Corporate change limits bank investors
Federation Bank president and CEO Jamie Collier said today that Federation Bank customers can expect to see no changes in service as a result of the bank’s change from a Chapter C to a Subchapter S corporation classified bank.
He also said there will be no changes in management or employees. He said that the change is being done at the corporate level and deals with how dividends are distributed to shareholders.
Collier explained that the change, which was voted in Tuesday evening during a special stockholder’s meeting, would only affect the manner that shareholders are paid dividends and tax filings that is designed to boost profits. It will also limit the number of shareholders.
“There are just some basic differences,” Dale Torpey, chairman of the Federation Bank board, said. “With a Subchapter S we can only have 100 shareholders while C can have as many as they want. There are also some tax advantages under S. With a Chapter C there is kind of double taxation. The corporation pays taxes and when we dividend out the shareholders pay taxes on the dividends. Under a subchapter S, it is only taxed once when it is distributed to shareholders.”
Collier said that the proposal to change, which has been in the works for over a year, is an advantage to the remaining shareholders. Torpey said that when the issue came up Tuesday evening, it was approved overwhelmingly. Until the meeting, Torpey said that there were over 100 shareholders and now there will be fewer. He said that he is not sure at this time how many shareholders there will be.
Torpey explained that there will be a cutoff for people with a certain number of shares. He said that people having less than the determined amount will be paid out. He said that he couldn’t give certain confidential information on the change.
Collier also explained that the Internal Revenue Service allows S corps to form family groups. He said that husband-and-wife investors can count as one investor. He also said that the groups can be formed through six generations.
Torpey said that a few shareholders who were paid out weren’t happy, but he said this was the best thing for the majority of the shareholders.
“As directors and officers of the bank, it is our fiduciary responsibility to do what is best for the majority of shareholders, and that is what we have done,” he said. According to data from SNL Financial, S corps have been shown to outperform C corps in general. In 2011, the median return for equity on S corps is 89 percent while it is 58 percent for C corps.
Torpey said that people being bought out will receive money before the end of the year to fall under the current capital gain rate. Collier said that next year the capital gain rate is expected to rise next year. This year the rate is 15 percent while next year it could be as high as 23.8 percent.
Both Torpey and Collier said that the bank is currently doing very well. Torpey said that there have been many things that the bank has worked through in the last 10 years. He said now there is really good management in place, earnings are good, assets are at $115 million and the bank is positioned well.
“I don’t think the future has ever been brighter than it is now,” he said.