KBRA Comments on German American Bancorp, Inc.'s Proposed Acquisition of Heartland BancCorp

Rhea-AI Summary

German American BancCorp, Inc. (NASDAQ: GABC) has announced a merger agreement to acquire Heartland BancCorp (OTCQX: HLAN) in an all-stock deal valued at $330.2 million. The transaction, expected to close in 1Q25, will expand GABC's presence into Ohio, particularly the Columbus and Cincinnati MSAs. Key highlights include:

- Pro forma total assets of $8.1 billion
- Expected ROA of ~1.50% in 2025 (1.35% excluding accretion income)
- 30% cost-savings on HLAN's expense base
- Solid proforma capital metrics with CET1 ratio ~12% at closing
- Complementary loan mixes and manageable deposit costs

The acquisition aligns with GABC's growth strategy, offering opportunities to leverage its business lines in new markets. While integration risks exist, GABC's experience as an acquirer may help mitigate these challenges.

Positive

• Expansion into attractive Ohio markets (Columbus and Cincinnati MSAs)
• Expected 30% cost-savings on HLAN's expense base
• Strong projected profitability with ROA of ~1.50% in 2025 (1.35% excluding accretion income)
• Complementary loan mixes and manageable proforma cost of deposits at 1.95%
• Solid liquidity position with proforma loan-to-deposit ratio of 80%

Negative

• Decline in CET1 ratio from 14.5% to ~12% at closing
• Increase in investor CRE concentration relative to total risk-based capital
• Inherent integration risks associated with bank M&A transactions

Insights

Financial Analyst

German American Bancorp's proposed acquisition of Heartland BancCorp is a strategic move that warrants close attention. The $330.2 million all-stock deal, valued at 2.02x price-to-tangible book value, represents a significant expansion for GABC into the Ohio market, particularly the lucrative Columbus and Cincinnati MSAs.

The transaction's financial projections are noteworthy. With expected cost savings of 30% on Heartland's expense base, the combined entity is projected to achieve an impressive ROA of 1.50% in 2025. Even excluding accretion income, the estimated ROA of 1.35% still indicates robust earnings potential.

Key financial metrics to consider:

• Pro forma total assets: $8.1 billion
• Pro forma loans: $5.7 billion
• Pro forma deposits: $7.0 billion
• Pro forma loan-to-deposit ratio: 80%
• Pro forma CET1 ratio: 12% (down from GABC's current 14.5%)

While the acquisition will increase GABC's investor CRE concentration to 212% of total risk-based capital, it remains well below the 300% regulatory guidance. The $28.7 million credit mark (1.85% of Heartland's loans) and $13.8 million Day 2 CECL adjustment suggest a prudent approach to potential credit risks.

Overall, this acquisition aligns with GABC's growth strategy and could enhance its competitive position. However, investors should monitor the integration process and the realization of projected cost savings, as these will be important for the deal's long-term success.

Market Research Analyst

German American Bancorp's acquisition of Heartland BancCorp represents a significant market expansion strategy that deserves investor attention. This move into Ohio, particularly the Columbus and Cincinnati MSAs, opens up new growth avenues for GABC.

Market implications to consider:

• Geographic Diversification: The expansion into Ohio reduces GABC's reliance on its existing Indiana and Kentucky markets, potentially mitigating regional economic risks.
• Competitive Landscape: GABC's entry into new markets may disrupt local banking dynamics, potentially leading to increased competition and innovation.
• Cross-Selling Opportunities: The acquisition allows GABC to leverage its strengths in C&I lending and wealth management in these new markets, potentially driving revenue growth.
• Branch Network Optimization: With a combined network of 95 locations, there may be opportunities for cost savings through branch consolidation in overlapping areas.

The co-branding strategy in Ohio markets suggests a thoughtful approach to maintaining Heartland's local presence while integrating GABC's offerings. This could help retain existing customers and attract new ones who value both local roots and expanded services.

Investors should watch for:

• Integration challenges and their impact on customer retention
• The pace of cross-selling success in new markets
• Any shifts in the competitive landscape in response to GABC's entry
• The combined entity's ability to capitalize on the strengths of both organizations

While the market potential is significant, the success of this acquisition will largely depend on GABC's execution in these new territories and its ability to effectively blend the two organizations' cultures and operations.

Legal Expert

The proposed acquisition of Heartland BancCorp by German American Bancorp presents several legal and regulatory considerations that investors should be aware of:

Regulatory Approval: The transaction's closing, expected in Q1 2025, is contingent on regulatory approval. This process typically involves scrutiny from agencies such as the Federal Reserve, FDIC and state banking regulators. Key areas of focus may include:

• Antitrust considerations and market concentration
• Community Reinvestment Act (CRA) compliance
• Capital adequacy and financial stability of the combined entity
• Risk management practices and governance structures

Integration Risks: While GABC has a track record as an experienced acquirer, the legal complexities of integrating two banking institutions across state lines should not be underestimated. Potential challenges include:

• Harmonizing policies and procedures to ensure regulatory compliance
• Managing any conflicting contractual obligations
• Addressing potential employment law issues arising from organizational changes

Corporate Governance: The addition of Heartland's CEO to GABC's board and the retention of Heartland's executive team as regional management may require careful structuring to ensure clear lines of authority and compliance with corporate governance best practices.

Disclosure Obligations: As a publicly traded company, GABC must ensure timely and accurate disclosures regarding the acquisition's progress and its impact on the company's financial position and operations.

While the transaction appears to be structured in a legally sound manner, investors should monitor the regulatory approval process and post-merger integration for any unexpected legal challenges that could impact the deal's timeline or value realization.

NEW YORK--(BUSINESS WIRE)-- Jasper, Indiana-based, German American BancCorp, Inc. (NASDAQ: GABC, or "German American") (KBRA senior unsecured debt rating: BBB+ / Stable Outlook) announced on July 29 that it had entered into a merger agreement to acquire Heartland BancCorp (OTCQX: HLAN or "Heartland'), based in Whitehall, Ohio. The transaction, valued at $330.2 million (P/TBV: 2.02x), is an all-stock deal consideration and expected to close in 1Q25 pending regulatory approval. Upon completion of the transaction, Heartland’s subsidiary bank, Heartland Bank, will be merged into German American’s subsidiary bank, German American Bank, and operate under a co-branded name within the Ohio markets. G. Scott McComb, Chairman, President and CEO of Heartland is expected to join the board of directors for GABC, while members of the Heartland executive and senior teams are expected to stay on as regional management to provide local leadership and decision making.

The proposed acquisition is in line with German American's overall growth strategy of expansion into contiguous markets through both acquisitive and organic means. The transaction allows GABC to expand into Ohio, notably the attractive Columbus and Cincinnati MSAs, offering solid opportunities to leverage GABC's business lines in new markets, notably C&I lending and wealth management business. The acquisition is expected to add approximately $1.9 billion in assets to GABC's balance sheet at close, with pro forma total assets of $8.1 billion, $5.7 billion in loans, and $7.0 billion in deposits, based on financial data as of June 30, 2024, as well as a branch network of 95 locations across Indiana, Kentucky, and Ohio. The combined company’s financial projections include strong profitability metrics following the close of the transaction, in part, due to the 30% cost-savings expected on HLAN's expense base, with 75% of the savings recognized in 2025 and the remainder achieved in the year thereafter. With cost-savings fully realized, the combined institution is expected to generate an ROA of ~1.50% in 2025, though this estimate includes a respectable amount of accretion income given the interest rate marks on the securities and loan portfolios. Excluding accretion income, ROA would be approximately 1.35%, still representing solid earnings power. The proforma loan portfolio is not expected to change materially as both institutions have complementary loan mixes, with CRE remaining the largest component at 41% of total loans, followed by residential loans at 27% and C&I at 12%. With respect to deposit mix, while HLAN maintains a higher proportion of time deposits (34% of deposits at 2Q24 vs. 16% for GABC), the proforma cost of deposits is expected to remain manageable at 1.95%, supported by a solid NIB component of 27% of total deposits, based off of 2Q24 metrics. Furthermore, GABC's liquidity position, measured by the loan-to-deposit ratio, will continue to provide flexibility with its funding profile reflected in a proforma ratio of 80% (76% as of 2Q24 for GABC).

Regarding credit quality, both institutions have had strong metrics for an extended period of time, with minimal NCO and NPA ratios for the past several years, which is a testament to disciplined underwriting and conservative management teams that have extensive knowledge of their operating markets. German American conducted a thorough review of the loan portfolio, inclusive of 74% of the total loan portfolio, and expects to record a total gross pre-tax credit mark of $28.7 million (1.85% of HLAN's loans) along with a Day 2 CECL adjustment of $13.8 million in relation to the transaction. While investor CRE relative to total risk based capital is expected to increase upon closing, CRE concentration will remain well below the 300% guidance (proforma 212%). GABC has prudently managed capital metrics with an above peer CET1 ratio of 14.5% in 2Q24, reflective of the conservative nature of the bank, though this ratio is expected to decline to ~12% at closing. Nonetheless, proforma capital metrics appear solid and, combined with the proforma earnings profile, capital rebuild should be relatively quick. Overall, we believe that the proposed acquisition complements the company’s growth strategy, and while there is an inherent level of integration risk involved with any bank M&A transaction, such risk is somewhat mitigated by GABC's demonstrated track record as an experienced acquirer.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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Anna Jezerski, Associate

+1 301-960-7047

anna.jezerski@kbra.com

Brian Ropp, Managing Director

+1 301-969-3244

brian.ropp@kbra.com

Business Development Contact

Justin Fuller, Managing Director

+1 312-680-4163

justin.fuller@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What is the value of German American Bancorp's acquisition of Heartland BancCorp?

German American Bancorp (GABC) is acquiring Heartland BancCorp in an all-stock deal valued at $330.2 million, with a price-to-tangible book value ratio of 2.02x.

When is the GABC-Heartland merger expected to close?

The merger between German American Bancorp (GABC) and Heartland BancCorp is expected to close in the first quarter of 2025, pending regulatory approval.

How will the acquisition affect GABC's total assets?

The acquisition is expected to add approximately $1.9 billion in assets to GABC's balance sheet, resulting in pro forma total assets of $8.1 billion based on financial data as of June 30, 2024.

What cost savings are expected from GABC's acquisition of Heartland?

German American Bancorp (GABC) expects to achieve 30% cost-savings on Heartland's expense base, with 75% of the savings recognized in 2025 and the remainder in the following year.

How will the acquisition impact GABC's return on assets (ROA)?

With cost-savings fully realized, the combined institution is expected to generate an ROA of approximately 1.50% in 2025, or 1.35% excluding accretion income.