worldlyinvestor.com Sector of the Day
A Golden Opportunity
By Anton Schutz and Russell Echlov, Columnists
Golden State Bancorp is an enterprising thrift selling at a thrift-store price.
Last Thursday we had the opportunity to talk to Fred Cannon, the director of investor relations at Golden State Bancorp (NYSE:GSB - news). Once again we find ourselves interested in a thrift that is in the process of creating value by evolving the balance sheet into a more commercial-like balance sheet.
This is partially as a defense during this difficult interest-rate environment, which is putting some pressure on margins, driving the rate on total interest-bearing liabilities up to 5.03% from 4.63% a year ago. In the same period, the rate on total interest-earning assets has raised only 7 basis points to 7.08% from 7.01% combining to reduce the net interest margin to 2.09% from 2.37% over the past year.
The Golden State story is focused around the very low price/earnings ratio: 6.50. Also, the bank's experienced management team and board of directors have a high degree of incentive to boost value. The gradual development of the business-banking unit will continue to increase the value of the company as will the continued focus on improving the cross-sell ratio.
Lending More Than a Hand
The rise of its commercial banking business is one aspect of Golden State that we are focusing on. In the latest first-quarter earnings press release, the company announced that the commercial business lending increased 54% from a year ago. This group is targeting $1 billion in outstanding loans by the end of 2001.
Through multiple transactions, the bank has accumulated a large amount of goodwill, depressing reported earnings and tangible book value. The stock currently trades at 5.5 times this year's Keefe, Bruyette & Woods cash earnings estimate that is well below its peers. We believe this makes it a very interesting investment opportunity.
The insider ownership is significant with Chairman Gerald Ford and director Ron Perelman owning in excess of 45% of the company. Although this is not viewed as a good thing unanimously by the Street, we believe that this ownership is a positive because these two could be motivated sellers of the bank if the right buyer comes along.
Market Will Get Fed Up
Holding the fourth-largest market share in California, Golden State is an attractive franchise to an out-of-market or an in-market buyer. Potential buyers include Wells Fargo (NYSE:WFC - news), US Bancorp (NYSE:USB - news), Zions Bancorp (Nasdaq:ZION - news), Citigroup (NYSE:C - news) or a foreign buyer looking around the US for acquisition candidates.
Another strength of Golden State is its finely tuned mortgage machine that has allowed the company to meet or beat earnings estimates in a challenging environment. The value of the partially hedged servicing portfolio has increased substantially due to the rising rate environment that improves the probability of future cash flows and in turn improves the ability of Golden State to sell the servicing rights if they choose.
Another reason to own the stock sooner rather than later is that when the market decides that the Federal Reserve is done raising rates, money will be thrown at the banks and, more specifically, the mortgage originators. Although Golden State has been able to benefit from the mortgage-servicing portfolio, they were given very little credit for it as investors fled the stock as they did with any stock associated with mortgage origination as interest rates began their ascent.
Potential Windfall
Finally, although we do not currently give it any weight, the company has a large supervisory goodwill lawsuit against the government. This piece could be a lottery ticket that could provide the company with a windfall of several dollars per share if a favorable decision is made. This would shore up the equity ratios and allow Golden State to buy back stock aggressively.
But the outcome of this lawsuit against the government is highly uncertain from an outcome and timing standpoint.
We believe that the patient investor will be well rewarded by owning Golden State by the gradual realization of the company's value or by the company being acquired or potentially from the goodwill judgment.
Anton Schutz is President and Russell Echlov is an analyst at Mendon Capital Advisors Corp. which is a Registered Investment Advisor. Mendon Capital is the manager of two hedge funds and is the sub-advisor to the Burnham Financial Services Fund. All of these funds currently hold Golden State. The hedge funds hold short positions in Wells Fargo and Citigroup. The mutual fund and onshore hedge fund hold Zions. |
