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[Swoosh] [Music] Jason: Welcome my name is Jason Watson with The Watson CPA Group and I'm going to keep saying that 500 times, we're now considered WCG Incorporated. We are here at the Axe and the Oak, part of a, I should say, a part of our Bourbon and Business series for our, our podcasts. Quentin Leighty is joining me with First National Bank of Monument. And today we're going to talk about, I think somewhat controversial, but if you take a step back and look at it, there's some real economic impact of what maybe some rules and regulations are preventing, and that is marijuana, cannabis, pot industry, whatever you want to call it. Colorado and Washington, I believe, were the first one's Quentin: First two, yeah. Jason: to legalize it. I think that was also the same year that Denver and Seattle were in the Super Bowl. Quentin: Could be. Jason: Yeah, I think Roger Goodell had to tell it, had to tell the player does it matter where you land, it's still a banned substance in the NFL. But anyway we, from a CPA perspective we have, we're, we're in this weird dichotomy. The activity is illegal, federally. We can still sign a tax return, we can still prep the return. There are certain rules, especially with the capitalization of expenses. And as it goes into inventory you can't immediately deduct things like rent for the grow warehouse, and other things like that. That all has to be capitalized inventory, meaning that you're not going to realize the expense of that until you sell the product. Luckily, I don't know too many marijuana stores that have a lot of inventory, seems to sell pretty quickly, at least in our experience. For our State Board here in Colorado, they have come out and said we are cool and the gang with you signing and preparing tax returns as CPA's and that is our governing body. Which is nice because we can deal with that on a local level, banking not so much, right? Quentin: No. Jason: So let's talk about some of the handcuffs that you have from a national perspective. Quentin: Yeah, and so you know especially being a community bank, our regulators play a big role in our, you know, our business decisions, they should in all all institutions. But, they have the power and, and we, we have choice in regulator but we were chartered in 1901 and to change that is not real appetizing to us. So we are under the Office of the Comptroller of the Currency, which is the Treasury Department. There is also the Federal Reserve, the FDIC, but then there's the State. Jason: So can you just tell us a little bit about that because there are different governing agencies depending on the bank. Quentin: Yes, you can, you can choose to be in a national charter which we are, first National Bank. Jason: Okay, okay. Quentin: If you are, you're either going to have a name "National" or the letters "NA" in your name somewhere, and that signifies that you're chartered through the OCC, which is Treasury Department. The Federal Reserve is another regulatory body that you can choose to have as your, be a FED member. Jason: Okay, you've got Treasury let's say on this side, you've got Federal Reserve, okay. Quentin: And then you've got State, State banking commission, and then FDIC. Those go hand in hand, so they rotate who does the exam. So FDIC will do one and then the State and they, they work together. Jason: Okay. Quentin: The others are independent. Jason: Okay, so we have really three in the State and the FCC, kind of churn within their own bucket. Quentin: That's right. Jason: Okay. So, so if you're to begin one today, you had $100 million land in your pocket and you want to begin a bank, let's say, what would you choose? Quentin: You know, we've had a great relationship with our regulator, and we feel like they are really strong just understanding community banking because they have been around for a long time. I think most of my competitors would say State and FDIC and I think partly because they know the local economy and what's going on, and it's more of a local focus. I think they have a smaller budget, which can be good or bad. And so I think, I think if you look over the trend in the last 10 years, more banks have moved to the state charter and away from some of the federal charters. Jason: Okay. Is that for what reasons? Because of the local relationship you can build with your regulator and some of the local laws that are more flexible? Quentin: I think that and I think some accountability. You know, you can go to Denver and meet with them direct, and the actual head of that department versus you know, the head of the department we deal with is in D.C. They do have a Denver office and we have a great relationship with those folks. But there is an additional layer. Jason: Okay. Jason: Somebody in Washington still has to sign off on this stuff. Okay. Quentin: Yeah. So for banking, and especially for national charter, you know that it wasn't really an option. There was some guidance given by the Treasury Department, I think in 2014 about, "Well, if your state allows this, here's how to go about it so that we don't come down on you." But the reality was there is still this federal piece to it that, we had this kind of a "Oh, go ahead and do it, nobody is going to get mad at you" versus put it on paper saying, "Look, here it is fine, it's okay to do this kind of banking.". And so what it triggered was a lot of state chartered banks got into this space. I shouldn't say a lot, a few, and they, because there's not many of us willing to do it because of the risk to our organizations from the government's side of things, they, the fees they can charge on these accounts is unbelievable. And so, it's capitalism at its best, right? But it's, it's, it's not fair, in my opinion, it's an industry that, you know, if you pull, if you take them out of the banking system what's the alternative? Right? Jason: Right, right. Quentin: I mean, you, do we want cash in people's safe at their business? Do we want them taking cash home or having to pay a fee to pay their taxes? You know, we can't track their activities and, and what, what's going on in the industry. We all want to know what's going on in whatever industry Jason: Sure. Quentin: It is that we're interested in. Jason: Sure, you can't do any analysis, no data collection, no data mining. I mean, the IRS is having difficulty figuring out what's a reasonable amount for this expense, that expense because again, people are using cash to pay for a lot of things. Quentin: Well and then it provides an incentive, right, to not report all of your earnings and not to be totally above board. Jason: Right. Quentin: And so we think those things are important. Jason: Yeah, totally. Let's take a step back again. So we have the Federal Reserve is in the middle, Treasury Department is over here, and we have the FDIC and the State on this side. Which ones allow you to take marijuana dollars, for lack of a better word. Quentin: So Jason: None of them? Quentin: I, I think they would, I think they would all say, "Well, we've given an avenue for that" but the reality is there's still big question marks about the criminal nature. So, there's certain things where we have to basically monitor the accounts to the level where we're asserting that they're doing everything above board. Well, we don't know, how, how would we ever know if, if that pot shop is allowing people to buy from across state lines, where it's not legal, with the intent of taking it to their state or whether they're reporting all of their information correctly? We, we can't, we don't know how to be the police for any industry Jason: Right. Quentin: But especially that industry. Jason: Are you doing that for any other industry? Quentin: Not to the extent that it's required there. Jason: Okay. Quentin: Not to the extent. There are certain high risk industries, you know online gambling. Jason: Okay. Quentin: Things, things that has a tendency for money laundering and fraud that we have to monitor and watch closer. But nothing like an illegal substance from the federal government. Jason: Okay. So dollars aren't into, or they aren't entering into the banking system. Kind of help us figure, tell us why that's not good for the economy. Quentin: Yeah. I mean it's, you know, those dollars then if they're not sitting in an account where we can then lend them out, they're not, the multiplier effect isn't happening. Jason: Right. So what's your lend ratio? Like if someone puts 100 bucks, I mean, that's probably not a fair example. Quentin: Yeah. Jason: Tell us what you can, you know, leverage, you know, $10,000 into. Quentin: We keep higher capital than normal, so we keep a little bit higher capital base than even our peer group. But even at that, we're putting out 88 cents of every dollar that's deposited in, we're loaning it back out. Jason: Okay. Quentin: And so if that money is not in the banking system, it's sitting on the sidelines not being redeployed Jason: Right. Quentin: For other projects, whether they're any industry, I mean it doesn't have to be marijuana related. You know, we've taken the deposit Jason: Totally. Quentin: and loan it out anywhere else. Jason: Totally. Quentin: And each bank should have the option to choose if they want to do that kind of stuff or not. We don't have the expertise in that industry, we wouldn't do it. Jason: Right. Quentin: But we can definitely help benefit the community by taking those deposits and redeploying them into new construction for people's homes, or helping somebody buy a new tractor, whatever that item is. Jason: Right. Quentin: But when it's sitting on the sidelines, it really doesn't get that churned and multiplying effect. Jason: I mean it's still being spent, let's say you like the think that it's still ending up Quentin: Sure, it's not all sitting in retail. Jason: Yeah, but you're not getting, you're not getting that big leverage. You know, economists always argue about that dollar here. Let's say you give a tax break that puts a dollar back in someone's pocket. You know, does the GDP end up being a 7x or an 8x to that dollar? Like, hey we're going to add eight times to the GDP for that dollar. Maybe we're not talking about that as much but if you can take money in, lend it out, for someone can go buy a house. Well now a realtor gets paid, you know. Quentin: Right. Jason: And now the guy who sold the house buys another house. You know, it's just a huge whipsaw effect by having those dollars in your bank that you can then lend out. Quentin: Well, and, and you know, if you gum up that system too much and the banks won't take it, which is what's on now, you know they're forced to pay taxes in cash, pay a service to come get their cash. Nobody likes receiving cash for tax payments. Jason: No. No. Quentin: So it's just time consuming, it's inefficient, it's frustrating. Jason: Our preparation fee comes in cash, that's nice. Reported of course. Quentin: Yeah. So, you know, it's, there's just a lot of unintended consequences. Jason: There is, and we have a handful of customers that run marijuana farms, warehouses I should say, with the retail component. Those are usually dovetailed pretty tightly, and they all attempt to run this like a legitimate business. They got advertising expenses, they got labor, lots of labor. They, you know, they're, they're paying rent. They're doing all the things a normal owner does. You know, it's just very interesting, if you were to line up 50 people and say pick out which guys are running marijuana farms, you couldn't do it. Quentin: Yeah. Jason: It's impossible. It's, its's not like you can, could you clearly tell someone's different than everybody else. They're all small business owners try to make a buck, you know, and they chose this as their profession. So. Quentin: We had a, we had a real estate investor that has done real estate investment their whole adult lives. Twenty five years doing that type of investment. And they also had a medical marijuana operation. And so they wanted some financing on some real estate, totally separate from anything to do with the marijuana, and so we went to a regulator and said, "Is this something we can do?" You know, there's some gray areas and the Jason: To use their debt service, their financial debt worth as Quentin: Yeah, can we loan it to these people since they're in that industry, even though it's not, maybe, all of what they do and the answer was, "Peel out all marijuana income and if it can cash flow without that then you're fine." And so, even though they were receiving a decent amount of cash flow, if those properties didn't cash flow on their own, then forget about it, you can't loan them the money. Jason: Yeah. Quentin: And it's just, some common sense things that don't really play in there. Jason: Yeah. Yeah. No, that's unfortunate. So you, okay, so I can really see, so what, what does the future hold, you think? I mean Quentin: Yeah. Jason: You know, Washington and New York whatever, those guys move at glacial speeds. Quentin: It's becoming a federal issue. Jason: Are we a decade away? Are we Quentin: I don't think so. I think it's moving faster than that because just two weeks ago, I think it was, the Safe Act passed the House. Jason: Okay. Quentin: And so the Safe Act basically says you can bank, if you're in a state where it's legal, you can bank it without worry from your regulator for repercussions or for them telling you don't get into this industry. Jason: Okay. Quentin: So, the House's are and it was very bipartisan, there were only, there were over 90 Republicans that voted for it as well. And so it was really strong, and, and our State was one of the leaders in this because we are kind of at the forefront of this whole process. And so the House voting it in, now it kicks over to the Senate. The Senate's going to be tougher. There's more discussion to be had. But Senator Gardner here in Colorado is pushing hard for it, and, and really with the arguments that you know, this stuff needs to be banked. There's too many other, there's too many other avenues that this goes without it being in the banking system, and, and different entities trying to be formed, those types of things that aren't healthy for our economy. And so, it is becoming a hot button. I've read things that say maybe as soon as three months we could have it in to law and available. Jason: Federally, you mean? Quentin: Yes. Jason: Wow. Quentin: Now Jason: Yeah. Just like in construction Jason: Yeah. Quentin: We're going to wait and see on that because it will Jason: So three Congress months is like five years. Quentin: Could be, you're right. But there is a lot of movement on it right now and, and community banks are, are leading that fight, we're trying to say, listen this needs to be Jason: How are the big banks responding to this? Quentin: Well, I think a lot of them are already doing it, they just won't tell you that. Jason: Okay. Quentin: And so they, you know there's, there's some level of, "Well, we have a proprietary way of doing this and we don't want everyone in here." We want to get our $1,000 a month fee and Jason: Right. Quentin: And continue to do this and so they haven't been as vocal but I think, I sense that they would welcome a change there because nobody likes to have a huge department working on just trying to see okay, who's doing marijuana and you know, should we kick them out?" Should it should it be an account that's allowed? Those types of things, it's really not productive. Jason: Yeah. Yeah. No, it's tough. So, all right, well thanks for that, I know that's controversial. It's certainly controversial for a CPA. I know a lot of CPAs who don't want to touch that, for maybe religious reasons, philosophical, but I think a lot of them are just afraid of the regulation Quentin: Yeah. Jason: Behind it and, and for banks I think the same thing. And, during that transition between someone saying, "Hey, we're going to look the other way" to the point that you actually have it on, on paper, it's going to be kind of a gray area for operations, you know. Real quick, before I forget, how does like a credit union work? Where, where are they regulated? And do they have different rules than a bank? Quentin: Yeah. And I, I know nothing about the difference. Quentin: ure. So. Jason: Between credit unions and banks. Quentin: Well, so yeah, it's a great question and I think a lot of don't understand the difference. Credit unions were initially put into place to help serve the underserved. So, people that couldn't get banking services, they couldn't qualify for a loan because they, they had no income or bad credit or they had a unique business that they worked for that had seasonal cash flows that the typical banking product didn't work for. Think about like migrants coming across and they don't have everything they need. Jason: Right. Quentin: Or they haven't been set up long enough for a traditional loan so they would serve the underserved. And then the camel got its nose under the tent. Jason: Right. Quentin: And they have expanded into the biggest financial institutions in the country. Jason: Oh sure. Quentin: For instance, especially in this county, we see that a lot. There's a 300,000 square foot office being built up in Jason: Yes. Quentin: Our neck of the woods for a credit union to serve the underserved, as you can imagine. Jason: Right. Quentin: And so thats not what's happening and while they are nonprofit and they pay no taxes, so. Jason: How about the regulation? Can they take marijuana dollars? Or is that Quentin: So their regulator is, we, I'm biased here so just fair warning, but Jason: Full disclosure. Quentin: Their regulator's more of a cheerleader for them than, ours is really there to make sure we're doing what we need to do the right way. And theirs really has. Jason: But they're certainly influential in the economy now. Quentin: They are, they're getting large. Jason: We can't, we can't ignore what they can do. Quentin: No, no question and they do operate a lot, there, there's similarities a lot to community banking, which is the frustration because we, we'll compete with anybody on a level playing field, all day long. Jason: Right. Quentin: But, but the playing field is not level. Jason: Oh, okay. Quentin: And so when you get it, you know, if you had a competitor that, you know, was doing the same business lines as you but your tax rate is 30% and there is zero. Jason: Right. Quentin: Imagine what they could do with that 30%, Jason: Right. Exactly. That's huge. You're right. Quentin: So, that's been the frustration and so the net result is higher pay for their top people than what we can afford to do, nicer real estate, bigger real estate, just more stadiums named after them, or event centers named after them. And so that tax benefit really, you see it come into play there. Jason: Nonprofit is kind of watered down. Quentin: It's a nonprofit Jason: So it's a watered down term. Quentin: That's right. And we don't have a problem with the ones that stick to that original mission because there is a need there. Jason: Sure. Quentin: But it's when we're, when we're getting competition, head to head from the doctors and the lawyers and you know, that's the "underserved" that the lines have been really blurred as to what they can and can't do. Jason: I agree, 100%. Well thank you for spending time with those talking about a controversial topic, the marijuana stuff, how not putting cash into the banking system, not putting cash directly into the economy, or getting it in there but in kind of weird ways. But no, but you know, thank you for sharing your thoughts on that. My name is Jason Watson with WCG Incorporated. Tax and accounting firm here in Colorado Springs. Quinten Leighty, First National Bank of Monument. Thanks for joining us. Ax and the Oak is a gracious hosts here for our Bourbon and Business series for our podcasts. And thanks, and we'll talk to you real soon. [Swoosh]