Why United Community cozied up to a target before buying it

It’s fair to say United Community Banks in Blairsville, Ga., dipped its toe in the water months before taking the plunge with HCSB Financial in Loris, S.C.

The $10.7 billion-asset United invested in HCSB’s March 2016 recapitalization — well before it agreed last week to buy the company outright. The $66 million all-stock acquisition is United’s latest effort to expand along South Carolina’s coast.

“I was familiar with the bank and believed it would be the perfect complement to our … entry point into Myrtle Beach,” said Lynn Harton, United’s president and chief operating officer.

“We invested in that recapitalization [and] remained close to the bank as it made changes, improved credit, added lenders,” Harton said. “When the board of HCSB decided to sell, we were able to make our presentation and ultimately win the deal.”

Banks often become minority investors in other institutions. In recent months, Iberiabank in Lafayette, La.; BancorpSouth in Tupelo, Miss.; Fulton Financial in Lancaster, Pa.; and First Citizens BancShares in Raleigh, N.C., have all disclosed those types of investments.

On occasion, they lead to something bigger.

The $7.2 billion-asset First Merchants in Muncie, Ind., agreed in February to buy Independent Alliance Banks for $251.3 million. That deal came five months after First Merchants bought a 12.1% stake in the Fort Wayne, Ind., bank from a private investor.

For United, the HCSB deal follows its late-2015 hiring of a lending team in Charleston, S.C., and its April 2016 purchase of Tidelands Community Bank in nearby Mount Pleasant.

Acquiring the $376 million-asset HCSB would make United the fifth-largest bank in Myrtle Beach by deposit market share, according to data from the Federal Deposit Insurance Corp. Tidelands already had a branch in the city, which has been a popular retirement and vacation spot.

Conway National Bank is the biggest community bank in the market, with 11% of local deposits at mid-2016. Larger banks, including the $221 billion-asset BB&T in Winston-Salem, N.C., hold more than half of the region’s deposits.

United Community, for its part, says it believes it can steal share from those larger banks.

“We want to be a high-performance community bank … with the talent, the risk-management [processes] and product set of a larger organization,” Harton said. “You need a decent-size base to be a real community bank with the community presence, engagement in community activities and the ability to make local decisions.”

Myrtle Beach, in terms of population, is the fastest-growing market in South Carolina, Harton said.

The area’s population increased by 4% over the 12 months that ended July 1, reaching 449,000 people, according to the Census Bureau. Nearly a million people flew into Myrtle Beach International Airport last year, representing an increase of 17% from 2013, according to airport authorities.

“We’re seeing 40 to 42 people a day move into the region,” said Josh Kay, president and CEO of the Myrtle Beach Regional Economic Development Corp., adding that newcomers are a “good mix” of retirees and young families.

Kay’s organization, which focuses on attracting manufacturing and technology firms, has helped recruit more than 1,700 jobs to the area in recent years. Still, tourism remains the main driver of the local economy.

“When you’ve got 18 million people visiting the coastline every year, I don’t think that’s ever going to change,” Kay said. “I don’t think we want it to, either.”

“The businesses there obviously are more focused on tourism and perhaps a little more seasonal than other parts of the state,” Harton said. “Still, that kind of population growth makes it a dynamic market both from a consumer side and the business side.”

Of course, United Community will have to contend with local banks eager to profit from any disruption caused by HCSB’s sale.

HCSB “has been a player here for some time,” said Wayne Wicker, chairman and CEO of South Atlantic Bancshares in Myrtle Beach. “They certainly had deep roots. Up until the downturn they had been doing very well.”

Wicker said he sees the deal as an opportunity for his $483 million-asset company. South Atlantic is well positioned to take advantage of any opportunities, given a $20 million capital raise that closed late last month. The capital is intended to help the company double in size over the next five years.

Pinnacle Financial Partners’ pending acquisition of BNC Bancorp offers a similar opportunity, Wicker said. The $11.7 billion-asset Pinnacle agreed to buy BNC for $1.9 billion in January, less than seven months after BNC bought the $492 million-asset Southcoast Financial, a coastal player that was based in Mount Pleasant.

Despite rapid population growth and its status as a tourist hotspot, Myrtle Beach “is still a small community” most of the year with local ties that run deep, Wicker said. South Atlantic is also set to bump up against United in Charleston, where it is planning to open two branches this year.

With HCSB poised to join the fold — the deal is expected to close in the third quarter — Harton said United will have all the scale it needs along South Carolina’s coast. “We’re turning our sights to the next market we need to enter,” he said.

The next logical move would be Columbia, S.C., in the heart of the state and equidistant from Greenville, S.C., where Harton is based, and Myrtle Beach.

“In South Carolina, specifically, the biggest market we’re not in today would be Columbia,” Harton said, though he declined to say the city was next in line. “It’s certainly on the list of attractive places to be.”