KBRA Assigns Ratings to STAR Financial Group, Inc.

Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to STAR Financial Group, Inc. (“STAR”). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to its subsidiary, STAR Financial Bank. The Outlook for all long-term ratings is Stable.

The ratings are supported by STAR’s favorable funding mix aided by a strong core deposit franchise, which we note was present even prior to the pandemic and influx of liquidity, with a cost of total deposits of 0.50% and core deposits representing 96% of total funding at YE2019. STAR’s comparatively cheap funding is, in large part, due to a sizeable non-IB deposit base that typically makes up at least 35% of deposits and over 40% in more recent quarters. Similar to most banks, STAR’s funding profile has improved even further since the onset of the pandemic with a peer-leading cost of deposits of 0.06% and core deposits comprising 98% of funding at the end of 1H21. Further supporting the ratings is STAR’s diverse and durable fee income sources, which have consistently tracked above 25% of revenue. Although insurance commissions will no longer contribute approximately 15% of noninterest income at the consolidated level, STAR also generates a respectable amount of noninterest income from service charges, bank card processing, mortgage GoS and servicing, as well as wealth management related fees. With respect to credit performance, STAR has had a few negative credit events in 2018 and more recently in 2021 that resulted in an uptick in NCOs, though we view these charge-offs as isolated in nature as opposed to an indication of faulty credit underwriting, policy, or monitoring. As a ~$1 billion bank during the GFC, STAR remained profitable throughout, reported comparatively modest credit losses, and did not need TARP funds. KBRA attributes this to sound risk management practices as well as a relatively resilient Indiana based economy, though geographic concentration risk remains as STAR’s operating footprint is more limited compared to higher rated peers. However, the Indiana economy has performed solidly during the pandemic thus far and STAR’s exposure to COVID sensitive industries is modest while related deferrals have been lower than most peers.

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The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.

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 pursuant to the Temporary Registration Regime. 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.

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