Where the small-bank lobby will focus next

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NASHVILLE, Tenn. — Preston Kennedy never set out to be a banker.

Kennedy, president and CEO of the $244 million-asset Zachary Bancshares in Louisiana, had his eye on law school. He helped pay for college working summers in a sawmill and his father’s stockyard, stacking green lumber and shoveling sawdust.

An introduction to banking came in the summer of 1978, before Kennedy's senior year at Louisiana State University.

Compared to summers in the mill, the bank job "had the decided appeal of being clean, cool and considerably more prestigious,” Kennedy recalled.

Four decades later, Kennedy is set to take on a one-year appointment as chairman of the Independent Community Bankers of America at the group's annual conference. In that role, he will help promote the group's recalibrated legislative and regulatory platform: “Community Focus 2020: The Community Bank Agenda for Expanding Economic Opportunity.”

While quick to note that he is taking the reins without a personal agenda, Kennedy said there are issues of importance to him and his fellow bankers, including Bank Secrecy Act reform, a short-form call report and — no surprise — competition from credit unions.

For community banks, regulatory reform is a never-ending struggle.

"If you're here 20 years from now and you're talking to bankers, the first thing they're going to say is, 'We need reg relief,' " he said half-jokingly.

Kennedy has been preparing for his new role for the past year, serving as the ICBA's chairman-elect.

He's also been getting things ready in Zachary. In May, Mark Marionneaux was named CEO of the the company's 115-year-old Bank of Zachary, completing the shift of day-to-day duties that began in 2017.

Kennedy "has handled things in an admirable way," Marionneaux said. "He doesn't get into the weeds on things, but if we need historical perspective, he's always there for us. ... He's a phenomenal person."

Kennedy recently discussed the leadership transition at the ICBA and his bank and his goals for the next year. This is an edited transcript of the conversation.

You originally planned to go to law school, but went into banking. What happened?
PRESTON KENNEDY: Let me warn you on the front end. It’s a story I love, and I like to tell stories.

When I was a junior in college, my girlfriend’s father owned a part of four sawmills. [J.J. Johnson] was from a real rural part of Mississippi. When he was growing up before World War II, it was even a lawless part of Mississippi. It was a real rough-and-tumble, Depression-era existence, and Mr. Johnson had to quit school in I think the seventh or eighth grade to help his family.

After World War II, he came to Louisiana and got involved in the timber industry. By the time I met him, he was a wealthy man, but very humble. He never forgot where he came from.

One of his goals, as he became successful, he wanted to be on the local bank’s board of directors. A lot of his friends were on the board, but they never asked him to join. He assumed, he didn’t really dwell on it, that it had to do with the fact he was self-made.

Eventually, an opportunity came around for him to buy a community bank that was failing. It was about to become the first failed bank in Louisiana since the Great Depression. … To buy the bank he had to leverage his assets. Everybody that I know of and heard of later advised him against it. They said it was a terrible move and that he’d regret it. But he wanted to, so he bought the bank.

That’s where you came in?
At that time, I had one semester left before earning my undergraduate degree. I went to work at the bank over the summer. I also worked for him in the sawmill. That wasn’t any fun. I worked for my father, who owned a stockyard. The stockyard and the sawmill were outdoors and not a lot of fun, so to get to work for a bank, that was great.

The bank was in terrible shape and had a lot of delinquent loans. That’s what they gave me to do. They gave me a telephone and a past-due list — no training. I learned a lot about lending. I got my degree in the fall. I had applied to LSU law school and got my acceptance, but I had the spring semester free, so I went back to the bank.

It was just such a crusade. The deal was to save the bank. Everything we did or talked about was devoted to getting business for the bank or people to invest. The more we worked in it, I just didn’t want to leave. ... Once you got in there and rolled up your sleeves and started trying to breathe life back into the bank, it was something I didn’t want to walk away from.

Is banking still fun for you?
I don’t know that anything could match those early years trying to get the bank back on its feet. The successes were so obvious.

When I first went to work at the bank, there were these two guys sitting in the corner. I didn’t know who they were. I asked one of my colleagues who they were and he said, "Those are bank examiners." I thought every bank had a couple of examiners sitting in the corner because we did for the first three or four months I was there.

It was a victory to get them out. To start cleaning up our balance sheet, that was a victory. We applied for a branch and had to compete against another local bank to get that. That was a victory. There were some other local bank-against-bank things with the bank that didn’t offer [Johnson] a board seat. They suddenly became fierce competitors. A whole lot of that would probably fill a book that five people would enjoy reading.

What's the objective of the ICBA's 2020 platform?
Community Focus 2020 is all about [providing] economic opportunity. It would allow more banks greater time and resources to be focused on serving underbanked individuals. ... Remember, community banks are in 52,000 locations and work one on one with local customers.

Let's talk about credit union competition.
I’ve had the privilege of speaking at 15 state associations. Nothing energizes the community bankers as much as a reference to credit unions — they have never lost sight of the issue.

It really was a shot in the arm when Sen. [Orrin] Hatch came out with his letter [questioning credit unions' tax exemption]. I think the overlooked thing in that whole conversation was [NCUA Chairman J. Mark McWatters’] admission that credit unions can’t make it without that tax subsidy. It would threaten their insurance fund and their industry.

Think about what that means. Credit unions are unable to make it on their own. They have to have taxpayer support. Yet, banks manage to pay taxes and fulfill their mission. I don’t think that got enough attention, that admission by the NCUA chairman that credit unions are totally dependent — he didn’t say it that way, but I’ll say it that way — on the taxpayer to prop up their industry.

Look at the PenFeds, the Navy Federals and the other big credit unions. They’re so in-your-face, purchasing naming rights to stadiums, sponsoring college bowl games. I don’t think that’s going to go without notice forever. This is a huge industry that’s allowed to be banklike and not pay taxes.

They’ve strayed so far from their mission. I don’t think there’s any argument there. They're no longer focused on people of modest means. I don’t think they even pretend that anymore.

Another big issue is the CECL standard for loan losses. Do you feel banks are as far along as they should be?
If community bank members of ICBA are not as far along as they should be, it’s not for lack of trying on the part of ICBA. We’ve been engaged in this for many years.

Our main point of contention had to do with the prospect of expensive modeling. The Financial Accounting Standards Board said, "Oh, no. It won’t be that much." We wanted to get that clarified and it has been. We at least have them on record saying you don’t have to use sophisticated modeling.

I give a lot of credit to my predecessor, ICBA Chairman Tim Zimmerman. He was at the forefront of that fight. Tim is a CPA, so he can talk the language.

CECL is not something we went out and asked for. It was dropped in our laps. Our focus is our members and how we make things better for them. How do we ensure that it will be implemented in a way that won’t require expensive modeling? ICBA always does what’s best for our members — community banks, and only community banks.

How have you addressed CECL at Zachary?
We hired a longtime external auditor, who is now our chief operations officer. He's a CPA. They just eat this stuff up. We’re ready for CECL.

What are the issues would you like to focus on as ICBA chair?
The perennial issue is regulatory relief.

Community banks didn’t cause the financial crisis, yet they still have to comply with the avalanche of regulations that came on after the crisis. That’s why the ICBA and community bankers are proponents of tiered and proportionate regulations. We're there for our customers and communities and regulations shouldn’t hinder that.

At my bank, we do a lot of mortgage lending. The very idea that somebody had to dictate to our bank ... a borrower’s ability repay a loan to us, [implying] that we’re not capable of judging how we’re lending our own capital. That’s just crazy to me. We're capable of judging how we lend.

So the mortgage relief we got in S 2155 is a big deal. That was an ICBA and community banker victory. In 40 years as a community banker, that's the first time the pendulum stopped.

This isn’t the end. It’s not like the regulations started in 2007 or 2008. We’re still dealing with things from way back. One good example is BSA and the $10,000 threshold. That was set in 1970. Certainly, there’s room for some relief by increasing the threshold.

One of the things we were granted in S 2155 was a short-form call report, but more work needs to be done by the regulators on that.

As a CEO, how much of your time today is spent on banking, as opposed to compliance?
As we came out of the financial crisis, I would say my focus — I hate to say it, but it’s the truth — shifted more to administration and keeping the rules. Making sure we were in compliance. Making sure we were not going to cross a line that was going to cost us. It went from more business development, that really a CEO ought to be doing, and more to worrying about using the right language. Were we filling out the proper forms?

De novo activity is picking up. Would you like to see more?
I would. If the barriers to entry were lowered just a little bit, you’d see folks rushing to form de novos, or at least talk about it. We hear people talking about it in Louisiana a lot. There’s an appetite there. That doesn’t surprise me. As long as there are small towns and medium-size towns, there will be people who want to invest in, and be a part of, a local bank. They’re popular. People like them.

I'm personally very happy to see that happen. It vindicates my career. People want to be what I am. They want to be a community banker.

You recently stepped away from day-to-day management of your bank. Can you talk about the changes there?
When Mark came to work at the bank, we didn’t talk about succession on day one, but his age was right. He was in his mid-30s. I’m in my 60s, so it just worked.

As he worked there a while, I knew this could be the guy to take over the bank, so we started talking about it. Setting a timeline, expectations and reviewing it was critical — having a plan and sticking with it, working it through.

Nothing trumps having the right person. We have the right person. He’s energetic. He’s involved in the community. He takes coaching very well. He wants me to coach him more than I do. Quite honestly, there’s not a lot to tell him. He’s got it.

Are you looking forward to the next year?
I enjoy the work. I’m very gratified that my ICBA chairmanship is going to be the capstone of my career. I’m humbled by it. I’m not saying that because it’s what you’re supposed to say. I really mean it.

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