CEO Reflections

Optical Distortion, Inc., was an aptly-named company formed in North Carolina in 1975, which later became a Harvard Business School case study. The case describes the inhumane practice of debeaking laying hens, by which baby chickens’ beaks are burned off to prevent infighting associated with the formation of a pecking order. Optical Distortion offered an alternative: By placing contact lenses that replicated the effects of glaucoma in the chicks’ eyes, farmers could eliminate debeaking entirely. Insert contacts, and voila: They no longer pecked each other. Data showed reduced stress, enhancing the farmer’s ability to grow chickens faster with less feed. The resulting projected profits to the farmer were considerable - almost too good to be true in a low margin industry. The case has most MBA students salivating over the potential; the economics were so compelling it seemed the product would sell itself.

And yet the company failed… largely because they could not get around most farmers’ unwillingness to consider an idea as ridiculous as placing contact lenses in a baby chicken’s eyes. Neither the product nor the context was new or innovative - contact lenses were depicted by Leonardo da Vinci in 1508 and had been widely used for over 100 years by the time Optical Distortion came along. And, Darwin surmised that chickens were domesticated some 7,000 years ago. But the new use case combining the two (and distorting rather than improving eyesight) was innovative - so much so that it was considered outlandish. Using an old tool in a new way is a delightful way to create value for society, and a long-proven model for (re)inventing the future.

My friend Curt tells me we are operating in humanity’s “second oldest profession.” There is nothing new about our foundational business model. And there is nothing new about food, farming, and other natural resource-based businesses. Our impact assessment encourages our partners to utilize a stakeholder-oriented model that far predates the more recent shareholder value-driven variety. But there is something quite new about this combination: using the form of a startup bank (which itself is rare) with mutual ownership to achieve defined impacts within our food, agriculture and natural resource ecosystem.

Herein lies our challenge: How to convince a farmer to put contact lenses on their chickens?

The answer is not to build a contact lens company that happens to sell a variety for chickens, or to try to get a company that sells debeaking supplies to sell contact lenses. The task is to help farmers build an entirely new mental model around what they are trying to accomplish. In our case, we are not “just a bank”, we are certainly not a normal startup, and neither are we a non-profit [1].

Despite our desire to move opportunistically at a startup pace, in many places we have the heavy process and policies, structure, and hierarchical organizational chart of a much more well-established company - often without the resources to fully support this infrastructure. Despite having a very deliberate impact model akin to a non-profit organization, we are still dependent upon making a profit. Profit proves the viability of our model and unlocks access to the capital required to fuel continued growth (and the associated impact) and ultimately gives us a right to exist. Despite having essentially the same business model as your local community bank (we take deposits and make loans), we have a very different focus. We are driven by our commitment to our mission, as represented by our brand; we are a digital bank; we are focused on a very specific lending target; and we are governed by a different mutual capital structure with a much wider group of stakeholders (investors, corporators, founding depositors). No other bank in the country has this particular combination.

So, we are still doing the hard work of building a new mental model for what we do… first with our team, then with all of you, and then with the broader ecosystem to which we aim to contribute.

2024 included many highlights you’ll see noted in this year’s report, but there are a few that I wanted to direct special attention to.

Our Seedlings program is just getting off the ground, but it is another demonstration of the role a bank can play as an agent for change. The basics of credit are collateral, cash flow, and character. The first two are relatively straightforward - does the business have adequate profit to pay off the loan (cash flow), and if that were to change at some point in the future, are there adequate assets behind the loan to pay off the debt (collateral)? Character, however, is a softer and more nuanced equation. The bank is mostly concerned with how the operator will act when things are not going quite as planned. Since banks originate a very high volume of deals each year (increasingly so in an era of banking consolidation [2]), a personal relationship is not always possible the way it once was. So, banks tend to rely on “shorthands” for character - which usually means a FICO score. While the relationship-based local bank lending model of the post-war years had its own discriminatory problems [3], reducing someone’s character to a number also seems obviously problematic. Many studies have found FICO scores reinforce generational racial wealth gaps, and suffer from serious inaccuracies, particularly among disadvantaged populations (especially those that simply lack credit history) [4]. The implication is that many creditworthy would-be borrowers among small farms and businesses are left behind.

In late 2024 as part of a first pilot, we invited six food- and-farm-based businesses, all with less than $100,000 in revenue, to join our loan-readiness Seedlings program, co-developed in partnership with the Hannah Grimes Center for Entrepreneurship in Keene, NH. The program relies on a peer cohort set-up in which participants develop and critique each other’s growth projections and cash flow forecasts - exactly the type of scrutiny their businesses would get in front of our own loan committee. At scheduled intervals, participants review each other’s readiness to receive a loan, data which the bank will collect and analyze. As we prove and iterate on the lending model, these loans will, at first, rely on outside investor guarantees. However, our hypothesis is that a well-designed peer review process will yield more informative data to support the underwriting of a loan than a FICO score might. And because it relies largely on peers instead of bank resources, we believe it to be a model that we can replicate and scale with the help of many area non-profits with similar missions to support small farms and business development. If you are interested in supporting this program by pledging a CD as a guarantor, please do reach out.

I continue to be inspired each day by my colleagues, and we have added some amazing people in the past year (8 of our current 17 employees joined us in the last 12 months): Sarah Day on commercial lending, Patrick Hostetter on agricultural lending, Greg Doolittle on compliance and audit, Mel Foden and more recently Megan Pigsley on partner experience, Brett Hill and Pat Monahan on credit, Avril Kenney on technology. All of these folks feel like they have been here for years, and they have jumped right into the task of building our new “mental model.”

We also get to learn from the most impactful leaders of our era, who are doing important work - from Justin Strausbuger of Full Plates Full Potential (the driving force behind Maine’s first-in-the-country School Meals for All program) to Dave Potter’s 200-year-old, fifth generation Potter’s Farm, to Shizu Okusa of Apothekary who is reinventing natural plant-based medicine for all. We’ve supported the re-emergence of small-town general stores, craft vinegar, direct-from-the-boat fish, local produce distribution, human breastmilk distribution for premature infants, urban food gardens, grain growers, mills and bakers, solar installations, agrovoltaics, local distilling and many others. These are exactly the types of things we set out to fund, many overlooked by traditional banks.

We remain deeply committed to building this place for the long-term, and continue to be grateful for your partnership in that endeavor.

Sincerely,
Charley

Charley Cummings

Chief Executive Officer