Great Southern Bancorp: Continued Loan Growth to Boost Profits (NASDAQ: GSBC)

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Earnings of Great Southern Bancorp, Inc. (NASDAQ: GSBC) will likely continue to grow this year, driven primarily by mid-single-digit loan growth. In addition, the large balance of loans indexed to LIBOR and prime rates will lead to an increase in interest income in a rising interest rate environment. At the same time, expected loan loss provisioning will remain modest due to the outstanding credit quality of the portfolio. Overall, I expect Great Southern Bancorp to report earnings of $5.89 per share for 2022, up 8% year-over-year. For 2023, I expect earnings to grow another 9% to $6.40 per share. The year-end target price suggests a slight upside from the current market price. Based on the moderately high expected total return, I’m adopting a buy rating on Great Southern Bancorp.

Growth in CRE loans to compensate for the anticipated slowdown in residential loans

Great Southern Bancorp’s loan portfolio grew by a remarkable 9% in the first half of 2022, or 18% annualized. This growth was broad-based across major lending segments, as reported in the earnings release. Going forward, I expect loan growth to slow down due to several factors, especially high interest rates.

Great Southern Bancorp focuses on commercial and residential real estate. The bank primarily caters to customers in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas. However, it also operates in several other states. Therefore, it is best to take national averages when trying to determine future demand for company loan products.

Residential real estate loan growth will most likely slow in the second half due to high interest rates. Additionally, real estate prices are still very high from a historical perspective despite the recent downturn.

Chart
US House Price Index data by YCharts

Additionally, the Mortgage Bankers Association expects mortgage purchase volume to decline this year and then increase by only 4% next year.

Mortgage Purchase Forecast

Mortgage Bankers Association

On the other hand, I expect commercial real estate lending growth to remain strong. Indeed, the PMI indicates that business activity is expanding, despite the overall drop in GDP.

Chart
US Services ISM PMI Data by YCharts

Given these factors, I expect the loan book to grow 4% annualized every quarter through the end of 2023. Historically, the loan book has also grown in the mid-single digit range .

Growth in other balance sheet items will primarily correspond to loan growth. However, the book value of equity will be pressured by rising interest rates and the resulting impact on the market value of the available-for-sale securities portfolio. Unrealized mark-to-market losses will continue to flow directly into the equity account, bypassing the income statement. The book value of equity has already fallen to $44.53 per share at the end of June 2022, from $46.09 at the end of June 2021 and $45.65 at the end of March 2022. The following table shows my estimates of balance sheet.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 3,989 4,154 4,297 4,008 4,449 4,630
Net loan growth 7.0% 4.1% 3.4% (6.7)% 11.0% 4.1%
Other productive assets 338 504 904 1,137 851 885
Deposits 3,725 3,960 4,517 4,552 4,607 4,794
Loans and sub-debts 398 412 340 239 426 443
Common Equity 532 603 630 617 579 639
Book value per share ($) 37.3 42.1 44.6 45.1 45.6 50.4
Tangible BVPS ($) 36.7 41.5 44.2 44.7 44.8 49.5

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Moderate rate margin sensitivity due to loan mix

About 28% of the loan portfolio is linked to 1-month or 3-month LIBOR and an additional 16% of the portfolio is linked to prime, according to details given in the 10-Q filing. Therefore, around 44% of the loan portfolio is likely to be repriced just a few months after a rate hike.

Unfortunately, Great Southern Bancorp’s average cost of deposits will also react quickly and strongly to interest rate increases due to the large balance of interest-bearing and unmatured deposits. These deposits, namely interest-bearing current and savings accounts, represented 52% of total deposits at the end of June 2022. Management mentioned during the last conference call that customers will start to expect increases in their rates.

Given these factors, I expect the margin to increase by 10 basis points in the second half of 2022 before stabilizing in 2023.

Earnings to increase by 8%

Expected loan growth and expanding margins will likely boost earnings this year. Meanwhile, provisioning for expected loan losses is likely to remain subdued as most of Great Southern Bancorp’s loans are secured. Non-performing loans represented only 0.10% of total loans, while provisions represented 1.38% of total loans at the end of June 2022.

On the other hand, non-interest expenses will likely increase this year in a high inflation environment, which will limit earnings growth. Additionally, as mentioned in the conference call, management expects system conversion costs to nearly double due to implementation and training. Management expects these system-related costs to remain elevated through the third quarter of 2023.

Overall, I expect Great Southern Bancorp to report earnings of $5.89 per share for 2022, up 8% year-over-year. For 2023, I expect earnings to grow another 9% to $6.40 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
income statement
Net interest income 168 180 177 178 195 211
Allowance for loan losses seven 6 16 (6) 6 9
Non-interest income 36 31 35 38 37 38
Non-interest charges 115 115 123 128 131 138
Net income – Common Sh. 67 74 59 75 75 81
BPA – Diluted ($) 4.71 5.14 4.21 5.46 5.89 6:40 a.m.

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. The war in Ukraine is at an important crossroads, which has a direct impact on inflation. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

Adopting a buy rating due to a large expected total return

Great Southern Bancorp has increased its dividend every year since 2013. Given the earnings outlook, the company is likely to maintain the dividend trend this year. Therefore, I expect the company to increase its dividend from $0.02 per share to $0.42 per share in the second quarter of 2023. Earnings and dividend estimates suggest a payout ratio of 26% for 2023, which is below the five-year average. by 35%. Based on my dividend estimate, Great Southern Bancorp offers a dividend yield of 2.8%.

I use historical price/book tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Great Southern Bancorp. The stock has traded at an average P/TB ratio of 1.33 in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 32.5 36.7 41.5 44.2 44.7
Average market price ($) 51.7 54.4 57.1 43.5 55.0
Historical P/TB 1.59x 1.48x 1.37x 0.99x 1.23x 1.33x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $44.8 yields a target price of $59.7 for the end of 2022. This price target implies an upside of 0.9% compared to the closing price on September 9. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.13x 1.23x 1.33x 1.43x 1.53x
TBVPS – Dec 2022 ($) 44.8 44.8 44.8 44.8 44.8
Target price ($) 50.7 55.2 59.7 64.2 68.6
Market price ($) 59.1 59.1 59.1 59.1 59.1
Up/(down) (14.2)% (6.6)% 0.9% 8.5% 16.1%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 11.5x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 3.64 4.71 5.14 4.21 5.46
Average market price ($) 51.7 54.4 57.1 43.5 55.0
Historical PER 14.2x 11.6x 11.1x 10.3x 10.1x 11.5x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $5.89 yields a price target of $67.5 for the end of 2022. This price target implies a 14.2% upside from at the September 9 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 9.5x 10.5x 11.5x 12.5x 13.5x
EPS 2022 ($) 5.89 5.89 5.89 5.89 5.89
Target price ($) 55.7 61.6 67.5 73.4 79.3
Market price ($) 59.1 59.1 59.1 59.1 59.1
Up/(down) (5.8)% 4.2% 14.2% 24.1% 34.1%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $63.6, implying a 7.6% upside from the current market price. Adding the forward dividend yield gives an expected total return of 10.4%. Therefore, I adopt a buy rating on Great Southern Bancorp.

About Catherine Wilson

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