A handful of community banks in Texas are champing at the bit to convert to a new state banking charter that allows them to operate like partnerships and thereby avoid corporate federal income tax.

The Texas Banking Department has issued a charter to First Bank of Anna, a $34 million-asset institution that recently converted from a national bank.

It is the first bank in the state, and possibly the country, to become a so-called "limited banking association."

'A Significant Measure'

The banking department has two other applications on file and two more pending, said deputy banking commissioner Randall James.

"The charter could be a significant measure for community banks," said Al Jones, president and chief executive of $200 million-asset American National Bank, Corpus Christi, which has applied for such a conversion.

Mr. Jones said a community bank that converts could save as much as 50% a year on taxes. If its application is approved, American will change its name to American Bank LBA.

Conversion Seen Soon

Mr. Jones said the conversion could take place within the next three months.

"We are ... serious," Mr. Jones said. "We have worked on this plan for six or seven years."

Under Texas law, a limited banking association will still take in deposits and make loans. It must also be federally insured and can be a member of the Federal Reserve.

"From the standpoint of the public everything is transparent," said Mr. James, the banking commisioner.

Taxing Criteria Different

The primary structural difference between a limited banking association and a regular banking corporation is the way they are taxed.

A limited banking association's shareholders directly report the income they receive from the institution and are responsible for paying taxes on the earnings.

In contrast, a regular banking corporation's earnings are taxed by the federal government, and are taxed a second time if shareholders receive dividends.

Shareholder Risk Unclear

The new charter is a "way to perhaps provide an alternative to community banks to accumulate more capital and be more competitive," said Patrick Kennedy, a San Antonio-based attorney who represents American.

It is unclear what the risks are to the stockholders and what liability they would have if the institution failed.

Mr. Kennedy said stockholders could be required to pay their share of taxes on the income of the partnership even if the bank were unable to distribute earnings.

"The risk would certainly be a minimal one," he said.

Two Types of Partners

But there are risks in becoming a participant in a limited banking association.

For example, if the institution needs capital the participants are on the hook to help the bank meet the requirements.

Under Texas law, there are two types of partners -- a limited liability participant, who is similar to a stockholder with no personal liability, and a full liability participant, who is liable under any judgment or court order for the entire amount of a debt or obligation.

Mr. James said the agency wants go slowly on the chartering process. With the state's thrift crisis still on their minds, regulators are reluctant to take undue risk.

"It's something we need to talk about," he said. "We don't rush headlong into anything anymore."

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