Chip Mahan, First Internet Banker, Is Back With Tech-Enabled SBA Lender Live Oak Bank

Twenty years ago, Chip Mahan founded the first Internet-only bank, called Security First Network Bank. He was early then. Now, at  64, Mahan – a consummate banker and serial entrepreneur – is back with Live Oak Bank, a bank that defies the rules of banking by focusing on small-business lending, and especially SBA loans, and doing so on the basis of its own technology. Think of it as the alternative to alternative lending. “Banks do a horrible job of lending under $1 million,” Mahan says. “So if you are a small business person and you need $100,000 to $1 million you are screwed.”

In the eight years since it first began lending, Live Oak has leapfrogged up the ranks of the largest Small Business Administration’s 7(a) lenders to the number two slot, by dollar volume, behind only Wells Fargo. And it’s growing fast: All told, Live Oak’s loan originations are on track to reach $1.1 billion this year, an amount that’s more than three times the $307 million the bank originated in 2011. In addition to the bank, Mahan also founded a related cloud-banking platform, called nCino (the name being a play on “encino,” the Spanish word for “live oak”).

For small business borrowers, bank loans, when they’re available, are far cheaper than the growing number of alternatives financed by Wall Street due to their cheaper source of capital. And while the SBA loan process will never be as speedy as that of an alternative lender, Live Oak can give completed applications for loans less than $350,000 a yes-or-no answer within two business  days and close those loans within three or four weeks. “Banks without technology are not going to be able to compete,” says Neil Underwood, Live Oak’s president.

In July, Live Oak Bancshares – which had earlier received an investment from Wellington Management – went public. In a volatile market, its shares have since fallen 15%, giving it a recent market cap of $490 million. Mahan and his wife, Peggy, retain a personal stake in the bank of 6.1 million shares, worth nearly $90 million.

How does Live Oak do what it does with no branches, no tellers, and no customer service reps? Essentially, it combines the personal relationship of a small-town banker – using its own planes to visit prospective borrowers in person – and a high-tech backbone to make loans, even small ones, quickly and efficiently. “Live Oak has a different business model than any bank I’ve ever looked at in my years as an analyst,” says Diane Glossman, the former banking analyst who now sits on Live Oak’s board of directors."They're very smart and very focused. I'm a fan," adds Bob Coleman, an industry expert and publisher of "The Coleman Report," a trade publication for SBA lenders.

Instead of focusing on a specific locale, as community banks generally do, Live Oak lends to a 11 different small-business niches, like veterinarians, pharmacists, chicken farmers, funeral home owners, insurance agents and investment advisors. It earned the nickname the “doggie bank” from former FDIC chairman Sheila Bair for its early work with vets. While most banks preach the values of diversification, Live Oak’s concentration of borrowers lets it deeply understand the industries it’s targeted to keep risks lower. Mahan and his team scour the SBA data to choose which industries to target. As Mahan puts it, bluntly: "There are a thousand industries the SBA says you can lend to, so don't be an idiot."

Live Oak’s average loan size is $1 million, 75% of which is guaranteed by the government, and its charge-off rate is below 1%. Those numbers belie the common wisdom that lending small sums to small businesses is inherently risky. “We are a paper factory,” Mahan says. “It’s the department that everyone hates at a bank, and we made it a business.”

Mahan is a serial banking entrepreneur. He was born in Lexington, Kentucky (and still speaks with a Southern twang), and grew up on his grandparents’ farm after his father was killed in a plane crash when he was 11. He got into banking in an executive trainee program at Wachovia in 1973 after graduating from Washington and Lee University with a degree in economics. He grew to like banking, but detested the bureaucracy.

In his first entrepreneurial venture, he formed a group of investors – including friends of his stepfather, a veterinarian known for his orthopedic surgery on racehorses – to buy Citizens Union National Bank & Trust. He ran Citizens for about a year before selling it to Bank One (now part of JPMorgan Chase). “I couldn’t take the big bank thing,” he says. Instead, Mahan started over, founding Cardinal Bancshares and building it into a publicly-traded institution with $800 million in assets. “This is not work for me,” he says. “This is fun.”

Then, in 1995, he started the nation’s first Internet-only bank, Security First Network Bank, adding a technology offshoot, known as S1 Corp., a few years later. He stumbled onto the idea during a conversation with his then-brother-in-law, Michael McChesney, who was running a tech company called SecureWare, over dinner. McChesney said something along the lines of ‘Let’s put a bank on the Internet.’ And so they did, turning a small savings and loan in Pineville, Kentucky, into Security First. While it was too early for online banking then, the tech part of the business soon inked deals with thousands of banks – and for a time was a darling of Wall Street with a market cap that peaked at $7.8 billion. Eventually, Mahan sold both the banking operations and the tech firm.

Now, Mahan is back, and once again combining technology and banking. The difference today is that putting a bank online is no longer an oddity. Technology is driving banking and financial services everywhere, and the ability to do loans quickly online has become a selling point. As every entrepreneur knows, getting a loan from a bank isn’t easy, and for that reason alternative lenders have proliferated in recent years, offering speedy approvals in exchange for higher (and sometimes exponentially higher) rates. Live Oak is straddling that divide, using the technology that’s driven alternative lending to become a leader in SBA lending. “Chip has an idea a minute, and boundless energy,” Underwood says. “Have you seen the cartoons with the Tasmanian devil? He’s a force of nature.”

Mahan has not only set up Live Oak differently for borrowers, he’s also created a different type of institution for employees. All of the bank’s employees get free health care, generous 401(k) matches and access to profit-sharing. And – in a huge departure from how lending is typically done – no one gets commissions. That helps keep its bankers focused on how the loans will perform over time rather than on signing up borrowers quickly to make a buck. Says Mahan: “We recognized at the beginning that this was going to be different.” And it is.