KBRA assigns a senior unsecured debt rating of BBB+, a subordinated debt rating of BBB, and a short-term debt rating of K2 for Indiana, Pennsylvania-based S&T Bancorp, Inc. (NASDAQ:STBA) ("the company"). KBRA also assigns deposit and senior unsecured debt ratings of A-, a subordinated debt rating of BBB+, and short-term deposit and debt ratings of K2 to its subsidiary, S&T Bank. The Outlook for all long-term ratings is Stable.
Key Credit Consideration
The ratings are supported by S&T Bancorp, Inc.'s core deposit franchise that represents a majority of its total funding (87% at 2Q24), respectable market share in its home state of PA which spans generally less interest rate sensitive rural markets and more urban MSAs, granularity, and a favorable mix of NIB accounts (28% at 2Q24), which has resulted in lower than average funding costs (2.22% for 2Q24) and has supported its stable NIM throughout the Fed's interest rate hiking cycle. The deposit base is further balanced by ample access to secondary sources of liquidity (notably FHLB availability) accounting for 40% of total assets at 2Q24, matching uninsured deposits by over 2 times. STBA's ratings are further strengthened by its strong earnings profile, evidenced by an ROA that has been consistently above 1%, excluding 2020 check kiting fraud/pandemic, with a 5-year average of 1.22% and a risk-weighted ROA of 1.55% (including 2020 ROA). Revenues are also enhanced by a non-spread revenue derived from stable sources of noninterest income that are comprised of card and deposit fees and wealth management that have historically accounted for approximately 15% of operating revenue. Although STBA's loan portfolio is currently well diversified with sufficient concentration limits established, relatively conservative LTVs, and is granular in nature, the portfolio has experienced inconsistent performance through the relatively benign post-GFC credit cycle. The more recent credit administration enhancements have supported improvement in asset quality as reflected by criticized and classified loans declining to 3.4% of total loans at 2Q24, down from 5.8% at 1Q23. KBRA expects the actions taken by the company to result in more consistent credit performance going forward. STBA has managed its core capital ratios post-pandemic in a conservative manner with TCE and CET1 levels between 130 and 180 bps above KBRA rated peers, appropriate for the risk profile in our view. Although KBRA expects the company to conservatively manage its capital levels going forward, we would note that the company may be opportunistic with an M&A transaction in the future as the company approaches the $10 billion Durbin threshold.
Rating Sensitivities
A rating upgrade is not expected in the near to medium term. However, further geographic diversification along with increased, stable noninterest revenue, more consistent asset quality performance, and the maintenance of solid capital metrics, could lead to positive rating momentum over time. Conversely, a rating downgrade is unlikely in the near term, though significant deterioration in asset quality performance leading to weakened earnings and reduced core capital levels could pressure ratings.
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Methodologies
- Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
- ESG Global Rating Methodology
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 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.
Doc ID: 1005591
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