Charting a New Course

Sound Community Bank doesn’t shy from reviewing its charter options or making a switch

By Michael Lotti

A community bank’s charter is like its constitution, so it should be hard to change, right?

Not according to Laurie Stewart, president and CEO of Sound Community Bank, a $395 million-asset community bank with six retail locations in the Seattle-Tacoma area of Washington state. Sound Community Bank recently converted from a national to a state banking charter. For Stewart, the switch was simply a good business decision for the bank—and one that was quite easy to carry out.

Stewart admits that Sound Community Bank’s history made it easier to consider adopting a new charter in the first place. The bank began in 1952 as the Associated Grocers Employees Federal Credit Union. In 1996 it became a state-chartered credit union, Credit Union of the Pacific, to expand beyond its grocery employee membership. Later, in 2003, it changed again—this time to a mutual savings bank regulated by the Office of Thrift Supervision. “The federal bank charter gave us more flexibility to meet the needs of our members and to grow as a housing lender, which was our core competency,” Stewart says.   

The leadership at Sound Community Bank “has always thought about the charter as something changeable,” says Stewart, who has witnessed all of the institution’s growth and changes since she began working there in 1989. She advises other community banks to periodically evaluate the potential strengths and weaknesses of their institution’s operational charter, perhaps during strategic planning sessions. Every community bank leader, she says, should fully understand what a charter does and doesn’t allow his or her institution to do, which can change over time.

Best for the bank

When the Wall Street financial crisis hit in 2008 and Congress enacted subsequent financial reform legislation two years later, Stewart and Sound Community Bank’s board of directors began to wonder whether a federal charter was, indeed, best for the bank’s long-term future. The fact that the Office of Thrift Supervision was preparing to be absorbed into the Office of Comptroller of the Currency created significant regulatory uncertainty for the bank’s executives. “Nobody knew what the new regulatory regime would look like,” Stewart says.

By 2011, after the OTS merged into the OCC, Sound Community Bank’s leadership continued to worry about the additional regulatory costs—which were nearly $50,000 more per year for the bank than state and FDIC supervision—as well as regulatory policies directed by unfamiliar administrators a continent away in Washington, D.C. “Have you ever tried to get a hold of a bureaucrat in Washington, D.C.?” asks Stewart as a way of pointing out the difficulties she and the bank’s directors foresaw.

Still, switching charters wasn’t part of the business plan at the beginning of 2012, according to Stewart. Additional reflection by Sound Community Bank’s board of directors, along with some persuasion from state banking officials, pushed them over the threshold into taking action.

“It’s the fundamental right of banks to choose their own charters, and community banks should have charters that connect them with the regulators who will serve them best,” says Rick Riccobono, the state banking official who made the pitch for Sound Community Bank’s charter change before its board of directors.

A seamless transition

According to Stewart, the process to change Sound Community Bank’s charter wasn’t complicated, but rather it was straightforward. She met with her state’s banking officials a few times to discuss the details of switching, and state officials argued a case for more local regulatory oversight before the bank’s board of directors. The board then charged Stewart with setting the machinery for the switch in motion.

Sound Community Bank’s internal work to change charters involved about 90 total staff hours, mostly for determining if there were regulatory issues or reporting that would be required after the bank converted its charter, Stewart says. Otherwise, the heavy lifting was carried out by outside lawyers who drew up the new charter. The legal costs amounted to about $15,000, and the bank paid about $1,000 in state fees for the charter filing and approval.

Stewart says community banks shouldn’t be overly committed to their charters, which shouldn’t be barriers to banks becoming what they want to be. However, she adds that the overall costs and benefits of switching a charter should be weighed carefully. Such a fundamental change should be a good long-term business decision.

“Our first question is always, ‘What makes the most sense for the good of the bank?’” she says.

While Stewart did inform customers and investors of the charter change, she didn’t think the change demanded any significant publicity beyond a few press releases. The change itself, completed in December 2012, “was basically a non-event,” she says.

“We’ve spent most of our energy getting ready for our first exam with Washington State Division of Banking and FDIC. Otherwise, it’s been business as usual.”

Michael Lotti is a writer in West St. Paul, Minn.