Some community banks are doing more than grumbling about the added cost, paperwork, and time required to comply with the Sarbanes-Oxley Act. They're going private.
In the last month, five banking companies have deregistered their stocks, which means they no longer have to file documents with the Securities and Exchange Commission and comply with its guidelines, including Sarbanes-Oxley provisions.
Experts predict that more small banks will go private and that fewer will choose to go public in the coming months.
In their termination filings the five companies cited the administrative burden and expense of SEC registration, and some singled out the new governance requirements in Sarbanes-Oxley.
The act was signed into law in July with the purpose of stepping up corporate oversight and reporting guidelines to prevent another scandal like that of Enron Corp., and it is starting to take effect.
One of the most onerous tasks for small banks is finding separate, external and internal auditing firms, as well as creating an audit committee made up of people who are not connected with the bank.
Experts say it is difficult to fulfill these requirements in a small town.
Indeed, one of those deregistering, Chesapeake Financial Shares Inc., is based in Kilmarnock, Va., which has fewer than 1,200 residents.
Cheryl Hinkle, the chief financial officer of the $196 million-asset Madison Bancshares Group Ltd. in Blue Bell, Pa., said Sarbanes-Oxley prompted the board to reconsider its Nasdaq listing. She said that in the past decade Madison had spent about $200,000 a year filing paperwork, meeting SEC requirements, and paying attorneys and accountants.
"We thought, 'What's more important to the shareholders?' " Ms. Hinkle said. "This is a substantial cost savings, and it frees up time so we can build a better and stronger bank."
Like other companies that deregister with the SEC, Madison was required to stop listing on a major exchange and to maintain fewer than 300 shareholders. (Though the deregistering process is called "going private," these five companies are still technically publicly traded because their stocks are available over the counter.)
Walter G. Moeling 4th, a banking attorney with Powell, Goldstein, Frazer & Murphy in Atlanta, said he expects many other small companies to follow in Madison's footsteps. He said community banks' biggest expense related to Sarbanes-Oxley is the "bureaucracy cost": the time and resources the board uses to sort out the act's regulatory details and establish policies and procedures to meet them.
"What it comes down to is a cost-benefit analysis," Mr. Moeling said. "There were excessive costs and minimal benefits" before Sarbanes-Oxley, and now the ratio is "hugely skewed," he said. "It's a wonder everybody doesn't deregister."
Mr. Moeling said that with the exception of those that are or plan to be active acquirers, banking companies with under $2 billion of assets and fewer than 2,000 shareholders would be better off going private.
Lexington B&L Financial Corp. in Missouri, which has $135 million of assets and 250 shareholders, officially stopped filing with the SEC last Friday after seven years as a public company.
E. Steva Vialle, Lexington's chief executive, said Sarbanes-Oxley was part of the reason for the decision. In addition, the bank had only about 500,000 shares outstanding and was paying about $60,000 a year to comply with the agency before the new corporate governance requirements.
"With our level of trading, it's not economically effective to stay listed," Mr. Vialle said.
Two of the three other companies that went private in the past month specifically cited the additional costs of Sarbanes-Oxley compliance.
Zachary Bancshares Inc. in Louisiana, with $105 million of assets, said in its filing that "these SEC registration-related expenses have been increasing over the years, and we believe that they will continue to increase, particularly in light of the Sarbanes-Oxley Act."
Chesapeake, which has assets of $290 million, said it paid $75,600 in SEC-related costs in 2002, its seventh year as a registered company.
Because the companies had more than 300 shareholders - Zachary with 600 and Chesapeake with 457 - they had to do reverse stock splits.
However, according to Ronald R. Glancz, a partner in the Washington law firm of Venable, Baetjer, Howard & Civiletti, few registered companies have a shareholder base of less than 300 or the ability to successfully complete a reverse stock split.
Mr. Glancz said most banks have too many small shareholders or too little capital to go private. Because of those limitations, he expects the greater impact of Sarbanes-Oxley to be a large number of companies' deciding not to go public, he said.
"The regulatory burden and the cost of Sarbanes-Oxley is something they will have to take into account," he said. "If it's a close call, this could tip the balance the other way."
Karen Thomas, the director of regulatory affairs for the Independent Community Bankers of America, warned that deregistering might not free companies of all Sarbanes-Oxley obligations, because examiners could apply the corporate governance standards for public companies to private institutions.
Ms. Thomas said banking regulators have already applied some of the act's requirements to private banks and could apply others. For example, last week all regulators announced that they would require privately held banks with more than $500 million of assets to have external and internal auditors.
One of the biggest questions for community banks that are not publicly traded "is how stringent the regulators and examiners will be on this and when the agencies will encourage banks to do certain things," she said.
