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Having grown up on a Kentucky farm, Chip Mahan

is undoubtedly familiar with combines.

In a way, Mahan is still working on one, though in an entirely different context. His

entrepreneurialstrategyplaying

out now for the second time in his career, at the North Carolina startup Live Oak Bancsharesisunique in that it

combines a community bank with

a pioneering technology firm.

Can this odd gambit really work?

By sean sposito

ThaT PerfecTcombinaTion

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Mahan plays steward as they board the Gulfstream G200, handing waters to every-body before sinking into one of the white leather seats himself. The plane is in use al-most daily. On a recent three-day trip, this crew followed Mahan, Live Oaks chairman and CEO, to Minneapolis, Portland, San Francisco, San Diego, and finally to Las Ve-gas, before heading home.

This jet-setting is essential to Mahans business, which combines a small bank and high-tech ambitions.

Instead of focusing on a specific geo-graphic area, Live Oak lends nationwide to veterinarians and a handful of other niche customer segments. In the five years since its start, it has leapfrogged to number three on the Small Business Administrations list of the largest 7(a) lenders by dollar volume. The $90.8 million of loans it made in the SBAs fiscal 2013 first quarter trails only Wells Fargos $197.9 million and U.S. Banks $99.2 million.

else, says Anil Arora, the president and CEO of bank tech vendor Yodlee, where Ma-han once served on the board, he inspires.

Mahan believes his latest startup could be just as big, if not bigger, than all of his earlier efforts combined. It replicates the Security First strategy of pairing a branch-less bank that uses new technology with a firm that offers this technology to others.

In addition to owning its namesake Live Oak Bank, Mahans new company retains a 40 percent stake in a cloud-computing ven-ture it created, called nCino. The technol-ogywhich Mahan sees as rivaling Internet banking in significanceputs the volumi-nous paperwork necessary for each loan into the cloud, allowing everyone involved easier access.

There is plenty of reason to be skeptical about Live Oak, from its concentration in small-business lending to its unusual gam-bit in a technology so new that the industry has yet to embrace it and so promising that bigger competitors are making their own plays. Daunting security concerns about the cloud have regulators and bankers leery. But its dj vu for Mahan, who faced down similar skepticism about Internet banking and is unfazed by the doubters.

The bankers spread out around him on the jetlaptops open, typing awayare just as confident as Mahan is in what the future holds. They dont just work for Live Oak; they are investors, each having put a percentage of their own liquid assets into the business, as is required for all senior executives.

Another believer is John Mack, the for-mer Morgan Stanley chairman and CEO. An nCino investor, Mack makes clear that what hes really putting his money into is Mahan.

The magic sauce is Chip, Mack says. There are a lot of products out there,

but its all about taking a great idea and ex-ecuting on it.

Mahan was 11 years old when his father died in a plane crash in 1962. It was devastating, says Mahan, who describes his father as hav-ing a larger-than-life personality to go with his 6-foot-7-inch frame. His mother

Although the banks thriving, it also serves another purpose. Its a showcase for cloud-computing technology that Mahan expects to revolutionize the lending pro-cess for the banking industry.

This is Mahans second time starting a nontraditional bank. He is best known as the driving force behind the nations first Internet-only bank nearly two decades ago, Security First Network Bank, and its profitable technology offshoot, S1 Corp. Though Security First never took offre-member 1995 was very early for online anythingit succeeded in what Mahan views as the primary goal: demonstrating what the Internet banking platform from S1 could do. He rapidly inked deals with major industry players like Citibank and not only built a technology juggernaut for a time, but an impressive network of loyal-ists who still buy into his entrepreneurial vision all these years later.

What Chip does more than anyone

was 32 at the time and had never written a check, he says. (Though Mahan is named James after his father, Mahans grandfather called him Chip. The nickname stuck.)

Mahan took on responsibility at an early age. He recalls tough work at his grandfathers farm, in Mahans hometown of Frankfort, Ky. In summer, he would toss bales of hay onto a trailer for up to 12 hours straight. The aching in his arms was terrible.

Sitting in a silo covered in molasses was worse, though. He had to mix the sticky substance with hay to make a type of feed

hip Mahan travels with an en-tourage. The 62-year-old community banker is leading them nowfive men, all of them cheery, but exhaustedin a single-file procession across the tarmac and up the airstairs. Its midafternoon on a typical work day for these atypical small-business lenders, who are returning to Wilmington, N.C., af-ter an overnight visit to Boston. They met the day before with Fidelity to talk about the idea of a partnership that could give their $337 million-asset Live Oak Bancshares access to thou-sands of new borrowers, if a deal is struck.

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else, says Anil Arora, the president and CEO of bank tech vendor Yodlee, where Ma-han once served on the board, he inspires.

Mahan believes his latest startup could be just as big, if not bigger, than all of his earlier efforts combined. It replicates the Security First strategy of pairing a branch-less bank that uses new technology with a firm that offers this technology to others.

In addition to owning its namesake Live Oak Bank, Mahans new company retains a 40 percent stake in a cloud-computing ven-ture it created, called nCino. The technol-ogywhich Mahan sees as rivaling Internet banking in significanceputs the volumi-nous paperwork necessary for each loan into the cloud, allowing everyone involved

There is plenty of reason to be skeptical about Live Oak, from its concentration in small-business lending to its unusual gam-bit in a technology so new that the industry has yet to embrace it and so promising that bigger competitors are making their own plays. Daunting security concerns about the cloud have regulators and bankers leery. But its dj vu for Mahan, who faced down similar skepticism about Internet banking and is unfazed by the doubters.

The bankers spread out around him on the jetlaptops open, typing awayare just as confident as Mahan is in what the future holds. They dont just work for Live Oak; they are investors, each having put a percentage of their own liquid assets into the business, as is required for all senior

Another believer is John Mack, the for-mer Morgan Stanley chairman and CEO. An nCino investor, Mack makes clear that what hes really putting his money into is Mahan.

The magic sauce is Chip, Mack says. There are a lot of products out there,

but its all about taking a great idea and ex-

ahan was 11 years old when his father died in a plane crash in 1962. It was devastating, says

Mahan, who describes his father as hav-ing a larger-than-life personality to go with his 6-foot-7-inch frame. His mother

was 32 at the time and had never written a check, he says. (Though Mahan is named James after his father, Mahans grandfather called him Chip. The nickname stuck.)

Mahan took on responsibility at an ear-ly age. He recalls tough work at his grandfa-thers farm, in Mahans hometown of Frank-fort, Ky. In summer, he would toss bales of hay onto a trailer for up to 12 hours straight. The aching in his arms was terrible.

Sitting in a silo covered in molasses was worse, though. He had to mix the sticky substance with hay to make a type of feed

Winston-Salem, N.C., not far from where Live Oaks headquarters is today.

Going into banking wasnt a life goal. He just happened to have connections to the former Wachovia (since absorbed by Wells Fargo), through his college fraternity, Delta Tau Delta. So here is how that worked: I was president of my fraternity and the past two presidents went to work at the Wacho-via training program, Mahan says.

A year in, he says, he started getting seri-ous about a banking career. But he also felt his mindset shifting, permanently as it turns out, into a more entrepreneurial mode.

I just came to the conclusion that you are either going to be an employee or an owner, says Mahan, who was making $9,000 a year at the time.

Hugh Durden, one of Mahans mentors and bosses at the former Wachovia, de-scribes Mahans rise there as steep.

He had a knack for signing up many of Kentuckys distilleries, including really lo-cal ones that no one ever heard of, Durden recalls, and they were becoming success-ful. Mahans clients also included Louis-ville Slugger, the baseball bat maker.

No one did it better than him in the corporate banking fieldhe was a star, says Durden, who is now the chairman of the Alfred I. duPont Trust, a $5 billion orga-nization that funds childrens healthcare.

Back before people talked about your emotional IQ, he had it. He could relate to all sorts of people.

Mahan left Wachovia to become an owner in 1983. He formed a group of investorsinclud-ing friends of his stepfather, a veterinar-ian known for his orthopedic surgery on racehorsesto buy Citizens Union National Bank & Trust Co.

Among those investors were Mickey and Karen Taylor, part-owners of Seattle Slew, which is one of only 11 racehorses to ever win the Triple Crown.

Mahan recalls flying to the Sun Valley, Idaho, airport in the winter of 1984 and being picked up by actor and racehorse investor Albert Finney, who famously played Daddy Warbucks in the screen and

called silage. The powerful odorsimilar to soy sauce, Mahan sayswas unbearable.

We put 50 gallons of molasses in that somebitch, he says with a deep twang that gives away his Kentucky roots. Totally a shit job. I only lasted a day.

It was perhaps an aha moment for Ma-han. Working on a farm wasnt going to be a lifetime occupation.

After graduating from Washington and Lee University with a degree in finance, he worked his way through an executive trainee program at a Wachovia office in

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stage versions of Annieapropos, Mahan reflects, given the multimillion-dollar mis-sion he was on. I was 31 years old, and I was raising money to buy what was a $300 million bank in Lexington, Kentucky, he says, almost in disbelief at his younger self.

The outside investors put up $3.5 mil-lion in all, leaving Mahan and his business partners to mortgage their homes to raise the final $1 million they needed. The deal closed in 1985, and Mahan moved with his wife and two children from North Carolina back to Kentucky. He was the banks chair-man, president and CEO for about a year, before selling it at a healthy profit to Bank One (now part of JPMorgan Chase).

The countrys first Internet bank started around a dinner table in Lexington, Ky. It was 1993, and Mahan was at a party in his father-in-laws home. He was chatting with Michael McChesney, his brother-in-law at the time.

Mahan by then was chairman and CEO of Cardinal Bancshares in Lexington. He

First Federal Savings and Loan of Pineville, Ky., turned into Security First, and the two men set up operations in Atlanta with an eye toward creating a branchless bank.

Security First attracted investments of $2 million each from Huntington Banc-shares and Wachovia in its initial public offering. Connections Mahan made earlier in his career helped in securing support. Durden, who was still at Wachovia, talked with the operations executive there, after having dinner with Mahan and hearing what he was up to. I said, I dont under-stand the technology, but if they are right, this thing could be very important. Then I stepped out of it, Durden says.

Developers were a priority. But by then, SecureWare, McChesneys old firm, had sold its software to Hewlett-Packard, and just like that a team was in place.

McChesney initially created a separate company to house the technology develop-ment business. (It later would be part of the bank, and later still, spun off.)

This tech startup would evolve into S1. It

had raised $16 million to start the company two years after selling Citizens Union.

McChesney was running a 50-person software firm in Atlanta called Secure-Ware. He did very technical security work for the government, the Department of De-fense launch codes, very complex stuff, Mahan says.

The two men were trying to find some middle ground between business and tech-nology, for what was such inconsequential small talk that Mahan struggles unsuccess-fully to recount any of it.

That is, except for one remark by McChesney that proved very consequen-tial indeed. He said: Lets just put a bank on the Internet, Mahan says. Lets adver-tise CDs and money market accounts.

The idea was not of the lightning-strike variety. It didnt spark any feverish excite-ment or immediate action. But it stuck in Mahans mind for an entire year afterward.

Ultimately, he decided to repurpose one of Cardinals banks to give the idea a try and brought McChesney in to help. The

had wild ups and downs over the years, but it was more successful than the bank, which never made a profit.

Security First opened before the Internet gained mainstream tractiona full two years before Bank One orchestrated the high-profile launch of its online-only Wingspan Bank. Though heavily advertised, even Wingspan didnt make it.

Security First attracted only a few thousand depositors. They had to mail in checks to get money into the bank.

In 1998, Mahan sold Security Firsts banking operations for $20 million to Royal Bank of Canada, which would later contract with S1 for its online banking platform.

As Internet banking grew, so did S1. Thousands of banks, big and small, used its technology, including 35 of the top 100 banks in the world, Morgan Stanley and JPMorgan Chase among them. Mahan be

When Chip Mahan went to banking regulators in 2007 with the idea of starting a bank in Wilmington, N.C., with no branches, no tellers and a na-tional lending platform heavily concentrated in Small Business Administration loans, the response was less than enthusiastic.

I was skeptical at first, says Joseph Smith Jr., North Carolinas banking commis-sioner at the time. What Chip was propos-ing was very much out of the ordinary for the banking industry.

It took more than a year for authorities to get comfortable with the idea and grant a charter to Live Oak Bancshares, but Ma-han didnt wait. Confident of approval, he started hiring lenders with contacts in his first targeted niche, veterinary medicine, and began originating.

The SBA market had dried up, and he had these lenders on his staff. It was prime

The philosophy underlying Live Oaks strategy is that industry expertise matters more than location. General manager Tra-vis York, for instance, is the son of a vet-erinarian; senior loan officer Ed Webman is a third-generation pharmacist and once owned a small-town drug store himself. An-other senior loan officer, Annemarie Murphy, was a vice president of healthcare finance at United Western Bank in Denver, and still lives in Colorado.

Live Oak targets business customers with $1 million to $3 million in annual rev-enue. They need some hand-holding, and are more concerned about getting a loan than a percentage point on their rates.

The well-connected lending team gets its leads mostly through word of mouth and at trade shows. The bank has lent to funeral home directors in Michigan and California, veterinarians in South Dakota and Tennes-

time for them to be lending, recalls Greg Gibson, then the CEO of Mountain 1st Bank & Trust in Hendersonville, N.C., which warehoused $100 million in Live Oak loans while Mahan waited for his charter. I acted as their proxy and shared my balance sheet with them.

It didnt take long for Live Oak to explode onto the SBA lending scene. Though it has just $330 million in assets, it trails only Wells Fargo and U.S. Bank on the governments list of the most active SBA lenders. Its third-place ranking puts it ahead of JPMorgan Chase and large regionals such as SunTrust Banks and KeyBank.

Live Oak concentrates on just a handful of high-performing niches, such as veteri-nary medicine, dental care, funeral homes and small-town pharmacies. All show up near the top of the SBAs list of categories with the lowest default rates.

see, and dentists in Oregon and Missouri. When underwriting, Live Oak focuses

more on cash flow than on equity or experience. We dont worry about collateral, Mahan says. Most of these businesses generate plenty of cash flow for them to make a nice living and pay the loan back.

Growth has been strong. Live Oaks figures show that in 2012 it originated $415.2 million in loans, up from $161.8 million three years earlier. Almost all of that volume came from the SBAs 7(a) loan program, which slaps a government guarantee on 75 percent of each loan.

The company sold $276.7 million of its loans to investors on a resurgent secondary market, reaping a net gain-on-sale of $121,900 per $1 million in loans sold.

Most of the unguaranteed portions of those loans were sold as participations to loan-starved community banks, with Live Oak retaining about 10 percent of the typical loan on its books, as well as the servic

live oaks small-business roots

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First Federal Savings and Loan of Pineville, Ky., turned into Security First, and the two men set up operations in Atlanta with an eye toward creating a branchless bank.

Security First attracted investments of $2 million each from Huntington Banc-shares and Wachovia in its initial public offering. Connections Mahan made earlier in his career helped in securing support. Durden, who was still at Wachovia, talked with the operations executive there, after having dinner with Mahan and hearing what he was up to. I said, I dont under-stand the technology, but if they are right, this thing could be very important. Then I stepped out of it, Durden says.

Developers were a priority. But by then, SecureWare, McChesneys old firm, had sold its software to Hewlett-Packard, and just like that a team was in place.

McChesney initially created a separate company to house the technology develop-ment business. (It later would be part of the

This tech startup would evolve into S1. It

had wild ups and downs over the years, but it was more successful than the bank, which never made a profit.

Security First opened before the Internet gained mainstream tractiona full two years before Bank One orchestrated the high-profile launch of its online-only Wingspan Bank. Though heavily advertised, even Wingspan didnt make it.

Security First attracted only a few thousand depositors. They had to mail in checks to get mon-ey into the bank.

In 1998, Mahan sold Security Firsts banking operations for $20 million to Royal Bank of Canada, which would later contract with S1 for its online banking platform.

As Internet banking grew, so did S1. Thousands of banks, big and small, used its technology, including 35 of the top 100 banks in the world, Morgan Stanley and JPMorgan Chase among them. Mahan be-

Mahans family moved to Wilm-ington to be closer to the re-search hospital treating his wife.

He never left her side, re-calls Jeff Lunsford, a former S1 corporate development execu-tive and now an nCino investor. He just said: We have to go to Duke every week; we have to go and treat this thing.

Mahan returned as CEO again in 2005partly because Peggy had gone into remission, partly because the company was floun-dering. But contentious activist investors left him so frustrated

that he quit a year later. Heartbroken is the word, he says.

Mahan says he learned a lot through the experience, though. He says the insight he gained is valuable for keeping nCino from making similar missteps.

And S1 did ok in the end. It was acquired last year by ACI Worldwide in a deal worth $540 million.

came a practiced pitchman in the process.But the company, which had a mar-

ket capitalization of $4 billion at its peak, would go on an ill-fated acquisition spree to expand into enterprise software and payments processing. S1 struggled mightily after Mahan, its chairman and CEO at the time, gave up the CEO title in 2000 to care for his wife, Peggy, who had breast cancer.

The philosophy underlying Live Oaks strategy is that industry expertise matters more than location. General manager Tra-vis York, for instance, is the son of a vet-erinarian; senior loan officer Ed Webman is a third-generation pharmacist and once owned a small-town drug store himself. An-other senior loan officer, Annemarie Murphy, was a vice president of healthcare finance at United Western Bank in Denver, and still

Live Oak targets business customers with $1 million to $3 million in annual rev-enue. They need some hand-holding, and are more concerned about getting a loan than a percentage point on their rates.

The well-connected lending team gets its leads mostly through word of mouth and at trade shows. The bank has lent to funeral home directors in Michigan and California, veterinarians in South Dakota and Tennes-

see, and dentists in Oregon and Missouri. When underwriting, Live Oak focuses

more on cash flow than on equity or expe-rience. We dont worry about collateral, Mahan says. Most of these businesses generate plenty of cash flow for them to make a nice living and pay the loan back.

Growth has been strong. Live Oaks fig-ures show that in 2012 it originated $415.2 million in loans, up from $161.8 million three years earlier. Almost all of that volume came from the SBAs 7(a) loan program, which slaps a government guarantee on 75 per-cent of each loan.

The company sold $276.7 million of its loans to investors on a resurgent second-ary market, reaping a net gain-on-sale of $121,900 per $1 million in loans sold.

Most of the unguaranteed portions of those loans were sold as participations to loan-starved community banks, with Live Oak retaining about 10 percent of the typi-cal loan on its books, as well as the servic-

ing Live Oak. (Former S1 general manager Neil Underwood is now Live Oaks COO.)

After a couple of failed stabs at creating in-house solutions, they stumbled on Sales-force.com and its scalable, cloud-based plat-form for hosting proprietary applications. The San Francisco-based firm helped pioneer the cloud-computing movement a decade ago, and today boasts hundreds of thousands of clients and a market cap of $24 billion.

Live Oak built an app that transfers the bulk of the paper-intensive lending process online, making it more efficient, more acces-sible to more people and easier to manage.

Cloud-based apps dont require users to buy additional hardware or software, because the platforms are housed on and accessed via the Internet. Salesforce.coms customers build their apps on the same platform, which also comes with whats considered a state-of-the-art customer re-lationship management function.

Salesforce.com hosts proprietary apps

ing income. About 80 percent of banks revenues come from noninterest sources, most of it gains-on-sale.

The returns have been impressive. Ex-cluding nCino losses, net income at the holding company was $12.2 million last year, beating internal forecasts by more than 50 percent. Return on average assets was 4 percent; return on average equity was a tick over 40 percent.

If every community bank in the country really understood the power of the 7(a) pro-gram theyd all be doing it, Mahan says. Done right, it allows your returns on risk-weighted capital to go through the roof.

But the SBAs 7(a) lending program also introduces a confusing mass of paperwork into the underwriting process. The typical loan requires some 148 documents to com-plete, plus regular monitoring.

Mahan felt the frustration early on, and brought in some of his former crew from S1, the bank technology firm he led before start-

big lenders to small businessYear to date, Live Oak has been the third most-active lender in the Small Business Administrations 7(a) loan program during fiscal 2013

lender number gross approvalof loans amount (mln)

Wells Fargo 736 $197.9U.S. Bank 523 $ 99.2Live Oak 124 $ 90.8Huntington National Bank 804 $68.0Ridgestone Bank 80 $59.4JPMorgan Chase 671 $53.5Newtek Small Business Finance 59 $48.0Noah Bank 40 $41.5TD Bank 118 $34.1BBCN Bank 47 $31.1Source: SBA.gov

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from some 5,000 financial services compa-nies, including such big names as Wells Far-go and Huntington National Bank, but had nothing along the lines of a purpose-built application for mid-market banking, says Ron Huddleston, a Salesforce.com senior vice president.

With his background in financial technol-ogy, it didnt take long for Mahan to conclude there could be a market for a standalone firm to sell his solution to other banks. Live Oak named the software business nCino, a play on the Spanish term for the live oak tree, and made it a separate enterprise.

Live Oak uses nCino for managing its SBA loans, but most bank clients employ it on commercial or construction loans. Ver-sions are being readied to tackle the retail- and mortgage-lending markets as well.

Pierre Naude, a former S1 divisional president and now head of nCino, says that on the cloud, offerings can be adapted and customized quickly. In contrast, S1s solu-

the average time to approve a loan from 60 days to 45. Instead of a serial, step-by-step process, you can stroll up and down and see exactly where you are at, what doc-umentation is outstanding, he says. The loan moves faster.

Bankers report being pleased. They literally take data dumps from my core ev-ery day, says Jarrod Beck, CEO of $200 million-asset United Texas Bank in Dallas, which uses the app to manage residential construction loans. It puts all this disparate data at my fingertips, where I can print re-ports and do stuff with it.

Some clients expect the offering to get bigger and deeper with time. With what Im creating through them, it would make a lot of sense for nCino to eventually be my core, Beck says.

Emmanuel Viale, director of Accenture Technology Labs in France, doesnt know of nCino specifically, but argues that the de-sign agility, scalability and sheer firepower of

tion involved 15 million bug-filled lines of code, with network interfaces and database designs that required constant attention.

With Salesforce.com, you get all your hardware, all your software layers, on a high-ly secure platform, Naude says. I can focus all my energy on my industry domain exper-tise and business problems, as opposed to worrying about the core technology.

nCinos app doesnt replace a banks core system, but complements the core, Naude says.

At the beginning of the lending process, a complete file is scanned into a template and uploaded to the app. The file is acces-sible to underwriters, closers, executives and anyone else with a valid interest in see-ing whats needed next, be it appraisals, tax returns or closing documents. Everything to do with the process, except for a signature page, is digital.

Naude says the app makes a cumber-some process more manageable and cuts

the cloud make it too attractive to ignore. He notes that big banks such as Spains

BBVA are making cloud-based technology more central to their operations, while large tech firms, including Amazon.com, HP and Google, are expanding their cloud offerings.

Cloud computing can fuel new ways of doing thingsnew segmentation models, new ways of sharing data, new ways of connecting with social media, Viale adds. With time, its natural to think the cloud will become a primary way of doing things for banks.

Its possible that nCino could prove to be a bigger jackpot for Mahan than the bank itself. Or it could become a black hole that gets lost in the shadows of larger competitors and security concerns.

The nCino app, housed on the platform of Salesforce.com, is accessible only via the Interneta tough sell for many bankers at a time of increased fears over data security and privacy, and the heightened scrutiny

Restless after leaving S1 the second time, Mahan soon began laying the groundwork for Live Oak. The inspiration came from former banking ac-quaintances who shared their experiences with SBA lending.

I cant not work, he says. He had to get up and do something every day. He just had to figure out what.

He got some help from David G. Lucht, a former chief credit officer at Cardinal.

Lucht wrote the charter application for Live Oak sitting on a wicker chair in the an-teroom between a wine cellar and a walk-in closet full of guns and hunting attire at Mahans house on South Live Oak Parkway. (Mahan is a big-time duck hunter.)

It took three months. I came in every day with a muffin for breakfast, says Lucht. And every day Chips golden retriever would come in and eat the wrapper.

Lucht says he had no hesitation leav-ing his chief credit officer gig at FirstMerit Bank in Akron, Ohio, when Mahan called to pitch another startup.

ians. (FDIC chairman Sheila Bair nicknamed Live Oak the doggy bank, Mahan says.)

But it later added dentists, pharmacists, funeral home owners and, most recently, independent investment advisers (hence the meeting at mutual-fund giant Fidelity).

The new types of borrowers help lower concentration risk and keep regulators happy, Live Oak President (and former S1 executive) Neil Underwood says, though he insists theres been no regulatory direc-tive given to Live Oak to that effect.

Jon Winick, president of bank advisory firm Clark Street Capital, closely monitors SBA lenders. He says he doubts Live Oak, one of the last charters approved in North Carolina before the FDIC curtailed de novo banks, could have started up in the current regulatory climate.

They looked at SBA lending from a stra-tegic standpoint. They focused on a couple niches that they really understand, but you couldnt expect that charter to get approved today, Winick says. Now, they would lock you up if you came to them with this busi-

It was Lucht who had the idea of requir-ing all senior employees to invest a per-centage of their liquid assets in Live Oak. He wont put in $200,000 himself and now owns $600,000 of stock.

Live Oak opened in May 2008 and has been going gangbusters ever since. The bank unit, which is an S corporation, earned a pretax $19.6 million last year, up 29 percent from 2011, according to Federal Deposit Insurance Corp. data. The earn-ings growth was driven primarily by a $10 million increase in noninterest income, to $42 million. (It generally sells the guar-anteed portion of its SBA loans.)

Mahan says it has made roughly $1.5 bil-lion in federally backed loans with a default rate of less than 1 percent since it opened.

Live Oak has no branches, no tellers and no customer service reps. But it does have four pilots on the payroll, because it likes to keep those planes busy. Think mo-bile branch managers, Mahan enthuses. New model, buddy!

At first, Live Oak lent only to veterinar-

ness plan. Winick considers that all the more reason to admire Live Oakand, by extension, Mahan.

Of course, you could hang in the back of the room and say its all going to blow up, that their growth is going to slow down, he says. But you cant deny the tremendous success that theyve had to date in a very difficult industry to navigate.

Though Mahan says hes strictly a banker, he runs his businesses with a formula that most bankers would find unfamiliar: separate the finance from the technology systems and sell both.

In 2010, Live Oak spawned nCino, which sells cloud-based software to other banks to help them underwrite loans and generate reports. The tech startup raised $7.5 million from the likes of Eugene Ludwig, the founder and CEO of Promontory Financial Group and former Comptroller of the Currency, and Mack, the former Morgan Stanley CEO, who says he became friends with Mahan when S1 was booming in the 90s. nCino is

pullquote to go here if needed pullquote to go here if needed pul-

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the average time to approve a loan from 60 days to 45. Instead of a serial, step-by-step process, you can stroll up and down and see exactly where you are at, what doc-umentation is outstanding, he says. The

Bankers report being pleased. They literally take data dumps from my core ev-ery day, says Jarrod Beck, CEO of $200 million-asset United Texas Bank in Dallas, which uses the app to manage residential construction loans. It puts all this disparate data at my fingertips, where I can print re-

Some clients expect the offering to get bigger and deeper with time. With what Im creating through them, it would make a lot of sense for nCino to eventually be my

Emmanuel Viale, director of Accenture Technology Labs in France, doesnt know of nCino specifically, but argues that the de-sign agility, scalability and sheer firepower of

the cloud make it too attractive to ignore. He notes that big banks such as Spains

BBVA are making cloud-based technology more central to their operations, while large tech firms, including Amazon.com, HP and Google, are expanding their cloud offerings.

Cloud computing can fuel new ways of doing thingsnew segmentation mod-els, new ways of sharing data, new ways of connecting with social media, Viale adds. With time, its natural to think the cloud will become a primary way of doing things for banks.

Its possible that nCino could prove to be a bigger jackpot for Mahan than the bank itself. Or it could become a black hole that gets lost in the shadows of larger competi-tors and security concerns.

The nCino app, housed on the platform of Salesforce.com, is accessible only via the Interneta tough sell for many bankers at a time of increased fears over data security and privacy, and the heightened scrutiny

Each of Mahans endeavors seems to push the envelope on innovation at a time when profit pressures demand new think-ing. Each also has had to confront skepti-cism from regulators and bankers alike.

Even today some critics argue that Live Oak shouldnt have deposit insurance be-cause it isnt a traditional community lend-ing institution, says Smith, who stepped down as North Carolinas banking commis-sioner in 2012 and is now an attorney with the law firm Poyner Spruill in Raleigh, N.C.

We wouldnt want every bank in North Carolina doing what Chip is doing, but I thought it was important to allow some experimentation to see if there were differ-ent ways to use the small-bank charter, Smith says, explaining the decision to ap-prove Live Oaks charter. Having one bank that focused on a different kind of lending would give our banks some insights into how to be more successful small-business lenders. John Engen

those fears can bring. The Internet component doesnt feel as

secure as a point-to-point communication with your servicer, says Gibson, Live Oaks early champion, who is now chief financial officer of the $2.3 billion-asset Northwest Federal Credit Union, an nCino customer in Herndon, Va. But if you put in the time to understand the layers of technology that ex-ist, you can get comfortable with it.

Regulators have cast a wary eye at the concept, cautioning banks in a July 2012 bulletin to perform thorough due diligence and risk assessments on prospective cloud-computing providers, while also talk-ing about firming up regulations on the use of their solutions.

Mahan heard similar concerns during the early days of Internet banking, when he ran Security First Network Bank, the online play he founded in 1995. (The banks software efforts formed the basis of S1, which, like nCino, was spun off as a separate firm.)

ians. (FDIC chairman Sheila Bair nicknamed Live Oak the doggy bank, Mahan says.)

But it later added dentists, pharmacists, funeral home owners and, most recently, independent investment advisers (hence the meeting at mutual-fund giant Fidelity).

The new types of borrowers help lower concentration risk and keep regulators happy, Live Oak President (and former S1 executive) Neil Underwood says, though he insists theres been no regulatory direc-tive given to Live Oak to that effect.

Jon Winick, president of bank advisory firm Clark Street Capital, closely monitors SBA lenders. He says he doubts Live Oak, one of the last charters approved in North Carolina before the FDIC curtailed de novo banks, could have started up in the current

They looked at SBA lending from a stra-tegic standpoint. They focused on a couple niches that they really understand, but you couldnt expect that charter to get approved today, Winick says. Now, they would lock you up if you came to them with this busi-

ness plan. Winick considers that all the more reason to admire Live Oakand, by extension, Mahan.

Of course, you could hang in the back of the room and say its all going to blow up, that their growth is going to slow down, he says. But you cant deny the tremendous success that theyve had to date in a very difficult industry to navigate.

Though Mahan says hes strictly a banker, he runs his businesses with a formula that most bankers would find unfamiliar: separate the finance from the technology systems and sell both.

In 2010, Live Oak spawned nCino, which sells cloud-based software to other banks to help them underwrite loans and generate reports. The tech startup raised $7.5 million from the likes of Eugene Ludwig, the found-er and CEO of Promontory Financial Group and former Comptroller of the Currency, and Mack, the former Morgan Stanley CEO, who says he became friends with Mahan when S1 was booming in the 90s. nCino is

about to close on another $1.5 million of in-vestments from employees.

But this Mahan enterprise might not fare any better than the ahead-of-its-time, online-only bank Security First.

Mack gets testy when asked about the fate of Security First. That was 25 years ago, he says, sharply. I mean, look, I dont know how old you are, but Im 68 years old, and one of the things that I try to do is get more involved with technology companies.

Mahan says Live Oak and nCino are his last big endeavors. This is his working re-tirement before the real onea way to hang out with smart 20-somethings and friends from his long banking career and get ev-eryone paid in in the process.

Mahan says he is not in it to score a big payday from a sale. He expects what he is building here to last long after he is gone.

Live Oak, which hires 10 to 15 recent grads a year, is starting a training program thatll be run by Mahans son, Jimmy IV, a former high school principal. Called Live Oak University, its not unlike the Wachovia

training program Mahan completed at the start of his career.

The bank completely covers its employ-ees healthcare and pays for them to work out with a personal trainer up to three days a week. Theres also a profit-sharing program, which last year gave all Live Oak employees a 56 percent boost to their annual salaries.

Walking into the temporary offices (a larger $11 million space on a manmade pond is getting built on the other side of town) upon his return from Boston, Mahan gives a young nCino employee an explod-ing fist-bump. There is nothing more fun than seeing these young folks walk in to work happy and having all these fresh fac-es, Mahan says. He mentions, not for the first time that day, that for him, working to make Live Oak a success is really more about securing their future than his.

He brings up the Boston trip as a way to underscore the point. It was inspiring to go to Fidelity, Mahan says. Ned Johnsons father started that company in 1945 and its still here. That family had a vision.

June 2013 AMeRICAn BAnKeR MAGAZIne 29

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