The Modern CPA Success Show: Episode 90
In this special edition, our host and Summit’s Director + VCFO, Jamie Nau, Adam Hale, Partner at Anders CPAs + Advisors, and Paul Rhea, Director + Strategic Growth at Anders CPAs + Advisors, debrief a hot topic issue about banking activity in the news, Silicon Valley Bank (SVB). They discuss the importance for businesses to remember the value of safety and diversification and the importance of diversifying funds and understanding the risk versus return.
[00:00:00] Jamie: Welcome to today's episode. This is actually a going to be a quick episode. We just have a there's a hot topic issue we want to talk through and make sure that all of our listeners have our thoughts on the issue. So, there's been some baking activity in the news lately. So, we have Paul Ray and Adam Hale to just briefly talk through the issue and really.
[00:00:20] Our goal here is two things. One, to give a little bit of background and two to talk about what our clients or what our listeners can do going forward. Welcome to the show, Paul and Adam.
[00:00:30] Paul: Thanks. Thanks for having us.
[00:00:32] Adam: Hey, Paul, do you mind giving the listeners a little bit of your background just so they can, they know the, to listen more to you than Jamie or I, whenever it comes to this topic. That's probably going to be evident anyway but go ahead.
[00:00:41] Paul: I am a 32-year banking veteran here in the Midwest. Primarily my territory, Missouri, Kansas, Colorado, Wyoming, and Montana with a large bank, one of the big six for many years, but also spent plenty of time on the community side and even the regional side.
[00:01:03] And I joined Anders about five years ago as an individual that would work directly with our clients on banking relationships and making sure that they're doing the right thing moving forward. As we all know that's a challenge for any business, whether it's small, medium., or large.
[00:01:18] And I've worked with this firm off and on for probably 30 years, as well referring clients back and forth and it just made sense. And that's what I do here. So that's a quick background.
[00:01:30] Jamie: Great. So, in case anyone is coming off a sabbatical or they've been in a cave for the last couple months, can you just give a real quick summary of what's gone down over the last couple weeks?
[00:01:39] Paul: I think more than anything if it hadn't gone the direction of social media, I think we probably would be having a different discussion today. But here we are. Let's go back to Silicon Valley Bank, who has a history of working with tech and digital firms and startups and for many years.
[00:01:55] And so with that it a little bit different client base from a commercial bank that deals with more diversified clients, but certainly SVB had some of that as well. Good bank to work with the startup industry. But as you look directly at lifting up the covers a little bit and looking at what's underneath, a couple of different things happened.
[00:02:16] They had a lot of uninsured deposits and uninsured deposits exist in every bank, not just SVB. They had their share of it. Just first Republic is dealing with now because there are a lot of companies or individuals of wealth that deal dealt with those banks. So naturally over the past 20 years, we've gotten comfortable with relationships and forgot a little bit about safety and diversification and with.
[00:02:40] There's concern if there's a problem with the bank. Really without rising interest rates, there probably wouldn't have been a significant problem. But when you go through the process of what you want to invest all those excess deposits in you make the decision. And one of the decisions that was made by SVB, right or wrong, and we'll certainly know more down the road, was to invest a ton in treasuries, which are interest rate sensitive vehicles.
[00:03:05] So with that, you're going to have a challenge, just like any of our own investment portfolios, but we have to wait long term, right? To gain those back. Not a bad decision, but the regulatory industry typically doesn't like that size of portfolio. So, what on the interest rate sensitive side, so what happens at this point is rates go up, value of their investments go down.
[00:03:29] The client base unfortunately got wind of the challenges from a social media perspective. It seemed, and there were some calls for yanking of deposits and it's something that's very difficult to stop, especially when it's large deposits and there was a run on the bank. So, the bank made a decision right or wrong and again, history will tell, but they had to liquidate some assets that were down here, treasuries, that the value's here not up there.
[00:03:54] So what happens at that point, they don't have enough to fund the depositors, it just heads downhill quick. So that sort of in a nutshell is what. Took the 16th largest bank in the country down. And I'm sure there are plenty of other things, but that's what's, I think given the folks a little uneasiness in the banking industry that how many other organizations are out there that have the huge amount of unsecured deposits and invested on the high side in treasuries, so let's go find the next bank to fail.
[00:04:24] That seems to be the motto, and with that, it causes people to run, get their deposits out, and here we are today.
[00:04:30] Adam: With three or four more banks doing kind of the same thing. Little different situations, but similar problem. As you mentioned, only time will tell what to do there.
[00:04:37] And obviously, stoking panic just makes the problem bigger. So, what do what should we be telling our clients? What should we be talking about? I guess you'll probably tell us this is the same stuff that probably has been going on for years but what are our options out there for clients?
[00:04:51] Paul: Yeah, I think we all get a little complacent when we talk about the strength of the banking industry. Those of us that were around in 2008, it was painful, but it was all about bad debt derivatives, all of those types of things. Back then, you remember everybody got a hundred or 150% on mortgages.
[00:05:08] It was just a crazy environment. This one snuck up on the general public. I'm not so sure it completely snuck up on the regulators, but they hoped to keep it in a little group, and it just didn't happen that way. So, we're back to what typically folks should be doing all, all along as.
[00:05:26] How do we remain safe and diversify, but we want great returns, and we want it all and we've had it all for the past 15 years. So, with that we've been a little spoiled. So now we have to back up and say, you know what the best return. If we follow normal investment principles is the highest risk, right?
[00:05:48] Risk versus rewards. So that's where banks have enjoyed that risk versus reward hasn't been much of a concern for the clients for quite some time. So our clients really, in any business, whether it's startups, techs, any businesses across the board, should really have a strategy of diversification of the funds that they don't particularly need on a 90-day basis to a six-month basis. If they've got that cashflow, let's start to diversify the rest of those funds. And how do you do that? It, we make it sound easy, but it can be difficult. We're dealing with most of our clients I feel like, deal with the community and regional banks, although there are plenty in the large banks as.
[00:06:32] The key really is having the strategy of what you need and what you don't need. Taking that excess, for example, we've talked about regional community banks having programs that are titles for CDs or money markets or checking accounts where you throw a couple names out there?
[00:06:48] There are other companies as well that do this, and they work with your bank to help you diversify that. And what they're really doing is moving it into CDs at a group of consortium banks out there. So that you're under the FDIC insurance in every bank.
[00:07:09] So with that, you can decide, do I want 90-day CDs or do I want six months CDs, or do I want one year? And if you've done that need strategy around your cash, it's a pretty easy situation. You can go out and do it in a money market scenario as well with the ICS product, so taking the names away from it.
[00:07:30] It really is just using your bank to help you diversify all that comes back into a nice clean report or online where you're really just going accessing the information you have. That's one way. Not every bank has that, but most do, especially in the regional and the community side.
[00:07:49] I stated in an email a couple days ago that, just in Missouri, Illinois, and Indiana, if I'm just looking at that three-state area, there's almost 600 banks that participate in that. But it's not overly sold. It is now, but it wasn't because what bank wouldn't like to have all your deposit?
[00:08:07] What bank doesn't believe that? Safe enough to have all your deposits. So, they get to loan on that. They don't particularly get to loan on these deposits, but hey, they'd still love to have you as a client relationship, so they'll be happy to use this and spread it out through the network.
[00:08:23] Another piece is just blocking and tackling the old-fashioned way. If you, let's say you have $750,000 and you really only need to protect 500. Get a couple of other banks and just literally go open accounts at that bank. Might be a little harder if you have more money, but that's the way it used to be done.
[00:08:42] So you've got that process as well; let's go to brokerage accounts. We don't want to forget about those, and I have to be careful on all the disclosures about brokerage because they have market risk and, past returns are not a guarantee of what the future's going to bring, but there's great opportunities in the market out there, folks that have a little more of an appetite with that, bringing it out of a bank, putting it with a broker, an individual broker, or a wealth manager that can help ladder. And what I mean by ladder is stagger the maturities of investments. These are things that we've all gotten away from and now we need to get back to those. And that's where CFOs of companies can really pay attention to these things now that before it wasn't a concern.
[00:09:27] I think just a couple more items. Credit unions out there have FDIC insurance. That's not FDIC. It's new through the National Credit Union Association but works the same. So, if you're in a community that only has a couple of banks but has a credit union, don't hesitate to utilize that.
[00:09:44] Sort of the same thing. And last but not least, I think for folks, we're talking about companies today, but these owners also have personal. There's a much stronger way to, to protect those in a bank because you can take different titling, trusts, all those types of things and you can protect more with the same bank under FDIC insurance.
[00:10:04] By just doing some things around titling and we could spend two hours on that today, but there's some great resources on the FDIC website. Your local community bank can help you through that to gain a lot more insurance than you may have had before, but with companies. It's a little tough.
[00:10:20] You got to let your money get spread out a little bit. So those are the things that I would pay attention to, and I wouldn't worry about trying to research the bank that I'm at right now to make sure that it's really strong. I'm going to leave all my money there. Maybe it's time to think about those strategies differently now than we had in the past.
[00:10:37] Adam: Yeah. Can I vent for a few seconds? The frustrating thing is like most of what you just said on the surface isn't super practical these days; we see everything else where the government just doesn't trail with inflation is things change $250,000.
[00:10:55] And we don't have a crystal ball. We'll see now that they're ensuring all these things if they bump it up or do different things for people. But it just doesn't pace with practicality for business owners who have a $500,000 payroll or a $300,000 payroll. I know whenever you talk about risk reward, the safest you can possibly do. And the counterweight to that is, is oh, I'm not getting any money on my money that's sitting in my checking account. But it's not risky. And so, what we've always advised our clients, especially clients that have a roller coaster in terms of their cash flow, is to hang on to.
[00:11:27] Two to four months’ worth of cash in the bank. 10 to 15% of your rolling revenue should be in cash, should be liquid, because you're going to be able to have to act as your own line of credit. You're going to have to be able to move money and do all these kinds of things. And again, you're not getting a return on it, which is the bummer, but it's in a safe place. And now what we're being told is it's not so safe, and we knew that, anything north of 250. But I think that whenever it comes to, the more practical solution, and then I guess even during covid, we always really started talking about, “you should really amplify your banking relationships.”
[00:12:03] And how do you get more power with a relationship? Consolidate into one place so you can leverage that banker and that bank better. Now we're like, okay, all those things, we have to unwind them a little bit. So, I think what's interesting, obviously if you can create a couple different relationships and move money around, I think that's obviously option one, but those bank products through and I know you mentioned like entry five whenever we were talking about.
[00:12:28] When they have two different programs where they do that stuff behind the scenes. I did the same thing. I started looking up the banks. Almost every local bank where I live has that program or has a program like that. So, I think we need to maybe start at least looking into that.
[00:12:45] But I will say though that whenever I talk to some of the big six that you're talking about, the bigger banks Yeah. And ask, Hey, I didn't see you on this list. Because we don't need to be on that list. If you end up having a problem with us for that, your money's probably not worth anything anyway.
[00:13:00] He said that tongue in cheek, one of the guys did. But what do you think about it if you are with one of the big six banks? And they don't offer that kind of program.
[00:13:11] Paul: Yeah. you're right. We are living in a different reality. The big six clearly have been focused on from a strength perspective by the federal government since 2008. They've done a masterful job of making sure that those folks are regulated to the nth degree. to make sure that they're too big to fail. We keep hearing that; you can say that all day long and it may be true, but the thought process around anything is the old adage of all your eggs and run baskets.
[00:13:44] And when I worked for the big bank, that's the same thing I would say. But I think from a realistic perspective you're with a big. You can certainly put more deposits there, but nothing is guaranteed above two 50. And as long as you understand that, then I [00:14:00] think it tells you why the driver of most organizations, of the clients that the size that middle market companies that, that we specialize in.
[00:14:09] Sort of have driven themselves out of the big bank into the regionals and the community banks because they're much easier to deal with in some scenarios. And I have a lot of great friends that work with big banks and they do a great job, but there's never going to be a point when anyone's going to be able to tell you that a bank is a hundred percent safe.
[00:14:27] The old adage of, if we go down, there's a big problem. I remember 2008 there were a couple of pretty large ones that went down, and so there was a problem, but yeah to wrap it up a little bit or with a bow on it, the bigger banks have been scrutinized much more heavily in the past six years and weren't given the opportunity to get outside the boundaries a little bit.
[00:14:50] So yeah, they. They're probably, from that perspective, they're probably safer but no one can guarantee that because we don't know what the market's going to derive between here and there. So, it's a challenge on the bigger banks. You almost do just have to have a mentality of, if I've got more there, then I'm doing it because they're too big to fail.
[00:15:12] We'll see if that works. And that's not a great solution for all of our clients, , but at least they're aware of it and maybe utilizing the other scenarios of working through brokerages and things of that nature.
[00:15:25] Jamie: I think this is a lot of really good information here. Hopefully people are taking good notes.
[00:15:28] I think that the one final thought for me is you know, as people know, my background, I have worked in a couple of large organizations, and both of those organizations had treasury departments, right? They had two or three people of treasury departments that took care of this. And so, if you're a small business, having an outsourced CFOO, you want to make sure that you are aware of what the big companies are doing. You need to be doing something similar. So whether you're working with the banks or whether you're having some, someone in-house, checking your bank accounts and checking your balances and making sure you know where your money is frequently it needs to be the same as the big companies do.
[00:15:57] And like I said that's what the big companies do. They have people that are looking at this all the time, moving money around all the time. And so, if you're a smaller company or a smaller business, you need to make sure you're keeping an eye on your cash and how it's spread out. So that's my final thought. Paul, Adam, any final thoughts for our listeners?
[00:16:11] Paul: Jamie, I do have one final thought, and Adam mentioned it a while ago, and I think he wanted to touch on that, but then he thought I'll hold off, so I'll touch on it. 250,000 isn't enough, right?
[00:16:20] There, there either needs to be a significant change in the F D I C insurance or it needs to go away completely, which, my feelings on that's probably a nightmare. , but if you can't guarantee people's money, then what options do you give them? So I think we'll see over the next 90 to 120 days some significant changes around that.
[00:16:41] And I think that's, diversify while you can. And let's see what we get out of this mess. We may get a bigger insurance opportunity.
[00:16:48] Adam: Great. Let, Let me pump my final thought back to you, Paul, for one last question because this has been coming up. What about people with open lines of credit right now?
[00:16:58] I've heard an awful lot of people going, Hey, maybe the bank won't have money. So should I go and even though I don't have anything on my drawn on my line of credit right now, should I just go grab my $500,000 off my line and set it and then do my diversification, but at least you. Pay on the interest and sit on my cash just to protect.
[00:17:20] Paul: If I had a dime for every time I'm asked that question. And it really comes down to an opinion. An opinion is that I've never been comfortable with taking on debt that you didn't need. But if I'm a business owner and I'm paying attention to this and I feel like that a half a million dollars will give me some diversity and I can go out and diversify a portfolio, clean it.
[00:17:44] Give me a comfort level. It would be hard to argue that would I do it? No I'm completely debt averse on some of those things, but, the, I if all the banks are going to run outta money back to the adage we're probably have bigger concerns than that. So I don't know that I'd take on additional debt.
[00:17:59] But it's going to have to be each and every individual business owner's decision because yeah, it is an uncomfortable feeling.
[00:18:06] Adam: Especially at the rates the way they are too. So it almost before it might have made sense when rates were super low, but now you're gonna be paying a good chunk of change on that pole.
[00:18:14] So unless you're super close to your cash, I think that's probably the one, the clients that are leaning more towards that are people that are less worried about the diversification because they're sitting on a ton of cash and it's more the clients don't have any cash and are worried about not being able to access that line of credit.
[00:18:30] Yeah. I think those are the folks that probably maybe should, consider that maybe a little bit heavier.
[00:18:34] Paul: And at this point, as long as it's a short-term strategy, then, that certainly beats the alternative. Yeah. Yep. Okay. Great.
[00:18:45] Jamie: All right. Definitely appreciate both of you guys and a lot of good information here.
[00:18:49] Paul: You bet. Thanks for having me.