Episode Transcript
[00:00:02] Speaker A: Welcome to Intentional growth, a show that teaches you as a business owner and entrepreneur to view and run your company like a financial asset, which will allow you to enjoy work, create wealth and make an impact. This mindset will help you focus on building a more valuable business and give you the choices to grow, acquire, reinvest, or exit. Live the life you plan for all with intention.
And now, here's your host, Ryan Tansom.
[00:00:32] Speaker B: What's going on, everybody? Thanks for tuning in. I hope you're enjoying this podcast. If you are, go give it a rating on iTunes or Spotify or whatever player you're listening in on. The ratings really help and we're going to continue to level up the guests, and I'm very excited for today's guest. His name is Jeff Campbell and he is the senior vice president at Scale bank. I've known Jeff for over ten years. He was actually one of the banks that I interviewed while we were trying to refinance our business back before we sold it. And the reason I'm excited to have him on the show is he's got unique insights into the economic shifts and what's going on into the business banking landscape and the industry. And why it's so fascinating is because Jeff's bank, they have been in business primarily focused on financing, working capital. And in order to do that, a bank needs to completely understand how a company operates and generates cash flow to better understand the risk of that future cash flow, which is why Jeff is the right person to have on where we dive into what's going on in the banking industry, all the commercial real estate loans, the baby boomer wealth tsunami. We talk about private equity, we talk about the exposure that the banking industry has from interest rate risks and how that relates down to businesses and how businesses might be impacted for the future funding of their company and why it's so important to understand how the banking industry works and thinks about risk. So that way you can better understand how to interview the right banker and go find yourself the right funding. And the first hour we go from the macro space all the way down to banking industry and how they operate to then businesses and how a business should structure their finances. And the last half hour of the conversation, we do A-Q-A with some of the listeners questions that were submitted in about what questions they would have for a commercial banker. And Jeff was more than happy to accommodate. I know you're going to absolutely love this episode. If you have any interest in banking, the economic shifts of what's going on and how to continue to fund and scale your company. Thanks, everybody, for tuning in, and I hope you enjoyed this conversation with Jeff.
[00:02:28] Speaker A: This episode is brought to you by Arcona's fractional CFO services. Arcona's fractional cfos integrate into your management team and assume the responsibility of the CFO. They become your strategic financial partner to help you run the business, create your value growth plan, and build the financial roadmap to the valuation you want to achieve.
[00:02:50] Speaker C: Jeff, how are you, man?
[00:02:52] Speaker D: Great, Ryan. Thanks for having me on.
[00:02:55] Speaker C: I'm so excited to have this conversation.
I've known you now, what, eleven years? I actually was thinking about that because your kids were, I think, four and seven or something like that when I met you.
[00:03:07] Speaker D: Yeah, that sounds about right. Well, I think I got to meet your father a little before that even. I was looking back at some of the records.
I think it was like eight, nine, or thereabouts.
[00:03:19] Speaker C: Oh, no shit. That was before me then.
[00:03:23] Speaker D: And then you got in the mix. So there was a couple of different phases there, and I don't know if we can allude to what we're talking about there, but when we really needed some help. Yeah.
[00:03:36] Speaker C: Well, I'll just say why I'm excited to have you on the show is because I interviewed 17 bankers, man, and I found out the difference between bankers, and that was probably 2011, 2012. And I was like, some people are salespeople, some people are underwriters, some people are partners. And then I was like, you had this unique blend of, you understood money, you understood business, you understood us, and you actually cared out of the 17, and I think at that point, you didn't have like a preferred SBA program or something like that. So we were just not a fit or something like that. But you really wanted to help even though you didn't have the capacity.
Yeah, I don't know if I'd be here if you would have had that program, because you might have probably got it figured out and I'd be still selling copyrights, maybe.
[00:04:18] Speaker D: Hey, it's funny how life works out that way. I appreciate the kind.
We're kind of getting right to the brass tax of it, but really, that's kind of how we can talk more about the bank and the history and everything else. But what you described right there is kind of how the philosophy of the management of the bank and myself is. I've been there 22 plus years.
It's a long game.
You do good work, look out for. And this sounds cliched, and people, you could be rolling your eyes as people hear this, but it's true. And do what's right for the client or the prospect in this case, and try to get to a yes or a solution or some sort of provide something. And I would go on calls with, in your case it would be, hey, I want to try to find a solution. It may not even be to anything, to my or the band you're helping.
[00:05:22] Speaker C: Us with, even factoring offerings.
[00:05:23] Speaker D: Well, it wouldn't even been to our direct benefit necessarily, but this stuff adds up over time. In terms of my selfish interest. It would be do good work and try to help people and things come around, and it may be years thereafter. But that's really kind of the philosophy and that's how it's always been here. That's one of really the nice things. Hey, I'd go on telemarket. We have a guy that lines up calls for some of the lenders for like, telemarketing appointments. And I would go out there and understandably, sometimes I'm knowing I'm getting into this would be a goose chase. And there's really not going to be a lot of upside here, other than spending time driving up there, meeting with someone, but go in with the philosophy, there's little downside to meet with a business owner, whether I think just to learn more about them. And I would always have the goal, I want to have one leave behind with this guy or this gal. And if it's something I can't help them with, I want to leave them with a name or an idea or an introduction or a referral or something, and they may take it for granted and never hear from again, or it may change everything. So it was almost going in with the blinders of what is the financial gain that this is going to be? Selfishly, that isn't the goal. It is, how can I help these people, or this owner, or this company, or this group of owners or this family?
It all works out big time in the long run, kind of the long game. That's always been the philosophy, which is.
[00:07:00] Speaker C: Really nice when I got to experience it, man. It's the whole giving the giver's mindset, which I know you say is cliche, but I think more now than ever, business owners are looking for those service providers that actually just show up and are human. And let's talk about how you got into banking specifically and then why scale bank, which used to be called fidelity. And you can kind of give us the background container of that, Jeff, because it's pretty rare to have someone stick at one bank for over two decades at this point. And you're not old man, so you're actually a young guy. So you've been in the point where someone could go career hopping. You didn't do that. And so I think there's interesting data points that we should pull on here.
[00:07:44] Speaker D: Well, I think I feel like an old man. You're a nice guy.
I saw your LinkedIn about your workout habits and that was a motivating post. How many? 5000. Some od.
[00:07:57] Speaker C: Yeah.
[00:07:59] Speaker D: Work to do. So anyone watching this realizes real quick who's been in the gym. But anyway, I think I didn't know what I was getting into when I was looking for the start of career. It was my first job out of college when I started with the bank and didn't really have, I had met with other banks.
[00:08:20] Speaker C: Finance major.
[00:08:22] Speaker D: It was like a business and econ kind of major. So that was really the finance and business major at the college I went to and had been looking around, met with, actually interviewed in the office from which I'm sitting now with the now president and CEO Tod Williams, who's really been kind of the driving force of the organization. You know, Todd, he's been here 30 plus years.
[00:08:47] Speaker C: Wow, cool.
[00:08:47] Speaker D: And really hit it off with him and it kind of started from there. So it was really lucked out. I mean I look back, I use this line, I just wanted to eat, I needed a job, but really hit it off. They were looking for credit analyst, was the position commercial credit analyst. That's how the career path has started with a lot of the lenders here at the bank and really hit it off with Todd. And then Chuck Miller was involved at the bank. Then Jim Morton, the previous president before Chuck and Tod, all of whom were at the bank 35 plus years during their careers. And it was more, hey, there's a personality fit. Things started clicking and I learned more about business and accounting the first week.
[00:09:34] Speaker C: But it's true.
[00:09:35] Speaker D: Holy smokes. So some really great mentors that I had learned a ton from over the years and don't need to name them, they know who they are, whether it's business development or credit or relationship management. And that's been critical. So it just kind of clicked and there was a way about doing business. I think that's what stuck. So people ask how long you've stayed at this bank? That long?
It's back to my original comments. There's just a way of doing business that I think has always resonated. And a lot of the lenders and the people at the bank here, as we kind of take a step back. A lot of them are small town background. This is just one anecdote, but I think it does make sense. We kind of got a small town background amongst the employee base, and I think that kind of rolls into how we take care of our clients and how we do business.
When you walk in your office, there's a hard work ethic that's assumed, again, your word means something and you're not really out.
The ethical dilemma kind of thing, that doesn't ever really become an issue. It's want to do what's best for the client, not about the short term gain or financial benefit of the bank. That isn't how we operate. So that's been the intangible. I think that's been the difference. The other great things that I didn't know going in that the bank was so well run, well managed, diversified, model, good performer. All of that, of course, helps to keep people happy and to preserve the continuity of the employees and therefore the continuity of the delivery of our product to our clients. Because the bank's been such a good performer. So that lifts all boats. Yeah, exactly.
[00:11:22] Speaker C: It's a palpable feeling, honestly, when you walk into your office, too, of that kind of energy.
It's just the human touch with the practical business model at the same time. And so let's talk about.
Maybe I'll give you a little container of like for all the problems that you saw 15 years ago, is why I care about money, because I didn't have any, and we just needed to make payroll. And so now I've had this decade plus infatuation with how money works. Where does it come from, and why do these bankers back? I remember being a kid, Jeff, going like, so we just drive by this bank and they just grant people money or not.
But what I've noticed over the last even 15 plus years is out of the 17 banks that I interviewed, you're the only small town bank still around. There's a consolidation that's been going on. What's happened since eight, when the Fed hit the printing press, and how the business models have changed, yet you guys are still there, tried and true. So maybe just without having to give us going into too many different rabbit holes, but how the business of the banking business model, the middle markets, has changed over the years from business development to underwriting. Just kind of give us like, you've been doing this for 20 years. What's been the evolution that you've seen and where we're at right now?
[00:12:45] Speaker D: Yeah, I mean, it does feel like if you look back at it, things have changed.
It's changed, but it mean the basics and those elements are still as important as ever. But I think in the local market, I would agree. I think we do pride ourselves on being one of the few remaining Minnesota owned, Minnesota based business banks in town. There are certainly fewer.
We were always a bit of a unique player in the market. Even back in the early branch network. Everything's in one spot, which was by design to get decisions made and move quickly, not run it up the ladder to a know, send it to maybe.
[00:13:31] Speaker C: That doesn't know anybody, or to send.
[00:13:33] Speaker D: It to underwriting in Green Bay and get an answer know it was walk down the hall. Here's what I'm thinking. Someone needs the following here. We got to get on this issue right away and move quickly. So we were always unique in as much as very flat, very tight knit, commercial focused. We're in an office park, same office park we've been since 1970. And it's functional office space. Okay, but it works.
[00:13:56] Speaker C: People are in the office, and it's working, and it's not this hologram.
[00:14:01] Speaker D: We're not keeping these people around because of our nicest amenities, necessarily, but it's a nice, fun place to work with good people, and it definitely serves the job. But it had been moved quickly in a dynamic environment. Hey, we got to get things done. So having a branch network. So the value in the bank here was always, hey, the people are really the value there isn't like this huge branch. Again, a network of. And we had a niche where the bank was always focused on. First and foremost, was working capital lending, which was a little bit more high touch, a little bit more monitoring required than most every other bank, particularly during that early period of time, which was mainly focused on commercial real estate and or certain types of SBA lending, and some of whom had rocket ride growth where ours had been more slow, moderate, steady growth, focused on working capital and then building around that with other.
And that was always unique and a differentiator in the want to.
[00:15:06] Speaker C: That is so fascinating, Jeff, and I've never heard you clearly say it like that, but it makes a ton of sense because for the mean, I bet you, Jeff, working capital, I say those words, and all the business workshops or all the CEO presentations or whatever people's eyes glaze mean. Everybody knows what it is. You can't pay payroll with your receivables, right? Unless you're doing some sort of factoring. But my point is, working capital is you have to understand the business operations to understand how cash comes in and out of the company. You have to actually understand the business versus when you say, like, everybody has had a rocket ship growth. Hey, guess what? Rates went down, asset values went up. We have fictitious margins or equity. Now here's more money.
Capital is cheap, equity goes up, here's more money.
And I watch those banks too. Or like the peripheralation or the growth, whatever, however you say the word is, install all these salespeople that don't understand money. I mean, I actually had a commercial banker, Jeff, go to me and the crazy thing is they said this shit out loud is this banker said, I never knew you could value a company based on its cash flow. And he was a banker that had been in this for 30 years.
[00:16:23] Speaker D: Well, I think you see a lot of. There was a lot of transactional stuff going on that was leading to some of the growth in some of these. So we really never really thought of ourselves as the transactional lender. It was picking our spots with relationships and not a high volume kind of situation. So that's probably the reason why there has been some additional. There's been a lot of banks from out of town, the Dakotas, elsewhere that have come in that have entered the market through acquisition. And given our unique structure, we just probably were never a target. Nor were we. I don't think the owners were ever open to that. And then the other thing that really we're a complicated little bank is kind of how I describe if we're a 500 and 5600 million in assets, it does vary. And we've been higher. We've been lower based on a few different silos within our portfolio. But for a bank of our size, it's unusual to have not just the core commercial banking stuff like I do, really, the small business, closely held, privately held companies call it 100 million and under in revenue, really hyper focused on that. A lot of that drives the liquidity and steady core deposits that we've been able to accumulate and work very hard to preserve in the last couple of years. And then on top of that, there's some other diversification in the model that really makes it unique. There's a factoring company that's part of the bank, which is again, very unusual for a bank of our size to have a factoring division. A lot of that is tied into the transportation, oil and gas and staffing industry. So factoring of invoice based receivable lending, that is more transactional and more of a nationwide model where the business banking is generally mainly in town, but if you can drive there and back in a day is kind of how I describe it. And then there's another big part of the bank. There's an equipment and leasing division that we've added in recent years that's been another growth spot. There's another big part of the bank that does a mortgage warehouse lending, which is a real niche. And again, extremely unusual for a bank of our size to have a presence in that when it really would be funding mortgages, private mortgage bankers, again, more of a nationwide model, funding those mortgages before they get sold off in the secondary market. So think of it as working capital to mortgage companies.
And that's a lot of volume during the low rate environment. Late 2020, early 21, the bank's balance sheet was extremely swelled due to the volume in that it's come down as rates quite quickly. Rates went up, that volume went down. All of this is to your point, it never really made sense as an acquisition target. Didn't feel like because we were such a union, we're kind of an OD duck in the market and we really worked hard to keep our people around. And for just what you described meeting with you or prior to that, your father, 1314 years ago, we've got clients that have been here 25, 30 plus years. They know who calls the shots. They know where the decision maker, who the decision makers are, what the process is, and they have access through decision maker. That's the difference. So it sounds easy, hard to do, hard to deliver, to execute on. That's really been the difference. And then you mentioned just real quick.
So that was Fidelity bank in its evolution, started in 1970, was originally called Southwest. Fidelity bank of Edina and then it became Fidelity Bank Southwest.
[00:19:55] Speaker C: Because at Southwest it is defidelity.
[00:19:58] Speaker D: There were other fidelity banks in town way back when. And then there was others that got bought up.
[00:20:03] Speaker C: Not your location?
[00:20:04] Speaker D: No, we were the last one standing. Then it became Fidelity privately owned in five. We were acquired by really a family office is how I would describe it. That's, hey, we're an investment in a portfolio and there's independent governance and there's firewalls and it's really been a really good ownership group for what it's worth, too.
[00:20:22] Speaker C: It's the Opus family, right.
[00:20:23] Speaker D: It's the roundhorse family that's tied to, most people would associate with opus construction. So it's some family trusts tied to that family.
[00:20:33] Speaker C: I bring it up because Paul Moffat's.
[00:20:34] Speaker D: Been on the show, correct.
[00:20:37] Speaker C: Paul manages the family private equity family. When we were talking about his sliver of the family.
Jeff, before, I want to interrupt you, before you keep going, because I think that this is a good foundation for how we can compare what's going on and some of the challenges in the middle market banking problems that we're going to get into. Why you're kind of insulated from what I've gathered from that, because of these different diversified revenue streams and the complexity behind your business model, if you can. Because then I want to get into the scale. Maybe you can finish your thought about scale bank and why you've renamed it going back to then that cash flow. And I think about the cash flow as the nucleus, the machine that has to keep going. And so when I do my presentations, I go, you want to go from point a to point b, and you've got a car, and your company is the car, and you cannot run out of cash.
And I think about working capital as the gas. In this case, we want to accumulate it because we want to accumulate more than working capital. But working capital is that engine, or the gas for the engine. But you have to understand the car, the destination, where you're going, who's driving it, instead of just what is it worth on paper. And then it's not just an interest rate equity game. You have to understand the inner workings. But you mentioned something of why you started off as working capital and then diversify it out into equipment leasing and deposits. And if I think why those things are important for you, why did you diversify off into those things, and then why is that important for your income stream and how that's different to these other banks that have high risks right now?
[00:22:16] Speaker D: Yeah, I think it's a diversification.
That's the element. As important as anything.
I think the mortgage warehouse thing was something that was started with a local mortgage broker in town 25 plus years ago. And that thing has really morphed over time, as we've learned a lot about that industry, and that's very complex. And there's a group of folks here at the bank that are really dedicated to that particular area, and it's changed. We went through the financial crisis during that time, when we've ridden some waves and it's been up and down.
[00:22:49] Speaker C: But doing mortgage credit facilities like you're talking about working capital for mortgage brokers is different than you. Which other small banks might have 30, 40% of their balance sheet, actual mortgages, which is different, right?
[00:23:05] Speaker D: No, for sure. So that's short term lending.
It's here for days, is really almost how quickly. That's the velocity of those types of fundings. But yeah, I think it would be the market maybe drove some reason to divert. We had always done equipment lending and term lending or owner occupied real estate, but I think as the market evolved and as we had more sophisticated clients and other opportunities, we kind of grew and morphed with our client base and our centers of influence. So a little bit more, we do some investment real estate, seemingly a lot less if you look at the portfolio, compared to a lot of the peer groups in town. Owner occupied real estate for manufacturing facility or an office warehouse or something like that. But it was really always back to the bread and butter of the working capital and the high touch. So that requires, like you said, you got to watch it more closely. There's more monitoring involved and it's more work. And we've been set less competition doing that too.
Yeah, but we've got some technology that helps streamline things with the reporting and our ability to.
I think we've just been trained to have the understanding, like you said, if you're lending on short term assets, hopefully that collateral is going to change every 30, 60 plus days and have the ability to understand what's really the type of receivables, what risks can be involved with certain elements within a receivable base, likewise with inventory, and then really the balance sheet construct as a whole and how it all plays out. Because I think you can get in a different mindset like you're discussing. Well, hey, I have my operational cash flow. I have an income that we're making to service my obligations. But there's also the working capital, cash flow of the ins and outs on a short term basis to fund the business and to meet the needs and have things appropriately structured to provide that sufficient working capital to live. So that's been a bit of the difference. Where we had the expertise, we would partner up with asset based lenders and other maybe nontraditional lenders historically to do things that maybe were on that, we would have additional monitoring in place where we could partner up with others to do deals and get in a little bit earlier. And then once things came around, we may be able to help them on a direct basis. So that was really the difference where we were just trying to kind of stay laser focused on one particular component and then grow with it and grow with our clients, and then diversify as we needed to make sure we're hitting the needs of the market. So I don't know, was all of that a grand scheme and design some of it probably was. We were fortunate that some of these things worked out. If you think about it, under normal circumstances, if the economy happens to be slowing, we're in a different environment right now. We'll talk about. But if the economy happens to be slowing and the Fed would begin to cut rates in order to spur on growth and to stabilize the economic situation, therefore, rates are lower in turn. There should be more potentially residential mortgage activity as a counter because the rates are lower and then vice versa. If the economy things are moving more quickly, rates may be higher, the commercial side may be more active, where the mortgage stuff may be lower. So there is that counterbalance in terms of the hedge of our risk in certain economic cycles. That's kind of part of the logic. It doesn't always work out perfectly.
[00:26:53] Speaker C: And the bank's balance sheet must turn over pretty fast, too.
[00:26:56] Speaker D: It's a little bit more of a unique balance sheet versus having such high.
[00:27:01] Speaker C: Interest rate risk exposure, which we can get into in a little bit. But what, I'm just kind of hearing it. You guys just have to understand how businesses operate, and you have built a sustainable, predictable, transferable cash flow for the bank based on the health of businesses and the underwriting that you're doing of these companies and the different diversified risk, maybe this ties into the scale bank rebranding and we can get into then how this risk is in other banks. But I think it's important to understand. We talk about the roundhorse family, the opus family, essentially, really wealthy individuals, the family office that has this, where the money comes from, from a bank. Because I think, again, what we're doing, by talking about your bank, we're providing relativity for people to understand. Because I think a lot of times, Jeff, people don't know to ask this stuff, oh, the banker said, yes, I get money or no, I get money. And they kind of just leave it at that. Versus like, this money comes from somewhere for the bank, because the bank, their inventory is capital, and where they get their money matters, and the intent behind that ownership group matters. So where you get your money and then maybe, where do other banks get their money? And then we can kind of talk about, like, scale. But I don't know how you want to tie scale bank. The rebranding in there. Maybe just start there. It's up to you.
[00:28:20] Speaker D: Yeah, well, the rebrand was really, they were looking to freshen up the brand. We had this 1970s logo.
[00:28:30] Speaker C: Fair enough.
[00:28:31] Speaker D: Some of these things come back in time, right? You were waiting for that logo was never going to come back in time. Never come back in style. So they were looking to refresh the brand. It ultimately became a decision, if they're going to invest money, we're going to invest money into a brand. Why invest in a brand in a name that we could never own?
Mainly because of fidelity investments.
[00:28:50] Speaker C: Right.
[00:28:51] Speaker D: And we would get phone calls and people coming in all the time, and service providers, and they would be confusion. There's a fidelity investments location just a few blocks away on France Avenue. It'd be constantly an issue. And our tellers and our receptionists and our people would take phone calls all the time. They had it down. Wrong number. Here's the correct one. We don't do iras here, and vice versa. We'd have clients that would. Prospects that would mistakenly go to. So that was always an issue. There was also 50 ish fidelity banks in the country, like fidelity or first fidelity or first fidelity of Oklahoma.
[00:29:31] Speaker C: It's like oak and wealth management, like, so creative.
[00:29:35] Speaker D: Yeah. So that was another thing. So this would be coming full circle. To your question, that wasn't necessarily the reason for the rebrand, which occurred last in September of 23 scale bank, as in scaling up to the next level. And it's been an exciting change. Nothing changed with the management or the ownership of the bank. It was just a rebrand. But looking back at it, think of roughly a year ago, March of 23, there were banks. That was when the banking turmoil began. And let's talk about how the deposits and how that all plays into this. Well, one of the banks, there used to be a bank in town here that shared, totally unrelated. That shared the name of a bank that went. That failed in March of 23, that bank had since changed names and had been acquired. But if you think about it, for those that weren't paying any attention and saw the headlines of bank, I'm trying to deposit place here for the anonymity, but if Bank XYZ went under. Wait a second, that's where I bank. Even though it was a different bank, there could be confused. Why have that risk in that was maybe by looking back at it, that would be another reason to have your own name carved out and presence in the market.
[00:30:54] Speaker C: Better define that out with someone else's case study.
[00:30:58] Speaker D: Exactly.
So unique name. Not everyone. There was a lot of work and research into the name. I think it'll grow on you if you don't. Some folks were hesitant. No one really likes change, but kind of get more of a modern look and an exciting change. And it was a great exercise. Talk to the clients and really get out and promote the new ideas back to the whole deposit thing.
The model of the bank has been really focused on that small business, which we defined as small business, 100 million and under in revenue, mainly in town. But that type of business, as we've added new business for decades, has led to a diversified client base with not huge block, not major concentrations in a particular industry or type of lending or even deposit concentration within certain industries either. It's been a diversified commercial deposit base for clients that need to have operating checking accounts and additional liquidity in the form of savings and money market accounts or CDS deposits with the owners or the principals of the companies as well, that we could grow. So as a result, there's been this core, stable level of liquidity that we've been able to preserve, and it swelled during COVID like every bank did. But we kind of had that core level of deposits that we were able to preserve, and it's been, knock on wood, it's been relatively sticky that we've been able to preserve a lot of that because, hey, you got to keep a checking account. You got to run your company. If you're a $20 million working capital.
[00:32:41] Speaker C: You need the working capital. Yeah.
Let's talk about why that's important for the listeners, Jeff, because I find this so fascinating, and I find it also fascinating how few people get into the weeds of this. So banks need deposits. So correct me and interject if I'm off track on this, but banks need deposits. So they need deposits so they can lend out money. That's their inventory of capital. Then they say, okay, well, I can lend out now nine times my deposits, or whatever that is. And so if you have a diversified set, so, hypothetically, you got a million dollars in cash, you can lend out 9 million. If that million dollars goes away, you can't have those loans out there. Right. Or the equity of the bank changes. And again, I don't know.
[00:33:26] Speaker D: Well, it would be the liquidity position of the bank.
Stable commercial deposit base, mainly commercial. We've been very fortunate and have worked really hard to preserve that. The owners have also, I think, left in a fair amount of capital for the bank to manage some of the volatility in our balance sheet with these other industries, and then also if there's an opportunity that we wanted to take advantage of. So they've preserved a lot of capital in the bank, too, which has, of course, helped in the form of really excess capital. But to your point, the deposit thing was kind of taken for granted for a long time or really wasn't a focus among. Because money was so easy, or you could borrow it so cheap, even a banks could borrow it so cheaply as well. So if they didn't have the deposit base, but had all of a sudden this huge, considerable growth in, let's say, it was commercial real estate, there were other ways to fund that through brokered deposits or other borrowing mechanisms. If they didn't have the deposit base to do that, and the model was working fine, when the rates were low and the money was easy and there were all this liquidity in the system, it worked just fine until a disruption would prove that maybe that model was a little too dicey and there was a lot more risk to having it structured that way than people realized, which.
[00:34:50] Speaker C: I want to dive a little bit further into, because I think it just helps give relativity to your bank compared to what's going on out there. And people should be asking their banks these questions because it all runs downhill.
[00:35:03] Speaker D: Trust me, they should always know who they're working with. And if it's not one of their money control banks, they need to know what's going on. They want to know who the management and the decision makers. But really, hey, those are good questions, and it's public information. Hey, what's your bank up to? How's it performing? What type of loans do you do? What's going on in your portfolio? These are things that people can easily. Look, Jeff, what I want to do.
[00:35:30] Speaker C: Is just kind of continue to go back a little, and just for the listeners that are not fully in this every day about how financial engineering works, because what happens is people that listen in, they're like, I need enough cash in my checking account to pay my payroll and to buy stuff. And what happens is, when you go back to, if a bank has a million dollars in deposits and is diversified from a lot of people, you have the ability to then give loans out and not have risk of that core that you're loaning against. But one of the banks that went under, they had like $300 million for one of the tech companies, and it just disappeared. And it's like, that's a problem, because now all of a sudden, everything. So there's the deposits and the ratio of how the deposits to loans, and the fact that your bank has a family office where they don't need all the money. And so they've got other things going on. They say, hey, we're going to park more cash in here to help you guys be safe. Where everybody else is going, we have 0.1% room for error. Just like it's the same thing. Like if someone were to take a bet out on occupancy and say, hey, we're going to like the commercial real estate, it's going to be 97% occupied forever. It's like that. You ran all your models on that.
I think that's kind of a good analogy to say commercial real estate occupancy, like little room for error compared to deposits and how much cash you keep in there and where they come from. But then there's the whole other layer that you just mentioned of. Even if they had that little room for error, then they can go do other financial engineering to do short term borrowing to then still make those loans out on someone else that's got a 95% occupancy model.
[00:37:14] Speaker D: Yeah, I think again, until there was a disruption. So the disruption when there was the bank turmoil last again, I think mainly in March of 23, that weekend, I started getting emails from people, clients, and I'm like, I've gone through the.
I remember the PPP. This isn't going to be another one of those, again, where people were wondering, hey, what's going on here? Am I safe? And they were concerned, or this was a wake up call. Now, like you're saying, you should have an understanding of what's going on with your bank and the financial profile of the bank. I mean, those are fair questions to ask. And I think banks, any bank should be prepared to answer those questions. They didn't really come up for ten plus years because no one really cared since we've got short memories and no one really thought about it since the financial crisis, call it 15 years. So these questions, people started emailing me over the weekend, hey, what's going on? So we had the ability to say, hey, here's what we're doing. Here's what we have in our portfolio, here's the data. Please feel free to dig in. You'd be amazed. There are both ends of the spectrum where some have no idea or interest at all as to what's going on at one's particular bank and the others that did their homework and intimately aware of what was going on and asking really good questions. So it was really interesting to hear some of the questions from the clients. We were able to talk through these issues and reposition things and make sure that we were making everyone feel comfortable. But I think these questions were going to every bank. Well, every bank was going to have press releases issued, the bank stable, good capital ratio. Everyone had the same messaging. But you got to peel it back and look what's going on. And hey, we had to play a lot of defense and there was other ways to preserve and reposition things.
[00:39:08] Speaker C: How good did it feel to be able to tell the truth? Man, I think about all these other bankers.
If you know that you're kind of up Schitt's Creek and it's like. Or you got to kind of like, because it's like this chicken or the egg where if the deposits don't leave, you actually might not have a problem.
[00:39:24] Speaker D: It felt good to tell the truth.
You don't want to cast stones. Things can change quickly. So it was being fully transparent and just laying out the facts. You're exactly right. But knowing that it's a small town and we're always kind of watching our flank as well. So I think what exacerbated things here even further would be kind of what you alluded to. Meanwhile, those that had huge portfolios of primarily installment loans in the form of fixed rate real estate loans that started with a three or a four, with the percentage that are fixed for five plus years, three, five, seven year fixed rate loans, and all of a sudden the cost of money is in excess of that. Well, or around that. That math doesn't work very long. So you were getting compounded issues with. And then the other thing, I believe there were certain banks that did that were more of the high growth, real estate driven, maybe had more transactional deposit structure as well, where that was more likely to exit the bank, their banks. So they had some reduction or flight of deposits out. Meanwhile, margin erosion because of the interest rate environment, that's a double whammy. So all of a sudden you're not making any money and your liquidity is really tight.
[00:40:47] Speaker C: I want you to back into this because I like where you're going with this. And just as a note, too, we've got some questions from listeners to back to your earlier point. There are a lot of people that do really care, and I don't want to skip past that because I'd say kind of people are almost in two camps. It's like they're trying to understand this stuff or people really care about this stuff. And we're going to get to some questions from listeners that we've got prepped, but I think you're getting to kind of the major issue in the middle market banks of the business model. But before, as far as these long term loans at certain rates and as rates go up, let's try and do our best. Jeff, for people that aren't living this every, like, what is actually going on with the bank balance sheets and their cash flow statements? Because some people might have heard of the inverted yield curve or maybe they care a lot about it. But this flipping, it's like the whole world got like for middle market banks, the business model got flipped on its head where the cash flow was working and the balance sheet was good. But all of a sudden Jerome Powell and Yellen rack up the rates and all of a sudden everything doesn't work. And people probably that aren't familiar with this all the time are going like, how is that possible for a whole business model to get flipped on its head that fast?
[00:41:59] Speaker D: Well, it moved quick and it was, historically speaking, very fast. There's no doubt. Well, it's kind of to my, if you've got a certain amount of loans that you're accumulating, you're earning interest on a loan that starts with a four and your cost of money is roughly the same, there just isn't the margin. The net margin erosion within the banks was really an issue. So the performance became, and these things are focuses, talk about your cost. These are what the regulators focus on.
[00:42:26] Speaker C: And I want to do maybe step by step, forgive me for maybe we're doing some baby steps here. So cost of money. So your cost of money in capital was what, two or three? And then it goes up, explain.
[00:42:39] Speaker D: So that your cost, it had been virtually at zero for the longest time because rates were so low. So what a bank is paying on their deposit, it'd be an accumulation of what they have in their various deposit accounts amongst their customers and other things. And if they're borrowing and kind of how that particular funding portion of the balance sheet is set up compared to what they're earning on. So for the longest time, rates prime was at three and a quarter and no one was earning anything on a savings account. For how long. I mean, it never came up for a decade.
Every bank felt, hey, their cost of money was virtually, that really wasn't the focus.
It was accumulating additional assets and having a margin that was appropriate at that time based on whatever the. And those were very low rate loans. As a result, all of a sudden, major swift change, their margins are getting squeezed as a result. And the regulators have things they focus on, one of which is the earnings of the bank and the liquidity position. So you've got that. So this is really strictly from the bank's position. All of a sudden a particular bank may not be earning what they were used to.
[00:43:53] Speaker C: And this is a cash flow perspective.
[00:43:55] Speaker D: From the bank assets. And then compounded with if they had any deposit flight out, they were feeling they may have to borrow money to fund their loans at even higher rates. So it really snowballs and creates these bigger issues. Now, some of this is going to work out because the Fed, hey, if things turn, and some of these things, if banks are going to have the ability to ride it out, and it would ultimately, over time.
[00:44:28] Speaker B: Pardon the interruption. I hope you're enjoying the conversation with Jeff. I wanted to briefly give you an overview of why I think it's worth going and checking out the intentional growth starter kit, or if you wanted to dive further into the online intentional growth academy, as Jeff and I are talking about, how banking works, how banks assess risk, it really all boils down to how financials work and how to understand the predictable, sustainable future cash flows of a company. And that starts with understanding how financials work. In the starter kit, I have an actual case study where I break down the three financial statements. So you can see, using a case study, how to organize your three financial statements, your income statement, tie it to your balance sheet, and most importantly, the visibility into that cash flow statement. How to tie that cash flow statement to your target normalized EBITDA so you can reverse engineer the financials and see your working capital and how much you're going to need and how much you're going to need to fund that working capital in order to hit your goals, how that impacts your distributions as an owner, and how that impacts your taxes and how that impacts your timeline to get to the valuation that you want. Because if you understand, I truly believe you understand the financials like Jeff and I are talking about. You can sit in front of a bank, a private equity firm, or any potential buyer, and you can tell your story instead of, like I did, using a PowerPoint or a whiteboard ten years ago. You can tell the story, and you can prove the story that you know what the heck you're talking about. So go check out the intentional growth starter kit. It's free, it's got a bunch of videos and the case study that I'm talking about. Thanks for tuning in, and I hope you enjoy the rest of the conversation with Jeff.
[00:45:58] Speaker C: For most, I want to comment on that, because when I think about when March 2020 happened, Jeff, and I'm watching the politicians and the people going, oh, small businesses will be fine over time.
Well, what in the hell? The ink 5000. The stats are on the ink 5000. Like 80% of those people can't afford two payrolls. So over time, it's not going to be fine because there is no time, right. And it goes back to whatever their models were of these banks. Your bank, over time will be perfect. There's capitalism, right. But then all the other people that didn't have that time.
[00:46:37] Speaker D: Well, I think what you're going to see is on a case by case.
The looming thing that you're reading about all the time is the commercial real estate market and what this all means. And you see different dates. And I was reading articles this week about there's a big slew of loans that are coming due within a certain period of time by the next.
Like, 80% of those loans are with the regional banks or with the small banks. So if those loans are coming, if they're actually coming due, well, there's two things. One might think, okay, that would allow the bank to reset the pricing so it would be more in line with their cost. What the cost is, however, adjusting that pricing is going to impact the cash flow for the borrower, because all of a sudden their cost of money. So think about these moving parts here.
[00:47:35] Speaker C: I do too much think about this.
[00:47:38] Speaker D: And I don't have the answers and maybe we'll solve it yet. So therefore, in theory, the value of that particular asset or that real estate is less because there's less cash flow getting generated because of these things.
[00:47:54] Speaker C: Well, let's, let's pull back because I'll see if I can put the link in the show notes. Jeff, I was watching the 60 minutes. I think I might have sent you that one. I'm not sure. But the 60 minutes of the commercial real estate from like a couple of weeks ago, and I'm going to say this because I was saying before we hit recorders, I struggle with how to word this without sounding like an ahole, honestly, is like, this guy is on tv and he's talking about his multibillion dollar real estate portfolio that has gone down in share value like 40% because he had all of his cash flow models built on 95% occupancy. And so he borrowed billions and billions of dollars against a 90. Like, hey, dude, I can just tell you at the age of 37 that there's probably going to be things that come up that might have that occupancy go down. And he's sitting there going, okay, so now I think the numbers, Jeff, were like, he needs $80 million in refinancing over the next twelve months and he can only borrow now 60, right.
Because of his equity. The equity that went down. So it went from 80 to 60, yet the 60 is going to cost him more than the 80 did.
[00:49:12] Speaker D: Yes.
[00:49:13] Speaker C: And he's got now half of his people. Instead of 95% occupancy, it's like 80. And you know what the guy said? And I just wanted to punch him in the face. He goes, this is one of the biggest societal problems ever. And I just wanted to go, dude, this is called capitalism. And I just was like, what societal problem is this for you?
[00:49:34] Speaker D: Societal problem would be addiction to debt at low rates and easy money.
But I'm with you. I get you multiply that by. So the magnitude of dollars that that guy's talking is huge, but it was a double, triple, quadruple whammy of things that are working against him. So how does that all get resolved? I think it's because the bank still has the loan.
[00:50:02] Speaker C: Right.
Let's go back to your point where the bank has the loan in that situation. So the bank still needs to refinance the loan, and if he can't pay back the loan, the bank's balance sheet is in jeopardy. There's kind of this chicken or egg.
[00:50:18] Speaker D: They'Re in it together, or they're having an issue servicing the loan itself, because if the vacancy is higher or there's compounded with a higher payment because interest rates are higher. So this all goes back to, you. Kind of got to walk. The bank operates under a diversified model on a conservative balance sheet and a certain amount of liquidity. We tell our clients, this is what we're telling our clients all the time. There's a certain amount of a reasonable and manageable level of debt and an adequate level of liquidity available and good information, I don't need to tell you, but forward looking to get out in front of an issue and running cash flows to project, it all comes back.
For those that were promoting this, and the banks are as guilty as anyone enabling some of this and promoting this stuff, and then people are running, hey, you're flying too close. And ultimately, if there is an issue in this case, three or four issues occurring at the same time, it doesn't end well if you're doing it all on leverage and high rates of leverage, assuming the rates are never going to.
[00:51:38] Speaker C: Go up, and that the cash flow is always going to be there, and.
[00:51:41] Speaker D: That the triple whammy, again, that was.
[00:51:48] Speaker C: Just, and this is not dealt with, to your point. And this is where everybody thinks like, oh, last year was when we had the banking cris, and people keep hearing about this stuff and I think what happens is there's a news flash, clickbait. People look at it and then they forget about it. But you and I who live in cash flow statements, I'm like, well, the problem is still 18 months. I mean, it's still there.
[00:52:09] Speaker D: Yeah, I do worry about that. And I don't have any insight. This is only my personal.
People ask what's going on in the economy all the time, and I get tidbits from clients. And it's really hard to assess as to what is going on.
We have, I think, certain manufacturers, it's been softer. Some of the macro indexes would indicate that it has been slower. There are certain segments that real estate, like mortgage banking, has been softer.
Certain industries have been okay. Others feel like they've slowed down transportation. It's hard to get a gauge on the economy, and you're flooded with information every day that it's day by day, you could come up with a different know. I mean, there's so much information to digest. It's really hard to.
[00:52:59] Speaker C: And just because one industry is down doesn't mean that the other ones are, you know what I mean? And I do believe, too, because after with Brian from ITR economics coming on the show every 90 days, if the Fed is going to reduce rates four to six times this year, and even if it's a little bit, it's going to prop up the economy for the next twelve to 18 months.
And I think about where I've learned the hard way is I just look at this and it's kind of what Ray Dalio explains when he had his lessons learned in the Fed comes in and bails out all the banks, it'll actually just be fine. The thing is, the economy could still sustain that. If all of a sudden every bank that was at risk has a big, huge parachute of money landed there, and then all of a sudden all the financial numbers make sense again. You know what I said, though, Jeff? Someone over the holidays, I said, you know what I, because when the bail happened over the weekend, I said to my buddies who own companies, too, I said, if they bail these son of a guns out, I don't know what I'm going to do. It's like the death of, and like, literally, it happened before Monday. And I was like, you know what I felt like just happened. I said, I felt like I've been playing soccer my whole life, which is what I played. And someone on the other team grabbed the ball with their hands, threw it into the net and said, two points, but you can't do that. And I was just like, what the heck is this?
[00:54:21] Speaker D: Well, that will be interesting. I don't know if where I was going is on the economy. If there's one thing that I do get, is there going to be additional issues in the banking system, system wide, as a result of everything we've talked about? Like, what's this black swan that's going to derail things here? I don't know. Maybe they're going to be able to navigate all this and handle it.
You got election, you got all these things that are factors into it. You got Fed policy, you've got obviously the interest rate mark. But if there's a banking thing, then that could be really the issue that really gets the, that may spur on the Fed to move more quickly to lower rates more quickly as a probably that would be the one thing I think that might trigger further because they would feel, let's say they start cutting here maybe as soon as March, probably not. Maybe, probably by May. And if inflation begins to start perking up again, man, they would look even more foolish than they have previously. They went in so early. But if there is a banking thing that drives it, that might be the way for them to cut harder because.
[00:55:28] Speaker C: It'S going to be something that can be swallowed by the public, is the problem.
I want to move on to then some Q and A from the listeners because I think all this is. I don't want this to get lost is the point is we as privately held business owners and banks like yours who care about cash flow, we can navigate this. I I lose it sometimes, too. Jeff we're like, I mean, the ITR, Brian and Alan's book is called Prosperity in the Age of Decline. He's like, this is about prosperity for the people that give a shit. Ryan and I was like, you're like, I just care about the system so much that I get lost sometimes. But the reality is this is a good thing for people that do care. And so I want to get into some of the questions that we've got. But I just think it is fascinating, Jeff, because when we were talking about that, someone saying that debt doesn't matter, I'm like, the US government can't afford its debt right now. The payments. We just talked about commercial real estate. No one's talking about private equity because there's no visibility. I got to imagine it's the same numbers as commercial real estate. Jeff from what I've been doing for ten years, and it's the same math equations and the same challenges.
There's these landmines going on, but if we're aware of them, then we can navigate them, control what we can control, I guess.
[00:56:49] Speaker D: Isn't that a great lesson right there in life.
[00:56:54] Speaker C: Living by that?
[00:56:58] Speaker D: When you're at crack of dawn working out, you got a lot on your mind. I get it. So you got to work through all those things because you're burning off steam.
[00:57:08] Speaker C: Before we get into some of the questions from the listeners, I want to talk about a fascinating concept that I dropped in our notes, which is that I talk about the US Census Bureau at how many privately held companies are out there? The 6 million privately held companies, 20,000 of them are over 100 million with 56 million employees. And then there's 300,000 between 5 million and 100 million, and then 5.6 million underneath 5 million of revenue.
[00:57:38] Speaker D: Yeah.
[00:57:39] Speaker C: And then we think about this $10 trillion baby boomer wealth tsunami that the exit planning institute and all these people are talking about, which I understand that they're trying to help people, but as I've been inside of cash flow statements and balance sheets, I'm going, am I missing something here? Because 5.6 million of them generally have enough cash flow for their lives.
[00:58:02] Speaker D: Right.
[00:58:03] Speaker C: But if you look at the valuation and the transaction price and the ability for the cash flow to sustain a transaction, I know what you're saying.
[00:58:15] Speaker D: I was interested. Those statistics are really interesting that you shared. I think there is a huge percentage of those that big wealth transfer. Well, a huge chunk of that wealth transfer supposed are lifestyle businesses that have lived a great life and have generated income for themselves and have added, but they haven't. And you're the guy that, hey, this is what you're to build a sustainable, treat your business like a financial asset that you want to get to the next level and scale. Like the name. That would be a great name for a bank. And not everyone is wired. They don't think that way.
[00:58:56] Speaker C: Because you have to investigate.
[00:58:58] Speaker D: There's one thing I've learned, it's investing in systems and other people. And a lot of times there was a recent transaction with a client that just had a liquidity event a week or two ago. I'm looking back at it and this was owned by one individual and it was sputtering along when we started working with them, 15, I don't know, twelve years ago, the owner, I think was smart enough to know I'm never going to get this thing where I want to go on my own. I need to bring in someone to run this thing so, first and foremost, this guy was smart enough and had the lack of ego to admit, I need someone here to help me get this thing where I want to go. And he got out of the way and hired a great individual that I happened to know from previous stuff, and we ended up working together, and we kind of rode this thing. So my point is, unusual for someone to have the foresight of ego and the foresight and the ability, hey, I'm not going to ever get to this 25, 50, whatever million dollar revenue on my own doing what I'm doing. I need to hire. I need to invest in systems. You hear a lot about eos in town here. That's always a big one. Work with people like yourselves that can help implement other controls on the financial side and get out and actually plan your capital investments and get out in front of working capital issues and manage your bank relationships and other things like that. It's a lot of work. It is. And I don't think everyone, and there's nothing wrong with the lifestyle business for those folks that are living a good. But they're not maximizing the value of that company.
[01:00:38] Speaker C: Jeff, I want to add a couple things to that, because I love how you worded that.
There's two parts I always say, like, it's okay to not want to do that, but what I want, and kind of my whole thought and intentional is get what you expect and reduce the gap between your expectations and reality, because the bigger the gap, the more resentment and unhappiness there is. Because what happens is, and I'll roll through this, is if someone's making 200 grand, let's say they're making 200 grand, salary distributions, whatever it is, and then someone. This is where we have to have the financial lens of this, because otherwise, people can't get to that other side or make a choice. If someone says to me or you and says, you know what, I don't want to do those things, but what they can then do is save for retirement.
[01:01:25] Speaker D: Right? You know what I mean?
[01:01:27] Speaker C: Instead of expecting your company to randomly be worth $5 million on its own, that just so happens to be the exact amount of money that you need to retire. But realistically, it's not. So there's that gap in expectations.
I say to someone, if you don't want that level of work, then just you have to adjust your expectations and what you do. But if you do want that level of work, then the challenge also, Jeff, that I see is people don't have the visibility to make that choice themselves, which is the biggest shame, I think, for business owners, because I'm confident if people have the data, they can make their own decision. It's like, well, I want this or that, but I think the problem is to go from the 200 grand, and I see so many people in the US meetings, dude, it's like they go in there, hire an implementer, seven grand a day, they go in there for two days, and they make up all these things that they want to do next year. No idea how much they cost, no idea how much they're going to impact their distributions, no idea how they're going to impact their valuation. Just making shit up. And I'm going, the problem is, I see that to go from that smaller business to scale with what you're talking about is you might have to reduce your annual income, which people don't. That's a very intentional choice to say, like, Jeff, if you can't afford less than 20 grand a month in income, this is a non option to do these investments. Or you have to borrow money from a bank that gets it, or they.
[01:02:52] Speaker D: Got to surround themselves with people that are willing to challenge them. And not everyone's going to listen. I mean, I understand that, but I think they need folks like yourselves or other fractional or consultants, or get in a peer group or do something where they're going to get challenged, and they may not take the advice, they may not do it, but those that can. That's a character profile that we often associate with a good client of ours is ceos or business owners that are in a peer group because they don't know it all. They like to learn, they like outside influence. And those are the ones that understand what their limitations are and are willing to maybe make some of these adjustments for the long run, and they're going to ultimately maximize their value and really get the payday at the end. But again, not everyone sees it that way. There's no harm in that. But if you really feel like you're building something or you want to build something, this is your number one financial asset and you want to get it worth X. Well, there's steps to do that, and there's important kind of the pillars of your advisors and influencers that you need around you to help you challenge you, being Mr. And Mrs. Business owner, to get to that.
[01:04:06] Speaker C: And as we get into the Q a now and then, I'll let you run the show.
I truly do believe, Jeff, that, and I'm curious what you think about this thought concept. And then we can get into Q-A-I do believe, Jeff, I really do believe is that if we, as the advisor community or other entrepreneurs help each other shift our goal from revenue and net income to a target equity valuation at a point in time. So if you say you want to go from X normalized EBITDA to y, and then what's my EBITDA got to be in 2030? What's my multiple got to be, and what's my debt? That equity valuation brings those three KPIs into clear view instead of just some blind k, one that they're thinking about. And I think then it aligns, then how they're going to use scale bank, how you're going to fund your working capital to get there, how it impacts their distributions. I just think shifting the goal helps.
[01:05:04] Speaker D: Or only solely focusing on the top line and not. So do you want to be the biggest or you want to be the best? You know what I mean? I mean, that's kind of how the banks operate. You want to be the best.
[01:05:12] Speaker C: What's your definition of farmer?
[01:05:13] Speaker D: Well, the best performer. You want to make cash flow. Well, yeah. And you want to double your revenue and have all these other complications that go along with that and make the same amount of money. No.
[01:05:24] Speaker C: Well, and I always say, Jeff, like my dad and I, when we met you, 21 million in revenue, lost $950,000. Who cares? 115 employees, lots of stuff. If we would have sold the business, we would have owed the bank 2 million some dollars.
That is not the called winning.
[01:05:40] Speaker D: That wouldn't have worked out so well.
[01:05:44] Speaker C: Okay, we can kind of do some rapid fire behind these if you want.
So how do banks evaluate current clients for risk? What steps do they take? And how do other banks handle those same issues?
[01:05:57] Speaker D: Current clients.
For current clients, I would say at least how we operate. We know who we're working with and we stay really close to them.
We like a lot of information and it isn't to burden the client, and this should be stuff that they're producing themselves anyway, but it's another set of eyes on it and for us to be responsive and get out in front of an issue or if they have an opportunity and they need to do something. We're not getting reeducated and getting up to speed. So it's know who you're doing business with, stay close and then have an understanding. Know the business, get to know the company and the industry the best you can. We're never going to know it as well as the owner. And then, hey, there's a certain rhythm of actual review of credit and so forth. But I think if you're proactive and you're staying close, you can get out in front of maybe a particular issue or an opportunity versus just the reactive. Hey, give me a statement once a year and don't talk to me in the meantime. And then we can talk then. Sometimes that's too late or there may already be an issue. So I think it's proactively. Staying close would be the best way to do that. And that can mean, how do you.
[01:07:04] Speaker C: Assess the risk of a new client?
[01:07:06] Speaker D: New client? It would be, hey, it's kind of back to the old, the five c's of credit. What's the collateral, the cash flow, the conditions in the market. We want to work with people that do a business a certain way so that character and the assessment of the management is really as important as anything. And I've heard that from, there was another credit guy here at the bank who had worked at a previous bank and they had a scorecard as to how they analyze folks. One of the criteria that they really leaned heavily on was the owner's grasp of the company's balance sheet, which I thought was really interesting.
A lot of owners don't really think you can see that when the owner likes, oftentimes the entrepreneur, it's the P L. The bank starts with the balance sheet and it's.
[01:07:57] Speaker C: Interesting. Yeah, I like that because my old partner always just say if the balance sheet is accurate and you have two balance sheets over two periods of time, and there's the cash flow statement and it's going to be correct. The PNL might be muddied up, but you're going to have two pictures of the truth.
[01:08:16] Speaker D: Banks always like the balance sheet. That'd be a tidbit to the users. When you're providing financial statements to your bank, have the balance sheet on page one.
[01:08:23] Speaker C: Hey, I like that. What factors are most important in approving a deal? History in the business? Successful track record? Personal balance sheet?
[01:08:31] Speaker D: I think all of the above. I think the accuracy of good and timely financial information is really important to us. So we got to have a comfort level in the information and I think a realistic approach to what the needs are and what the expectations are. But all of that does come into play.
There may be ways to mitigate a certain shortfall with, hey, maybe it could be augmented with support from the individual's balance sheet, or you could utilize some other loan program or utilize the SBA or something like that to help with a particular softness in a deal, but none of which can happen if your information doesn't make sense and doesn't. So that's a constant battle. And there's sophisticated business people that don't appreciate the value of accurate, timely financial information or utilizing an outside professional to help them provide that.
[01:09:24] Speaker C: Well, Jeff, I'll add to that, because one of my.
[01:09:27] Speaker D: You probably know a little something about this.
[01:09:28] Speaker C: Yeah, well, on both sides of it, because I was actually going to talk about my crappy situation before now. This is why I'm so timely, accurate, useful financials. And I learned this the hard way, because after interviewing 17 banks, and I can't even imagine what you and all these bankers thought we'd sitting down and they're like, okay, we're in a shit storm. We need more money, and we got a really good business. And then I'd go up and I would have amazing powerpoints. I'd bubble chart our entities and where our growth is. And people be like, that is an amazing story, Ryan. And then they'd say, prove it. And like, well, I just like, there's that story, and then there's the character, the five C's that you talk about. But then the numbers in the cash flow statement, the balance sheet, prove the story. And that is the proof. And I always say it's such a shame because you can't prove your story if you don't have that data. So it's not just an administration task, it's literally the nail in the coffin to get what you want.
[01:10:30] Speaker D: It's a tool. It's got to be a tool, not a task.
[01:10:35] Speaker C: Another question is, I would love to know how who owns the bank matters. It affects us significantly since the bank has a singular owner who likes real estate versus operating companies due to collateral.
[01:10:46] Speaker D: Yeah, that would be.
Well, each model has its own merits. I would think there would have been. If there's a family that owns a bank, like a family with no plan for succession other than to sell it, that can oftentimes be easily identified or an individual. What we saw when there were a bunch of banks popping up in, the early individuals that invested in banks, and they put in 5100 grand, whatever, and it was a pool of individuals. Well, that goal was to grow the bank and to sell it because they wanted some return on their investment in the form of liquidity. So it is important to have an understanding as to the long term. Anything can happen with a never say never. And any bank could, you never know. But to have an understanding of the ownership and the long term plan, I think that's a fair question.
[01:11:45] Speaker C: To ask, and I think if I were to just to comment on that too, is the fact that someone had that question and knew, well, they know the answer. Yeah. Right.
I think the answer is ask the question. Right?
[01:11:59] Speaker D: Yes.
[01:12:00] Speaker C: What steps can entrepreneurs and business owners take to limit their personal guarantees? And then in quotes, he might not answer that one. Yeah.
[01:12:09] Speaker D: Well, most of our deals, the standard in the industry is if it's closely held or privately held company, that there's often a guarantee from the owner or owners. There are ways to work around that. We've got a lot of ESOP clients at the bank. I know you know esops well, so employee owned where there isn't a majority owner. A lot of those deals don't have guarantors. We've been able to structure deals around that with the trade off would be, at least in our case, from a simplicity of the documentation and potentially the financial monitoring or covenants around a deal.
[01:12:52] Speaker C: Fair.
[01:12:52] Speaker D: If there's a guarantor, sometimes we can keep it more on the simple side versus if there's more of a covenant driven deal without guarantors, sometimes that can be a little bit more complicated with more complex loan agreements and legal documents and covenants around it versus, and a lot of our clients like it easy. They want to be a guarantee security agreement. I understand what this means. Or you could have a limited guarantee, which sometimes can take some of the edge off. But there's a trade off from simplicity to complexity in that regard.
[01:13:27] Speaker C: Well, that makes a ton of sense because when people do esaps, a lot of times the personal guarantees are eliminated. But if you think about why that is, is exactly what you just said is in order for someone to do the transaction, to do an ESAP, they actually have to get their stuff together, get the data to write together so everybody believes the story and therefore eliminate.
[01:13:47] Speaker D: So it's really just a sound management team. All those things factor into it.
There's ways to work around that. But most of our, the industry standard is still that. Most cases there is a guarantee.
[01:13:59] Speaker C: The next two I think we kind of covered, which is how does someone evaluate a bank? I think we did a pretty decent job on that one. And then when a few failed banks, I called several, then they said that they had safe investments. I don't know what this means. I think we kind of covered some.
[01:14:15] Speaker D: Yeah, there are those tools back to the esops again, too. Some of those are really board driven or trustee driven that they wanted to make sure they did not have any exposure, as little as possible in excess of the FEIC coverage and others that just were motivated to restructure some things. There are ways where you could enter into agreements to have overnight, what's the IC insured cash sweep. They call that basically a bank would enter into a program and there'd be a back end that would administer all of this. Where there would be each night overnight there's kind of tranches of a pool of deposit that would go to other banks to help share that risk. So we would only have technically the limit would not be impacted by the primary bank because it was getting shared overnight. And then the reciprocating bank would receive deposits from the other bank so we wouldn't lose deposits as an organization. And the customer would feel like it's all with the same bank. But behind the scenes these things were getting shared amongst other banks. The trade off sometimes can be a slightly lower yield for that benefit, but that is a tool.
We had to dust off those options here over the last year. Certainly when these issues have come up, there's a bit of a trade off from the cost and there's some complexity, but really it's all behind the scenes and really from the client's perspective it doesn't really necessarily doesn't change anything.
[01:15:50] Speaker C: Better question, asking that question how they do that versus like, I think the blanket answer over the last twelve months is split all your money over $250 between a bunch of different banks. And I'm like, that just sounds administratively like, I mean, there's a certain level of exposure.
[01:16:08] Speaker D: We had some heart to heart. Hey, I'll show you my balance. Hey, we're in this together and you're just going to take it. And there were some difficult discussions where we had to kind of make sure folks understood our position that we're working together for the long run. And for you to start pulling out everything is going to be that isn't in everyone's best benefit. And how can we structure something where everyone feels as though it's secure and the bank still is sound and has the ability to operate going forward and they can kind of connect the dots. Okay, hey, I'm in this together with you. And this is a partnership of a certain respect. Some people, hey, there's people that did that. Or they open up personal accounts and join accounts and start divvying it up, a little bit of brain damage to do all that. Know your bank, know who you're working that and understand what's going on and ask these tough questions. The other thing I would add just, and I don't know, if it was on the Q A. But the other thing, I would encourage business owners, make sure your bank is taking fraud seriously.
[01:17:13] Speaker C: Oh, yeah.
[01:17:14] Speaker D: That would be whether it's products that the bank can offer to mitigate risk for just your day to day banking, or they have resources or other ideas or can point you in the right direction to have a policy where you're running your day to day banking as efficiently but as securely as. And let's talk about a couple of.
[01:17:35] Speaker C: Stories, Jeff, because I think people hear the word fraud or cybersecurity and their eyes glaze over now. But recently, I had said to you, I talked to two different people. One were like, they had some request for a transfer, and they transferred 250 grand. This is not one of our clients, but this was a friend of mine. And the bank's like, well, the bank approved it. And he was like, I didn't do that.
[01:17:57] Speaker D: Happens all the time. Where you would get an email that'd be the social engineering attempt, where you'd get an email from the president who inevitably is traveling or out of town, that would email the CFO, hey, I'm buying this. That or the other. Can you wire the following? And it would sound like it's them, but it isn't them. And then they would initiate a wire, and it would be approved, and the bank would go through their steps.
So that is a big one. The attempted wire fraud, usually through email. We've got the benefit. We know you don't want things to grind to a halt. But if anyone ever emails me about a wire, I'm calling them. I got to hear their voice, and I got to understand what's going on, and I'm asking them, where'd you get this from? Are you comfortable? Do you want me to call whoever sent you this information? So there's a vigilance required from just the human element is a number one to stop stuff like that. But that stuff happens all the time. But these attempts. So, before I get into the stories, there are tools that the bank can implement. Positive pay is a big one on the check side, where if a check hit that wasn't part of a file that you uploaded to the bank, that it would be an exception. You'd have to approve or disallow that item to go through. There's filters for Achs that only allow certain accounts to debit your account. You can have limits on your AcHs dual approvals. Other layers of approval and segregation of duties is as big as anything, and that's kind of 101. But, yeah, we would have new account kind of getting up and running, had them onboarded. They were hiring a new CFO. Then we get an email from the controller, hey, we got our new CFO hired. Here's his id and his email. We want him to have full access to everything.
Oh, by the way, we just changed our web domain so the ink at the end of our email addresses is no more. It's just blank. Blankblank.com. And that's part of a change we're working on. Can you get us this paperwork? And we're like, we got an id. I mean, it looks legit. It came from the client. Purportedly it was someone in their email. You get an id from somebody with a Social Security in it to add them as a user and a signer on the accounts. But you kind of, hey, that should be recognized. Make a phone call. Hey, what's going on? Oh, that wasn't me. So something as elaborate as that. But they would still take the steps of creating a new individual with a Social Security and an id and everything.
[01:20:22] Speaker C: Wild.
[01:20:23] Speaker D: And then the last one here, first day of the year, business day of the year, January 2, have a big loan that we're getting ready to fund, and the proceeds are really going to a private party who we had been in touch with to confirm the receipt of the information the Friday before the new year. So whatever the January 30 or whatever that was, our client sends over an email and says, hey, by the way, I talked to so and so, and there's a new account for the proceeds. Here's the email. It's on letterhead from a bank. It's got a signature from some officer, it looks.
And we're like, we better call the seller here just to make sure this. Sure enough, the seller's email had been compromised. Had been watching all of this correspondence going on and on and on, and forwarded the email to the client, who probably didn't really pay any attention to it, and fired it off to us. Now, had we had been asleep at the wheel, or I'm out of the office, or no one's around, and you weren't moving a million miles an hour, you might just forward that thing on and not take two looks at it. But we had the guard up. We had some folks that took a further look, made the phone call, discovered it with $1.9 million.
I wouldn't be on with you today had that gone out. Okay, again, long story short, the personal, knowing who you work with, understand that the bank takes this seriously and that they know you and have resources where they can actually get a hold of somebody and make a decision. I mean, that's important. So you can't have business grind to a halt. You got to know who you're working with, because the human element is what stops.
[01:21:55] Speaker C: You know, it's so fascinating. And I think you just said the most important part, probably to sum up this whole conversation, which here we are, AI is going to be on a rampage now going forward, and all these challenges and everything comes down to the human to human touch.
[01:22:16] Speaker D: And our billboards for the new bank name. It was the human bank. It was a spin. It was an AI counter AI theme. Human banking, the human touch. That's exactly right. Where we can be more human than maybe the competition and provide that close.
[01:22:34] Speaker C: Because at the end of the day, when I think about money, and the reason I like the concept of money so much and capital and all this stuff, Jeff, is because I love psychology so much. And the way that human beings exchange goods and services and trust is through money. And so at the end of the day, it is psychology, and we're exchanging trust and assets. We're just exchanging trust. And you're the brokers of trust. I mean, isn't that what you are? To eliminate the human part of that?
[01:23:06] Speaker D: It's insane.
[01:23:07] Speaker C: And so knowing the business, knowing the people, knowing all that stuff, it becomes exponentially more important otherwise.
Hold on.
[01:23:19] Speaker D: That's well said.
It's as important as ever, for sure. And, hey, we're all busy. We're all running around. We got a zillion email that has really been important to us to know who we're working with and understand the business. And then again, $1.9 million, that would have been a devastating transaction had we not had people that were paying attention that knew what, that had a firm understanding of what was going on.
[01:23:46] Speaker C: Yeah. Jeff, this has been an absolute blast, man. I'm so pumped that we finally got to do this. Where can people find you?
[01:23:53] Speaker D: Yeah, well, the website of the bank.
It's a bank. Domains, it's scale bank, and there's some reasons for that. So that's another thing that's in the industry.
It's advantageous for a bank to have a bank domain from security purposes. So if anyone ever got an email from me that said.com, it'd be a spoof or from the bank. So it's scale bank and then LinkedIn. I don't do a lot of other socials, so I'm pretty boring. I don't know. You were talking about this young guy earlier, that ain't me. I've just got LinkedIn in the website.
[01:24:28] Speaker C: I share your feelings on that stuff, too.
[01:24:30] Speaker D: We'll get the email on there, but the website of the bank and then the LinkedIn. And I've got a goal. So I know you did an episode. You've done nearly 400 plus of these things.
[01:24:41] Speaker C: Yeah, you'll be close. You'll be in the 300.
[01:24:44] Speaker D: I got one goal here. So John Thielan, your buddy JT, who was a couple of hundred ago, he was telling me he was one of the most listened to of your podcast. And I don't think I can beat him, but I want to get like half of.
Let's make sure JT is on lookout here. We're coming for.
[01:25:04] Speaker C: We got to get this on your newsletter. And you will be.
[01:25:08] Speaker D: We're going to blast it.
[01:25:09] Speaker C: Not your four LinkedIn connections, but like.
[01:25:16] Speaker D: I'm coming for JT on this one.
[01:25:18] Speaker C: We're going to go, that's awesome. And then data is the ultimate decision maker on that one. There you go.
[01:25:24] Speaker D: There you go. We'll try to manipulate the best we can.
[01:25:27] Speaker C: Awesome. Appreciate it, Jeff.
[01:25:29] Speaker D: Thanks, Ryan. This is a blast. Take care.
[01:25:34] Speaker B: Thanks for listening into that conversation. I hope you found the time valuable. If you enjoyed the conversation, please leave the show. A review on your podcast player. We're constantly trying to up those reviews. It helps a lot with the visibility and if you didn't catch the commercial in the middle of that episode, there's two different ways that we can help you. One is if you want that kind of clarity. We have a coaching program that is based on the five intention growth principles and uses the material to help you get that kind of clarity on your target. Equity valuation and income that you need on the way towards that valuation. What you want from the business long term and why, and then how to get aligned with your leadership and your partners. So that way everybody's working in the right direction to get you what you want. And the second way is if you want to jump right into the data and you want to actually build out your financial roadmap with your three statements and tie your financials and your operational data to that target equity valuation. My team offers a complimentary financial assessment. Either way, all you have to do is go use the link in the show notes below, schedule a discovery call with me. We can walk through your situation, figure out if there's a fit or not, and if not, I can point you in the right direction. Thanks everybody for tuning in and I hope you enjoyed this episode, and I.
[01:26:41] Speaker C: Will see you next weekend.
