Accountants advising founders of Greater Rome Bancshares Inc. in Rome, Ga., estimated when it opened in February 1996 that bookkeeping, financial reporting, and other jobs associated with Securities and Exchange Commission registration would cost about $25,000.
"We thought we could live with that," said Thomas D. Caldwell III, the president and chief executive of the $125 million-asset company. So incorporators had no qualms about SEC registration, which was required when they sold stock to more than 500 investors.
By last year, however, the estimated cost of SEC registration had risen to $53,000. And with the passage of federal legislation requiring big changes in corporate accounting and auditing, the bill appeared sure to climb higher.
"Because of Sarbanes-Oxley, because of more stringent corporate governance, our accountants said they wouldn't be surprised if that $53,000 grew to $100,000 in three or four years," Mr. Caldwell said.
The company averted the extra cost by buying back shares from its smallest shareholders early this year, cutting their ranks enough that it could withdraw its SEC registration, which it also did, effectively converting from a public company to a private one.
Though the number of institutions making similar moves is not great, Greater Rome's action appears to reflect consideration that dozens, if not hundreds, of community banks are giving right now to the relative merits of maintaining SEC registration and being a public company.
Foremost in the minds of executives and directors considering withdrawing SEC registration is the cost of preparing quarterly and annual filings, including auditing of financial statements and legal review of just about everything companies say in and about their filings.
More than historical legal and accounting expenses, public companies are facing increased burdens under the Sarbanes-Oxley Act, enacted last year in response to a series of financial reporting scandals. Among other things, SEC-reporting companies have to take steps to protect the independence of board audit committees, which many observers believe will be difficult for community banks. And chief executives and chief financial officers will have to certify financial statements filed with the SEC, possibly increasing their personal liability for any problems that surface.
But in addition to the quantifiable cost of SEC registration, community bankers are questioning traditional assumptions behind registration and public ownership.
The logic, accepted by hundreds of community banks for many years, is that SEC registration and public ownership provides maximum access to capital markets. In addition, an active market for a company's stock, which in theory goes hand in hand with SEC registration and a sizeable number of owners, may provide currency for acquisitions.
Maybe so. But bankers and their advisers increasingly note that publicly traded community banks are more likely these days to raise capital by issuing trust-preferred securities through pools organized by investment banks (which does not require SEC registration) than to undertake a secondary stock offering. They also say that many community banks have next to no interest in making acquisitions.
Community bankers also counted on shareholders to bring them business. But Greater Rome's Mr. Caldwell and others say owners of a few shares bring much less to the table than larger owners.
Most public community banks seem to be standing pat, at least for now. In fact, some are downright enthusiastic about their current position.
"Being a public company is wonderful," said David T. Taber, the president and CEO of the $356 million-asset American River Holdings in Sacramento, "in that it provides each of our investors with flexibility when they want to buy more or when they want to sell."
That is important, Mr. Taber said, because closely held companies can be forced to sell themselves when a significant owner needs to sell a large block of stock for reasons having nothing to do with the company's performance.
"Having a public market for our stock is so powerful," Mr. Taber said. "that it overrides, in my mind, a very tall stack of regulations that go with it."
Some advisers agree.
"You have absolutely clear access to all forms of capital," said Richard A. Schaberg, a Washington lawyer with Thacher Proffitt & Wood. Access to capital may be especially important if a bank seeks to acquire another company or even just a few branches, he said. Ruling out acquisitions, as many community banks do, is short-sighted, he said.
"I'd be hesitant to go private and save short-term money" Mr. Schaberg said, "and then watch a perfect franchise show up and not be as nimble as your competitors in trying to buy it."
But the opposite sentiment is gaining momentum. Unconvinced by Mr. Schaberg's thinking, about a dozen community banks have filed notice with the SEC this year of their intent to withdraw registration of their securities.
Executives with Coddle Creek Financial Corp. in Mooresville, N.C., launched a tender offer to owners of 99 or fewer shares in September, fearing the company will be swamped with Sarbanes-Oxley-related compliance costs if it remains SEC-registered.
Section 404 of the law requires companies to establish an internal audit procedure for financial transactions, said Billy Williams, the controller of the $140 million-asset banking company. Depending on how regulations are written, that could mean annually auditing 10,000 routine transactions, Mr. Williams said, at a cost of well over $100,000.
If banks that went through the same exercise a year or two year earlier are any indication, the move has little impact on operations.
First Palmetto Savings Bank FSB in Camden, S.C., saved about $50,000 to $60,000 in accounting and legal fees when it bought out its smallest shareholders and withdrew its SEC registration in 2000, said president and CEO Samuel Small. That is worth about 8 cents to 10 cents a share for owners of the $600 million-asset company, Mr. Small said.
Though this "was not significant in itself," he said, it was a useful step in a never-ending effort to pare costs.
With no foreseeable need for capital and no thought of making acquisitions beyond perhaps an occasional branch, which it would pay for in cash, Mr. Small says he saw no drawback to taking First Palmetto private.
More emphatic than that, Walter G. Moeling 4th, a banking lawyer with Powell, Goldstein, Frazer & Murphy in Atlanta, said there is no benefit at all in SEC registration for most community banks that now have it. Well-run closely held banks are quite capable of raising capital through private placements, trust-preferred offerings, and subordinated debt, he said.
"For a good bank or a good idea," Mr. Moeling said, "there's all the capital in the world, whether or not you are a quote 'publicly traded company.' "
It's important, he said, to distinguish between being SEC-registered and being a public company. Many, if not most, SEC-registered community bank stocks are too thinly traded to truly be considered public, he said. Without significant trading volume, he said, their stock is not especially useful as acquisition currency and will not provide real liquidity to investors with large holdings.
"For the great bulk of community banks under $1 billion to $2 billion in assets and with less than 1,000 shareholders," he said, "those arguments really do not hold water."
Though SEC registration is required of companies with more than 500 shareholders, it must be maintained until the number falls below 300. Start-up banks and converted thrifts often attract more than 500 shareholders right from the start. Older community banks, perhaps once dominated by a few individuals, often add shareholders gradually, particularly as substantial owners distribute shares to children and grandchildren.
The cost-benefit analysis of going private for SEC registered-banks will not directly answer whether mutual thrifts should convert to stock companies. Nonetheless, Mr. Moeling said, thrifts that do convert should think about winnowing out small stockholders quickly for the same reason that longstanding public companies should do so - that the many investors with very small holdings bring little benefit but cost plenty.
Many advisers to community banks offer a view somewhere between Mr. Schaberg's (that SEC registration usually is worth it) and Mr. Moeling's (that it usually isn't).
SEC-reporting banks have a much better shot at paying for acquisitions with their stock than banks that do not report to the agency, said Raymond A. Tiernan, a banking lawyer with Washington law firm Elias, Matz, Tiernan & Herrick.
"I think you give a lot more comfort to the target company in the efficacy of the reports they're going to get," he said. Deregistering may be reasonable, however, for slower-growing banks that can fund expansion from retained earnings.
Whether maintaining SEC registration makes sense ultimately depends on the business plan and the extent to which a banking company can really generate trading activity in its stock, said Paula Johannsen, managing director of Carson Medlin Co., an investment banking firm in Tampa specializing in community banks.
American River Holdings' Mr. Taber said about 400,000 shares of his company's stock change hands in a typical year, enough to provide liquidity for shareholders who need to sell out.
Many banks shares trade far less often.
"If we have a couple of trades a month, it's unusual," said Nicki Brown, the president and CEO of Wilton Bank in Wilton, Conn., which may withdraw registration of its stock soon. Though it has just $98 million of assets, 509 investors bought its stock when the bank was launched in 1986, so it had to report quarterly financial results and follow other rules in the 1934 Securities and Exchange Act.
With more than enough capital and no plans to make acquisitions, the bank gets nothing from being "public," Ms. Brown said.
Wilton has been buying stock back from small holders since its inception and finally brought the number of owners below 300 in 2001, just before Enron Corp.'s troubles burst into the public's consciousness. Unsure how deregistering would be perceived when corporate governance standards were attracting intense scrutiny, the bank held off on formally becoming a private company.
"For companies that aren't getting any real benefit out of it," said Carson Medlin's Ms. Johannsen, "you have to look at that $75,000 or $100,000 or $150,000 that you're spending to be SEC-registered and whether it is worth it."
Mr. Stoneman is a freelance writer in Albany, N.Y.
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