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Banking & Finance



Mortgage crisis prompts large-scale layoffs

Banks, credit unions experience record losses, forced to layoff thousands

Mutual that the nation’s largest savings and loan insti- tution has decided to get out of the subprime business altogether and instead rely only on third-party brokers.

layoffs of as many as 45,000 employees. E-Loan Inc., an online mortgage lender, is cut- ting 44 percent of its work force due to reduced overall demand for home loans.

With the housing crisis in a complete tailspin, layoffs like the ones at Washington Mutual are becoming more and more common for major banks, credit unions and mortgage lenders.

Thus it is no longer just the homeowners feeling the impact of the subprime mort- gage crisis; financial institu- tions are getting hit just as hard. FDIC-insured institu- tions across the country have posted net incomes from the third quarter of $28.7 billion, a 25 percent decline from a year ago. Banks have not earned less than $30 billion in a quarter since 2003. This means layoffs may start to become more and more com- mon in the banking industry, and this trend may continue until the housing crisis straightens out.

Washington Mutual serves as just one example of major financial institutions reducing staff to compensate for the financial impact of the hous- ing crisis. Citigroup reported that its shares are at a five- year low, causing extensive

Financial institution cus- tomers will most likely begin to feel the effects of the layoffs through the possibility of slower service. There may be a little longer wait in line or on the phone. Financial institu- tions are doing their best to accommodate income loss without sacrificing quality service, as well as their employees’ well being and job situation.

Joseph Schroeder

Customers may also incur

some pricing increases — slightly higher loan rates and/or slightly lower deposit rates and/or increased fees may be passed along to con- sumers as loan losses impact the financial institution’s prof- itability, and margins are increasingly squeezed.

It is uncertain how long it


San Diego Metropolitan Credit Union

The subprime mortgage cri- sis, which has swept the coun- try affecting homeowners everywhere, has now started to take its toll on financial institutions nationwide, caus- ing large-scale layoffs and record losses. Major banking corporations such as Washington Mutual (NYSE: WM), Countrywide (NYSE: CFC), Bank of America (NYSE: BAC), Wachovia (NYSE: WB) and Citigroup (NYSE: C) have been forced to lay off thousands of workers to compensate for several billion dollars of mortgage losses. Overall, companies in the banking and mortgage indus- tries have cut more than 100,000 jobs this year.

Washington Mutual recent- ly announced the closing of 190 of its 336 loan centers and sales offices, as well as the lay- offs of more than 3,000 employees due to the sub- prime crisis.

It may take years for Washington Mutual to return to profit making, as the com- pany announced expected losses of $1.8 billion to $2 bil- lion in the first quarter of 2008. The subprime business was so brutal to Washington

will take for the economy to stabilize. In the meantime, customers directly affected by foreclosures should work with their lender. Be direct and proactive with them. Lenders feel more confident in a con- sumer’s intent to pay if they are actively communicating their issues/concerns. It also

never hurts to try to negotiate prospective loan modifica- tions with your lender, but expect to pay more until this economic slump subsides.

Schroeder is CEO of San Diego Metropolitan Credit Union.

Source Code: 20080124crc

Employee stock ownership plans provide tax-advantaged benefits for business owners


Regents Bank

ESOPs (employee stock ownership plans) are tax- qualified employee benefit plans that double as tax- favored financing vehicles. The owner can sell all or part of his shares for a fair market price to the employees through an ESOP.

Most small and medium- sized businesses are well suit- ed for ESOPs. Business own- ers considering setting up an ESOP should have a compa- ny that is valued at a mini- mum of $1 million with 10 or more employees and in good financial condition.

The ESOP is a powerful tax-planning tool that allows the owner to sell all or a min- imum of 30 percent of her stock and defer or perma- nently avoid capital gains tax on any gain resulting from the sale. The ESOP provides a market for a closely held company’s stock. By selling a portion of the stock, the owner is able to maintain control of the business and is able to take cash out of the business tax-free prior to selling the remainder of her stock to the ESOP or to a third party.

The employees benefit by having a 100 percent compa- ny-funded retirement plan, job security and more incen- tive than ever to increase their productivity since they benefit directly through increased value of the com- pany stock allocated to the ESOP. The company benefits because by having an ESOP, it can significantly reduce its annual tax liability.

If the company does not have adequate cash resources to finance the purchase of the stock from the shareholder, which is usually the case, a company secures an ESOP loan from a bank to purchase the shares. The company is entitled to deduct the loan’s principal payments as well as the interest on an ESOP loan within generous limits set by the IRS. In effect, the compa- ny pays back only two-thirds of the loan principal and the government pays the remain- der by providing the tax deductions.

For the business owner to qualify for these benefits, he must meet three require- ments.

Taxes are deferred by pur- chasing qualified replace- ment property, which gener- ally includes stocks and bonds of domestic operating companies. The taxable event occurs only when the busi- ness owner sells these new investments.

Taxes can be avoided alto- gether if the business owner holds the new investments until her death. At that point, the heir pays tax only on the appreciation of the invest- ment between the time of the business owner’s death and the date of sale of the invest-

ments. Unlike



employees make no financial contribution to the plan, but rather earn stock in the com- pany. The plan is funded by company profits. Employees do not pay taxes on the value of their stock until they liqui- date it, and many choose to further defer taxes upon liqui- dation by rolling the proceeds into an IRA. When employees retire or leave the company, they sell their stock back to the company for fair market value as determined by annu- al independent evaluations.

The company has one year to pay an employee who retired, died or left from dis- ability.

If the employee leaves for other reasons, the company has five years to pay the employee.

Business owners need to assess whether the ESOP ben- efit is right for their company and employees. ESOP plans are more expensive than other retirement plans to set up and administer, but the tax savings more than compensate for the additional costs.

In order to create an ESOP, the business owner must first learn about the plans through a financial adviser, banker or attorney who spe- cializes in ESOPs. When the owner has chosen to set up an ESOP after consulting with his business advisory team (CPA, banker, attorney and investment adviser/bro- ker), he would commission a thorough, independent valu- ation of his business to deter- mine the value of the stock, assuming it’s a private com- pany, and re-evaluate the cost each year. The market determines stock value of public companies.

ESOP for your company are:

  • Tax advantaged method

for financing for the purposes of business expansion, equip- ment purchases and to buy out a partner or to provide funds for a divorce settlement by redeeming the departing shareholder’s shares.

  • The owner can maintain

control of the company while at the same time providing employees with the incentive to succeed. An ESOP can help to attract and retain qualified people.

  • Providing a market for

closely held company stock and selling it free from cur- rent capital gains taxation.

  • Improved cash flow for

the business due to tax advantages.

Clark is a senior vice presi- dent/founding partner with Regents Bank. She is familiar with and has funded many ESOP loans. To learn more about ESOP loans, contact her at (619) 446-5590.

Source Code: 20080124crf

First, the ESOP must own at least 30 percent of the company stock after the owner’s sale. Second, the owner must invest the pro- ceeds into qualified replace- ment property within 12 months. Finally, the business owner’s stock cannot be allo- cated back to any member of the family.

In the majority of ESOP formations, obtaining suit- able debt financing is an important factor. The trick is to find a bank or banker that is familiar with ESOP loans. Many are not and may be reluctant to approve a loan they do not fully understand.

In summary, the uses and benefits of establishing an

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