German American Bancorp Inc. is digging deeper into northern Kentucky with its $101.0 million cash-and-stock play for Owensboro, Ky.-based First Security Inc.
Analysts say the deal — the Jasper, Ind.-based bank's largest to date — is in line with its efforts to grow in attractive northern Kentucky and southern Indiana markets. The bank will gain a foothold in Owensboro, Bowling Green and Lexington.
"[Our] relationship-based model, we believe, works better in smaller markets than in the very largest of metro markets," chairman and CEO Mark Schroeder said in an interview. "These three markets fit the smaller MSA profile perfectly."
Adding First Security's business will also bulk up German American's presence in Evansville, Ind., where it anticipates a roughly 35% increase in market share.
"It is a little bit larger of a deal than we've seen them do in the past," Keefe Bruyette & Woods analyst Damon DelMonte said of German American in an interview. "But I think from a strategic standpoint, it makes a lot of sense, because it helps them deepen their presence in markets that they've been slowly moving into."
FIG Partners analyst Brian Martin agreed but believes German American will need to rework First Security's loan portfolio and deposit mix. First Security's loan portfolio is largely composed of one- to four-family real estate, and was probably not German American's "first choice," since it is primarily a commercial lender, Martin said. He also noted that First Security's deposit mix is largely composed of noncore funding.
"It gets them into new markets," Martin said "Now, they just have to work their strategy on the loan and deposit side to get it to where their optimal level is."
First Security's loan portfolio was already shifting to be more in line with German American's before the deal agreement, Schroeder said. German American's loan portfolio is mostly composed of commercial real estate and commercial and industrial lending. According to SNL data, First Security's commercial and multifamily real estate loans had increased to roughly 37% of the total at year-end 2017, from about 31% at the end of 2015.
Following the deal's close, First Security will merge into German American, and President and CEO Michael Beckwith will take on the role of Kentucky regional president. DelMonte said Beckwith's addition will be a positive for German American.
"'First Security has been in these markets for a while," DelMonte said. "To have somebody who's been leading that effort over the last couple of decades — it will be good to keep [Beckwith] in the mix and help with the transition process."
DelMonte said the deal presents an opportunity for German American to keep its organic growth pipeline strong, and to fund additional growth in future quarters. On a pro forma basis, German American's assets will increase about 20%.
German American's Schroeder said the bank will likely take time to digest the deal, but he is not ruling out additional M&A in Indiana or Kentucky. "We'd be open to that, and operationally, could handle that," he added.
German American's last deal was its 2016 acquisition of River Valley Bancorp.
