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This article expands on my previous primer on Northeast Bank (NASDAQ:NBN) that was published five months ago on Seeking Alpha. If you are interested, you can find the primer here.
In the original article, I discussed the incredible track record of value creation at Northeast Bank and attributed it to the unconventional way in which the bank is structured. Despite being a bank, it operates more like a credit fund with superior structural features. This unique structure allows the bank to outbid traditional credit funds on good performing loans, access capital more effectively, and be flexible in deploying or allowing liabilities to run off. These features have proven to be a sustainable competitive advantage in the commoditized banking industry.
Warren Buffett’s insight into the insurance industry’s similarly commoditized nature further supports the idea that small and quirky features arising from corporate governance and organizational structure can lead to long-term value creation. Berkshire Hathaway, under Buffett’s leadership, has demonstrated how minor tweaks to the traditional insurance business model and taking a long-term view can result in phenomenal success.
Applying this perspective to the banking industry, the story of Andy Beal, known as the wealthiest banker in America, provides valuable insights. Beal’s Beal Bank and Beal Bank USA have achieved tremendous success by operating with an unconventional “accordion” balance sheet that allows for flexibility in capital deployment. This flexibility enables the banks to make bold and decisive bets on various investment opportunities while avoiding the compromises associated with a traditional deposit franchise and fixed costs tied to local branches.
By examining Beal’s unconventional approach and the success of other companies in commoditized sectors, it becomes clear that the traditional barriers to entry and competitive advantages seen in niche markets can be achieved through unique corporate governance and operational strategies. This approach could likely provide valuable mental models for framing discussions about Northeast Bank’s peculiar business model and its potential for continuing value creation.