About 10% of all banks have converted to S corporations as a way to save on taxes and boost profits, a study found.
The study, released last week by Grant Thornton LLP, shows that 441 community banks changed their ownership structure to an S corporation for the 1998 tax year. In 1997-the first year banks with fewer than 75 shareholders could become S corporations-562 banks made the switch.
Converting to an S corporation lets a bank avoid federal income taxes by passing earnings directly to shareholders. Experts said tax savings vary, but anecdotal evidence from bankers suggests they save between 30% and 40%.
Richard A. Soukup, a partner at Grant Thornton who completed the study, said slightly fewer banks than he expected became S corporations this year, but he predicts far fewer will change in the future.
"The majority of banks that can convert have already made the transition," Mr. Soukup said.
S corporation banks now represent nearly a quarter to almost a third of some states' bank charters.
In Wyoming, 32% of the banks are S corporations, and more than 20% of the banks in Iowa, Minnesota, North Dakota, New Mexico, Oklahoma, and South Dakota have converted.
Mr. Soukup said S corporation banks are concentrated in the Midwest because the region still has many small, closely held banks. About 80% of the S corporation banks have less than $100 million of assets, the study found.
Many of the banks that changed to S corporations for 1998 wanted to convert for 1997, but could not meet all the criteria between September 1996, when Congress passed the law, and the March 1997 deadline.
John H. Burson, president and chief executive officer of Valley Bank of Commerce, Roswell, N.M., said his bank could not qualify as an S corporation for 1997 because it needed time to change its employee profit- sharing plan to a stock-ownership plan and buy out some shareholders.
The conversion for 1998 was worth the wait, however. Mr. Burson estimated $65 million-asset Valley Bank would pass along a 40% tax savings to each of its 60 shareholders this year.