KBRA Affirms Ratings for Enterprise Financial Services Corp
16 Oct 2024 | 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
The ratings are supported by EFSC’s above-average profitability with a reported RoRWA that has tracked roughly 30 bps above rated peers in recent years. Benefitting from an asset sensitive balance sheet (61% of total loans have variable rate structure), EFSC was able to absorb part of the escalating funding costs, through either loan repricing or reinvesting, while maintaining its margin above 4% since 2H22. In terms of noninterest income, EFSC’s fee income sources are considered less diversified, typically representing around 10% of total revenue.
Enterprise’s relationship-oriented business model remains primarily focused on C&I, which, in turn, has helped the bank to maintain its relatively durable funding base, as evidenced by the bank’s limited reliance on wholesale funding sources in the current environment (brokered deposits and FHLB borrowings amounted to 3% and 1% of total liabilities, respectively). The cost of total deposits was 2.16% for 1H24 and was generally aligned with the rated-peer average, although, KBRA notes that a large portion of the bank’s specialty deposit book has earnings credit rates, which are classified under noninterest expense ($44 million, or around 70 bps of average total deposits on a YTD basis).
The ratings are counterbalanced by the comparably higher risk profile of the loan portfolio, specifically the sponsor finance and the SBA book, as well as the higher-than-peer RWA density of 84% (compare to the peer average of 77%). With that said, KBRA recognizes EFSC’s ability to appropriately price for and manage the risk within the loan portfolio which is well reflected in its higher average loan yields and well contained credit losses. Additionally, EFSC’s exposure to sensitive CRE related loan segments remains manageable with office loans, which are relatively granular in nature, representing 4% of total loans.
EFSC’s regulatory capital ratios have improved over time and currently track largely in line with the rated peer group, including a TCE ratio of 9.2% and a CET1 ratio of 11.7%, which KBRA views as adequate considering the company’s historical performance. Cash & ST investments and the securities portfolio (50% unpledged) comprise around 4% and 16% of total assets, respectively. Total on- and off-balance sheet liquidity covers around 156% of uninsured deposits (29% of total).
Rating Sensitivities
Enhanced fee income and increased capital ratios, tracking more in line with higher rated peers, along with sustained earnings and asset quality could result in positive rating momentum over time. Conversely, significant deterioration in asset quality with loss rates sustained at above peer average levels over multiple periods, impacting the profitability of the company, or more aggressive capital management could result in negative rating action.
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