Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Lowell, Massachusetts based Enterprise Bancorp, Inc. (NASDAQ: EBTC). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for its subsidiary, Enterprise Bank and Trust Company. The Outlook for all long-term ratings is Stable.
The ratings are underpinned by a strong core deposit franchise that continues to support EBTC’s durable and above-average NIM. Core deposits have consistently represented close to 90% of the funding mix (94% as of 1Q20), which is a function of the company’s relationship-based community banking model that has resulted in sizeable deposit market shares within EBTC’s footprint. EBTC’s reliable noninterest income generation (typically ~13% of operating revenue), primarily through wealth management activities and deposit/interchange fees, have also helped stabilize earnings. However, noninterest income contributions have remained below higher rated peers. Despite the overall resiliency in EBTC’s earnings performance, ROA has tracked modestly below peers with higher than average operating expenses stemming, in part, from significant investments in the wealth management platform. EBTC’s favorable track record of strong credit performance with low NPAs and marginal NCOs is, in part, attributable to management’s stringent focus on banking within the company’s relatively small footprint, in which local knowledge and expertise is vital, coupled with a conservative credit culture throughout an extended benign credit environment and a comparatively cautious growth strategy. Nonetheless, EBTC’s constrained footprint compared to larger peers also represents a geographic concentration risk and limits the ratings, though KBRA recognizes the local economy is strengthened by its close proximity to Boston. The loan portfolio is relatively diverse, despite moderately elevated CRE and C&D concentrations. However, KBRA believes appropriate risk management practices are in place to offset the risk as evidenced by historically low loss rates coupled with conservative reserve balances. Further, EBTC’s COVID-19 exposure is in line with peers and manageable at 13% of loans as of 1Q20.
KBRA continues to monitor the potential direct and indirect effects of the coronavirus on banking and other sectors. Please refer to our publication U.S. Bank 1Q 2020 Ratings Compendium for our latest thoughts.
The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.
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Disclosures
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
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 U.S. Information Disclosure Form 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 U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. 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 and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA.
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