Great Southern Bancorp: Attractively Valued With A Positive Earnings Outlook

Summary

• The deposit mix continued to worsen during the last quarter. Nevertheless, the margin is likely to expand in 2023.
• The outlook for commercial and construction loans remains bright; therefore, total loan growth is likely to remain positive.
• The December 2023 target price suggests a high upside from the current market price. Further, GSBC is offering a decent dividend yield.
• Unrealized losses are around 11% of total equity. Therefore, GSBC's risk level is not too high.

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Earnings of Great Southern Bancorp, Inc. (NASDAQ:GSBC) will most probably continue to surge this year on the back of commercial and construction loan growth. Further, the margin will continue to expand even though the deposit mix has worsened throughout 2022. Overall, I'm expecting Great Southern Bancorp to report earnings of $6.33 per share for 2023, up 5% year-over-year. Compared to my last report on the company, I haven't changed my earnings estimate much. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on GSBC stock.

Further Margin Expansion is Likely Despite the Deposit Mix Deterioration

Great Southern Bancorp's net interest margin growth subsided during the last quarter. The margin grew by only three basis points during the quarter, as opposed to an expansion of 18 basis points in the third quarter of last year.

Further margin expansion is likely in the first quarter of 2023 because the fed funds rate has increased by 50 basis points this quarter and also because the average loan portfolio yield is quite responsive to rate changes. The heightened rate sensitivity is attributable to the large balance of variable-rate loans, which made up around 48% of total loans at the end of December 2022, according to details given in the 10-K filing.

However, recent changes in the deposit mix will hold back margin growth. Great Southern Bancorp's deposit mix deteriorated throughout last year as depositors shifted their funds to higher-rate accounts. As a result, the proportion of non-interest-bearing deposits dropped while the proportion of certificates of deposits (“CD”) rose in the total deposit book.

SEC Filings

Considering these factors, I'm expecting the net interest margin to grow by six basis points in 2023, as opposed to 43 basis points in 2022.

Commercial and Construction Loan Growth to Compensate for the Slacking Residential Loan Segment

Great Southern Bancorp's loan growth dropped to just 0.2% in the fourth quarter from 3.1% in the third quarter of the year. Further pressure on loan growth is likely because of single-family loans, which make up a sizable 20% of total loans. The outlook for the residential loan segment remains bleak due to high mortgage rates. Further, home prices are at an elevated level despite the recent disinflation. Great Southern Bancorp operates in several states including Missouri, Iowa, Kansas, Minnesota, Nebraska, and Arkansas. As the economies of these states are quite different from each other, it's best to consider the national home price index when trying to gauge product demand.

Data by YCharts

The outlook for commercial real estate and commercial and industrial loans is brighter than the outlook for residential loans. This is mainly because of strong job markets, as depicted by the record-low unemployment rates shown below. Moreover, the services Purchasing Managers Index (“PMI”) index is in the expansionary territory (above 50).

Data by YCharts

Further, the management gave an optimistic view of the construction segment pipeline in the conference call. The unfunded commitments in the segments stood at $1.44 billion at the time of the conference call, which was substantially higher than at the end of 2022. To put this number in perspective, $1.44 billion is 32% of the loans outstanding at the end of December 2022.

Considering these factors, I'm expecting the loan portfolio to grow by 3% in 2023. Further, I'm expecting deposits to grow in line with loans. The following table shows my balance sheet estimates.

Financial Position	FY18	FY19	FY20	FY21	FY22	FY23E
Net Loans	3,989	4,154	4,297	4,008	4,507	4,644
Growth of Net Loans	7.0%	4.1%	3.4%	(6.7)%	12.5%	3.0%
Other Earning Assets	338	504	904	1,137	761	784
Deposits	3,725	3,960	4,517	4,552	4,685	4,827
Borrowings and Sub-Debt	398	412	340	239	366	378
Common equity	532	603	630	617	533	592
Book Value Per Share ($)	37.3	42.1	44.6	45.1	43.4	47.0
Tangible BVPS ($)	36.7	41.5	44.2	44.7	42.5	46.1
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified)

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Expecting Earnings to Grow by 5%

The anticipated loan growth and margin expansion discussed above will likely drive earnings this year. As a result, I'm expecting Great Southern Bancorp to report earnings of $6.33 per share for 2023, up 5% year-over-year. The following table shows my income statement estimates.

Income Statement	FY18	FY19	FY20	FY21	FY22	FY23E
Net interest income	168	180	177	178	200	225
Provision for loan losses	7	6	16	(6)	6	8
Non-interest income	36	31	35	38	34	30
Non-interest expense	115	115	123	128	133	146
Net income - Common Sh.	67	74	59	75	76	80
EPS - Diluted ($)	4.71	5.14	4.21	5.46	6.02	6.33
Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified)

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In my last report on Great Southern Bancorp, which was issued before the release of the third quarter’s results, I projected earnings of $6.40 per share for 2023. My earnings estimate hasn't changed much because I haven't made any big changes to any income statement line items.

Unrealized Losses do not Pose a Big Risk to the Stock

Great Southern Bancorp has a small investment securities portfolio; therefore, its unrealized mark-to-market losses are not too high. The company reported unrealized losses of $56.5 million at the end of December 2022, which is around 11% of total equity. In case the deposit run that ruined SVB Financial (SIVB) spreads to Great Southern Bancorp, and the company has to sell securities to satisfy its obligation to depositors, then it would incur a limited loss. In the case of such a loss, equity will slip by 11% and the resultant fall in Great Southern Bancorp’s fair value will also be around 11% (valuation is discussed in the section below).

The Federal Reserve is now projecting a higher Fed Funds rate next year, as mentioned in the supplementary material released with the policy decision on March 22, 2023. Nevertheless, I'm still confident that Great Southern Bancorp will ride out the current rate environment and reverse its unrealized losses without having to turn them into realized losses. This is because the Federal Reserve is still forecasting rate cuts of around 75 basis points next year.

Other areas of risk also appear manageable. Great Southern Bancorp's capital adequacy ratios significantly declined last year, but they're still at comfortable levels. The company reported a total capital ratio of 13.5% at the end of December 2022, as opposed to the minimum regulatory requirement of 10.50%.

Maintaining a Buy Rating Due to a High Total Expected Return

Great Southern Bancorp has increased its dividend every year since 2013. Due to the earnings outlook, I’m expecting the company to maintain its dividend trend this year. Therefore, I’m expecting the company to increase its dividend by $0.02 per share to $0.42 per share in the second quarter of 2023. The earnings and dividend estimates suggest a payout ratio of 26% for 2023, which is below the five-year average of 35%. Based on my dividend estimate, Great Southern Bancorp is offering a dividend yield of 3.1%.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Great Southern Bancorp. The stock has traded at an average P/TB ratio of 1.30x in the past, as shown below.

	FY18	FY19	FY20	FY21	FY22	Average
T. Book Value per Share ($)	36.7	41.5	44.2	44.7	42.5
Average Market Price ($)	54.4	57.1	43.5	55.0	59.9
Historical P/TB	1.48x	1.37x	0.99x	1.23x	1.41x	1.30x
Source: Company Financials, Yahoo Finance, Author's Estimates

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Multiplying the average P/TB multiple with the forecast tangible book value per share of $46.1 gives a target price of $59.8 for the end of 2023. This price target implies a 13.3% upside from the March 22 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	1.10x	1.20x	1.30x	1.40x	1.50x
TBVPS - Dec 2023 ($)	46.1	46.1	46.1	46.1	46.1
Target Price ($)	50.6	55.2	59.8	64.4	69.0
Market Price ($)	52.8	52.8	52.8	52.8	52.8
Upside/(Downside)	(4.2)%	4.5%	13.3%	22.0%	30.7%
Source: Author's Estimates

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The stock has traded at an average P/E ratio of around 10.6x in the past, as shown below.

	FY18	FY19	FY20	FY21	FY22	Average
Earnings per Share ($)	4.71	5.14	4.21	5.46	6.02
Average Market Price ($)	54.4	57.1	43.5	55.0	59.9
Historical P/E	11.6x	11.1x	10.3x	10.1x	9.9x	10.6x
Source: Company Financials, Yahoo Finance, Author's Estimates

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Multiplying the average P/E multiple with the forecast earnings per share of $6.33 gives a target price of $67.1 for the end of 2023. This price target implies a 27.2% upside from the March 22 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	8.6x	9.6x	10.6x	11.6x	12.6x
EPS 2023 ($)	6.33	6.33	6.33	6.33	6.33
Target Price ($)	54.5	60.8	67.1	73.5	79.8
Market Price ($)	52.8	52.8	52.8	52.8	52.8
Upside/(Downside)	3.2%	15.2%	27.2%	39.2%	51.2%
Source: Author's Estimates

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Equally weighting the target prices from the two valuation methods gives a combined target price of $63.5, which implies a 20.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 23.4%. Hence, I’m maintaining a buy rating on Great Southern Bancorp.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.