Why Warren Buffett invested in Illinois National Bank. The Warren Buffett Illinois National Bank investment was one of Buffett’s first investments in financial services firms. Buffett acquired 97.7% of the stock of the Illinois National Bank in 1969. The bank was founded by Eugene Abegg without outside capital, from humble roots of $250,000 of net worth and $400,000 of deposits in 1931. These swelled to $17 million of networth and $100 million of deposits by 1969.
One of the conditions Buffett laid out in his purchase was that Abegg continue as Chairman. This is a characteristic pattern in many of Buffett’s investments. Unlike some aggressive private equity investors who may try to replace its target company’s management, Buffett often insists on keeping the current management intact; he also gives his managers enormous leeway in running their businesses and encourages them to run their businesses as if they were the owners, for that has been proven to be the best way of generating outstanding business performance.
There were several reasons that made this Warren Buffett Illinois National Bank purchase worthwhile:
First, the bank led the industry in earnings as a percentage of total deposits. When Buffett made the purchase, the bank made $2 million in operating earnings in 1969. As a percentage of total deposits and of total assets, this was close to the top even among significantly larger commercial banks in the US. While the Illinois National Bank earned 2% on total assets, the average bank earned only about 0.5%. Its net margin was 27%, while its competitors averaged 7%.
Second, the bank was run in a financially conservative manner. It avoided money market borrowings, and did not use borrowed funds except for reserve balancing transactions that occurred infrequently. The bank also maintained a liquidity position that was significantly above average.
Third, the bank recorded loan losses significantly below average. Its loan policy produced a net charge-off ratio in last two years of about 5% of that of the average commercial bank.