What is a subchapter S Corporation?
Subchapter S is a section of the Internal Revenue Code for a corporation that has 35 shareholders or less and meets requirements to be taxed as a partnership. In turn, the corporation can distribute income to shareholders and avoid corporate income tax.
Despite the availability of the federal funding, some area bank officials say the program isn’t an attractive option. Freeport-based Texas Gulf Bank NA, for example, already has sufficient funds to actively pursue small-business loans, said Rich Jochetz, president. So even if the bank were eligible, it wouldn’t apply right now because tapping into that capital wouldn’t boost current lending levels. “We are having trouble finding good quality loans as it is,” he said. “It all sounds good, but if the borrowers aren’t out there, it doesn’t matter.” Still, Jochetz added that he hasn’t totally ruled out the fund, should the bank’s financial situation change.
For some subchapter S corporation banks, the Small Business Lending Fund simply wasn’t on their radar. “We are not participating in it because we have good liquidity and it doesn’t fit in our plan,” said W. Phillip Johnson Jr., chairman of the board and CEO of Houston Community Bank. Vista Bank Texas is also not interested because it is already having success with small-business lending, said Tawn Vandenberg, senior vice president of treasury management. The bank has grown from $60 million to $460 million over the past four years, mainly due to owner-occupied commercial real estate lending, and banking high-net-worth individuals, she added.
Still, Vista Bank is about five or six months out from closing its planned merger with Founders Bank SSB of Sugar Land, Vandenberg said. At that time, Vista will be involved in Founders’ Small Business Administration lending practice.
Subchapter S corporations not being eligible for government loans isn’t new. The same issue cropped up in 2008 when the U.S. Treasury started the Troubled Asset Relief Program, said attorney Toppin, also executive director of the Subchapter S Bank Association. “Originally, the Treasury was going to use TARP funds to buy bad assets, but they couldn’t figure out a way for that,” he said. “Instead, the Treasury came up with a way to invest in the banks.” But rather than have the banks issue common stock in return for government investment, the Treasury decided on preferred stock, he said. Common stock was seen as more of a permanent investment, and would then get the Treasury involved in duties such as voting on board members. Instead, preferred stock wasn’t a voting stock, and the thought was once the bank got healthy again, it could buy back the stock from the Treasury, Toppin said.
To give subchapter S corporations a chance to apply for TARP money, the Treasury allowed the issuance of subordinated debt by subchapter S corporations, and the Federal Reserve issued an interim final rule allowing the debt to be treated as Tier 1 capital, which is what regulators use to measure a bank’s financial strength. Toppin and bank associations are advocating for a similar change on the Small Business Lending Fund and further propose allowing subchapter S corporations to issue preferred stock. “Getting the regulatory agencies to do something is difficult, though,” he added. Even if the rules were changed, Toppin is unsure how many of Texas’ 600 subchapter S corporation banks would want to participate because of the perception of TARP as a government bailout. But he thinks the Small Business Lending Fund is friendlier than TARP in terms of regulations and is a good solution for smaller banks that are falling short of their loan requirements.
Meanwhile, the Treasury Department has extended the deadline for C corporation banks to apply for small-business funds until May 16. Through early April, more than 600 banks nationwide have applied, requesting about $8.6 billion in funds, the Treasury Department said.