Federal and state law enforcement agencies, most recently the U.S. Securities and Exchange Commission, continue to investigate possible securities law violations at financially troubled Horry County State Bank, but officials aren’t talking about the status or the extent of those inquiries.
The investigations focus on the bank’s sale of subordinated debt notes in the months before the Federal Deposit Insurance Corp. forced the bank to sign a February 2011 consent order agreeing to improve its management and finances.
A class-action lawsuit filed this year claims bank officials did not fully disclose Horry County State Bank’s financial problems when the notes were sold to investors. That lawsuit is in its early stages and no court dates have been set.
The investigations are referenced in the bank’s latest annual and quarterly reports, filed last month with the SEC. Those are the first reports the bank has filed in nearly 1 1/2 years as regulators have pored over financial and loan documents to determine whether the bank is healthy enough to remain open. Horry County State Bank was hit hard by last decade’s real estate collapse and has never fully recovered.
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The bank is considered to be “significantly undercapitalized,” according to its quarterly report, and continues to be in violation of minimal capital ratios required in the FDIC’s consent order. The latest quarterly report, which covers the period ending March 31, states the bank’s “auditors have noted that the uncertainty of our ability to obtain sufficient capital raises substantial doubt about our ability to continue as a going concern.”
Despite the bank’s financial troubles, depositors’ money is insured by the FDIC for up to $250,000 per account.
The report also notes that the SEC served a subpoena in January seeking information about the bank’s sale of subordinated debt notes. This follows a subpoena the SEC issued last year for information regarding the same topic. An SEC spokeswoman on Wednesday said she cannot confirm whether an investigation is taking place, but the bank’s quarterly report lists a case number for the inquiry.
The U.S. Attorney’s office in Columbia and the S.C. Attorney General also are conducting investigations, according to the bank’s filings. A spokeswoman for U.S. Attorney William Nettles has said the agency cannot confirm whether an investigation is taking place. Mark Powell, a spokesman for the attorney general’s office, confirmed that agency’s investigation but said he cannot comment on the pending matter.
Jimmy Clarkson, the bank’s chief executive officer, also declined to comment on the investigations except to say the bank is cooperating with federal and state officials.
The notes were sold to investors to raise $12.1 million to help shore up the bank’s finances. The notes were supposed to pay 9 percent annual interest. Months after the notes were sold, regulators ordered the bank not to make any interest payments until its financial condition improves. The bank has since deferred about $2.9 million in interest payments. Investors in the class-action lawsuit say the bank should have known its financial condition would have precluded it from making the interest payments.
The consent order requires Horry County State Bank to maintain a Tier 1 capital ratio -- the sum of its equity capital and disclosed reserves -- of at least 8 percent of total assets. That ratio stood at 3.34 percent at the end of March, up from 3.07 percent at the end of 2013.
The bank’s report states that about $25.5 million in new capital is needed to meet the consent order’s requirement and return the bank to “well capitalized” status. Horry County State Bank tried to raise capital
“There are no assurances that we will be able to raise this capital on a timely basis or at all,” the report states. “If we cannot meet the minimum capital requirements . . . or if we suffer a continued deterioration in our financial condition, we may be placed into a federal conservatorship or receivership by the FDIC.”
The bank tried to raise money in 2012 by selling new shares of its common stock but investors weren’t interested. The bank also has cut its workforce and branches to improve its capital.
A widely used measure of a bank’s financial strength called the Texas Ratio – which compares the amount of equity and loan loss reserves a bank has to offset risky loans and foreclosed property – shows Horry County State Bank has steep challenges. The bank’s Texas Ratio stood at 210.95 as of March 31. Any bank with a Texas Ratio near or greater than 100 is considered at risk.
Despite the financial troubles, Clarkson said he is hopeful the improving economy eventually will help the bank comply with the consent order. Net income for the bank improved to $1.8 million by the end of 2013, compared with losses of $9.5 million in 2012 and $29 million in 2011. The bank also has made progress in reducing its balance sheet to preserve capital ratios, trimming assets by $34.4 million -- or 7.34 percent -- in 2013 compared with 2012.
Trouble spots include the bank’s non-performing loans, which total 17 percent of its loan portfolio, and its inability to pay back $12.9 million it borrowed from the Troubled Asset Relief Program, or TARP, in 2009.
“There are a lot of improving trends, such as the real estate market, that we hope will assist in our efforts to raise more capital,” he said. “We’re considering any option that’s presented to us.”
Contact DAVID WREN at 626-0281 or via twitter at @David_Wren_