Sub S Regulation Update

Treasury Issues Regulations Affecting Sub S Banks: Good News with Some Wrinkles The Need ironing

Special thanks to Patrick J. Kennedy, Jr., Managing Partner at Kennedy Sutherland and President of the Subchapter S Bank Association, for the following information.

The U.S. Treasury issued proposed regulations on August 8, 2018 on section 199A of the Tax Cuts and Jobs Act, which establishes the 20 percent qualified business deduction (QBI) for Sub S banks and other pass-through entities. We have been working diligently with a coalition of Independent Community Bankers Association and American Bankers Association professionals to make sure that the Treasury regulations clearly implemented the Congressional intent that Sub S bank shareholders were intended to be eligible for the QBI deduction.

We were successful in that the regulations proposed make clear that Sub S banks are eligible for the deduction by clarifying that the term financial services (a specified service that is not eligible for the deduction) should be narrowly defined to include “services provided by financial advisors, investment bankers, wealth planners and retirement advisors and other similar professionals, but does not include taking deposits or making loans.”

The regulations, which cover 184 pages, initially appear to have eliminated another concern for the majority of Sub S banks with regard to income generated by Sub S banks from excluded specified services trade or business (SSBT) such as “investing and investment management, trading and dealing in securities or brokerage.” However, there remain questions about how this will be applied. While we urged blanket availability of the QBI deduction for any bank business activity permitted by law, we also suggested establishment of a “de minimus” rule that Treasury has proposed. Unfortunately, the way the de minimus rule is proposed, an S bank would lose its entire ability to deduct any QBI if 10 percent of its gross receipts consist of SSBT income if the total gross receipts are $25MM or less and 5 percent of gross receipts if its gross receipts are in excess of $25MM.

The regulation states: “For a trade or business with gross receipts of $25MM or less for the taxable year, a trade or business is not an SSBT if less than 10 percent of the gross receipts of the trade or business are attributable to (SSBT type income).” It does appear to permit a Sub S bank to take the QBI deduction from such activities so long as it does not exceed 10 percent of the entity’s gross receipts and total gross receipts of the bank are $25MM or less. We believe that a bank’s gross receipts are generally interest income, non-interest income and gain on sale of assets such as loans. 

In addition, we are concerned that many Sub S banks may be deemed to be “dealing in securities” by virtue of their originating and selling loans or parts of loans. The proposal makes specific reference to existing code provisions that categorize such activity as dealing in securities, but also contain an exception where the activity involves fewer than 60 individual loan sales per year. Based on our initial review, this could impact a number of banks who are active mortgage originators and sellers to Freddie, Fannie or other institutional buyers.

There are numerous other obligations that are imposed on Sub S banks by virtue of these regulations, including making a determination about the amount of QBI, W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property for use in a trade or business and whether the relevant reporting entity (RPE) – that is a bank, bank holding company or operating subsidiary is engaged in any SSBT.

We will continue to work with ICBA, ABA and a small group of tax professionals with whom we have collaborated on these Sub S bank issues since the initial draft of HR 1 was introduced last year and intend to submit comments within the required 45-day period and potentially have other meetings with Treasury and the IRS as a result of these remaining issues. For the majority of banks that do not engage in any of the activities that are defined as SSBTs—that is investing, investment management, trading or dealing in securities or brokerage, including trust services—the guidance clearly establishes that Sub S banks are entitled to take the QBI deduction as intended by Congress.

The regulations also confirm that Electing Small Business Trusts are entitled to take the QBI deduction. We will be asking for input from our Sub S bank members and other interested parties as we study the proposal more carefully in the coming days and formulate additional recommendations for Treasury.

Baker Market Update

In his novel Foucalt’s Pendulum, Italian author Umberto Eco wrote that “I believe that you can reach the point where there is no longer any difference between developing the habit of pretending to believe and developing the habit of believing.” Signore Eco wasn’t talking about economic fortunes or financial markets when he wrote those words, but their relevance to today’s environment might be greater than many would like to admit

Read More in the Baker Market Update

Congratulations BOCB

Texas community banks continue to blow us away with your Best of Community Banking (BOCB) Award submissions—and this year was no exception. Our bank members should be commended for the outstanding work they do both in their banks and in their communities. Special congratulations to Woodforest National Bank for its “Helping Rebuild After Hurricane Harvey” community service submission that received the top spot with the 2018 Best of Show Award.

Listed below are the 2018 BOCB Gold Eagle Award winners, and all other winners can be found here. Thank you to all entrants for enriching the lives of Texans each and every day.


Architectural Design

Legend Bank, Bowie (COMMUNITY SPIRIT)


Bank Culture

Independent Bank, McKinney

TrustTexas Bank, Cuero


Community Service

Woodforest National Bank, The Woodlands (BEST OF SHOW)

Texas First Bank, Texas City


Financial Literacy

First United Bank, Lubbock (COMMUNITY SPIRIT)

Fort Hood National Bank, Fort Hood

Woodforest National Bank, The Woodlands

FirstCapital Bank of Texas, Midland



Legend Bank, Bowie

First State Bank, Gainesville

Kleberg Bank, Kingsville

Centennial BANK, Lubbock


Also in the vein of honoring community banks and the work you do to better your communities and make your customers’ dreams come true every day, we encourage you to watch CalTech’s incredible video it made to promote the community banking industry.


The Office of the Comptroller of the Currency (OCC) announced last week it would move forward with special-purpose bank charters for fintech firms. One of the main criticisms shared by IBAT and other banking associations is that these charters would allow fintechs to evade the regulatory scrutiny community banks face and also that any new chartered institution should be subject to the same supervision and regulation required of community banks. The latter would require the OCC to procure explicit statutory authority from Congress before it issues fintech charters.

John W. Ryan, president and chief executive officer of the Conference of State Bank Supervisors, had the following to say about these new charters:

“Regarding the OCC’s move to create a new national charter for select, uninsured fintechs: An OCC fintech charter is a regulatory train wreck in the making. Such a move exceeds the current authority granted by Congress to the OCC. Fintech charter decisions would place the federal government in the business of picking winners and losers in the marketplace. And taxpayers would be exposed to a new risk: failed fintechs. On behalf of the citizens to whom we are accountable, state regulators are keeping all options open to stop this regulatory overreach.”

Early Bird

IBAT’s Annual Convention in September is quickly approaching, as is the August 10 early bird deadline! You only have four more days to save $100 or more on the registration fee. We hope you’ve checked out the brochure and website for the latest information on general and educational sessions, events and PAC activities, and sponsor and exhibitor listings.

One special treat at this year’s event is the presence of Diebold Nixdorf’s BRET – Big Rig Experience Truck. Visit booth 17 to be on your way to discover innovation that goes beyond omnichannel. Explore firsthand how Diebold Nixdorf’s experience-driven technologies and services extend into the future to empower a more cohesive, end-to-end ecosystem for financial institutions. View this sneak peek.


Register Now!

FS-ISAC is offering a two-day Cyber-Attack Against Payment Systems (CAPS) exercise that will help you practice your cyber-attack response plan without the stress of a real attack. You can register online for the one of the following dates: October 9-10 or October 16-17.

This program will challenge your response teams, find gaps and help you build a stronger response plan. Register today.

Baker Market Update: 8.06.18

In the last Jobs Report before the onset of college football season, the Bureau of Labor Statistics (BLS) came out with a little bit of a pre-season surprise, and not a particularly good one. The better news is, it’s not a particularly bad one, either. The not-so-good part is that job creation, as measured by Non-Farm Payrolls, disappointed the market estimators that were expecting a gain of 193k. For those expecting something below the published 157k, well, they’re less disappointed. There’s a lesson in there somewhere about the relationship between expectations and happiness.

Read More in the Baker Market Update

Salary Survey

It’s not too late to fill out IBAT’s 2018 Community Bank Salary and Compensation Survey. The data collection deadline has been extended to Friday, August 10—that’s nearly two weeks from now. Participants receive a complimentary copy of the comprehensive PDF report and custom reporting tool ($450 value), due out in mid-September. Use this information to ensure your employees and directors are compensated competitively for your market, bank size and other factors.

We make this process as simple as possible with two easy ways to participate:

  • Enter data online by clicking here. It takes less than a minute to create an account, then click “participate” to provide salary and compensation data for the survey.
  • Print this form and return it by mail or fax to the contact listed at the bottom.

We encourage to take a few minutes to help us make this tool the valuable resource it is every year.


Congratulations to State Bank of Texas, which secured the top spot in Sageworks’ list of the 15 best-run U.S. community banks in 2017 using a combination of their return on average assets and efficiency ratio.

A total of 4,140 community banks specializing in commercial or agricultural lending in terms of asset concentration, with between $100 million and $10 billion in assets, were evaluated for the list. View the full list here.

Legal Ease

We did a collateral modification on a commercial loan. Would this be subject to the Beneficial Ownership rules?

Learn the answer here. For this week's Legal Ease in a printable PDF, click here.

Contact Kelly Goulart (512-275-2231) or Janie Daniel (512-275-2221) if you have further questions or need clarification on the topic above.

Legal Ease is chosen from questions received through the IBAT Compliance Adviser Helpline, available to IBAT members free of charge at 1-800-749-4228 or kgoulart@ibat.org. IBAT members can also read and/or initiate discussions with other community bankers in the IBAT Compliance Forum.

2018 Bank Lending Institute

Now in its fifth year, IBAT’s annual Bank Lending Institute (BLI) provides practical management and leadership strategies necessary for successful community bank lending. The program provides:

  • A community banking focused curriculum encompassing real-world situations, issues and solutions;
  • Valuable relationship building with experienced faculty and fellow bankers;
  • Necessary skills to build an effective and profitable lending portfolio; and
  • Strategic insight into both present and future banking best practices.

This two-year program will take place November 11-16, 2018 at the Hotel Contessa in San Antonio. Click here for the brochure.


Baker Market Update: 7.30.18

Remember when, as a youngster on the 4 th of July, how tempting it was to set off the whole string of Black Cats at once? You knew if you did, you’d be treated to fifteen seconds, or so, of intense fire and fury. Flashes of light and billows of smoke against a background of loud bangs! Pretty tempting. You also knew that if you yielded to that temptation, there was a downside; you were out of firecrackers. 

Read More in the Baker Market Update

Annual PAC Auction

IBAT’s 44th Annual Convention is quickly approaching. If you haven’t already registered, we encourage you to do so before the August 10 early bird deadline. We have a great line-up of speakers and a jam-packed schedule to inspire both newcomers and those who are with us each year.

PAC activities have been an important part of every IBAT convention for the last 29 years. The Annual PAC Auction and Dream Vacation have made the IBAT PAC the success it is today – and it’s all thanks to your generosity.

The IBAT PAC is exclusively dedicated to promoting the community banking industry. PAC funds enable IBAT to support candidates who understand the important role that community banks play across Texas. The IBAT PAC is an essential tool in the association’s government relations efforts – and we hope you will help us make the 30th anniversary of the Annual Live and Silent Auction bigger and more successful than ever. Learn how you can contribute here.

New Survey

An interesting new survey found that 46 percent of millennials feel held back by their credit scores. Results show that bad credit impacted millennials’ ability to get a loan, credit card or house, not to mention buy a car. Additionally, 14 percent of respondents live with roommates because bad credit impacted their ability to rent an apartment on their own.

Of the millennials who missed credit card payments in our survey, 36 percent said they simply forgot about it, while another 10 percent said they had a bill they didn’t know they had to pay. Of more concern is that 24 percent said they had received insufficient education about habits and techniques that build a strong credit history. Listed in the report are “millennial money hacks” that can help with issues such as not making payments on time.

This survey further validates the need for financial literacy and education programs—ideally starting with school-aged children—that many community banks offer.


Last week, the Senate confirmed Federal Reserve Vice Chairman for Supervision Randal Quarles for a new 14-year term on the agency’s board on a 66-33 vote. Quarles was previously approved for a four-year term as vice chairman and a term for a seat on the board that expired in January.

In other regulator news, the Senate Banking Committee also held a hearing last week on Consumer Financial Protection Bureau director nominee Kathleen Kraninger and Export-Import Bank president nominee Kimberly Reed. Additionally, Michelle “Miki” Bowman, Richard Clarida and Marvin Goodfriend are awaiting a full Senate vote to become Federal Reserve Governors. Once approved, Bowman will fill the community banking seat on the board.

Early Bird Discount

Do you consider yourself an expert when it comes to credit analysis and/or appraisals? IBAT’s lending summits provide up-to-date training that benefits both new and experienced bankers, so if you’re looking to perform your job better and help your bank improve its lending policies and practices, we invite you to register for these upcoming programs:


Don’t delay! We’re offering a $75 discount if you register for both summits by the end of the month!

We hope you will join us in Austin for one or both of these informative summits. Please feel free to reach out if you have any questions.

Kelly George, CAE @ kgeorge@ibat.org

Baker Market Update: 7.23.18

Move over, Austin Powers; the world has found a new “International Man of Mystery.” Federal Reserve Chairman Jerome Powell displayed uncharacteristic coyness with lawmakers this week when he presented his semi-annual Monetary Policy Report to Congress. No one was surprised when Jerome said that the Fed would continue to raise rates gradually, but, his coquettish caveat of “for now,” has left many wondering what the self-satisfied central banker might have meant. Did he mean that the gradual hikes might have to soon be ramped up, or maybe he was saying that they’ll soon have to end? Those that appreciate irony should also appreciate that his report’s prologue piously proclaimed that “monetary policy should be a mystery to no one.” Now, that’s funny! 

Read More in the Baker Market Update

Exam Cycle Update

The Texas Department of Banking last week issued a revision to Supervisory Memorandum 1003 to reflect the changes made to examination frequency for well-rated banks between $1 billion and $3 billion in assets. These revisions were made to comply with the recently passed Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) and will extend the examination cycle to 18 months for those banks falling within this asset range.

TRID Improvement Act of 2018

Last week, a joint letter was filed by several groups, including banking advocates, urging all U.S. senators to support, cosponsor and pass the TRID Improvement Act of 2018 (S. 2490). If enacted, it would allow for accurate disclosure of insurance premiums and potential discounts available to homebuyers. Currently, the TILA-RESPA Integrated Disclosure does not allow disclosure of available title insurance discounts.

If passed by the Senate, S. 2490 offers a straightforward solution that would benefit consumers and will avoid the creation of inconsistent mortgage documents. The House passed its version of the bill in February.

The Texas Independent Banker

The July/August 2018 issue of IBAT’s magazine, The Texas Independent Banker, is now available online. This month’s cover feature takes an in-depth look at cybersecurity, including strategies to help protect banks from attack, keep customer data safe and ensure your employees aren’t your weak link. Other articles include:

As always, we welcome your suggestions for content to be featured in future issues. Please feel free to contact Neil Ferguson with ideas.

Baker Market Update 7.16.18

While President Trump is busy sweet-talking our allies in Europe and the U.K., Fed Chairman Powell might want to think about how he’s going to sugar-coat his inflation message to American consumers. The much-desired and long-sought-after condition of rising price levels has now succeeded in eliminating any gains in the purchasing power of those that are compensated on an hourly basis. For the second month in a row, Real Average Hourly Earnings, adjusted for inflation, have been stagnant. So, while headlines herald an ever-soaring stock market and a “booming” domestic economy, the man-on-the-street may still have to do most of his shopping through windows. Not particularly positive for an economy built on consumption.

Read more in the Baker Market Update.

Protect Your Customers

We all know that banks, like other important institutions, are at risk of a cyberattack every minute of every day. According to a recent article in The Texas Independent Banker magazine, 35 percent of all cyberattacks are targeted at banks. More than likely, your bank has a plan in place that will guide it through an incident, should one occur. But wouldn’t it be nice to have the opportunity to practice your plan without the stress of a real attack?

FS-ISAC is offering a two-day exercise that will help you do just that—the Cyberattack Against Payment Systems (CAPS) exercise, which takes place October 9-10 or October 16-17, 2018. This program will challenge your response teams, find gaps and help you build a stronger response plan. Register today.

Wondering what you can do in the wake of a cyberattack? Click here for an article on how to help protect your customers and preserve public confidence. A single institution can’t prevent an attack—it takes a village.


Following the passage of S. 2155, the Consumer Financial Protection Bureau (CFPB) announced low-volume community bank lenders will now be exempt from certain HMDA data collection and reporting requirements. Community banks that originate fewer than 500 closed-end mortgage loans or 500 open-ended lines of credit will no longer be required to collect, record and report certain data points specified in current Regulation C of HMDA.

Additionally, the CFPB restated that reporting entities will not have to resubmit HMDA data collected in 2018 and reported in 2019 for non-material reporting errors, as it will not assess penalties for data collected in 2018 and reported in 2019.

Lastly, the format of the Loan/Application Registers for institutions filing HMDA data collected in 2018 will not be affected. Read the bureau’s statement, which includes additional information about exempted data fields and HMDA reporting guidance, here.

Baker Market Update: 7.09.18

Can Superman do more push-ups than The Hulk? Could Nolan Ryan strike-out Ted Williams? Is a good Jobs Report more important than a bad trade war? Good questions all, but tough to answer. To begin with, some might wonder how an increase in the Unemployment Rate from 3.8% to 4.0% could be positively perceived. A reasonable question. Thanks to an unexpected, but welcomed, increase in the Labor Force Participation Rate from 62.7% to 62.9%, not even a larger than expected rise of 213k in Non-Farm Payrolls could prevent the rise in the rate of unemployment. A closer look at the Household Survey from the Bureau of Labor Statistics (BLS) tells us how that happens. When the number of unemployed persons rises by 499k but the number of people who are employed only rises by 102k while the labor force expands by 601k, the numerator rises relative to the denominator. Voila’,the rate goes up. But, just when you think you’ve got the “S” from the “BLS” all figured out; remember, the survey that produces the Non-Farm Payroll count is different than the one that calculates the Unemployment Rate. Got it? 

Read More in the Baker Market Update