The FDIC's May Enforcement Actions
An anti-ESG bank, a green bank, and a bank with concentrated CRE exposure
Earlier today the FDIC released the public enforcement actions the agency took in May 2024 against banks under its supervision. The headline was probably another BaaS-related consent order, this time with Thread Bank, as covered by Jason Mikula at Fintech Business Weekly but there were at least three other orders in the FDIC’s release that readers may find interesting as well.
Old Glory Bank
Elmore City, Oklahoma is a town of 738 people a little more than an hour south of Oklahoma City. In 1903, a local businessman and other members of the community founded First State Bank, a name the bank kept for the next 119 years of its existence.
In March 2022, the owners of First State Bank agreed to sell their bank to Old Glory Holding Company and the bank was renamed Old Glory Bank. The new owners1 explained their vision for the bank in a press release:
Old Glory Bank states it will be the first chartered bank to openly support America, its flag, freedom, patriotism, the military and first responders. Old Glory Bank promises it will never cancel law-abiding customers for their beliefs or for exercising their lawful rights of free speech.
Old Glory Bank has since then launched an “anti-woke" and “cancel proof” payment app, “proudly announce[d] its Mission Statement — the US Constitution,” adopted a Banking Bill of Rights, and offered an opportunity for “accredited Americans in all 50 states to become an owner of Old Glory Bank” with a minimum investment amount of $1776. An American Banker article from March 2023 has more details on the bank’s plans and the founders behind them.
In touting the stock offering mentioned in the paragraph above, Old Glory noted that in its first full year under its new business model, the bank quickly turned to rapid growth.
This legacy bank took 120 years to grow to 229 customers and $12 million in deposits. Old Glory Bank just began offering online accounts in March of 2023, and during their first year have added tens of thousands of new customers across all 50 states, with deposits totaling over $100 million, which is more than 700% growth.
In visual form…2
Old Glory Bank Total Assets
Old Glory Bank Total Deposits
Old Glory Bank Number of Deposit Accounts3
FDIC Consent Order
Some bankers might see the growth in the charts set out above and think hey, pretty good. Their regulators, though, are likely to have a much different reaction. This was evidently the case at the FDIC and the Oklahoma State Banking Department, and therefore those two regulators in May 2024 entered into a consent order with Old Glory Bank.
Broadly speaking, the consent order seeks to drive maturation of the bank’s risk management approach to be more consistent with its new size and business model.4 Along with this, the consent order also includes several provisions that more or less explicitly say, slow down.
New Business Plan and Restrictions on New Product Offerings or Partnerships
The consent order requires Old Glory Bank to update its original business plan from 2022 to map out its plans for 2024, 2025, and 2026, including “projections for earnings performance, budget, growth, balance sheet mix, liability structure, and capital, together with strategies for achieving those objectives.”
Any change in the business plan, which the consent order makes clear includes, for example, any “new product, new business line, [or] new or proposed business relationship,” requires prior approval from the FDIC and the Oklahoma regulator.
The same provision of the consent order goes on to require that Old Glory Bank receive prior approval from its regulators in relation to “any event that may result in a deviation of ten (10) percent or more in any balance sheet account” as projected in the business plan.
Increased Minimum Tier 1 Leverage Ratio
Within 90 days of the effective date of the consent order, Old Glory Bank must maintain a minimum Tier 1 leverage ratio of 14%. This new requirement is well in excess of the otherwise applicable 4% regulatory minimum, and also a decent ways in excess of the higher minimum leverage ratios that the FDIC typically requires of de novo banks.5
Were this new minimum in effect today, Old Glory Bank would be shy of the required ratio.
As noted above, Old Glory this past spring was raising capital from accredited investors, and the proceeds of that capital raise may help in initially meeting this new capital requirement. Going forward, however, because the denominator of the leverage ratio is total assets, this provision of the consent order is likely to also impose constraints on Old Glory Bank’s growth.
Forbright Bank
Old Glory Bank, discussed in the item above, pitches itself as anti-ESG. A bank taking the opposite view, at least with respect to “E”, is Forbright Bank of Potomac, Maryland.6
Forbright Bank and its executive chairman, former Congressman John Delaney, are aiming to operate as the first green full-service bank. Congressman Delaney describes the bank’s mission like this:
[A] full-service bank that can not only finance a community solar project, or finance residential solar, or other types of sustainable infrastructure, but a bank where a restaurant can actually go and do its banking business. Or you could go and get a mortgage on your home, wherever you live.
What we’re really trying to do, very simply, is create the first bank that does that, and we think we can deliver market returns.
The bank’s website says it is “reinventing how financial institutions shape the economy through [its] approach to climate and sustainability.” A calculator on that same page of the website shows how, by depositing money with Forbright Bank, the bank’s customers “can make a difference in carbon emissions” by helping to finance green projects.
Forbright Bank has approximately $6.9 billion in total assets, and so is comparatively much larger than Old Glory Bank. But like Old Glory Bank, much of Forbright Bank’s growth has been relatively recent.7
Forbright Bank Total Assets Year-End 2018 through Q1 2024
FDIC Consent Order
Last month the FDIC and the Maryland Office of Financial Regulation entered into a consent order with Forbright Bank. The consent order cites “deficiencies and weaknesses in the supervision and direction of management by the Bank’s board of directors (Board); management performance; risk management; capital planning; liquidity and funds management; and interest rate risk.”
The consent order also makes reference to unspecified violations of insider lending rules8 and, separately, requires the bank to address unspecified “compensation-related deficiencies and weaknesses.”
Growth Restriction
One consequence of the deficiencies and weaknesses identified by the FDIC and the Maryland state regulator is that Forbright Bank will have to slow down a little. In a provision of the order captioned “Growth,” the regulators say:
The Board must ensure that the Bank’s total assets, as defined in the FDIC’s Instructions for Preparation of Consolidated Reports of Condition and Income, do not increase by more than 5% during any calendar quarter and do not increase by more than 10% annually.
If at any time Forbright Bank thinks it might exceed these limits, it must notify the FDIC and the Maryland regulator and must devise a “Growth Compliance Plan” to return back within the limits.
Furthermore:
The Board must also ensure that it receives timely and accurate information regarding material loan, investment, or funding sources and reports any change of more than 5% during any fiscal quarter to the DRD and the Commissioner.
California Business Bank
California Business Bank is a $97.6 million asset bank based in Irvine, California. The bank and the FDIC have fallen into a pattern of entering into consent orders and then years later terminating those consent orders only to replace them with new ones.9
The latest May 2024 consent order, among other things, takes issue with California Business Bank’s concentration in commercial real estate, and requires the bank to develop a plan (or revise an existing plan) to address this concentration.
On its own a bank with CRE concentrations that make its regulators a bit nervous is probably not all that unusual these days, but the FDIC’s order calls out one group of borrowers in particular (emphasis added).
CONCENTRATION OF CREDIT
Within 90 days from the effective date of this Order, the Bank shall develop or revise, adopt, and implement a written plan, approved by its Board and acceptable to the Regional Director and the Commissioner for addressing the amount of loans or other extensions of credit advanced, directly or indirectly, to or for the benefit of, any borrowers in the “Commercial Real Estate” Concentration, with particular emphasis on those borrowers in the gas station industry.
…
SUPPORT FOR HIGH CONCENTRATION LIMIT
Within 120 days from the effective date of this Order, the Bank shall complete a comprehensive analysis of the Bank’s gas station portfolio that thoroughly analyzes the risks and issues inherent to it and makes recommendations going forward.
On first reading this I could not recall seeing this specific type of concentration being called out before in a enforcement action, but as it turns out there are a few examples from the early 2010s of the FDIC including something similar in consent orders with other banks.10 So not unique, but interesting nonetheless.
Old Glory’s list of founders features “some of the leading voices supporting freedom and love of country, including former Secretary of Housing and Urban Development, Dr. Ben Carson; Radio and Television Host Larry Elder; country music superstar, TV host, entrepreneur, and songwriter, John Rich; and former two-term Governor of Oklahoma, Mary Fallin-Christensen.”
All data comes from Old Glory Bank’s call reports (RSSD ID 116554).
This comes from Schedule RC-O, Memorandum Item 1 on the call report.
For example, the bank must hire an independent audit firm to review the bank’s IT controls, including assessment of information security, cybersecurity, and electronic funds transfer systems.
Also, the bank’s Business Continuity Management Plan and Third-Party Security Policy must “be updated to correspond with digital operations” and the bank’s of board of directors must “implement procedures to improve the initial vendor analysis process.”
Looking at the FDIC’s deposit insurance approvals from the past few years, minimum leverage ratios imposed for de novos have ranged from eight to twelve percent. To be clear, though, Old Glory Bank and most of these banks have different growth strategies and business plans, so this is not necessarily a like-for-like comparison.
Forbright Bank was founded in 2003 as Congressional Bank and rebranded to its current name in 2022.
The bank’s growth was powered, in part, by an equity investment by an investment vehicle managed by Galvanize Climate Solutions, co-founded by Tom Steyer.
All data in the chart comes from the bank’s call reports (RSSD ID 3187630).
The order references, without explaining further, “violations of law or regulations, including section 22(h) of the Federal Reserve Act as implemented by 12 C.F.R. § 215.” Because this is all the order says, it is not clear if the violations in question were recordkeeping or similar violations or were instead something more serious. (Not that Reg O recordkeeping isn’t serious, of course…)
More specifically, the timeline looks like this
March 2010: The bank and FDIC enter into a consent order.
February 2012: The bank and FDIC enter into a new consent order, and terminate the March 2010 consent order.
August 2017: The bank and FDIC enter into a new consent order, and terminate the February 2012 consent order.
February 2020: The bank and FDIC enter into a new consent order, and terminate the August 2017 consent order.
May 2024: The bank and FDIC enter into a new consent order, and terminate the February 2020 consent order.
For instance, this 2011 order took issue with a bank’s “lax loan administration and underwriting” including an excessive concentration of “gas station loans” amounting to more than 200 percent of the bank’s Tier 1 capital. Similarly, this 2010 order required a different bank to undertake a “thorough and comprehensive investigation of [its] gas station/convenience store loan portfolio.”