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Banking Essentials Newsletter: 8th March Edition

Climate-focused de novo aims to 'shock and awe' global warming doubters

Joe Biden's presidential win could be a boon for a bank startup with a climate focus.

President-elect Biden has outlined aggressive climate and clean energy plans and pledged to rejoin the Paris Agreement on climate change.

"That's going to be nothing but great for us," said Kenneth LaRoe. LaRoe is the longtime banker behind Climate First Bank, a Florida de novo bank in organization. "Sustainability or regeneration will be moved to the forefront, dirty energy will be moved to the back and renewables again emphasized."

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Climate First Bank founder Kenneth LaRoe
Source: Climate First Bank

In a recent interview, LaRoe said part of the inspiration for the new bank came from reading the book Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming. In it, scientists list dozens of steps to combat the climate crisis.

"I went through [that list] and said: 'OK, out of those things, what can a community bank do?'" he said. "There were eight or 10 things in the book that we could actually do — rooftop solar, other renewable energy like wind, building retrofits, new building construction, regenerative agriculture, women-owned businesses."

The bank is also seeking someone to fill a director seat that would represent Mother Earth, "so that whenever there's a board vote, the planet has got to be taken into consideration," he said.

LaRoe plans to take the bank public in year five and begin paying dividends around the end of year five. He intends to have a large capital stack for small businesses, especially those that are values-aligned.

"In traditional bank lending you're in a box. It's a very constrained box — it's an understandable box — but the regulators and long-term historical bank underwriting really limits the businesses you can lend to," he said. "There's a lot of businesses, second-stage companies that may be post-cash flow but pre-profit, but you can't lend to them."

Not everyone is receptive to the idea of a bank focused on combating climate change, however.

"A lot of people rightfully ask: 'Well are you going to only lend for sustainable projects?'" LaRoe said. "Oh my God, if we did that in Central Florida we'd be broke in a week. There's not much traction for that here."

The Climate First Bank brand aims to "shock and awe," he said. "I wanted to have a name that was so in your face, so obvious what the goal is that it would be undeniable."

In some cases that has driven away potential investors. "I've gotten people who didn't invest because they view it as a liberal, Democrat, socialist thing: 'You're going to take my investment money and fool around with this climate thing that's unproven?'" he said.

But LaRoe said working with regulators in the application process has gone smoothly.

"They're saying: 'We're open for business.' They're saying they want to do de novos and they're happy we're doing it," he said. With the de novo application submitted, the bank is now starting to get questions about things like how it will handle COVID-19. He described feedback from Florida state regulators as particularly positive.

Climate First is not LaRoe's first foray into startups or sustainable banking. He was a founding member of the North America chapter of the Global Alliance for Banking on Values, or GABV, an industry group with the goal of creating a more transparent banking system that supports economic, social and environmental sustainability.

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There are eight U.S. banks in the GABV, most with less than $2 billion in assets. That cohort has performed better in some respects than community banking peers. For the U.S. GABV members, the return on average assets climbed a median 23 basis points year over year, according to an S&P Global Market Intelligence analysis. Over the same period, U.S. community banks saw their ROAA fall a median 9 basis points. Net interest margins also fared better for the GABV group, climbing a median 7 basis points compared to a 28-basis-point median drop for the broader U.S. community banking industry.

LaRoe also founded another sustainability-focused startup in 2009, First Green Bank. The values-based lender offered initiatives like discounted rates on environmentally friendly commercial and residential building projects, and a loan program to encourage customers and employees to install solar panels. First Green sold to Seacoast Banking Corp. of Florida in 2018.

"No one can say Ken LaRoe is just a bunny hugger and he doesn't know how to make any money," he said pointing to the Seacoast sale. "We made really good money, we really took care of all the stakeholders — the shareholders, the community, my coworkers, the customers. It was just our ethos."