KBRA Affirms Ratings for STAR Financial Group, 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 Fort Wayne, Indiana-based STAR Financial Group, Inc. ("STAR" or "the company"). In addition, 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 main subsidiary, STAR Financial Bank ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

STAR’s ratings remain supported by a stable operating performance, with a 1H25 core of ROA of ~0.8% – supported by low credit costs and NIM stability at ~3.0% – that was largely consistent with company returns generated during recent years. Core noninterest income remains anchored by wealth fees and interchange; continuing to contribute >20% of total revenues and support returns amid modest balance sheet expansion.

STAR’s ratings profile continues to benefit from its solid core deposit franchise that provides a stable, low-cost funding base. Core deposits consistently comprise >90% of total funding, with nearly one-third of deposits in NIB accounts. Comparatively low-cost deposit stability – the base recently reflecting a total cost of ~1.6% – stems, in part, from STAR’s long-tenured market presence in Indiana, and has minimized reliance on wholesale funding and facilitated a relatively low loans-to-core deposits measure (70% at 2Q25). Intensified industry deposit competition, driven by Fed balance sheet reductions and higher interest rates, has unsurprisingly led to a deposit base remixing for STAR, including some moderate attrition of NIB balances. Noting such balances recently representing just under 30% of STAR’s total base, and aforementioned total deposit costs, the company remains comparatively well positioned.

Recent asset quality metrics have remained largely favorable; the NPA ratio has averaged ~0.3% in recent years while net charge-offs have been negligible, facilitated in part by STAR’s larger residential mortgage book and comparatively lower exposure to investor CRE (127% of total risk-based capital). While STAR has experienced an uptick in internally classified/criticized loans (off a low base), this has been consistent with broader industry trends and has not translated into losses to date.

STAR’s consolidated capital ratios have rebounded since a dip during 2023, following prior shareholder actions, though remain modestly below most peers. In 2021, the company undertook sizable share repurchases and an ESOP retirement that collectively reduced its CET1 capital by nearly 400 bps, resulting in a consolidated CET1 ratio of 9.8% at 4Q23. Since then, management has adopted a more conservative approach to capital management – as earnings retention and moderate balance sheet growth in 2024 and 1H25 have contributed +160 bps to CET1 – leaving a ~11.5% measure at 2Q25. With respect to non-risk-based core capital, STAR’s bank level TCE ratio (8.7% as of 2Q25) is somewhat lower than peer averages; largely impacted by unrealized losses on the company’s proportionally larger AFS securities portfolio. Overall, STAR’s core capital ratios remain on the lower end relative to similarly rated peers, and continued capital accretion toward peer-like levels is viewed as important to the ratings profile.

Rating Sensitivities

While a rating upgrade is unlikely, the ability to generate stronger returns over time and the maintenance of a peer-like capital profile could lead to positive rating momentum over the longer term. Conversely, a rating downgrade in the near term is not expected. However, negative earnings trends or a material deterioration in asset quality and / or capital metrics could pressure the ratings.

To access ratings and relevant documents, click here.

Methodologies