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 comparatively stable operating performance – core ROA of ~1.0% for 1H24 – that continues to benefit from very low credit costs, along with the company’s modest improvements to core capitalization, which contribute to a holding company CET1 ratio that has recently tracked in the low-11% range. The company’s returns are partly attributable to its low-cost core deposit franchise, evidenced by an average cost of total deposits of 1.95% compared to a peer median of 2.46%, and featuring a durable proportion of noninterest-bearing balances over time (31% of total deposits at 2Q24). STAR’s CET1 ratio (11.1% at 2Q24) has risen considerably since its recent trough in 4Q23, mostly due to contained loan growth and retention of earnings. As a reminder, following STAR’s $50 million issuance of subordinated notes in 2021, share repurchase activity and the retirement of the company’s ESOP program deteriorated holding company risk-based ratios to below 10%. Since that time, the company has steadily rebuilt CET1 capital to a level closer to peer medians. In our view, STAR’s current ratings hinge on an assumption that core capital ratios will remain near current levels. STAR’s ROA in recent periods has been in line with the peer group despite a comparatively less levered balance sheet from a loan-to-earning asset perspective (average of 59% since over past 5-years). STAR’s ROA has also been supported by core fee income over the bank’s contemporary operating history. Notably, even with diminished mortgage banking activity in the current rate environment, noninterest income relative to total operating revenue outpaces that of the peer group historically, often representing 25%+ of total revenue. Asset quality remains solid, with NPAs and NCOs remaining well contained over the last few years (related ratios averaging 0.30% and 0.12% over the past 5-years). While asset quality has remained solid, criticized and classified assets have also been contained, and we would expect gradual normalization in asset quality metrics going forward, consistent with our expectations for the broader industry.

Rating Sensitivities

While a rating upgrade is unlikely over the intermediate term, 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 or capital metrics could pressure the ratings.

To access rating and relevant documents, click here.

Methodologies