Episode 116 - Chip Mahan: “I Couldn’t Do the Big Bank Thing”
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Chip Mahan has built his career revolutionizing the banking industry. He founded and currently serves as CEO and chairman of Live Oak Bankshares, headquartered in Wilmington, NC. Its commercial banking subsidiary, Live Oak Bank, specializes in providing lending and deposit services to small businesses nationwide. Chip joins us on the Faith Driven Investor Podcast to talk more about investing in technology that helps banks of all sizes innovate and cut through the red tape.
All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and I'm here with my partner Luke Roush in beautiful Wilmington, North Carolina.
Luke Roush: We are on the campus of Live Oak Bank, which is quite the place and it's great to be back in North Carolina.
John Coleman: Absolutely. And we are privileged to have with us the founder of Live Oak Bank, Chip Mahan, who's going to talk to us today about his story and about the variety of businesses he's had the opportunity to kind of create and steward over the course of his lifetime. And the way that that intersects with a view of investing, I think that's different than normal. So, Chip, thank you so much for being here today.
Chip Mahan: Delighted to be with you guys. It's been fun so far for sure.
John Coleman: Well, maybe if you don't mind just to get us started, tell us a little more of your personal story and how you came to found Live Oak Bank.
Chip Mahan: Well, I think, you know, to begin from the beginning and you guys cut me off about ramble too much, right? So an interesting turning point in my life was September the fourth, 1962. It was the first day of the sixth grade in Orchard Park, New York. And my dad worked for a oil company, the Ashland Oil Company in Ashland Kentucky. And regrettably, 13 men died on a company plane crash that night. and I'll never forget. So my next door neighbor our next door neighbor was a senior executive at American Airlines. And I remember him poking me on the chest as my mother told us what happened that night and said, you know, now you're the man of the house, which you're 11 years old. Right. Like, ma'am. So my mother would tell you that that was a bit of a change. Apparently, prior to that, I was just kind of a happy go lucky little kid and then became maybe a little bit different after that moving forward, which also has to do with faith is. So we had to move back to the family farm at Frankfort, Kentucky. My grandparents had a 300 acre soybeans, corn, a few cows, tobacco, kind of scrub family farm. So my brother, my mother and I moved into that house, which was 800 square feet. Wow. And went to church that first Sunday. And I met a girl named Peggy [...], whose father was in the civil engineering business. And we were 14 and high school our wrote in her capital in high school yearbooks that I was going to marry her. And she went to Highland college.
John Coleman: Did she know that prior to that point?
Chip Mahan: Yes, she did. She went to Highlands College in Roanoke, Virginia, I went to Wesley university in Lexington, Virginia, 45 minutes away. Yeah, I did marry her two weeks after college in 1973, and she has been the beacon of my life and ups and downs, a devout, great Christian.
John Coleman: Next year, 50 years.
Chip Mahan: Next year, 50 years, 50 years together.
John Coleman: Amazing.
Chip Mahan: Really more than that. So she turned 71 on May 5th last week. I'll be 71 on May 26. Married a younger woman. So you really need to go back to 11, right? So it's been 60 years, right? And, you know, we'll talk business, all that kind of stuff. But at the end of the day, if you're an entrepreneur, there are going to be ups and downs and the downs can be tough if you are not. What's the purpose of this podcast? It's all about. When you focus on Him and your life is dedicated to him. None of those things mean anything. Yeah, you go right to sleep. People ask you, what is your worst day? Everything that we do is for him. None of this is ours. You guys know that, right? The money, the stock, the equity. If you can just build something in his honor, then great things just actually happen. And then, you know, back to all that other mess, right? So I went to work at the Wachovia Bank when I was 22. The two presidents of the fraternity before me went to the training program. So I did that for a while. And then, you know, at some point life you got to decide you want to be an employee or do you want to be an owner? So I decided at 28 I wanted to be an owner, and that led to going to work for a guy in Lexington, Kentucky, who had bought a bank that was in serious trouble. It was actually bankrupt. Bankrupt the butcher, the brothers of Tennessee, Jake and C.H. Butcher. And that's a whole another story. I got ran for governor, but so we took the bank. He hired me to run the bank, and then he ran out of money. So Saturday was the Kentucky Derby, a very exciting country derby.
Luke Roush: What a year.
Chip Mahan: This year I was something like 81. So Mickey Taylor was a lumberjack from Yakima, Washington. Jim Hill was a veterinarian from Miami Lakes, Florida, and they bought a racehorse for $17,000 by the name of Seattle Slew. Wow. And he won the Triple Crown. Wow. And when you syndicate a stallion, there are always 40 shares do know why. Those are the facts. So they kept on usually 20 to 40 shares. Wow. So I wanted to buy the bank. From this guy that was in trouble and I had no money. But since my father was a veterinarian and knew Dr. Hill, I was able to meet with Dr. Hill and Mr. Taylor. So I'll remind you that at that time they were breeding that racehorse about a hundred times a year. So 22/40. Times 100 times $750,000. No laugh, old guarantee. So if you brought your may Seattle Slew, that's an aging machine.
John Coleman: That is. So that's a new fun strategy right there.
Chip Mahan: That's what that is. So they staked us. We borrowed money against our houses and put up not much money. We had 25% of the bank and then all the banking laws changed. So you could now buy banks across state lines. So Bank one corporation and John Lacroix came to us before we actually closed. Wanted to buy that bank. Wow. So they bought the bank from us. And I'll never forget having a conversation with him about no contracts. So we don't believe in contract. So about two years into another, oh I can't do this for the rest of my life? So what took the profits from that? Started our own banking company. So we bought banks in the middle of nowhere. Kentucky, very highly capitalized banks, a lot of core deposits, but no loans. That our thesis was to start banks in Lexington and Lowell make the loans in the city deposits in the country. And it worked out pretty well. And then in 1993, my brother in law, who had a security software firm in Atlanta, said to me over multiple glasses of wine one night, the Internet is going to be a big deal. I had no idea what the Internet was. I said, Why don't we advertise CDs and savings accounts on this Internet thing to see if we can generate core deposits? And he said, You're an idiot. We ought to put clicking on the web.
Luke Roush: What year is.
Chip Mahan: 1993? Wow. And. Okay, great. What's Quicken? I want Quicken Loans. So this is this actually this kind of interesting thing. I said, okay, because he was kind of a genius. Stay at home guy. Got out of bed at 1030 in the morning right here. Puts where's all this? It's all happening. San Francisco, Palo Alto. All right, let's go. Let's get on a plane. Let's go out there. So we met with Marc Andreessen.
John Coleman: In 93.
Chip Mahan: When the browser was Mosaic. Wow.
Luke Roush: And you are pretty old and all that.
Chip Mahan: And so they had just hired Jim Barksdale, who was the chief operating officer of FedEx, to run Netscape. So they changed Mosaic to Netscape. And he said, We'll build that Internet bank for you. And said, what was going to cost? And he said, a million bucks. Then I got in a car with my brother in law. I said, That's great, let's get them to do that. He said, No, they want the source code. I said, What is source code, I do not know what source code was? And he said, I'll do it for you. So we ended up. I moved from Lexington, Kentucky to Atlanta with my brother in law. He and his engineers built the first bank on the Internet, which was Security First Network. Wow. We beat Wells Fargo Market by month in October of 1994, I believe 1995. And it was a stock market, darling. I mean, we had a market cap of like six or $7 billion. Wow. And then one turning point, back to your comment about the way you run your businesses capital we kept saying that your capital is king. So I was sitting on the runway in 1999, I think it was before the crash in 98, May in Atlanta. And we were number 31 for takeoff. And the value of our business was in excess of Delta Airlines. Wow. I was flying to Amsterdam to meet with the number two guy at the ABN Amro Bank to sell software and Schiphol Airport, Amsterdam. Beautiful, beautiful place flying there. All the flowers in the tubes. Right. And so we met in a conference room there, and I was getting on the airplane, the same airplane once they cleaned it to go back. So I flew over for just 2 hours. And I got to thinking about that, like, this is wrong. I mean, we're losing large amounts of money. We need to raise more capital. So I called the board from the airport and said, I want to raise $300 million from our customers.
John Coleman: What year was this?
Chip Mahan: This was 98 99 before the crash. So my brother in law and I went to State Farm in the early days, said you ought to have it back. So I did the State Farm Bank to these $20 billion bank. And we did a lot of work with them. So I called them and they wrote a check for 100. Zurich Insurance was their customer. They wrote a check for 75. Wow. This collision, I like to say I never know about life and where it's going. Brian Moynihan was general counsel at Fleet Bank and he was a big fan of ours. He wrote a check. He's now the chief executive officer of the Bank of America. Right. So had we not raised that capital, that $300 million, I don't think that company would have made it. And that's a little bit of a reflection of this bank. We have probably the highest capital ratio of any bank in the country. We really peel the Union Bank and see the amount of capital that we have versus the risk that we're taking, because most of our loans are guaranteed by the United States government. And then, you know, it's like my wife is like the most unbelievable human. You know, anytime you come up with an idea, you know, let's sit down and talk about [...]. Legal [...]. Yeah, right.
John Coleman: Yeah.
Chip Mahan: And the things I heard, you guys probably [...] tear it up throw it into the trash. You know, I couldn't live with myself, if we don't try.
John Coleman: Yeah, that's right.
Chip Mahan: And she always says, How long do I have? And where are we going? Yeah, well, we're moving from Lexington to Atlanta. from Atlanta to [...] And she literally, you know, she live in a mobile home. Right. So when you have faith in him and you have a spouse like that and you think about the journey of life in general. Like it doesn't get any better than that and you just spend time with my daughter. So she certainly reflects her most.
Luke Roush: Extraordinary, you.
Chip Mahan: So anyway, like I told you, I was going to ramble too much because.
Luke Roush: I want to take a little detour, I want to get back to your decision because. So when we pulled into the parking garage this morning, I was quote, over top. And when you say you flew to Amsterdam and back for like a two hour meeting that says something, but like do you do that often? Get on a plane for an hour, a two hours meeting, come back and maybe just dovetail that into what it says in that parking garage?
Chip Mahan: Yes. I mean, that's why I'm so blessed to have people like [..] that you met earlier that can deal with regulators and compliance and all those things that are not fun. What's the most fun for me to get on a plane without having to go see a customer and see if we can do some business together? Right. And I think, you know, it's a little bit like sports. I mean, you guys probably played sports, you know, a hundred years ago. I played basketball. And it's like you can say you hustle and you can say you are pretty good at customer service. But did you did you treat that customer like the only customer in the bank? Yeah. So when you put your head on the pillow at night, did you give it your all? So the basketball analogy would be it's like you didn't say it was like you're under the basket and that dude elbows you in the jaw and now the adrenaline's flowing out and you're going down on the other end and you're jumping as high as you jump. But maybe just the fingernail touched the ball that it allowed a teammate to tip it in at the buzzer. There's that level of effort and it's not. It's binary. So if, in fact, everyone here has fun putting capital in the hands of small business America, which in my judgment have been a bit orphaned by our industry, I think the big banks do a wonderful job and retail and credit cards and all those sort of things. I think they do a fantastic job for the larger companies. I do not think they do a very good job for a 35 year old female veterinarian who happened to break her arm. And she's a single mom. And are you going to do everything you can to help her staying in her business? Because she really didn't have the right disability insurance or there's construction in front of her place. So we have built probably 100 websites for veterinarians. We go to 450 trade shows a year to say to that industry and to those people. We are here for you. And when you're young people, you know, sitting behind me here are 55, 22 year olds that are responsible, giving a financial statement every 90 days on 5000 customers. If you love what you do, then you will treat every customer like the only customer. And I said earlier, I mean, you know, it's kind of like the airline business. Remember couple of years ago, they punched that guy in United Airline.
John Coleman: Oh, yeah, yeah. Oh, yeah.
Chip Mahan: Like, what do you people do it? I mean, like the banking business is.
John Coleman: Well, they didn't punch everybody, though, just out.
Chip Mahan: But it's just like, you know, what do you do? You really care like and that's right. I think by and large, that is the difference in this place.
John Coleman: Well, and that brings us to Live Oak. I mean, what I love about your story is there is this kind of glamorous sort of meaning marketing [...]. And in 1993 and learning about the Internet and launching the first Internet bank and then with Live Oak, you almost went the other direction, which is to take an overlooked segment like veterinarians and begin to just dominate the way in which you work with them. Talk to us about that transition and founding this bank and the desire to work with small businesses in these overlooked niches.
Chip Mahan: Yeah, that's a good question. So I think that if you ask most bankers historically, they would say the SBA division is more or less the portal out of the banking business. So if the commercial lending dudes can't make a big time commercial loan, send it down to Mikey in the basement of the SBA [...] And slap a government guarantee on credit. So that's kind of what that was. But the interesting thing is that if you delve into that, as we did in the early days, if you understand that you can lend money to 1100 different industries, and then if you look as we did. In the early days of the Freedom of Information Act data and veterinarians pay their loans back. Chicken farmers pay their loan back. And you focus on different segments where you understand at least the historic payment records of every other bank in the country in the Portland Banking Department. And then if you add to that, the fact that we are going to hire a domain expert. Domain experts are pretty simple definitions, like if you run one of those businesses. So we would hire people like that. Put people like that on our board. An example of that, and I think it may be an interesting one, I believe perspective is the chicken business. So Dan Jackson's a friend of mine.
Luke Roush: Not a hypothetical example. You guys are actually in chicken, but in business.
Chip Mahan: And I'm going to tell you why. And I think this would be a typical of other banks. Right. So Dan was the former COO of Foster Farms, a privately held company in California's largest chicken business west of the Mississippi. He was also the CEO of Pilgrim's Pride. So you see like. Tell me how the chicken business operates. And there was one bank in Eldorado, Arkansas, that did almost all the SBA loans. And Dan explain the business. Here's how it works. You really need to have six chicken houses to make the numbers work. And this is where we got into the business for 2013, these chicken houses, 660 feet long, 66 feet wide. The big chicken companies are going to bring 42,000 chicks to each house. They're going to bring you the feed and in 39 days if it's a Chick-Fil-A chicken at four and a half pounds. They're going to come pick up the birds and they're going to send us the flock chick. So the grower. I either baby sitter at the birds. It's his money after we get our money. And so what are the real risks? Generators, chip you need to [...]. Most chicken houses are in the south. Georgia is a big state. You got a thunderstorm, everything goes out. Birds are dead in 30 minutes. Yeah, that's it. So tell me about the first national [...]. So, you know, they're little white guys that are older, you know, 75% loan to value. So let me ask you a question. Like what happens if we loan to 100% or the two and a half million dollars to get started to a 28 year old guy are mostly guys, not gals really in this business that wants to be in the chicken business? What's the debt service coverage ratio? 125 to 135. Done. Yeah. Let's go do that. So we've loaned over $1,000,000,000 until the SBA changes over 10%, down to 28 year old guys. And hey, Howard, Georgia. So it all works. So Matt Anglin, which we have a video of, was one of our first customers. Veteran Iraq, Afghanistan, several tours was a welder, $35,000 a year. We now know he need money for his second set of houses. He makes $300,000 is a chicken farm. Yeah. And has something to give to his children. So I think, you know, if you think of that and then the other thing that we do that's quite a bit different is this. I think it's part of the culture, too. So. Every SBA lender in the country is paid the same. Typically. So if you make $1,000,000 loan, let's use that example. You package up $750,000 for a bow tied around that package guaranteed by the government. Sell it a bank makes 75 grand, gives a third of that to the [...] commission. Mm hmm. So we thought, like, how is that going to work? We going to pay? we have $25,000 day one on a 25 year chicken. Mm hmm. That are making sense to me, because if he's trying to sell the credit guy, he sits at the door of the vault. Yep. And transfer that risk to him so he gets a check and the credit guy gets the risk. It's like, man, this is a bank. Yeah, we can't do that. Well. Okay. So that has a lot to do with the culture here. And when we hire other people from other banks. This is an interesting situation that is taking place beginning at 4:00 today. No name but an average SBA lender in this country does that 8 to $12 billion of loan production per year. Our guys do over 25. Wow. We are interviewing a guy this afternoon did 200.
John Coleman: 200 million? Wow
Chip Mahan: On commission. $2 million a year. Wow. That's going to be an interesting negotiation, etc..
John Coleman: How do you. I mean, because what you describe, though, for those of us less familiar with banking. You're describing an underwriting process that actually knows the industry and the counterparty better. And yet you're also doing more volume. How does that work within the context of the bank to be able to do greater diligence and know it better, but also move greater volume?
Chip Mahan: Well, I think, you know, it does get back to shoot letter. It does get back to treating every customer like the only customer. It does get back to go into 450 trade shows a year. But it's deja vu all over again. I mean [...] I mean lending money to get there it's not rocket science. It's not like we're lending to a multi national conglomerate. Right. It's a services business. It's $1 to $2 million revenue business. It's not rocket science. We just do it again and again and again. And the same is true of most every industry. It doesn't take that long to figure out the few home business. Right. So if you have the domain expertize and you have the right people and you have the technology to answer the question, as we discussed earlier, am I approved and when I'm going to get the money, it's relatively simple, right? And I think the other thing that's so different is if you think about the banking business, right, it's usually a bank in a geographic area. So you have the bank of Wilmington in New Hanover County where they branches. Right. So you take deposits from the butcher, the baker, the candlestick maker, and you lend money to the same. And if things are going well in that geographic area, things are fine. Are they growing? Are they not fundamentally. Most banks or real estate play. And we basically said we're not going to do that. I mean, it was hard to get this charter approved because if you think about the FDIC who writes the deposit insurance, they're saying, let me see if I got this right. You're going to start a bank in Wilmington and you're not going to have branches now. We're going to pay up for deposits. That's not we don't want proper deposits. And you're only going to lend money to veterinarians. Yeah right don't like concentration. That's it. And you're going to lend money all over America and not geographically to where you're located. That's right. We don't like any of that. So it took us a long time to get that approval. So we got that approval on May 12, 2008. What happened in this time? You remember what happened in September? Yeah. Okay, great. So in March of 2009, the FDIC called me to Atlanta and I had Neil Underwood with me, who is a brilliant technologist, been with me since day one. He's one of these guys who has to have instant feedback after every meeting, like, man, seriously on a 1 to 10, how did we do? So she looked me in the eye and let me describe banking regulators. They have a unique characteristic. They're masters of the pregnant pause, which is what that was. And they don't blink. They stare at you.
John Coleman: Yeah.
Luke Roush: It makes me uncomfortable. That's even right now.
Chip Mahan: They just stare at you, and they don't blink. And she looked me right in the eye and she said, Mr. Mahan, I want you to sell or liquidate this bank.
John Coleman: Wow. This is six, eight months after you founded it, basically.
Chip Mahan: Prior to that, we started Live Oak Lending Company. So under special approval by the SBA, you can start a lending company fundamentally a broker. So we had parked $140 million of pawns at a bank in Hendersonville, North Carolina, in anticipation of selling those loans. We got our charter and I told her, I said, No, ma'am, we can't do that. We have commitments to $140 million worth [...], primarily the female veterinarians. And you got to do what you gotta do. We got do what we got to do. And then we got in the car and Underwood said, Well, how do you think the meeting works? Like, what are you talking about?
John Coleman: What meeting were you in?
Chip Mahan: Well, what are you. What are you talking about? My gracious [...] life. She told us to liquidate or sell the bank.
Luke Roush: So I said finish the story. Because, I mean, you know, the critics, right? Not in the arena, but the critic outside the arena would say, well, your NPL rate is going to be way high. I mean, you're going to have all kinds of charge offs that concentrated, you know, goodness gracious, these people don't have any assets. And that's why they're looking for an SBA. They don't have any assets,.
Chip Mahan: That's for sure.
Luke Roush: And how that turned out.
Chip Mahan: Our loss ratio over 13 years is 30 basis points. Wow. So Wells Fargo was historically the number one SBA lender for many, many years. Their losses were two and a half percent.
John Coleman: Wow.
Luke Roush: How has it been eating their lunch?
John Coleman: Well.
Chip Mahan: You know, look, here's the deal on that, right? So Wells Fargo. I remember when Carl Reichert used to run that place and they had a great reputation and Kovacevich came in and they had a great reputation. And, you know, their challenges have been well documented. But of all the Wells Fargo lenders that we've hired here are just fundamentally, extremely well trained. Most of them have been with Wells for 20 plus years. Most have started in the branch and worked their way up and are just wonderful human being and just it broke their heart to leave. Right. They had the stagecoach coming out of their veins until the place just ran them up. And then fundamentally the regulators were running it, plants was running it, and it was just they couldn't get an answer to their customers, which are paid on commission, and that's where that goes. They had to do something else. Yeah.
John Coleman: Well, one I think one of the more fascinating aspects of your story and I want to come back to this scaling the client service mentality, because now the bank is publicly traded, $2 billion market cap. 800 people everywhere. It's clearly outgrown just loaning to veterinarians. How do you scale that mentality that allowed you to succeed? So you obviously have it. You were probably able to hire a few people who had it at the beginning, just this dedication to that segment, a real purpose and meaning and serving them as you expand in the bank's remit expands. How do you scale that culture of client experience or customer focus?
Chip Mahan: You know, that's a good question. So I get asked that all the time, and I think I'd come back to this. Right. So the American banker has been around the magazine. They have been around since like 1837, and they do the best banks to work for every year. And we won it like four years in a row. So they would ask all of our employees 100 questions anonymously, and I'd be happy to give that to you guys. Okay, so we start the bank, we got eight employees, right? And we do the same thing and it goes to 50 and 50 goes to 100. And then we run into Evan, right? It's like so every time you add another human being, you've got to be the same. And if you are hiring the right people that have the right heart and have the right desire to help the customer overwhelmingly set it right, there is three legs to this, that's your customer. You have folks, you have the shareholder and you hire the right folks and you tell them what we talked about. Like seriously treat every customer like the only customer all day, every day less. But you get to do, what we got to do is do everything we can for you in every way. Yeah. So is that a nice place to work these buildings in this camp? Is it a 6% [...] payment? Is it paying 100% of your health care? Is it have three jets that can go to the West Coast flying 800 hours a year with normal corporate travel? 300? Yeah. Is it? So in the early days, we think wellness is important. So I think what we're going to buy a individual session for all of our people three days a week. So if you're making 50 grand a year and you get a personal session one on one with a trainer, $60 each, 180 bucks after tax week, you're making 50 grand a year. Let's say you're a closer. Toughest job on the bank. You got 148 documents for every SBA loan and you're closing 12 deals all at wow. Lawyers, paralegals on both sides. I need the money, construction draws, all this kind of stuff. You might need an hour for yourself, but I want you to know that it's not necessarily bad. What I want you to know is, like you are important to me. You are important to building that business. Not necessarily me and my role, but for us and our role, us meaning all of us. And if you do that right and you make it fun and every time, you know, as we discussed earlier, we invest in these companies. And so far, these companies have done well. And then when you make a profit and you sell those business and you let everybody participate the profits. We do that also in the early days before we were public or private, just I went to the board and Tim and I got all the data of every bank in North Carolina. In 2009, and only 5% made more than 10% on equity in that year. A lot of them off. We were making 35% on equity, 4% of assets on the board and said, look, here's what I want to do. I want to do 10% return on equity, which is better than 95% of the banks in North Carolina. We get all the shareholders above that. Let's give $0.25 of every dollar to our employees.
John Coleman: I love that.
Chip Mahan: Exclude the senior management team, all the original shareholders and just your one 55% of base.
John Coleman: Wow.
Chip Mahan: And after that, it was 33 and 18 and 33 until we were public. Kind of too hard to manage it that way. But again, it gets back to, you know, we talk about it, we talk about trust and we talk about love. If you love your folks, all of them, and you trust your folks, they'll do the right thing. Yeah, they'll take care of the customer. And here we go.
John Coleman: Maybe. Well, I was just going to pivot a bit because you know we've heard about chicken farms and veterinarians, but there is a secret about live open, about some of the work you do that you haven't told us about, which is, I mean, you had incubated and launched a number of extraordinarily successful technology companies on the back of the bank and then have also invested in technology companies. Would you talk to us a little bit about that component of the work and where it started and how you manage those two things alongside each other? A very analog kind of old school banking business right alongside a very successful financial technology enterprise that you're building.
Chip Mahan: Well, I think it kind of gets back to the story about my brother in law and how smart he was technology and how dumb I was. Right. So Neil Underwood's been with me since the beginning, back during the S-1 days, and he is a technologist and he was working at S-1 at the time when I said, Neil, I need your help, but we're trying to lend money in 50 states and we got 150 documents in this government guaranteed loan, and we've got a hand-off problem. So the lender, the architect of the deal that understands safety, soundness of debt service coverage ratios and understands all the nuances of the government guarantee 550 pages SOP, works with an underwriter, so they architect a deal. Now you got to get all the documents. Then you got to get it approved by the credit department, right? So you have an underwriter and then you got a closer. God love their soul. And that's a huge challenge because you're juggling all those things we talked about before. Well, then you got to service the long run. You got to get financial statements every 90 days. Are you doing what you said you were to do relative to the budget and all that? And how are we going to perfect that hand off? So back during our S-1 days, we had 650 folks in India. Mm hmm. And I spent some time over there. I know some of those fellows. So I called them and said, Can you help me this way? I flew over from India so we can build this. And that didn't work out very well. And then Neil was still in Atlanta, the other company. I said, Neil I need some help on this. We got to scale this thing. So we had another guy from Atlanta who was a software architect. That didn't go so well. I said, Neil, buddy, I'm serious about this. We got our fixes on the charts, graphs and flowcharts and all these sort of things. So he and his brother on one rainy weekend in December, interviewed a ton of different companies, and they picked Salesforce when Salesforce market cap was $2 billion. So we started writing code. And then another guy that worked at S-1 about the new appeared all day. They were in the process of selling that company, so we convinced Pierre to come run that business. And I said, This is great. And really what happened before? that was Neil sneaked off and made a presentation at the Mosconi Center in San Francisco at the annual Salesforce User Conference, where they fundamentally take over all of downtown that, you know. And it was in the financial services segment of the Salesforce.
John Coleman: Dreamforce, Dreamforce. He was doing that big deal.
Chip Mahan: And then he gets mobbed afterwards when he showed what we had already built at the bank and he Mahan Let's go back in the software. I don't want to back in the software business. It is just too hard. No, seriously Mahan. And this is different. This is cloud based. We can get this code, we spin up an org, we do this today. I said, All right, let's just see if we can get a small bank to use it. And then they ran up to try to sell US bank. I said, It's not going to go well. This is a nascent software company in Wilmington, North Carolina, inside a bank. They're not going to fool with it. And they did. Right. And then one bank bought it another bank also. Look, we got to get this out of the bank because we're a federally regulated bank with capital ratio challenges. So if you're going to scale this, but it's going to raise more capital. So we did. The rest is history.
Luke Roush: So, Chip, one of the things that you've talked about today is seeing a problem and then being able to step in and solve it with technology. And so nCino came out of that public company that has grown quite large. You made a bunch of investments, green light, fintech, others. Maybe just speak a little bit about how you've thought about active investing from the platform it's been built in and through a lot of.
Chip Mahan: I think it goes back to, you know, the Force.com cloud based discussion. I mean, you know, the estimate is that there are 280 billion lines of code in the financial services business. And just having watched this over the years, I think it's all going to get swamped out. Right. So a very well-known, unnamed banker recently, relatively recently, used the term cloud blast. Right. So if you think about all those companies that serve all the smaller banks in the country Foster, Jack Henry and I asked them lots of data centers. Yeah. So you're going to be more efficient than Amazon Web Services, whose data centers run at 119. And yeah, go back and look, over the last ten years, how many banks, Internet banking systems have gone down? So if you think about the market cap of Amazon, Google and Microsoft who are dramatically trying to solve this problem, I mentioned this in the earnings call. I'll scrub the numbers. I think in the last quarter, Microsoft made $17 billion on 49 billion in revenues for the quarter. They now own 20% of the cloud based business. Amazon Web Services owns 40. Yeah. And their business last quarter grew 46%. And I don't know if you split out AWS and ran it as a separate company, you'd still be probably worth $1,000,000,000,000. Yeah, I know all stocks are all down a lot this is going on, but it's like no individual bank is going to be more efficient in a cloud based environment than those three companies. And they're making it better every day. Yep. So we started a company, to your point./Luke better go call payrails the next generation build peak company where you give the banks the data which currently competitors do not. So we have received 40 price decreases since we started that business. For me now, because more people that use the system, the more that they can improve the product. So when do you buy a product from a company and expect the price to go down next year?
Luke Roush: Maybe it doesn't happen.
Chip Mahan: It just doesn't happen. Amazing. Right. So that to me is pervasive. And so if we look at each little subsegment cybersecurity, defense store, bill pay, pay rails, internet banking, front end aperture, we're moving everything as fast as we can to the cloud, much more efficient. And that gives you the ability to do other things like we're doing at this company, which is if we've bundled together 14 separate vendors to get where we are at Lavo, can we sell those services to others? Other banks only branches, so we don't have a teller application. So we've got to fill this out of that out. But I think we have the ability to do that over and over again.
John Coleman: And you've started to find effectively to support that model, correct?
Chip Mahan: Correct. So we made like six investments and in Lava Ventures at the Holding Company, but we're a small bank, so, you know, we had a runway quickly there. So Gene Ludwig has been a friend of mine for years. Gene went to Yale Law School with the Clintons and President Clinton made him Comptroller of the Currency in 1992. He then started a consultancy called Promontory prior to the Great Recession. And of course, after 2008, every bank CEO was interested in talk, in the Gene, because he hired all the most senior regulators from every branch of the government, from the FDIC, even back in the ALTS days, to the LCC. And he built a very wonderful business there. And he came and sat in that chair one day and said, Let's do a fund. Let's do a venture capital fund to do this thing. He was a seed investor at [...]. So he saw the power of the cloud nCino. You know, in the early days in Force.com an all of that. So we did we went out to 45 banks. That a simple thesis, as you could possibly imagine, to say, you know, we'll be your venture capital arm. It's all about looks at the basket because, you know, all these fintech companies that raise unlimited amount of capital, a low interest rate environment like nCino, did they know nCino is now doing $250 million in revenues, but still losing like $40 million a year where you can't do that inside a bank holding company. But if you get many, many looks at the basket of companies like that, it would allow you to serve your customers better. That is the thesis of Canopy, right? So we raised $650 million from 45 banks we're closing fund to which are probably 700 plus million dollars, maybe 50 banks this time. But if you were a white hot fintech entrepreneur in the Silicon Valley and you want to sell your software to a bank, it is highly likely you're going to call us.
John Coleman: When.
Chip Mahan: We get a call Andreessen, Horowitz and Sequoia and all those big shots. But if you want customers, you're probably going to call us. And, you know, so far so good. They've done quite well.
Luke Roush: Yeah. Maybe just speak to one of the things that many of the listeners of Faith Driven Investor and we've all talked about a lot is that at times the financial services sector has not earned a reputation of truth and transparency and real customer engagement and care. Maybe speak to your faith and how that affects the way you see yourself as a change agent in financial services across the breadth of how God is using you today.
Chip Mahan: Well, you know, I think that just gets back to our folks. I mean, I can't speak for any other bank I, you know, as I mentioned earlier, Brian Moynihan is a good friend of mine. How in the world somebody runs the Bank of America is beyond me. He's done a fantastic job with probably 300,000 employees or whatever they have today. But I think if we just stick to our knitting and maintain the culture that we have, caring about the customer and caring about each other. Right. I mean, treat folks the way you want to be treated. And, you know, it's hard. And heaven knows, as we've had this conversation, it's hard in a federally regulated institution from the FDIC to the SEC to the SBA to the state of North Carolina, and the SEC being a public company for me to preach. Right? Mm hmm. But every chance I get, I try to let our folks know that this is all because of him. Mm hmm. And Peggy and I feel that way about whatever capital we've developed there. We're just going to make sure it all goes to him and do what he wants us to do to help those less fortunate. And I think that's been, you know, our major focus in terms of education here in Wilmington. I know you talked to my daughter earlier about Glo. We went to New York City and met with the Tisch family seven years ago and they started a school for minorities in every minority on the planet is in New York City. And, you know, there are 100 girls in each class of 600 from sixth grade to 12th grade. And I was blown away that 100% graduated and 100% went to college. So we're now in our sixth year here. And we'll have our first graduating class here this year and hopefully can replicate that model. Now, that said, we uncovered a challenge here in Wilmington, North Carolina, with 125 thousand, who we get our girls in the sixth grade. They're three grades behind. Mm hmm. So what are you going to do about that? Well, our research indicates that we probably need at least ten child care centers for six weeks to pre-K. Mm hmm. So Peggy and I have bought a building, renovating that building to take care of 180 kids. Wow. And then, as a quick aside, we live in. The most interesting place in the United States of America. We just sold here Wilmington, the largest private hospital in the United States. 4,000,000,006 billion; a billion four of the billion six sits in a foundation. Now, New Hanover County is a second smallest county in the state of North Carolina, and 100% of the investment proceeds need to be re channeled in New Hanover County. Wow. Wow. We have gone to them and said, we'll pilot your riskier projects and if it works. So maybe we'll do to our families. Then you come in behind that with that massive amount of capital you have and really, really help. You know, Wilmington, North Carolina, is no different than Nashville. It's no different than Charlotte. I mean, we all have the same challenges and the poverty level and the crowds shootings and things like that. But we actually have a chance at a town this small with that and capital the no way solve it. You have to have the right people in these positions. And I know that you guys know Casey and you know what he's doing with schools and you bet his team when you meet his team that is running that show, it's like they're going to win. Yeah, I don't know how they're going to win, but they're going to win. they are driven driven people to educate those people. That to us is the answer. Well, I mean, I don't know how many times in the Bible I you know, that I listen to Tim Keller every day of my life and I sit down every day listening Tim Keller' sermon in the morning.wow. And his people will be here in this room Wednesday for lunch. Yeah. Yeah. I met him one day in a zoom call for about an hour and a half. But it's like I've read every book that he's written. He's had a dramatic effect on the way.
Luke Roush: I think our co-founder Henry Kaestner would say the same thing about Tim's teaching. He spoke at our annual meeting a couple of years ago when Extraordinary Guy got in.
Chip Mahan: He is a modern day C.S. Lewis period in the story. Full stop.
John Coleman: Well, Chip maybe they close us out. We do like to ask folks at the end of these conversations just what are you learning from scripture right now, potentially from the sermons you're listening to, what God teaching you right now that you might want to share.
Chip Mahan: To help those children tell the children, to help the children. To help the children. And if we can help the children in Wilmington, if we could come up with a plan, then can that be scalable? Like everything else we've talked about the rest of the end of the day, it's about if you're not growing your diet. So it's always about scaling the business. If we can scale like actually wants to do with the schools that he's investing in that we maybe can have effect on those that can't help themselves.
John Coleman: It's a good word Chip. This was fascinating conversation all the way from your elementary middle school love story. I guess you're working with Mark Andresen on Netscape and launching the first Internet bank to serving chicken farmers, now serving the educational community in Wilmington and beyond. We're really grateful for the work you're doing in the financial services sector and beyond, and also grateful for you for sharing this story with the listeners here at the Faith Driven Investor podcast. So thank you so much for come.
Chip Mahan: I'm honored. Yes, I'm truly.