Challenges Facing De Novo Banks

Kinney Misterek: Well Huston, it seemed like a good idea to talk a little bit about the problems or challenges faced by new banks and especially minority owned institutions.

Huston McKinney: Ok

Kinney Misterek: I thought a little bit about this and it seems like you can have problems with people, problems with controls, problems with customers and even problems with the overall strategy, and then it seems like there’s some inherent limitations that make banking a hard start-up business.

Huston McKinney: Yes

Kinney Misterek: Have you seen problems with people?

Huston McKinney:I’ve definitely seen problems with people, particularly in newer banks and minority owned institutions. Often times newer banks and even minority owned institutions will go out and get a chief executive officer that has really strong lending experience. And, I know lending is key to every successful institution, every successful institution. But, for a minority owned institution or even a de novo institutions, in my experience, having a broad array of skills in the deposit side, the operations side as well as the lending side, makes for a better opportunity for success for de novo or minority owned institution.

Kinney Misterek: So you need to be more of a generalist than a specialist at the start-up stage?

Huston McKinney: To some extent. Then you grow your specialized skills as you grow into the type of bank you are going to be. But, early on you really do need some generalist skills in your institution.

Kinney Misterek: Well you’re a CPA and I know controls are always important to you. Have you seen problems with controls in new institutions?

Huston McKinney: I’ve seen problems with controls in new institutions. Often times examiners will go in and say, “We need you to separate these duties because there’s too much control in one given person.” And the first thing you hear from the bankers is, “We don’t have the staff to separate duties”. So, that’s where the problem runs in smaller or de novo institutions or even MOI’s.

Kinney Misterek: So, we know they are going to start out with a small staff.

Huston McKenney: Yes

Kinney Misterek: That’s just going to be a requirement. You don’t staff up for tremendous amounts of volume initially. So, how do they get out of this trap? They don’t have enough staff to separate the duties, but they’ve still got to have that control.

Huston McKenney: For de novo or MOI institutions we believe a board of directors that is active and involved in the business and takes a strong interest in identifying the risk and trying to rectify those risks in the institution we think are really important.

Kinney Misterek: Can customers be wrong? I mean can you really, literally get the wrong customers when you’re a new institution? Isn’t it really all about growth?

Huston McKenney: It’s all about growth, but it’s all about growth according to your planned strategy as well. Often times, every time you have a new bank the bank has to set up its strategic plan. And, you want to grow according to that strategic plan. But, often times trying to get new customers in your institution you have to take on higher risk because you may find some of those customers don’t have banking relationships for a reason.

Kinney Misterek: Yeah, that’s possibly true. One of the things that we see in the mid-west is you’ll have a bank in a small town that’s doing really well buy they’ve got no growth prospects. So they want to expand into a regional trade area. And, what they find is that, as you said, the customers with strong established relationships are already taken, all of the good customers, and they find themselves losing their key attribute, which is local information and knowledge about people. They can get into trouble in that sense.

Huston McKenney: Yes they can. Some ways to avoid this is being a generalist, as the president, or CEO of an institution is often bringing his marketing skills into the organization and knows the community and knows the customer as well.

Kinney Misterek: Yes. So, when you think about an institution that can have the wrong strategy, what could be the wrong strategy here?

Huston McKenney: What could be the wrong strategy? One that provides, one that identifies growth where you don’t have the necessary funding or the necessary capital to support that growth. That’s the wrong strategy.

Kinney Misterek: Yes, Well I think that brings us to my last observation which is, you know, there are certain economies of scale in banking, and, you’re going to have to be prepared to build that infrastructure over time. One of the things that I’ve seen with new institutions is that they see an under served geography or group of people and, they are looking at that as their vision, and sometimes they find out that those customers want to have all of the services that are associated with a much larger institution. It seems to be something of a surprise to them. Have you seen that before?

Huston McKenney: Yes, I’ve seen that before. And, often times I believe that companies, newer companies and MOIs will get into trouble trying to offer those services to them when they don’t have the expertise on their staff to offer those services. Or, when they offer products that they just don’t have the skills in and it can backfire on them in the long run.