Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory podcast, that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts, who will challenge you to think beyond the suit and tie, while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain. Those who have a strong relationship with their banker, know just how valuable this relationship can be for the business’s bottom line. On the other hand, those who only use their banker for a few services here and there, probably have no idea what I’m referring to, and the idea of establishing and nurturing a relationship with a banker might sound like a foreign concept. On today’s show, we will pull back the curtain, and examine everything from the benefits of banking relationships and knowing what questions to ask at your next meeting with your banker, to how to choose the right institution to work with.
Dave: Today’s guest knows all about the importance of banking relationships. Doug Houser recently joined Rea & Associates as our new director of construction and real estate services, for our firm across the state of Ohio, and while he has more than 25 years of experience in accounting, he has racked up first hand experience in the banking industry, as well as carrying a four handicap. Doug is going to offer us an entirely new perspective to how do we approach our banking relationships. Welcome to unsuitable, Doug.
Doug Houser: Good to be here, Dave.
Dave: Great. How’s that golf game coming along?
Doug: You know, it’s probably put away for the winter, sadly, but had a lot of fun playing late in the year particularly.
Dave: It does get winter early in Ohio, doesn’t it?
Doug: Yes. Fall is the best golf though. Absolutely love it.
Dave: It is. So we’re gonna talk about better banking relationships. We’re gonna talk cover on maybe three areas. Door number one is which bank is the right bank? Door two, one size does not always fit.
Doug: Correct.
Dave: And three, what you don’t know could hurt you.
Doug: Absolutely.
Dave: In your banking relationship, and all those loan documents. So pick your door. Door one, door two or door three?
Doug: Let’s start with door one.
Dave: Door one.
Doug: I mean, which bank is the right bank? The things to ask, it becomes so much more complicated than it was pre financial crisis. And what happened was, you really saw a lot of institutions pull back the decision making from the local level. So the relationship person the before could have a great influence and be a great advocate for you, no longer, they can’t do that anymore. The decision making is now eight or nine levels removed in most cases. So what we’ve seen is, the banks have gotten away from even training those folks to be a relationship person. In many cases, they’re just trained to go out, get information, bring it back. It gets sent off to some other state, some other region, whatever the case might be. They run it through a advanced analytics program. Really crunch the numbers that way, and they determine, “Hey, this is the box it fits in. This is what we’ll do.” And that’s it. So you’re nothing more than the delivery person and a order taker.
Dave: So is that all banks? Is that the way the industry has gone?
Doug: I would say, if you’re looking at it, any bank that’s above probably a couple billion in assets.
Dave: Okay.
Doug: So you still have some very small, community banks that don’t operate that way, but there are dangers there as well, which we can get into. The real problem is, most of them have tried to cut costs. They’ve tried to segment everything into certain industry buckets. And that’s also symptomatic of the regulatory environment. The regulatory environment is much more difficult for them, so I know from having spent 20 years in that industry, that the amount of time they’re spending on regulation is, it’s probably tenfold from what it was even 12 years ago.
Dave: So the whirlwind of the regulation has impacted the industry?
Doug: Absolutely. And I’m not saying that’s necessarily a bad thing, per say, but what it’s done is the pendulum has swung so far in that direction, that the regulators spend so much time evaluating each bank’s portfolio, and they’ll come in each year and dictate to them, “Okay, these are your different industry segments. We feel you’ve got too much exposure for example in the construction industry. Too much exposure in the real estate industry. Too much exposure in manufacturing.” Whatever the case might be. So that impacts what the bank can do for you. They won’t tell you that, but that’s what happens.
Dave: You know, as a business owner, why should I care about that? Why should I care about whether those decisions are being made in this community or some data center three states away?
Doug: Right. In theory you think well maybe that doesn’t matter. If they can provide what I need and I’m happy with what they’re doing for me locally. The problem is you just have no ability for that person to be your advocate. And as we know, in our business, if you’ve got somebody, a principle, a manager, the person who’s out there dealing with that client or persons on a day to day basis, who are the advocate for that client say, “You know what? These folks, they really work hard, they know what they’re doing, we’re gonna try to do everything in our power to advance their business forward.” And ultimately, that’s what we try to do, right? We’re just a little slice and hopefully giving them the tools and the resources so that they can do their thing and be successful.
Dave: Right, right.
Doug: And the problem is, most of the folks at these institutions now, they don’t care. They’re just not incented to do that. They’re not paid to do it. So that’s the difficult position that you find yourself in. You can find yourself dealing with somebody who’s not making the decision anywhere near your community or your state, or even your region. So it’s difficult for somebody like that to advocate for you to be successful if you’re a closely held business owner.
Dave: So, again as a business owner, I’ve gotta have my act together. Even more so than ever because of the regulation and the process you go through, but my banking relationship, my guy or gal’s gotta help me get my loan docs, my loan file, in order.
Doug: Absolutely. That gets reviewed every year, either internally or by the regulators that come in. That entire … It’s really old school, most of it’s still on paper. Even though a lot of them have been uploaded electronically, when the regulators come in, they’ll have to print all that stuff off. It’s much like the IRS auditors that we deal with.
Dave: Sure.
Doug: It’s very technology lack, you would say. So they’ve gotta go through all that stuff, make sure all the proper documentation, financial statements, all the proper schedules, everything that they’ve asked for, is in there. So the quality of that information has a big impact on their opinion of that credit, per say. And that’s where we come in. For us, to put together a product that’s really meaningful, beyond just here’s a packet of paper that we hand to the client, there’s gotta be some teeth behind it, and some meaning to it. And some real important and valuable information in there, that works not only for our client, but for their other advisors, such as the bank and the law firm.
Dave: Right. Well, you know, you hit on a point. As a CPA firm, and using your knowledge in the banking relationship, we can really play a solid role in helping our clients pick the right bank.
Doug: Absolutely. And we certainly try to remain agnostic in terms of who they work with, but our role, as I see it, is to try to make sure that the partnership works for them.
Dave: Match. Matchmaking.
Doug: Absolutely.
Dave: You didn’t know you were a matchmaker.
Doug: Absolutely. And that’s important. And I think the more times that we, as their trusted advisor, as client’s trusted advisor, the more that we sit down jointly with the client and their bank, the better that relationship becomes. Because then all parties understand a little bit more what they’re looking for, what they need to really help that business be successful.
Dave: Okay. So as advisor and a CPA, and I’m a business owner, you can kinda help me chill out here, kinda help me understand the process and say, “Dave, that’s just … I hate to tell you, but that’s just the way it is.”
Doug: Right.
Dave: And I don’t know that I have to accept that, but I just have to have my act together a little better.
Doug: Right.
Dave: What about, we talked about the loan process, but what about depository process and treasury managing products and things like that? Again, which bank is the right bank?
Doug: Right. There’s so much change in technology as we know, in many businesses. And just like anything else, the movement of money, the technology has increased rapidly, particularly in the last five years I would say. Exponentially. So there’s a lot of different solutions out there, from the very, very simple, and that may be fine for your business and all you need, depending on who you are and how you do business, to the very complex. If you accept and take money in a number of different ways, or across different state lines in a number of different formats, be it online, point of sale, invoice, however it might work. You can get as sophisticated as you want. And the thing that I would suggest is, that like many things, it’s much cheaper to outsource that to the institution these days, because the technology is just so advanced, you can’t possibly manage all that risk on your own. So it’s better to let somebody else who’s an expert do it for you.
Dave: All right Doug, you’re my CPA, Rea & Associates has been my firm for years. I gotta tell you, I hate these loan guarantees that are being requested.
Doug: Right.
Dave: What can you do for me? Help me out here, buddy.
Doug: Well, the thing to watch out for there is, as we really get into the language as it relates to those guarantees, there’s continuing guarantees, limited guarantees, there’s guarantees where you can make sure that say your primary residence is excluded from that. There’s guarantee triggers, there step downs in those guarantees. So you just wanna make sure you understand what is in place. If it’s unconditional and continuing, in essence that makes it such that there is no limit to that. And the bank has, technically has access to any and all of your assets, and perhaps those of your spouse, if that’s the case as well.
Dave: And that document’s 8,000 pages long.
Doug: It is. It is. I have a funny story about that, I think I’ve told before. When I started in the early ’90s, after I had been in public accounting and went to commercial banking, we had commercial loan documents for large companies that were one page front and back. Filled it in, …, signed it. Very simple. By the time I left, I recall this vividly, a nice construction client that I had, we did about a $7 million deal for. The loan package was 960 pages. I’m not kidding. And it was just, it was frightening when you think about what’s in there.
Dave: So do … You already know I’m not a fan of guarantees.
Doug: Right.
Dave: I said, “Doug, I want you as my CPA. Shop that thing around.” Are you gonna be able to find a solution where there is no guarantee?
Doug: Perhaps. I would say it’s best to find the best partner, and not always just go shopping around for the best rate, per say. So if you can get a deal structured in place that gives you some milestones, or some benchmarks to say, “Okay, maybe I’ve got to guarantee this deal up front today, but if you tell me that my cash flow or my fixed charge coverage might be one and a half times, I can step that down to maybe a 50% guarantee, or 25%, or I can exclude certain assets from that guarantee and make it a limited guarantee.” That’s what you wanna do, is just try to … I always say set benchmarks, set goals. We’re all good, I think we’re all better off if we set goals and try to achieve them. So I try to do the same thing with folks who are asking for help with their bank relationship. Let’s set goals for you, and this puts it in place with you and the bank, so if you achieve X or Y, then you get something. So that’s the way I would approach it.
Dave: All right, let’s go off the record. Let’s say you and I are having a beer at the corner neighborhood bar, and I said, “Look Doug, is it reasonable for me not to have a guarantee? Should I just go for it and make sure you guys are gonna review that loan doc closely to protect me?”
Doug: Right. It depends on the industry largely as well. Construction and real estate, we definitely see the guarantee in place more often than not, but under the right scenarios, they can be excluded. And if that’s an important risk parameter for you as the owner, great. We’ll work hard to make that happen. There’s other things that I think, other clauses that we can talk about, material adverse change, change in law clauses. In fact, we’re dealing with a situation for a great client right now. Unfortunately, in their loan documentation, we discovered that, because of the change in the tax law, it created a trigger in their loan package. So they either have to pay a significant make whole provision to the bank, or they can choose to fight that in court, and exit the relationship.
Doug: So there’s a lot of difficult things that sometimes you think, “Well, that’s sort of the fine print, that’s kind of standard boilerplate language in a lot of these documents, and doesn’t get paid attention to, and all of a sudden, somebody at the institution decides it’s time.” In this case, they decided it was time, they wanted out of this specific industry, and they used this clause as a trigger. And they’re saying, “Look, we as an institution want out of this industry, and so you can either pay us-“
Dave: There’s your clause, there’s your out clause.
Doug: “Pay us this huge penalty, or that’s it.”
Dave: Sure. Sure.
Doug: You just can’t be too careful.
Dave: So let’s switch gears just slightly, along the same path, and these are the loan covenants that are out there, they’re in the loan documents. Sometimes they’re really easy to find, sometimes they’re not so easy to find. And of course, I have to comply with that, but we’ve both had clients on both end of this that didn’t know those covenants existed.
Doug: Right.
Dave: Again, as trusted advisor and a CPA, you’re gonna find those out for me. That’s part of what you do for me. I’m gonna hire you to do that.
Doug: Absolutely. I mean, the language in there can be difficult to understand. Sometimes the banks, again they try to keep their cost down, so they’re using boilerplate documents, boilerplate language. By that I mean, it’s just standard stuff that they try to fit and use in every situation. So I’ve seen, and I’m sure you have too, I’ve seen situations where the client technically is in violation of that covenant the day they sign the loan documents, because nobody paid attention really to a specific part of the definition. I’ve seen things like that, particularly with contractors where, for example, if they have a lot of bonded receivables … Well technically, the surety has priority on those receivables over the bank. Well, unless your bank knows the industry, they don’t really know what the heck they’re doing. They may not realize that, so they’ve got a working capital or borrowing base requirement. On day one, they’re technically in violation of that.
Doug: There’s other things, fixed charge coverage, debt service coverage. Those can be vastly different. People often don’t understand the difference in things like that. So it pays to have somebody to really just take a look at that and understand what the bank is asking for. I mean, sometimes people say, “Well, I’m gonna have my attorney look at that.” Well the attorney is great at the law. They’re not always the best at understanding the bank’s perspective in terms of how they look at it. That’s where we can really help.
Dave: And you were in banking 20 plus years?
Doug: 20 years, yeah.
Dave: I’m dying to ask you a question. How many times a week did you walk in to the vault?
Doug: Early on in my career, I did several times. It was pretty cool.
Dave: How much money’s in there?
Doug: Depends where you are. Depends where you are. So, one of the banks I worked for was headquartered in Cleveland, and I did that a couple times there a lot. Let’s just say a lot. So yeah, it was pretty cool.
Dave: Didn’t we have dinner in that … –
Doug: We did. It’s now converted to a great, very fancy restaurant. Beautiful restaurant.
Dave: And they didn’t have you take a look in the vault, didn’t they?
Doug: Right, yeah. Absolutely.
Dave: Okay, one more question.
Doug: No more money there, sadly.
Dave: One more question and we’ll get back into it. But I can remember when I would open a Christmas club, and I’d get a little book and I got a glass or something. Those things have disappeared. What’s going on?
Doug: Well, the reward programs-
Dave: Or a toaster. Used to be a toaster.
Doug: Sometimes you see reward programs come and go, and I would say that all has to do with their cost to fund. So for, really since the crisis hit, most banks, they’ve been flush with deposits. Some of them, even for large corporate depositors, they’re actually charging the company to deposit money with them, if you can believe it. It’s negative interest. It truly exists. There’s a few institutions that are doing that. Now, that will turn again, where they will be in need of liquidity, and so they’ll start reward more for deposits, but that’s typically what you see there.
Dave: Well we’ve been playing around under door number one, which bank is the right bank. Door number two is one size fits all doesn’t fit. I think you’ve hit most of those things you wanted to cover there.
Doug: Sure.
Dave: Anything we’ve missed?
Doug: It’s just, again, I would try to be as conscious as you can of the overall relationship. By that, I mean it’s not just one person, it’s do you know leadership at that institution, above and beyond just the day to day person that you deal with? So it can be big, it can be small, depending on your needs, and where you want to be. Just be conscious of the whole relationship and don’t get tied too much to an individual.
Dave: Right. You know, I want to end up with what you don’t know could hurt you.
Doug: Yes.
Dave: Now, I don’t even know what to ask, what can hurt me. Other than the guarantees and the loan covenants, you know that kind of pisses me off. But what else is out there?
Doug: It’s some of the other clauses, you just want to understand in your documents. Like I mentioned the one about the change in the law or statute caused a trigger. You might ask or have us take a look, if that’s in those documents, let’s get it removed. The other one I don’t like is the material adverse change clause.
Dave: What is that?
Doug: The MAC clause. If you read, typically that’s defined if the bank feels “uncomfortable”, they can trigger you’re note. I never like that, because uncomfortable is a very nebulous definition to me. I don’t like that. We’re black and white people, we like define it for me. What’s that mean? Give me a number, give me a range.
Dave: Could that be a morals clause?
Doug: Almost, right. Almost. Sounds like the Baseball Hall of Fame, the morals clause or something. I don’t know.
Dave: Should Pete be in the Hall of Fame?
Doug: No.
Dave: No? You don’t care for that?
Doug: Sorry.
Dave: What else … I have to ask you another question about all these applications you fill out and you check the box. Does anybody ever look at those things, at those boxes that I checked all the boxes?
Doug: Rarely. It’s kind of like the Apple agreed to terms of service. Does anybody ever read that stuff? We all check those boxes, right? So again, it’s just worth having the conversation to make sure that you understand. The likelihood that some of this is gonna come back to bite you, probably not great, but let us just take a quick look, give you an assessment of telling you where the major points of risk are. So that you understand them.
Dave: Right.
Doug: You have a business to run.
Dave: You’re the director of construction and real estate services for Rea & Associates, but I know that fellow team members are consulting with you on a continuous basis on how to get the proper loan documents in place, and go through that whole process. And you can help our clients make that an easier process.
Doug: Absolutely. Absolutely. It’s all about putting them in position so they know where their risks are, and then they can run their business and do what they do. That’s what we want, right?
Dave: As a banker, and a CPA, what are the red flags you see? As a banker, put your banker hat on for a minute.
Doug: I don’t want to go back to that world. You’re scaring me.
Dave: What were your red flags back then, when you would look at a financial statement?
Doug: For me, you can tell a lot by the quality of the statements. There is a lot to be said for that. Also, the firm and its reputation and who prepared the information. Do they have industry expertise? Do they have a good team? Who else do they work with? That type of thing. All those are very important. If I had knowledge of the firm and its principals and understood the quality of those people, then you feel comfortable. If it’s a small shop, and maybe they’re in over their heads, or conversely a bigger shop and maybe they’re not spending enough time with that client. Both times, you can point out, have led to a lot of risk. And so that’s what I’d look for, when I was a bank.
Dave: Did you use the three C’s?
Doug: Yeah, that’s still in play. Although I will tell you that, it’s less important today for most of the institutions. Again, they’re using a lot of advanced analytics. So even the three C’s-
Dave: Go through the three C’s for me real fast.
Doug: Well, the old character component, that’s first and foremost. Now, even that one, which you’d say, “Well, how do I know you’re character unless I sit down across from the table and maybe talk to people that you know.” They’ll run analytics on that these days, and check social media, other things that just are red flags. So it’s really frightening what they can tell you.
Dave: … character. Cash flow, is that another one?
Doug: Yep. And capital.
Dave: And capital and collateral. The three C’s.
Doug: Yeah, yeah.
Dave: So again, you can help me get my three C’s in order and so forth. So, again, as we wrap up, our guest has been Doug Houser, talking to us about better banking relationships. And Doug is a CPA, and as I mentioned earlier, is the director of construction and real estate for Rea & Associates. So appreciate you taking a look, taking us behind the scenes, behind the curtain and even into the vault.
Doug: All right.
Dave: Thanks so much. Thanks for joining us, Doug.
Doug: Appreciate you having me.
Dave: I would imagine that a lot of what we covered today is completely new information to a lot of our listeners. I’m glad you made time to join us. Listeners, did you enjoy today’s episode? Let us know. Like it, comment on it, or share it. And don’t forget to check out videos of our podcast on YouTube. If you want to learn more about this topic, or talk one on one with Doug Houser, email contact.us@imtiazqazi.com, and we’ll make the connection. Until next time, I’m Dave Cain, encouraging you to loosen up your tie, and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own, and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only, and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation, so they can expertly guide you to the best solution for your specific circumstance.