KBRA Affirms Ratings for Enterprise Financial Services Corp

17 Oct 2023   |   New York


KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred stock rating of BBB-, and the short-term debt rating of K2 for Clayton, Missouri-based Enterprise Financial Services Corp (NASDAQ: EFSC) (“Enterprise” or “the company”). Moreover, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the subsidiary bank, Enterprise Bank & Trust. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

EFSC’s ratings are supported by an experienced management team with extensive knowledge of the company's operating markets, and a longstanding track record of successful M&A integration, with demonstrated positive impact on the company’s funding profile as well as on market scale and diversification. Despite recent competitive deposit pressures, EFSC’s funding mix remained better than pre-pandemic levels. Robust NIB contribution (33% of deposits at 2Q23) and below peer cost of deposits (1.46% in 2Q23) support the company’s solid funding profile, in our view. Further, we consider the quality of the deposit base as comparatively higher with the addition of multiple specialty deposits that tend to be stable by nature. While the loan-to-core deposit ratio recently exceeded 100%, the company’s liquidity position remained reinforced by both on balance sheet and secondary liquidity facilities, representing ~30% of total assets at 2Q23. Benefiting from an asset sensitive balance sheet and increased loan volume, EFSC’s NIM (4.43% in 2Q23) declined by a comparatively moderate 28 bps from 4Q22 and tracked well above the average for similarly KBRA rated peers. Sustained by strong margins, and generally well controlled costs, EFSC’s profitability (ROA of 1.55% in 1H23) remains strong, and is considered a key rating driver. Underpinned by a conservative credit culture, disciplined underwriting, and a relationship oriented lending approach, KBRA considers the company’s somewhat riskier loan portfolio mix to be well-managed. Further, episodic credit quality challenges have generally been efficiently handled as evidenced by an NCO ratio of ~8 bps for the past five years. Additionally, EFSC’s exposure to sensitive CRE related loan segments remains manageable with office loans representing less than 5% of total loans at 2Q23.

EFSC’s reliance on spread revenues relative to higher rated peers remains a constraint. Fee income has trended downward to ~ 0.50% of average assets over the past three years, well below rated peer average of 0.91%. EFSC’s regulatory capital metrics remained largely consistent and in line with peers, including a CET1 ratio of 11.1% and the TCE ratio at 8.7% at the end of 2Q23. KBRA considers EFSC’s capital protection as sufficient, though stronger regulatory capital levels would be viewed as more suitable given the company’s commercially oriented loan portfolio and the increasing likelihood of credit stress that could lead to higher credit costs in the foreseeable future.

Rating Sensitivities

The Stable Outlook indicates that a rating upgrade is not expected in the near term. However, stronger capital levels, and enhanced fee income, along with sustained earnings, asset quality, and liquidity performance would be viewed positively. Significant deterioration in asset quality measures above peer experience could lead to negative rating actions. Additionally, a material depletion of regulatory capital ratios, or significant deterioration in earnings or liquidity position may pressure the ratings.

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