Tag Archives: national economic trends

Valuations For Financial Institutions Are Falling — And Presenting New Opportunities For Estate Planning

“Strange,” “Nothing like it before,” “Astonishing” are a few ways to describe what has transpired in the financial institution industry over the last several months. As liquidity and asset concerns for financial institutions have become magnified, national economic trends have exacerbated the situation.

Despite all of this gloomy news there is at least one silver lining: If you own stock in a financial institution and need to do some estate planning, now is a great time to consider gifting some of those shares to family members or other beneficiaries. While gifting has many advantages, one of the most important benefits is the removal of assets from your estate and lowering your future estate tax.

Valuations of shares in financial institutions (and many other privately held businesses) are likely to be lower than in recent years due to many factors.

Some of the external factors include the uncertainty and volatility of the public stock markets, the effects and duration of the current economic downturn, the potential estate tax law changes that will occur with a new administration in the White House, and U.S. Treasury programs that are still being finalized from the financial-system bailout.

Each financial institution is unique and specific facts will dictate whether a substantial decline in value exists for each institution. The following are some noteworthy items that should apply when determining the value of any financial institution in today’s environment.

Liquidity and capital concerns may lead to financial institutions tightening their distribution policies to ensure capital levels are maintained.

Distribution policies can significantly impact the value of an entity. If lower distribution levels are expected to be maintained for a significant period of time, lower values for an entity can be substantiated.

There have been 139 bank failures since July 1, 2008, according to the FDIC’s Web site. As many as 115 of those bank failures have occurred in 2009. To put this in perspective, from 2001 through 2007, there were only 24 bank failures. This trend suggests that problems are more prevalent with financial institutions than in the past and that earnings expectations for future years may be lower than in recent years. Lower future earnings generally equate to lower valuations of stock prices.

The ability to achieve recent historical earning levels for financial institutions may prove to be difficult. According to the FDIC’s quarterly banking profile for the fourth quarter of 2008, annual net income for all financial institutions was at its lowest level since 1989, and return on assets for the industry (0.08 percent) has not been this low since 1987. During the second quarter of 2009, the FDIC noted that more than one in four institutions was unprofitable and industry assets declined by $238 billion. With future earnings unlikely to mirror recent historical earnings (prior to 2008), valuations for shares in financial institutions should be lower.

Many valuations of privately held financial institutions rely on publicly traded information as benchmarks for establishing values. While the markets have rebounded since early 2009, the publicly held banks are still trading at considerably lower levels. Specifically, a review of publicly traded banks in Yahoo! Finance’s Pacific and Southwest Regional Banks category indicates the average price-to-book value for the 184 publicly traded banks was 0.70 as of October 31, 2009. This is considerably lower than price-to-book ratios prior to 2008, and will likely impact buyers of private financial institutions leading to lower valuations.

The private marketplace is another source of information that appraisers rely upon when determining the value of financial institutions. The amount of activity in mergers and acquisitions of private financial institutions in the Southwestern U.S. significantly dropped during 2008 and 2009. Of the 20 transactions in 2008, only five were announced in the second half of 2008. Like the publicly traded banks, private banks in the Southwest also have seen a decline in the average price-to-book multiple above 30 percent from 2007.

Moving shares at lower values seems counter intuitive, but the tax advantages may be beneficial in planning your estate. With the current potential for lower stock valuations of financial institutions, owners may be able to gift more shares for the same dollar amount than they would have been able to gift in the past. These conditions should reduce the applicable gift tax and/or unified credit that would be used in connection with a gift. While the timing may be right for gifting shares of stock in your financial institution, be sure to visit with your financial advisers to determine when gifting is the best option for you.


Arizona Business Magazine

February 2010