NC banking: Mighty oak

 In Features June 2016

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By Kevin Maurer

Glance at Neil Underwood’s résumé, and he seems like an iconoclastic choice to run a thriving North Carolina-based bank. His background as an engineer and experience in sales wouldn’t seem to lend themselves to leading the nation’s second-largest originator of U.S. Small Business Administration loans.

But Live Oak isn’t a traditional bank. It has no branches, no tellers or ATMs, instead focusing almost entirely on SBA lending. Agency data identifies which of the SBA’s 1,100 eligible industries are the most attractive and likely to need loans, prompting the Wilmington-based bank to pursue 11 distinct sectors, one pharmacist, chicken farmer or funeral-home director at a time.

“We’re a software company that lends money,” Neil Underwood says. “We are indeed a regulated bank. But we don’t always have to think that way.”

Or look the part, either. Set in the pines east of downtown, the headquarters looks more like a cabin in the woods, overlooking wetlands where Venus’ flytraps grow. Bank employees can bring their dogs to work and wear flip-flops to the office. Wilmington’s only publicly traded company, Live Oak saw its loan originations soar from $256 million in 2010 to more than $1.1 billion last year, without any dilutive acquisitions. While shares have declined slightly since Live Oak’s initial public offering last July, the company’s market value in mid-May topped $530 million, or about 35% greater than some North Carolina-based community banks that are triple its size.

It isn’t surprising that Live Oak is an innovator, given co-founder Chip Mahan’s history. In 1995, he started Security First Network Bank, the first U.S. bank to operate solely through the Internet. It took deposits online, eschewing traditional bank branches. At the same time, he created an affiliated software company, later called S1 Corp.

Security First was an idea ahead of its time, but it never really caught on. Royal Bank of Canada bought the Atlanta-based company for $20 million in 1998 as the Canadian bank was expanding in the United States. S1 proved to be much more successful, spinning off as an independent company at the time of the Security First sale. It operated independently, including several years as a public company, until it was acquired for more than $500 million in 2012 by New York-based payments processor ACI Worldwide Inc.

Mahan and co-founder Lee Williams were living in Wilmington when they started Live Oak Bancshares Inc. in 2008, providing loans to veterinarians. They thought the coastal city, with its beaches and relatively low cost of living, would help them attract and keep talent. In 2010, Mahan approached Underwood, asking how much money he had.

“Nobody asks that,” says Underwood, who was general manager at S1 from 2001-10. “Youcan’t ask those questions. But he’s got an amazing way of just getting information out of you. If you spend any time with him, you know he’s a very charismatic guy.”

Underwood agreed to invest in Live Oak. He won’t disclose the amount but says it was all of his liquidity. “I talked him into investing more than he wanted,” says Mahan, whose 18% stake was valued at more than $90 million in mid-May. It has paid off for Underwood, who owns 3%, worth more than $15 million. Live Oak now employs 375 and has offices in Atlanta, Houston and Santa Rosa, Calif.

“The bank was ready to scale,” Underwood says. “[I] felt I could help and never looked back.” Without Underwood, Mahan says, ”We wouldn’t have a bank. He has vision.”

Many banks make SBA loans, but what makes Live Oak distinct is its use of technology to speed  the application process. Here’s how it works: Live Oak lends an insurance agent $1 million to open a new office, with $750,000 guaranteed by the federal government, if all regulations are followed. If the agent defaults, the SBA pays Live Oak $750,000, and the bank seeks repayment on the balance. The agency had outstanding loan guarantees of $118 billion at the end of its latest fiscal year. About 2% of the loans in its largest program were charged off in 2015.

“Think of SBA like an insurance plan against default,” Underwood says, noting that the program requires banks to follow strict underwriting guidelines. “The benefit to the borrower is that because of the guarantee, the term of the loan can be longer and the interest rate lower, making their monthly repayment easier to fit into business expenses.”

The benefit for Live Oak is the spread between what it charges on the SBA loans, which tend to be at slightly higher rates than conventional ones, and interest paid on deposits. Without any branches, Live Oak collects deposits online, paying unusually high interest rates to savers. In May, it was paying 1.3% for a one-year CD, compared with a national average of 0.28%, according to Bankrate Inc. With only a tiny fraction of its borrowers missing payments on their loans, Live Oak is thriving, reporting a net profit of $20.6 million last year. By comparison, Charlotte-based Capital Bank Financial Corp., which is seven times larger, had a profit of $54.7 million. Newton-based Peoples Bancorp, roughly the same size, earned $9.6 million.

Credit for Live Oak’s technology leadership mostly goes to Underwood’s brother, Peter, who had worked at investment bank Warburg Dillon Read (now UBS) and Wall Street Access Management LLC, an investment manager. Peter Underwood pushed his brother to adopt the Salesforce.com platform, adding his own software knowledge to create a cloud-based system that is simple for borrowers and gives Live Oak real-time updates.

“The tech is giving us the edge,” says Peter Underwood, Live Oak’s chief technology officer. “If you apply cutting-edge tech to an age-old problem, you’re going to see results. Live Oak is the best evidence of that. We do more with less, and the spirit of innovation is there.”

Sitting at his desk, Neil Underwood pulls up a screen that shows the activity of all of his loan officers by industry group. He can see the status of each loan and determine each lender’s activity. While it can take a month at some peer banks for an application to be submitted and then approved, Live Oak has compressed the process to a week or 10 days. “I tend to be a process and engineering guy,” Neil Underwood says. “I’ve got the business side as well. But what gets me excited is looking at a process.”

Bucking tradition is a mantra at Live Oak. “Long ago, we decided we don’t like banks,” Neil Underwood says. “It’s like they are doing you a favor. How can we focus 100% on the customer? How does Suzie, who’s working on 10 or 12 concurrent deals, know that the Jones deal, the middle one in [her stack], has been in the inner queue for 14 days. We digitized everything throughout the organization.”

Daniel C. Kelley, who used Live Oak to obtain an SBA loan for his Fairport, N.Y.-based financial advisory company, Clover Leaf Financial LLC, praises the bank’s efficiency. “I never had a time when a question wasn’t responded [to] in less than 15 minutes,” Kelley says. “I never once waited for them.”

The loan system borrows from social media. Using feeds like Twitter and “walls” like Facebook, the bank and its customers can communicate in real time and track progress. A status bar on top of his computer screen showed Kelley the status of his loan at any time. “It’s a brilliant idea,” he says. “I didn’t have to bother them trying to find out where they are.”

The system was so successful that Underwood talked Mahan into creating an offshoot to sell the software. nCino (Spanish for live oak) opened in 2012 and has raised more than $60 million in private financing and signed up more than 100 bank customers. While focused on speeding business lending, nCino also is expanding into mortgages and cash-management services. “We are a superuser of their software, and we continue to push the limits of what it can do,” says Underwood, who is a director. Live Oak sold its last stake in nCino last year, recording a $3.8 million profit.

Mahan and Underwood have created an unusual corporate culture befitting the beach culture of Wilmington. Live Oak employees can take advantage of low-cost health insurance, an onsite gym, a restaurant and a dog park. Live Oak topped American Banker’s list of the industry’s top employers in 2015.

But the laid-back vibe is matched by a drive to succeed. Underwood often sends emails late at night or early in the morning and says everyone at the company works and plays hard. “You know, we do believe in your faith, in your health, in your home life, your children and your spouse,” Underwood says. “And work is one of those as well. At the pace at which we move, it just weaves throughout.”

Click to see the list of the Financial 100, our story on Richard Moore at First Bank and Kelly King, and interviews with Scott CusterMarc Schaefer and Rick Callicutt.

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