Small community banks are going private at an increasingly rapid rate, and most cite regulatory compliance costs as the primary factor behind the trend.
For example, the $68 million-asset Home Financial Bancorp in Spencer, Ind., plans to terminate its registration with the Securities and Exchange Commission today, and the $311 million-asset Sturgis Bancorp Inc. of Sturgis, Mich., did so Thursday. The two companies no longer have to file reports to the SEC detailing their operations.
This year five banking companies, including Home Financial and Sturgis, have gone private or announced plans to do so. Twenty went private last year, up from 10 in 2003, according to statistics compiled by SNL Financial LC of Charlottesville, Va.
John Blaylock, a senior associate at Alex Sheshunoff & Co. Investment Banking in Austin, Tex., said he expects that annual compliance costs as high as $350,000 will induce even more community banks to go private.
"Most banks are simply not willing to put up with the cost and time it takes to comply with all the regulations," Mr. Blaylock said. "You have to have a compelling reason to go through all that. If you're not getting the trading volume, why are you there?"
John C. Donnelly, a managing director with Donnelly Penman & Partners, the Gross Pointe, Mich., investment banking company that advised Sturgis, agreed with Mr. Blaylock's analysis and said that most of the delistings would involve banking companies with between $100 million and $500 million of assets.
"They're too small to be big and too big to be small," he said.
Home Financial's president and chief executive officer, Kurt Rosenberger, said the Sarbanes-Oxley Act of 2002 and other regulations have pushed up the cost of SEC reporting compliance such that "the advantages of continuing as a public company are far outweighed by the disadvantages."
Mr. Rosenberger said in a press release Tuesday, "We believe that the cost savings we will realize by going private will have a positive impact on the company's results of operation and will allow management to focus more of their attention on the company's business."
Brian P. Hoggatt, the chief financial officer at Sturgis, said it went private because its stock did not trade frequently enough to justify the $130,000 a year it cost to maintain its Nasdaq registration. Sturgis' daily volume rarely exceeded 4,000 shares, he said.
"It didn't really give us more liquidity," Mr. Hoggatt said in an interview Thursday. "Maybe small banks aren't as sexy as other alternatives."
