HCSB Financial Corporation Announces Fourth Quarter 2016 Financial Results

LORIS, S.C., Jan. 26, 2017 (GLOBE NEWSWIRE) -- HCSB Financial Corporation, (the “Company”) (OTCQB:HCFB), the holding company for Horry County State Bank (the “Bank”), announced today financial results for the fourth quarter ended December 31, 2016. The Company announced net income of $1.4 million, or $0.00 per common share, for the fourth quarter of 2016, an increase from a net loss of $1.8 million, or $0.00 per common share at the end of the third quarter of 2016.

“We have wrapped up 2016 on a very positive note, with net income of $1.4 million for the fourth quarter. We believe this gives us great momentum going into 2017 as our focus remains on delivering profitability for our shareholders and valuable financial services to our communities. Our loan production exceeded our internal expectations, and we believe that is poised to continue as our bankers are providing exceptional customer service in each of our markets. In the fourth quarter, we were able to release $1.1 million in loan loss reserves, as the quality of our portfolio has improved significantly with the completion of our asset disposition plan in the second half of the year and the management team gained further understanding about the risk remaining in the loan portfolio. In addition, we have migrated to an independent third party model for calculating our loan loss reserves which gives us great confidence in our estimates and allows us to account for market fluctuations that may occur,” remarked Jan Hollar, Chief Executive Officer of the Company and the Bank.

Financial Highlights

During the fourth quarter, the Company reported net income of $1.4 million, as the Company released $1.1 million in loan loss reserves due to the significant reduction in nonperforming assets, continuing positive trends in past dues, the completion of the accelerated asset disposition plan and management gained an improved understanding of the risk within the loan portfolio. Excluding the reversal of provision, pre-tax net income for the fourth quarter was $29,000, a $1.8 million increase over a net loss of $1.8 million for the third quarter of 2016. Noninterest expense was down $1.7 million quarter-over-quarter as the net cost of operation of other real estate owned (“OREO”) decreased $1.4 million and FDIC insurance expense decreased $183,000.

The Company saw loan growth of $5.9 million, or 3%, for the fourth quarter of 2016 as loan production continues to be a key management focus. Total deposits decreased $10.1 million and totaled $313.3 million at December 31, 2016, compared to $323.4 million at September 30, 2016, as non-interest bearing demand accounts decreased $5.7 million due to seasonality of deposits in our market area, and time deposits decreased $4.3 million primarily due to the maturity of internet-based time deposits which were not renewed.

Interest Income and Net Interest Margin

Net interest income remained flat quarter over quarter, totaling $2.5 million for the fourth and third quarters of 2016. Net interest margin increased 6 basis points to 2.86% for the quarter ended December 31, 2016 from 2.80% for the quarter ended September 30, 2016. The increase in net interest margin is primarily the result of a 5 basis point increase in yields on interest earning assets, and the cost of borrowings remains stable. This increase in yields was due to an increase in yield on other interest-earning assets and a decrease in interest-bearing cash for the quarter.

For the year ended December 31, 2016, net interest income increased $124,000, or 1.3%, as compared to the year ended December 31, 2015. This increase in net interest income was primarily the result of a significant decrease in cost of liabilities, partially offset by a decrease in yields on interest earning assets. The decrease in cost of liabilities was primarily due to the payoff of subordinated debt, while the decrease in yields on interest earning assets was the result of lower yields on securities.

Non-Interest Income

Non-interest income was $412,000 in the fourth quarter of 2016 compared to $334,000 in the third quarter of 2016. The third quarter included a $222,000 loss on sale of assets recorded in the third quarter related to the bulk sale of nonperforming loans announced in the second quarter. Also included in non-interest income for the third quarter was a $153,000 gain on sale of securities. There were no gains or losses on the sale of assets or securities in the fourth quarter of 2016.

Non-interest income for the year ended December 31, 2016 was $20.6 million, which included a $19.1 million gain on the extinguishment of debt, as compared to non-interest income of $3.1 million for the year ended December 31, 2015. Non-interest income for 2016 also included $222,000 of losses on the sale of assets as compared to a gain on sale of assets of $717,000 in 2015. Gain on sale of securities for the year ended December 31, 2016 was $68,000 as compared to a gain on sale of securities of $232,000 for the year ended December 31, 2015.

Asset Quality

Overall asset quality continued to improve in the fourth quarter of 2016, as the Bank’s classified assets to Tier 1 capital ratio decreased to 46.4% at December 31, 2016. This compares to a classified asset to Tier 1 capital ratio of 55.3% and 287.2% at September 30, 2016 and December 31, 2015, respectively. OREO decreased by $1.1 million during the quarter to $2.9 million at December 31, 2016 due to the sale of several properties. Nonperforming loans, increased by $1.1 million to $2.0 million at December 31, 2016 due to the repurchase of two loans from the asset disposition. Both loans repurchased are SBA guaranteed loans and no additional losses are anticipated. The ratio of nonperforming assets to total assets was 1.31% at December 31, 2016 as compared to 1.30% at September 30, 2016 and the ratio of nonperforming loans to total loans was 0.94% at the end of the fourth quarter of 2016 as compared to 0.45% at the end of the third quarter of 2016.

Allowance for Loan Losses

At December 31, 2016, the allowance for loan losses was $3.8 million, compared to $4.7 million at September 30, 2016. As a percentage of total loans held-for-investment, the allowance for loan losses was 1.74% in the fourth quarter of 2016, down from 2.24% in the third quarter of 2016 and 2.20% at December 31, 2015. In the fourth quarter of 2016, the Company implemented a new third party software for the calculation of the allowance for loan losses. The new model allowed management to perform further analysis of the portfolio and better identify improving credit trends. Overall, the decrease in the allowance for loan losses as a percentage of total loans was a reflection of improved trends in past dues and significant reductions in nonperforming loans in 2016. Out of the $3.8 million in total allowance for loan losses at December 31, 2016, specific allowances for impaired loans accounted for $643,000 as compared to $788,000 in the third quarter of 2016.

Balance Sheet and Capital

Total assets decreased $5.2 million during the fourth quarter of 2016, while gross loans (including loans held-for-sale) increased $5.9 million compared to the third quarter of 2016 as the Company continued to see solid loan production during the quarter. As discussed earlier, total deposits decreased $10.1 million and totaled $313.3million at December 31, 2016, compared to $323.4 million at September 30, 2016.

As of December 31, 2016 the Bank’s leverage ratio, Common Equity Tier 1 ratio (CET1), Tier 1 risk-based capital ratio, and total risk-based capital ratio were 9.95%, 15.14%, 15.14% and 16.39%, respectively.

About HCSB Financial Corporation

HCSB Financial Corporation is the holding company for Horry County State Bank, a full-service community bank providing services in eight branches across Horry County, South Carolina. Horry County State Bank’s website is www.hcsbaccess.com. HSCB shares are quoted on the OTCQB tier of the OTC Markets Group, Inc. under the symbol “HCFB”.

SAFE HARBOR

This news release contains forward-looking statements, as defined by the federal securities laws, including statement about the Company’s financial outlook and business environment. Forward looking statements generally include words such as “expects,” “projects,” “anticipates,” “believes,” “estimates,” “strategy,” “plan,” “potential,” and other similar expressions. These statements are provided to assist in the understanding of future financial performance and such performance involves risks and uncertainties that may cause actual results to differ materially from those anticipated in such statements. Any such statements are based on current expectations and involve a number of risks and uncertainties. For a discussion of some factors that may cause such forward-looking statements to differ materially from actual results, please refer to the section entitled “Forward-Looking Statements” on pages 1-2 and in the section entitled “Risk Factors” of the Company’s annual report on Form 10-K filed with the SEC for the year ended December 31, 2015. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise forward-looking statements.

HCSB Financial Corporation
Condensed Consolidated Balance Sheet (Unaudited)
As of
December 31, September 30, June 30, March 31, December 31,
2016 2016 2016 2016 2015*
($ in thousands)
ASSETS
Cash and due from banks$25,429 $31,174 $64,024 $41,652 $22,137
Investment securities available for sale 106,529 111,581 80,969 83,205 89,701
Nonmarketable equity securities 1,345 1,090 1,090 1,276 1,330
Loans held for sale - - 4,280 - -
Loans 215,112 209,176 199,072 199,635 209,367
Allowance for loan losses (3,750) (4,676) (4,492) (3,719) (4,601)
Net loans 211,362 204,500 194,580 195,916 204,766
Premises and equipment, net 14,314 14,456 14,591 15,758 15,917
Assets held-for-sale - - 768 - -
Other real estate owned 2,887 4,032 7,256 11,270 13,624
Bank-owned life insurance 11,643 11,562 11,481 11,400 11,319
Deferred tax assets 19,646 16,270 16,270 19,587 22,474
Valuation allowance for deferred tax assets (19,646) (16,270) (16,270) (19,587) (22,474)
Other assets 2,425 2,712 3,441 2,886 2,629
Total assets$375,934 $381,107 $382,480 $363,363 $361,423
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand noninterest-bearing$41,324 $47,060 $44,077 $40,227 $40,182
Money market, NOW and savings 125,714 125,785 119,191 122,613 116,678
Time deposits 146,231 150,505 159,974 172,621 173,971
Total deposits 313,269 323,350 323,242 335,461 330,831
Short-term borrowings 1,983 1,662 1,659 1,248 1,716
Long-term debt 24,000 17,000 17,000 34,141 34,138
Accrued expenses and other liabilities 1,355 2,502 3,312 7,161 6,988
Total liabilities 340,607 344,514 345,213 378,011 373,673
Shareholders' equity:
Preferred stock - - 9 12,895 12,895
Common stock 4,958 4,958 3,633 38 38
Warrants - - - 1,012 1,012
Additional paid-in capital 68,411 68,273 81,903 30,220 30,220
Retained deficit (34,783) (36,183) (48,177) (58,090) (54,807)
Accumulated other comprehensive loss (3,259) (455) (101) (723) (1,608)
Total shareholders' equity 35,327 36,593 37,267 (14,648) (12,250)
Total liabilities and shareholders' equity$375,934 $381,107 $382,480 $363,363 $361,423
Common shares issued and outstanding 495,763,940 495,763,940 363,314,783 3,846,340 3,846,340
* Derived from audited financial statements.

HCSB Financial Corporation
Condensed Consolidated Income Statement (Unaudited)
At or For the Three Months Ended
December 31, September 30, June 30, March 31, December 31,
2016 2016 2016 2016 2015
($ in thousands, except per share amounts)
Interest income
Loans, including fees$2,630 $2,667 $2,581 $2,483 $2,753
Investment securities 473 426 386 461 479
Nonmarketable equity securities 13 11 14 14 14
Interest on deposits at banks 37 68 73 31 14
Total interest income 3,153 3,172 3,054 2,989 3,260
Interest expense
Money market, NOW and savings deposits 108 115 100 96 98
Time deposits 385 403 412 427 450
Borrowings 157 150 97 523 518
Total interest expense 650 668 609 1,046 1,066
Net interest income 2,503 2,504 2,445 1,943 2,194
Provision for loan losses (1,061) - 3,560 1,424 -
Net interest income (loss) after provision 3,564 2,504 (1,115) 519 2,194
Noninterest income
Service charges on deposit accounts 168 188 189 161 163
Mortgage banking income 41 7 - - 6
Income from bank-owned life insurance 111 110 110 110 109
Gain (loss) on sale of securities available for sale - 153 (102) 17 -
Gain (loss) on sale of assets - (222) - - (4)
Gain on extinguishment of debt - - 19,115 - -
Other noninterest income 92 98 141 128 149
Total noninterest income 412 334 19,453 416 423
Noninterest expenses
Salaries and employee benefits 1,616 1,638 1,668 1,286 1,228
Occupancy and equipment 458 493 486 499 493
Legal and professional fees 351 428 1,076 215 494
FDIC insurance 21 204 206 309 320
Impairment on assets held for sale - 1 247 - -
Net cost of operation of other real estate owned 37 1,392 3,273 1,564 167
Other noninterest expense 403 467 549 345 364
Total noninterest expenses 2,886 4,622 7,505 4,218 3,066
Income (loss) before income taxes 1,090 (1,784) 10,833 (3,283) (449)
Income tax expense (benefit) (310) - 920 - (40)
Net income (loss) 1,400 (1,784) 9,913 (3,283) (409)
Preferred dividends - - - (398) (405)
Gain on extinguishment of preferred shares - - 13,778 - -
Net income (loss) available to common shareholders $1,400 $(1,784) $23,691 $(3,681) $(814)
Earnings per common share, fully diluted$0.00 $(0.00) $0.03 $(0.96) $(0.21)
Weighted average diluted common shares 508,945,190 411,085,981 319,862,554 3,846,340 3,846,340
-28.44% 8.49% 0.00% 8.91% 8.68%


HCSB Financial Corporation
Condensed Consolidated Income Statement (Unaudited)
At or For the Twelve Months Ended
December 31, December 31, December 31,
2016 2015 2014
($ in thousands, except per share amounts)
Interest income
Loans, including fees$10,361 $11,628 $13,417
Investment securities 1,747 1,980 2,556
Nonmarketable equity securities 52 51 60
Interest on deposits at banks 208 67 62
Total interest income 12,368 13,726 16,095
Interest expense
Money market, NOW and savings deposits 419 423 450
Time deposits 1,626 2,009 2,545
Borrowings 927 2,022 2,059
Total interest expense 2,972 4,454 5,054
Net interest income 9,396 9,272 11,041
Provision for loan losses 3,923 - 1,061
Net interest income (loss) after provision 5,473 9,272 9,980
Noninterest income
Service charges on deposit accounts 706 744 880
Mortgage banking income 48 181 229
Income from bank-owned life insurance 441 431 440
Gain (loss) on sale of securities available for sale 68 232 201
Gain (loss) on sale of assets (222) 717 6
Gain on extinguishment of debt 19,115 - -
Other noninterest income 458 830 1,800
Total noninterest income 20,614 3,135 3,556
Noninterest expenses
Salaries and employee benefits 6,208 5,383 5,606
Occupancy and equipment 1,936 2,133 2,243
Legal and professional fees 2,070 1,708 1,318
FDIC insurance 740 1,391 1,574
Impairment on assets held for sale 248 - -
Net cost of operation of other real estate owned 6,266 632 1,411
Other noninterest expense 1,763 1,379 1,597
Total noninterest expenses 19,231 12,626 13,749
Income (loss) before income taxes 6,856 (219) (213)
Income tax expense (benefit) 610 27 78
Net income (loss) 6,246 (246) (291)
Preferred dividends - (1,512) (1,112)
Gain on extinguishment of preferred shares 13,778
Net income (loss) available to common shareholders $20,024 $(1,758) $(1,403)
Earnings per common share, fully diluted$0.06 $(0.46) $(0.37)
Weighted average diluted common shares 317,563,726 3,823,244 3,770,355
8.90% -12.33% -36.62%


HCSB Financial Corporation
Average Balance Sheets and Net Interest Analysis (Unaudited)
For the Three Months Ended
December 31, 2016 December 31, 2015
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (2) Balance Expense Rate (2)
Assets($ in thousands)
Interest-earning assets:
Loans and loans held for sale (1)$208,850 $2,630 5.01% $214,778 $2,753 5.09%
Interest-bearing deposits 28,480 37 0.52% 22,711 14 0.24%
Investment securities 109,615 473 1.73% 88,846 479 2.16%
Other interest-earning assets 1,262 13 4.10% 1,144 14 4.86%
Total interest-earning assets 348,207 3,153 3.60% 327,479 3,260 3.95%
Allowance for loan losses (4,716) (5,009)
Cash and due from banks 1,497 1,356
Premises and equipment (net) 14,408 16,011
Other assets 18,432 29,980
Total assets$377,828 $369,817
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand$40,664 $13 0.13% $39,326 $16 0.16%
Money market, NOW and savings 83,394 95 0.45% 78,739 82 0.41%
Time deposits 143,939 378 1.04% 173,916 426 0.97%
Brokered deposits 4,038 7 0.69% 3,135 24 3.04%
Total interest-bearing deposits 272,035 493 0.72% 295,116 548 0.74%
Short-term borrowings 1,383 1 0.29% 992 2 0.80%
Long-term debt 21,717 156 2.86% 34,248 516 5.98%
Total borrowed funds 23,100 157 2.70% 35,240 518 5.83%
Total interest-bearing liabilities 295,135 650 0.88% 330,356 1,066 1.28%
Net interest rate spread 2,503 2.74% 2,194 2.67%
Noninterest-bearing demand deposits 44,241 43,761
Other liabilities 2,116 7,225
Shareholders' equity 36,336 (11,525)
Total liabilities and shareholders' equity$377,828 $369,817
Net interest margin 2.86% 2.66%
(1) Nonaccrual loans are included in the average loan balances.
(2) Yield/ rate calculated on Actual/Actual day count basis, except for yield on investments which is calculated on a 30/360 day count basis.
$- $-
Wholesale funding costs 27,138 164 2.43% 38,375 542 5.68%


HCSB Financial Corporation
Selected Ratios (Unaudited)
At or For the Three Months Ended
December 31, September 30, June 30, March 31, December 31,
2016 2016 2016 2016 2015
($ in thousands, except per share amounts)
Per Share Data:
Basic Earnings (Loss) per Common Share$0.00 $(0.00) $0.03 $(0.96) $(0.21)
Book value per common share (1)$0.07 $0.07 $0.10 $(7.16) $(6.54)
Common shares outstanding 495,763,940 495,763,940 363,314,783 3,846,340 3,846,340
Weighted average dilutive common shares outstanding 508,945,190 411,085,981 319,862,554 3,846,340 3,846,340
Selected Performance Ratios:
Return on Average Assets 1.47% -1.85% 11.07% -3.57% -0.41%
Return on Average Equity (2) 15.33% -19.92% -336.28% N/A N/A
Net interest margin (non-tax equivalent) 2.86% 2.80% 2.84% 2.45% 2.66%
Non-interest Income as a % of Revenue 11.56% 9.53% 86.43% 12.22% 11.49%
Non-interest Income as a % of Average Assets 0.11% 0.09% 5.40% 0.11% 0.11%
Non-interest Expense as a % of Average Assets 0.76% 1.20% 2.08% 1.14% 0.78%
Asset Quality:
Past due 30-59 days (and still accruing)$888 $535 $636 $3,667 $3,897
Past due 60-89 days (and still accruing) 150 112 159 647 244
Past due 90 days plus (and still accruing) - - - - -
Nonaccrual loans 2,025 931 332 6,115 8,742
Nonperforming loans 2,025 931 332 6,115 8,742
Nonperforming loans held for sale (nonaccruing) - - 4,012 - -
OREO 2,887 4,032 7,256 11,270 13,624
Nonperforming assets 4,912 4,963 11,600 17,385 22,366
Nonperforming loans to total loans 0.94% 0.45% 0.17% 3.06% 4.18%
Nonperforming assets to total assets 1.31% 1.30% 3.03% 4.78% 6.19%
Allowance to total loans held-for-investment 1.74% 2.24% 2.26% 1.86% 2.20%
Allowance to nonperforming loans 185.19% 502.26% 1353.01% 60.82% 52.63%
Allowance to nonperforming assets 76.34% 94.22% 38.72% 21.39% 20.57%
Net charge-offs (recoveries) to average loans -0.26% -0.36% 5.46% 4.32% 0.74%
(annualized)
Capital Ratios (Bank):
Common Equity Tier 1 (CET1) capital$37,721 $36,404 $38,114 $9,238 $12,135
Tier 1 capital 37,721 36,404 38,114 9,238 12,135
Tier 2 capital 3,122 3,039 2,939 2,962 3,267
Total risk based capital 40,843 39,443 41,053 12,200 15,402
Risk weighted assets 249,122 241,456 233,528 236,204 260,024
Average assets for leverage ratio 379,052 388,135 384,914 360,649 370,482
Common Equity Tier 1 (CET1) ratio 15.14% 15.08% 16.32% 3.91% 4.67%
Tier 1 ratio 15.14% 15.08% 16.32% 3.91% 4.67%
Total risk based capital ratio 16.39% 16.34% 17.58% 5.17% 5.92%
Tier 1 leverage ratio 9.95% 9.38% 9.90% 2.56% 3.28%
(1) Book value per share excludes non-voting preferred shares
(2) Ratio not applicable in prior periods due to negative equity
Days in the quarter 92 92 91 91 92
Charge-offs 62 78 4089 2379 460
Recoveries 196 262 1302 73 40
Net C/Os -134 -184 2787 2306 420
Qtrly Averages
Loans$208,850 201,380 205,314 214778 $226,162
Assets 377,828 384,665 360,123 369,816 394,891
Equity 36,336 35,621 (11,856) (11,525) (11,843)

For additional information contact: Jennifer W. Harris Chief Financial Officer (843) 716-6407 jharris@horrycountystatebank.com

Source:HCSB Financial Corp