Gene Abegg
Founder of Illinois National Bank
Founder of Illinois National Bank & Trust Company, a highly profitable bank acquired by Berkshire.
Biography
Eugene "Gene" Abegg founded the Illinois National Bank and Trust Company of Rockford, Illinois, and ran it for nearly half a century — from the day it opened its doors in 1931 until well past his eightieth birthday. He started with $250,000 of paid-in capital and $400,000 of deposits, in the depths of the Depression, and never added a dollar of outside capital again. The bank earned $8,782 in its first full year of operation. By 1969 it had grown to $17 million of net worth and $100 million of deposits, entirely from retained earnings.
Warren Buffett bought 97.7% of the bank in March 1969, in what he called the most significant event of that year for Berkshire Hathaway. Abegg, then in his early seventies, stayed on as Chairman and kept running the bank exactly as he always had — and the results after the sale were, if anything, better than before. Bob Kline joined as President in January 1971, with Abegg continuing as Chairman and Chief Executive Officer. Late in 1977, at eighty, Abegg finally asked that a successor be brought in, and Peter Jeffrey, formerly president of American National Bank of Omaha, took over as President and CEO effective March 1, 1978. Abegg remained, setting records alongside Jeffrey into his eighties.
The partnership ended by law, not by choice. The Bank Holding Company Act required Berkshire to divest the bank by December 31, 1980, and Berkshire complied by exchanging Rockford Bancorp shares with its own shareholders. In the 1985 letter Buffett reported that Illinois National had since been sold, and that Rockford's shareholders would receive per-share proceeds about equal to Berkshire's per-share intrinsic value at the time of the sale — evidence, in his view, that the division had been reasonably equitable.
Key Stories
A Bank Built from $250,000 (1931–1969) — Abegg opened the Illinois National Bank in 1931, one of the worst years in American banking history, with $250,000 in capital. The 1969 letter laid out the arithmetic Buffett found so attractive: from $250,000 of net worth and $400,000 of deposits in 1931, Abegg had built the bank to $17 million of net worth and $100 million of deposits by 1969 — without a single addition of outside capital. Its earnings, as a percentage of deposits or total assets, ranked close to the top among larger commercial banks in the country.
Topping a Banner Year (1970) — The 1969 letter had warned that beating the bank's record earnings would not be easy. Abegg did it anyway, in the face of an unchanged level of deposits, while holding above-average liquidity. Buffett's 1970 verdict: an exceptionally well-managed banking business.
The Founder Who Never Left (1971–1972) — Buffett repeatedly grouped Abegg with Jack Ringwalt of National Indemnity and Vic Raab of Home & Automobile as men cut from the same cloth: founders who sold their companies for cash and then kept running them with undiminished energy and imagination. The 1972 letter noted that in all three cases the founders had been major sellers, received significant proceeds, and then improved on the fine records they had already established.
The Exceptional Becomes the Commonplace (1974–1976) — Through the mid-1970s Buffett ran out of fresh ways to praise the bank. In 1975, a year when many banking operations experienced major troubles, Illinois National recorded net loan losses of $24,000 against average loans of about $65 million — .04% — while the thirty largest banks in the country earned an average of .5% on total assets and Illinois National earned about four times that much. When National City Corp. of Cleveland advertised a 1.34% return on average assets in 1976 as the best among major banking companies, Buffett pointed out that Illinois National's earnings were close to 50% better.
A Successor at Eighty (1977) — Late in 1977, Abegg — still running what Buffett called a banking operation without peer — asked that a successor be brought in. Peter Jeffrey arrived in March 1978, and the bank kept setting records under the two of them: approximately 2.1% on average assets in 1978, about three times the level of major banks, achieved with significantly less asset risk.
The Standing Ovation (1979) — The 1979 letter was the last in which Buffett could report the bank as a Berkshire subsidiary. Under Abegg and Jeffrey it broke all previous records, earning approximately 2.3% on average assets — more than double what banks regarded as outstanding achieved. Buffett closed the account by saying Berkshire's shareholders owed Abegg a standing ovation, for that year and every year since the 1969 purchase.
Impact on Berkshire
Abegg was the second great proof — after Jack Ringwalt of National Indemnity — of the acquisition pattern that would define Berkshire: buy an excellent business from its founder, pay cash, and leave the founder alone to run it. The 1971 letter made the pattern explicit, describing Ringwalt, Abegg, and Vic Raab as men who built their companies from scratch and, after selling, retained every bit of their proprietary interest and pride. The 1972 letter confirmed the formula was working: all three acquisitions had succeeded from both the financial and human standpoints.
The bank also mattered financially in its own right. Since Berkshire's 1969 purchase, it paid out $20 million in dividends while never receiving a dollar of new capital — cash that flowed to Omaha during the years Berkshire was assembling its insurance and investment holdings. And it did this while paying maximum permitted interest to depositors, keeping unusual liquidity, and holding loan losses to a fraction of the industry average. Abegg demonstrated that conservative banking and highly profitable banking were not opposites.
Finally, Abegg became Buffett's Exhibit A for two durable management lessons. On cost discipline: the manager of a tightly-run operation keeps finding ways to cut costs even when already well below competitors, and no one demonstrated that better than Abegg. On age: Buffett delighted in pointing out that his best managers included Abegg at 81 and 82, Ben Rosner at 75 and 76, and Louie Vincenti at 73 and 74 — men who came to work each morning and instinctively, unerringly thought like owners.
Key Passages from Buffett's Letters
This bank had been built by Eugene Abegg, without addition of outside capital, from $250,000 of net worth and $400,000 of deposits in 1931 to $17 million of net worth and $100 million of deposits in 1969.
These three men have built their companies from scratch and, after selling their ownership position for cash, retain every bit of the proprietary interest and pride that they have always had.
This record is a direct tribute to the leadership of Gene Abegg and Bob Kline who run a bank where the owners and the depositors can both eat well and sleep well.
There is little new to say about Illinois National Bank and Trust. With Eugene Abegg running the operation, the exceptional has become the commonplace.
It is difficult to find adjectives to describe the performance of Eugene Abegg, Chief Executive of Illinois National Bank and Trust of Rockford, Illinois, our banking subsidiary.
Gene Abegg opened the doors of the Illinois National Bank in 1931 with paid-in capital of $250,000. In 1932, its first full year of operation, it earned $8,782. No additional capital has been paid in, and we recommend reading its financial statements on pages 28-34 to see what a truly outstanding manager has built in 44 years at the helm.
No one has demonstrated this latter ability better than Gene Abegg.
The record is simply extraordinary, and the shareholders of Berkshire Hathaway owe a standing ovation to Gene Abegg for the performance this year and every year since our purchase in 1969.