KBRA Affirms Ratings for Enterprise Bancorp, 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 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 bank"). The Outlook for all long-term ratings is Stable.

The current ratings are underpinned by EBTC’s long running ties with the local communities, which, in return, has helped the bank to maintain a very low cost deposit franchise in a highly competitive geographic region (EBTC’s cost of total deposits was 1.72% as of 1Q24, compared with KBRA’s rated northeastern bank average of 2.58%). The bank’s deposit base is also supported by a sizable noninterest-bearing portion (30% of total deposits). In addition, with a loan-to-deposit ratio of 89%, the bank is able to remain largely self-funded in the current environment, with no brokered deposits and a de minimis amount of wholesale borrowings outstanding (borrowings from FRB amounted to 1% of total liabilities).

The company has demonstrated consistency in its operating performance over time with ROAA generally in the sub 1% range, supported by a healthy NIM (3.17% as of 1Q24) which has outperformed its peers since YE2020. Also contributing to the company’s earnings stability is the company’s fee income base, which is primarily derived from sources that are less correlated with lending activities (e.g., Gain-on-Sale) and should prove resilient over time, although it should be noted that EBTC’s fee income base (around 10% of total revenue) has historically lagged its peer average.

The ratings are counterbalanced by the high CRE loan weighting. Investor CRE and C&D loans currently amount to 366% and 116% of total RBC, respectively, and both remain above regulatory guidelines. In addition, the company’s multi-family portfolio (around 20% of total loans inclusive of multi-family construction) appears to be relatively concentrated in its operating footprint (27 branches in 22 communities). However, the current multi-family portfolio is steadily performing with an average occupancy rate of 98% and a DCR of 1.45x. The total office portfolio comprises around 5% of total loans and remains stable.

While regulatory capital ratios are generally in line with the rated peer group and have been consistently managed in the current range, captial has also tracked below peer comparisons historically and is less robust when considering the company’s elevated exposure to CRE loans as well as the more recent lower earnings related to margin compression (ROAA of 0.73% as of 1Q24), in KBRA’s view. For these reasons, KBRA evaluates the current level of CET1 ratio of 10.43% (8.7% including AOCI) to be at the minimum end of the current rating category.

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