KBRA Affirms Ratings for German American Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Jasper, IN-based German American Bancorp, Inc. (NASDAQ: GABC) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for German American Bank, the lead subsidiary. The Outlook for all long-term ratings Stable.

The ratings are supported by GABC’s strong track record of consistently generating solid earnings with ROAA averaging 1.35% over the past five years, supported by contributions from its diverse, fee generating business lines, representing ~20% of total revenue, a history of low credit costs, and a durable low-cost deposit base. That said, 1Q25 earnings were impacted by the completion of the Heartland Bancorp (OTCQX: HLAN) acquisition, though, when excluding one-time expenses ($5.9 million merger expenses and $16.2 million Day 2 CECL provision), core ROA was in line with historical levels at ~1.30%. Core earnings were supported by meaningful NIM expansion, partly attributable to purchase accounting accretion contributing 24 bps of the 42 bps of expansion, as well as the addition of HLAN’s loan portfolio supporting an increase in the company’s loan to earning asset mix to 71% (67% in the prior quarter). Going forward, the company’s earnings profile should continue to benefit from NIM expansion supported by management’s target of mid-single digit loan growth, along with expected cost saves following the HLAN acquisition. Furthermore, GABC’s robust core deposit franchise and favorable liquidity position has been a staple characteristic of the company throughout its 115-year history. As such, GABC maintains lower deposit costs, tracking 30 bps below peer averages for 1Q25. Total deposit costs are aided by a meaningful amount of NIB deposits, a less rate sensitive deposit base, and solid deposit market share with a top 10 market share position in the majority of its operating markets. Additionally, GABC has a conservative and credit-focused management team with prudent underwriting standards, reflected in below peer NPA and NCO ratios of 0.27% and 0.04%, respectively, as of 1Q25. As a result, provision expense has averaged 10 bps or less since 2022, excluding the increase in provision related to the HLAN merger. Additionally, the loan mix is well diversified within both investor CRE and C&D loans comfortably below regulatory guidance. We consider GABC to be well positioned with its ACL coverage of NPLs at ~500%. Moreover, GABC’s prudent capital management over the past several years with the CET1 ratio regularly ~100 bps+ above peers is symbolic of management’s conservative stance as it pertains to the balance sheet. That said, the recent acquisition resulted in CET1 falling to 12.7% as of 1Q25, though remains in line with peers. Going forward, we expect the company to rebuild capital metrics closer to historical levels via GABC’s solid earnings profile.

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