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 Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by STAR’s favorable core deposit franchise and conservative liquidity positioning. The company maintains a low-cost deposit base (~1.4% during 2Q26), supported by an attractive mix (28% NIB), solid market share, and limited noncore funding. The plentiful deposit base has contributed to excess liquidity, with the loan-to-deposit ratio below 70% amid comparatively modest loan growth in recent years. Accordingly, STAR maintains a sizable securities portfolio, a portion of which was accumulated during the low-rate environment and continues to weigh on NIM and below-peer profitability (ROA of ~0.9% during 1H26). That said, earnings are trending positively, with further NIM improvement expected from loan and securities repricing, liquidity deployment, and stronger loan growth. Management targets NIM of 3.30%-3.35% over the longer term. We also view STAR’s revenue diversification favorably, with fee income generally representing >20% of operating revenues, supported by durable sources including private advisory, deposit-service fees, and bank card processing. Capital ratios have rebounded (CET1 ratio of 13.1% at the consolidated level at 2Q26) following the 2022 ESOP-related share repurchases and now track closer to peers. Recent internal capital generation has been supported by improving earnings, a modest dividend payout, limited share repurchases, and measured balance sheet growth. TCE (8.3% at 2Q26) has also improved as AOCI pressure has moderated, though negative AOCI remains meaningful at 18% of total capital. Over time, management targets a bank-level leverage ratio of 10%-10.5%, which we view as adequate for the risk profile. STAR maintains a conservative credit profile, supported by disciplined underwriting, manageable loan concentrations, and favorable asset quality. The portfolio is centered on core C&I and relationship-based CRE, with comparatively modest ICRE exposure. NCOs and NPAs remain low despite some normalization in criticized loans. These strengths are partially offset by STAR’s modest scale and concentrated central and northeast Indiana footprint, increasing sensitivity to regional economic conditions.

Rating Sensitivities

A rating upgrade is unlikely, though stronger earnings and maintenance of other favorable key financial metrics, as well as greater franchise scale and diversification could support positive rating momentum over time. A rating downgrade in the near to intermediate term is not expected. However, negative earnings trends, or a material deterioration in asset quality and/or capital metrics could pressure the ratings.

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