest rates, which likely increases the debt burden for borrowers. For these reasons, KBRA evaluates the current level of regulatory capital – as measured by the CET1 ratio – to be at the minimum end of the range for the current ratings. Consequently, ratings pressure could ensue, if KBRA believes that 1) regulatory capital is not on a trajectory to improve overall (relative to RWA) and 2) the concentration in CRE loan exposure, especially C&D loans, compared to regulatory capital is not tracking downward. A deterioration in credit metrics beyond KBRA’s expectations, or significantly below peer profitability measures, leading to capital depletion, and unexpectedly weaker than peer liquidity position could lead to negative rating implications.
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Methodologies
Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
ESG Global Rating Methodology
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
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Contacts
Analytical Contacts
Amina Pare, Associate Director (Lead Analyst)
+1 301-969-3187 amina.pare@kbra.com
Shannon Servaes, CFA, CPA, Managing Director
+1 301-969-3247 shannon.servaes@kbra.com
Joe Scott, Senior Managing Director
(Rating Committee Chair)
+1 646-731-2438 joe.scott@kbra.com
Business Development Contact
Justin Fuller, Senior Director
+1 646-731-1250 justin.fuller@kbra.com
