To an outsider, it might have looked as if Community Financial Group had won the lottery. But bank officials say they were not nearly so lucky.
The Nashville-based bank company added $25 million in capital in the final days of 1998, when investors took advantage of stock warrants that were about to expire. The warrants gave investors until the end of the year to buy Community Financial shares at $12.50, slightly below the market price at the time.
Investors bought more than two million shares of the $238 million-asset company last December, doubling not only its capital but also its shares outstanding.
The result: Community Financial's earnings dropped to 78 cents per share, from 89 cents in 1997-even though net income rose 25% last year, to $2.6 million.
"You would like to think you had a good year when your net income jumps like that," said Mack S. Linebaugh Jr., president and chief executive officer. "But it's hard to get too excited when earnings go down."
The company has hired a consulting firm, Franklin, Tenn.-based Dorland & Associates, to advise it on uses for its capital.
The rush on shares at the end of last year was due to Federal Deposit Insurance Corp. limitations on bank stock warrants. The government requires that warrants be cashed in during the first 10 years a bank is in business, and Bank of Nashville was founded in 1989.
It could have been worse. Mr. Linebaugh said that there were more than two million other warrants that investors either forgot about, or chose not to exercise. If those shares had been purchased, the company would now have close to $75 million of cash on its books.
Community Financial is now looking for places to spend its money. It has already made an investment in a start-up factoring firm, which Mr. Linebaugh said his bank will use "as a new option for our business customers."
Mr. Linebaugh refused to say what his company planned to do with the capital, but he said he expected to begin spending the money soon.
Industry experts said it is rare for a bank to run into trouble because of its warrants plan. Richard P. Hunt, chairman and chief executive officer of Kendrick, Pierce & Co., a Tampa-based firm that specializes in helping de novos, advises his clients to stagger warrant expiration dates to make sure not all of the money comes in at once.
"It's all a matter of planning," Mr. Hunt said. "You have to be thinking of what could happen ahead of time, and prepare for it."
Mr. Linebaugh, who was not with the company when it was formed, said he was not sure why so many warrants were promised. "I assume they thought they would need more capital by now," he said.
Chris Hargrove, president of Professional Bank Services Inc. in Louisville, Ky., had advice for Community Financial, or any other company in its shoes.
"They need to go to the market and start buying back those shares immediately," he said. Not only would buying shares burn some of the capital, he said, it would also reduce shares outstanding and therefore improve earnings per share.
