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.

Key Credit Considerations

The ratings are supported by GABC’s strong revenue profile highlighted by a contribution from its diverse, fee generating business lines of ~25% of total operating revenue as well as a robust low cost deposit franchise. Noninterest income is primarily generated by GABC’s insurance services, interchange fees, deposit service charges, and wealth management related fees. The company's funding profile has benefitted from GABC’s robust core deposit franchise that has been a staple characteristic of the company throughout its 110+ year history. At the end of 1Q23, the company maintained 23% of total assets in on-balance sheet liquidity. Uninsured and uncollateralized deposits were just 21% of total deposits at 1Q23, which are completely covered by contingent funding sources. Additionally, GABC’s cost of deposits (0.23% for 2022 and 0.69% for 1Q23) have remained well below peers - similar to previous interest rate cycles. Further supporting the ratings is GABC’s prudent management of capital over the past several years (CET1 ratio regularly ~100 bps or more above peers), which is also symbolic of the company’s conservative stance as it pertains to the balance sheet composition. GABC has a conservative and credit-focused management team with prudent underwriting standards, evidenced by lower levels of classified and criticized loans. Additionally, the loan mix is absent of any material concentrations with both investor CRE and C&D loans comfortably below regulatory guidance. We also consider GABC’s ACL position to be prudently managed – representing 1.2% of loans as of 1Q23. 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

A rating upgrade is not expected, though growth and geographic expansion of the franchise, maintenance of historically better than average performance and greater earnings diversification may have positive rating implications over time. Additionally, a rating downgrade is not expected, though asset quality deterioration, declines in capital metrics beyond peers, or substantial degradation in the funding profile could negatively impact ratings.

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Methodologies