Climate-friendly bank gets dinged by FDIC over its funding model

A climate-friendly bank led by a onetime Democratic presidential candidate says it has overhauled its funding structure after being dinged by the Federal Deposit Insurance Corp. in a consent order.

Forbright Bank, whose executive chairman is former Maryland congressman and 2020 presidential candidate John Delaney, has grown rapidly since a 2021 rebranding that focused on financing the transition to clean energy sources.

But the Maryland-based bank funded that fast growth through the use of deposits that regulators have long viewed as less reliable than funds that provide a more direct connection to the customer.

In a consent order made public last week, the FDIC cited Forbright's "reliance on noncore funding" as a risk. The bank said in a statement Tuesday that it has made significant progress in addressing the agency's concerns, particularly through a digital bank it launched in 2023 to gather deposits directly from consumers.

"We take this matter seriously and have already completed multiple workstreams to address the issues identified," the bank said. "This includes enhancing our risk management policies and procedures and launching successful direct-to-consumer savings accounts that are replacing brokered sweep deposits."

Forbright had less than $2 billion of assets at the start of 2021, shortly before getting an additional capital investment and its rebrand from Congressional Bank. Soon after, it vaulted past the $6 billion-asset mark.

The bank funded its much larger loan volumes with brokered deposits. That source of funding is sometimes known as "hot money" because it moves in search of higher interest rate yields, making it less "sticky" than traditional retail deposits.

Some observers have argued that regulators' skepticism of brokered funds is misplaced. They note that some brokered funds were far more stable than the traditional deposits at banks that collapsed last year.

In late 2022, more than 60% of Forbright Bank's deposits were listed as "brokered," which represented a peak, according to regulatory data.

That metric has quickly fallen to more normal levels around 20%, thanks to Forbright's digital bank, which is offering certificates of deposit and high-yield savings accounts directly to consumers.

Forbright offers annual rates of up to 5.3% on its CDs and savings accounts, according to the bank-comparison website Bankrate.com, which says that the rates it pays on savings accounts are well above average for U.S. banks. Last month, Forbright launched a new savings account that qualifies customers for passes at national parks.

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During a routine examination of the bank last year, the FDIC and Maryland's Office of Financial Regulation flagged "deficiencies and weaknesses," and they required the bank to submit analyses of its liquidity needs and risks.

The two agencies also are requiring Forbright to submit a revised capital planning process that takes into account concentration risks and vulnerability to stress scenarios.

In the consent order, the regulators also took issue with the bank's management of risks tied to interest rate changes, and they called on its board to "immediately increase" its oversight of the bank's operations. Regulators are requiring the bank to ensure that its meeting minutes are "sufficiently detailed" and to fix "compensation-related deficiencies and weaknesses" tied to director and executive pay.

The agencies also limited the bank's growth to no more than 10% per year, and they required it to ask its regulators for approval before paying any dividends to its shareholders.

In its statement, the bank touted its strong financial position. It noted that a key capital ratio is far above the regulatory minimum at 16%, that cash and other short-term assets make up a major chunk of its balance sheet and that 85% of its deposits are insured by the FDIC.

The bank also noted less than 1% of its loans are tied to commercial office buildings, a sector that has caused hand-wringing among investors and regulators. The bank's core areas of health care lending, financing for nonbank lenders, real estate and leveraged finance "are all actively lending in today's market," the bank said.

Delaney, who first ran for Congress in 2012, founded a healthcare lending company in the 1990s and later ran the commercial lender CapitalSource.

CapitalSource, which bought a failed thrift institution in 2008, was acquired by PacWest Bancorp in 2013.

Delaney became chairman of Congressional Bank after investing in the bank in 2011. The company raised $345 million in capital in 2021 as it was gearing up to rebrand. 

The investors in 2021 included the firms Centerbridge Partners, Gallatin Point Capital, Bayview Asset Management, and Blackrock funds. Former Federal Reserve Vice Chairman Donald Kohn also joined the board that year.

In a 2021 statement announcing the rebranding, Delaney said that science was clear that "climate change is a fundamental risk" to the world and that a shift toward more sustainable energy was necessary.

"Governments cannot fund this transition alone," Delaney said. "The private sector needs a bank to help finance a brighter, greener, and more sustainable future, and Forbright will be an indispensable financial partner in advancing that goal."