Horry County State Bank fails to file third-quarter financial report

HCSB Financial Corp., the parent company to Horry County State Bank, failed to file its third-quarter financial report on time in the wake of an examination by federal regulators that called into question the amount of money the bank has set aside to cover real estate-related loan losses, according to a document filed with the U.S. Securities and Exchange Commission.

The Loris-based bank holding company notified the SEC on Nov. 15 that it would not be able to file its quarterly report on time, but said it expected to file the report no later than Nov. 19. However, the report still had not been filed as of Monday, according to the SEC’s online database.

Jimmy Clarkson, the bank’s chief executive officer, could not be reached for comment Monday.

The bank was told to recalculate its loan loss provisions following an examination by regulators with the Federal Deposit Insurance Corp., according to the Nov. 15 notification. The bank has been under a consent order from the FDIC for nearly two years to boost its capital levels.

“Due to the continued deterioration in the bank’s loan portfolio stemming from the continued downturn in the local real estate market, we have been working with the FDIC to determine the appropriateness of the bank’s loan loss reserve,” the notification stated. “At this time, we currently anticipate recording a [quarterly] loan loss provision of approximately $2 million to $3.7 million, resulting in a net loss of approximately $3.1 million to $4.2 million.”

The Nov. 15 notification stated that the bank was continuing to analyze its financial condition and the loan loss provision “could be materially higher when reported.”

The projected third-quarter loss is more than three times larger than the $908,000 loss recorded during the second quarter of this year and the $256,000 loss recorded during the first quarter.

“Late filings are usually bad news,” said Robert Burney, a banking expert with Coastal Carolina University. “But if they are trying to recalculate their financials because of an examiner’s or regulator’s request, that’s potentially not as bad.”

However, Burney questioned why it would take so long to recalculate a figure that’s based on historical data and trends.

“The data should be pretty accessible,” he said.

Horry County State Bank has been decimated by this area’s real estate bust, recording $30.7 million in non-current loans – most of them real estate-related – as of the second quarter. The bank also has foreclosed on property backing $23 million in loans, with most of that property now worth a fraction of the loan amounts.

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 165.6 percent at the end of the second quarter compared with the national average of 18.73 percent. A lower percentage indicates more financial strength.

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

HCSB needs to raise about $17.5 million to attain the requirements outlined in the FDIC’s consent order, and Clarkson was hopeful a stock offering this year would put the bank close to that goal. A private placement memorandum for the stock offering was issued on June 27, but the stock did not initially generate any enthusiasm among investors. In an Aug. 23 report, the bank stated that it “had not received any subscriptions for shares of common stock” in the offering.

The bank extended the deadline for purchasing shares to Nov. 30, and it is not clear how many shares of the bank’s stock – which is thinly traded on the over-the-counter bulletin board – have been sold since the Aug. 23 report. The over-the-counter bulletin board showed roughly 3.7 million shares of HCSB stock outstanding as of Monday – about the same amount as recorded at the end of the second quarter.

The stock hit a 52-week high of 81 cents per share in the weeks after the private placement was announced, but had declined in value to 31 cents per share as of Monday.

Federal and state regulators want Horry County State Bank to attain a Tier 1 capital ratio of at least 8 percent of total assets, according to a 2011 consent order. The bank stood at 2.77 percent at the end of June. Regulatory orders restrict many of the bank’s activities, including barring it from repaying the nearly $12.9 million it borrowed in 2009 under the federal Toxic Asset Relief Program, or TARP, until it raises its capital ratio to at least the minimum level.

Horry County State Bank was organized in 1987 and opened its first office in Loris the following year. The bank now has 11 branches throughout Horry County. The bank, which had $531 million in assets at the end of June, has made several efforts to cut costs including reducing its work force by one-third over a two-year period and closing three underperforming branches.