Strategic Advisory Board Q&A with Doug Hultquist
June 16, 2020
With many implications of the COVID-19 pandemic becoming clear for the financial services industry, we spoke with Strategic Advisory Board member Doug Hultquist for his perspective on how community banks can successfully chart the course forward.
Doug recently retired as President and CEO of QCR Holdings, Inc., the company he co-founded as Quad City Bank & Trust in 1993 with $14 million in assets. Under Doug’s leadership, QCR grew into a multi-bank holding company that oversees over $4.5 billion in assets.
What made community banking appealing to you when you co-founded Quad City Bank & Trust in 1993?
DH: In the early ‘90s community banks were at a critical juncture. The big banks were buying them up quickly in the Quad Cities. The largest bank in the region sold in early 1992 and three other community banks sold soon after. That left a real void and I, along with my co-founder Mike Bauer, decided that it was a good time to start a de novo.
Our goal was to form a relationship-based bank, hire the best people in the market and focus on owner-managed businesses and wealth management, and compete against the big banks’ 1-800 approach. I knew the space from my years as a tax partner at KPMG and really enjoyed it because of the many ways that banks play a role in their communities that extends far beyond financial services. I’d go as far as to say that here in the midwest, communities value having “their” bank. In fact, today the four states where QCRH has a presence – Missouri, Iowa, Illinois and Wisconsin – count for 25% of bank charters in the country.
What are some of the most significant changes you’ve seen in banking over the course of your career?
DH: The most important, I think, is the technology advancement that has brought community banks to a critical juncture yet again. Industry consolidation is another: we’ve gone from 15,000 community banks 25 years ago to 5,000 today. The rise of credit unions is also a big change. They’ve become more sophisticated and significant competitors, partly because they’re savvy from a technological standpoint and are tax exempt.
What is the biggest threat facing community banks?
DH: The technology needs of the younger generation (laughs). Let me clarify. I would say it’s that the next generation of bank clients don’t appreciate relationships as much and are more focused on the technology.
Look, if nothing else, this pandemic has shown us that the investment in technology is invaluable. It’s clear that community banks are evolving to where technology has to be state of the art, regardless of size. It’s 25 years since we started Quad City and owner-managed businesses are now going through a generational change. The 30- and 40-year-old children of that generation are starting to run the business or manage the family assets, and they expect to be able to do that on their phone and be done in three minutes. So a community bank has got to be able to approach that younger family member, provide close to the level of technology that a Big Four can, and then prove its ability to have a relationship, in part by providing valuable advice.
I like to say it’s imperative that the community bank needs to prove that it isn’t just a commodity. There’s a lot of value to be added, particularly to owner-managed business and to wealth management clients, by having that relationship. And I’m hoping that a lot of people now appreciate that value in a new way. With the Paycheck Protection Program, for instance, community banks really showed their nimbleness in being able to turn those loans around, and it took the Big Four quite a while to get the wheels turning to do a $250,000 loan for a small business, if they were so inclined. And for a while they weren’t. Our four charters did an unprecedented number of loans in two weeks. And we got a number of clients we didn’t have before this because they wanted to be able to talk to a local banker who would put their needs first.
What should the CEO of a community bank be thinking about when approaching tech investment?
DH: Firstly, and I really can’t overstate this, they must recognize that technology investment is key to the future success of community banks. So how do you make that happen? When we started Quad City, you looked to your core processor to provide all of your technology needs. But over time, and as tech has become so much more sophisticated, the Big Four banks are now basically tech companies. And while the Big Three core providers are very reliable on processing, they really aren’t leading edge from a technology standpoint. So CEOs have to look at using consulting firms to identify what fintech companies they can align with to close that gap between what the Big Three offer and what the Big Four banks provide. And that gap has widened. You know, for 20 years I thought because we were so relationship-focused we could close that gap and we didn’t have to have all the bells and whistles. In today’s world, though, we’ve got to be 90% of the way there with our technology. Not only in terms of ease of access to the Millennials and Gen Zers that it’s so important to, but you also have to satisfy the regulators that you’ve got the safeguards in place and the cybersecurity protection, and rightfully so.
Today’s CEO also needs to consider that fintech companies have sold to the Big Three and diluted what they aspired to do, and many of them couldn’t provide the security infrastructure. So it’s a real dilemma, but I think it’s getting better. I think there are fintechs out there that can really help the community bank space get closer to the Big Three, Neocova being one of them obviously. But the tech challenge is such a big risk for community banks, both in terms of underinvesting now, when I think they should be bold, and overinvesting without the appropriate safeguards.
Having said that, I absolutely believe that right now is a very good time to be opportunistic in terms of investing in technology, both because of the larger economic environment and because it’s so clear that it’s imperative for community banks to be more technologically sophisticated in order to survive. Since it’s just not possible for a community bank to have all the resources in-house to address it, they have to use consulting firms both from a tech and banking standpoint. In my experience, I found that hiring technology experts who may not have any banking experience can be quite helpful.
I would also suggest they need a strong peer group, not from competitors, but from banks of similar size in other communities where they could work together to do some of these things. I think it’s even more important to have continual communication with your regulators, because as times are changing so fast, you don’t want to proceed with a big project or make a big tech change and then have your regulators come in a year later and say ‘no, we don’t approve of this, we can’t allow you to run on this platform.’
What questions should community bank CEOs be asking themselves to not only survive but thrive in the future?
DH: I think the big ones are: What approaches can we take that, in total, create more nimble and safer technology? Reduce cyber risk? Enable banks to recruit younger employees and clients, while simultaneously proving that relationships matter.
Think of yourself meeting with a client or prospective client. You can bring your lender, your deposit manager and/or your trust officer. All of those folks come into a meeting and make sure the client is looking at the big picture – the business, the family wealth, whatever it may be – and make sure everything’s in sync. Again, it’s a chance to prove that banking is not a commodity, and I think that’s a unique opportunity.
Next, continue to focus on the next two generations coming along and don’t be naive in thinking they’re going to do it like their parents did it, because that’s just not the case.
Will there be such a thing as a “community bank” in 10 years? If so, what will it look like?
DH: I think there will be. There will be fewer banks, and fewer physical locations, probably half as many as we have today. I think that in order to survive and prosper, the average age of the employees and clients has got to come down and, again, you have to prove to the next generation that you don’t have to sacrifice technology to have a strong relationship.
Those two can absolutely go hand in hand and I think that community banks will step up and make a lot of progress on that in the next five to ten years.
Last question: Is it true that you are a Yankees fan? How did that come about?
DH: I confess, it is true. I’ve been a loyal fan since 1961, when I was six – not a popular choice growing up in Muscatine, Iowa. The Yankees were winning big and they had Mickey Mantle, Yogi Berra, Whitey Ford, Roger Maris, Elston Howard and many more stars. How could you not like this team? And now my niece’s husband works for the Yankees, so I have even more reason to get to NYC for games!
Doug Hultquist former CEO & President of QCR Holdings, Inc., is a Certified Public Accountant (inactive) and previously served as a tax partner with two major accounting firms. During his public accounting career, Mr. Hultquist specialized in bank taxation, taxation of closely held businesses, and mergers and acquisitions. Douglas serves on the board of directors of Quad City Bank and Trust, Rockford Bank and Trust, Community State Bank and m2 Lease funds.