In 1931, a young man named Eugene Aberg, with a starting capital of $250,000, founded a bank in Rockford, Illinois.
He named it the National Bank trust Company of Illinois, but many locals call it Rockford Bank. It had $400,000 in deposits, and since then it has never raised any new capital from shareholders.
Through Aberg's hard work bit by bit, by 1969, the bank's net worth reached $17 million, deposits reached $100 million, and annual profits were about $2 million, which was a satisfactory return.
In terms of deposits or total assets, Ken Chase, president of Berkshire Hathaway, described such profitability as "near the top level of a large domestic commercial bank." The profit figure is 2% of the $100 million deposit, or $2 million with $17 million in shareholder capital ($2 million/ $17 million = 11.8%), and in any case, the bank's return is quite high in terms of return on assets/liabilities.
Not only that, but the bank's operations are also very stable, its capital structure, liquidity and lending policies are low risk, but it has achieved high rates of return.
Rockford Bank rarely borrows money from capital markets or money markets, and it has a policy of maintaining liquidity at relatively high levels. This means that it has enough reserve assets that can be realized in a short period of time, rather than placing a large number of assets on long-term loan projects. In addition, it has the ability to carry out short-term financial integration from the market.
Rockford Bank's lending business is also very cautious and conservative, so its loan bad debts are significantly lower than its peers. Moreover, more than half of its deposits are fixed deposits, which gives it greater customer stickiness. But such low risk also reduces the level of profits, because higher interest rates must be paid to term deposits.
Considering that it puts safety first in every way, the bank has created such a high rate of return on capital that is amazing. Buffett attributes it to outstanding management.
Before Buffett arrived, Aberg, which owns a 25 percent stake in Rockford Bank, had already negotiated with others about selling the stake. But the potential buyer who came to negotiate began to point fingers, criticize and accuse, and demand an audit audit. This upset Aberg, and he planned to terminate the deal with the guy.
At this point, Buffett showed up, and he was willing to bid, but his bid was $1 million lower than other buyers. Aberg, tired of other bidders, pressured shareholders to accept Buffett's bid and threatened to resign if he didn't.
In 1969, Berkshire Hathaway bought a 97.7 percent stake in Rockford Bank. According to a well-informed observer, Robert M. P. Myers said the buy price was $15.5 million. If that number is accurate, Buffett pays just 7 times its profit for the city's largest bank, which continues to prove itself capable of achieving high rates of return on capital. Even, even more incredibly, Eugene Aberg's selling price is lower than its book value (net asset value).
Buffett's decision to borrow $10 million as part of the funding for the acquisition is rare. He later said: "In the next 30 years, we hardly borrowed a penny from the bank. ”
Buffett likes to retain good management to run his company. He has long noted Aberg's brilliance, he has managed the bank for 39 years, he knows where to generate returns and how to keep risk low for shareholders.
Even though Aberg is 71 years old, Buffett decided to ask him to stay in office — which is not difficult for Aberg, and he wants to continue working. Once Abeg was retained, Buffett continued to adopt a decentralized management model, leaving Aberg to manage the operations of the business alone.
In the five-and-a-half years since the acquisition, the bank paid Berkshire as much as $20 million in dividends, more than the original purchase price. In addition, the value of the franchise implied in the bank has increased over time.
In 1971, the After-Tax Profits of the National Bank of Illinois reached 2% of the average deposit. Aberg did not stop, he continued to accelerate the improvement of efficiency, the figure reached 2.2% in 1972. At the same time, the bank was expanding rapidly, and by 1972 the loans it provided to customers had grown by 38 percent. The following year set another record, with average deposits rising to $130 million and after-tax operating profit once again holding the highest level in the industry, equivalent to 2.1% of average deposits.
In a 1975 letter to shareholders, Buffett highlighted the bank's astonishingly low bad debt rate: "It's hard to find an adjective to describe the outstanding performance of CEO Eugene Aberg, with net bad debts of just $24,000, or 0.04 percent, of the average $65 million in loan amounts." ”
Even, this already excellent indicator became even better in the following year. In 1976, the bank's loan losses were only 0.02% of loans issued, a measure that is negligible compared to the average banking sector.
Although profits, deposits (up $60 million since 1969) and loans increased during the period, the number of employees at the bank did not increase and remained at the level of the 1969 acquisition. Banks are aggressively moving towards trust, tourism and data processing with the same workforce.
By 1977, the bank's profits had reached $3.6 million, a figure three times higher than most large banks in terms of return on assets.
At this time, Aberg was 80 years old, and he asked Buffett if he could find a helper. Not long after, Peter Jeffrey became president and CEO of the bank, a former president and CEO of the National Bank of America in Omaha. Subsequently, they continued to increase their full horsepower, and by 1978, the performance reached a return on assets of 2.1%, which was a net profit after tax of $4.26 million for the company's shareholders.
Over the course of ten years, the bank's fixed deposits for customers increased by 4 times, the bank's net profit increased by 3 times, and the profits of the trust department doubled, while the company's costs were firmly under control.
What did Buffett's investment case teach us?
1. Invest in excellent businesses at reasonable prices.
If a business has shown strong profitability in the past, we have good reason to think that this profitability will continue, then the business is worth buying at a reasonable price.
2. What's more icing on the cake is that if you can buy such a company at a low price, you will get a very satisfactory result.
Over a decade, the Bank of Illinois has seen its annual profit rise by 150 percent to $5 million, increasing the bank's value by about four times.
3. For great businesses, you should buy more equity, preferably in large proportions.
Whenever Buffett finds a similarly good company, he buys as many shares as possible, and the more the merrier.
4. If the founder of a business is very concerned about who the buyer is when selling the company, rather than just wanting to sell the company at the highest price, this is a very good signal.
Buffett understands that if a manager only cares about the high price of the sale, rather than the buyer's business philosophy, the cost of the two will be greater in the future.
Buffett gets managers like Eugene Aberg, or Ben Rosner of The Union Retail Store, who "will do their best to manage the companies for Berkshire as if they owned them 100 percent." The qualities of these good managers should be "deeply rooted in character."
5. Banks that insist on low costs, focus on low risk, and focus on sustained growth have a completely different outlook than those that of complex banks.
Those "complex" banks will participate in a variety of complex financial derivatives, market lending, and have a corporate culture shaped by investment bankers.
6. Managers who continue to seek efficiency improvement and cost savings are worthy of strong support. Because these actions can continue to deepen and broaden the company's competitive advantage of the moat.