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Balancing climate urgency and business reality

Mar 29, 2022 / Consumer Banking
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Our Guest

When Climate First is part of your name, it’s clear where your priorities lie.

Ken LaRoe, founder and CEO at Climate First Bank, joins us to talk about his startup institution, its name and its values in the context of broader issues in banking today.

A few takeaways from Ken LaRoe:

  • While climate ranks as the top consideration, he is a business realist willing (outside of certain exceptions) to lend for other types of projects.
  • U.S. banks should counter open skepticism about “greenwashing” by educating the public on why banking can’t change at the drop of a hat.
  • Fintechs are all over the environmental space with products and services, but many banks have yet to understand the business opportunity.

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Below is a full transcript of my interview with Ken LaRoe.

Ken, start, if you could, by telling us a little bit about Climate First Bank. I know you have your offices in the Tampa-St. Pete area in Florida, but are you set up as a brick-and-mortar operation, or are you primarily a digital bank? How should we be thinking about that and how should we be thinking as well about the niche that you’re trying to fill?

It’s a great question, and it certainly is germane nowadays with COVID-19. We opened 10 months ago, so the charter application was a year and a half before that — it was right about the time COVID hit. Banks were going back to drive-thrus. It was a really positive, I think, teaching for us and the regulators in that we were planning on being a hybrid from the start, where we would have a really robust digital platform but also still have some brick and mortar, and it really, really reinforced that theory. We’ve discovered that we’re going to definitely have less brick and mortar, and what we do have is going to be smaller. Probably for the first three to five years, we’re not going to have more than four actual physical locations, but we’ll have a really, really strong digital platform, which we’ve already got.

You have “climate” right up front in your name. Is that all you’re going to do, climate-related stuff, or are there other things as well that might fall under that same ESG umbrella?

This is a tricky one, because when my wife, Dr. Cindy LaRoe, and I started working on this bank, it basically was a prod with a red-hot poker when she said, “Hey, quit obsessing over this. You got to do it. You want to do it.” She came up with the name Climate First Bank, and her logic was “it’s because nothing else matters.” If we don’t have a planet, what does financial inclusion matter? What does racial equality matter? I’ve come to the realization, and maybe it should have been an obvious realization, that you can’t just separate the E from the S from the G (in ESG). As we know and we’ve seen a load of moderate income and communities of color are more adversely affected by climate change. I don’t think you can just silo your initiatives or your efforts. Also, I need to make it clear to the listeners that we’re a community bank and we’ll do business with people or businesses that aren’t in the sweet spot of ESG. An example I would use would be a young dentist or veterinarian is wanting to build an office building, and we’d really like her to build it to LEED standards and cover the roof with solar. But if she doesn’t want to, we’re not going to force it, and we’d still be delighted to finance her building. We also will not do evil, and that’s a really, really broad macro statement and a macro word. But to do that, we’ve created a negative filter. I’ve also heard them call it a negative screen or exclusionary list, stuff that we won’t do. That’s things like extractive industries, which in Florida includes sod farming, dirty energy, guns, porn, for-profit prisons and bad agriculture.

You’ve been around for about a year, I think 10 months, you just said. What reception have you been given by the market in terms of the size of the deposit base you’ve been able to build up and the size of your loan book?

Knock on wood, it’s been truly amazing to me where we are, especially having started and scaled exiting two banks previously. We’ve topped $160 million in assets, a little more than $110 million in loans and $120 million in deposits. I think that’s just a real endorsement. It’s not all ESG or corporate social responsibility, but it’s a good bit of that.

Ken, you’re a serial bank founder. You’ve been part of two previous startup banks, so this one is number three for you. What have you learned from your experience with the first two startups, in terms of opening and running banks, that Climate First Bank is going to benefit from?

A really big thing, which is always difficult in a startup, is the regulatory process of getting the charter. That’s never easy, and it’s been different every time because it’s been a different environment every time. Starting a bank during a pandemic, I didn’t even know what the word pandemic meant when COVID started. But I know better now how to get through that process much faster, and it was reflected in our approval timeline. But I’m thinking the biggest experience benefit is that me and all of my people that have rejoined have a lot better idea now of what it takes to run a values-based bank. It’s a really, really hard endeavor because you’re basically running a for-profit and a nonprofit at the same time. Those two endeavors sometimes have competing initiatives. An example, window envelopes. We all get the window envelopes with a bill or whatever, a statement, that’s got the plastic in it that messes up the recycling or recyclability of the paper. We decided early on, we were not going to have any plastic window envelopes. We told all our vendors we’re not going to do it. Well, guess what? Our main vendor, the one that sends out the statements, said, “Well, we can’t do that. We have this big machine that cost $150,000. If you put windows in there that don’t have plastic, it’ll hang on the envelope and jam it, and it will shut down our whole process.” So what do you do? It’s something that obvious and that in-your-face, and you’re going to be sending a statement out to a customer from Climate First Bank that’s got plastic in the window envelope? It’s those kind of conundrums in many cases that are impossible to do anything about.

How did you solve that?

Well, in that case, it’s pretty much just trying to go totally paperless and telling our customers, “No, you can’t get a bank statement. We’re not going to provide it. If we do, it’s going to cost.” That helped a bunch, but there was nothing we could do. We couldn’t switch vendors. It was tied to our core processor.

Ken, every bank, every credit union, every institution, both large and small, they’re feeling a lot of competitive pressures these days. You’re starting a bank in a very challenging environment, not just COVID-related, but competitive aspects of that outside of the pandemic. What have been the biggest challenges that you’ve had to face in getting this new bank off the ground?

The biggest challenge was COVID and the regulators not knowing what to do about it, like questions: “How are you going to open a branch when you have to protect your employees and your customers? You’re going to put up those big plastic things?”, those kinds of questions. But at the end of the day, COVID proved to be a great teaching tool. It showed us that we can work remotely and we don’t need physical buildings. The other big challenge that all banks are experiencing is the absolute crush in the net interest margin. It’s so much harder to make money now. Now, that rates are turning rapidly and unexpectedly, it should benefit everybody, but that’s been a biggie.

Another thing that banks are facing these days is problems and challenges in hiring and retaining talent, up to the point where the big players are offering all sorts of sweeteners. Citi recently said it was setting up a hub in a Mediterranean resort town in Spain to try to attract workers. What does your experience tell you for the reasons why the industry is having the talent challenge? Is that something that you’re facing as well?

We definitely are facing it, most specifically in the Tampa Bay area, where our headquarters are in St. Pete-Tampa. We’ve really struggled recruiting executives in that market, and we’re also having a terrible time recruiting executives to head our SBA division and residential lending divisions. However, we’ve got a huge talent recruiting silver bullet in our values proposition. We actually had people seeking us out to come work for us, including our chief technology officer. He came to us after he saw a magazine article about the bank. I think that’s especially germane with millennials. I just read a study that nine out of 10 MBA students would prefer to work with a company that practices CSR, corporate social responsibility. And I also read a study that showed that companies committed to CSR can reduce staff turnover by 50%. That demographic, we’re golden, but trying to recruit a 50-something executive has been a real issue.

BAI also does survey work that cuts across the various generations of Americans. We have found, similar to what you just said, that along with the greater embrace of technology that the younger generations, the millennials and the Gen Z folks, they’re also more about doing business with companies that they share values with, and this includes banks. What does this generational change in values, if you will, what does that bode for the banking industry?

It’s absolutely what’s going on, and I think it bodes very poorly for community banks that have their head in the sand. If they’re not embracing technology and working with their core and other vendors to provide… I guess I want to use one of our competitors as an example – if they can’t provide a Capital One digital experience for their customers, they’re going to lose them. My millennial daughter and son-in-law, they won’t step foot in a bank. They refuse. If they can’t do it online, they’re not doing it, so it’s a really big deal. Then, of course, it’s spawned all the fintech stuff, which, as we know, are not banks and have to have a bank to backstop their systems. But millennials and Gen Zs don’t know they’re not banks.

It seems like every conversation relating to ESG – to environmental, social, and governance concerns in banking – always gets around to the issue of greenwashing, the belief that institutions are more focused on appearing to care about ESG than they are about making substantive changes in how they operate or how they allocate capital. How do you think about the greenwashing issue? And as a longtime banker, do you have more understanding, do you have more patience with the industry in terms of the pace of change that’s feasible for them?

There is definitely greenwashing going on. My advice to anybody that’s thinking about greenwashing is don’t do it because you’re going to get caught. Stuff does get contorted and twisted and depending on where somebody’s coming from or where some talking head is coming from. The real problem is, as a species, we need to change everything we’re doing immediately if we’re going to survive as a species.

However, a big bank that’s banking a lot of oil or whatever, they have contracts. Those loans are contracts. They can’t unilaterally go in and say, “Hey, guess what? We’re calling your loan today.” It’s going to take time and there has to be a just transition. Nobody wants to have the lights go out, not even the most left-leaning liberal out there. Yeah, I do have more patience and I try to educate people on that all the time. Maybe that’s something that, for instance, the big banks need to jump on as an educational campaign.

The Russian invasion of Ukraine has added fuel, if you will, to both sides of the ongoing debate about the future of energy, what you were just talking about. For one side, it’s evidence that we need more domestic sources of oil so that countries like Russia have less economic leverage. But on the other side, the war in Ukraine is seen as evidence that we need to move away faster from reliance on oil, period. Knowing that Climate First Bank is a member of the Fossil Free Banking Alliance, it’s not hard to guess which side of the debate you land on, that you sympathize with, but is it that easy a call to make – to cut off fossil-fuel lending across banking?

It’s definitely not an easy call to make, and it really encompasses all of dirty energy: coal, all of the various fossil fuels, everything that are great contributors to the carbon emissions. But you can’t instantly cut it off. However, finance is a very powerful tool for change and there can be other steps taken like encouraging renewable energies. Very few banks understand that. It’s an opportunity, I think. I’d like to turn everything around and make every negative a positive and turn it into an opportunity.

So what’s the opportunities that you see here for Climate First?

We have what is the best for the consumer solar loan program in the country. You talk to almost any community banker out there, they don’t know anything about solar power, how to finance it, anything at all about it. It’s a great opportunity for us because we have a niche that nobody else even understands, except some fintechs, and we think we can beat them.

Seems all financial institutions are looking something that gives them a competitive edge, and for someone out there, this could well be that thing. Ken LaRoe, founder and CEO at Climate First Bank in Florida, many thanks again for sharing your thoughts with us on the BAI Banking Strategies podcast.

Thank you so much. This was an absolutely awesome interview.

Terry Badger, CFA, is the managing editor at BAI.