KBRA Assigns Ratings to S&T Bancorp, Inc.

Rhea-AI Summary

KBRA has assigned ratings to S&T Bancorp, Inc. (NASDAQ: STBA), including a BBB+ senior unsecured debt rating, BBB subordinated debt rating, and K2 short-term debt rating. The company's subsidiary, S&T Bank, received A- deposit and senior unsecured debt ratings, BBB+ subordinated debt rating, and K2 short-term deposit and debt ratings. All long-term ratings have a Stable outlook.

Key factors supporting the ratings include STBA's strong core deposit franchise, respectable market share in Pennsylvania, and favorable deposit mix. The company's strong earnings profile, with a 5-year average ROA of 1.22%, and diversified loan portfolio also contribute to the positive assessment. However, KBRA notes the company's inconsistent credit performance in the past, although recent improvements have been observed.

Positive

• Strong core deposit franchise with 87% of total funding at 2Q24
• Favorable deposit mix with 28% non-interest-bearing accounts, resulting in lower funding costs (2.22% for 2Q24)
• Ample access to secondary liquidity sources, covering uninsured deposits by over 2 times
• Strong earnings profile with 5-year average ROA of 1.22% and risk-weighted ROA of 1.55%
• Stable non-interest income sources accounting for approximately 15% of operating revenue
• Improvement in asset quality with criticized and classified loans declining to 3.4% of total loans at 2Q24
• Conservative capital management with TCE and CET1 levels 130-180 bps above KBRA rated peers

Negative

• Inconsistent loan portfolio performance through the post-GFC credit cycle
• Potential for opportunistic M&A transactions as the company approaches the $10 billion Durbin threshold

Insights

Financial Analyst

KBRA's assignment of ratings to S&T Bancorp (STBA) reflects a stable financial institution with several strengths. The 87% core deposit base and 28% non-interest-bearing accounts contribute to lower funding costs (2.22%) and a stable net interest margin. This, coupled with ample liquidity (40% of assets), provides a solid foundation.

The bank's consistent profitability is noteworthy, with a 5-year average ROA of 1.22% and risk-weighted ROA of 1.55%. The diversified revenue stream, including 15% from non-interest sources, adds stability. Recent improvements in asset quality (criticized loans down to 3.4% from 5.8%) are positive, though historical inconsistencies warrant monitoring.

Capital levels are conservative, exceeding peers by 130-180 bps, which provides a buffer for potential M&A as STBA approaches the $10 billion Durbin threshold. Overall, while not groundbreaking, STBA presents a solid, stable investment in the regional banking sector.

Risk Management Expert

S&T Bancorp's risk profile shows both strengths and areas for vigilance. The diverse loan portfolio with established concentration limits and conservative LTVs is a positive. However, the inconsistent credit performance through the post-GFC cycle raises concerns about risk management practices.

Recent credit administration enhancements have yielded improvements, as evidenced by the reduction in criticized and classified loans. This suggests a more robust risk management framework is now in place. The ample liquidity (40% of total assets) provides a strong buffer against potential funding pressures, covering uninsured deposits by over 2x.

The bank's conservative capital management post-pandemic is commendable, maintaining levels well above peers. This provides a cushion against unexpected losses and supports potential growth strategies. However, any future M&A activity as the bank approaches the Durbin threshold should be carefully monitored for integration risks and potential impact on the risk profile.

NEW YORK--(BUSINESS WIRE)-- 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.

To access rating and relevant documents, click here.

Click here to view the report.

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

View source version on businesswire.com: https://www.businesswire.com/news/home/20240829814227/en/

Analytical Contacts

Brian Ropp, Managing Director (Lead Analyst)

+1 301-969-3244

brian.ropp@kbra.com

Jason Szelc, Senior Director

+1 301-969-3174

jason.szelc@kbra.com

Ian Jaffe, Senior Managing Director

+1 646-731-3302

ian.jaffe@kbra.com

Ashley Phillips, Managing Director (Rating Committee Chair)

+1 301-969-3185

ashley.phillips@kbra.com

Business Development Contact

Justin Fuller, Managing Director

+1 312-680-4163

justin.fuller@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What ratings did KBRA assign to S&T Bancorp, Inc. (STBA)?

KBRA assigned a BBB+ senior unsecured debt rating, BBB subordinated debt rating, and K2 short-term debt rating to S&T Bancorp, Inc. (NASDAQ: STBA).

What is the outlook for S&T Bancorp's (STBA) long-term ratings?

The outlook for all long-term ratings assigned to S&T Bancorp, Inc. (STBA) is Stable.

What is S&T Bancorp's (STBA) core deposit franchise percentage?

S&T Bancorp's (STBA) core deposit franchise represents 87% of its total funding as of 2Q24.

What is S&T Bancorp's (STBA) 5-year average Return on Assets (ROA)?

S&T Bancorp's (STBA) 5-year average Return on Assets (ROA) is 1.22%, excluding the 2020 check kiting fraud/pandemic impact.

What percentage of S&T Bancorp's (STBA) operating revenue comes from non-interest income?

Approximately 15% of S&T Bancorp's (STBA) operating revenue historically comes from stable sources of non-interest income, including card and deposit fees and wealth management.