It may be an opportune time for bank investors to consider estate planning opportunities.  Rising inflation has been top of mind for business owners and bankers (and everyone for that matter) over the last few years.  While inflation has decelerated from its peak, business owners, bankers, and investors are adjusting to the new higher for longer interest rate environment.

Higher inflation and interest rates have affected every business with few exceptions.   All else equal, higher interest rates will negatively affect business value as higher discount rates are used to bring future cash flows to the present.   In some industries though, inflation-driven increases in earnings or revenue growth expectations have offset (or even outweighed) the negative impact of higher interest rates.

However, not all industries have been immune to pressure from higher interest rates and inflation on the value of their shares.  Banking is one of several industries that have underperformed broader market indices as investors remain skeptical of the “new normal” and impact of the rate environment on banks’ cost of funds and net interest margins.

As shown in the following tables, small and mid cap public bank stocks have underperformed broad market indices, and valuation multiples (as measured by P/E and P/TBV) remain below long-term historical averages.

While it remains uncertain when the interest rate easing cycle will begin, the easing cycle will likely also have divergent outcomes for different industries.  At this point between cycles and with bank valuation multiples below long-term averages, it is important to consider the potential opportunity to favorably transfer business value to future generations.

A second reason to consider estate planning transactions in the current environment is issues on the tax and policy front.  The Tax Cuts and Jobs Act enacted in December 2017 doubled the basic exclusion amounts individuals could give away without paying estate taxes.  The sunsetting of this provision on December 31, 2025 and the potential for lower exclusion amounts thereafter and higher estate taxes, makes considering transfers all the more important.

The combination of lower bank stock valuations combined with sunsetting favorable estate tax provisions make 2024 a worthwhile year for bank investors to consider estate planning strategies.  Many strategies will require a current valuation of your bank, and our professionals are here to help.

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