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 bank"), the lead subsidiary. The Outlook for all long-term ratings Stable.

Key Credit Considerations

The ratings are supported by GABC’s strong track record of consistently generating solid earnings with ROAA averaging 1.38% over the past 5 years, despite a lower than peer loan-to-deposit ratio, supported by contributions from its diverse, fee generating business lines, representing ~25% of total revenue. That said, in June 2024, the company sold its insurance business for a $27 million net gain on sale, which management intends to strategically reinvest into the bank and the wealth management business. Nonetheless, we expect noninterest income to remain at a solid level near 20% of total revenue going forward. Furthermore, GABC’s robust core deposit franchise and favorable liquidity position (68% loan-to-deposit ratio at 1Q24), has been a staple characteristic of the company throughout its 110-year history. As such, GABC maintains lower deposit costs, tracking nearly 60 bps below peer averages at 1.61% for 1Q24, 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. Despite this, GABC has not been immune to NIM headwinds, in part, due to a lower loan to earning asset ratio of 68% as of 1Q24. Further supporting the ratings, GABC has a conservative and credit-focused management team with prudent underwriting standards, reflected in below peer NPA and NCO ratios at 0.22% and 0.09%, respectively, as of 1Q24. Additionally, the loan mix is well diversified within both investor CRE and C&D loans comfortably below regulatory guidance. We also consider GABC’s ACL position to be adequate at 1.1% of loans as of 1Q24, covering NPAs by over 500%. Additionally, GABC’s prudent capital management over the past several years with the CET1 ratio regularly ~100 bps or more above peers (14.3% at 1Q23), is symbolic of the company’s conservative stance as it pertains to the balance sheet. The ratings are slightly constrained by GABC’s limited footprint compared to higher rated peers, which is mainly concentrated in Indiana and Kentucky.

Rating Sensitivities

Continued growth and geographic expansion, credit outperformance, and maintenance of better than average earnings and capital, may have positive rating implications over time. A rating downgrade is not expected, though asset quality deterioration, decline in capital metrics beyond peers, or substantial degradation in the funding profile could negatively impact ratings.

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Methodologies