Incoming ABA chair on credit union takeovers of banks: Enough

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SEATTLE — What a difference a year makes.

When Jeff Szyperski took over as chairman of the American Bankers Association last October, interest rates were rising, net interest margins were holding up and the words "recession" and "liquidity" were not top of mind.

But as Laurie Stewart, president and CEO of the $686 million-asset Sound Financial in Seattle, prepares for her one-year term at the ABA’s annual convention this week, things are drastically different.

"There's a lot of uncertainty about an impending recession," Stewart said in an interview, though she added that bankers have probably never been in as good of an overall position given the slow, but steady, decadelong recovery from the financial crisis.

"We will cope with margin compression, but we'll also be innovative and think of ways to improve our efficiency ratios as our [investors] are demanding," she said. "I'm not overly concerned."

Stewart, who was one of American Banker's Community Bankers of the Year in 2018, also discussed efforts to promote diversity in the banking industry and frustrations with credit unions being allowed to buy banks. (Sound, under Stewart's leadership, converted from a credit union to a bank in 2003.)

Her comments come just a week after the Independent Community Bankers of America announced an initiative to encourage members to push for a level playing field with credit unions.

The following is an edited transcript of the conversation with Stewart.

What's on the top of your to-do list as ABA chairman?

LAURIE STEWART: It's hard to name just one thing. I'm honored and humbled to have this wonderful opportunity. I'm focused on several issues that are important to me and bankers around the country. Certainly, diversity and inclusion is a huge issue. And it ties into our ability to develop and empower emerging leaders in our industry.

I'm also pretty fired up about this situation with credit unions buying taxpaying community banks and taking them off the tax rolls of communities around our country. This is an area we have to talk more about. If you're going to be a bank, perhaps you should do what we did, which is convert to being a bank.

How are credit union-bank deals connected to the tax-exemption issue?

It's an even more egregious situation. How do we stretch and think that a credit union can buy a bank's book of business and believe that there's a common bond there? When I think about the Federal Credit Union Act and how it talks about people of modest means, or when I think about the credit union that we were, serving the grocery industry. That's the essence of a credit union. Now we see credit unions offer all the same services as banks but not be beholden to [the Community Reinvestment Act], have less of a compliance burden and then take taxpaying banks off the tax rolls.

Is it realistic that the credit union tax exemption will ever be repealed?

Hope is not a strategy, so I don't think we can just hope for it to be repealed. I do believe that as more and more consumers become aware of these trends it will help. There's definitely an educational component that needs to happen. Nothing about this is going to be easy. But I think crossing the line into broader awareness and seeing banks bought by these institutions might be a tipping point. This just can't be good public policy.

I've actually talked to a few credit union CEOs that think fundamentally there's going to be taxation and they would be better served if they could get their industry to structure a tax and be more in control rather than have to be on the defensive all the time. They've just grown to be something totally different than what was imagined in the 1930s, and it's time to fix it.

Where are banks feeling the most competition from credit unions?

The pressure I get from credit unions is on commercial real estate. They're making those loans in our market at incredibly low rates with very generous terms that I think are not prudent and are not scrutinized at the same level that we're examined.

What other issues will the ABA focused on this year?

One of the things I'm excited about is that we've got great bipartisan support for issues like BSA/AML revisions and ... the SAFE Act. But the fact that we have 33 states and the District of Columbia all hogtied in terms of being able to bank the marijuana industry has to change. It's a big industry. I talk to clients in marijuana-related businesses all the time about how they're hungry for bankers to help them run their business. The fact that we've seen bipartisan support for good public policy is an important start.

Is the banking industry far enough along in terms of preparing for CECL?

When you talk to me as Laurie Stewart, CEO of Sound Community Bank, I will say that banks our size got a delay, but the real issue is whether CECL is the right thing? What's the impact going to be to consumers? What's the impact going to be to the cost of credit? Who will be disenfranchised in our communities the most? If I have to predict the probability of a loan going bad, I'm going to have to set aside more money for borrowers that are more risky. So which loans are not going to get the attention? Probably those for the segment that needs them the most. So I worry about consumers getting hurt.

How would you describe the Seattle market?

I'm a cheerleader for Seattle and a native Washingtonian. We have a very strong and robust economy. One of the things that saddens me is that we have many fewer banks today. We've had a lot of bank failures and the de novo market has not returned. There will always be mergers, but we're not adding to the community bank population in our state.

How can community banks better compete in the digital space?

I believe every bank needs a digital strategy. The depth of that depends on your business plan. A banker in Kansas operating in a couple of rural communities who sees all of his clients on a regular basis is probably under less pressure than we are at Sound. But this is just another channel, and you can always tweak them. The role of the brick-and-mortar branches is different now, too. And in some cases we can free up some of that branch money for things like fintech.

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