Tag Archives: Cahaba Wealth

Silicon Valley Bank Collapse

3/2023

By Brian O’Neill CFP®

Friday (3/10/2023) saw the precipitous collapse of Silicon Valley Bank (SVB), making it the second largest US bank failure, only topped by that of Washington Mutual at the peak of the 2008/2009 financial crisis. On Sunday (3/12/2023), New York-based Signature Bank followed suit, marking the third largest US bank failure in history. This obviously led to questions about the health of the US financial industry, and worries about echoes from that turbulent time. With nerves understandably on edge, we thought it would be a good time to share some calming thoughts.

On Sunday evening, the Treasury Department, Federal Reserve, and FDIC issued a joint statement laying out decisive actions that will be taken to strengthen confidence in the banking system. In short, all depositors at these banks will be made whole, even those who maintained accounts larger than the FDIC insurable limit of $250,000. While these emergency measures were necessary for depositor protection and for companies to make payroll this week, shareholders and unsecured debt holders of these banks will not be bailed out.

The Fall of SVB

Primarily, the failure of SVB was specific to both the clientele of the bank, and what can only be termed loose risk controls that management put in place. SVB served the start-up community and venture capital backed companies, mostly in the San Francisco region. The bank’s deposits ballooned during the pandemic, as new money from Initial Public Offerings and Special Purpose Acquisition Vehicles soared. The bank then chose to invest the proceeds of these significant deposits into long-dated US Treasuries, rather than choosing to make riskier loans. While that feels safe, the reality of long-dated bonds is that when interest rates rose in 2022, the value of these bonds fell, and in some cases, fell dramatically. 

Even in the backdrop of falling bond prices, the bank remained solvent, as most of their customers were required to continue to bank with them. This meant deposits remained…until last week. As the economy has softened, many of these startup companies began withdrawing cash to sustain operations – easy money was no longer available, and they had to use their funds in the bank. This initially forced SVB to sell some of these “safe” securities they had purchased, and in their 8-K filing on March 8th, they disclosed they did this at a loss of $1.8 billion. With this 8-K filing, an old fashioned bank run started, and within 3 days, the bank was insolvent, and taken over by the FDIC.

Longer Term Implications

Should we worry about other banks? Our belief is that this is fairly focused on SVB and Signature, and possibly other smaller banks intertwined with the startup and crypto communities. Most banks do not have deposits that are significantly over these FDIC insured limits, as most banks work with individual clients like you and me. Additionally, bank regulators placed much more significant controls on capital and lending requirements. While it appears regulators missed the specific issues at SVB, the overall banking system in America is much healthier than it was prior to 2008/2009, and we do not believe these issues exist on most bank balance sheets.

We will need to monitor the fallout of these failures, so this story is not completely told, but we see no reason to hit any panic buttons due to our financial system. 

As always, we welcome any questions.

Brian O’Neill, CFP®, is president and a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Getting Ready for the New Year

12/2022

As we begin wrapping up the 2022 tax year and planning for 2023, we wanted to make note of the announcements the IRS recently made for the 2023 tax year. In a year that was highlighted by soaring inflation putting pressure on taxpayers and their families, the IRS made unprecedented changes to the retirement plan limits and raised the income thresholds for each tax bracket. The government hopes to stimulate economic activity by allowing Americans to keep more of their earnings and increase their retirement contributions. Here are the important changes to know going in to the New Year:

Retirement Plan Limits

2023 Limits2022 Limits
401(k)/403(b)/457(b) Elective Deferrals$22,500$20,500
Traditional and Roth IRA$6,500$6,000
Catch-Up Contribution (plans other than SIMPLE plans)$7,500$6,500
SIMPLE Plan Employee Deferrals$15,500$14,000
SIMPLE Plan Catch-Up Contributions$3,500$3,000
Plan Maximum Annual Contribution – Defined Contribution Plans$66,000$61,000
Maximum Annual Benefit – Defined Benefit Plans$265,000$245,000
Compensation Limit under Section 401(a)(17)$330,000$305,000
(Source: www.irs.gov)

Health Savings and Health Flexible Spending Accounts

2023 Limits2022 Limits
 HSA – Annual Contribution Limits
   Self-Only Coverage$3,850$3,650
   Family Coverage$7,750$7,300
   Catch-up Contributions (age 55 or older)$1,000$1,000
FSA – Annual Contribution Limits
   Self-Only Coverage$3,850$3,650
   Family Coverage$7,750$7,300
(Source: www.irs.gov)

Standard Deductions

2023 Limits2022 Limits
Single$13,850$12,950
Married Filing Jointly$27,700$25,900
Head of Household$20,800$19,400
(Source: www.irs.gov

Other Changes for 2023

  • In addition the changes mentioned above, 2023 will bring revisions to the tax brackets, exemptions and credits, and limitations. 1
  • The Alternative Minimum Tax (AMT) exemption will increase to $81,300. AMT is in place to ensure higher income earners pay at least a minimum amount of tax. 1
  • Also in 2023, the Social Security Administration announced an 8.7% cost-of-living adjustment (COLA) Social Security retirement and disability beneficiaries. 2
  • The first $17,000 of gifts to any person are excluded from tax, up from $16,000. The exclusion is increased to $175,000 from $164,000 for gifts to spouses who are not citizens of the United States. 1
  • The Earned Income Tax Credit (EITC) increased the maximum credit amount to $7,430. This is a refundable tax credit for low and moderate-income workers. 1

If you’re curious how the new changes will affect your bottom line, we are here to talk about your plan. As always, we appreciate the opportunity to be of service.

We wish you a joyful and fulfilling New Year!

1 Source: www.irs.gov

2 Source: https://www.ssa.gov/cola/

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Seasons Change

9/2022

By Walton Cobb, CFP®

Fall is in the air, and children are back in school for a new year. A sense of optimism usually follows each change of season. However, for investors in 2022, each season has brought the same doom and gloom. The S&P 500 is down over 23% year to date, the Nasdaq Composite is down over 31%, the Russell 2000 (small cap index) is down over 23%, and broad based foreign stocks are down over 27%1. What is most troubling of all? The impact that rising interest rates have had on the bond market. Year-to-date, the 10 Year Treasury is on pace for its worst return on record 2. Wait, we invest in the bond market to reduce risk and be “safe”, right? A new season indeed!

As the sun rose yesterday morning revealing the horrid images of Hurricane Ian’s destruction, we are reminded of how little we control in the short term. Clearly human life is more valuable than any investment portfolio, but there is a parallel here. One does not move to the Florida coast without accepting the risk of Mother Nature’s tropical rage and few permanently flee after a storm recedes. Why? Simply put, there are many more sunny days in Florida than not. Just as every hurricane ends, bear markets do as well. Although every economic recession and bear market is different in how it begins, the results are generally the same. Markets decline, sometimes precipitously, and then the cycle begins anew, eventually to reach new heights. In 2008, the S&P 500 fell by 37%, but bounced back 26.46% and 15.06% in 2009 and 2010, respectively 3. In fact since 1996 the S&P 500 has only had 5 down years, which means during that time period there were many more sunny days than not 3.

At Cahaba, our job is to coach our clients through the good times and the bad by helping you minimize the role emotion plays when making financial decisions. The data overwhelmingly shows that the only way to withstand a bear market is to “control the controllables”. These “controllables” include tax loss harvesting, diversification, rebalancing, cash flow projection revisions, media consumption and most importantly your reactions. What can we not control in the short term? GDP, market performance, inflation, the Federal Reserve, corporate earnings, which party is in control of Congress… you get the idea.

One of the most difficult behaviors that we battle is our own consumption of mass media. Should you find yourself watching too much CNBC or reading too many negative voices on social media, turn the television off and put down the phone. These voices are intentionally appealing only to your fears. No matter how smart the media pundits seem, no one can foresee the future. The timing of economic recessions and market crashes are rarely ever accurately predicted. As we witness daily, when it comes to investment managers there are very few good stories, but thousands of storytellers. Anyone can be right over a 3 year period and completely wrong over the next 3.

As a team, we are committed to a data driven approach to portfolio management. We will not pretend to know what the near term will bring us. However what we do know is that the water will recede and most importantly, we know you. Throughout the financial planning process, we learn your investment objectives, risk tolerance, time horizon, current/future tax brackets, future expected expenses, insurance needs, and what to expect for your family long after you are gone. With the markets down, it is also a great time to “stress test” your long term cash flow projection for any potential long term hiccups.

Human nature tells us to take action and stop the bleeding. During many other crisis situations, that may be an appropriate response. However, when considering long term investment success, we must be in the markets on the very first day of its return to glory, as it will never be available to you again. Since we don’t know exactly when that day will come, we have to weather the storm through its worst days. As a firm, we have witnessed multiple economic recessions coupled with bear markets. In all cases, the thing to do was to remain invested. The odds are overwhelmingly in our favor that history will repeat itself again. In the meantime, we have to “control the controllables”. We remain confident that the changes of season will soon bring more optimism, and we look forward to many more sunny days ahead.

Walton Cobb, CFP®, is a financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1 Source: Stocks. (n.d.). Retrieved September 30, 2022, from https://ycharts.com/stocks

2 Source: Bahceli, Y. (2022, June 30). Bonds in line for worst year in decades. Reuters. Retrieved September 30, 2022, from https://www.reuters.com/markets/rates-bonds/brutal-first-half-puts-bonds-line-worst-year-decades-2022-06-30/

3 Source: S&P 500 total returns by year since 1926. (n.d.). Retrieved September 30, 2022, from https://www.slickcharts.com/sp500/returns

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.