Great Southern Bancorp's Resilient Q2 Sets Stage for Outperformance in a Shifting Rate Landscape

Great Southern Bancorp (NASDAQ: GSBC) delivered a robust Q2 2025 performance, showcasing its ability to navigate a complex rate environment while maintaining margin discipline and capital efficiency. With net interest income rising 8.9% year-over-year and a strengthened net interest margin (NIM) to 3.68%, the bank has positioned itself as a potential outperformer among regional peers as monetary policy stabilizes. However, looming risks—including the expiration of an interest rate swap and loan portfolio payoffs—demand careful scrutiny. Let's dissect the drivers of success, the challenges ahead, and what this means for long-term investors.

Margin Expansion: A Triumph of Deposit Cost Management

The star of Great Southern's Q2 results was its net interest income, which surged to $51.0 million despite a $156 million contraction in the loan portfolio. This growth was driven by aggressive deposit rate management, as the bank reduced interest expenses by $4.2 million compared to Q2 2024. The expanded NIM to 3.68% reflects not only lower funding costs but also the accretion of $434,000 from recovered non-accrual loans—a testament to disciplined credit underwriting.

Crucially, management's focus on optimizing the funding mix is paying off. would reveal a steady downward trend in deposit costs amid rising rates, a rarity among regional banks. This suggests the bank's pricing power and customer relationships are stronger than peers', a key advantage as rates stabilize.

Asset Quality: A Foundation of Strength

While loan payoffs reduced the portfolio's size, Great Southern's asset quality remains pristine. Non-performing assets fell to just 0.14% of total assets, with an allowance for credit losses at 1.41% of loans—a conservative buffer that outpaces most regional peers. This resilience is critical, as loan paydowns (particularly in construction and commercial real estate) may pressure future growth. Yet management's emphasis on risk-adjusted returns over volume growth ensures capital is deployed prudently.

The $22.8 million increase in stockholders' equity, driven by retained earnings and share repurchases, further underscores balance sheet strength. A tangible common equity ratio of 10.5% and a Tier 1 Leverage Ratio of 11.5% provide ample flexibility to navigate uncertainties, whether from loan demand shifts or regulatory changes.

Capital Efficiency: A Balancing Act

Great Southern's improved efficiency ratio (59.16% vs. 64.27% in Q2 2024) highlights cost discipline. Reduced legal expenses and lower other real estate costs were catalysts, but the bank's capital allocation strategy is equally compelling.

In Q2, the company repurchased 176,000 shares at an average price of $55.11 and authorized an additional 1 million shares for repurchase. Combined with its $0.40 quarterly dividend, this signals confidence in the stock's valuation. However, investors should note that buybacks come at a cost: diluted earnings per share (EPS) rose to $1.72, but the share count declined by ~1% year-to-date, amplifying the impact of margin headwinds ahead.

The redemption of $75 million in subordinated notes in June 2025 also merits praise. Avoiding rising interest costs on these notes preserves capital flexibility, aligning with management's focus on long-term stability over short-term gains.

Risks on the Horizon: Swap Expiration and Loan Payoffs

Two key risks could test Great Southern's outlook. First, the termination of its interest rate swap in October 2025 will remove approximately $2.0 million of accreted interest income in Q3, with no further gains thereafter. This will create a $2.0 million drag on Q4 NII, potentially pressuring margins by ~40 basis points. Management has acknowledged this but emphasizes that liquidity ($1.22 billion in FHLB lines alone) and asset-liability management will mitigate the impact.

Second, loan portfolio declines—driven by payoffs rather than defaults—highlight a conundrum: disciplined underwriting limits growth but preserves credit quality. While a $4.53 billion loan book is substantial, sustained payoffs could limit future NII growth unless rates stabilize to spur demand for new loans.

Investment Thesis: A Strong Hand in a Stable Rate Environment

Great Southern's Q2 results argue for its resilience in a transitioning rate cycle. Unlike peers that struggled with margin compression, GSBC's focus on deposit cost control and balance sheet flexibility has insulated it from pressures. The swap expiration and loan payoffs are manageable risks, especially if the Fed pauses rate hikes, allowing the bank to stabilize margins through 2026.

For long-term investors, the stock's current valuation—trading at 14.5x trailing earnings and 1.3x book value—offers a margin of safety. would likely show it trades at a discount to peers, despite stronger fundamentals.

Actionable Takeaway:
Investors seeking a regional bank with a fortress balance sheet and disciplined capital management should consider GSBC. While near-term margin headwinds exist, the stock's valuation and liquidity position suggest it could outperform peers if the Fed pauses rate hikes. Monitor Q3 results for signs of margin stability post-swap expiration, but the long-term thesis remains intact.

In a sector where many banks are grappling with margin pressures and elevated loan losses, Great Southern's Q2 performance signals it's built to endure—and even thrive—in the years ahead.