em>A veteran banker motivates his colleagues to reboot the financial services landscape.
In 2013, Live Oak Bank got interested in chickens. The bank, which formed five years earlier, had grown fast by making Small Business Administration loans nationally to veterinarians, medical practices, funeral homes and other businesses that it understood well. CEO Chip Mahan wanted to add poultry farmers to the bank’s collection of specialty industries.
He called an El Dorado, Ark., banker who was the nation’s most successful lender to chicken farmers, recalls Lee Williams, Live Oak’s co-founder and vice chairman. “The guy said, ‘I’m perfectly happy down here.’”
That didn’t discourage Mahan, says Williams, who met him in the 1970s when both worked for Wachovia Bank in Winston-Salem.
“Just like he’s always done, he called him in June, and he called him in September,” Williams says.
On the latter call, the El Dorado banker revealed that he had developed cancer and that his employer was “‘treating me really, really bad related to me being really, really sick. And I’m ready to talk to you about taking my chicken-lending team and coming to work for Live Oak,’” Williams says.
Live Oak started poultry lending in January 2014 and has since issued $1.2 billion in loans. It’s part of the reason the Wilmington-based bank with no branches, tellers or ATMs has made more Small Business Administration 7(a) loans than any financial institution over the last three years.
Larger than life
Live Oak and its technology offshoot nCino, which have a combined stock market value of nearly $10 billion, are built in large part on the 69-year-old Mahan’s ability to recruit talent. So is Canapi Ventures, the Washington, D.C.-based investment firm that has raised $545 million for financial-technology investments, and Apiture, another affiliated tech company.
Mahan certainly has some technology credibility. In the 1990s, he started the country’s first online-only bank in Atlanta. The Wilmington campus housing Live Oak, nCino and Apiture has a design that has drawn architectural industry raves. But he takes issue with being portrayed as a Silicon Valley-style entrepreneur.
“We’ve got to get one thing straight,” he says. “I am not a technical guy, and I am not a visionary. I hang around guys that are really, really smart. And then you give them a little capital, and it’s amazing what they do.”
Those people say there is something amazing about Mahan. They’ve watched as he’s grown Live Oak from an idea to a bank with $8 billion in assets and $1.8 billion market value while developing other enterprises with potentially even greater prospects.
“He had the self-confidence of a successful entrepreneur,” says Joseph Smith Jr., the N.C. banking commissioner when Live Oak was chartered. “He was a tough son of a bitch. He had a good idea. And he was willing to put his own money up and make a go of it.”
Mahan lured Huntley Garriott from Goldman Sachs Group to Wilmington to run Live Oak Bank in 2018. He calls his boss “a larger-than-life persona. … This company, in a lot of ways, is Chip’s persona.”
But Mahan’s entrepreneurial instincts haven’t always been so sharp.
Owning something
In the 1970s and early ’80s, the Washington and Lee University graduate traveled across Tennessee and Kentucky for Wachovia, selling cash management and other services to distilleries and other businesses. But he wasn’t happy working for someone else or with his $9,000 annual salary. An early attempt to buy an equipment-rental franchise fizzled. In the early ’80s, he spotted an opportunity: Farmers Bank & Capital Trust Co. in Frankfort, Ky., the capital city where he spent his teenage years.
The stock was trading at just 25% of book value. “I got to thinking if I could get somebody to lend me the money — lend me three times what the stock’s trading for, but still under book value — then we could basically buy the bank for free,” he says.
Auto dealership owner Bill Gatton overheard Mahan talking about his idea on a flight between Lexington, Ky., and Bristol, Tenn. “I got off the plane, and I went to his house, and we talked until 3 a.m.,” Mahan recalls. “He said, ‘I’ll back you.’”
Before Mahan left his job in late 1982 to pursue the deal, Wachovia CEO John Medlin gave him a warning: “‘You can’t do a hostile takeover of a community bank,’” Mahan recalls Medlin saying. “‘It’s just not going to work.’”
Mahan was undeterred. “I thought I knew where the largest shareholders were because this was a small community where I grew up,” Mahan says. He rented an office and started calling people. “I’m offering three times what the stock’s trading for. You know how much stock I got? Not one share.”
With a 3-year-old and 6-year-old at home, Mahan had to “crawl on his belly” to get his job at Wachovia back. “But it was over after that. You just can’t go back,” Mahan says. “It was exhilarating to think that you could actually own something.”
The internet beckons
Within a few months, connections made during the Farmers Bank venture led to a chance to run another small community bank in Kentucky and then buy it with some other investors.
In 1985, that bank was acquired by Columbus, Ohio-based Bank One, which later became part of today’s JPMorgan Chase. Two years later, Mahan raised $16 million and started Lexington, Ky.-based Cardinal Bancshares, which went public in 1992.
In 1993, over dinner with his brother-in-law, Atlanta software company owner Michael McChesney, Mahan heard about the internet for the first time. “I said, ‘Well, if people are going to go look at this stuff nationwide, why don’t I advertise CDs [certificates of deposit] on the internet?’” Mahan says. “He said, ‘You’re a dumbass’ — he’s way smarter than me — ‘What we need to do is put [budgeting software] Quicken on the web.’”
Mahan and McChesney flew to San Francisco and met with Marc Andreessen, who helped create the first widely used web browser, NCSA Mosaic, and co-founded Netscape. Andreessen offered to write its software for $1 million.
McChesney nixed the deal, insisting the company couldn’t let someone else own the source code. He would hire the programmers himself.
In 1995, they launched Security First Network Bank in Atlanta as the nation’s first FDIC-insured, branchless, online bank. It attracted just a few thousand customers, who had to mail checks to the bank to deposit funds. In 1998, Mahan sold the banking operations to Royal Bank of Canada. (He’d sold Cardinal Bancshares a year earlier to another Kentucky-based community bank.)
While Security First had little success, Mahan and McChesney knew they were on to something big. They spun off the technology created to develop Security First, calling it S1. In the next few years, it became one of the key early providers of online-banking technology for thousands of companies, including JPMorgan Chase.
Team building
Chip Mahan has surrounded himself with these executives to lead Live Oak, nCino, Apiture and Canapi Ventures. Some are former colleagues at S1 or Wachovia.
Stepping away
In 2000, Mahan’s wife, Peggy, whom he’d met in Kentucky at age 11, developed cancer. Mahan quit his job as S1’s CEO but remained chairman, and the couple moved to Wilmington to be closer to Duke University Hospital, where she was being treated.
By 2005 Peggy’s cancer was in remission, but S1 was struggling financially amid increased competition and management turmoil. Mahan returned as CEO just as activist investor Jeffrey Smith of the Starboard Value hedge fund was circling the company. Rather than wage a proxy battle, S1 gave Smith a board seat, where he exerted pressure successfully to put the company up for sale.
S1 directors met with 28 potential investors but attracted just one bid — from Mahan, with backing from a San Francisco billionaire — for about $4 per share. The board turned it down. Mahan quit and sold all his stock the next day; it was trading at about $1.
The next week, he was sitting around with Williams, who had gained expertise in SBA lending while working with Mahan at Cardinal Bancshares. “We ought to start an SBA-only bank,” Mahan suggested. And so, Live Oak was born, opening in 2008 as a state-chartered bank with a national online-lending platform.
Live Oak’s business model was to make SBA loans, which are partially guaranteed by the government, in industry sectors that have low default rates. It would hire lenders with deep expertise and connections in what is now 33 industry sectors.
Smith, the banking commissioner, says Live Oak showed a way to diversify business lending across the nation. “It wasn’t ‘bank everybody locally,’ it was ‘bank everybody in an industry we understand deeply.’”
Aligning interests
An initial Live Oak investor was Neil Underwood, who had met Mahan when he joined S1 in 2001 to head that company’s enterprise sales unit. Mahan told him about the new bank as the pair were sitting in a duck blind.
When Underwood expressed interest in investing, Mahan inquired about his liquid net worth. After his hunting pal gave a number, Mahan said, “‘OK, that will do,’” Underwood says. “[I said,] ‘You want all my liquid net worth that I’ve earned over the years in this bank?’
[Mahan replied,] ‘Yep! Our interests have got to be aligned, son.’”
Underwood joined Live Oak full time in 2010 and is president of the holding company. He didn’t give Mahan all his liquid net worth, “but I gave him a large portion.” Government filings show Underwood now holds about 1.3 million shares, or about 3.2% of the company, with a mid-December valuation of about $60 million. Mahan owns nearly 16%, worth about $300 million.
David Lucht, who had worked with Mahan at Cardinal, left the $10.5 billion, Ohio-based FirstMerit Bank, where he had been chief credit officer, to join the new company.
“Although it was a startup, I had kind of an inside knowledge that Chip usually had really good ideas,” Lucht says. “I jumped at the chance.”
Leading lender
The idea has worked. Loan volume surged from $162 million in 2008 to $848 million in 2014, a year before the IPO. Three industries made up about 60% of the lending back then. Now, the three biggest sectors — agriculture, health care and veterinary — account for 30%, with total loans topping $4.5 billion as of Sept. 30.
The lending is largely fueled by consumer deposits that grew by 60% to $4 billion over the previous 18 months. Live Oak sells online certificates of deposit that pay higher interest rates than most peers, typically earning a wider profit margin because it doesn’t have the expense of branches.
The rapid growth hasn’t produced steady profit because of fluctuations in the sales of loans to other institutions. Net income peaked at $100 million in 2017, then slumped to $18 million in 2019. Shares that sold for $19 at the IPO reached $30 in mid-2018 before selling off over the next 20 months. Last March, amid the stock market’s pandemic panic, shares traded under $10. Since then, they’ve quadrupled to more than $46 in mid-December.
In October, Raymond James analyst Ammar M. Samma upgraded Live Oak from “outperform” to “strong buy,” calling the third quarter the strongest in the company’s history. Live Oak “blew away our expectations this quarter” for its net interest margin and loan growth, he wrote.
A few days later, the SBA named Live Oak the agency’s largest lender by dollar volume, processing more than 1,000 loans worth nearly $1.5 billion in the 2020 fiscal year. It also ranked first in the two previous years.
Fintech future
While loans and deposits are Live Oak’s core, what sets Mahan apart is his growing collection of financial-technology companies. The bank spun out nCino as a separate company in 2011 to focus on cloud software developed by the bank to manage its lending. Mahan and Pierre Naudé, another former S1 colleague hired to run the business, figured other companies would pay for the technology.
Revenue is expected to top $170 million this year, and nCino (a play on encino, the Spanish word for oak) calls itself the “worldwide leader in cloud banking.” It went public in July at $71 and traded for about $75 in mid-December. Though it has never reported a profit, nCino’s market cap of $6.9 billion dwarfs Live Oak’s. Mahan owns more than 2 million shares, or more than $150 million.
In 2018, Mahan partnered with Gene Ludwig, founder and CEO of Promontory Financial Group (which is now owned by IBM), to found Canapi Ventures. The group raised $545 million from about 35 investors, including banks and trade associations, and lists seven fintech portfolio investments on its website.
Then there’s Apiture, which has signed more than 400 financial institution clients for services to improve digital-banking offerings since Mahan’s team started the business nearly three years ago. The business is led by Chris Babcock, another former S1 executive. In July, it raised $20 million from investors affiliated with Baltimore-based T. Rowe Price Associates and Nashville-based Pinnacle Bank. Mahan says Apiture has nCino-type potential.
Mahan’s success is having a big impact on Wilmington, where the network of companies has become an important economic force. Live Oak’s three-building campus near a man-made lake seems more Silicon Valley than southern. Employees enjoy a 25,000-square-foot fitness center, fully paid health care with no copays or deductibles, and an on-site cafeteria.
Because it profited from issuing Paycheck Protection Program loans in 2020, Live Oak paid $10,000 bonuses to each of its 600 employees, including cafeteria workers. A few senior executives were excluded.
“The people that he hires, the way that he invests in them, is unique, and it has landed them at the top of the list of the best banks to work for,” says Peter Gwaltney, president and CEO of the N.C. Bankers Association. “Part of their secret sauce is hiring smart people and letting them work in a casual, relaxed environment with high expectations and the ability to make a really good living.”
Mahan sees his role as bringing people and money together and pointing them at problems.
Garriott says that he and Mahan talk frequently, usually starting with a 5 a.m. exchange of emails, but the elder banker almost never tells him what to do.
“He always has the veto since he’s the CEO and chairman,” Garriott says. “But he hasn’t exercised it — maybe once in two years. … He’s really let me do my job, which is probably hard for someone who actually made every decision for this company for so long.”
Mahan knows that managing senior executives isn’t so much about managing as it is about aiming and aligning.
“I never say ‘You work for me,’” he says. “A Huntley Garriott or a Neil Underwood — unless they feel like they’re in charge, they’re probably not going to do it. … You paint the target — we collectively paint the target — and then they go get that.”
But Mahan knows what the target is. And it’s not chicken farms or veterinarians or even software companies. The key is to reboot the “280 billion lines of code [that] run the entire banking business in the U.S. It’s 40 years old. None of it works worth a damn,” he says. “Now you’ve got a chance to change the entire infrastructure of the largest industry in the U.S. and, fundamentally, the world.”
