Transcript
We’re rolling into today’s episode of Plugged In with five legendary artists, all for one legendary entrepreneur.
That’s right. Steve Williams and I are getting Plugged In with the one and only Chip Mahan.
Chip, what’s happening?
My friends, glad to be with you fellas this afternoon.
Steve, at Cornerstone Advisors we often talk about supporting the troublemakers. Do you think you could set the record straight one more time about why Chip is a troublemaker in the best of ways?
Yeah.
We like to say “troublemaker” kind of like Apple talks about “the crazy ones.”
Banks and entrepreneurial folks in finance aren’t supposed to exist by now. We were supposed to be consolidated down to 10 big behemoths controlling the entire financial system.
For 30 years I’ve been in banking, we’ve confounded the experts, and it’s because of entrepreneurs like Chip.
I want to level the playing field and go way back to Chip, a banker who spent time at Wachovia and built up Cardinal Bank.
Very famously, he started Security First Network Bank, the first internet bank, which turned into the software company S1.
First victory, S1 selling to ACI for more than half a billion dollars.
But then this entrepreneur, Al, goes on to do other things.
He starts Live Oak Bank, the number-one SBA lender in the country, with roughly a $1.5 billion market cap this morning, and I would say undervalued in this current banking environment.
Out of Live Oak came nCino, the top commercial technology platform in banking, this morning with a market cap of $3.3 billion.
Out of that discussion about the need for better technology and a “headless core” came the company Finxact, which was built up and is now part of Fiserv, for a valuation of more than $800 million.
Then a venture firm, which, Chip, I know as you say, if you’re a technology company and you want to sell to banks, you probably need to talk to Canapi.
The venture capital firm now works with more than 100 fintech founders in the banking space.
If that’s not a list, I don’t know what a troublemaker looks like.
Chip, thank you so much for being here.
Those are incredible numbers. Each one is an incredible story.
That’s just too much. I give up.
Well, Steve, keeping today’s Plugged In short, we’ll just invite everyone to join us in the future.
Unless we can...
Oh, there he is. There he is.
Steve, as you’re talking about this, whether you’re a tech guru, a finance aficionado, or simply curious about the entrepreneurial spirits driving change today, get ready to explore some of the power, the pitfalls, and really the possibilities that we feel Chip epitomizes.
It all comes back to this word: opportunistic.
We want to take some opportunity to have some fun with my man, who is sporting a tie today.
Back in the day, that was my look.
I’m going to have to go back to my wall and pull out my Washington Generals hat that I pulled for a fellow general, because we’re going to have a good time with Chip.
We’re going to kick off today’s show by referencing one of maybe the greatest songwriters of all time, Mr. Bob Dylan.
He wasn’t singing about banking back in 1964 with the title track to his really famous album The Times They Are a-Changin’, but I think there are some interesting parallels to the world that we’re a part of right now.
Steve, there’s a line in here that goes, “And the first one now will later be last, for the times they are a-changin’.”
You and I have talked about how banks think about the world they’re a part of, whether it’s M&A, talent carve-outs, new market entries, or lines of business.
We think that when the industry is inward-focused and risk-averse, it’s really time to do something special.
We want to get your take on that basic idea, Chip.
If you think about this at the highest level and you think about the amount of equity that management teams own in, particularly, larger banks, and you think about the way the world is set up to report quarterly earnings, it’s awfully hard to be creative.
It’s awfully hard for a management team to say, “I am going to miss the quarter because I am going to spend this much money on something that has never been done before.”
We have been incredibly blessed over the years not to worry about the quarter ever, or the year.
If you take that perspective and you can operate the business for your shareholders and your employees on an incredibly long-term basis, I think that’s been one of the key drivers in what you all said earlier about things that we’ve done in the past.
How would you recommend your peers, who want to try to build things like you’ve built, things that were very unique, a domain expert in Live Oak, a new core, a platform to become the operating system of banking, how do they start to have those discussions with institutional investors and with their board?
You’ve done it well.
I think you’ve got to be very honest.
You’ve got to paint the end target, and you’ve got to paint milestones that may not be financial.
I will admit to you that until very, very recently, over these past 25 or 30 years, I’ve never had a software project on time or on budget.
Al, you know how hard this is.
It is really, really hard, particularly if it’s new.
We lived through the internet days.
Then we lived through cloud-native, API-first days, and we did nCino on Force.com when cloud was a dirty word in the banking business because of safety, security, and all those sorts of things.
You just have to, at the end of the day, be willing to fail.
Be willing to take a few chances.
I like your point about nonfinancial milestones.
I don’t think we do enough of that in strategy development.
As the industry becomes more tech-oriented, to your point, just like Apple or Intel, we’ve got to start delivering on those capability milestones.
I think getting boards oriented around those nonfinancial milestones is a great insight.
You have to have the right board too.
You have to have a board that thinks long term, not for the quarter, not for the year.
That’s tough with institutional investors because they have a job too.
What are they going to do over these next 12 months?
I know it sounds cliché to talk about betting the jockey, not the horse, but I think this is where someone like Chip has earned the opportunity to say, “We’re going to go a little bit long on our approach.”
If you’re a startup company, you don’t have the luxury of missing deadlines.
But again, if you can earn the respect of others because you’ve been able to deliver on a recurring basis, I think that’s something leaders have to take into account.
Steve, you and I have talked to various CEOs who’ve owned their tech destiny.
I know there’s something we want to talk about with Chip.
But again, we want to keep introducing some fun lyrics and artists to keep things going because we live in this time where liquidity and margin compression are going to be here for a while.
It’s hard to think about being opportunistic.
But then you could say there are folks like Shawn Carter, who might be better known as Jay-Z, who was opportunistic at a time when rap was making its real big move.
All of a sudden, Jay-Z is the first solo rapper in the Rock & Roll Hall of Fame, which I think is a pretty cool nod to his creativity.
He has a song called “Run This Town.”
I was listening to it the other day when I was going to the gym, and it’s all around, “The only thing that’s on my mind is who’s going to run this town tonight.”
I know that Chip’s built a little empire down in Wilmington that attracts some great talent and really gives him some license to do some cool things.
Chip, talk a bit about being opportunistic.
This isn’t the first time the business of banking has gone through some tough times, yet you’ve been able to weather the storms and build some really successful and compelling businesses.
Al, if you think about March, what happened in March with SVB and First Republic, Jim Herbert is a pretty good friend of mine at First Republic.
I think most everyone in the banking business would put him and that bank at the top of the list for running a fantastic bank, stock performance, ROEs, ROAs, and all that other stuff.
But then if you go back and really examine some of the facts, the FDIC was created, I believe, around 1933.
From 1933 until today, the average uninsured deposit at a commercial bank in the United States was 60%.
When SVB went down, it was 94%.
We run a branchless banking model, and I’ll get back to that in just a minute.
Our uninsured deposits at Live Oak Bank at that time were 18%.
In an abundance of caution, the day after SVB went down, we accumulated four times, in American legal tender, all uninsured deposits in our bank.
As you know, the banking industry operates this business on a thin thread of confidence, so you have to do that first.
Then what happened?
Interest rates, as a result of that and even more afterwards, have gone up 550 basis points.
Again, we as an industry celebrate banks that have a low deposit beta.
I have never in my life understood that.
We celebrate screwing the customer.
That doesn’t seem fair to me.
In a branchless bank, no tellers, no branches, no CSRs.
On the other side, if you look at, and I think this is public, if not it’ll be directionally correct, somebody at Cornerstone could give me all the exact data.
I think BofA’s total all-in cost of running a branch system is about 160 basis points.
If you look at almost all the larger banks, because we know that the top five have 50% market share and the top 50 banks in the United States have about 80% market share, the others, the four or five thousand of the rest of us, have less than 20% market share.
The big guys with those massive distribution systems can’t reprice their entire book.
They can’t reprice 30-basis-point or 50-basis-point savings accounts.
We, on the other hand, pay market rate because we don’t have to worry about an infrastructure cost of 160 basis points.
It’s really gotten out of hand this time in another way.
It’s not just wealthy people.
Looking at you, Al, because you’re the exact same age as my son.
If a man or woman had $10,000 to their name, and that was it, in a savings account, that’s your nest egg.
Would you pick up $400 out of the couch?
You probably would.
How long is this going to go on?
You talked in your notes to me about net interest margin coming down.
Some of these deposits are fleeing these larger banks because you can’t continue to have one-off negotiations.
You call me on the phone and you’re saying, “I’m paying you 50 basis points.”
Well, because you’re a great guy, I’ll give you 400 basis points, but not for the entire book.
I think if you can continue to operate a bank on both sides of the balance sheet, I used to say on the lending side that loyalty is worth somewhere between an eighth and a quarter.
Chip, you’re a great guy, but BofA is at a half over prime and blah, blah, blah.
We have to be competitive on both sides.
If technology can level that playing field, both in a self-service fashion and a full-service fashion, then you’ve got something.
It’s not that all business models have to be branchless like Live Oak.
But I think what you’re revealing is that this new world is saying, “What is your cost to deliver, and how much can you pass on in value to your customers?”
I think that’s a really good point that’s going to be revealed.
You can’t just drag the low deposit beta through the water and hope for the best.
Business-model discussion has really been brought up by what happened in March, in my opinion.
Here’s another quick thing.
My wife and I just celebrated our 50th wedding anniversary.
We’ve been together for 61 years, but this is our 50th.
Congrats.
Patient woman.
She is.
She works out with a bunch of older women every day, and they’ve got a trainer.
This guy runs a nice business.
He saw a billboard here in Wilmington that we offer 4% savings, so he opened an account.
He shook her one day when she went in and said, “They answered the phone.”
Then he called back each of the next two days, and we answered the phone in 11 seconds.
That’s full service.
You’ve got to do it all.
You can’t route something to make somebody wait for two minutes in another country.
Every little bit counts.
As you’re saying this, I’m kind of mentally shifting one of the artists.
I wish Steve had a piano in the studio.
He could play a little soft jazz and channel his inner Miles Davis for the customer experience that you’re talking about.
But I want to flip this back to the tech side, Chip, because one of the challenges I think we’re all facing, not just in the financial space but in industries across the country, is that as we become more digital, the concept of trust has shifted.
I think there are a lot of businesses that still live with the old idea that trust is about sitting across from somebody, or even answering the phone in 11 seconds.
I think about the digital nature of our relationships.
Sometimes you want transparency, and other times you want privacy.
I’m not sure businesses have fully embraced what this new concept of trust is in the digital space.
How do you put your big-picture idea on when it comes to this concept of trust in a digital world?
This is a tough one for me because I have no technology background whatsoever.
I mentioned earlier that until recently, I never had a software project on time or on budget.
But recently, I have.
We have 13 guys in cyber, 12 guys in data governance.
Before, we had like three.
We got an appropriate rating from the federal banking regulators before, and we certainly have an appropriate rating from the federal banking regulators now that we’re over $10 billion.
But when these guys who are really, really smart say that ransomware in the first six months of this year was $500 million, and you think that you are a tech-forward small bank and all those wonderful things that you all brought up in the beginning, how do you tell them they can’t have the next two or three guys?
The bad guys are gaining on this.
Again, you operate this business on a thin thread of confidence.
I view it this way, Al.
There are two doors to the vault.
There’s the regulatory and compliance door to that vault because if you mess that up and you’re in a consent order, you’ve got problems.
Then you’ve got the door of the real vault, which is safety and soundness.
You’ve got to make good loans because if you’re not 99.5%, we’re out of business.
You have to have experts.
Sometimes I tease my people and call them “dead-ass overhead” because you’re not a revenue producer.
It’s dead-ass overhead.
But it’s almost like the military.
Those people let us put our head on a pillow at night and sleep really well.
You have to have both.
Chip, I’ve seen interviews with you in the past, and one thing I like about Live Oak that is trusted to its target market is what you’ve said about the combination of deep domain expertise plus technology that delivers convenience and delivery, but also people who build relationships.
I think that’s a great framework to say, “Do I have trust in my business?”
It’s domain expertise plus tech plus people.
Most organizations are missing some gaps in one of those dimensions.
I think that’s right.
We started this business.
It’s all pretty simple.
We all understand the three-legged stool of business.
You have your folks, you have your customers, you have your shareholders.
We talked earlier about focusing on 90-day returns, meeting earnings guidelines, shareholder, shareholder, shareholder.
On this one, we basically said, “Look, this model is going to be really profitable, so let’s focus on our folks.”
Everything that we can possibly give them.
Six percent 401(k) matches, airplanes, go down the list.
Pay 100% of everybody’s health care, both spouses and employees.
Then you ask one thing.
You only have to do one thing.
Treat every customer like the only customer in the bank.
That’s everybody’s job, all thousand people in this bank.
That’s what you’ve got to do.
If you can do that, then the shareholder is going to be just fine.
That’s where I think you’ve been so successful, kind of living on the tip of the knife, where you’ve got threats and challenges, but you’ve been able to really rally the team collectively to that mindset and culture.
Again, I want to bring it back to something that Steve said to open this episode.
These things don’t just happen.
It’s a series of events, experiences, and opportunities that you’ve been able to bring really smart, talented folks into, but you’ve been able to put them in alignment, which is a really special thing from a leadership standpoint.
Steve and I probably spend too much time thinking about music when we should be thinking about other things.
But Jimi Hendrix is somebody that I know he loves.
He loves the guitar riffs, and we’ll just quietly jam out to those when he’s driving into the office.
Another troublemaker.
Another troublemaker, keeping to the theme of today’s show.
Just like Hendrix took charge of his musical destiny, you’ve been able to do the same in terms of controlling your tech destiny without having that tech experience or background that you’ve referred to a few times.
A lot of people claim to have a vision for how they’re going to own their future.
You’ve been able to walk the walk.
What advice would you give to somebody who’s in the early days of being in the banking space, where what they’re dealing with today certainly won’t be what they have to address five years from now?
I’ve been blessed to have guys who understand tech around me.
If you go back to Security First Network Bank in the mid-’90s, we put the first bank on the internet and learned a heck of a lot.
Then we do this company, Live Oak Bank.
Live Oak Bank is making a pain-in-the-ass government-guaranteed loan in all 50 states.
How are you going to get all that data in one place between the lending officer, the underwriter, the closer, and the servicer, between Anchorage, Honolulu, and San Juan, Puerto Rico, and all those different time zones?
That led us to studying, in 2008 and 2009, the Force.com platform.
We did loan origination on Force.com, which became nCino, which you all alluded to earlier.
Now, that’s the loan side.
Now we need to march to the deposit side.
At that point in time, we’re figuring out this whole AWS thing, cloud-first, API-native, cloud-first, and all that other kind of stuff.
Loan origination is great, and nCino is a great company, but as you know from your previous job, Al, at the end of the day everything begins and ends with a core.
I had known Frank Sanchez from S1 days and when we landed the Citibank account together.
We were the front end.
Frank and Mike Sanchez were the back end.
I called Frank and said, “Frank, you’re the only guy I know who can build a next-generation core on Amazon Web Services’ platform so we can actually scale this and have almost an inventory-management system and create better banking.”
I’ll get to that in a minute.
Frank said no.
I kept calling him and texting him every night and day.
We capitalized that company in December of 2016.
As you alluded to earlier, now Frank Sanchez and Frank Bisignano are in business together at Fiserv.
But you have to have that instant scalability and flexibility to create products.
In our case, a bespoke bank in the industries that we serve.
We’re in 35 separate industries making SBA loans.
Can you build a bespoke bank for a veterinarian?
A bespoke bank for a pharmacy owner?
A bespoke bank for a dentist?
Integrating everything they need to operate their business.
That practice manager who runs that vet practice doesn’t really think about the bank every day.
She thinks about the practice-management software and taking care of customers.
But if you can integrate payment systems and lending and all that stuff on top of that, on top of QuickBooks for financial forecasting and tax prep, now you’ve built something special in an easy-to-use portal.
But you can’t do that with ancient technologies that are 40 years old, run by somebody else.
Chip, here’s where I love how you tell that story.
Not to be lost in there is that Frank said no to you multiple times.
You kept saying, “Hey, you’ve got one more dance in you, buddy.”
I did.
You are maybe the best salesman I’ve ever come across because you convinced somebody who was dead set against doing anything not just to say, “Okay, I’ll throw my hat in,” but to build a really compelling company that, as you mentioned, has exited to Fiserv.
Again, it starts with the leadership and it starts with the vision of, “Hey, this is an unmet need, and we can fill it faster than anyone else.”
I think one of the lessons there, that Chip is being very humble about, is you don’t have to understand all of technology to appreciate bringing in smart technologists to solve a business problem.
I think you’ve gotten your checkbook out and made big swings with smart technologists.
That’s the lesson, Chip.
As an experienced banker, you don’t have to become that, but you have to appreciate that and put your money where your mouth is to that kind of talent.
Steve, as you’re saying this, maybe this is a good way to take us home.
We’ve got football season coming up.
If you remember, Hank Williams Jr. used to talk about all his rowdy friends coming over tonight.
We’ve got some rowdy friends in the artificial intelligence space.
In previous episodes, we’ve gone a lot deeper on the generative AI front.
But I just want to toss this to Chip because you have an uncanny ability of looking over the hill a little bit faster than others.
What do you find interesting in this AI world of ours right now?
As you guys said at the top of the program, about four years ago my dear friend Gene Ludwig and I created Canapi.
We raised about $1.5 billion from 70 banks.
Gene, being the premier regulator in the history of the United States, when crypto was like AI is today, a year or two ago we decided to sit on the crypto sidelines and just see how the regulators were going to address that on behalf of our limited-partner banks.
I would say we are kind of in that stage with AI right now.
There’s a tremendous amount of hype out there.
We have, at Canapi, invested in one startup company that has several MIT PhDs, just to more or less test the water and call it R&D for us.
We continue to understand use cases, if you will, with our 70 LP banks.
I’d say early stage.
Early stage on that.
Nothing really to report at this point.
I like you keeping your cards close to the vest.
We’ve been lucky to have folks like Gene on this show.
We’ve talked a little bit about where things are moving.
It is interesting times.
It is early stages.
I do think some of the hype that’s around these companies, banks need to pay attention to it.
We talked with Sarah Hinkfuss from Bain Capital Ventures a few weeks ago about why there’s hope, there’s hype, and there are things that are actually happening.
She thinks the hype is worthy of our time.
I think what Chip’s saying reinforces the idea that you’ve got to participate, even if it’s in a small manner.
You can’t just sit as a passive outside observer.
You might be an insider, but don’t miss the chance to do something cool and creative.
Otherwise, guys like this are going to eat your lunch.
It also shows in the Canapi portfolio that while this is exciting new technology, there are a lot of problems to solve that are just basic right now.
How to streamline a loan.
How to open an account digitally.
Give a better digital experience.
Do KYC better.
I think that’s a good point.
We shouldn’t always react to the latest technology.
Keep working on all those problems to solve.
Steve, I think this is a good way for us to wrap things up with Chip.
We might have to grab Gene Ludwig and Chip Mahan and do a speed round at some point this fall and see what we can get these two guys to open up about.
I just want to take a minute to thank him for getting Plugged In with the Cornerstone Advisors team, with Steve Williams, and with myself, Al Dominick.
We hope everyone’s enjoyed this particular episode.
Thank you, guys. Good being with you.
Thank you, Chip. Really appreciate the time.
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