WWII 042: Wolverine Bank Mutual Thrift Conversion - 180% Annualized Return, Where the 7% Average of Stock Returns Comes From, Warren Buffett Buys $12 Billion in Stock Since Election
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In this episode, I shine the light on an investment I made in 2010 that returned annualized %
Main Topic: Wolverine Bank Mutual Thrift Conversion That Provided A 180% Annualized Return
In 2010, I came across a copy of the Seth Klarman book “Margin of Safety” and discovered an investment strategy that I was completely unaware of and fit the definition of “way off the beaten path.” The strategy was called “Mutual Thrift Conversion” which meant buying stock in mutual thrift banks that are converting to publicly floated bank status.
I immediately started looking for these types of conversions and eventually discovered a mutual thrift called Wolverine Bank that was just getting started.
The Garn-St. Germain Act of 1982 permitted what were once conservative banks to begin lending and investing in increasingly risky areas. This caused a massive problem and caused numerous thrifts to become insolvent and unable to raise money.
Those that were strong enough were able to raise capital through public markets, did. When a mutually owned (owned by its depositors) bank issues stock in a conversion, the stock is first offered to depositors, then to the surrounding community, then, if there are any shares left over, to anyone.
It’s the structure of the offering and it’s mechanics that create the value. The issue price is based on the book value per share. The offering price is $10 per share. The number of shares to be issued is calculated by dividing the book value by $10. This structure creates the value.
Seth makes this clear:
“A thrift institution with a net worth of $10 million might issue one million shares of stock at $10 per share…the proceeds of $10 million resulting in pro-forma shareholder’s equity of $20 million. Since the one million shares sold on the IPO are the only shares outstanding, pro-forma net worth is $20 million per share.”
You pay $10 per share for a bank worth $20 per share in book value. See the margin of safety and the value created?
Wolverine Bancorp was a small, well capitalized mutual thrift bank in Michigan. In 2010, Wolverine filed a form S-1 with the SEC announcing its intention to convert from a mutual thrift to publicly held.
A firm called Keefe, Bruyette & Woods, Inc. would market the stock. I contacted KBW to request the forms needed to buy stock. Wolverine happened to have already offered stock to its depositors and local community, and there were shares available to purchase.
I filled the forms out, cut a check for $35,000 and sent it off to the bank. Wolverine issued a total of 2,507,500 shares raising $25 million, and my check was good for 3,500 shares. The issue added $23.8 million (net of expenses) to the bank’s balance sheet as cash. This increased the book value per share from $10, to about $18 per share.
My stock certificate was received in January of 2011 after a few months and I forwarded it to my broker for deposit into my account. A few weeks later, the position showed up in my account.
Once the stock was floated on the Nasdaq capital market initially at $14.50 per share. If I had sold immediately, that would represent a 45% gain in about three months, or 180% annualized.
This kind of transaction was common in the 1980’s and 1990’s but is not as common today. I still keep an eye out for these, but they are few and far between.
Thrift conversions…are an interesting part of the financial landscape. More significantly, they illustrate the way the herd mentality of investors can cause all companies in an out-of-favor industry, however disparate, to be tarred with the same brush.”
Ask JB: Do Stocks Really Return 7% Annually?
submitted 3 months ago by 341p
The 7% number is the average return of a basket of stocks or an index for over 100 years. It includes all the booms and busts and everything in between. You may have negative returns for a year or two or more in a row. You may have stellar years of 20% or more. What no-one thinks about is that you cannot predict what the market will have done in the few years leading up to your “retirement”. The best thing you can do is plan and work hard to build up your assets and passive cash flow, so you can ride out any market storm that might be raging early on in your “retirement”.
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Warren Buffett Watch 2017 - New Segment!
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