This article is from 2011. The bank remains under a Consent Order.
Horry County State Bank, regulators plan improvement process
Published: February 19, 2011
By Adva Saldinger — asaldinger@thesunnews.com
Horry County State Bank has to raise capital ratios, account for bad loans and evaluate its management and lending practices under a consent order the bank signed with federal and state regulators.
"[The consent order is] not the kiss of death by a long shot," said Jimmy Clarkson, the president and CEO of Horry County State Bank. "It drafts a plan for what areas need improvement and what the goals are and we had already put into place a majority of the plans that are in there and we intend to fully comply."
The real estate market collapse is the main cause of the Loris-based bank's problems as borrowers are unable to pay on real estate loans and the severely diminished values have forced the bank to take significant losses, Clarkson said.
"The real estate market in our community had a substantial demise in the last couple years and it's played a large role in people's economic problems ... and it spills over into banks," he said.
Clarkson said real estate is such a big part of the local economy that it was natural the bank would have a lot of real estate-backed loans.
Looking back, some of the problems may have been avoidable, but nobody expected the market to collapse like it did, he said.
Bank customers should not be concerned because their money is insured by the Federal Deposit Insurance Corp. and they won't see any changes as they do their business, Clarkson said. The FDIC insures up to $250,000 of deposit accounts per person per bank.
The bank's situation is serious, but it is not getting ready to sell out nor is it on the brink of failure, he said.
Some experts say that it is a challenge for a bank in HCSB's situation to meet the requirements and work its way out of the situation, but that there is a possibility.
"It's going to be extremely difficult for them to do it," said Byron Richardson, the president of bank consulting firm Bank Resources. "They've got an uphill battle [but] it can be done."
The consent agreement gives the bank 120 days to meet the requirements or possibly face further regulatory action.
The problems the bank is having can be traced back to its loans, many more of which are in real estate than other similar banks, which has created earning problems and assets that aren't bringing money in, he said. But HCSB is not alone; many banks in similar markets are facing the same challenges, Richardson said.
The economic downturn and real estate market collapse has put a strain on many banks and several area banks are operating under regulatory orders. Plantation Federal based in Pawleys Island has been operating under a cease and desist order since June and Charleston-based Atlantic Bank and Trust signed a cease and desist order in January. Mount Pleasant-based Tidelands Bank has been operating under a consent agreement since December.
The regulatory agreements are sometimes the precursor to a bank's failure, as was the case with Myrtle Beach-based Beach First National Bank, which failed last year.
HCSB's consent order with the FDIC and the S.C. State Board of Financial Institutions requires the bank to raise capital ratios which can be done by getting more money, selling off assets or both.
The bank plans to take a combination of actions to raise its capital ratios, including selling off some of its assets like securities or land and raising capital, Clarkson said.
"We're looking to do some of all, we're not leaving any stone unturned," he said.
Clarkson didn't say how the bank might raise capital or what assets it would sell, but he said that several consultants have been hired to help come up with a plan.
The consent agreement also requires the bank to write down the total value of any loans that are rated a loss and 50 percent of loans classified as doubtful. Clarkson said the bank doesn't have any "loss" loans because it writes them down immediately and that the losses for most of the doubtful loans have already been taken into account.
The challenge for banks in this situation is that writing down the losses will reduce capital levels as the bank is also trying to raise capital, Richardson said. In the current economic environment, it is very difficult for banks to raise the capital they need to work through their problems, he said.
"The capital markets are dry - the only way a company is going to come in and give capital is if they get a great deal which means the shareholders are diluted pretty heavily," he said.
Richardson said that a merger or sale is also always an option in a situation like this, but would come at a significant cost to shareholders. Clarkson said that a merger is a possibility but is near the bottom of the list of solutions the bank is considering.
"We're going to address it very aggressively because we intend to be a survivor and not a seller," Clarkson said.
The consent order also requires the bank to assess management and staffing to ensure that the leadership is qualified. It calls on the bank's board to step up its oversight to monitor policies, correct violations and submit reports to the regulators.
A consultant has already come in and evaluated the bank's management, said Tommie Grainger, the chairman of the board of directors. He said he has full confidence in the bank's leadership, which was confirmed by the consultants.
At first the board was surprised at how widespread the problems were but that the management stepped up to address problems well before the consent order.
"We saw it. We were aware of it," Grainger said. "Our management team was smart enough to react and meet some of the challenges ahead of time."
The board has been more aware of the problems in the past three or four months and has gotten more involved, meeting more frequently and establishing additional committees to oversee challenging areas, he said.
"It was a concern but we are meeting the challenge," Grainger said. "I feel they are going to work through it, it won't be done overnight ... but we feel the challenges will be met."
How the bank meets its challenges will depend in part on the speed of the economic recovery, said Robert Burney, a banking and finance professor at Coastal Carolina University.
"It's a tough situation just because the market situation is not conducive to taking those actions," he said. "The real problem is the recovery is so painfully slow."
Richardson agreed, saying that Horry County will make a comeback.
"The longer they can hang on the more chance they have that the economy will improve and that they can restore the bank to safety and soundness," he said.
Community banks such as HCSB have an edge because they have better knowledge of the community, but that advantage also makes them more susceptible to problems in key local industries as a result of their focus, Burney said.
"[The Grand Strand] is still the kind of local or regional economy that's conducive to the success of local community institutions," Burney said. "I'm hopeful that the community will continue in the future to have true community institutions with a community focus."
Contact ADVA SALDINGER at 626-0317 or follow on Twitter @TSN_ASaldinger.
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