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August 14, 2014

Horry County State Bank battling with insurance company over legal bills

Financially troubled Horry County State Bank is fighting with its insurance company over who is responsible for paying the legal bills associated with a trio of state and federal investigations into possible securities law violations at the bank.

Financially troubled Horry County State Bank is fighting with its insurance company over who is responsible for paying the legal bills associated with a trio of state and federal investigations into possible securities law violations at the bank.

The Loris-based bank and its holding company — HCSB Financial Corp. — have filed a lawsuit against St. Paul Mercury Insurance Co. alleging that the Minnesota-based firm has refused to provide coverage on a policy that is supposed to protect the bank when it is accused of wrongdoing.

The bank admits no wrongdoing but says the policy should help pay for its legal defense against the investigations.

Peter Dworjanyn, a lawyer representing the insurance company, says in court documents that the policy doesn’t apply because none of the investigations have yet alleged any “wrongful act.”

The U.S. Attorney’s office in Columbia, the S.C. Attorney General and the federal Securities & Exchange Commission have served subpoenas on the bank — most recently in January — seeking documents related to the sale of stock and subordinated debt notes that are the subject of pending civil lawsuits. The bank has supplied documents and other information to investigators, but the agencies have not filed any formal charges.

Jimmy Clarkson, the bank’s president and chief executive officer, has said he cannot comment other than to say the bank is cooperating with investigators.

A federal judge has ordered the bank and the insurance company to participate in mediation in the hopes of avoiding a trial. That mediation must be conducted by Jan. 26, according to court documents.

Horry County State Bank spent nearly $1.9 million on legal fees in 2013, according to the bank’s annual report. That is nearly double the amount spent on legal fees in 2012. It is not clear how much of the legal fees are associated with the state and federal investigations.

The investigations stem from the bank’s sale ending in July 2010 of $12.1 million in subordinated promissory notes to investors, many of them bank customers. The 10-year notes initially were supposed to pay 9 percent annual interest for the first four years and then a rate of between 8 percent and 12 percent until maturity. Less than a year later, the bank entered into a consent order with federal regulators who later prohibited the bank from paying any interest on the notes because of the bank’s worsening financial condition.

The bank has deferred $3.1 million in interest payments on the notes as of June 30, according to its most recent regulatory filing.

Some investors allege in civil lawsuits that bank officials knew Horry County State Bank’s financial condition was deteriorating when it sold the notes and shares of stock that have since declined in value. Those investors say bank officials did not fully disclose the financial problems.

Horry County State Bank has been under a consent order with state and federal regulators since February 2011. The bank has been ordered to raise its capital levels but has been unsuccessful and was classified as “significantly undercapitalized” as of June 30.

The bank’s holding company reported a net loss of $74,000 for the quarter that ended June 30 compared with a net income of $77,000 for the same period a year ago. The company attributed the decline to a provision expense of $497,000 that was recaptured during the second quarter of last year.

The bank has trimmed its non-performing assets — that is, the value of its bad debt and foreclosed property — to $56 million as of June 30, down from $60.6 million at the end of 2013.

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 non-performing assets – shows Horry County State Bank has steep challenges. The bank’s Texas Ratio stood at 355.1 as of June 30. Any bank with a Texas Ratio near or greater than 100 is considered at risk.

Despite the bank’s financial troubles, depositors’ money is insured by the FDIC for up to $250,000 per account.

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