Bank Board Letter February 2016 : Page 2

“In general, during the financial crisis, agricultural banks were in better shape by far than banks that were relying on any kind of real estate development and construction,” — Dale Leighty, First National CEO and chairman of the board by far than banks that were relying on any kind of real estate development and construction,” says Dale Leighty, CEO and chairman of the board at First National. Leighty says his bank also enjoys a “very strong efficiency ra-tio” due to its frugal attitude and tight management of expenses. Live Oak Bank in Wilmington, N.C., is ranked by SNL Financial as a top-performing bank in the $500 million to $5 billion category. One thing it does well has made it the nation’s second-largest SBA lender in the United States behind Wells Fargo Bank. While the SBA 7(a) Loan Program allows banks to lend in 1,100 industries, Live Oak Bank has picked 11 so far. They “reverse engineered” the process by hiring domain experts in each sector who then teach the chief credit officer what the credit box should be. For example, in the poultry sector, the expert is a former CEO of Pilgrim’s Pride Corp. “We had a grand time in ’08, and ’09 and ’10 when banks shut down because we were there for veterinarians. We were there for independent pharmacists and funeral directors,” says James “Chip” Mahan, founder, chairman of the board and CEO. Live Oak Bank analyzes its customers’ quarterly financial state-ments and if something looks wrong, Mahan says they “get on a plane and go see them” to solve issues before a loan goes south. employees who understand how to lend SBA money, including those who grasp its detailed operating procedures. First National Bank’s 70-employee team doesn’t experi-ence much turnover since the bank tends to be a competi-tive employer in the small towns where it operates. Leighty says the bank offers the management team stock options as “motivation and incentive for keeping an eye on every decision we make.” Also, the Colorado bank is putting more resources into cyber security. Leighty calls it “one of the biggest threats to our safety and soundness.” Cross River Bank is keeping clients’ data secure by ob-taining certifications such as the ISO (International Organization for Standardization) 27001, which outlines processes for continuously improving information security management systems. Technology also plays a key role in the bank’s ability to provide a real-time payment solution in all 50 states by being one of the nation’s few banks signed up with every PIN debit network. future oPPortunities These bankers plan to grow in different ways and expect mini-mal impact from Federal Reserve rate hikes, if they are done slowly and steadily. “Certainly if it is over a period of time and we’re asset-sensi-tive, we’ll make more money,” says Mahan. Looking ahead, Mahan expects Live Oak Bank in coastal North Carolina will grow by identifying more sectors to lend in beyond the current 11 and by becoming less dependent on the SBA. Leighty says while First National Bank will stay its course, he keeps an eye out for acquisitions if they are the right geo-graphic and cultural fit. Future rate hikes will benefit his bank, especially his customers who depend on interest income from their CDs. “A rising rate environment, if it’s not too much, too quick, is better for the majority of banks for their earnings,” says Leighty. Cross River Bank plans to grow by continuing to develop its marketplace lending platform and beefing up its compliance management system to “pay close attention to what the regula-tory environment is expecting us to adhere to.” Gade expects minimal impact from Fed rate increases. “It depends what the Fed’s strategy is going to be in the next few years, not the next few months,” says Gade. Susan Thomas Springer is a contributing writer based in Sisters, Ore. Maintaining Profitability Looking ahead, the three CEOs agree that staying ahead of technology and maintaining a highly skilled team are keys to remaining a high-performing bank. “Finding quality staffing for compliance and internal audit is quite difficult,” says Gade. To compete with larger banks, especially for key staff needed to manage complex regulatory issues, Gade says they’re creating “a killer environment, a little bit like Silicon Valley” complete with perks like yoga classes, breakfast parties, event tickets and robust health coverage. Cross River Bank offers free dental and vision coverage as well as life insurance to its 90 employees. Live Oak Bank is also creating an enticing environment for its 50 employees with pay at the top of the range, paid health-care and a modern headquarters offering food service and a gym with personal trainers. Mahan wants to grow by finding more Next moNth: the Compliance Burden Cloud-Based Core Processing

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