Episode 95

Ken LaRoe is the Founder of Climate First Bank, which is his third bank. After the very successful sale of Florida Choice Bank, his first, LaRoe and his wife Cindy rented a small RV to travel the country. For that trip LaRoe's brother gave him a copy of Patagonia founder Yvon Chouinard's book, Let My People Go Surfing. It proved to be a transformational read. In this episode of SPx we explore that transition into values based banking as well as entrepreneurial banking as a whole.

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Joe Hamilton  00:06

You’re listening to St. Pete X Today’s episode is brought to you by Cityverse. Cityverse brings the community together on a new Civic Platform powered by Catalyst News. St. Pete Cityverse is launching soon. You can learn more and reserve your Homespace at Cityverse dot life. Now enjoy the conversation. Joining me today on SPX is the founder of Climate First Bank, Ken LaRoe. Welcome.

 

Ｋｅｎ　ＬａRｏｅ  00:54

Thank you for having me. Good afternoon.

 

Joe Hamilton  00:56

So I’m interested — people say, “I started a bank,” and you think of banks as these pretty large institutions that are just there. But there is a whole swath of smaller banks and niche banks and special purpose banks. And it can be a pretty interesting and fun and creative business. So let’s start by just understanding when you say you’re on your third bank now, what does it take? And what is it to start a bank?

 

Ｋｅｎ　ＬａRｏｅ  01:19

It’s a great and often asked question. It’s very difficult. America is the only country in the world that has entrepreneurial banking. So it’s a unique historical nuance, based on our multiple banking regulator system that we have. We have state regulators, we have the national regulators with the Office of the Comptroller of the Currency office, and then the FDIC. So it’s kind of actually three. And when I started in banking in 1982, there were about 18,000 individual bank charters in the country. Now there’s less than 5000. So unfortunately, our really cool entrepreneurial model has kind of shrunk and gotten impaired. Because it is way more difficult now to start a bank than it was 20-30 years ago.

 

Joe Hamilton  02:11

Did that Sarbaines-Oxley stuff put a bit damper on that?

 

Ｋｅｎ　ＬａRｏｅ  02:14

Not really. Mostly, One, it’s not as attractive for investors, the multiples used to be much higher for a bank sale, three times book was fairly common, four times book was not unheard of. Now, you’re lucky to do two times book. So getting investor interest is difficult. And the amount of capital you have to raise has hugely gone up. When I did my first bank in 1999, the state required $5 million in capital, which in ’99, 5 million was a lot, but it wasn’t insurmountable. The second bank, they had raised it to 15 million, that was in ’08. And then with this bank, they don’t set a specific number anymore, they just tell you that you have to raise enough so that at the end of your three years, your capital to assets ratio isn’t more than 10%. So if you’re planning on being 300 million at the end of three years, you need to raise 30 million in capital. And the corresponding difference. So that’s a lot lot harder to do.

 

Joe Hamilton  03:23

Does that 30 have to be fully liquid or what are the parameters around that?

 

Ken LaRoe  03:27

That’s a great question. So it’s really kind of bizarre, you file the application. And it’s a gigantic, voluminous thing that all of the agencies use, and you start grinding through, and the approval process will come back with questions while you’re doing all that. And then once you get a certain ways down that path, they allow you to start raising capital, but they will not let you open unless you hit the minimum that you subscribe for. So all that means is, you know, you might be working people and they’re saying, Yeah, I’m gonna do 100,000, they’ll sign a letter of intent, but then they’re waiting till the very last minute to write the check. They won’t let you open until it is in the bank, good funds in the bank. So it has to be 100%, you know, liquid.

 

Joe Hamilton  04:15

And then what about ongoing? Same requirements.

 

Ｋｅｎ　ＬａRｏｅ  04:18

Pretty much, at least untill you’re fairly large, then the capital ratio requirements might come down a little bit to 8%, 7%. But it’s still around, I just use a 10% figure, because it’s easy. So we raised 44 million on this bank initially, then we did another capital raise through warrant exercise that ended in June and we raised almost 35 million there, which is what we had budgeted and planned because we plan on being over 600 million by the end of the third year, which is June 2024.

 

Joe Hamilton  04:54

And when you say you subscribe how set in stone is that? So if you say we want to be a 300 million bank and you come down close to launch and you’ve only raised 25 million, you can just say where $250 million bank?

 

Ｋｅｎ　ＬａRｏｅ  05:08

No, it kills your application, you have to start over again.

 

Joe Hamilton  05:12

There’s a real science to picking your number

 

05:14

There really is. You don’t want to miss it, or you’re hustling a whole lot of the end. And that’s an unpleasant pressure point.

 

Joe Hamilton  05:22

Talk about the terms–well first, I guess, leading into that, why has the sale price gone down from 3x or 4x to 2x profitability? What’s behind that?

 

Ｋｅｎ　ＬａRｏｅ  05:34

Well, it’s a great question, because the community bank profitability is still sort of in the same realm that it was before 1% return on assets is a good milestone, you’re running a pretty good bank if you’re 1% or north of that. So the earnings potential isn’t really reduced, it’s really more of how difficult it is to be accretive to the buyer, especially if they’re a publicly traded bank, which are usually the ones that are buying small banks. And that’s that accretiveness number that is really drives it,

 

Joe Hamilton  06:09

Because it seemed like there was a while, maybe just a couple of years ago, now we’re banks were just hot and got snapped up constantly. And so that’s cooled quite a bit, And there’s just not as many buyers, therefore prices are depressed.

 

Ｋｅｎ　ＬａRｏｅ  06:19

Yeah. And they weren’t great back when the period you’re talking about, they weren’t even great, then it might maybe was 2.2 for a good bank

 

Joe Hamilton  06:27

So fast, but not great. 

 

Ｋｅｎ　ＬａRｏｅ  06:29

Yeah. And I mean, three times book, I don’t know if there’s any transactions that have even been close three times book in the last 10 years, probably. So therefore, it’s key to have a unique model so that you do have a compelling investor thesis. And that’s part of what we did with this bank. A couple things. One, we’re, we’re very unique in the fact that we’re the only climate-focused bank in the country, maybe even the world. I don’t know if that’s necessarily true. There’s also a climate-focused credit union in Colorado, which I don’t have any opposition to credit unions, like most bankers do. But we have that unique environmental perspective. But we also have a FinTech that the bank is the majority owner of–the holding company as a majority owner of, and our Fintech has written a whole bunch of proprietary code for our residential solar loan program. So it’s got its own value, and it adds value to the bank. So between the two, we have a really compelling investor thesis.

 

Joe Hamilton  07:35

Yeah, I’m assuming that’s a two sided approach, in that there’s a marketing element to it, you know, all things being considered, I’ll choose a bank that aligns with my values. And then there’s, from an operating standpoint, a specialist element where you say, we specialize in solar, because it fits with our mission.

 

Ｋｅｎ　ＬａRｏｅ  07:51

Very good observation. Yeah, for sure. And then the other thing is, is we are doing everything we can to not be place-based to have as few physical buildings as we can get away with. And then when we do we want to have it where they’re multi-use or multipurpose, we try to get tenants that will cross pollinate the bank and the tenant and all that kind of stuff. And I feel and have always felt the bank or the holding company should own their real estate, because the shareholders should get the value appreciation, which is off balance sheet. So it’s kind of a gravy at the end if the bank sells.

 

Joe Hamilton  08:30

Yeah, so that’s another value prop. And that’s different. Do you think that’s unusual for banks?

 

Ｋｅｎ　ＬａRｏｅ 08:39

Many, I’d say maybe not most, but many community banks lease a lot of their facilities. And I’ve just never–

 

Joe Hamilton  08:46

There’s additional capital outlay to buy the land. So you’ve got to raise more.

 

Ｋｅｎ　ＬａRｏｅ 08:49

Yeah, that’s the issue. It does affect liquidity. But generally lease rates for banks are so high. To me, it doesn’t make any sense.

 

Joe Hamilton  08:58

And what’s been the lift? I mean, your previous bank, First Green, was early in the marijuana space, which was kind of new, and had some additional government, we’ll say, annoyances, pain, bureaucracy, or whatever. Are you finding that in the climate space, where you’re having to deal with sort of illogical laws or other red tape or things like that to just do normal?

 

Ｋｅｎ　ＬａRｏｅ 09:21

Fortunately not, because your observation on the cannabis thing was weird situation, which continues to be weird with it federally illegal but legal in most states. Now, the environmental side or the you know, the solar side, the regulators are completely okay with it, but it took a while. And if we hadn’t done First Green and launched a solar product there, we wouldn’t have had near as much comfort from them as we do now. So it was kind of a fortuitous, you know, continuation of what we’re doing before. They’re comfortable with the product, they’re comfortable with us doing it. There are not very many bankers in the country that understand Renewable Energy, and we understand utility scale, we understand community solar, we understand individual solar, commercial solar. So we really have a niche there. And we’ve got some incredible thought leaders and knowledgeable bankers in that space. The only thing that’s disturbing is the whole nationwide anti-ESG movement, which is really weird to me, because ESG is just a metric. That’s just the measure of what you do on CSR, which is corporate social responsibility. And I agree that there’s a lot of holes in ESG. And there’s been a lot of companies investment firms that use it for greenwashing. And so I would like to see a set set of standards that nobody can mess with. And that to me is a solution, not just saying ESG is bad.

 

Joe Hamilton  10:56

The pushback I’ve seen the ESG, oftentimes coming from environmentalists, is that it’s too corporate control, that it’s been set up to fill space but they don’t actually care about the environmental piece of it.

 

Ｋｅｎ　ＬａRｏｅ  11:11

Precisely. Yep. That’s my beef too, as a committed environmentalist.

 

Joe Hamilton  11:17

The question then becomes, is the actual battle of who makes the standards.

 

Ｋｅｎ　ＬａRｏｅ  11:21

Right, and that’s being refined as being sorted out, there’s a number of different organizations, both nationally and internationally that are leading America, and especially the EU is leading America. And there’s some programs through the United Nations, like the net zero banking Alliance, where they’re trying to refine that. We can look to, for instance, the CPA industry, the, you know, the financial, the standard financial metrics, which we’re used to, with the generally accepted accounting principles. Well, there’s a sets of standards, it took a while and it took a lot of agreement, and there’s still gnashing of teeth occasionally, but I mean, it can be done. And then the UN carbon measurement tool is a good tool that can also be integrated, where you have to measure your scope-123 emissions, which means the emissions you create or the emissions your customer creates, which is a whole nother set.

 

Joe Hamilton  12:19

And obviously, the difference between like GAAP is the just that variables change in the environment, right? So a problem that may be really detrimental to your score gets a solution to be no longer detrimental, almost making the score potentially obsolete. So I’d like to just juxtapose a couple things with banking. So first one, inflation. If we start to get to a place of high inflation, that’s 8% money sitting is losing value every year, how does inflation affect the ability to get dollars in to loan out and then the whole cycle?

 

Ｋｅｎ　ＬａRｏｅ  12:52

It’s been a bear this go round. I’ve been in banking since January 2 of ’82. And I was in banking when primary was 21%. And we were doing Florida’s usury rate as 18%. We were doing home mortgages at 18% with a one year balloon, and people were taking it, you know, because it’s it was the reality at the time. But this super rapid rise in rates to try to tamp down inflation has really slammed the banking industry, because generally a rising rate is favorable, because any of our variable rate loans immediately adjust, but we don’t have to immediately adjust the deposits. Well, guess what? We had to immediately adjust deposits this go-around, because they went up so fast, the guy that had a money market with us at 2% is now getting a 5% offer from somewhere else. And so we had to be defensive. And our net interest margin, the spread between what we pay on deposits, what we earn on loans, has just gotten really compressed. And that’s a big killer income for community banks. That’s another point with our bank model. We’re really trying to lean a lot on fee based services like Residential Lending, where you sell the loans off in the secondary market or government guaranteed lending where you sell the loans off in the secondary market. And then we’re also working on some programs to sell tranches of our solar loans. There’s a secondary market for it, it’s not been made yet, but there are banks interested in buying a $5 million tranche or 1 million or 10 million so we’re working on that.

 

Joe Hamilton  14:31

And the average solo loan is, what, 25-50k?

 

Ｋｅｎ　ＬａRｏｅ  14:35

You’re really close. Initially it was like 42 When we started it, and now it’s really about 50. And I don’t know how it moves so much in the 20-something months we’ve been in business, but it is. I shouldn’t say I don’t know how, because a lot of them, we also finance the roof because they get up there and it’s a it’s a 15 year old roof, well, there’s no sense in covering it with solar, and then battery storage is starting to tick up because it’s becoming more affordable and better quality stuff. So we’ve actually done a fair amount of solar with storage.

 

Joe Hamilton  15:12

That’s great. So then just revisiting the inflation piece. There’s not so much inflation, it’s really just been the speed of them raising the rates. So it shouldn’t normalize after the rate hikes slowdown, ideally.

 

Ｋｅｎ　ＬａRｏｅ  15:22

Yeah, I mean, if there’s somebody a lot, or even a little smarter than I am, there is a direct inflation correlate to our performance, but it’s really more rates than the actual inflation, except for the peripheral stuff that goes on, you know, the restaurant has to raise its prices so much. And now their business is down and they bank with us. And so now we’ve got a borrower that’s not viable anymore. All that kind of crap is a real problem.

 

Joe Hamilton  15:55

I would assume that’s part of the raise in price for solar as well as some of the costs.

 

Ｋｅｎ　ＬａRｏｅ  15:59

There has been cost increase and then goofiness in the supply chain. And now there’s a big movement to have stuff manufactured in the US, which I love, but some of that is disruptive.

 

Joe Hamilton  16:10

How about crypto? 

 

Ｋｅｎ　ＬａRｏｅ  16:12

No, we’re staying the heck away from that. I think crypto is nothing but a shell game and tulip bulbs.

 

Joe Hamilton  16:20

There’s certainly been a lot of that stuff, which has come and gone and imploded and exploded, but then there’s the ones that that have some volatility, but have had pretty reliable staying power, which is Bitcoin. And now you have some of the bigger banks looking to build Bitcoin ETFs and to move that. So same answer, even though you see some of the bigger folks getting in specifically to Bitcoin?

 

Ｋｅｎ　ＬａRｏｅ  16:42

Yeah, I mean, at some point, it’s gonna be a reality. The blockchain is for sure here to stay. There’s so many really good legitimate uses for blockchain. So therefore, there’s got to be a legitimate currency, you know, come out of it, and likely say, most likely, it’s going to be Bitcoin or something.

 

Joe Hamilton  17:02

I’m finding decent utility with it. I have one of my designers in South Africa. And it is kind of a pain to send money South Africa, but with Bitcoin, two minutes for $1, I can send him a couple grand.

 

Ｋｅｎ　ＬａRｏｅ  17:16

It’s certainly got application big time, and a lot of it’s going to, I feel like it’s going to have to be regulated. And it’s gonna have to be brought in to the finance system, whatever that is, I wouldn’t say banking system, but the finance system. And that’ll happen. And, for instance, all our regulators are getting their arms around it, it takes regulators a while but they’re getting their arms around it, it scares them significantly.

 

Joe Hamilton  17:42

I mean, there’s there’s an inability to control it at the end of the day. They can, you know, they can force banks to keep data and report whatever they want. Bitcoin’s not owned by anybody, and it’s truly borderless. So there’s there actually is a ceiling to how much they can control it and require, you know, reporting requirements and things, kind of similar to transacting in foreign currency or outside the state you’re supposed to report it back in, as they say about that onus on it. But there’s some built-in–which is kind of the point of it–there’s some built-in resistance to control.

 

Ｋｅｎ　ＬａRｏｅ  18:12

Yeah, and anonymity. So I mean, it’s your opinion that it’s here to stay. And it’s got legitimate usage.

 

Joe Hamilton  18:20

Yeah. Yeah. Right. Now, I’m very bullish, and am acquiring until it hurts,

 

Ｋｅｎ　ＬａRｏｅ  18:27

you know, maybe it is the absolute best time to be bullish, given the FTX, and all that other stuff, because it is still early in the regulatory acceptance cycle and all that stuff. So it probably is a good time.

 

Joe Hamilton  18:42

I’m seeing signs that the people that are the influencers, the Goldman Sachs of the world, and the people whose executives end up in the highest levels of government, they’re getting on board, and people like Cathie Wood, who I respect quite a bit, she says this is the future, I have personal utility for it, and if yo step back and take a holistic look at currency in general, how many currencies are here today that were here 200 years ago? So, you know, currency is actually, in the long term, a fickle game. And we’ve obviously been printing just endless amounts of it here in the States. And you know, we’ve seen countries currencies crash and Bitcoin has become the place they turn in eastern Africa or in Central America,where they start to get hyperinflation, there are solutions in place to go just get a couple Satoshis, which is a fraction of a Bitcoin and then people trust it. And so when you start to get these pockets of trust from population centers all over the world, at some point you get enough of that saturation because currency is trusting just enough to make it legit. Now, there’s the threat of quantum computing, potentially hacking, which I think is several, hopefully many years out. So it does have a potentially have an existential threat, if something were to come up that it’s actually made by the CIA, or somebody, somehow the algorithm got cracked or whatever. So there’s that risk. But with that not happening, I think it’s gonna be a big deal.

 

Ｋｅｎ　ＬａRｏｅ  20:11

Well, to your point on the currencies that exist today, there’s only a handful that are any good anyway. I mean, there’s only a handful of countries or the EU, or whatever, that you would even trust a currency, or even want to trade or be in it at all.

 

Joe Hamilton  20:27

And the core tenant of decentralization is trustlessness. And that’s where it ends up being interesting for banks, because right now, the bank service is to judge your credit worthiness, and to give you a loan appropriately, but the ultimate loan for bank is one that’s risk free, essentially, that says, almost to the point where I’ll give you a million dollars in cash, if you loan me a million dollars in cash and pay interest on it while you keep my million dollars in cash as security for the million dollars. And with decentralized products, with Bitcoin, it’s a weird anomaly. A lot of people bought Bitcoin early, or they don’t want to move it and they want to hold on to it. But they can put that into, you know, into these completely independent loaning mechanisms as collateral, take cash out, and pay interest back. And they’re happy to do it. But now it’s the average person who can then put their cash into that, and reap the rewards of that. So it has the potential to siphon a lot of loans businesses and a lot of banking services, because you can now keep it yourself and pay yourself.

 

Ｋｅｎ　ＬａRｏｅ  21:32

Yeah, I agree. 100%. It’s just another medium of exchange. And I totally agree. But I just thought of something– you asked a question like, “so are you guys still out,” and part of the equation is the de novo period, which is the first three years a new charter is granted, it’s a period of heightened scrutiny by the regulators, we would not be allowed to go into it because we didn’t build it into our business plan. And if we build it into the business plan, they never would have approved the business. So we got to get past June one next year before we even think about it. But you don’t want to be the tip of the spear on that one. And I have some friends at a another bank. That’s a very, very well run, fairly large community bank, and they got into it, and just got spanked by the regulators. So it’s not quite time I don’t think yet. If you’re a behemoth, you can probably get away with it. Bank of America or whatever, but not community banks. Not yet.

 

Joe Hamilton  22:29

Yeah, I think this is why the bigger folks are getting in. If they can get these ETFs approved–Cathie was going for one, I think JP Morgan and Goldman are going for them, and that just opens up all the summer demand. Bitcoin has a fixed supply of 21 million, probably a couple million are lost to time because the people lost their thumb drives or whatever, but then originally you get rewards a Bitcoin for mining, right? The halving is coming. So the rewards cut in half next year. And historically, that always bumps the price up. So the sort of perfect storm of massive influx of availability of demand plus the halving coming early next year, I think a lot of people see that as potentially significantly increasing the value of Bitcoin and establishing a new sort of baseline for what it’s worth, and we’ll see what happens from there.

 

Ｋｅｎ　ＬａRｏｅ  23:17

Gotcha. Yeah, I mean, I think it’s the real deal. And then I don’t–again, not to go backwards, but on the cannabis thing, I think we might finally be on the cusp of some breakthroughs there. I think Congress is going to do something whether it’s the safe banking type stuff or whatever. I mean, there’s even finally talk again of delisting it, it would still be a controlled substance, but not up there with heroin or whatever it’s up there with now, but we are definitely looking at getting back into it after de novo. We feel like we have a really good knowledge base, we’re really good at it. There’s competitors now because it has become easier to bank the industry. But we know a lot of the people in the industry, we like the industry, we like the people, and quite frankly, it’s pretty darn values aligned with us from the medicinal standpoint. Even recreationally, it’s just something we would like to be involved in.

 

Joe Hamilton  24:18

So to dig into that a little bit, you’re kind of a unique creature in that you have these values that you’ve infused into what has been a somewhat conservative industry, which came first? Your values? Well of course your values, but how did you end up going down the banking road to express those values versus some other path?

 

Ｋｅｎ　ＬａRｏｅ  24:38

Well, it’s interesting, and a lot of people have trouble wrapping their head around it. I was born and raised in Eustis. I still live in Eustis, four miles from the house I was raised in, and it’s a very, very conservative environment. And I was raised very conservative, and I say I was a redneck from Eustis and everything that entails, and I was a Republican till I was 57 years old. And I just one day said, this party has gone off the rails, they don’t represent me anymore, and I switched to independent. So I haven’t always had this belief system. It’s a fairly recent thing for me, probably in my 50s. I’ve always been an environmentalist, or so I thought, I didn’t really know what it meant totally. But after we sold the first bank, which had no pretense to anything environmental, or anything ESG, we got a mini motorhome, we circumnavigated the country. And my brother gave me Yvon Chouinard’s autobiography, he’s the guy that founded Patagonia clothing. The name of the book is “Let my people go surfing”. And I read it on the trip. And it’s like, oh, my gosh, this is it, I got to do something at 49 years old, I got to do something that gives back, instead of just making a bunch of people a bunch of money, I want to make a bunch of people a bunch of money, but do good in the process. And so my first foray was First Green Bank in 2009. And just as I learned, and as we learned, as a group, what it meant to be a value space, man, we’ve just gotten it deeper and deeper and deeper into our DNA.

 

Joe Hamilton  26:12

Interesting. So then you exited your first bank as a very traditional banker, the had this transformation, partly driven by the book. I mean there’s a lot of conservatives who are naturalist and care very much about the environment. And so can you kind of put your finger on, when you say values-based what wasn’t values-based about your first bank that was about your second? Was it just the specific topics, or just actually a bigger consciousness of values and doing your life?

 

Ｋｅｎ　ＬａRｏｅ  26:46

Much, much bigger consciousness on values in general, but you kind of have to look at everything. As silly and seemingly insignificant as it is to buy recycled paper and properly recycle and go paperless with your statements, you know, they just they all add up. But probably some of the bigger things are the social elements of the corporate social responsibility. And I wouldn’t say governance is much change, because we’ve always believed in radical transparency, and, you know, super good corporate minutes, all that stuff, I’d say we’ve been as good at all three banks in that, but it’s just everything, it’s racial equity, financial inclusion, we didn’t do any of that at the first bank. And we just got deeper and deeper and deeper with First Green. And then with Climate First, it’s even, you know, doubled down.

 

Joe Hamilton  27:37

Right? So then if we say that banking is a conservative endeavor, are banking investors conservative? And if so, then how did your path to raise capital change? When you had the values explosion?

 

Ｋｅｎ　ＬａRｏｅ  27:51

I wish I could quantify it. We’ve tried, how many of our investors were are in it just for the money? How many are in it, predominantly, for the value proposition? How many are in the middle? And what I like to say is the value proposition brings us a lot of customers and interest or people with whom our values align, but it doesn’t really piss anybody off. So it’s kind of a win win. We’re a really high quality community bank that cares about customers and the community. And that appeals to pretty much everybody. I would say probably 70% of our investors fall in the “don’t care about”. I mean, everybody cares about you’d run in a corporation that they’re investing in. So everybody cares about some element of it, but probably 70% are ambivalent, don’t care a whole lot, or care quite a bit. And then probably 20% are in it just because they will not invest in anything that’s not ESG driven. And then 10% are maybe almost there. We’ve got a couple of fairly large ESG funds that invested in the bank. And so that’s 100% the reason. They’re they’re like million dollar pops kind of thing.

 

Joe Hamilton  29:11

That’s great. Can you talk about the when you read the book, what specifically about it made the most sense to you?

 

Ｋｅｎ　ＬａRｏｅ  29:18

Wow, another great question. That’s the great thing about being interviewed by smart, insightful people, they always come up with great questions. That is such a great question. I never have given any thought. So kind of what you’re asking is did something jump out at something–this is the epiphany or whatever.

 

Joe Hamilton  29:36

It was an exposure to perspective, a lifestyle, a way of thinking about the world that was probably appealing. But even with that, sometimes there’s this guy did this thing and me thinking about me doing this thing makes me feel good. What were those things?

 

Ｋｅｎ　ＬａRｏｅ  29:50

It was probably probably the fact that they made a lot of mistakes up front, and then over time realized that we’re making a mistake. Like one of the big ones early on was cotton. And they made their clothing or apparel out of cotton, where you just order the fabric from whatever fabric supplier and they make it out of cotton. And then they start drilling down on the environmental impact of non organic cotton, and it is horrid. It’s absolutely horrid. And then you start drilling into the human rights abuses for the fabric manufacturers in India or Bangladesh or whatever, or where they assemble the clothing. And so they start drilling down and go, Oh, my God, we can’t do that anymore, and then changed it. And they were getting to the point then where they decide to go to organic cotton, they’re actually having to go out and find farmers that will switch to organic, because there was not enough. And so that’s kind of what the epiphany was, for me is, my gosh, one little company can make a difference.

 

Joe Hamilton  30:52

When I look at Patagonia, they have premium clothes at a premium price, which is, you know, in just straight positioning, where are you on in the marketplace is fair enough. There’s that space there. But I see the ultimate service that they provide is they’ve done their homework, so you don’t have to write you have this desire to have this thing. But you can’t go out and figure out the true pain that cotton causes, but you now can trust Patagonia to do that for you. And therefore you’ll pay the premium for the premium product and the premium peace of mind that that’s being done, right? So same logic in banking, they’re looking for you to say you have to go be that expert and understand the entire capital chain and know who’s doing it and who’s not and will, you know, will bank with you and then potentially pay a premium or not pay a premium, but take pay for the fact that you are getting recycled paper versus the cheaper non recycled paper. And you know that whole cost structure gets factored in doing business with you, because you’re bringing that insight or that knowledge.

 

Ｋｅｎ　ＬａRｏｅ  31:59

That is a fair observation, the problem we have is we can’t charge a premium. Because banking services are fungible and their commodities are commoditized. Whereas somebody can make a decision to vote with their wallet on their clothing, we will have some people that will say well, I’ll put up with X, Y, or Z, but the fact they don’t have a branch on every corner–which really isn’t a pain point, by the way, because our mobile stuff is so good. So the challenge for me and my team and my board is we can’t charge anymore. But we’ve got to perform at or above the highest level or performance in the industry or nobody will take us seriously. So it’s it’s kind of like running two businesses at once–a for profit and nonprofit, and, and then with the complications of not being able to charge anymore. So it’s interesting, but it’s hard.

 

Joe Hamilton  32:52

I guess I’m somewhat surprised to hear you say that, because I would have thought that people would have banked with you and wouldn’t have been as price sensitive, or would be at least a little bit price insensitive. I see clothing as potentially a commodity too in that, you know, there’s competing brands, or at least as good, that get switched into pretty easily, but they’re willing to pay the premium for that brand. So you’re not finding actually that in banking, people pay a little more.

 

Ｋｅｎ　ＬａRｏｅ  33:17

I bet it’s less than 10% are price insensitive and would bank with us no matter what. We try to track the customers that are there just because of the values. And it’s of course hard to do. On the consumer side, somebody opens an account online, we don’t know if they’re values aligned or not. But on the commercial side, it’s not so hard. And then also project based, is really easy. You do a commercial solar project. That’s a million dollars. That’s easy. That’s about as long.

 

Joe Hamilton  33:46

And did you believe that? Was that a surprise to you? Or was that your expectation when you started First Green, that even though you had this niche, and this expertise, that you wouldn’t be able to charge it?

 

Ｋｅｎ　Ｌ a Rｏｅ  33:55

It surprised me, honestly. And it surprised me that we didn’t generate more from people that were just voting with their wallet. I think we’re at a point societally, where that might start happening more now, especially with good internet banking, online banking. And we as a community bank, just like every other community bank, we’re beholden to our suppliers, our software vendors, and the stuff that they produce is mostly garbage. So we’ve had to write a bunch of proprietary middleware to make it easy on the consumers in the background. There’s all this stuff we run into to make it seamless, but we’ve got a good start, and it’s getting way better every month. So I think people will be able to, but it’s a challenge, as you’ve seen, though, because the millennial generation and Gen Zers, they have a much different worldview than I do. And even you do. So my daughter won’t set foot in the bank. My son in law won’t set foot in the bank. And they don’t think they ever have. They do all their business online and they finance their home and never set foot in the bank. So it’s a challenge, you know, the generational cohort has thrown some extra challenges out there.

 

Joe Hamilton  35:15

Yeah, I mean, those feel like, for you at least, opportunities, because if you go with that message and a superior tech strategy, then you might be in good position to win.

 

Ｋｅｎ　ＬａRｏｅ  35:25

It is an opportunity for sure. And we’re finding that to be the case. We’re starting to get our arms around, how do you market digitally? How do you market better digitally? That’s another thing I completely forgot about for community banks. That makes it more difficult and less attractive for people to open banks. Nothing works like it used to. You needed 10 million in deposits, you ran an ad in the newspaper, and all the retirees from the villages would drive down and open CDs. Nobody reads the newspapers, you know, none of that works anymore. So it’s it’s fun, but it’s challenging and different.

 

Joe Hamilton  36:00

So, you know, I’d like to finish up a little bit as a founder talking about exits. So can we go back and look at your two exits and remember where they first went? Obviously, you took a trip to celebrate. What did that feel like? How arduous was the process? Did you come out of it as you had hoped?

 

Ｋｅｎ　ＬａRｏｅ  36:18

The first one was pretty darn fulfilling. We got a really big multiple. It wasn’t a big complicated dance. The buyer was a fairly small regional out of Birmingham, Alabama, and Alabama National was name of it. Really good folks. The CEO and I hit it off, and it felt good. And then 18 months after they bought us, they sold to Royal Bank of Canada, in 2007, right before the meltdown. So my investors made a 7x multiple on their investment capital in seven years. So it was like mind boggling returns. And every time I go into Publix, I’d see one of my shareholders, and they were giving me high fives. That’s a good feeling, you know. So then the next bank we opened in February 2009. Right at the bottom of the trough. It was great for us, because no banks were lending in was just shooting fish in a barrel. But the regulators changed that over a period from three years to seven years, and they limited my growth to 25% a year. So it was purely arithmetic, every October we’d have to shut off the faucet for loans and deposits, turned back on on January 2, up $50 million on the books, and then do it again and shut it off in October. So that was exhausting. And we built it up to 825 million and close to nine years. And then my investors were getting worn out. It had been a long time where you can’t really couldn’t really pay dividends. I investigated everything, going public, every angle I could, it just came down to what we need to exit. The multiples weren’t great. We had a great bank, last year in business, we were going to make $10 million profit. And then I was courted by three different banks. Two deals fell through. After we’d gone through all of the definitive agreement and all the stuff that goes on with M&A, for one reason or another, they fell through. One of them the regulator’s told them they couldn’t buy any more banks because they bought too many and they were at better multiples. And so it just came down to the sale we made. And it was not fulfilling. I was not happy about it, it didn’t feel good. Didn’t feel good to any of my people. And it just kind of broke all our hearts. And that’s really rough on me, is when I feel like I’ve let my my team, my work family down. I don’t feel like I let the investors down. It wasn’t the return I wanted, but it was a good return. And if they hadn’t invested, they probably would have lost all the money with the meltdown. And so it was kind of you know, I saved a lot of people and made them a lot of money. So it didn’t feel great. And I was 60 years old. And that was a huge factor in doing this one is, am I too old? Well, I’ve got to because I’ve got unfinished business.

 

Joe Hamilton  39:18

So was it the dissatisfaction that made you said, I’m not going to go out like this, I’m going to do it once again, Or was it really just the opportunity that you saw? And I guess of course it sounds like they ended up with a period back to three years, which helped.

 

Ｋｅｎ　ＬａRｏｅ  39:28

Yes. All of the above. I wouldn’t say it was all dissatisfaction or all unfinished business. I mean, there was certainly the opportunity thing staring me in the face. So it was a combination. Yep. And after we sold First Green, we got another mini motorhome, we circumnavigated the country again. So that was helped in the decision-making process because it provided some clarity. And then I had grandkids born in that timeframe. And it’s like, oh my god, it’s this is why I do this. I gotta leave a planet for these little people.

 

Joe Hamilton  40:02

Makes sense. Wonderful. Well I’ve enjoyed the conversation it’s been a good ride and a lot of success and you know the opportunity to have success with your values leading is not something everybody gets, so something to celebrate and of course exits are always something to celebrate, and hopefully Climate First will be your third good one, and you can fire up the motorhome and roll.

 

Ｋｅｎ　ＬａRｏｅ  40:24

Yeah, this time I want to do the big water trip up the east coast through the intercoastal down the Mississippi. I want to I want to do that one. That’s my dream.

 

Joe Hamilton  40:34

All right. Make it happen. Ken LaRoe, appreciate the time. Thank you.

 

Ｋｅｎ　ＬａRｏｅ  40:37

Thank you. Thank you for having me.