KBRA Assigns Ratings to S&T Bancorp, Inc.

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