KBRA Affirms Ratings for Great Southern Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Springfield, Missouri-based Great Southern Bancorp, Inc. (NASDAQ: GSBC) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Great Southern Bank. The Outlook for all long-term ratings is Stable.

The ratings remain supported by the long-tenured management team and its consistently executed lending strategy tied to CRE. The ratings are also bolstered by the favorably trending regulatory capital ratios, which had deteriorated meaningfully in 2022, largely because of sharp RWA growth (i.e., loans). While the CET 1 ratio, for example, has risen to a level above rated peers, it remains below levels reported in 2020 and 2021. KBRA is also mindful that Investor CRE and C&D loans are elevated in relation to regulatory capital, essentially at multi-year highs.

During the past number of years, after various FDIC-assisted bank purchases spanning from 2009-2014, the company has embarked on a strategy of diversifying the CRE book, organically, vis-à-vis LPOs across a broad array of geographical territories, stretching from the Southeast to the Southwest, but also encompassing various other select regions, such as parts of the Midwest. While KBRA acknowledges the measured approach undertaken, including hiring well experienced lending officials, overall and within the footprint, the preponderance of this expansion has occurred during relatively benign economic conditions, and these elements of the portfolio have not been tested by a cyclical downturn.

Loan quality performance continues to be relatively healthy, albeit with a modest uptick in NPLs, not unexpected given the sharp rise in interest rates the past two years coupled with the now-apparent fundamental challenges in key CRE sectors (e.g. office (demand) and multifamily (supply)). Considering management’s longstanding experience in commercial real estate lending, KBRA would anticipate at least peer-like loan quality performance through an economic cycle.

Earnings performance, consistent with that of most KBRA rated banks, has downshifted, principally because of higher deposit funding costs and an unfavorable mix-shift. The company's NIM appears to have stabilized, in the context of the Fed’s current monetary stance. Interest rate hedges have weighed on NIM in recent quarters; one received fixed, pay floating swap expired in 1Q24 and adversely impacted NIM by 14 bps annualized.

Asset liquidity in the form of cash and equivalents and unpledged AFS amounted to about $489 million (10% of AEA) as of 1Q24; unused FHLB and FRB borrowing capacity amounted to $1.6 billion. Net uninsured deposits (net of assets pledged) amounted to 15% of total deposits (or about $700 million).

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