**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-KSB**

 

**(Mark One)**

 
| x                                                    | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
|------------------------------------------------------|---------------------------------------------------------------------------------------------------|
| ** **                                           |
| **For the fiscal year ended December 31, 2007** |
| ** **                                           |
| **or**                                               |
| ** **                                           |
| o                                                    | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                   to                   **

 

**CommissionFile Number:  000-26995**

 

**HCSB FINANCIAL CORPORATION**

(Name of small business Issuer in its charter)

 

| **South Carolina**

(State or other jurisdiction

of incorporation or organization)        |   | **57-1079444**

(I.R.S. Employer

Identification No.) |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                                       |   |                                                  |
| **5201 Broad Street**

**Loris, South Carolina**

(Address of principal executive offices) |   | **29569**

(Zip Code)                                 |

 

Issuer’s telephone number: **(843)756-6333**

 

Securities registered under Section 12(b) ofthe Exchange Act:  **None**

 

Securities registered under Section 12(g) ofthe Exchange Act: **Common Stock**

 

Checkwhether the issuer is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act o

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

 

Check if there is no disclosure of delinquent filers inresponse to Item 405 of Regulation S-B in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes o  No x

 

The issuer’s revenue for its most recent fiscal year was$31,232,000.  As of March 13, 2008,3,677,955 shares of Common Stock were issued and outstanding.

 

The aggregate market value of the Common Stock held bynon-affiliates (shareholders holding less than 5% of an outstandingclass of stock, excluding directors and executive officers) of the Company on March 3, 2008 was$31,742,721.  Because there is not anactive trading market for the Common Stock, we have used our book value of$9.91 as of February 28, 2008 to calculate our public float.

 

                Transitional Small Business DisclosureFormat.  (Check one): Yes o  No x

 

 

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**DOCUMENTS INCORPORATED BYREFERENCE**

** **
| Annual  Report to Shareholders for the                  | Part II  (Items 5-7)                      |
|---------------------------------------------------------|------------------------------------------------|
| Year  Ended December 31, 2007                      |                                           |
|                                                    |                                           |
| Proxy  Statement for the Annual Meeting of Shareholders | Part III  (Portions of Items 9-12 and 14) |
| to  be held on April 24, 2008                      |                                           |

 

# ** **

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# **PART I**

# ** **

**Item1.  Description of Business.**

 

                    This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements are based on many assumptions and estimates and are not guarantees of future performance.  Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control.  The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements.  Potential risks and uncertainties that could cause our actual results to differ from those anticipated in our forward-looking statements include, but are not limited, to those described below under “Risk Factors” and the following:

 

·                  significant increases in competitive pressure in the banking andfinancial services industries;

·                  changes in the interest rate environment which could reduce anticipatedor actual margins;

·                  changes in political conditions or the legislative or regulatoryenvironment;

·                  general economic conditions, either nationally or regionally andespecially in our primary service area, becoming less favorable than expectedresulting in, among other things, a deterioration in credit quality;

·                  changes occurring in business conditions and inflation;

·                  changes in technology;

·                  changes in monetary and tax policies;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amounts of charge-offs;

·                  the rates of loan growth;

·                  adverse changes in asset quality and resulting credit risk-relatedlosses and expenses;

·                  loss of consumer confidence and economic disruptions resulting fromterrorist activities;

·                  changes in the securities markets; and

·                  other risks and uncertainties detailed from time to time in our filingswith the Securities and Exchange Commission (“SEC”).

 

# **GeneralOverview**

# ** **

HCSB FinancialCorporation was incorporated on June 10, 1999 to become a holding companyfor Horry County State Bank.  The bank isa state chartered bank which commenced operations on January 4, 1988.  Our primary market includes Horry County inSouth Carolina and Columbus and Brunswick Counties in North Carolina.  From our 14 branch locations, we offer a fullrange of deposit services, including checking accounts, savings accounts,certificates of deposit, money market accounts, and IRAs, as well as a broadrange of non-deposit investment services.

 

**Operatingand Growth Strategy**

 

                Our goal is to be the leading community bank in ourmarket area.  We intend to achieve thisgoal chiefly by providing personalized service to our customers.  Other strategies that we use to support ourgoal are hiring, developing, and retaining high caliber and motivatedemployees, focusing each of our branches on the unique needs and cultures ofthe community in which it is located, maintaining high asset quality,increasing asset size through internal growth and branch expansion, andoffering our customers a breadth of products competitive with those offered bymuch larger institutions.  These goalsare intended to build long-term shareholder value.

 

·                  *Personalized Service.* We view banking as a service industry in which personal relationshipscan provide a competitive advantage. This paradigm is captured in our marketing tagline “It’s the littlethings that make a little bank . . . BIG!” We strive to be “BIG” (important) to our customers by doing “little”things like identifying our customers’ needs and promoting products to satisfythem, knowing our customers by name, and providing our products with superior

 

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levels of quality and service.  We seek customers who prefer to conductbusiness with a locally owned and managed bank that demonstrates an activeinterest in their business and personal financial affairs.  We believe that by consistently providinghigh levels of service to customers who value that service, we develop andstrengthen relationships that provide a competitive advantage.

 

·                  *MotivatedEmployees. *We believe that thekey to our success lies with our employees, because it is through our employeesthat we are able to provide our customers with the high level of service andattention that they expect and deserve. To this end, we hire people who are familiar with their community andare committed to providing a superior level of banking service to ourcustomers.  By selecting onlyknowledgeable and committed employees, we believe we can provide an unsurpassedlevel of customer service and satisfaction. We strive to develop, sustain the motivation of, and retain ouremployees through training, personal attention, recognition, and competitivecompensation.  We encourage and equipeach employee to focus on the individual needs of our customers and to deliverthe specific products and services that will best help these customers achievetheir financial goals.

 

·                  *Community Focus.* We approach banking with a community focus, particularly at the branchlevel.  We operate each branch as anindependent business unit and encourage our branch managers to promote thoseproducts that best meet the need of their customer base.  This strategy enables our branches to servediverse populations and economies effectively. We support our branches by supporting the economic development of ourcommunities and by encouraging our employees to be active in communityaffairs.  We have located our existingoffices, and plan to locate proposed offices, in communities in which webelieve we can develop strong relationships. We favor growth areas and areas in which there are opportunities todifferentiate ourselves by providing customers with superior service.

 

·                  *High Asset Quality.* We place a great deal of emphasis onmaintaining high asset quality and believe that the outstanding asset qualityexperienced to date is principally due to the closeness of our lenders, seniorofficers, and directors to our customers and their significant knowledge of thecommunities in which they reside.

 

·                  *Internal**Growth, Branch Expansion.* We have grown significantly over the last five years.  We willcontinue to focus on acquiring market share, particularly from largeSoutheastern regional bank holding companies, by emphasizing our localmanagement and decision-making and personal services.

 

·                  *Broad Rangeof Products and Services.*  We striveto provide our customers with the breadth of products and services comparableto a regional bank, while maintaining the quick response and personal serviceof a locally owned and managed bank.  Inaddition to offering a full range of deposit services and commercial andpersonal loans, we offer products such as mortgage loan originations, on-linebanking, and investment products and brokerage services through a third partyarrangement.

 

**Locationand Service Area**

 

                Our primary markets include Horry County, SouthCarolina and Columbus and Brunswick Counties, North Carolina.  Most of the banks in these areas are nowlocal branches of large regional banks. Although size gives the larger banks certain advantages in competing forbusiness from large corporations, including higher lending limits and theability to offer services in other areas of South Carolina and North Carolina,we believe that there is a void in the community banking market in our marketthat we successfully fill.  We alsobelieve that the Horry County market will continue to grow, particularly alongthe Atlantic coast.  We intend tocontinue to expand our branch network to take advantage of opportunities causedby this growth.  We generally do notattempt to compete for the banking relationships of large corporations, butconcentrate our efforts on small- to medium-sized businesses and onindividuals.

 

 

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**BankingServices**

 

                We offer a full range of depositservices that are typically available in most banks and savings and loanassociations, including checking accounts, NOW accounts, savings accounts, andother time deposits of various types, ranging from daily money market accountsto longer-term certificates of deposit. The transaction accounts and time certificates are tailored to ourprincipal market area at rates competitive to those offered in our marketarea.  In addition, we offer certainretirement account services, such as Individual Retirement Accounts.  All deposit accounts are insured by the FDICup to the maximum amount allowed by law (generally, $100,000 per depositor,subject to aggregation rules).  We solicitthese accounts from individuals, businesses, associations and organizations,and governmental authorities.

 

**LendingActivities**

 

*General*. We emphasize a range of lending services, including real estate,commercial, agricultural and consumer loans, to individuals and small tomedium-sized businesses and professional concerns that are located in orconduct a substantial portion of their business in our market area. Thecharacteristics of our loan portfolio and our underwriting procedures,collateral types, risks, approval process and lending limits are discussedbelow.

 

*RealEstate Loans.* Theprimary component of our loan portfolio is real estate mortgage loans, whichmade up approximately 57.4% of our loan portfolio at December 31,2007.  These loans are secured generallyby first or second mortgages on residential or commercial property.  These loans consist of commercial real estateloans, construction and development loans, and residential real estate loans(but exclude home equity loans, which are classified as consumer loans).

 

*CommercialLoans. *At December 31, 2007, approximately 18.0% of ourloan portfolio consisted of commercial loans. Commercial loans consist of secured and unsecured loans, lines ofcredit, and working capital loans.  Wemake these loans to various types of businesses.  Included in this category are loans topurchase equipment, finance accounts receivable or inventory, and loans madefor working capital purposes.

 

*ConsumerLoans.*  Consumer loans made up approximately 5.9% ofour loan portfolio at December 31, 2007. These are loans made to individuals for personal and household purposes,such as secured and unsecured installment and term loans, home equity loans andlines of credit, and revolving lines of credit such as overdraftprotection.  Automobiles and small recreationalvehicles are pledged as security for their purchase.

 

*AgriculturalLoans. *Approximately 2.0% of our loan portfolio consisted ofagricultural loans at December 31, 2007. These are loans made to individuals and businesses for agriculturalpurposes, including loans to finance crop production and livestock operatingexpenses, to purchase farm equipment, and to store crops.  These loans are secured generally by liens ongrowing crops and farm equipment.  Alsoincluded in this category are loans to agri-businesses, which are substantiallysimilar to commercial loans, as discussed above.

 

*Constructionand Development Loans.*  The remaining 16.7% of our loanportfolio at December 31, 2007 was composed of consumer and commercialreal estate construction and commercial development loans.  These loans are secured by the real estatefor which construction is planned and, in many cases, by supplementarycollateral.

 

*UnderwritingProcedures, Collateral, and Risk. *We use our established credit policiesand procedures when underwriting each type of loan.  Although there are minor variances in thecharacteristics and criteria for each loan type, which may require additionalunderwriting procedures, we generally evaluate borrowers using the followingdefined criteria:

 

·                  Character — we evaluate whether theborrower has sound character and integrity by examining the borrower’s history.

 

 

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·                  Capital — we evaluate the borrower’soverall financial strength, as well as the equity investment in the asset beingfinanced.

·                  Collateral — we evaluate whether thecollateral is adequate from the standpoint of quality, marketability, value andincome potential.

·                  Capacity — we evaluate the borrower’sability to service the debt.

·                  Conditions — we underwrite the credit inlight of the effects of external factors, such as economic conditions andindustry trends.

 

It is our practice toobtain collateral for most loans to help mitigate the risk associated withlending.  We generally limit ourloan-to-value ratio to 80%.  For example,we obtain a security interest in real estate for loans secured by real estate,including construction and development loans, and other commercial loans.  For commercial loans, we typically obtainsecurity interests in equipment and other company assets.  For agricultural loans, we typically obtain asecurity interest in growing crops, farm equipment, or real estate.  For consumer loans used to purchase vehicles,we obtain appropriate title documentation. For secured loans that are not associated with real estate, or for whichthe mortgaged real estate does not provide an acceptable loan-to-value ratio,we typically obtain other available collateral such as stocks or savingsaccounts.

 

Every loan carries acredit risk, simply defined as the potential that the borrower will not bewilling or able to repay the debt.  Whilethis risk is common to all loan types, each type of loan may carry risks thatdistinguish it from other loan types. The following paragraphs discuss certain risks that are associated witheach of our loan types.

 

Each real estate loan issensitive to fluctuations in the value of the real estate that secures thatloan.  Certain types of real estate loanshave specific risk characteristics that vary according to the type ofcollateral that secures the loan, the terms of the loan, and the repaymentsources for the loan.  Construction anddevelopment real estate loans generally carry a higher degree of risk than longterm financing of existing properties. These projects are usually dependent on the completion of the project onschedule and within cost estimates and on the timely sale of the property.  Inferior or improper construction techniques,changes in economic conditions during the construction and marketing period,and rising interest rates which may slow the sale of the property are all risksunique to this type of loan.  Residentialmortgage loans, in contrast to commercial real estate loans, generally havelonger terms and may have fixed or adjustable interest rates.

 

Commercial loansprimarily have risk that the primary source of repayment will be insufficientto service the debt.  Often this occursas the result of changes in economic conditions in the location or industry inwhich the borrower operates which impact cash flow or collateral value.  Consumer loans, other than home equity loanproducts, are generally considered to have more risk than loans to individualssecured by first or second mortgages on real estate due to dependence on the borrower’semployment status as the sole source of repayment.  Agricultural loans carry the risk of cropfailure, which adversely impacts both the borrower’s ability to repay the loanand the value of the collateral.

 

By following definedunderwriting criteria as noted above, we can help to reduce these risks.  Additionally we help to reduce the risk thatthe underlying collateral may not be sufficient to pay the outstanding balanceby using appraisals or taking other steps to determine that the value of thecollateral is adequate, and lending amounts based upon lower loan-to-valueratios.  We also control risks byreducing concentration of our loan portfolio in any one type of loan.

 

*LoanApproval and Review*.  Our loan approval policies provide forvarious levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds thatindividual officer’s lending authority, the loan request is considered by anofficer with a higher lending limit.  Anyloan in excess of this lending limit is approved by the directors’ loancommittee.  We do not make any loans toany of our directors or executive officers unless the loan is approved by athree-fourth’s vote of the board of directors of the bank and is made on termsnot more favorable to such person than would be available to a person notaffiliated with us.  Aggregate credit inexcess of 10% of the bank’s aggregate capital, surplus, retained earnings, andreserve for loan losses must be approved by a three-fourth’s vote of our bank’sboard of directors.

 

 

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*ResidentialMortgage Loans*.  We offer a variety of residential mortgagelending products, including loans with fixed rates for fifteen and thirty yearsas well as adjustable rate mortgages (ARMs). Typically, we close these loans with funds provided by a secondarymarket investor, although we may close them in the Bank’s name under apre-approved commitment to sell the loans to an investor within a few weeksfrom the date the loan is closed.

 

*LendingLimits.*  Our lending activities are subject to avariety of lending limits imposed by federal law.  While differing limits apply to certain loantypes or borrowers, in general we are subject to a loan-to-one-borrowerlimit.  These limits increase or decreaseas our capital increases or decreases. Unless we sell participations in loans to other financial institutions,we are not able to meet all of the lending needs of loan customers requiringaggregate extensions of credit above these limits.

 

**Other Banking and Related Services**

 

                Other bank services which are in place or plannedinclude cash management services, safe deposit boxes, travelers checks, directdeposit of payroll and social security checks, on-line banking and automaticdrafts for various accounts.  We areassociated with a shared network of automated teller machines that may be usedby our customers throughout South Carolina and other regions.  Two of our non-executive officers areregistered representatives of UVEST, and they effect transactions in securitiesand other non-deposit investment products. We also offer MasterCard and VISA credit card services through a correspondentbank as an agent for the bank.  Wecontinue to seek and evaluate opportunities to offer additional financialservices to our customers.

 

**Competition**

 

                Thebanking business is highly competitive. We compete with other commercial banks, savings and loan associations,credit unions, and money market mutual funds operating in our service area andelsewhere.  According to the FDIC data asof June 30, 2007, there were 22 financial institutions operating in HorryCounty, 13 financial institutions operating in Brunswick County and 6 financialinstitutions operating in Columbus County. We believe that our community bank focus, with our emphasis on serviceto small businesses, individuals, and professional concerns, gives us anadvantage in our markets.  Nevertheless,a number of these competitors are well established in our service area.  Most of them have substantially greaterresources and lending limits than the bank and offer certain services, such asextensive and established branch networks and trust services, that we do notprovide.  As a result of thesecompetitive factors, we may have to pay higher rates of interest to attractdeposits.

 

**Employees**

** **

As of March 15, 2008, we had 154 full-timeemployees and no part-time employees.  Weare not a party to a collective bargaining agreement, and we consider ourrelations with our employees to be good.

 

 

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** **

**SUPERVISIONAND REGULATION**

 

Both HCSB FinancialCorporation and Horry County State Bank are subject to extensive state andfederal banking regulations that impose restrictions on and provide for generalregulatory oversight of their operations. These laws generally are intended to protect depositors and notshareholders.  The following summary isqualified by reference to the statutory and regulatory provisionsdiscussed.  Changes in applicable laws orregulations may have a material effect on our business and prospects.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  We cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings in the future.

 

The following discussionis not intended to be a complete list of all the activities regulated by thebanking laws or of the impact of such laws and regulations on ouroperations.  It is intended only tobriefly summarize some material provisions.

 

**HCSBFinancial Corporation**

 

We own 100% of theoutstanding capital stock of the bank, and therefore we are considered to be abank holding company under the federal Bank Holding Company Act of 1956 (the “BankHolding Company Act”).  As a result, weare primarily subject to the supervision, examination and reportingrequirements of the Board of Governors of the Federal Reserve (the “FederalReserve”) under the Bank Holding Company Act and its regulations promulgatedthereunder.  As a bank holding companylocated in South Carolina, the South Carolina Board of Financial Institutionsalso regulates and monitors all significant aspects of our operations.

 

***Permitted Activities.*** Under theBank Holding Company Act, a bank holding company is generally permitted toengage in, or acquire direct or indirect control of more than 5% of the votingshares of any company engaged in, the following activities:

 

·                  banking or managing or controlling banks;

 

·                  furnishing services to or performing services for our subsidiaries; and

 

·                  any activity that the Federal Reserve determines to be so closelyrelated to banking as to be a proper incident to the business of banking.

 

Activities that theFederal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include:

 

·                  factoring accounts receivable;

 

·                  making, acquiring, brokering or servicing loans and usual related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depository institution, such as a savingsassociation;

 

·                  trust company functions;

 

·                  financial and investment advisory activities;

 

·                  conducting discount securities brokerage activities;

 

·                  underwriting and dealing in government obligations and money marketinstruments;

 

·                  providing specified management consulting and counseling activities;

 

 

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·                  performing selected data processing services and support services;

 

·                  acting as agent or broker in selling credit life insurance and othertypes of insurance in connection with credit transactions; and

 

·                  performing selected insurance underwriting activities.

 

As a bank holding company we also can elect to be treated as a “financialholding company,” which would allow us engage in a broader array ofactivities.  In sum, a financial holdingcompany can engage in activities that are financial in nature or incidental orcomplementary to financial activities, including insurance underwriting, salesand brokerage activities, providing financial and investment advisory services,underwriting services and limited merchant banking activities.  We have not sought financial holding companystatus, but may elect such status in the future as our business matures.  If we were to elect in writing for financialholding company status, each insured depository institution we control wouldhave to be well capitalized, well managed and have at least a satisfactoryrating under the CRA (discussed below).

 

The Federal Reserve hasthe authority to order a bank holding company or its subsidiaries to terminateany of these activities or to terminate its ownership or control of anysubsidiary when it has reasonable cause to believe that the bank holdingcompany’s continued ownership, activity or control constitutes a serious riskto the financial safety, soundness or stability of it or any of its banksubsidiaries.

 

***Change in Control****. *In addition, and subject tocertain exceptions, the Bank Holding Company Act and the Change in Bank ControlAct, together with regulations promulgated there under, require Federal Reserveapproval prior to any person or company acquiring “control” of a bank holdingcompany.  Moreover, the South CarolinaBoard of Financial Institutions also must approve an acquisition of a SouthCarolina bank holding company.  Controlis conclusively presumed to exist if an individual or company acquires 25% ormore of any class of voting securities of a bank holding company.  Control is rebuttably presumed to exist if aperson acquires 10% or more, but less than 25%, of any class of votingsecurities and either:

 

·                  the company has registered securities under Section 12of the Securities Exchange Act of 1934; or

 

·                  no other person owns a greater percentage of that class of votingsecurities immediately after the transaction.

 

Our common stock isregistered under Section 12 of the Securities Exchange Act of 1934.  Any shareholder of 10% or more, but less than25% of any class of our voting securities would be required to either file as acontrolling shareholder of the company or rebut the presumption of control inaccordance with Federal Reserve regulations**.**  The regulations provide a procedure forrebutting control when ownership of any class of voting securities is below25%.

 

***Source of Strength****.*  In accordancewith Federal Reserve Board policy, we are expected to act as a source offinancial strength to the bank and to commit resources to support the bank incircumstances in which we might not otherwise do so.  If the bank were to become “undercapitalized”(see below “Horry County State Bank — Prompt Corrective Action”), we would berequired to provide a guarantee of the bank’s plan to return to capitaladequacy.  Additionally, under the bankHolding Company Act, the Federal Reserve Board may require a bank holdingcompany to terminate any activity or relinquish control of a nonbanksubsidiary, other than a nonbank subsidiary of a bank, upon the Federal ReserveBoard’s determination that such activity or control constitutes a serious riskto the financial soundness or stability of any depository institutionsubsidiary of the bank holding company. Further, federal bank regulatory authorities have additional discretionto require a bank holding company to divest itself of any bank or nonbanksubsidiaries if the agency determines that divestiture may aid the depositoryinstitution’s financial condition. Further, any loans by a bank holding company to a subsidiary bank aresubordinate in right of payment to deposits and certain other indebtedness ofthe subsidiary bank.  In the event of abank holding company’s bankruptcy, any commitment by the bank holding companyto a federal bank regulatory agency to maintain the capital of a subsidiarybank at a certain level would be assumed by the bankruptcy trustee 

 

 

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and entitled to prioritypayment.

 

***CapitalRequirements.***  The Federal Reserve Board imposes certaincapital requirements on the bank holding company under the Bank Holding CompanyAct, including a minimum leverage ratio and a minimum ratio of “qualifying”capital to risk-weighted assets.  Theserequirements are essentially the same as those that apply to the bank describedbelow under “Horry County State Bank - Capital Regulations.”  However, The Federal Reserve guidelinescontain an exemption from the capital requirements for “small bank holdingcompanies” which in 2006 were amended to cover most bank holding companies withless than $500 million in total assets that do not have a material amount ofdebt or equity securities outstanding registered with the SEC.  Although our class of common stock isregistered under Section 12 of the Securities Exchange Act, we believethat because our stock is not listed on any exchange or otherwise activelytraded, the Federal Reserve Board will interpret its new guidelines to meanthat we qualify as a small bank holding company.  Nevertheless, our Bank remains subject tothese capital requirements.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.  Regardless, our Bank is “well capitalized”under these minimum capital requirements as set per bank regulatory agencies.

 

Subject to our capitalrequirements and certain other restrictions, we are able to borrow money tomake a capital contribution to the bank, and these loans may be repaid fromdividends paid from the bank to the Company. Our ability to pay dividends depends on the bank’s ability to paydividends to us, which is subject to regulatory restrictions as described belowin “Horry County State Bank — Dividends.” We are also able to raise capital for contribution to the bank byissuing securities without having to receive regulatory approval, subject tocompliance with federal and state securities laws.

 

***SouthCarolina State Regulation.***  As a SouthCarolina bank holding company under the South Carolina Banking and BranchingEfficiency Act, we are subject to limitations on sale or merger and toregulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval ofthe South Carolina Board prior to acquiring the capital stock of a nationalbank, but we must notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior toengaging in the acquisition of a South Carolina state chartered bank or anotherSouth Carolina bank holding company.

 

**Horry County State Bank**

 

Thebank operates as a state bank incorporated under the laws of the State of SouthCarolina and is subject to examination by the South Carolina Board of FinancialInstitutions.

 

TheSouth Carolina Board of Financial Institutions and the FDIC regulate or monitorvirtually all areas of the bank’s operations, including:

 

·                  security devices and procedures;

 

·                  adequacy of capitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

 

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·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable on loans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carry on safe lendingand deposit gathering practices.

 

TheSouth Carolina Board of Financial Institutions requires the bank to maintainspecified capital ratios and imposes limitations on the bank’s aggregateinvestment in real estate, bank premises, and furniture and fixtures.  The South Carolina Board of FinancialInstitutions also requires the bank to prepare quarterly reports on the bank’sfinancial condition in compliance with its minimum standards and procedures.

 

Allinsured institutions must undergo regular on site examinations by theirappropriate banking agency.  The cost ofexaminations of insured depository institutions and any affiliates may beassessed by the appropriate agency against each institution or affiliate as itdeems necessary or appropriate.  Insuredinstitutions are required to submit annual reports to the FDIC, their federalregulatory agency, and their state supervisor when applicable.  The FDIC has developed a method for insureddepository institutions to provide supplemental disclosure of the estimatedfair market value of assets and liabilities, to the extent feasible andpracticable, in any balance sheet, financial statement, report of condition orany other report of any insured depository institution.  The FDIC Improvement Act also requires thefederal banking regulatory agencies to prescribe, by regulation, standards forall insured depository institutions and depository institution holdingcompanies relating, among other things, to the following:

 

·                  internal controls;

 

·                  information systems and audit systems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

·                  interest rate risk exposure; and

 

·                  asset quality.

 

***Prompt Corrective Action. ***As aninsured depository institution, the bank is required to comply with the capitalrequirements promulgated under the Federal Deposit Insurance Act and theregulations thereunder, which set forth****five capitalcategories, each with specific regulatory consequences.  Under these regulations, the categories are:

 

·                  Well Capitalized — The institution exceedsthe required minimum level for each relevant capital measure.  A well capitalized institution is one (i) havinga total capital ratio of 10% or greater, (ii) having a tier 1 capitalratio of 6% or greater, (iii) having a leverage capital ratio of 5% orgreater and (iv) that is not subject to any order or written directive tomeet and maintain a specific capital level for any capital measure.

 

·                                          Adequately Capitalized — The institutionmeets the required minimum level for each relevant capital measure.  No capital distribution may be made thatwould result in the 

 

 

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                                                institution becoming undercapitalized.  An adequately capitalized institution is one (i) havinga total capital ratio of 8% or greater, (ii) having a tier 1 capital ratioof 4% or greater and (iii) having a leverage capital ratio of 4% orgreater or a leverage capital ratio of 3% or greater if the institution israted composite 1 under the CAMELS (Capital, Assets, Management, Earnings,Liquidity and Sensitivity to market risk) rating system.

 

·                                          Undercapitalized — The institution fails tomeet the required minimum level for any relevant capital measure.  An undercapitalized institution is one (i) havinga total capital ratio of less than 8% or (ii) having a tier 1 capitalratio of less than 4% or (iii) having a leverage capital ratio of lessthan 4%, or if the institution is rated a composite 1 under the CAMELS ratingsystem, a leverage capital ratio of less than 3%.

 

·                                          Significantly Undercapitalized — Theinstitution is significantly below the required minimum level for any relevantcapital measure.  A significantlyundercapitalized institution is one (i) having a total capital ratio ofless than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) havinga leverage capital ratio of less than 3%.

 

·                                          Critically Undercapitalized — The institutionfails to meet a critical capital level set by the appropriate federal bankingagency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%.

 

If the FDIC determines, after notice and an opportunity for hearing,that the bank is in an unsafe or unsound condition, the regulator is authorizedto reclassify the bank to the next lower capital category (other thancritically undercapitalized) and require the submission of a plan to correctthe unsafe or unsound condition.

 

If the bank is not well capitalized, it cannot accept brokered depositswithout prior FDIC approval and, if approval is granted, cannot offer aneffective yield in excess of 75 basis points on interests paid on deposits ofcomparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the bank’snormal market area.  Moreover, if thebank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC. The bank also would become subject to increased regulatory oversight,and is increasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalized institutionmay not acquire another institution, establish additional branch offices orengage in any new line of business unless determined by the appropriate Federalbanking agency to be consistent with an accepted capital restoration plan, orunless the FDIC determines that the proposed action will further the purpose ofprompt corrective action.  Theappropriate federal banking agency may take any action authorized for asignificantly undercapitalized institution if an undercapitalized institutionfails to submit an acceptable capital restoration plan or fails in any materialrespect to implement a plan accepted by the agency.  A critically undercapitalized institution issubject to having a receiver or conservator appointed to manage its affairs andfor loss of its charter to conduct banking activities.

 

An insured depository institution may not pay a management fee to abank holding company controlling that institution or any other person havingcontrol of the institution if, after making the payment, the institution, wouldbe undercapitalized.  In addition, aninstitution cannot make a capital distribution, such as a dividend or otherdistribution that is in substance a distribution of capital to the owners ofthe institution if following such a distribution the institution would beundercapitalized.  Thus, if payment ofsuch a management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

Asof December 31, 2007, the bank was deemed to be “well capitalized.”

 

***Standardsfor Safety and Soundness.  ***The Federal Deposit Insurance Act (“FDIA”)also requires the federal banking regulatory agencies to prescribe, byregulation or guideline, operational and managerial standards for all insured depositoryinstitutions relating to: (i) internal controls, information systems, and 

 

 

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internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth.  Theagencies also must prescribe standards for asset quality, earnings, and stockvaluation, as well as standards for compensation, fees, and benefits.  The federal banking agencies have adoptedregulations and Interagency Guidelines Prescribing Standards for Safety andSoundness to implement these required standards.  These guidelines set forth the safety andsoundness standards that the federal banking agencies use to identify andaddress problems at insured depository institutions before capital becomesimpaired.  Under the regulations, if theFDIC determines that the bank fails to meet any standards prescribed by theguidelines, the agency may require the bank to submit to the agency anacceptable plan to achieve compliance with the standard, as required by theFDIC.  The final regulations establishdeadlines for the submission and review of such safety and soundness complianceplans.

 

***DepositInsurance and Assessments.***  Deposits atthe bank are insured by the Deposit Insurance Fund (the “DIF”) as administeredby the FDIC, up to the applicable limits established by law — generally$100,000 per accountholder and $250,000 for certain retirementaccountholders.  In November 2006,the FDIC adopted final regulations that set the deposit insurance assessmentrates that took effect in 2007.  The FDICuses a risk-based assessment system that assigns insured depositoryinstitutions to one of four risk categories based on three primary sources ofinformation — supervisory risk ratings for all institutions, financial ratiosfor most institutions, including the company, and long-term debt issuer ratingsfor large institutions that have such ratings. The new premium rate structure imposes a minimum assessment of from fiveto seven cents for every $100 of domestic deposits in institutions that areassigned to the lowest risk category. This category is expected to encompass substantially all insuredinstitutions, including the bank.  A onetime assessment credit is available to offset up to 100% of the 2007assessment.  Any remaining credit can beused to offset up to 90% of subsequent annual assessments through 2010.  For institutions assigned to higher riskcategories, the premium that took effect in 2007 ranges from 10 cents to 43cents per $100 of deposits.

 

The FDIC also collects adeposit-based assessment from insured financial institutions on behalf of TheFinancing Corporation (“FICO”).  Thefunds from these assessments are used to service debt issued by FICO in itscapacity as a financial vehicle for the Federal Savings and Loan InsuranceCorporation.  The FICO assessment rate isset quarterly and in 2006 ranged from 1.32 cents to 1.24 cents per $100 ofassessable deposits.  For the firstquarter of 2007, the FICO assessment rate was 1.22 cents per $100 of assessabledeposits.

 

***Transactionswith Affiliates and Insiders.***  The company isa legal entity separate and distinct from the bank and its othersubsidiaries.  Various legal limitationsrestrict the bank from lending or otherwise supplying funds to the company orits non-bank subsidiaries.  The companyand the bank are subject to Section 23A and 23B of the Federal Reserve Actand Federal Reserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the bank’s capital and surplus and, as to all affiliatescombined, to 20% of the bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  The bank is forbidden topurchase low quality assets from an affiliate.

 

Section 23B of theFederal Reserve Act, among other things, prohibits an institution from engagingin certain transactions with certain affiliates unless the transactions are onterms substantially the same, or at least as favorable to such institution orits subsidiaries, as those prevailing at the time for comparable transactionswith nonaffiliated companies.

 

Regulation W generallyexcludes all non-bank and non-savings association subsidiaries of banks fromtreatment as affiliates, except to the extent that the Federal Reserve Boarddecides to treat these subsidiaries as affiliates.  The regulation also limits the amount ofloans that can be purchased by a bank from an affiliate to not more than 100%of the bank’s capital and surplus.

 

The bank is also subjectto certain restrictions on extensions of credit to executive officers,directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must bemade on substantially the same terms, including interest rates and collateral,as those prevailing at the time 

 

 

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for comparabletransactions with third parties and (ii) must not involve more than thenormal risk of repayment or present other unfavorable features.

 

***Branching****.*  Under currentSouth Carolina law, we may open branch offices throughout South Carolina withthe prior approval of the South Carolina Board of Financial Institutions.   In addition, with prior regulatory approval,the bank will be able to acquire existing banking operations in SouthCarolina.  Furthermore, federallegislation has been passed that permits interstate branching by banks ifallowed by state law, and interstate merging by banks.  However, South Carolina law, with limitedexceptions, currently permits branching across state lines only throughinterstate mergers.

 

***Anti-TyingRestrictions***.   Under amendments to the Bank Holding CompanyAct and Federal Reserve regulations, a bank is prohibited from engaging incertain tying or reciprocity arrangements with its customers.  In general, a bank may not extend credit,lease, sell property, or furnish any services or fix or vary the considerationfor these on the condition that (i) the customer obtain or provide someadditional credit, property, or services from or to the bank, the bank holdingcompany or subsidiaries thereof or (ii) the customer may not obtain someother credit, property, or services from a competitor, except to the extentreasonable conditions are imposed to assure the soundness of the creditextended.  Certain arrangements arepermissible: a bank may offer combined-balance products and may otherwise offermore favorable terms if a customer obtains two or more traditional bankproducts; and certain foreign transactions are exempt from the generalrule.  A bank holding company or any bankaffiliate also is subject to anti-tying requirements in connection withelectronic benefit transfer services.

 

***CommunityReinvestment Act****.*  The Community Reinvestment Act (“CRA”)requires that, in connection with examinations of financial institutions withintheir respective jurisdictions, a financial institution’s primary regulator,which is the FDIC for the bank, shall evaluate the record of each financialinstitution in meeting the credit needs of its local community, including lowand moderate income neighborhoods.  Thesefactors are also considered in evaluating mergers, acquisitions, andapplications to open a branch or facility. Failure to adequately meet these criteria could impose additionalrequirements and limitations on our bank. Additionally, we must publicly disclose the terms of various CommunityReinvestment Act-related agreements.

 

***FinanceSubsidiaries.***  Under the Gramm-Leach-Bliley Act (the “GLBA”),subject to certain conditions imposed by their respective banking regulators,national and state-chartered banks are permitted to form “financialsubsidiaries” that may conduct financial or incidental activities, therebypermitting bank subsidiaries to engage in certain activities that previouslywere impermissible.  The GLBA imposesseveral safeguards and restrictions on financial subsidiaries, including that theparent bank’s equity investment in the financial subsidiary be deducted fromthe bank’s assets and tangible equity for purposes of calculating the bank’scapital adequacy.  In addition, the GLBAimposes new restrictions on transactions between a bank and its financialsubsidiaries similar to restrictions applicable to transactions between banksand non-bank affiliates.

 

***Consumer Protection Regulations.*** Activities ofthe bank are subject to a variety of statutes and regulations designed toprotect consumers.  Interest and othercharges collected or contracted for by the bank are subject to state usury lawsand federal laws concerning interest rates. The bank’s loan operations are also subject to federal laws applicableto credit transactions, such as the:

 

·                  The federal Truth-In-Lending Act, governingdisclosures of credit terms to consumer borrowers;

 

·                  The Home Mortgage Disclosure Act of 1975, requiringfinancial institutions to provide information to enable the public and publicofficials to determine whether a financial institution is fulfilling itsobligation to help meet the housing needs of the community it serves;

 

·                  The Equal Credit Opportunity Act, prohibitingdiscrimination on the basis of race, creed or other prohibited factors inextending credit;

 

·                  The Fair Credit Reporting Act of 1978, as amended bythe Fair and Accurate Credit 

 

 

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                        Transactions Act, governing the use andprovision of information to credit reporting agencies, certain identity theftprotections and certain credit and other disclosures;

 

·                  The Fair Debt Collection Act, governing the manner inwhich consumer debts may be collected by collection agencies; and

 

·                  The Rules and regulations of the various federalagencies charged with the responsibility of implementing these federal laws.

 

The depositoperations of the bank also are subject to:

 

·                  the Right to Financial Privacy Act, whichimposes a duty to maintain confidentiality of consumer financial records andprescribes procedures for complying with administrative subpoenas of financialrecords; and

 

·                                          the Electronic Funds Transfer Act andRegulation E issued by the Federal Reserve Board to implement that Act, whichgoverns automatic deposits to and withdrawals from deposit accounts andcustomers’ rights and liabilities arising from the use of automated tellermachines and other electronic banking services.

 

***EnforcementPowers.***  The bank and its “institution-affiliatedparties,” including its management, employees, agents, independent contractors,and consultants such as attorneys and accountants and others who participate inthe conduct of the financial institution’s affairs, are subject to potentialcivil and criminal penalties for violations of law, regulations or writtenorders of a government agency. These practices can include the failure of aninstitution to timely file required reports or the filing of false ormisleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000a day for such violations.  Criminalpenalties for some financial institution crimes have been increased to 20years.  In addition, regulators areprovided with greater flexibility to commence enforcement actions againstinstitutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

***Anti-MoneyLaundering.***   Financial institutions must maintainanti-money laundering programs that include established internal policies,procedures, and controls; a designated compliance officer; an ongoing employeetraining program; and testing of the program by an independent audit function.The company and the bank are also prohibited from entering into specifiedfinancial transactions and account relationships and must meet enhancedstandards for due diligence and “knowing your customer” in their dealings withforeign financial institutions and foreign customers.  Financial institutions must take reasonablesteps to conduct enhanced scrutiny of account relationships to guard againstmoney laundering and to report any suspicious transactions, and recent lawsprovide law enforcement authorities with increased access to financialinformation maintained by banks. Anti-money laundering obligations have been substantially strengthenedas a result of the USA Patriot Act, enacted in 2001 and renewed in 2006.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.  The regulatory authorities have been activein imposing “cease and desist” orders and money penalty sanctions againstinstitutions found to be violating these obligations.

 

***USA PATRIOT Act. ***The USA PATRIOTAct became effective on October 26, 2001, amended, in part, the BankSecrecy Act, and provides, in part, for the facilitation of information sharingamong governmental entities and financial institutions for the purpose ofcombating terrorism and money laundering by enhancing anti-money laundering andfinancial transparency laws, as well as enhanced information collection toolsand enforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury 

 

 

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Department’s Financial Crimes EnforcementNetwork for transactions exceeding $10,000; and (iv) filing suspiciousactivities reports by brokers and dealers if they believe a customer may beviolating U.S. laws and regulations and requires enhanced due diligencerequirements for financial institutions that administer, maintain, or manageprivate bank accounts or correspondent accounts for non-U.S. persons.  Bankregulators routinely examine institutions for compliance with these obligationsand are required to consider compliance in connection with the regulatoryreview of applications.

 

Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”)can send our banking regulatory agencies lists of the names of personssuspected of involvement in terrorist activities.  The bank can be requested, to search itsrecords for any relationships or transactions with persons on those lists.  If the bank finds any relationships ortransactions, it must file a suspicious activity report and contact the FBI.

 

The Office of Foreign Assets Control (“OFAC”), which is a division ofthe U.S. Department of the Treasury, is responsible for helping to insure thatUnited States entities do not engage in transactions with “enemies” of theUnited States, as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our bankingregulatory agencies lists of names of persons and organizations suspected ofaiding, harboring or engaging in terrorist acts.  If the bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must freeze such account,file a suspicious activity report and notify the FBI.  The bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of anynotifications.  The bank actively checkshigh-risk OFAC areas such as new accounts, wire transfers and customerfiles.  The bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

***Privacy and Credit Reporting*****. **Financialinstitutions are required to disclose their policies for collecting andprotecting confidential information. Customers generally may prevent financial institutions from sharingnonpublic personal financial information with nonaffiliated third partiesexcept under narrow circumstances, such as the processing of transactionsrequested by the consumer or when the financial institution is jointlysponsoring a product or service with a nonaffiliated third party.  Additionally, financial institutionsgenerally may not disclose consumer account numbers to any nonaffiliated thirdparty for use in telemarketing, direct mail marketing or other marketing toconsumers.  It is the bank’s policy notto disclose any personal information unless required by law.

 

Like other lendinginstitutions, the bank utilizes credit bureau data in its underwritingactivities.  Use of such data isregulated under the Federal Credit Reporting Act on a uniform, nationwidebasis, including credit reporting, prescreening, sharing of information betweenaffiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)authorizes states to enact identity theft laws that are not inconsistent withthe conduct required by the provisions of the FACT Act.

 

***Payment of Dividends.*** A South Carolina state bank may not pay dividendsfrom its capital.  All dividends must bepaid out of undivided profits then on hand, after deducting expenses, includingreserves for losses and bad debts.  Thebank is authorized to pay cash dividends up to 100% of net income in anycalendar year without obtaining the prior approval of the South Carolina Boardof Financial Institutions, provided that the bank received a composite ratingof one or two at the last federal or state regulatory examination.  The bank must obtain approval from the SouthCarolina Board of Financial Institutions prior to the payment of any other cashdividends.  In addition, under the FDICImprovement Act, the bank may not pay a dividend if, after paying the dividend,the bank would be undercapitalized.

 

***Check 21.***  The Check Clearing for the 21stCentury Act gives “substitute checks,” such as a digital image of a check andcopies made from that image, the same legal standing as the original papercheck.  Some of the major provisionsinclude:

 

·                                          allowing check truncation without makingit mandatory;

 

·                                          demanding that every financialinstitution communicate to accountholders in writing a description of itssubstitute check processing program and their rights under the law;

 

 

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·                                          legalizing substitutions for andreplacements of paper checks without agreement from consumers;

 

·                                          retaining in place the previouslymandated electronic collection and return of checks between financialinstitutions only when individual agreements are in place;

 

·                                          requiring that when accountholdersrequest verification, financial institutions produce the original check (or acopy that accurately represents the original) and demonstrate that the accountdebit was accurate and valid; and

 

·                                          requiring the re-crediting of funds to anindividual’s account on the next business day after a consumer proves that thefinancial institution has erred.

 

***Effectof Governmental Monetary Policies*****.**  Our earnings are affected by domesticeconomic conditions and the monetary and fiscal policies of the United Statesgovernment and its agencies.  The FederalReserve bank’s monetary policies have had, and are likely to continue to have,an important impact on the operating results of commercial banks through itspower to implement national monetary policy in order, among other things, tocurb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effectsupon the levels of bank loans, investments and deposits through its open marketoperations in United States government securities and through its regulation ofthe discount rate on borrowings of member banks and the reserve requirementsagainst member bank deposits.  It is notpossible to predict the nature or impact of future changes in monetary andfiscal policies.

 

***ProposedLegislation and Regulatory Action*****.**  New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations, and competitive relationships of the nation’s financialinstitutions.  We cannot predict whetheror in what form any proposed regulation or statute will be adopted or theextent to which our business may be affected by any new regulation or statute.

 

**RiskFactors.**

 

*Our business, financial condition, and results of operationscould be harmed by any of the following risks, or other risks that have notbeen identified or which we**believe**areimmaterial or unlikely.  Shareholdersshould carefully consider the risks described below in conjunction with theother information in this Form 10-KSB and the information incorporated byreference in this Form 10-KSB, including our consolidated financialstatements and related notes.*

 

***Our recent operating results maynot be indicative of our future operating results.***

 

We may not be able tosustain our historical rates of growth of assets and earnings, and we may notbe able to grow our business at all. Although we have plans for continued expansion of our company, ourhistorical results of operation will not necessarily be indicative of ourfuture operations.  Various factors, suchas economic conditions, regulatory and legislative considerations, andcompetition, may also impede our ability to expand our market presence.  If we experience a significant decrease inour historical rate of growth, our results of operations and financialcondition may be adversely affected because a high percentage of our operatingcosts are fixed expenses.

 

***Ourdecisions regarding credit risk and reserves for loan losses may materially andadversely affect our business.***

 

Making loans and otherextensions of credit is an essential element of our business.  Although we seek to mitigate risks inherentin lending by adhering to specific underwriting practices, our loans and otherextensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

 

·                  the duration of the credit;

·                  credit risks of a particular customer;

 

 

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·                  changes in economic and industry conditions; and

·                  in the case of a collateralized loan, risks resulting fromuncertainties about the future value of the collateral.

 

We attempt to maintain anappropriate allowance for loan losses to provide for potential losses in ourloan portfolio.  We periodicallydetermine the amount of the allowance based on consideration of severalfactors, including:

 

·                  an ongoing review of the quality, mix,and size of our overall loan portfolio;

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

·                  regular reviews of loan delinquencies and loan portfolio quality; and

·                  the amount and quality of collateral, including guarantees, securingthe loans.

 

There is no precisemethod of predicting credit losses; therefore, we face the risk thatcharge-offs in future periods will exceed our allowance for loan losses andthat additional increases in the allowance for loan losses will berequired.  Additions to the allowance forloan losses would result in a decrease of our net income, and possibly ourcapital.

 

While we generallyunderwrite the loans in our portfolio in accordance with our own internal underwritingguidelines and regulatory supervisory guidelines, in certain circumstances wehave made loans, which exceed either our internal underwriting guidelines,supervisory guidelines, or both. The aggregate amount of all loans in excess ofthe supervisory loans-to-value limits should not exceed 100% of our bank’scapital.  As of December 31, 2007,approximately $18 million of our loans, or 57.6% of our bank’s capital, hadloan-to-value ratios that exceeded regulatory supervisory guidelines.  In addition, within the aggregate limit notedabove, total loans for all commercial, agricultural, multifamily or other non1-4 family residential properties should not exceed 30% of total capital.  At December 31, 2007, loanscollateralized by commercial, agricultural, multifamily or other non 1-4 familyresidential properties that exceeded the supervisory loan to value ratio were$11.5 million, or 37.0% of the bank’s capital. During the first quarter of 2008, a loan for $4,085,000 was paid-off,which will reduce this ratio to 23.8% and will be in compliance with the 30% ofcapital threshold.  The number of loansin our portfolio with loan-to-value ratios in excess of supervisory guidelines,our internal guidelines, or both could increase the risk of delinquencies and defaultsin our portfolio.

 

***Asignificant portion of our loan portfolio is secured by real estate, and eventsthat negatively impact the real estate market could hurt our business.***

 

A significant portion ofour loan portfolio is secured by real estate. As of December 31, 2007, approximately 74.1% of our loans had realestate as a primary or secondary component of collateral.  The real estate collateral in each caseprovides an alternate source of repayment in the event of default by theborrower and may deteriorate in value during the time the credit isextended.  The recent weakening of thereal estate market in the Myrtle Beach area could result in an increase in thenumber of borrowers who default on their loans and a reduction in the value ofthe collateral securing their loans, which in turn could have an adverse effecton our profitability and asset quality. If we are required to liquidate the collateral securing a loan tosatisfy the debt during a period of reduced real estate values, our earnings andcapital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires andfloods, which may cause uninsured damage and other loss of value to real estatethat secures these loans, may also negatively impact our financial condition.

 

***Alarge percentage of the loans in our portfolio currently include exceptions toour loan policies and supervisory guidelines.***

 

All of the loans that wemake are subject to written loan policies adopted by our board of directors andto supervisory guidelines imposed by our regulators.  Our loan policies are designed to reduce therisks associated with the loans that we make by requiring our loan officers totake certain steps that vary depending on the type and amount of the loan,prior to closing a loan.  These stepsinclude, among other things, making sure the proper liens are documented andperfected on property securing a loan, and 

 

 

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requiring proof ofadequate insurance coverage on property securing loans.  Loans that do not fully comply with our loanpolicies are known as “exceptions.”  Wecategorize exceptions as policy exceptions, financial statement exceptions andcollateral exceptions.  As a result ofthese exceptions, such loans may have a higher risk of loan loss than the otherloans in our portfolio that fully comply with our loan policies.  In addition, we may be subject to regulatoryaction by federal or state banking authorities if they believe the number ofexceptions in our loan portfolio represents an unsafe banking practice.  Although we have taken steps to enhance thequality of our loan portfolio, we may not be successful in reducing the numberof exceptions.

 

***Lackof seasoning of our loan portfolio may increase the risk of credit defaults inthe future.***

 

Due to the growth of ourbank into new markets over the past several years and our short operatinghistory in these communities, a large portion of the loans in our loanportfolio and of our lending relationships are of relatively recentorigin.  In general, loans do not beginto show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because a substantial portion of our loanportfolio is relatively new, the current level of delinquencies and defaultsmay not be representative of the level that will prevail when the portfoliobecomes more seasoned, which may be higher than current levels.  If delinquencies and defaults increase, wemay be required to increase our provision for loan losses, which wouldadversely affect our results of operations and financial condition.

 

***An economic downturn, especially one affecting Horry County in SouthCarolina and Columbus and Brunswick Counties in North Carolina, could reduceour customer base, our level of deposits, and demand for financial productssuch as loans.***

 

Our success significantlydepends upon the growth in population, income levels, deposits, and housingstarts in our markets, especially in Horry County, and to a lesser extent inColumbus and Brunswick Counties in North Carolina.  If the communities in which we operate do notgrow or if prevailing economic conditions locally or nationally areunfavorable, our business may not succeed. The real estate market, especially in Myrtle Beach and other coastalareas, has already weakened materially. An economic downturn would likely contribute to the deterioration of thequality of our loan portfolio and reduce our level of deposits, which in turnwould hurt our business.  If an economicdownturn occurs in the economy as a whole, or especially in Horry County,borrowers may be less likely to repay their loans as scheduled.  Moreover, the value of real estate or othercollateral that may secure our loans could be adversely affected.  Unlike many larger institutions, we are notable to spread the risks of unfavorable local economic conditions across alarge number of diversified economies. An economic downturn could, therefore, result in losses that materiallyand adversely affect our business.

 

***Changesin prevailing interest rates may reduce our profitability.***

 

Our results of operationsdepend in large part upon the level of our net interest income, which is thedifference between interest income from interest-earning assets, such as loansand mortgage-backed securities, and interest expense on interest-bearingliabilities, such as deposits and other borrowings.  Depending on the terms and maturities of ourassets and liabilities, a significant change in interest rates could have amaterial adverse effect on our profitability. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While we intend to managethe effects of changes in interest rates by adjusting the terms, maturities,and pricing of our assets and liabilities, our efforts may not be effective andour financial condition and results of operations could suffer.  During the second half of 2007, the FederalReserve began to reduce short-term interest rates, which may have an adverseeffect on our earnings.

 

***Weare dependent on key individuals and the loss of one or more of these keyindividuals could curtail our growth and adversely affect our prospects.***

 

**James R. Clarkson, our president and chief executiveofficer, has extensive and long-standing ties within our primary market areaand he has contributed significantly to our growth.  If we lose the services of Mr. Clarkson,he would be difficult to replace, and our business and development could bematerially**

** **

** **

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**and adversely affected.**

** **

**Our success also depends, in part, on our continued abilityto attract and retain experienced loan originators, as well as other managementpersonnel.  The loss of the services ofseveral of such key personnel could adversely affect our growth strategy andprospects to the extent we are unable to replace such personnel.**

** **

***We are subject to extensiveregulation that could limit or restrict our activities.***

 

Weoperate in a highly regulated industry and are subject to examination,supervision, and comprehensive regulation by various regulatory agencies.  Our compliance with these regulations iscostly and restricts certain of our activities, including payment of dividends,mergers and acquisitions, investments, loans and interest rates charged,interest rates paid on deposits, and locations of offices.  We are also subject to capitalizationguidelines established by our regulators, which require us to maintain adequatecapital to support our growth.

 

Thelaws and regulations applicable to the banking industry could change at anytime, and we cannot predict the effects of these changes on our business andprofitability.  Because governmentregulation greatly affects the business and financial results of all commercialbanks and bank holding companies, our cost of compliance could adversely affectour ability to operate profitably.

 

TheSarbanes-Oxley Act of 2002, and the related rules and regulationspromulgated by the Securities and Exchange Commission that are now applicableto us, have increased the scope, complexity, and cost of corporate governance,reporting, and disclosure practices.  Wehave experienced, and we expect to continue to experience, greater compliancecosts, including costs related to internal controls, as a result of theSarbanes-Oxley Act.

 

During 2007, managementhas evaluated and reported on the internal controls of the Company in which ourindependent registered public accounting firm will attest to our internalcontrols for fiscal year 2009.  We are performing the system and processevaluation and testing (and any necessary remediation) required to comply withthe management certification and auditor attestation requirements of Section 404of the Sarbanes-Oxley Act. While we currently anticipate that we will be ableto fully implement the requirements relating to internal controls and all otheraspects of Section 404 in a timely manner, as required by Section 404and the SEC’s related regulations, we could identify deficiencies that wemay not be able to remediate in time to meet this deadline. If we are not ableto implement or maintain the requirements of Section 404 in a timelymanner or with adequate compliance, we could be subject to scrutiny byregulatory authorities and the trading price of our stock coulddecline.  Moreover, effective internal controls are necessaryfor us to produce reliable financial reports and are important to helping preventfinancial fraud. If we cannot provide reliable financial reports or preventfraud, our business and operating results could be harmed, investors andregulators could lose confidence in our reported financial information, and thetrading price of our stock could drop significantly.   We currentlyanticipate that we will fully implement the requirements relating tointernal controls and all other aspects of Section 404 within the requiredtime frames.

 

***Our continuedpace of growth may require us to raise additional capital in the future, butthat capital may not be available when it is needed.***

 

We are required byregulatory authorities to maintain adequate levels of capital to support ouroperations.  To support our continuedgrowth, we may need to raise additional capital.  Our ability to raise additional capital, ifneeded, will depend in part on conditions in the capital markets at that time,which are outside our control.  Accordingly,we cannot assure you of our ability to raise additional capital, if needed, onterms acceptable to us.  If we cannotraise additional capital when needed, our ability to further expand ouroperations through internal growth and acquisitions could be materiallyimpaired.  In addition, if we decide toraise additional equity capital, your interest could be diluted.

 

 

20

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*** ***

***Weface strong competition for customers, which could prevent us from obtainingcustomers and may cause us to pay higher interest rates to attract customers.***

 

The banking business ishighly competitive, and we experience competition in our market from many otherfinancial institutions.  We compete withcommercial banks, credit unions, savings and loan associations, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds, and other mutual funds, as well asother super-regional, national, and international financial institutions thatoperate offices in our primary market areas and elsewhere.  We compete with these institutions both inattracting deposits and in making loans. In addition, we have to attract our client base from other existingfinancial institutions and from new residents. Many of our competitors are well-established, larger financialinstitutions.  These institutions offersome services, such as extensive and established branch networks, that we donot currently provide.  Also, a number ofcommunity banks are entering our primary service area.  They include de novo banks and branches ofestablished banking operations, both headquartered in-market as well asout-of-market.  As is the case with otherfinancial service providers, they are attracted to our primary service area’sdemographic trends and growing deposit base. There is a risk that we will not be able to compete successfully withother financial institutions in our market, and that we may have to pay higherinterest rates to attract deposits, resulting in reduced profitability.  In addition, competitors that are notdepository institutions are generally not subject to the extensive regulationsthat apply to us.

 

***We will face risks with respectto future expansion and acquisitions or mergers.***

 

We may seek to acquire other financial institutions orparts of those institutions.  We may alsoexpand into new markets or lines of business or offer new products orservices.  These activities would involvea number of risks, including:

 

·                  taking additional time and creatingexpense associated with identifying and evaluating potential acquisitions andmerger partners;

·                  using inaccurate estimates and judgmentsto evaluate credit, operations, management, and market risks with respect tothe target institution or assets;

·                  diluting our existing shareholders in anacquisition;

·                  taking additional time and creatingexpense associated with evaluating new markets for expansion, hiring experiencedlocal management, and opening new offices, as there may be a substantial timelag between these activities before we generate sufficient assets and depositsto support the costs of the expansion;

·                  taking a significant amount of timenegotiating a transaction or working on expansion plans, resulting inmanagement’s attention being diverted from the operation of our existingbusiness;

·                  taking time and creating expenseintegrating the operations and personnel of the combined businesses;

·                  creating an adverse short-term effect onour results of operations; and

·                  losing key employees and customers as aresult of an acquisition that is poorly received.

 

We have never acquiredanother institution before, so we lack experience in handling any of theserisks.  There is also a risk that anyexpansion effort will not be successful.

 

***Thesuccess of our growth strategy depends on our ability to identify and retainindividuals with experience and relationships in the markets in which wepresently operate as well as those into which we intend to expand.***

 

To expand our coastalfranchise successfully, we must identify and retain experienced key managementmembers with local expertise and relationships in these markets.  We expect that competition for qualifiedmanagement in the markets in which we now operate and into which we may expandwill be intense and that there will be a limited number of qualified personswith knowledge of and experience in the community banking industry in thesemarkets.  Even if we identify individualsthat we believe could assist us in establishing a presence in a new market, wemay be unable to recruit these individuals away from more established financialinstitutions.  In addition, the processof identifying and recruiting individuals with the combination of skills andattributes required to carry out our strategy requires both management andfinancial resources and is often lengthy. Our inability to identify, recruit, and retain

 

 

21

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talented personnel tomanage new offices effectively would limit our growth and could materiallyadversely affect our business, financial condition, and results of operations.

 

**Item 2.  Description of Property.**

** **

The main office of thebank is located at 5009 Broad Street, Loris, South Carolina, 29569.  Our operational support services are locatedin our Operations Center at 5201 Broad Street, Loris, South Carolina,29569.  Our executive offices arepresently located on the second floor of our branch office at 1701 North OakStreet, Myrtle Beach, South Carolina and will be relocated into our planned newCorporate Center to be constructed on a five-acre tract in the Loris CommerceCenter.  We expect to begin constructionof this Corporate Center in 2008, and upon its completion in 2009, we plan torelocate into it our executive officers and operational support services,including central deposit and central credit operations, computer operations,audit and compliance operations, human resources, marketing and creditadministration operations.  At that timewe expect to offer for sale our present facility at 5201 Broad Street, Loris,South Carolina, 29569.

 

The bank presently ownsthirteen lots on which we have branch banking facilities in addition to thepreviously mentioned lot which houses our present Operations Center and thefive-acre tract in the Loris Commerce Center. In addition, the bank has entered into one long-term lease agreement fora lot on which we have built a branch banking facility at 3210 Highway 701Bypass, Loris, South Carolina, 29569. The bank also entered into a two-year lease agreement in May, 2007 for abuilding in the Plaza at Gator Hole at 596 Highway 17 North, North MyrtleBeach, South Carolina, 29582.

 

The bank completedconstruction of a full-service branch bank in the first floor of the buildingat 1300 Second Avenue, Conway, South Carolina, 29526 and a drive-up bankingfacility on an adjacent lot and opened these facilities in November, 2007.  The bank owns the lot and building on SecondAvenue jointly with TLF Myrtle Beach Properties, LLC, the real estate ownershippartnership for the law firm of Thompson & Henry, P.A.  The law firm utilizes the third floor of thisbuilding for its offices.  The bank andTLF have leased the second floor of this building to two engineering firms.

 

**Item3.  Legal Proceedings.**

** **

In the ordinary course ofoperations, we may be a party to various legal proceedings from time totime.  We do not believe that there isany pending or threatened proceeding against us, which, if determinedadversely, would have a material effect on our business, results of operations,or financial condition.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

** **

No matters were submittedduring the fourth quarter of the fiscal year ended December 31, 2007 to avote of security holders through the solicitation of proxies or otherwise.

 

**PART II**

** **

**Item 5.  Marketfor Common Equity and Related Stockholder Matters.**

** **

The information requiredby Item 5 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2007.

 

**Item 6. Management’s Discussion and Analysis or Plan of Operation.**

** **

The information requiredby Item 6 is hereby incorporated by reference from our annual report to shareholdersfor the year ended December 31, 2007.

 

**Item7.  Financial Statements.**

** **

The information requiredby Item 7 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2007.

 

 

22

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**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

** **

None

 

**Item 8A.  Controls and Procedures.**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under the supervisionand with the participation of our management, including our chief executiveofficer and principal financial officer of the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our chiefexecutive officer and principal financial officer has concluded that ourcurrent disclosure controls and procedures are effective as of December 31,2007.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2007 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**Management’s Annual Report on Internal ControlOver Financial Reporting.**

 

Management of HCSBFinancial Corporation and its subsidiary Horry County State Bank is responsiblefor establishing and maintaining adequate internal control over financialreporting.  The Company’s internalcontrol system was designed to provide reasonable assurance to management andthe Board of Directors regarding the preparation and fair presentation ofpublished financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007. Based on this assessment management believes that as of December 31,2007, the Company’s internal control over financial reporting was effective.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report of this annual report.

 

**ITEM8B.  Other Information.**

 

N/A.

 

** **

23

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**PART III**

** **

**Item 9. ****Directors, ExecutiveOfficers, Promoters and Control Persons; Compliance with Section 16(a) ofthe Exchange Act**

 

*Code of Ethics*

 

We have adopted a Code ofEthics that applies to our board of directors, principal executive officer,principal financial officer, senior financial officers, and other executiveofficers in accordance with the Sarbanes-Oxley Corporate Responsibility Act of2002.  The Code of Ethics is availablewithout charge to shareholders upon request. Shareholders should contact our chief executive officer, James R.Clarkson, at our main office to obtain a copy.

 

Additional informationrequired by Item 9 is hereby incorporated by reference from our proxy statementfor our 2008 annual meeting of shareholders to be held on April 24, 2008.

 

**Item10.  Executive Compensation.**

 

Information required byItem 10 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on April 24, 2008.

 

**Item 11.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

Thefollowing table sets forth the equity compensation plan information at December 31,2007.

 

**EquityCompensation Plan Information**

 
| **Plan Category**                                           | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights(a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation   plans (c)  (excluding securities  reflected in column(a)) (1)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders     |       | 82,788                                                                                                 |       | $                                                                                           | 14.94      |                                                                                                                                                          | 341,572    |   |
| Equity compensation plans not approved by security  holders |       | 0                                                                                                      |       | $0.00                                                                                       |       | 0                                                                                                                                                             |       |
|                                                        |       |                                                                                                   |       |                                                                                        |       |                                                                                                                                                          |       |
| Total                                                       |       | 82,788                                                                                                 |       | $14.94                                                                                      |       | 341,572                                                                                                                                                       |       |
|                                                             |            |                                                                                                        |            |                                                                                             |            |                                                                                                                                                               |            |  |

----

(1)          The HCSB FinancialCorporation Omnibus Stock Ownership and Long Term Incentive Plan authorizes thegrant of options and the award of restricted stock from time to time during theterm of the plan.  The employees includedin the plan include the executive officers of the corporation as well ascertain non-executive officer employees. This column includes 156,681 options and 184,891 shares of restrictedstock.

 

Additional informationrequired by Item 11 is hereby incorporated by reference from our proxystatement for our 2008 annual meeting of shareholders to be held on April 24,2008.

 

**Item 12.  Certain Relationships and RelatedTransactions, and Director Independence.**

 

Inresponse to this Item 12, the information contained on page 8 of our ProxyStatement for the Annual Meeting of Shareholders to be held on April 24,2008 is incorporated herein by reference.

 

** **

24

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**Item13.  Exhibits**

** **
| 3.1    |   | Articles of  Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 1999).                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Bylaws (incorporated by  reference to Exhibit 3.2 to the Company’s Form 10-KSB for the  fiscal year ended December 31, 1999).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.1   |   | HCSB Financial  Corporation Omnibus Stock Ownership and Long Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 2003).*                                                          |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Form of Restricted  Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.3   |   | Form of Incentive  Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Form of Director  Deferred Compensation Agreement adopted in 1997 by and between the Board of  Directors and Horry County State Bank (incorporated by reference to  Exhibit 10.4 to the Company’s Form 10-KSB for the fiscal year ended  December 31, 2006).* |
|   |   |                                                                                                                                                                                                                                                                                   |
| 13     |   | The Company’s 2007  Annual Report                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                   |
| 21     |   | Subsidiaries of  Registrant                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 24     |   | Power of Attorney  (contained on signature pages herewith)                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Rule 13a-14(a) Certification  of the Chief Executive Officer.                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Rule 13a-14(a) Certification of the  Principal Financial Officer.                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 32     |   | Section 1350  Certifications.                                                                                                                                                                                                                                                     |

----

*                                         Managementcontract of compensatory plan or arrangement required to be filed as an Exhibit tothis Annual Report on Form 10-KSB.

 

**Item14.  Principal Accountant Fees and Services.**

 

Information required byItem 10 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on April 24, 2008.

 

 

25

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**SIGNATURES**

 

               In accordance with Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

**HCSBFINANCIAL CORPORATION**

 
| Date: March 21,  2008 | By:                            | /s/James R. Clarkson |
|----------------------------|--------------------------------|----------------------|
|                       | James R. Clarkson,  President  |
|                       | & Chief Executive  Officer |

 

KNOW ALL MEN BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints James R. Clarkson, his true and lawful attorney-in-fact and agent,with full power of substitution and resubstitution, for him and in his name,place and stead, in any and all capacities, to sign any and all amendments tothis Annual Report on Form 10-KSB, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto attorney-in-fact and agent full power andauthority to do and perform each and every act and thing requisite or necessaryto be done in and about the premises, as fully to all intents and purposes ashe might or could do in person, hereby ratifying and confirming all thatattorney-in-fact and agent, or his substitute or substitutes, may lawfully door cause to be done by virtue hereof.

 

                In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

 
| By:    | /s/Michael S. Addy                                 |   | Date: March 21,  2008 |
|--------|----------------------------------------------------|--------|----------------------------|
|   | Michael S. Addy,  Director                         |   |                       |
|   |                                               |   |                       |
| By:    | /s/Johnny C.  Allen                                |   | Date: March 21,  2008 |
|   | Johnny C. Allen,  Director                         |   |                       |
|   |                                               |   |                       |
| By:    | /s/Clay D.  Brittain, III                     |   | Date: March 21,  2008 |
|   | Clay D.  Brittain, III, Director              |   |                       |
|   |                                               |   |                       |
| By:    | /s/Rachel B.  Broadhurst                           |   | Date: March 21,  2008 |
|   | Rachel B. Broadhurst,  Director                    |   |                       |
|   |                                               |   |                       |
| By:    | /s/Russell R.  Burgess, Jr.                   |   | Date: March 21,  2008 |
|   | Russell R.  Burgess, Jr., Director            |   |                       |
|   |                                               |   |                       |
| By:    | /s/D. Singleton  Bailey                            |   | Date: March 21,  2008 |
|   | D. Singleton Bailey,  Director                     |   |                       |
|   |                                               |   |                       |
| By:    | /s/Franklin C.  Blanton                            |   | Date: March 21,  2008 |
|   | Franklin C. Blanton,  Director                     |   |                       |
|   |                                               |   |                       |
| By:    | /s/James R.  Clarkson                              |   | Date: March 21,  2008 |
|   | James R. Clarkson,  Director, President & |   |                       |
|   | Chief Executive Officer                            |   |                       |
|   |                                               |   |                       |
| By:    | /s/J. Lavelle  Coleman                             |   | Date: March 21,  2008 |
|   | J. Lavelle Coleman,  Director                      |   |                       |

 

 

 

26

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| By:    | /s/Larry G.  Floyd                      |   | Date: March 21,  2008 |
|--------|-----------------------------------------|--------|----------------------------|
|   | Larry G. Floyd,  Director               |   |                       |
|   |                                    |   |                       |
| By:    | /s/Boyd R.  Ford, Jr.              |   | Date: March 21,  2008 |
|   | Boyd R. Ford, Jr.,  Director       |   |                       |
|   |                                    |   |                       |
| By:    | /s/Tommie W.  Grainger                  |   | Date: March 21,  2008 |
|   | Tommie W. Grainger,  Director           |   |                       |
|   |                                    |   |                       |
| By:    | /s/Gwyn G.  McCutchen                   |   | Date: March 21,  2008 |
|   | Gwyn G. McCutchen,  Director            |   |                       |
|   |                                    |   |                       |
| By:    | /s/T. Freddie  Moore                    |   | Date: March 21,  2008 |
|   | T. Freddie Moore,  Director             |   |                       |
|   |                                    |   |                       |
| By:    | /s/Carroll D.  Padgett, Jr.        |   | Date: March 21,  2008 |
|   | Carroll D.  Padgett, Jr., Director |   |                       |

 

 

27

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**EXHIBITINDEX**

 
| 3.1    |   | Articles of  Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 1999).                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Bylaws (incorporated by  reference to Exhibit 3.2 to the Company’s Form 10-KSB for the  fiscal year ended December 31, 1999).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.1   |   | HCSB Financial  Corporation Omnibus Stock Ownership and Long Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 2003).*                                                          |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Form of Restricted  Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.3   |   | Form of Incentive  Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Form of Director  Deferred Compensation Agreement adopted in 1997 by and between the Board of  Directors and Horry County State Bank (incorporated by reference to  Exhibit 10.4 to the Company’s Form 10-KSB for the fiscal year ended  December 31, 2006).* |
|   |   |                                                                                                                                                                                                                                                                                   |
| 13     |   | The Company’s 2007  Annual Report                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                   |
| 21     |   | Subsidiaries of  Registrant                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 24     |   | Power of Attorney  (contained on signature pages herewith)                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Rule 13a-14(a) Certification  of the Chief Executive Officer.                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Rule 13a-14(a) Certification of the  Principal Financial Officer.                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                   |
| 32     |   | Section 1350  Certifications.                                                                                                                                                                                                                                                     |

 

 

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