Public Offering Combines CDs, Bank Stock : Liberty’s Bid for Growth Met By Some Skepticism

Liberty National Bank is pinning its hopes for fast growth on a unique public offering that combines insured certificates of deposit with warrants to buy newly issued common stock in the small Huntington Beach institution.

The hybrid securities, which are being sold through the bank until Nov. 2, could raise up to $3 million in capital and nearly $20 million in deposits for Liberty, bank officials said.

“This is the only time that you’ve seen a stock play where you are absolutely guaranteed your money back,” said Richard Wilbur, the bank’s chairman. “Because a portion of the investment (the CD) gains interest during the term, you get your money back and it’s fully insured by the government.”

Edward Carpenter, a Santa Ana financial consultant who devised the basic plan for Liberty, said several other Southern California institutions have retained his firm to put together similar packages.

Liberty’s offering could provide a model for other small banks and thrifts that want to raise additional funds to bolster their financial health and spur expansion, said Henry Dahlgren, a research analyst with Cruttenden & Co. brokerage in Newport Beach.

But other analysts are more skeptical, pointing out that investors may not fully comprehend the complicated terms of the offering and that returns on the investment may not be any better than on other instruments.

In the offering, Liberty hopes to sell 2,000 investment units at $10,000 per unit. Each unit consists of an $8,500 CD that matures in four years and $1,500 for warrants that allow the purchase of up to 1,200 shares of bank stock in the next three summers.

Investors can exercise their warrants--and pay additional money to purchase stock--at set periods each year. The price is set based on the equity that shareholders have on the bank’s books at the end of the previous year.

If the warrants are not exercised or sold, the investor loses the $1,500. Meantime, the CDs are earning interest at 6% to 9% and would give investors more than $10,000 per unit at the end of four years.

Dan Williams, an analyst at Sutro & Co. in San Francisco, isn’t so sure the offering is something he would recommend to the general public, though it might be appropriate in individual cases.

“It’s confusing, even to analysts,” said Williams, adding that investors could earn as good a return on U.S. Treasury bills or on other long-term CDs.

Gerry Findley, a Brea financial institutions consultant who attended one of Liberty’s recent meetings on the offering, pointed out that Liberty’s stock price would have to increase 84% to 122% for an investor to earn 9% on his purchase.

Inglee said the bank’s stock price already has jumped 50 to 70% in the last two months. The offering is based on a sale price of $2.50 a share. This week, stockholders could sell the stock for $3.75 a share and investors could buy it for $4.25 a share, according to Sutro.

The bank’s stock, however, has been lightly traded through Cruttenden and Sutro. In fact, Inglee said, only 8% of the stock has ever been traded since the bank opened seven years ago.

Liberty, which has been profitable since it was formed seven years ago, has an application pending to list its stock with the National Assn. of Securities Dealers Automated Quotation system. Inglee said the bank must get its stock listed on a national exchange if it is to develop the investor interest it seeks.

The bank plans to use the proceeds from the offering to expand its operations by buying a branch in South Orange County or North San Diego County. Liberty, which has assets of $125 million and offices in Huntington Beach and Los Angeles, hopes to double its size in the next few years.

The effort, Liberty executives said, is to be ready for 1991 when interstate banking laws open California’s institutions to buyers from across the country. The bank wants to preen itself for possible suitors, Inglee said. But if no one buys, he said, the bank must be strong enough to survive in what it sees as a more competitive environment in the 1990s.