Will Great Southern’s Winning Streak Last?

Growing up, Joe Turner’s dad didn’t let on that he wanted him to take over as CEO of Great Southern Bank one day, a role the father had held since 1974. Joe thinks it was because William Turner wanted him to work hard.

At 6 foot 5 inches, Joe played football at Drake University in Des Moines, Iowa, and describes himself then as an “average” foot-ball player. He became a CPA and started his own career as a lawyer away from his hometown, in Kansas City, Missouri. He got married there. Eventually, William did ask his son to take the job leading the bank in Springfield, Missouri. Luckily for both of them, the results were far from average.

For the last two years, the $6 billion Great Southern Bancorp has outperformed most others as one of the top 25 U.S. banks in Bank Director’s RankingBanking study, which is sponsored by the public accounting, consulting and technology firm Crowe LLP. The ranking is compiled by Piper Sandler & Co. using S&P Global Market Intelligence data on profitability, capital adequacy and asset quality, with a heavier weighting on profitability.

Great Southern has a long history of generating returns for shareholders. Since its initial public offering in 1989, its stock price rose 8,039% versus the Nasdaq Bank Index, which was up 856% as of late June, according to Piper Sandler. The banking company estimates it has generated a 19,952% total shareholder return, including reinvested dividends, from 1989 until the end of 2023.

But will that streak of winning touchdowns last? The former thrift turned commercial bank has a heavy concentration in commercial real estate, or CRE. As of the second quarter 2024, 72% of the loan portfolio was CRE, including multifamily and construction loans, according to a bank presentation. CRE represents more than 300% of its risk-based capital. Given higher interest rates and stress in commercial real estate, a sector that is heavily leveraged, some investors are shying away from Great Southern and other CRE-heavy banks.

“People definitely are a little concerned about potential credit issues going forward for Great Southern, just given their bigger commercial real estate portfolio,” says John Rodis, director of banks and thrifts at the investment bank Janney Montgomery Scott. “I’m not saying that’s going to happen, but certainly their exposure stands out.”

The Turners say the bank has extensive expertise in real estate and a strong credit culture. Investors aren’t so sure. While many top performing banks trade at a substantial premium, as of the second quarter the bank was trading at about 1.3 times price to tangible book value, according to S&P Global Market Intelligence. “Investors have painted the wider group with a broad brush,” says Piper Sandler Managing Director Andrew Liesch, who covers the stock. The company also reported a compliance matter that cost about $600,000 during the second quarter, but didn’t provide much detail, saying costs are not expected to recur.

A Family Legacy
But Joe Turner doesn’t spend much time wor-rying about the day-to-day performance of the bank’s stock. “From time to time, CRE will fall out of favor,” he says. “We don’t bounce around based on what’s the flavor of the day for investors. We understand [CRE], and it’s worked well for us for the 33 years I’ve been here.”

While Joe Turner may not worry about the day-to-day stock price, he’s focused on long-term shareholder returns and has an incentive to do so. Rex Copeland, the bank’s CFO, estimates that the Turner family owns about 16% to 17% of out-standing shares, which the family and others say contributes to the bank’s success.

Other family members either work for the bank or direct it from the board level. Joe’s sister, Julie Turner Brown, sits on the bank’s board and is a lawyer who works for the Springfield law firm Carnahan Evans. Her son, Turner Brown, is a CPA who works for Great Southern’s lending department in St. Louis. And Joe’s son-in-law, Ben Whitlock, is a lender in Springfield. “We have a lot to lose if the company doesn’t do well,” says William Turner, the 92-year-old patriarch who serves as the bank’s chairman. “Our net worth is tied up in the company.” Liesch says Great Southern has been careful to manage in a way that reduces the risks to their shareholders and themselves, pulling back on loan growth when it wasn’t a good time or was too competitive. “They manage the company fairly well and are very thoughtful of the actions they take to grow revenues,” he says. “When the opportunities are there, they execute. And when they’re not there, they don’t.”

The bank has paid a consistent dividend, which was $1.60 per share in 2023, and is buying back stock. “Right now, it’s not a market that’s very easy to grow in,” says Joe Turner. “We’ve been taking our excess earnings, or earnings less dividends, and we’re paying it to shareholders. And to a big extent, we’ve been reinvesting by buying back our stock at just a little above book value. And that’s how we believe we’re creating long-term share-holder value.”

A focus on long-term shareholder value and experience that predates the savings and loan crisis of the 1980s and 1990s may help Great Southern weather problems in commercial real estate amid higher interest rates. Age and experience have given some management teams an edge in the current rate environment.

The elder Turner happens to be old enough that an Irish media organization identified him as one of the few people still alive who personally knew Laura Ingalls Wilder, a famous local author born in the mid-19th century who penned the Little House on the Prairie books. Earlier in his career, William Turner rose in the ranks to be a president in the Springfield, Missouri, market for what’s now $30.6 billion Commerce Bancshares. When a friend who was a director at Great Southern told Turner the bank needed a new leader, it was a tough decision to apply for the job. Great Southern was small in 1974, at about $80 million in assets, while Turner had a good job with a much bigger bank. “Great Southern was kind of a long shot,” he says. “But the more I thought about it, the more I wanted to run my own show. I couldn’t do that with Commerce Bank. We had to report to Kansas City.”

He took the CEO job and grew the tiny thrift. By the time his son Joe agreed to take a job with the savings bank in 1991, it had grown to $468 million but was still dealing with troubled loans. Like other thrifts, the bank was heavily invested in mortgages. As William remembers the 1980s, the bank was sometimes paying 16.5% for certificates of deposit but had over $200 million in 30- year fixed rate loans at 9.5%. “That’s the wrong direction,” he says. Some 1,300 savings and loans failed from 1980 to 1994, according to the Federal Deposit Insurance Corp.

Surviving the S&L Crisis
The younger Turner got started with the difficult work of loan workouts. “I went right to work in the loan department,” he says. “And I was given the loan portfolio, was on the problem asset committee and was on the loan committee. And I really began to learn that business.”

The bank was well capitalized at the time, he recalls. The elder Turner thinks the Federal Reserve’s lowering rates saved the bank. But Great Southern became a publicly traded on the Nasdaq, and it eventually changed its charter to commercial bank.

Its survival helped Great Southern pass the 100- year mark last year in Springfield, which boasts Missouri State University and several smaller colleges. It’s a vibrant economy with the headquarters for Great American Outdoors Group, which owns the Bass Pro Shops and Cabela’s brands, and O’Reilly Auto Parts. It’s not far from Branson, Missouri, a vacation spot.

Growing in a Diligent Way
Still, some of its markets in Missouri are rural and don’t boast much growth. So, the bank took an opportunity to buy failed banks starting 15 years ago during the last financial crisis, generating significant bargain purchase gains and expanding into Iowa and Minnesota. It began opening loan production offices in high-growth places, including Atlanta, Charlotte, North Carolina, Chicago, Dallas, Denver, Omaha, Nebraska and Phoenix.

Bankers can set the stage for disaster by opening offices in highly competitive markets when they don’t know what they’re doing. But Great Southern does it in “a very diligent way,” says Damon DelMonte, a managing director at Keefe, Bruyette & Woods. “They don’t rush into markets so they can get growth.” He explains the strategy is to hire good lenders when they can find them and then open an office when they do. “They start with someone who is familiar with that market,” he says.

When asked if the bank is conservative, Joe reflects a moment. He says the bank has been entrepreneurial while staying focused on its roots. “When we see opportunities, we’re willing to capitalize on those,” he says. Great Southern has 97 locations in 12 states and has maintained retail branches, a common theme for banks that did well during the last two years. “They use the core deposits from markets where they have a physical presence,” says DelMonte. “They get consumers or business relationships that stick with the bank and don’t jump around from bank to bank.” Because of that, Great Southern has enjoyed a low cost of funds. In 2022, for example, its cost of funds as a percentage of earning assets was 0.6%.

However, those costs have been rising as deposit customers demand higher rates, which meant the bank’s cost of funds rose to change to 2.6% in the second quarter of 2024, according to S&P Global Market Intelligence.

That impacted margins in the second quarter, which fell to 3.4%. Great Southern enjoyed a margin as high as 4% a year prior. The industry’s net interest margin (NIM) declined 10 basis points to 3.17% in the first quarter, while community banks saw a slightly higher margin at 3.23%, according to the latest statistics from the FDIC.

The bank has closed about 25% of its branches in the last seven years, some of them overlapping locations from the failed bank acquisitions. “It’s difficult though, and it’s getting more difficult to find low-hanging fruit in that regard, because our banking centers are our best source of new accounts,” Joe Turner says. “And the banking centers we have left are all very productive.”

Despite the cuts, Turner says the bank is focused on taking care of employees. For him, that means paying average or above-average compensation and not micromanaging, except in loan underwriting, which has strict standards. When the bank faces a difficult quarter, investors and analysts ask whether the bank is going to cut costs, and that usually means cutting employees, Joe Turner says. “We feel like we need to operate a company efficiently all the time, but our people are our greatest asset,” he says. “We’re not going to let go of some of our greatest assets in response to a relatively short-term phenomenon. We’re going to manage for the long term. We talk about this a lot.”

A Battle-Tested Asset Class
Its long history as a mortgage and commercial real estate lender means it rarely diverges from those roots, including in the current environment. That position has worried some investors, including the fact that the bank reduced provisioning last year. CFO Copeland explains that unfunded commitments such as lines of credit fell by about one-third over the last few years, which accounts for the lower provisioning. Plus, the bank didn’t have much in the way of loan losses last year, with 20 basis points of nonperforming assets to loans and other real estate owned, according to RankingBanking. The median for the 300 largest publicly traded banks was 41 basis points.

Still, Rodis projects the bank will continue to see profitability decline and will achieve 101 basis points return on average assets in 2024, in line with similar banks. “Are they a very good, solid bank? Yes,” he says. “So far, it’s worked out. Does that mean it continues? We’ll have to see.”

Rodis and other analysts expect credit struggles ahead as CRE loans mature and renew at higher rates. But Great Southern is betting its superior underwriting will minimize losses. Loan-to-value ratios for office and retail range from 49% to 64% on average, according to a bank presentation. Ninety-six percent of the multifamily portfolio has a loan-to-value ratio at or below 75%, with 23% below 50% LTV. Lower LTVs generally equate to fewer loan losses, because even if a problem loan goes into foreclosure, the bank is less exposed. “They have a lot of wiggle room to recapture that loan without losing any money,” DelMonte says. “You hope that the underlying strategy and approach to making these loans was done in a manner where those losses will be limited. Given their track record, they should probably do pretty good.”

The management team has no plans to decrease its focus on real estate. “It’s an asset class that’s battle tested for us,” Turner says. At the age of 60, he’s contemplating who might replace him as CEO. Not surprisingly, he thinks about family. “I intend to work about another 10 years, though I hope to remain involved with Great Southern in some capacity for a lot longer than that,” he says. “If [nephew] Turner continues to like it and continues to advance and show an aptitude for it, which he’s certainly doing thus far, maybe he would eventually take over. Of course that would be for the board to decide when the time comes.”

He continues, “We’re a lot more interested in where we’ll be in the long term than what our profitability is going to be in the third quarter of 2024.”