A Dallas thrift is changing its corporate status to avoid paying income tax, a move likely to be followed by other closely held banks and thrifts.
Shareholders of Beal Financial Corp., the holding company for Beal Bank, last week approved a change to an S corporation for tax purposes, effective Jan. 1, 1997.
The law that lets banking companies become S corporations took effect in mid-1996, but apparently no other banking company-and certainly none as large as Beal-has taken advantage of it, though many are said to be thinking about doing so.
Operating as an S corporation, Beal will not pay corporate income taxes; instead, its shareholders will pay the personal tax rate on the thrift's earnings.
"By not having corporate income tax, the bank's earnings will rise," said David R. Farmer, president of the $1.3 billion-asset thrift. "It will provide more capital."
More banks are either changing their status or exploring the possibility, particularly in Texas, a banking attorney said. As of Sept. 30, the Lone Star State was dotted with 897 banks, hundreds of which are small, closely held institutions.
"Our law firm is advising a number of banks who have decided to change," said Patrick J. Kennedy Jr., managing partner of Kennedy & Baris LLP, a San Antonio firm. The company has talked to more than 10 banks since last summer, when Congress passed legislation that for the first time allowed banks to organize as S corporations.
Mr. Kennedy said there would be more converts if the federal government had not waited until December to issue guidelines that addressed some technical issues.
Others will want to see how it works.
"I've talked to a number of clients who aren't ready to do it because bankers are conservative," Mr. Kennedy said.
John H. Northcut, chief executive officer of Stockmens National Bank in Cotulla, Tex., is one of the fence-sitters. The bank still is contemplating the benefits of such a change.
"We're looking at it," Mr. Northcut said.
Banks seeking to change to S corporation status more likely will be closer to Stockmens' asset size of $25 million than Beal's $1.3 billion. The reason: Only banks with 75 or fewer shareholders can qualify for the status. For all its girth, Beal has only two shareholders, who now will be subject to a 40% personal tax rate on the bank's earnings, Mr. Farmer said.
In 1995, Beal paid $13.5 million in taxes, Mr. Farmer said. Due to a number of complicated variables, the thrift has not yet determined the total cost savings from the change.
"It's a substantial number, we just can't pinpoint it," he said.
