Another near-casualty of the financial crisis is poised for a comeback.
HCSB Financial in Loris, S.C., has fresh capital and several new executives following a $45 million infusion that took place last month. The company, which lost more than $50 million from 2010 to 2012, has been undercapitalized for years.
The newfound funds, part of an effort led by Castle Creek Capital Partners, should provide HCSB with a chance to eventually get back on offense. The process also shows that some institutional investors are still willing to place bets on struggling banks at a time when other large shareholders are planning their exit strategies.
Still, firms investing in companies such as HCSB will need to be patient, industry experts said.
HCSB "has made a great first step by raising money," said Lee Burrows, chief executive of Banks Street Partners in Atlanta. "They have taken the steps to right the ship and now it just depends on how quickly they can clean out troubled assets."
Expect a lengthy turnaround effort, said Jan Hollar, who was recently named HCSB’s chief executive in conjunction with the recapitalization.
"We have weathered the storm and we’re back in business," Hollar said. "That doesn’t happen overnight just because you got a wire of capital coming in. It takes a while to change expectations of your customer base."
A decade ago, the $361 million-asset company’s Horry County State Bank was actively lending to developers and other out-of-market borrowers, sometimes compromising credit standards. When the financial crisis hit, borrowers who might have otherwise stayed current with their loans began to miss payments.
HCSB has been dealing with credit problems and low capital levels ever since. At March 31, the bank’s Tier 1 leverage ratio was 2.56%; about 4.8% of total assets were nonperforming at the end of last year. Still, those numbers are an improvement from the end of 2012, when the Tier 1 leverage ratio was 1.56% and more than 16% of the bank’s assets were nonperforming.
The bank is still operating under a 2011 consent order with the Federal Deposit Insurance Corp. that required management to build capital, reduce classified assets and revise lending policies. While many other banks in a similar position ended up failing, HCSB has survived due to its grit, Hollar said.
"The bank was doing everything in its power to resolve these issues — trying to raise capital, trying to sell the bank, cutting costs, selling branches," Hollar said. "What I saw was a bank that was constantly trying to succeed."
Hollar, who retired as chief financial officer at Yadkin Financial before it sold to VantageSouth Bancshares in 2014, came out of retirement to join HCSB. Hollar, who initially recommended someone else to become CEO, said she took the post after determining that the bank needed a leader who could raise money from Wall Street and fix a troubled bank.
"I failed retirement after I realized that working in flower gardens and baking breads wasn’t all it was cracked up to be," she added. "I had been instrumental in helping banks … return to a position of strength. I felt like I could add value and succeed with this."
HCSB isn’t done raising capital. The company recently filed to raise another $2.3 million by selling stock to existing shareholders, employees and people who live in its core markets.
Having plenty of fresh capital should help, though it will be challenging for management to win over customers who saw it struggle in the wake of the financial crisis, industry observers said.
HCSB’s new executive team will need to clearly communicate its strategic plan, especially to key customers, said David Powell, president of the consulting firm Vitex. "You have to be very careful … so you don’t spook existing customers or shareholders," Powell said, adding that HCSB will be well served to promote a transformation defined by new leadership, fresh strategies and new capital.
HCSB plans to take a "hand-to-hand combat" approach when it comes to reassuring customers and its own employees, Hollar said. For now, the strategy involves having lenders out calling on current and potential customers, though Hollar said she is optimistic that the company will eventually launch a media campaign.
Internally, Hollar said she is trying to create transparency by meeting with employees, visiting each location and holding town hall meetings.
HCSB is also considering adding new products. The bank has operations along South Carolina’s tourism-heavy coast, including in Myrtle Beach, though the area also has high concentrations of retirees and professional services firms. Adding services, such as treasury management, could help lure those potential clients.
"Our market is diversified," Hollar said. "The beauty of being a small community bank is you can be nimble."
Ideally HCSB would be able use deposits gathered in its rural markets to fund loans in markets such as Myrtle Beach and Conway that are growing at a faster pace, Burrows said. Still, South Carolina is a tough market known for having a large number of financial institutions.
HCSB might be better served by looking to merge with another bank, industry observers said.
HCSB’s new shareholders do not have a timetable for cashing in on their investment, and they are not necessarily looking for a sale, Hollar said. The new management team is approaching the issue of consolidation from the perspective that HCSB is "a desirable target, but a desirable buyer as well," she said.
"This bank’s problem was its capital, not its ability to be profitable going forward," Hollar said.