# Exhibit 13

2003 Annual Report of
HCSB Financial Corporation

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HCSB FINANCIAL
CORPORATION

Loris, South Carolina

Annual Report

2003

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HCSB FINANCIAL CORPORATION 
Contents

|                                                                                      | 
|------------------------------------------------------------------------------------- | 
|
|Ten Year History                                                                      | 
|Message to Shareholders                                                               | 
|Selected Financial Data                                                               | 
|Description of Company's Business                                                     | 
|Market for Common Share and Dividends                                                 | 
|Management's Discussion and Analysis of Financial Condition and Results of Operations | 
|Independent Auditors' Report                                                          | 
|Consolidated Balance Sheets                                                           | 
|Consolidated Statements of Income                                                     | 
|Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income   | 
|Consolidated Statements of Cash Flows                                                 | 
|Notes to Consolidated Financial Statements                                            | 
|Board of Directors                                                                    | 
|Employees                                                                             | 

Headquarters

|5201 Broad Street           |  |  |  | Mailing Address:            | 
|--------------------------- |  |  |  | --------------------------- | 
|Loris, South Carolina 29569 |  |  |  | Post Office Box 218         | 
|(843) 756-6333              |  |  |  | Loris, South Carolina 29569 | 

Certain statements in this annual report contain  "forward-looking  statements" within the meaning of the Private Securities Litigation
Reform Act of 1995,  such as  statements  relating to the future plans and  expectations,  including  those  related to the  registered
offering of our common stock, and are thus prospective.  Such forward-looking  statements are subject to risks, uncertainties and other
factors  that could  cause  actual  results to differ  materially  from future  results  expressed  or implied by such  forward-looking
statements.  Please see our annual report filed on Form 10-KSB for further discussion of these risks.

HCSB Financial  Corporation  will furnish,  free of charge,  copies of the Annual Report and the Company's Report to the Securities and
Exchange  Commission (Form 10-KSB) upon written request to James R. Clarkson,  President and C.E.O., HCSB Financial  Corporation,  Post
Office Box 218, Loris, South Carolina 29569.

This  Annual  Report  serves as theANNUAL  FINANCIAL  DISCLOSURE  STATEMENTfurnished  pursuant  to Part 350 of the  Federal  Deposit
Insurance  Corporation's  Rules and  Regulations.THIS  STATEMENT  HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION.

1

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HCSB FINANCIAL CORPORATION Ten Year History(Omit 000's)

|Year | Assets | Deposits | Loans (net) | Capital | Earnings
|---- | ------ | -------- | ----------- | ------- | --------
|1994 |        |          | $           | 38,009  |         
|1995 |        |          |             | 45,913  |         
|1996 |        |          |             | 49,405  |         
|1997 |        |          |             | 72,156  |         
|1998 |        |          |             | 83,586  |         
|1999 |        |          |             | 114,326 |         
|2000 |        |          |             | 143,718 |         
|2001 |        |          |             | 148,651 |         
|2002 |        |          |             | 211,598 |         
|2003 |        |          |             | 269,714 |         

2

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MESSAGE TO SHAREHOLDERS

It is with great pleasure that I report to you on another very  progressive  year for HCSB Financial  Corporation  and its  subsidiary,
Horry  County  State Bank.  Not only were we fortunate  to sustain our growth in assets,  but more  importantly  our growth in earnings
outpaced our asset growth as we experienced our best year in this regard.

During  the year  2003,  total  assets of our  company  grew by 27.5% and closed the year at $269.7  million.  This  increase  was made
possible by a 27.9%  increase in our deposits to a year end level of $209.9  million which  enabled us to expand our loan  portfolio by
17.8% to $190.1 net of our Reserve for Loan Losses.

More  impressively,  our net income for the year 2003 increased by 35.1% over the prior year and surpassed  $1.5 million.  As a result,
shareholders' equity was boosted by 8.4% and concluded the year 2003 at $21.5 million.

These  accomplishments  seem quite  significant  to me in light of the status of our national  economy,  the general  level of interest
rates and the  resulting  conservative  nature of business and  consumers in their  borrowing  and spending  habits.  The interest rate
scenario alone restrained our earnings growth from being better.

Other  accomplishments  for our company  during the year 2003 included the February  opening of our new permanent  office in Windy Hill
Beach at the new entrance to Barefoot  Resort.  In November we also  relocated  our Tabor City office from its modular  facility into a
permanent  building on the same site on Hwy. 701 Bypass.  And, too, we  introduced  our on-line  banking  service last year as well. We
also began construction of a new 14,000 square foot facility at 1701 N. Oak Street in Myrtle Beach to house our Myrtle Beach branch.

And not only did our newest  offices in Windy Hill Beach and Myrtle  Beach  perform  very well in their first full year of  operations,
their  emergence  served to further  diversify  our  market  area.  Unlike  most  community  banks,  we truly have the good  fortune of
operating in very  differing  communities  and economies.  While we continue to be a strong  supporter of farmers in northern Horry and
southern  Columbus  counties,  we have been able through  expansion of our branch  system to grow  extremely  well into our area's best
retail market in Conway as well as into the Grand Strand area, which within itself provides significantly diverse markets.

Our success has  obviously  then been  bolstered by the markets in which we are  fortunate to operate.  These  business  places  simply
provide us with opportunities for success,  however;  it continues to be the dedicated efforts of our company's employees who are truly
primarily  responsible for the success that we experienced  last year and since our inception in 1988.  While we have always looked for
good branch  locations,  we have been extremely  blessed to be able to build our banking offices around  excellent  people who set HCSB
Financial  Corporation and Horry County State Bank apart from other financial companies.  As shareholders,  we indeed owe our employees
a big "Thank You!"

When we blend our staff of employees with the conscientious  oversight of our Board of Directors,  the vocal assistance that we receive
from  our  various  Advisory  Boards,  as well as the  support  of our  shareholders,  it is easy to see why we have  done so  well.  I
encourage our  shareholders  to not only  continue to support our company with your banking  business,  but further to recommend  Horry
County State Bank at your every opportunity in 2004 as we continue to work together to achieve our lofty goals.

Most respectfully,

/s/ James R. ClarksonJames R. ClarksonPresident & C.E.O.

3

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HCSB FINANCIAL CORPORATION
Selected Financial Data

The following  table sets forth certain  selected  financial data concerning the Company.  The selected  financial data has been derived
from the financial  statements.  This information should be read in conjunction with the financial statements of the Company,  including
the accompanying notes, included elsewhere herein.

|Year Ended December 31,                  | 2003 | 2002 | 2001 | 2000    | 1999
|---------------------------------------- | ---- | ---- | ---- | ------- | ----
|(Dollars in thousands, except per share) |      |      |      |         |     
|Financial Condition:                     |      |     
|Investment securities                    |      |      | $    | 28,115  |     
|Allowance for loan losses                |      |      |      | 1,774   |     
|Net loans                                |      |      |      | 190,055 |     
|Premises and equipment, net              |      |      |      | 9,377   |     
|Total assets                             |      |      |      | 269,714 |     
|Noninterest-bearing deposits             |      |      |      | 23,149  |     
|Interest-bearing deposits                |      |      |      | 186,782 |     
|Total deposits                           |      |      |      | 209,931 |     
|Advances from the Federal Home           |      |     
|Loan Bank                                |      |      |      | 36,690  |     
|Total liabilities                        |      |      |      | 248,205 |     
|Total shareholders' equity               |      |      |      | 21,509  |     
|Results of Operations:                   |      |     
|Interest income                          |      |      | $    | 14,237  |     
|Interest expense                         |      |      |      | 5,540   |     
|                                         |      |      |      |         |     
|Net interest income                      |      |      |      | 8,697   |     
|Provision for loan losses                |      |      |      | 857     |     
|                                         |      |      |      |         |     
|Net interest income after provision      |      |     
|for loan losses                          |      |      |      | 7,840   |     
|Other income                             |      |      |      | 2,002   |     
|Other expense                            |      |      |      | 7,436   |     
|                                         |      |      |      |         |     
|Income before income taxes               |      |      |      | 2,406   |     
|Income tax expense                       |      |      |      | 838     |     
|                                         |      |      |      |         |     
|Net income                               |      |      | $    | 1,568   |     
|                                         |      |      |      |         |     
|Per Share Data (1):                      |      |     
|Net income                               |      |      | $    | 0.94    |     
|Period end book value                    |      |      | $    | 12.93   |     

| | (1) | Adjusted for the effects of the two-for-one share split in the form of a 100%
                    share dividend declared in January 2000 and the 5% share dividends declared in
                    February 2003, February 2001 and January 1999. Adjustments have also been made
                    for the 7.5% stock dividend declared in January 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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HCSB FINANCIAL
CORPORATIONDescription of Companys Business

HCSB Financial Corporation (the
Company) was incorporated on June 10, 1999. The Companys only significant asset is
its wholly owned subsidiary, Horry County State Bank (the Bank). The Bank is a
state-chartered bank incorporated on December 18, 1987 and located at 5201 Broad Street,
Loris, South Carolina. The Companys primary market includes Horry and Marion
Counties in South Carolina and Columbus and Brunswick Counties in North Carolina. From its
ten branch locations, the Company offers a full range of deposit services, including
checking accounts, savings accounts, certificates of deposit, money market accounts, and
IRAs.

The Company is primarily engaged in
the business of attracting deposits from the general public and using these deposits
together with other funds to make agricultural, commercial, consumer, and real estate
loans. The Companys operating results depend to a substantial extent on the
difference between interest and fees earned on loans and investments and the
Companys interest expense, consisting principally of interest paid on deposits and
borrowings. Unlike most industrial companies, virtually all of the assets and liabilities
of financial institutions are monetary. As a result, interest rates have a greater effect
on the financial institutions performance. In addition to competing with other
traditional financial institutions, the Company also competes for savings dollars with
nontraditional financial intermediaries, such as mutual funds. This has resulted in a
highly competitive market area. The Company attempts to compete in this highly competitive
market by focusing on providing personal service and attention to its customers.

In June of 1997, the State Board of
Financial Institutions and the Federal Deposit Insurance Corporation (FDIC) approved the
Companys applications to open three branches in Little River, Tabor City, and Loris.
As a condition of approval, the Company was required to obtain an additional $2,000,000 in
capital. In response, the Company issued 65,805 shares for $1,542,000, net of expenses,
during 1997 and 42,027 shares for $967,000 during 1996. The Loris branch opened for
business on June 9, 1997, and the Tabor City and Little River branches opened on October 5
and 6, 1997, respectively.

The Companys application to
open a branch in Conway, South Carolina was approved by the State Board of Financial
Institutions and the FDIC in December of 1997. The branch opened for business on February
17, 1998.

The Companys application to
open a branch in the Homewood community north of Conway, South Carolina was approved by
the State Board of Financial Institutions and the FDIC in September of 1999. The branch
opened for business on August 10, 2000.

The Companys application to
open a branch in the Socastee section of Myrtle Beach, South Carolina was approved by the
State Board of Financial Institutions and the FDIC in December of 2000. The branch opened
for business on February 20, 2001.

In an effort to strengthen our
regulatory capital position to support future growth, HCSB Financial Corporation undertook
a secondary stock offering which ran from March to August of 2002. The Corporation issued
365,712 shares of common stock at a price per share of $22.00 which added over $8,000,000
to total capital.

The Companys application to open a branch in the Windy Hill section of North Myrtle Beach, South Carolina was approved
by the State Board of Financial Institutions and the FDIC in April of 2002. The branch opened for business on June 3, 2002.

The Companys application to open a branch in Myrtle Beach, South Carolina was approved by the State Board of Financial
Institutions and the FDIC in July of 2002. The branch opened for business on August 5, 2002.

As a result of this expansion of the Banks branch system, the Company has been able to substantially diversify its
marketplace from one of a predominantly agricultural flavor to one which blends residential developments of retirees and others, tourism, major employment areas, central
county government and the markets most active overall growth areas. In doing so, the Company has reduced considerably the seasonality in its loan portfolio as well as the
risks that are at times inherent with concentrations of loans in one particular segment of the economy.

5

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HCSB FINANCIAL
CORPORATION

Market for Common Share
and Dividends

As of December 31, 2003, there were
1,547,544 shares (1,663,610 shares as adjusted for 7.5% stock dividend declared in January
2004) of our common stock outstanding held by approximately 2,216 shareholders of record.
There is currently no established public trading market in our common stock, and trading
and quotations of our common stock have been limited and sporadic. Because there has not
been an established market for our common stock, we may not be aware of all prices at
which our common stock has been traded. We have not determined whether the trades of which
we are aware were the result of arms-length negotiations between the parties. Based
on information available to us from a limited number of sellers and purchasers of common
stock who have engaged in privately negotiated transactions of which we are aware, we
believe transactions in our common stock can be fairly summarized as follows for the
periods indicated:

|2003           | Low | High
|-------------- | --- | ----
|Fourth Quarter |     |     
|Third Quarter  |     |     
|Second Quarter |     |     
|First Quarter  |     |     

|2003           | Low | High
|-------------- | --- | ----
|               |     |     
|Fourth Quarter |     |     
|Third Quarter  |     |     
|Second Quarter |     |     
|First Quarter  |     |     

The above stock prices have not been
adjusted to reflect the 5% stock dividends paid in 2003 and 2002 and the 7.5% stock
dividend declared in January 2004.

No cash dividends have ever been
declared or paid by the Company. However, the Board of Directors approved a 10% stock
dividend for each of the five years ending December 31, 1996. The Company also declared a
5% stock dividend on January 14, 1999 for shareholders of record February 1, 1999 and a
two-for-one stock split in the form of a 100% stock dividend approved on January 27, 2000
to shareholders of record February 15, 2000. The Company also paid a 5% stock dividend to
shareholders on March 15, 2001, March 20, 2002, as well as March 21, 2003. The Board of
Directors has declared a 7.5% stock dividend payable March 12, 2004 for shareholders of
record February 13, 2004. Management does not expect the Company to pay cash dividends in
the foreseeable future. South Carolina and Federal banking regulations restrict the amount
of cash dividends that can be paid to HCSB Financial Corporation from the Bank.

6

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HCSB FINANCIAL
CORPORATIONManagements
Discussion and Analysis of Financial Condition and Results of OperationsINTRODUCTION

The following discussion describes
our results of operations for 2003 as compared to 2002 and also analyzes our financial
condition as of December 31, 2003 as compared to December 31, 2002. Like most community
banks, we derive most of our income from interest we receive on our loans and investments.
Our primary source of funds for making these loans and investments is our deposits, on
which we pay interest. Consequently, one of the key measures of our success is our amount
of net interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits and borrowed funds. In order to maximize our net interest
income, we must not only manage the volume of these balance sheet items, but also the
yields that we earn on our interest-earning assets and the rates that we pay on
interest-bearing liabilities.

We have included a number of tables
to assist in our description of these measures. For example, the Average
Balances table shows the average balance during 2003 and 2002 of each category of
our assets and liabilities, as well as the yield we earned or the rate we paid with
respect to each category. A review of this table shows that our loans typically provide
higher interest yields than do other types of interest earning assets, which is why we
intend to channel a substantial percentage of our earning assets into our loan portfolio.
Similarly, the Rate/Volume Analysis table helps demonstrate the impact of
changing interest rates and changing volume of assets and liabilities during the years
shown. We also track the sensitivity of our various categories of assets and liabilities
to changes in interest rates, and we have included an Interest Rate Sensitivity
Analysis table to help explain this. Finally, we have included a number of tables
that provide details about our investment securities, our loans, and our deposits and
other borrowings.

Of course, there are risks inherent
in all loans, so we maintain an allowance for loan losses to absorb probable losses on
existing loans that may become uncollectible. We establish and maintain this allowance by
charging a provision for loan losses against our operating earnings. In the Loan Portfolio
section we have included a detailed discussion of this process, as well as several tables
describing our allowance for loan losses and the allocation of this allowance among our
various categories of loans.

In addition to earning interest on
our loans and investments, we earn income through fees that we charge to our customers.
Likewise, we incur other operating expenses as well. We describe the various components of
this noninterest income, as well as our noninterest expense, in the Other Income and Other
Expense section.

The Company continued to grow in
2003, despite the general economic downturn and declining interest rate environment. Total
assets increased by $58,116,000, or 27.47%, and net loans increased by $28,674,000, or
17.77%. Much of this growth is attributable to the success of our two newest branch
offices in the Windy Hill community and in downtown Myrtle Beach.

The Companys growth began to
reap its rewards in 2003. Net income increased by 35.06%, from $1,161,000 in 2002 to
$1,568,000 in 2003, primarily as a result of increased income from loans and related fees.
The growth of the loan portfolio resulted in a loan to deposit ratio of 91.38% and a
$10,000,000 increase in borrowings with the Federal Home Loan Bank. The Company will need
to attract additional deposits, borrow more money, or a combination of the two to continue
expansion of the loan portfolio. A more detailed discussion of the factors contributing to
growth and challenges is presented below.

RESULTS OF OPERATIONS

The Company experienced an increase
of $1,612,000, or 14.02%, in interest income on loans and related fees. Because of the
declining interest rate environment, total interest expense increased only $329,000, or
6.31%, from $5,211,000 for the year ended December 31, 2002, despite the overall growth in
interest bearing deposits. Although net interest income increased significantly during
2003 when compared to 2002, the Company also experienced a significant increase in
noninterest expense during 2003. The primary factor contributing to the increase of
noninterest expense was salaries and employee benefits, which increased $573,000, or
15.3%, from $3,746,000 for the year ended December 31, 2002. This increase was related
primarily to the Windy Hill and Myrtle Beach offices being open for the full year of 2003
as compared to only a portion of 2002, as well as additional support staff necessary to
complement the Companys growth. Overall, the Company experienced net income for the
year ended December 31, 2003 of $1,568,000, compared to $1,161,000 for the year ended
December 31, 2002. This represents an increase in net income of $407,000, or 35.06%. An
interest rate swap transaction conducted by the Company during the third quarter of 2003
contributed to the minimal growth in interest expense for the year 2003.

7

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HCSB FINANCIAL
CORPORATIONManagement's Discussion and Analysis of FinancialCondition and Results of Operations

ASSETS, LIABILITIES,
AND SHAREHOLDERS EQUITY

During the twelve months ended
December 31, 2003 total assets increased $58,116,000, or 27.47%, when compared to December
31, 2002. The primary reason for the increase in total assets was an increase in net loans
of $28,674,000, or 17.77%, during 2003, from $161,381,000 at December 31, 2002. Total
deposits increased $45,770,000, or 27.88%, from the December 31, 2002, amount of
$164,161,000. Within the deposit area, interest-bearing deposits increased $39,335,000, or
26.7%, and noninterest-bearing deposits increased $6,435,000, or 38.5%, during 2003. The
increase in deposits was primarily due to the opening of two new branches. In order to
better match maturities of liabilities with the loan portfolio, the Company has chosen to
increase its borrowings with the Federal Home Loan Bank rather than to concentrate on
increasing deposits at this time. This also allows the Company to lock in low rates for a
longer period of time. As a result, borrowings with the Federal Home Loan Bank have
increased by $10,000,000, or 37.47%, from $26,690,000 at December 31, 2002.

DISTRIBUTION OF ASSETS,
LIABILITIES, AND SHAREHOLDERS EQUITY

The Company has sought to maintain a
conservative approach in determining the distribution of its assets and liabilities. The
following table presents the percentage relationships of significant components of the
Companys average balance sheets for the last three fiscal years.

Balance Sheet Categories
as a Percent of Average Total Assets

|                                           | 2003 | 2002 | 2001 |        |   | 
|------------------------------------------ | ---- | ---- | ---- | ------ | - | 
|Assets:                                    |      |      |      |        |   | 
|Interest earning assets:                   |      |     
|Federal funds sold                         |      |      |      | 8.58   | % | 
|Time deposits with other banks             |      |      |      | -      |   | 
|Investment securities                      |      |      |      | 11.14  |   | 
|Loans                                      |      |      |      | 72.37  |   | 
|                                           |      |      |      |        |   | 
|Total interest earning assets              |      |      |      | 92.09  |   | 
|Cash and due from banks                    |      |      |      | 3.72   |   | 
|Allowance for loan losses                  |      |      |      | (0.58  | ) | 
|Premises and equipment                     |      |      |      | 3.35   |   | 
|Other assets                               |      |      |      | 1.42   |   | 
|                                           |      |      |      |        |   | 
|Total assets                               |      |      |      | 100.00 | % | 
|                                           |      |      |      |        |   | 
|Liabilities and shareholders' equity:      |      |     
|Interest-bearing liabilities:              |      |     
|Interest-bearing deposits                  |      |      |      | 69.43  | % | 
|Federal funds purchased                    |      |      |      | -      |   | 
|Advances from the Federal Home Loan Bank   |      |      |      | 14.03  |   | 
|                                           |      |      |      |        |   | 
|Total interest-bearing liabilities         |      |      |      | 83.46  |   | 
|Noninterest-bearing deposits               |      |      |      | 8.38   |   | 
|Accrued interest and other liabilities     |      |      |      | 0.47   |   | 
|                                           |      |      |      |        |   | 
|Total liabilities                          |      |      |      | 92.31  |   | 
|Shareholders' equity                       |      |      |      | 7.69   |   | 
|Total liabilities and shareholders' equity |      |      |      | 100.00 | % | 
|                                           |      |      |      |        |   | 

8

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HCSB FINANCIAL CORPORATIONManagements
Discussion and Analysis of Financial Condition and Results of Operations

NET INTEREST INCOME

Earnings are dependent to a large
degree on net interest income. Net interest income represents the difference between gross
interest earned on earning assets, primarily loans and investment securities, and interest
paid on deposits and borrowed funds. Net interest income is affected by the interest rates
earned or paid and by volume changes in loans, investment securities, deposits, and
borrowed funds. The interest rate spread and the net yield on earning assets are two
significant elements in analyzing the Companys net interest income. The interest
rate spread is the difference between the yield on average earning assets and the rate on
average interest bearing liabilities. The net yield on earning assets is computed by
dividing net interest income by the average earning assets.

For the year ended December 31, 2003,
net interest income was $8,697,000, an increase of $1,542,000, or 21.55%, over net
interest income of $7,155,000 in 2002. Interest income from loans, including fees, was
$13,112,000, an increase of $1,612,000, or 14.02%, from 2002 to 2003 as demand for loans
in the Companys marketplace continued to grow. Interest expense for the year ended
December 31, 2003 was $5,540,000, compared to $5,211,000 for 2002. This represents a
increase of $329,000, or 6.31%, compared to the prior year. The interest rate spread and
net yield on earning assets were negatively impacted when compared to the previous year.
The net yield realized on earning assets was 3.74% for 2003, compared to 4.20% in 2002.
The interest rate spread was 3.50% and 3.87% in 2003 and 2002, respectively.

The following table sets forth, for
the periods indicated, the weighted-average yields earned, the weighted-average yields
paid, the interest rate spread, and the net yield on earning assets. The table also
indicates the average daily balance and the interest income or expense by specific
categories.

|                                                                      | 2003 | 2002 | 2001 |         |   |   |        |  | 
|--------------------------------------------------------------------- | ---- | ---- | ---- | ------- | - | - | ------ |  | 
|
|
|Year ended December 31,(Dollars in thousands)Assets:  Earning Assets: |      |      |      |         |   |   |        |  | 
|Securities, taxable                                                   |      |      | $    | 22,619  |   | $ | 662    |  | 
|Securities, nontaxable                                                |      |      |      | 3,644   |   |   | 163    |  | 
|Loans (1)                                                             |      |      |      | 182,415 |   |   | 13,112 |  | 
|Federal funds sold                                                    |      |      |      | 21,711  |   |   | 231    |  | 
|Time deposits with                                                    |      |     
|other banks                                                           |      |      |      | -       |   |   | -      |  | 
|Nonmarketable equity                                                  |      |     
|securities                                                            |      |      |      | 1,827   |   |   | 69     |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Total earning assets                                                  |      |      |      | 232,246 |   |   | 14,237 |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Cash and due from banks                                               |      |      |      | 9,289   |   |   |        |  | 
|Allowance for loan losses                                             |      |      |      | (1,463  | ) |   |        |  | 
|Premises and equipment                                                |      |      |      | 8,447   |   |   |        |  | 
|Other assets                                                          |      |      |      | 3,570   |   |   |        |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Total assets                                                          |      |      | $    | 252,089 |   |   |        |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Liabilities:                                                          |      |     
|Interest-Bearing Liabilities:                                         |      |     
|Interest-bearing                                                      |      |     
|deposits                                                              |      |      | $    | 175,013 |   |   | 4,045  |  | 
|Other borrowings                                                      |      |      |      | 35,348  |   |   | 1,495  |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Total interest-bearing                                                |      |     
|liabilities                                                           |      |      | $    | 210,361 |   |   | 5,540  |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Noninterest-bearing                                                   |      |     
|deposits                                                              |      |      |      | 21,123  |   |   |        |  | 
|Accrued interest and other                                            |      |     
|liabilities                                                           |      |      |      | 1,215   |   |   |        |  | 
|Shareholders' equity                                                  |      |      |      | 19,390  |   |   |        |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Total liabilities and                                                 |      |     
|shareholders' equity                                                  |      |      | $    | 252,089 |   |   |        |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Net interest income/spread                                            |      |      |      |         |   | $ | 8,697  |  | 
|                                                                      |      |      |      |         |   |   |        |  | 
|Net interest margin                                                   |      |      |      |         |   |   |        |  | 

(1)    The effects of loans in nonaccrual status and fees collected are not significant to the computations.

9

---

HCSB FINANCIAL
CORPORATION

Managements
Discussion and Analysis of FinancialCondition and Results of Operations

RATE/VOLUME ANALYSIS

Net interest income can also be
analyzed in terms of the impact of changing rates and changing volume. The following table
describes the extent to which changes in interest rates and changes in the volume of
earning assets and interest-bearing liabilities have affected the Companys interest
income and interest expense during the periods indicated. Information on changes in each
category attributable to (i) changes due to volume (change in volume multiplied by prior
period rate), (ii) changes due to rates (changes in rates multiplied by prior period
volume), and (iii) changes in rate and volume (change in rate multiplied by the change in
volume) is provided as follows:

|                                | 2003 compared to 2002 |  |   |       |  
|------------------------------- | --------------------- |  | - | ----- | -
|
|
|Interest income:                |                       |  |   |       |  
|Taxable securities              |                       |  | $ | 377   |  
|Nontaxable securities           |                       |  |   | 4     |  
|Loans                           |                       |  |   | 2,276 |  
|Federal funds sold              |                       |  |   | 138   |  
|Time deposits with other banks  |                       |  |   | (1    | )
|Nonmarketable equity securities |                       |  |   | 23    |  
|                                |                       |  |   |       |  
|Total interest income           |                       |  |   | 2,817 |  
|                                |                       |  |   |       |  
|Interest expense:               |                       | 
|Interest-bearing deposits       |                       |  |   | 1,165 |  
|Other borrowings                |                       |  |   | 508   |  
|                                |                       |  |   |       |  
|Total interest expense          |                       |  |   | 1,673 |  
|                                |                       |  |   |       |  
|Net interest income             |                       |  | $ | 1,144 |  
|                                |                       |  |   |       |  

|                                | 2002 compared to 2001 |  |   |       |  
|------------------------------- | --------------------- |  | - | ----- | -
|
|
|Interest income:                |                       |  |   |       |  
|Taxable securities              |                       |  | $ | (444) |  
|Nontaxable securities           |                       |  |   | 4     |  
|Loans                           |                       |  |   | 3,581 |  
|Federal funds sold              |                       |  |   | 24    |  
|Time deposits with other banks  |                       |  |   | (3    | )
|Nonmarketable equity securities |                       |  |   | 26    |  
|                                |                       |  |   |       |  
|Total interest income           |                       |  |   | 3,188 |  
|                                |                       |  |   |       |  
|Interest expense:               |                       | 
|Interest-bearing deposits       |                       |  |   | 541   |  
|Other borrowings                |                       |  |   | 514   |  
|                                |                       |  |   |       |  
|Total interest expense          |                       |  |   | 1,055 |  
|                                |                       |  |   |       |  
|Net interest income             |                       |  | $ | 2,133 |  
|                                |                       |  |   |       |  

10

---

HCSB FINANCIAL CORPORATION

Managements
Discussion and Analysis of Financial Condition and Results of Operations

RATE SENSITIVITY

Interest rates paid on deposits and
borrowed funds and interest rates earned on loans and investments have generally followed
the fluctuations in market rates in 2003 and 2002. However, fluctuations in market
interest rates do not necessarily have a significant impact on net interest income,
depending on the Companys interest rate sensitivity position. A rate-sensitive asset
or liability is one that can be repriced either up or down in interest rate within a
certain time interval. When a proper balance exists between rate-sensitive assets and
rate-sensitive liabilities, market interest rate fluctuations should not have a
significant impact on liquidity and earnings. The larger the imbalance, the greater the
interest rate risk assumed and the greater the positive or negative impact of interest
fluctuations on liquidity and earnings.

Interest rate sensitivity management
is concerned with the management of both the timing and the magnitude of repricing
characteristics of interest-earning assets and interest-bearing liabilities and is an
important part of asset/liability management. The objectives of interest rate sensitivity
management are to ensure the adequacy of net interest income and to control the risks to
net interest income associated with movements in interest rates. The following table,
Interest Rate Sensitivity Analysis, indicates that, on a cumulative basis,
after three through twelve months, rate-sensitive liabilities exceeded rate-sensitive
assets, resulting in a twelve month liability sensitive position. For a bank with a
liability-sensitive position, or negative gap, falling interest rates would generally be
expected to have a positive effect on net interest income, and rising interest rates would
generally be expected to have the opposite effect. The following table presents the
Companys rate sensitivity at each of the time intervals indicated as of December 31,
2003 and may not be indicative of the Companys rate-sensitivity position at other
points in time.

Interest Rate Sensitivity Analysis

|                                 |  | After One | After Three |         | Greater |  
|-------------------------------- |  | --------- | ----------- | ------- | ------- | -
|
|
|
|Assets                           |  |           |             |         |         |  
|Interest-earning assets          |  |          
|Federal fund sold                |  |           | $           | 22,832  |         | $
|Loans (1)                        |  |           |             | 82,223  |         |  
|Securities                       |  |           |             | -       |         |  
|                                 |  |           |             |         |         |  
|Total earning assets             |  |           |             | 105,055 |         |  
|                                 |  |           |             |         |         |  
|Liabilities                      |  |          
|Interest-bearing liabilities:    |  |          
|Interest-bearing deposits:       |  |          
|Demand deposits                  |  |           |             | 72,941  |         |  
|Savings deposits                 |  |           |             | 26,334  |         |  
|Time deposits                    |  |           |             | 3,555   |         |  
|                                 |  |           |             |         |         |  
|Total interest-bearing           |  |          
|deposits                         |  |           |             | 102,830 |         |  
|Federal Home Loan Bank advances  |  |           |             | -       |         |  
|                                 |  |           |             |         |         |  
|Total interest-bearing           |  |          
|liabilities                      |  |           |             | 102,830 |         |  
|                                 |  |           |             |         |         |  
|Period gap                       |  |           | $           | 2,225   |         | $
|                                 |  |           |             |         |         |  
|Cumulative gap                   |  |           | $           | 2,225   |         | $
|                                 |  |           |             |         |         |  
|Ratio of cumulative gap to total |  |          
|earning assets                   |  |           |             | 0.91%   |         |  

(1)    Excludes nonaccrual loans.

11

---

HCSB FINANCIAL CORPORATION

Managements
Discussion and Analysis of FinancialCondition and Results of Operations

PROVISION FOR LOAN
LOSSES

The provision for loan losses is
charged to earnings based upon managements evaluation of specific loans in its
portfolio and general economic conditions and trends in the marketplace. The 2003 and 2002
provisions for loan losses and their related effect of increasing the allowance for loan
losses are related to growth in the loan portfolio. Please refer to the section Loan
Portfolio for a discussion of managements evaluation of the adequacy of the
allowances for loan losses. In 2003 and 2002, the provisions for loan losses were $857,000
and $535,000, respectively.

OTHER INCOME

Other income was $2,002,000 for the
year ended December 31, 2003, an increase of $294,000, or 17.21%, when compared with the
year ended December 31, 2002. The increase is primarily a result of an increase of
$154,000, or 13.91%, in service charges on deposit accounts from $1,107,000 for 2002 to
$1,261,000 for 2003, which corresponds to an increase in average demand deposits and
savings accounts to $116,820,000 during 2003 as compared to $64,926,000 during 2002. The
Company also recognized gains of sales of securities in 2003 of $92,000, as compared to
$8,000 in 2002.

OTHER EXPENSES

All categories of other expenses
increased during 2003 due to continued growth of the Company. Salaries and employee
benefits increased $573,000 or 15.30%, due to an increase in staffing for the new branches
at Windy Hill and Myrtle Beach and to normal salary increases among existing employees.
Net occupancy and furniture and fixtures and equipment expenses also increased $118,000
due mainly to an increase in depreciation expense and the cost of equipment maintenance
attributable to the opening of the new branches. Other operating expenses were $1,928,000
for the year ended December 31, 2003, compared to $1,733,000 for the year ended December
31, 2002.

INCOME TAXES

The Companys income tax expense
for 2003 was $838,000, an increase of $221,000 from the 2002 expense of $617,000. The
increase in the expense results primarily from increased income before taxes. The
Companys effective tax rates for the years ended December 31, 2003 and 2002 were
34.83% and 34.70%, respectively.

LIQUIDITY

Liquidity is the ability to meet
current and future obligations through liquidation or maturity of existing assets or the
acquisition of additional liabilities. HCSB Financial Corporation manages both assets and
liabilities to achieve appropriate levels of liquidity. Cash and federal funds sold are
the Companys primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both deposits and loans. The investment
securities portfolio is the Companys principal source of secondary asset liquidity.
However, the availability of this source of funds is influenced by market conditions.
Individual and commercial deposits are the Companys primary source of funds for
credit activities. Although not historically used as principal sources of liquidity,
federal funds purchased from correspondent banks and advances from the Federal Home Loan
Bank are other options available to management.

As of December 31, 2003, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling
$9,000,000. These lines of credit are available on a one to fourteen day basis for general
corporate purposes. The lenders have reserved the right not to renew their respective
lines. The Company may also borrow an additional $17,229,000 from the Federal Home Loan
Bank based on a predetermined formula. Securities available-for-sale, which totaled
$28,115,000 at December 31, 2003, also serve as a ready source of liquidity. Management
believes that the Companys liquidity sources are adequate to meet its operating
needs. The level of liquidity is measured by the loans-to-total borrowed funds ratio,
which was at 77.78% and 85.32% at December 31, 2003 and 2002, respectively.

12

---

HCSB FINANCIAL CORPORATION

Managements
Discussion and Analysis of FinancialCondition and Results of Operations

IMPACT OF
OFF-BALANCE-SHEET INSTRUMENTS

The Company is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist of commitments to
extend credit and standby letters of credit. Commitments to extend credit are legally
binding agreements to lend to a customer at predetermined interest rates as long as there
is no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. A
commitment involves, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The Companys exposure to
credit loss in the event of nonperformance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Letters of credit are conditional
commitments issued to guarantee a customers performance to a third party and have
essentially the same credit risk as other lending facilities. Standby letters of credit
often expire without being used. Management believes that through various sources of
liquidity, the Company has the necessary resources to meet obligations arising from these
financial instruments.

The Company uses the same credit
underwriting procedures for commitments to extend credit and standby letters of credit as
for on-balance-sheet instruments. The credit worthiness of each borrower is evaluated and
the amount of collateral, if deemed necessary, is based on the credit evaluation.
Collateral held for commitments to extend credit and standby letters of credit varies but
may include accounts receivable, inventory, property, plant, equipment, and
income-producing commercial properties.

The Company is not involved in
off-balance sheet contractual relationships, other than those disclosed in this report,
that could result in liquidity needs or other commitments or that could significantly
impact earnings.

As of December 31, 2003, commitments
to extend credit totaled $23,323,000 and standby letters of credit totaled $835,000.

The following table sets forth the
length of time until maturity for unused commitments to extend credit and standby letters
of credit at December 31, 2003.

|                                            |  | After One | After Three |       |  |  
|------------------------------------------- |  | --------- | ----------- | ----- |  | -
|
|
|
|(Dollars in thousands)Unused commitments to |  |           |             |       |  |  
|extend credit                               |  |           | $           | 1,937 |  | $
|Standby letters of credit                   |  |           |             | 39    |  |  
|                                            |  |           |             |       |  |  
|Totals                                      |  |           | $           | 1,976 |  | $
|                                            |  |           |             |       |  |  

The Company entered into interest
swap agreements associated with Federal Home Loan Bank advances during the third quarter
of 2003. The interest rate swaps effectively converted the fixed interest rates on the
advances to a variable rate. The notional amount of advances involved in this transaction
totaled $14,600,000. The unrealized gain related to the interest rate swaps was $83,000 at
December 31, 2003. The Company believes that the hedging of such debt was very effective
as management hedged against further declines in interest rates as well as a continuation
of interest rates at their present low levels.

13

---

HCSB FINANCIAL CORPORATION

Managements
Discussion and Analysis of Financial Condition and Results of Operations

IMPACT OF INFLATION AND
CHANGING PRICES

The financial statements and related
financial data presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial institutions
performance than does the effect of inflation.

While the effect of inflation on a
bank is normally not as significant as its influence on those businesses that have large
investments in plant and inventories, it does have an effect. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in rates may
not be the same. While interest rates have traditionally moved with inflation, the effect
on income is diminished because both interest earned on assets and interest paid on
liabilities vary directly with each other unless the Company is in a high liability
sensitive position. Also, general increases in the price of goods and services will result
in increased operating expenses.

CAPITAL RESOURCES

The Company uses several indicators
of capital strength. The most commonly used measure is average common equity to average
assets, which was 7.69% in 2003 compared to 7.79% in 2002. This ratio changed very little
as income was realized proportionately to the increase in assets.

The Company and the Bank are subject
to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a material
effect on the Companys financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by
regulation to ensure capital adequacy require the Company and the Bank to maintain minimum
ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet
exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of
common shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of the
allowance for loan losses subject to certain limitations. Total capital for purposes of
computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Company and the Bank are also
required to maintain capital at a minimum level based on quarterly average assets, which
is known as the leverage ratio. Only the strongest banks are allowed to maintain capital
at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2%
above the minimum.

As of December 31, 2003, the most
recent notifications from the Banks primary regulator categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective action. There are no
conditions or events that management believes have changed the Banks category.

14

---

HCSB FINANCIAL CORPORATIONManagements
Discussion and Analysis of FinancialCondition and Results of Operations

CAPITAL
RESOURCES continued

The Company and the Bank are required
to maintain certain risk-based and leverage ratios. The Company and the Bank exceeded
these regulatory capital ratios at December 31, 2003, 2002, and 2001as set forth in the
following tables.

|December 31,                            | 2003 | 2002 | 2001
|--------------------------------------- | ---- | ---- | ----
|(Dollars in thousands)                  |      |      |     
|The Company                             |      |     
|Tier 1 capital                          |      |      | $   
|Tier 2 capital                          |      |      |     
|                                        |      |      |     
|Total qualifying capital                |      |      | $   
|                                        |      |      |     
|Risk-adjusted total assets              |      |     
|(including off-balance-sheet exposures) |      |      | $   
|                                        |      |      |     
|Tier 1 risk-based capital ratio         |      |      |     
|Total risk-based capital ratio          |      |      |     
|Tier 1 leverage ratio                   |      |      |     

|December 31,                            | 2003 | 2002 | 2001
|--------------------------------------- | ---- | ---- | ----
|(Dollars in thousands)                  |      |      |     
|The Bank                                |      |     
|Tier 1 capital                          |      |      | $   
|Tier 2 capital                          |      |      |     
|                                        |      |      |     
|Total qualifying capital                |      |      | $   
|                                        |      |      |     
|Risk-adjusted total assets              |      |     
|(including off-balance-sheet exposures) |      |      | $   
|                                        |      |      |     
|Tier 1 risk-based capital ratio         |      |      |     
|Total risk-based capital ratio          |      |      |     
|Tier 1 leverage ratio                   |      |      |     

The Company does not expect to pay
cash dividends to shareholders during 2004.

15

---

HCSB FINANCIAL
CORPORATION

Managements
Discussion and Analysis of Financial Condition and Results of Operations

INVESTMENT PORTFOLIO

Management classifies investment securities
as either held-to-maturity or available-for-sale based on their intentions and the
Companys ability to hold them until maturity. In determining such classifications,
securities that management has the positive intent and the Company has the ability to hold
until maturity are classified as held-to-maturity and carried at amortized cost. All other
securities are designated as available-for-sale and carried at estimated fair value with
unrealized gains and losses included in shareholders equity on an after-tax basis.
As of December 31, 2003 and 2002, all securities were classified as available-for-sale.

The following tables summarize the
carrying value of investment securities as of the indicated dates and the weighted-average
yields of those securities at December 31, 2003.

Investment Securities
Portfolio Composition

|December 31,                                            | 2003 | 2002 | 2001
|------------------------------------------------------- | ---- | ---- | ----
|(Dollars in thousands)                                  |      |      |     
|Securities of U.S. government agencies and corporations |      |      | $   
|Obligations of state and local governments              |      |      |     
|Commercial paper                                        |      |      |     
|Taxable obligations of state and local governments      |      |      |     
|Mortgage-backed securities                              |      |      |     
|Nonmarketable equity securities                         |      |      |     
|                                                        |      |      |     
|                                                        |      |      |     
|Total securities                                        |      |      | $   
|                                                        |      |      |     

Investment Securities Portfolio
Maturity Schedule

|                                                             | Available-for-Sale | 
|------------------------------------------------------------ | ------------------ | 
|
|
|Securities of U.S. Government agencies and corporations due: |                    | 
|After one year but within five years                         |                    | 
|Obligations of states and local governments due:             |                    | 
|Within one year                                              |                    | 
|After one year but within five years                         |                    | 
|After five years but within ten years                        |                    | 
|After ten years                                              |                    | 
|                                                             |                    | 
|                                                             |                    | 
|                                                             |                    | 
|Mortgage-backed securities                                   |                    | 
|Equities available-for-sale                                  |                    | 
|Corporate securities available-for-sale                      |                    | 
|                                                             |                    | 
|                                                             |                    | 
|                                                             |                    | 

(1)    
          For tax-exempt securities, the tax equivalent yield has been calculated using an
          incremental rate of 34%.

16

---

HCSB FINANCIAL CORPORATION

Managements
Discussion and Analysis of FinancialCondition and Results of Operations

LOAN PORTFOLIO

Management believes the loan portfolio is adequately diversified. There are no foreign loans, and agricultural loans as
of December 31, 2003 are limited. There are no significant concentrations of loans in any particular individuals or industry or group of related individuals or industries.

The Company has experienced continued growth of its loan portfolio throughout 2003 and 2002, resulting in increases of
$28,996,000 and $45,125,000, respectively. Management has concentrated on maintaining quality in the loan portfolio. The loan-to-deposit ratio is used to monitor a financial
institutions potential profitability and efficiency of asset distribution and utilization. Generally, a higher loan-to-deposit ratio is indicative of higher interest
income since loans yield a higher return than other interest-earning assets. The loan-to-deposit ratios were 91.38% and 99.19% at December 31, 2003 and 2002, respectively.
The loans-to-total borrowed funds ratio was 77.78% and 85.32% at December 31, 2003 and 2002, respectively. Management intends to deploy available funds to loans in order to
maximize earnings and achieve its targeted ratio of loans to deposits; however, there can be no assurance that management will be able to execute its strategy or that loan demand
will continue to support growth.

|                               |  |  |   |         | 
|------------------------------ |  |  | - | ------- | 
|
|(Dollars in thousands)         |  |  |   |         | 
|Real estate - construction and |  | 
|land development               |  |  | $ | 13,845  | 
|Real estate - mortgage and     |  | 
|commercial                     |  |  |   | 89,801  | 
|Agricultural                   |  |  |   | 6,891   | 
|Commercial and industrial      |  |  |   | 48,479  | 
|Consumer                       |  |  |   | 27,325  | 
|All other loans (including     |  | 
|overdrafts)                    |  |  |   | 5,488   | 
|                               |  |  |   |         | 
|Total gross loans              |  |  | $ | 191,829 | 
|                               |  |  |   |         | 

Credit Risk Management

Credit  risk  entails  both  general  risk,  which is inherent  in the  process of  lending,  and risk that is  specific to  individual
borrowers.  The management of credit risk involves the processes of loan  underwriting  and loan  administration.  The Company  manages
credit  risk  through a strategy  of making  loans  within the  Company's  primary  marketplace  and  within  the  Company's  limits of
expertise.  Although  management  seeks to  avoid  concentrations  of  credit  by loan  type or  industry  through  diversification,  a
substantial  portion of the borrowers'  ability to honor the terms of their loans is dependent on the business and economic  conditions
in Horry and Marion  Counties in South  Carolina  and Columbus  and  Brunswick  Counties in North  Carolina.  Additionally,  since real
estate is considered by the Company as the most desirable  nonmonetary  collateral,  a significant  portion of the Company's  loans are
collateralized  by real estate;  however,  the cash flow of the  borrower or the business  enterprise  is generally  considered  as the
primary  source of repayment.  Generally,  the value of real estate is not considered by the Company as the primary source of repayment
for  performing  loans.  The Company also seeks to limit total exposure to individual and  affiliated  borrowers.  The Company  manages
risk specific to individual  borrowers through the loan underwriting  process and through an ongoing analysis of the borrower's ability
to service the debt as well as the value of the pledged collateral.

The Company's loan officers and loan  administration  staff are charged with  monitoring  the Company's loan portfolio and  identifying
changes in the  economy or in a  borrower's  circumstances  which may affect the  ability to repay the debt or the value of the pledged
collateral.  In order to assess and monitor the degree of risk in the Company's  loan  portfolio,  several  credit risk  identification
and  monitoring  processes are utilized.  The Company  assesses  credit risk  initially  through the assignment of a risk grade to each
loan based upon an assessment of the borrower's financial capacity to service the debt and the presence and value of any collateral.

17

---

HCSB FINANCIAL CORPORATION
Management's Discussion and Analysis of FinancialCondition and Results of Operations
LOAN PORTFOLIO- continued

Credit grading is adjusted  during the life of the loan to reflect  economic and individual  changes having an impact on the borrowers'
abilities  to honor the terms of their  commitments.  Management  uses the risk  grades as a tool for  identifying  known and  inherent
losses in the loan portfolio and for determining the adequacy of the allowance for loan losses.

Maturities and Sensitivity of Loans to Changes in Interest Rates:
The  following  table  summarizes  the  loan  maturity  distribution,  by  type,  at  December  31,  2003  and  related  interest  rate
characteristics:

|                                       |  | Over One Year |   |       
|-------------------------------------- |  | ------------- | - | ------
|
|
|Real estate - construction             |  |               |   |       
|and land development                   |  |               | $ | 10,774
|Real estate - other                    |  |               |   | 23,332
|Agricultural                           |  |               |   | 3,120 
|Commercial and industrial              |  |               |   | 18,020
|Consumer                               |  |               |   | 7,082 
|All other loans (including overdrafts) |  |               |   | 4,925 
|                                       |  |               |   |       
|                                       |  |               | $ | 67,253
|                                       |  |               |   |       
|Loans maturing after one year with:    |  |              
|Fixed interest rates                   |  |               |   |       
|Floating interest rates                |  |               |   |       
|                                       |  |               |   |       
|                                       |  |               |   |       
|                                       |  |               |   |       
|                                       |  |              

Risk Elements

Loans are defined as impaired when it
is probable that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment of a loan is based on the present
value of the expected future cash flows discounted at the loans effective interest
rate or at the fair value of the collateral if the loan is collateral dependent.

Loans on the Companys problem
loan watch list are considered potentially impaired loans. These loans are evaluated in
determining whether all outstanding principal and interest are expected to be collected.
Loans are not considered impaired if a minimal delay occurs and all amounts due, including
accrued interest at the contractual interest rate for the period of delay, are expected to
be collected.

As of December 31, 2003 and 2002, the
Company had nonaccrual loans of approximately $1,641,000 and $915,000, respectively, and
loans that were past due 90 days or more and still accruing interest of approximately
$2,315,000 and $381,000, respectively, for which impairment had not been recognized. For
loans to be in excess of 90 days delinquent and still accruing interest, the borrowers
must be either remitting payments although not able to get current, liquidation on loans
deemed to be well secured must be near completion or the Company has reason to believe
that correction of the delinquency status by the borrower is near. The additional interest
income which would have been recognized into earnings if the Companys nonaccrual
loans had been current in accordance with their original terms is immaterial for all years
presented. The amount of both nonaccrual loans and loans past due 90 days or more were
considered in computing the allowance for loan losses as of December 31, 2003.

18

---

HCSB FINANCIAL
CORPORATIONManagements Discussion and Analysis of Financial Conditionand Results of OperationsLOAN PORTFOLIO-  continued

|                                |  |  |   |         |  
|------------------------------- |  |  | - | ------- | -
|
|Total loans outstanding at      |  |  |   |         |  
|end of period                   |  |  | $ | 192,304 |  
|                                |  |  |   |         |  
|Average loans outstanding       |  |  | $ | 182,445 |  
|                                |  |  |   |         |  
|Balance of allowance for loan   |  | 
|losses at beginning of period   |  |  | $ | 1,452   |  
|                                |  |  |   |         |  
|Loan losses:                    |  | 
|Real estate                     |  |  |   | 27      |  
|Commercial                      |  |  |   | 368     |  
|Consumer and credit card        |  |  |   | 175     |  
|                                |  |  |   |         |  
|Total loan losses               |  |  |   | 570     |  
|Recoveries of loans previous    |  | 
|charged-off                     |  |  |   | 35      |  
|                                |  |  |   |         |  
|Net charge-offs                 |  |  |   | 535     |  
|                                |  |  |   |         |  
|Provision charged to operations |  |  |   | 857     |  
|                                |  |  |   |         |  
|Balance of allowance for loan   |  | 
|losses at end of period         |  |  | $ | 1,774   |  
|                                |  |  |   |         |  
|Ratios:                         |  | 
|Net charge-offs to average      |  | 
|loans outstanding               |  |  |   | 0.30    | %
|Net charge-offs to loans at     |  | 
|end of year                     |  |  |   | 0.28    | %
|Allowance for loan losses to    |  | 
|average loans                   |  |  |   | 0.98    | %
|Allowance for loan losses to    |  | 
|loans at end of year            |  |  |   | 0.93    | %
|Net charge-offs to allowance    |  | 
|for loan losses                 |  |  |   | 30.16   | %
|Net charge-offs to provisions   |  | 
|for loan losses                 |  |  |   | 62.43   | %
|                                |  |  |   |         |  

Management has established an allowance for loan losses through a provision for loan losses charged to expense. The
allowance represents an amount which management believes will be adequate to absorb probable losses on existing loans that may become uncollectible. Management does not
allocate specific percentages of our allowance for loan losses to the various categories of loans but evaluates the adequacy on an overall portfolio basis utilizing several
factors. The primary factor considered is the credit risk grading system, which is applied to each loan. The amount of both nonaccrual loans and loans past due 90 days or more is
also considered. The historical loan loss experience, the size of our lending portfolio, and current and anticipated economic conditions is also considered in determining the
provision for loan losses. The amount of the allowance is adjusted periodically based on changing circumstances. Recognized losses are charged to the allowance for loan losses,
while subsequent recoveries are added to the allowance.

Management regularly monitors past due and classified loans. However, it should be noted that no assurances can be made that
future charges to the allowance for loan losses or provisions for loan losses may not be significant to a particular accounting period. At December 31, 2003 and 2002, management
considers the allowances for loan losses adequate based on their judgments, evaluations, and analysis of the loan portfolio.

19

---

HCSB FINANCIAL CORPORATION
Managements Discussion and Analysis of FinancialCondition and Results of OperationsLOAN
PORTFOLIO - continued

Managements judgment as to the
adequacy of the allowance is based upon a number of assumptions about future events which
it believes to be reasonable, but which may or may not prove to be accurate. Because of
the inherent uncertainty of assumptions made during the evaluation process, there can be
no assurance that loan losses in future periods will not exceed the allowance for loan
losses or that additional allocations will not be required. Our losses will undoubtedly
vary from our estimates, and there is a possibility that charge-offs in future periods
will exceed the allowance for loan losses as estimated at any point in time.

AVERAGE DAILY DEPOSITS

The following table summarizes the
Companys average daily deposits during the years ended December 31, 2003, 2002, and
2001. These totals include certificates of deposit $100,000 and over, which at December
31, 2003 totaled $41,792,000. Of this total, scheduled maturities within three months were
$1,945,000; within three to six months $19,655,000; within six to twelve months
$18,339,000; and $1,793,000 maturing thereafter.

|                             | 2003 | 2002 | 2001 |         |  | 
|---------------------------- | ---- | ---- | ---- | ------- |  | 
|
|
|
|Noninterest-bearing demand   |      |      | $    | 21,123  |  | 
|Interest-bearing transaction |      |     
|accounts                     |      |      |      | 69,954  |  | 
|Money market savings account |      |      |      | 21,350  |  | 
|Other savings accounts       |      |      |      | 4,893   |  | 
|Certificates of deposit      |      |      |      | 79,317  |  | 
|                             |      |      |      |         |  | 
|Total deposits               |      |      | $    | 196,137 |  | 
|                             |      |      |      |         |  | 

ADVANCES FROM THE
FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan
Bank averaged $35,348,000 in 2003 and totaled $36,690,000 at December 31, 2003. The
maximum amount of advances at any month-end was $36,690,000 in 2003 and the weighted
average interest rate was 4.23% in 2003. Advances from the Federal Home Loan Bank averaged
$22,254,000 in 2002 and totaled $26,690,000 at December 31, 2002. The maximum amount of
advances at any month-end was $26,690,000 in 2002 and the weighted average interest rate
was 5.19% in 2002.

Advances from the Federal Home Loan
Bank are collateralized by one-to-four family residential mortgage loans and the
Companys investment in Federal Home Loan Bank Stock. Although we expect to continue
using Federal Home Loan Bank advances as a secondary funding source, core deposits will
continue to be our primary funding source. Of the $36,690,000 advances from Federal Home
Loan Bank outstanding at December 31, 2003, $5,000,000 have scheduled principal reductions
in 2008 and the remaining balance matures after five years.

As discussed in the notes to the
financial statements, the Company has entered into interest rate swap agreements
associated with Federal Home Loan Bank advances maturing on March 1, 2010, May 24, 2010
and March 22, 2011. The interest rate swaps effectively converted the fixed interest rates
on the advances to a variable rate. The variable rate was 3.41% at December 31, 2003 and
is based on the three month LIBOR index.

20

---

HCSB FINANCIAL CORPORATIONManagements Discussion and Analysis of FinancialCondition and Results of Operations
RETURN ON EQUITY AND ASSETS

The following table shows the return
on average assets (net income divided by average total assets), return on average equity
(net income divided by average daily equity), and equity to assets ratio (average daily
equity divided by average total assets) for the period indicated. Since its inception, the
Company has not paid cash dividends.

|                         | 2003 | 2002 | 2001
|------------------------ | ---- | ---- | ----
|Return on average assets |      |      |     
|Return on average equity |      |      |     
|Equity to assets ratio   |      |      |     

ACCOUNTING AND
FINANCIAL REPORTING ISSUES

We have adopted various accounting
policies which govern the application of accounting principles generally accepted in the
United States in the preparation of our financial statements. Our significant accounting
policies are described in the footnotes to the consolidated financial statements at
December 31, 2003, as filed on our annual report on Form 10-KSB. Certain accounting
policies involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these accounting
policies to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which we believe to be reasonable under
the circumstances. Because of the nature of the judgments and assumptions we make, actual
results could differ from these judgments and estimates which could have a material impact
on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan
losses is a critical accounting policy that requires the most significant judgments and
estimates used in preparation of our consolidated financial statements. Refer to the
portion of this discussion that addresses our allowance for loan losses for a description
of our processes and methodology for determining our allowance for loan losses.

INDUSTRY DEVELOPMENTS

USA Patriot Act of 2001

In October 2001, the USA Patriot Act
of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington D.C. which occurred on September 11, 2001. The Patriot Act is intended to
strengthen U.S. law enforcements and the intelligence communities abilities to
work cohesively to combat terrorism on a variety of fronts. The potential impact of the
Patriot Act on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying client identification at
account opening, and rules to promote cooperation among financial institutions, regulators
and law enforcement entities in identifying parties that may be involved in terrorism or
money laundering. Compliance with the Patriot Act has added to the Companys
operating expenses due to the requirement for additional technology, paperwork and
recordkeeping that is required.

From time to time, various bills are
introduced in the United States Congress with respect to the regulation of financial
institutions. Certain of these proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. The Company cannot predict
whether any of these proposals will be adopted or, if adopted, how these proposals would
affect the Company.

21

---

HCSB FINANCIAL CORPORATION
Managements Discussion and Analysis of Financial Condition and Results of OperationsINDUSTRY
DEVELOPMENTS - continued

SARBANES-OXLEY

In the summer of 2002, the United
States Congress passed the Sarbanes-Oxley Act in response to corruption in some parts of
Corporate America. The Act was intended to require a change in corporate governance with
those companies that must report to the SEC. Not since the 1930s has a single piece
of reform legislation had such a dramatic impact on business practices in this country.
This voluminous legislation has caused a dramatic re-tooling in the way companies, both
large and small, have to disclose their financial information. It has also set in motion
many deadlines for implementing far-reaching changes in the reports that are filed with
the SEC. The bottom line is that like most legislation, this Act will cost small companies
a disproportionate amount of expense to implement the changes required as compared to a
large company. While the effectiveness of the legislation will not become apparent for
some time, rest assured that the cost of implementation would have an immediate impact on
the bottom line for the next several years.

CHANGE OF ACCOUNTANTS

Legislation and Securities Exchange
Commission rules adopted in 2002 have significantly increased, and will continue to
increase, the regulatory burdens on audit firms that audit the financial statements of
companies that are subject to the reporting requirements of the Securities Exchange Act of
1934. Consequently, many smaller audit firms are deciding to limit their audit practice to
companies that are not subject to the 1934 Act. Tourville, Simpson & Caskey, L.L.P.,
which served as the Companys principal independent accountant since the
Companys inception, is one such firm. Accordingly, effective January 2, 2003,
Tourville, Simpson & Caskey resigned as the Companys principal independent
public accountant. Elliott Davis, LLC was engaged by the Company on January 2, 2003 to
audit the Companys financial statements for the year ended December 31, 2002, and
was selected to audit the Companys financial statements for the year ending December
31, 2003.

Tourville, Simpson & Caskey,
L.L.P.s reports on the Companys financial statements for each of the years
ended December 31, 2001 and 2000 neither contained an adverse opinion or disclaimer of
opinion, nor was modified as to uncertainty, audit scope, or accounting principles. There
were no disagreements with Tourville, Simpson & Caskey, L.L.P. on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to Tourville, Simpson & Caskey, L.L.P.s
satisfaction, would have caused it to make reference to the subject matter of the
disagreement in its reports.

22

---

INDEPENDENT
AUDITORS REPORT

The Board of DirectorsHCSB
Financial CorporationLoris, South Carolina

We have audited the accompanying
consolidated balance sheets of HCSB Financial Corporation and its subsidiary as of
December 31, 2003 and 2002, and the related consolidated statements of income, changes in
shareholders equity and comprehensive income, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial
statements present fairly, in all material respects, the consolidated financial position
of HCSB Financial Corporation and its subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.

/s/ Elliott Davis, LLC
Elliott Davis, LLCColumbia, South CarolinaJanuary 22, 2004

23

---

HCSB FINANCIAL CORPORATIONConsolidated Balance Sheets

|                                                             | December 31, | 
|------------------------------------------------------------ | ------------ | 
|
|Assets:                                                      |              | 
|Cash and cash equivalents:                                   |              | 
|Cash and due from banks                                      |              | 
|Federal funds sold                                           |              | 
|                                                             |              | 
|Total cash and cash equivalents                              |              | 
|                                                             |              | 
|Investment securities:                                       |              | 
|Securities available-for-sale                                |              | 
|Nonmarketable equity securities                              |              | 
|                                                             |              | 
|Total investment securities                                  |              | 
|                                                             |              | 
|Loans held for sale                                          |              | 
|Loans receivable                                             |              | 
|Less allowance for loan losses                               |              | 
|                                                             |              | 
|Loans, net                                                   |              | 
|Premises, furniture, and equipment, net                      |              | 
|Accrued interest receivable                                  |              | 
|Other assets                                                 |              | 
|                                                             |              | 
|Total assets                                                 |              | 
|                                                             |              | 
|Liabilities:                                                 |              | 
|Deposits:                                                    |              | 
|Noninterest-bearing transaction accounts                     |              | 
|Interest-bearing transaction accounts                        |              | 
|Money market savings accounts                                |              | 
|Other savings accounts                                       |              | 
|Certificates of deposit $100 and over                        |              | 
|Other time deposits                                          |              | 
|                                                             |              | 
|Total deposits                                               |              | 
|Advances from the Federal Home Loan Bank                     |              | 
|Accrued interest payable                                     |              | 
|Other liabilities                                            |              | 
|                                                             |              | 
|Total liabilities                                            |              | 
|                                                             |              | 
|Commitments and Contingencies (Notes 4, 10 and 11)           |              | 
|Shareholders' Equity:                                        |              | 
|Common stock, $0.01 par value, 10,000,000 shares authorized; |              | 
|1,663,610 and 1,469,767 shares issued and outstanding        |              | 
|in 2003 and 2002, respectively                               |              | 
|Capital surplus                                              |              | 
|Retained earnings                                            |              | 
|Accumulated other comprehensive income                       |              | 
|Treasury stock, at cost                                      |              | 
|                                                             |              | 
|Total shareholders' equity                                   |              | 
|                                                             |              | 
|Total liabilities and shareholders' equity                   |              | 
|                                                             |              | 

The accompanying notes are an integral part of the consolidated financial statements.

24

---

HCSB FINANCIAL CORPORATION
Consolidated Statements of Income

|                                                    | Years ended December 31, | 
|--------------------------------------------------- | ------------------------ | 
|
|Interest income:                                    |                          | 
|Loans, including fees                               |                          | 
|Investment securities:                              |                          | 
|Taxable                                             |                          | 
|Tax-exempt                                          |                          | 
|Nonmarketable equity securities                     |                          | 
|Federal funds sold                                  |                          | 
|Time deposits with other banks                      |                          | 
|                                                    |                          | 
|Total                                               |                          | 
|                                                    |                          | 
|Interest expense:                                   |                          | 
|Deposits                                            |                          | 
|Advances from the Federal Home Loan Bank            |                          | 
|                                                    |                          | 
|Total                                               |                          | 
|                                                    |                          | 
|Net interest income                                 |                          | 
|Provision for loan losses                           |                          | 
|                                                    |                          | 
|Net interest income after provision for loan losses |                          | 
|                                                    |                          | 
|Noninterest income:                                 |                          | 
|Service charges on deposit accounts                 |                          | 
|Credit life insurance commissions                   |                          | 
|Gain on sale of residential mortgage loans          |                          | 
|Brokerage commissions                               |                          | 
|Other fees and commissions                          |                          | 
|Gain on sale of securities available-for-sale       |                          | 
|Other                                               |                          | 
|                                                    |                          | 
|Total                                               |                          | 
|                                                    |                          | 
|Noninterest expenses:                               |                          | 
|Salaries and employee benefits                      |                          | 
|Net occupancy                                       |                          | 
|Furniture and equipment                             |                          | 
|Other operating                                     |                          | 
|                                                    |                          | 
|Total                                               |                          | 
|                                                    |                          | 
|Income before income taxes                          |                          | 
|Income tax provision                                |                          | 
|                                                    |                          | 
|Net income                                          |                          | 
|                                                    |                          | 
|Net income per common share                         |                          | 
|                                                    |                          | 
|Average common shares outstanding                   |                          | 
|                                                    |                          | 

The accompanying notes are an integral part of the consolidated financial statements.

25

---

HCSB FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
Years ended December 31, 2003 and 2002

|                                 |  |  |  |           | Accumulated |   |   
|-------------------------------- |  |  |  | --------- | ----------- | - | --
|
|
|
|
|Balance, December 31, 2001       |  |  |  | 1,052,175 |             | $ | 11
|                                 |  |  |  |           |             |   |   
|Net income                       |  |  |  |           |             |   |   
|Other comprehensive income,      |  | 
|net of tax expense of $55        |  |  |  |           |             |   |   
|                                 |  |  |  |           |             |   |   
|Comprehensive income             |  |  |  |           |             |   |   
|Payment for fractional shares    |  |  |  |           |             |   |   
|Issuance of 5% stock dividend    |  |  |  | 51,880    |             |   | 1 
|Issuance of stock                |  |  |  | 365,712   |             |   | 3 
|Stock issuance costs             |  |  |  |           |             |   |   
|Purchase of treasury stock       |  | 
|(277 shares)                     |  |  |  |           |             |   |   
|                                 |  |  |  |           |             |   |   
|Balance, December 31, 2002       |  |  |  | 1,469,767 |             |   | 15
|                                 |  |  |  |           |             |   |   
|Net Income                       |  |  |  |           |             |   |   
|Other comprehensive income,      |  | 
|(loss) net of tax benefit of $39 |  |  |  |           |             |   |   
|                                 |  |  |  |           |             |   |   
|Comprehensive income             |  |  |  |           |             |   |   
|Payment for fractional shares    |  |  |  |           |             |   |   
|Issuance of stock                |  |  |  | 4,829     |             |   |   
|Issuance of 5% stock dividend    |  |  |  | 72,948    |             |   |   
|Sale of treasury stock           |  |  |  |           |             |   |   
|Reimbursement of stock           |  | 
|issuance costs                   |  |  |  |           |             |   |   
|Declaration of 7.5% stock        |  | 
|dividend on January 18, 2004     |  |  |  | 116,066   |             |   | 1 
|                                 |  |  |  |           |             |   |   
|Balance, December 31, 2003       |  |  |  | 1,663,610 |             | $ | 16
|                                 |  |  |  |           |             |   |   

The accompanying notes are an integral part of the consolidated financial statements.

26

---

HCSB FINANCIAL CORPORATIONConsolidated Statements
of Cash Flows

|                                                         | Years ended December 31, | 
|-------------------------------------------------------- | ------------------------ | 
|
|Cash flows from operating activities:                    |                          | 
|Net income                                               |                          | 
|Adjustments to reconcile net income to                   |                          | 
|net cash provided by operating activities:               |                          | 
|Provision for loan losses                                |                          | 
|Deferred income tax provision (benefit)                  |                          | 
|Depreciation and amortization expense                    |                          | 
|Premium amortization less discount accretion             |                          | 
|Amortization of net deferred loan costs                  |                          | 
|Net (gain) loss on sale of securities available-for-sale |                          | 
|Loss (gain) on sale of other real estate owned           |                          | 
|Loss (gain) on disposal of premises and equipment        |                          | 
|Increase in interest receivable                          |                          | 
|Increase in interest payable                             |                          | 
|Increase in other assets                                 |                          | 
|Increase in other liabilities                            |                          | 
|                                                         |                          | 
|Net cash provided by operating activities                |                          | 
|                                                         |                          | 
|Cash flows from investing activities:                    |                          | 
|Purchases of securities available-for-sale               |                          | 
|Maturities of securities available-for-sale              |                          | 
|Proceeds from sales of securities available-for-sale     |                          | 
|Net increase in loans to customers                       |                          | 
|Purchase of premises, furniture and equipment            |                          | 
|Proceeds from sale of premises, furniture and equipment  |                          | 
|Proceeds from sale of other real estate owned            |                          | 
|Decrease in time deposits with other banks               |                          | 
|Purchase of nonmarketable equity securities              |                          | 
|                                                         |                          | 
|Net cash used by investing activities                    |                          | 
|                                                         |                          | 
|Cash flows from financing activities:                    |                          | 
|Net increase in demand deposits, interest-bearing        |                          | 
|transaction accounts and savings accounts                |                          | 
|Net increase (decrease) in time deposits                 |                          | 
|Net decrease in federal funds purchased                  |                          | 
|Advances from the Federal Home Loan Bank                 |                          | 
|Proceeds from stock issuance                             |                          | 
|Purchase (sale) of treasury stock                        |                          | 
|Stock issuance (reimbursement) of costs                  |                          | 
|Cash paid for fractional shares                          |                          | 
|                                                         |                          | 
|Net cash provided by financing activities                |                          | 
|                                                         |                          | 
|Net increase in cash and cash equivalents                |                          | 
|Cash and cash equivalents, beginning of year             |                          | 
|                                                         |                          | 
|Cash and cash equivalents, end of year                   |                          | 
|                                                         |                          | 

The accompanying notes are an integral part of the consolidated financial statements.

27

---

HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTINGPOLICIES

Basis of Presentation and
Consolidation-  The accompanying consolidated financial statements include the
accounts of HCSB Financial Corporation (the Company) and its wholly owned subsidiary,
Horry County State Bank (the Bank). The Company was incorporated on June 10, 1999. The
Bank was incorporated on December 18, 1987, and opened for operations on January 4, 1988.
The principal business activity of the Company is to provide commercial banking services
in Horry and Marion Counties, South Carolina, and in Columbus and Brunswick Counties,
North Carolina. The Bank is a state-chartered bank, and its deposits are insured by the
Federal Deposit Insurance Corporation.

Managements Estimates - In
preparing the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the
balance sheet date and income and expenses for the period. Actual results could differ
significantly from those estimates.

Material estimates that are
particularly susceptible to significant change relate to the determination of the
allowance for loan losses, including valuation allowances for impaired loans, and the
carrying amount of real estate acquired in connection with foreclosures or in satisfaction
of loans. Management must also make estimates in determining the estimated useful lives
and methods for depreciating premises and equipment.

While management uses available
information to recognize losses on loans and foreclosed real estate, future additions to
the allowance may be necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, periodically review
the Companys allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination. Because of
these factors, it is reasonably possible that the allowances for losses on loans and
foreclosed real estate may change materially in the near term.

Significant Group Concentrations of
Credit Risk - Most of the Companys activities are with customers located within
Horry and Marion Counties in South Carolina and Columbus and Brunswick Counties in North
Carolina. The types of securities in which the Company invests are discussed in Note 3.
The types of lending that the Company engages in are discussed in Note 4. The Company does
not have any significant concentrations to any one industry or customer.

Investment Securities-
Investment securities available-for-sale by the Company are carried at amortized cost and
adjusted to their estimated fair value. The unrealized gain or loss is recorded in
shareholders equity net of the deferred tax effects. Management does not actively
trade securities classified as available-for-sale, but intends to hold these securities
for an indefinite period of time and may sell them prior to maturity to achieve certain
objectives. Reductions in fair value considered by management to be other than temporary
are reported as a realized loss and a reduction in the cost basis in the security. The
adjusted cost basis of securities available-for-sale is determined by specific
identification and is used in computing the realized gain or loss from a sales
transaction.

Nonmarketable Equity Securities - Nonmarketable equity securities include the Companys investments in the stock
of the Federal Home Loan Bank and Community Financial Services. The stocks are carried at
cost because they have no quoted market value and no ready market exists. Investment in
Federal Home Loan Bank stock is a condition of borrowing from the Federal Home Loan Bank,
and the stock is pledged to collateralize the borrowings. Dividends received on Federal
Home Loan Bank stock and Community Financial Services stock are included as a separate
component in interest income.

At December 31, 2003 and 2002, the
investment in Federal Home Loan Bank stock was $1,834,000 and $1,334,000, respectively,
and the investment in Community Financial Services stock was $60,000 in both years. During
2003, the Company purchased stock in another community bank totaling $25,000.

28

---

HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

NOTE 1-
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Loans held for Sale - Loans held
for sale consist of residential mortgage loans the Company originates for sale to
secondary market investors. They are carried at the lower of aggregate cost or market
value. Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Fees collected in conjunction with origination activities are deferred
as part of the cost basis of the loan and recognized when the loan is sold. Gains or
losses on sales are recognized when the loans are sold and are determined as the
difference between the sales price and the carrying value of the loans.

The Company issues rate lock
commitments to borrowers based on prices quoted by secondary market investors. When rates
are locked with borrowers, a sales commitment is immediately entered (on a best efforts
basis) at a specified price with a secondary market investor. Accordingly, any potential
liabilities associated with rate lock commitments are offset by sales commitments to
investors.

Loans Receivable - Loans
receivable are stated at their unpaid principal balance. Interest income on loans is
computed based upon the unpaid principal balance. Interest income is recorded in the
period earned.

The accrual of interest income is
generally discontinued when a loan becomes contractually 90 days past due as to principal
or interest. Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral exceeds the principal balance and accrued interest.

Loan origination and commitment fees
and certain direct loan origination costs (principally salaries and employee benefits) are
deferred and amortized to income over the contractual life of the related loans or
commitments, adjusted for prepayments, using the straight-line method.

Under Statement of Financial
Accounting Standards (SFAS) No. 114, (Accounting by Creditors for the Impairment of a Loan),
and SFAS No. 118, (Accounting by Creditors for Impairment of a Loan  Income
Recognition and Disclosures), loans are defined as impaired when it is probable that a
creditor will be unable to collect all amounts due according to the contractual terms of
the loan agreement. All loans are subject to this criteria except for smaller
balance homogeneous loans that are collectively evaluated for impairment and loans
measured at fair value or at the lower of cost or fair value. The Company
considers its consumer installment portfolio, credit card loans, and home equity lines as
such exceptions. Therefore, the real estate and commercial loan portfolios are primarily
affected by these statements.

Impairment of a loan is measured
based on the present value of expected future cash flows discounted at the loans
effective interest rate or the fair value of the collateral if the loan is collateral
dependent. When management determines that a loan is impaired, the difference between the
Companys investment in the related loan and the present value of the expected future
cash flows, or the fair value of the collateral, is charged to bad debt expense with a
corresponding entry to the allowance for loan losses. The accrual of interest is
discontinued on an impaired loan when management determines the borrower may be unable to
meet payments as they become due. There were no impaired loans at December 31, 2003 or
2002 that were material to the financial statements.

Allowance for Loan Losses - An
allowance for loan losses is maintained at a level deemed appropriate by management to
provide adequately for known and inherent risks in the loan portfolio. The allowance is
based upon a continuing review of past loan loss experience, current economic conditions
which may affect the borrowers ability to pay, and the underlying collateral value
of the loans. Loans deemed uncollectible are charged off and deducted from the allowance.
The provision for loan losses, including provisions for loan impairment, and recoveries on
loans previously charged off, are added to the allowance.

Premises, Furniture and Equipment
 Premises, furniture and equipment are stated at cost less accumulated depreciation.
The provision for depreciation is computed by the straight-line method. Rates of
depreciation are generally based on the following estimated useful lives: buildings 
40 years; furniture and equipment  3 to 25 years. The cost of assets sold or
otherwise disposed of and the related accumulated depreciation is eliminated from the
accounts, and the resulting gains or losses are reflected in the income statement.

Maintenance and repairs are charged
to current expense as incurred, and the costs of major renewals and improvements are
capitalized.

29

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HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES continued

Other Real Estate Owned - Other
real estate owned includes real estate acquired through foreclosure. Other real estate
owned is initially recorded at the lower of cost (principal balance of the former loan
plus costs of improvements) or fair value, less estimated costs to sell.

Any write-downs at the dates of
acquisition are charged to the allowance for loan losses. Expenses to maintain such
assets, subsequent write-downs, and gains and losses on disposal are included in other
expenses.

Derivative Financial Instruments
 The Company has entered into certain interest rate swap agreements which are
derivative financial instruments (derivatives). The derivatives are recognized
on the balance sheet at their fair value. On the date the derivative contract is entered
into, the Company designates the derivative as a hedge of fair value of a recognized asset
or liability (fair value hedge). Changes in the fair value of a derivative
that is highly effective as  and that is designated and qualifies  as a fair
value hedge, along with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk, are recorded in current-period earnings.

The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk-management
objective and strategy for undertaking hedged transactions. This process includes linking
all derivatives that are designated as fair value hedges to specific assets and
liabilities on the balance sheet. The derivatives in which the Company is a counterparty
qualify for the shortcut method of assessing the ongoing effectiveness of its
hedging relationship with the underlying hedged item.

The Company discontinues hedge
accounting prospectively when (1) the derivative expires or is sold, terminated, or
exercised; (2) management determines that designation of the derivative as a hedge
instrument is no longer appropriate; or (3) the underlying hedged item is liquidated. When
hedge accounting is discontinued, the derivative is carried at its fair value on the
balance sheet, with changes in its fair value recognized in current-period earnings.

Income and Expense Recognition -
The accrual method of accounting is used for all significant categories of income and
expense. Immaterial amounts of insurance commissions and other miscellaneous fees are
reported when received.

Income Taxes - Amounts provided
for income taxes are based on income reported for financial statement purposes. Deferred
income taxes are provided for the temporary differences between the financial reporting
basis and the tax basis of the Companys assets and liabilities. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
Management has determined that it is more likely than not that the entire deferred tax
asset at December 31, 2003, will be realized, and accordingly, has not established a
valuation allowance. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

Advertising Expense -
Advertising and public relations costs are generally expensed as incurred. External costs
incurred in producing media advertising are expensed the first time the advertising takes
place. External costs relating to direct mailing costs are expensed in the period in which
the direct mailings are sent. Advertising and public relations costs of $127,000 and
$187,000, were included in the Companys results of operations for 2003 and 2002,
respectively.

Net Income Per Share - Net
income per share is calculated by dividing net income by the weighted-average number of
shares outstanding during the year. Retroactive recognition has been given for the effects
of all stock dividends in computing the weighted-average number of shares. The Company has
no instruments which are considered common stock equivalents and therefore, diluted
earnings per share is not presented.

30

---

HCSB FINANCIAL
CORPORATIONNotes to Consolidated Financial Statements

NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Comprehensive Income -
Accounting principles generally require recognized income, expenses, gains, and losses to
be included in net income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net income,
are components of comprehensive income.

The components of other comprehensive
income and related tax effects are as follows:

|                                               | Years Ended December 31, | 
|---------------------------------------------- | ------------------------ | 
|
|Unrealized gains on                            |                          | 
|securities available-for-sale                  |                          | 
|Reclassification adjustment for (gains) losses |                          | 
|realized in net income                         |                          | 
|                                               |                          | 
|Net unrealized gains (losses) on securities    |                          | 
|Tax effect                                     |                          | 
|                                               |                          | 
|Net-of-tax amount                              |                          | 
|                                               |                          | 

Statements of Cash Flows - For
purposes of reporting cash flows, the Company considers certain highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents include amounts due from banks and federal funds sold.

The following summarizes supplemental
cash flow information:

|                                                         | Years Ended December 31, | 
|-------------------------------------------------------- | ------------------------ | 
|
|Cash paid for interest                                   |                          | 
|Cash paid for income taxes                               |                          | 
|Supplemental noncash investing and financing activities: |                          | 
|Foreclosures on loans                                    |                          | 

Off-Balance-Sheet Financial
Instruments - In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend credit and
letters of credit. These financial instruments are recorded in the financial statements
when they become payable by the customer.

Recent Accounting Pronouncements
- In December 2002, FASB issued SFAS No. 148, Accounting for Stock-based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions
of SFAS No. 123 and Accounting Pronouncement Board (APB) Opinion
No. 28, Interim Financial Reporting, to require disclosure in the summary
of significant accounting policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they account for
that compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. The provisions of SFAS No. 148 are effective for
annual financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim periods beginning
after December 15, 2002.

31

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HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

In April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other contracts and loan
commitments that relate to the origination of mortgage loans held for sale, and for
hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a material impact on the financial condition or operating
results of the Company.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is generally effective
for financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the financial
condition or operating results of the Company.

In November 2002, the FASB issued
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related to guarantees and
warranties. The initial recognition requirements of FIN No. 45 are effective for
guarantees issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of periods ending after December 15, 2002. The adoption
of FIN No. 45 did not have a material effect on the Companys financial position or
results of operations.

In January 2003, the FASB issued
FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46
requires a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns, or
both. FIN No. 46 also requires disclosures about variable interest entities that a company
is not required to consolidate, but in which it has a significant variable interest. FIN
No. 46 provides guidance for determining whether an entity qualifies as a variable
interest entity by considering, among other considerations, whether the entity lacks
sufficient equity or its equity holders lack adequate decision-making ability. The
consolidation requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to existing
entities in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established.
The adoption of FIN No. 46 did not have a material effect on the Companys financial
position or results of operations.

Risks and Uncertainties - In the
normal course of its business, the Company encounters two significant types of risks:
economic and regulatory. There are three main components of economic risk: interest rate
risk, credit risk and market risk. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different speeds, or on
different basis, than its interest-earning assets. Credit risk is the risk of default on
the Companys loan portfolio that results from borrowers inability or
unwillingness to make contractually required payments. Market risk reflects changes in the
value of collateral underlying loans receivable and the valuation of real estate held by
the Company.

The Company is subject to the
regulations of various governmental agencies. These regulations can and do change
significantly from period to period. The Company also undergoes periodic examinations by
the regulatory agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions from the
regulators judgments based on information available to them at the time of their
examination.

Reclassifications - Certain
captions and amounts in the 2002 financial statements were reclassified to conform with
the 2003 presentation.

32

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HCSB FINANCIAL
CORPORATIONNotes to Consolidated Financial Statements

NOTE 2 - CASH AND
DUE FROM BANKS

The Bank is required by regulation to
maintain an average cash reserve balance based on a percentage of deposits. At December
31, 2003 and 2002, the requirements were satisfied by vault cash.

NOTE 3 - INVESTMENT
SECURITIES

Securities available-for-sale consisted
of the following:

|                                           | Amortized | Gross Unrealized | Estimated |       
|------------------------------------------ | --------- | ---------------- | --------- | ------
|
|December 31, 2003                          |           |                  |           |       
|Securities of U.S. government agencies     |           |                 
|and corporations                           |           |                  | $         | 5,233 
|Mortgage-backed securities                 |           |                  |           | 17,159
|Equity securities                          |           |                  |           | 831   
|Obligations of state and local governments |           |                  |           | 4,803 
|                                           |           |                  |           |       
|Total                                      |           |                  | $         | 28,026
|                                           |           |                  |           |       
|December 31, 2002                          |           |                 
|Securities of U.S. government agencies     |           |                 
|and corporations                           |           |                  | $         | 6,580 
|Mortgage-backed securities                 |           |                  |           | 7,647 
|                                           |           |                  |           |       
|Obligations of state and local governments |           |                  |           | 3,639 
|Total                                      |           |                  | $         | 17,866
|                                           |           |                  |           |       

The following is a summary of maturities of securities  available-for-sale  as of December 31, 2003.  The amortized  cost and estimated
fair values are based on the contractual  maturity dates.  Actual maturities may differ from contractual  maturities  because borrowers
may have the right to call or prepay obligations with or without penalty.

|                                          | Securities | 
|----------------------------------------- | ---------- | 
|
|
|
|Due in less than one year                 |            | 
|Due after one year but within five years  |            | 
|Due after five years but within ten years |            | 
|Due after ten years                       |            | 
|                                          |            | 
|                                          |            | 
|Mortgage-backed securities                |            | 
|                                          |            | 
|Total                                     |            | 
|                                          |            | 

33

---

HCSB FINANCIAL CORPORATIONNotes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

The  following  table  shows gross  unrealized  losses and fair  value,  aggregated  by  investment  category,  and length of time that
individual securities have been in a continuous unrealized loss position, at December 31, 2003.Securities Available for Sale

|                              | Less than | Twelve months |   |        |  |  
|----------------------------- | --------- | ------------- | - | ------ |  | -
|
|
|
|Securities of U.S. government |           |               |   |        |  |  
|agencies and corporations     |           |               | $ | 2,144  |  | $
|Mortgage-backed securities    |           |               |   | 11,202 |  |  
|Equity securities             |           |               |   | 831    |  |  
|Obligations of state and      |           |              
|local governments             |           |               |   | 250    |  |  
|                              |           |               |   |        |  |  
|Total                         |           |               | $ | 14,427 |  | $
|                              |           |               |   |        |  |  

At December 31, 2003, and 2002,
investment securities with a book value of $15,542,775 and $3,113,000, respectively, and a
market value of $15,544,973 and $3,199,000, respectively, were pledged as collateral to
secure public deposits.

Gross realized gains on sales of
available-for-sale securities were $92,000 and $8,000 in 2003 and 2002, respectively.
There were no gross realized losses on sales of available-for-sale securities in 2003 and
2002. Proceeds from the sale of securities totaled $7,737,000 and $2,208,000 in 2003 and
2002, respectively.

NOTE 4 - LOANS
RECEIVABLE

Loans consisted of the following:

|                                                | Years ended December 31, | 
|----------------------------------------------- | ------------------------ | 
|
|Real estate - construction and land development |                          | 
|Real estate - mortgage and commercial           |                          | 
|Agricultural                                    |                          | 
|Commercial and industrial                       |                          | 
|Consumer                                        |                          | 
|All other loans (including overdrafts)          |                          | 
|                                                |                          | 
|Total gross loans                               |                          | 
|                                                |                          | 

Certain parties (principally certain
directors and officers of the Company, their immediate families, and business interests)
were loan customers and had other transactions in the normal course of business with the
Company. Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility. The
aggregate dollar amounts of loans to related parties were $2,707,000 and $994,000 at
December 31, 2003 and 2002, respectively. During 2003, $1,877,000 of new loans were made
to related parties, and repayments totaled $164,000.

34

---

HCSB FINANCIAL CORPORATIONNotes to Consolidated Financial Statements

NOTE 4  LOANS RECEIVABLE -
continuedTransactions in the allowance for loan losses are summarized below:

|                                           | December 31, | 
|------------------------------------------ | ------------ | 
|
|Balance, beginning of year                 |              | 
|Provision charged to operations            |              | 
|Recoveries on loans previously charged off |              | 
|Loans charged off                          |              | 
|                                           |              | 
|Balance, end of year                       |              | 
|                                           |              | 

Loans on the Companys problem
loan watch list are considered potentially impaired loans. These loans are evaluated in
determining whether all outstanding principal and interest are expected to be collected.
Loans are not considered impaired if a minimal delay occurs and all amounts due, including
accrued interest at the contractual interest rate for the period of the delay, are
expected to be collected.

As of December 31, 2003 and 2002, the
Company had nonaccrual loans of approximately $1,641,000 and $915,000, respectively, and
loans that were contractually past due 90 days or more and still accruing interest of
approximately $2,315,000 and $381,000, respectively, for which impairment had not been
recognized. The additional interest income which would have been recognized into earnings
if the Companys nonaccrual loans had been current in accordance with their original
terms is immaterial for all years presented. At December 31, 2003 and 2002, there were no
impaired loans that were material to the Companys financial statement.

The majority of the total loans
contractually past due 90 days or more and still accruing interest relate to a group of
loans to one borrower. Most of the loans are secured by real estate. Management is working
with the borrower to dissolve portions of the collateral. Management believes that the
allowance for loan losses has been funded adequately for these specific loans.

The Company is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in
the balance sheets.

The Companys exposure to credit
loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments.

Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance of a customer
to a third party. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. The fair value of standby letters
of credit is insignificant.

Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on managements credit
evaluation of the counter-party.

Collateral held for commitments to
extend credit and standby letters of credit varies but may include accounts receivable,
inventory, property, plant, equipment, and income-producing commercial properties. The
following table summarizes the Companys off-balance-sheet financial instruments
whose contract amounts represent credit risk:

|                             | December 31, | 
|---------------------------- | ------------ | 
|
|Commitments to extend credit |              | 
|Standby letters of credit    |              | 

35

---

HCSB FINANCIAL
CORPORATIONNotes to Consolidated Financial Statements

NOTE 5 - PREMISES,
FURNITURE AND EQUIPMENT

Premises, furniture and equipment
consisted of the following:

|                                | December 31, | 
|------------------------------- | ------------ | 
|
|Land                            |              | 
|Buildings and land improvements |              | 
|Furniture and equipment         |              | 
|Construction in progress        |              | 
|                                |              | 
|                                |              | 
|Less accumulated depreciation   |              | 
|                                |              | 
|Premises and equipment, net     |              | 
|                                |              | 

Depreciation expense for the years
ended December 31, 2003 and 2002 was $441,000 and $425,000, respectively.

In 2003 and 2002, the Company
capitalized $22,000 and $2,000, respectively, of interest during the construction and
renovation of new branches.

NOTE 6 - OTHER ASSETSOther assets consisted of the following:

|                             | December 31, | 
|---------------------------- | ------------ | 
|
|Cash value of life insurance |              | 
|Other real estate owned      |              | 
|Prepaid expenses             |              | 
|Unamortized software         |              | 
|Net deferred tax asset       |              | 
|Other                        |              | 
|                             |              | 
|Total                        |              | 
|                             |              | 

NOTE 7 - DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES

The Company maintains an overall
interest-rate risk-management strategy that incorporates the use of derivatives to
minimize significant unplanned fluctuations in earnings that are caused by interest-rate
volatility. As part of this strategy, the Company entered certain interest rate swap
agreements during 2003. Such interest rate swaps are derivative financial instruments
(derivatives). Interest rate swaps generally involve the exchange of fixed and
variable rate interest payments between two parties, based on a common notional amount and
maturity date. The Companys goal is to manage interest-rate sensitivity by modifying
the repricing or maturity characteristics of specific balance-sheet assets and liabilities
so that the net-interest margin is not, on a material basis, adversely affected by
movements in interest rates. The interest-rate swaps entered by the Company converted
certain nonprepayable fixed rate long term debt to floating rates. As a result of
interest-rate fluctuations, hedged assets and liabilities will appreciate or depreciate in
market value. The effect of this unrealized appreciation or depreciation will generally be
offset by income or loss on the derivatives that are linked to the hedged assets and
liabilities. The Company views this strategy as a prudent management of interest-rate
sensitivity, such that earnings are not exposed to undue risk presented by changes in
interest rates.

36

---

HCSB FINANCIAL
CORPORATIONNotes to Consolidated Financial Statements

NOTE 7 - DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - continued

By using derivative instruments, the
Company is exposed to credit and market risk. If the counterparty fails to perform, credit
risk is equal to the extent of the fair-value gain in a derivative. When the fair value of
a derivative contract is positive, this generally indicates that the counterparty owes the
Company, and, therefore, creates a repayment risk for the Company. When the fair value of
a derivative contract is negative, the Company owes the counterparty and, therefore, it
has no repayment risk. The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality counterparties that are
reviewed by the Companys credit committee.

Market risk is the adverse effect
that a change in interest rates, currency, or implied volatility rates has on the value of
a financial instrument. The Company manages the market risk associated with interest rate
swap contracts by establishing and monitoring limits as to the types and degree of risk
that may be undertaken. The Company periodically measures this risk by using a
value-at-risk methodology.

The Companys derivatives
activities are monitored by its risk-management committee as part of that committees
oversight of the Companys asset/liability and treasury functions. The Companys
asset/liability committee is responsible for implementing various hedging strategies that
are developed through its analysis of data from financial simulation models and other
internal and industry sources. The resulting hedging strategies are then incorporated into
the Companys overall interest-rate risk-management and trading strategies.

The interest rate swap agreements
provide for the Company to make payments at a variable rate determined by a specified
index (three month LIBOR) in exchange for receiving payments at a fixed rate of 5.8%.
During 2003, the Company recognized $105,000 as a reduction of interest expense on Federal
Home Loan Bank Advances as a result of its interest rate swaps.

At December 31, 2003, the information
pertaining to outstanding interest rate swap agreements used to hedge fixed rate debt is
as follows:

|                                                       |  |  |  | 2003        |     
|------------------------------------------------------ |  |  |  | ----------- | ----
|Notional amount                                        |  |  |  | $14,600,000 |     
|Weighted average fixed (receive) rate                  |  |  |  | 3           | .41%
|Weighted average variable (pay) rate                   |  |  |  | 1           | .11%
|Weighted average maturity in years                     |  |  |  | 6           | .6  
|Unrealized gain (loss) relating to interest rate swaps |  |  |  | 83          |     

No interest rate swap agreements were
used by the Company prior to 2003. At December 31, 2003, the unrealized gain of $83,000
related to interest rate swaps was recorded in derivative assets and other liabilities by
the same amount.

Risk management results for the year
ended December 31, 2003 related to the balance sheet hedging of long-term debt indicate
that the hedges were 100% effective and that there was no component of the derivative
instruments gain or loss which was excluded from the assessment of hedge
effectiveness.

NOTE 8 - DEPOSITS

At December 31, 2003, the scheduled
maturities of time deposits were as follows:

|Maturing In         | Amount
|------------------- | ------
|2004                |       
|2005                |       
|2006                |       
|2007                |       
|2008 and thereafter |       
|                    |       
|Total               |       
|                    |       

Overdrawn transaction accounts in the
amount of $42,000 and $119,000 were classified as loans as of December 31, 2003 and 2002,
respectively.

37

---

HCSB FINANCIAL
CORPORATIONNotes to Consolidated Financial Statements

NOTE 9 - ADVANCES
FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan
Bank consisted of the following:

|                  | Interest | December 31, | 
|----------------- | -------- | ------------ | 
|
|March 11, 2008    |          |              | 
|March 1, 2010     |          |              | 
|May 24, 2010      |          |              | 
|March 22, 2011    |          |              | 
|January, 17, 2012 |          |              | 
|July 23, 2012     |          |              | 
|August 4, 2012    |          |              | 
|January 30, 2013  |          |              | 
|                  |          |              | 
|Total             |          |              | 
|                  |          |              | 

Interest is payable quarterly.
Initially all advances bear interest at a fixed rate; however, the rate can be converted
to a floating rate after a certain period. As of December 31, 2003, all advances were
bearing fixed rates of interest.

As of December 31, 2003, scheduled
principal reductions include $5,000,000 in 2008 and the remainder after five years.

As collateral, the Company has
pledged its portfolio of first mortgage one-to-four family residential loans aggregating
$37,669,000 at December 31, 2003, as well as half of its commercial real estate loan
portfolio, totaling $23,472,000 at December 31, 2003. Additionally, it has pledged its
investment in Federal Home Loan Bank stock with a carrying value of $1,834,000.

As discussed in Note 7, the Company
has entered into interest rate swap agreements associated with Federal Home Loan Bank
advances maturing on March 1, 2010, May 24, 2010 and March 22, 2011. The interest rate
swaps effectively converted the fixed interest rates on the advances to a variable rate.
The variable rate was 3.41% at December 31, 2003 and is based on the three month LIBOR
index.

NOTE 10 - LEASE
COMMITMENTS

On May 15, 1997, the Company entered
into a lease agreement for land on which to operate its Tabor City branch. The lease had
an initial five-year term that expired June 5, 2002, and the Company chose to exercise its
option for a five-year renewal of the lease at that time. In December 2002, the Company
and the property owners chose to negotiate a new lease that began January 5, 2003 and ends
January 5, 2008 with the Company having an option for nine additional five-year renewal
periods thereafter. Subsequent to the date of the renegotiated lease, the lease was
amended and resulted in a new rental amount of $1,000 per month through January 5, 2008.
The lease gives the Company the first right of refusal to purchase the property at an
unimproved value if the owners decide to sell. The Company also pays applicable property
taxes on the property.

On February 4, 2002, the Company
entered into an annual lease agreement to operate its Myrtle Beach branch in a temporary
location. This annual lease has an option for twelve additional renewal terms of one month
each. The Company expects to have these one-month renewals in force through April 2004 and
pays a lease payment of $3,500 per month.

Expected future minimum lease
payments over the next four years for these long-term operating leases are as follows:

(Dollars in thousands)              
                            
                            
                            
                            
                
Amount

|2004  |  |  |  | $ 26 | 
|----- |  |  |  | ---- | 
|2005  |  |  |  | 12   | 
|2006  |  |  |  | 12   | 
|2007  |  |  |  | 12   | 
|Total |  |  |  | $ 62 | 
|      | 

38

---

HCSB FINANCIAL CORPORATIONNotes to Consolidated
Financial Statements

NOTE 11 -
COMMITMENTS AND CONTINGENCIES

In the ordinary course of business,
the Company may, from time to time, become a party to legal claims and disputes. At
December 31, 2003, management was not aware of any pending or threatened litigation or
unasserted claims that could result in losses, if any, that would be material to the
financial statements.

At December 31, 2003, the Company has
a new branch under construction in Myrtle Beach. The Company believes construction will be
complete in April 2004. The total contract price for the branch is $1,850,000. Therefore,
estimated additional costs to complete the branch are approximately $1,030,000 as of
December 31, 2003.

NOTE 12 -
SHAREHOLDERS EQUITY

Stock Dividends - On January 18,
2004, the Board of Directors declared a 7.5% stock dividend payable on March 12, 2004, to
shareholders of record at February 13, 2004. As a result of the stock dividend, 116,066
shares were issued. The financial statements as of December 31, 2003 were adjusted to
reflect such transaction and resulted in a reclassification of $2,011,000 from retained
earnings to common stock and capital surplus. All per share amounts have been adjusted to
reflect this dividend.

Restrictions on Dividends -
South Carolina banking regulations restrict the amount of dividends that can be paid to
shareholders. All of the Banks dividends to HCSB Financial Corporation are payable
only from the undivided profits of the Bank. At December 31, 2003, the Banks
undivided profits were $5,748,242. The Bank is authorized to pay cash dividends up to 100%
of net income in any calendar year without obtaining the prior approval of the
Commissioner of Banking provided that the Bank received a composite rating of one or two
at the last Federal or State regulatory examination. Under Federal Reserve Board
regulations, the amounts of loans or advances from the Bank to the parent company are also
restricted.

NOTE 13 - CAPITAL
REQUIREMENTS

The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material effect on
the Banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Banks capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum ratios (set
forth in the table below) of Tier 1 and total capital as a percentage of assets and
off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 100%. Tier 1
capital of the Bank consists of common shareholders equity, excluding the unrealized
gain or loss on securities available for sale, minus certain intangible assets. Tier 2
capital consists of the allowance for loan losses subject to certain limitations. Total
capital for purposes of computing the capital ratios consists of the sum of Tier 1 and
Tier 2 capital.

The Bank is also required to maintain
capital at a minimum level based on quarterly average assets (as defined), which is known
as the leverage ratio. Only the strongest institutions are allowed to maintain capital at
the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above
the minimum.

As of the most recent regulatory
examination, the Bank was deemed well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must maintain
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table
below. There are no conditions or events that management believes have changed the
Banks categories.

39

---

HCSB FINANCIAL
CORPORATIONNotes to Consolidated Financial Statements

NOTE 13 - CAPITAL REQUIREMENTS
 continued

The following table summarizes the
capital ratios and the regulatory minimum requirements for the Company and the Bank.

|                                                   |  |  |   |        |  | 
|-------------------------------------------------- |  |  | - | ------ |  | 
|
|
|
|
|                                                   |  |  |   |        |  | 
|(Dollars in thousands)December 31, 2003The Company |  | 
|Total capital (to risk-weighted assets)            |  |  | $ | 23,226 |  | 
|Tier 1 capital (to risk-weighted assets)           |  |  |   | 21,453 |  | 
|Tier 1 capital (to average assets)                 |  |  |   | 21,453 |  | 
|The Bank                                           |  | 
|Total capital (to risk-weighted assets)            |  |  | $ | 21,790 |  | 
|Tier 1 capital (to risk-weighted assets)           |  |  |   | 20,017 |  | 
|Tier 1 capital (to average assets)                 |  |  |   | 20,017 |  | 
|                                                   |  | 
|December 31, 2002The Company                       |  | 
|Total capital (to risk-weighted assets)            |  |  | $ | 21,179 |  | 
|Tier 1 capital (to risk-weighted assets)           |  |  |   | 19,727 |  | 
|Tier 1 capital (to average assets)                 |  |  |   | 19,727 |  | 
|The Bank                                           |  | 
|Total capital (to risk-weighted assets)            |  |  | $ | 19,783 |  | 
|Tier 1 capital (to risk-weighted assets)           |  |  |   | 18,331 |  | 
|Tier 1 capital (to average assets)                 |  |  |   | 18,331 |  | 

NOTE 14 - RETIREMENT
AND BENEFITS

Trusteed Retirement Savings Plan
- The Bank has a trustee retirement savings plan which provides retirement benefits
to substantially all officers and employees who meet certain age and service requirements.
The plan includes a salary reduction feature pursuant to Section 401(k) of the
Internal Revenue Code. Under the plan and present policies, participants are permitted to
contribute up to 15% of their annual compensation. At its discretion, the Company can make
matching contributions up to 4% of the participants compensation. The Company
charged $118,000 and $93,000, to earnings for the retirement savings plan in 2003 and
2002, respectively.

Directors Deferred Compensation Plan
- The Company has a deferred compensation plan whereby directors may elect to defer
the payment of their fees. Under the terms of the plan, the Company accrues an expense
equal to the amount deferred plus an interest component based on the prime rate of
interest at the beginning of each year. The Company has also purchased life insurance
contracts on each of the participating directors. At December 31, 2003 and 2002, $345,000
and $273,000, respectively, of directors fees were deferred and are included in
other liabilities.

Performance Compensation for
Stakeholders Plan - The Company implemented an employee bonus program in 2003 which
it refers to as its Stakeholder Plan. The plan pays employees based on a schedule of key
performance indicators they are required to meet in order to be rewarded. The plan accrues
for its employee bonuses based on a percentage of each employees annual salary. The
plan has a fiscal year ending on December 31, and pays out on January 30 of the following
year. At December 31, 2003, the plan had an accrued payout of $62,000.

40

---

HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

NOTE 15 - OTHER
EXPENSES

Other expenses are summarized as follows:

|                                  | Years Ended December 31, | 
|--------------------------------- | ------------------------ | 
|
|Advertising and promotion         |                          | 
|Stationery, printing, and postage |                          | 
|Telephone                         |                          | 
|Director and advisory fees        |                          | 
|Insurance                         |                          | 
|ATM services                      |                          | 
|Courier services                  |                          | 
|Other                             |                          | 
|                                  |                          | 
|Total                             |                          | 
|                                  |                          | 

NOTE 16 - INCOME
TAXES

Income tax expense is summarized as
follows:

|                                            | Years Ended December 31, | 
|------------------------------------------- | ------------------------ | 
|
|Currently payable:                          |                          | 
|Federal                                     |                          | 
|State                                       |                          | 
|                                            |                          | 
|Total current                               |                          | 
|                                            |                          | 
|Deferred income taxes                       |                          | 
|                                            |                          | 
|Income tax expense                          |                          | 
|                                            |                          | 
|Income tax expense is allocated as follows: |                          | 
|To continuing operations                    |                          | 
|To shareholders' equity                     |                          | 
|                                            |                          | 
|Total                                       |                          | 
|                                            |                          | 

41

---

HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

NOTE 16 - INCOME TAXES -
continued

The components of the net deferred tax
asset are as follows:

|                                                     | Years Ended December 31, | 
|---------------------------------------------------- | ------------------------ | 
|
|Deferred tax assets:                                 |                          | 
|Allowance for loan losses                            |                          | 
|Net capitalized loan costs                           |                          | 
|State net operating loss                             |                          | 
|Deferred directors' fees                             |                          | 
|Organizational costs                                 |                          | 
|Nonaccruing interest                                 |                          | 
|                                                     |                          | 
|Total deferred tax assets                            |                          | 
|                                                     |                          | 
|Deferred tax liabilities:                            |                          | 
|Accumulated depreciation                             |                          | 
|Gain on sale of real estate                          |                          | 
|Software amortization                                |                          | 
|Net unrealized gain on securities available-for-sale |                          | 
|                                                     |                          | 
|Total deferred tax liabilities                       |                          | 
|                                                     |                          | 
|Net deferred tax asset                               |                          | 
|                                                     |                          | 

Deferred tax assets represent the
future tax benefit of future deductible differences and, if it is more likely than not
that a tax asset will not be realized, a valuation allowance is required to reduce the
recorded deferred tax assets to net realizable value. Management has determined that it is
more likely than not that the entire deferred tax asset at December 31, 2003 and 2002 will
be realized and, accordingly, has not established a valuation allowance. Deferred tax
assets are included in other assets.

A reconciliation between the income
tax expense and the amount computed by applying the Federal statutory rates of 34% to
income before income taxes follows:

|                                                    | Years Ended December 31, | 
|--------------------------------------------------- | ------------------------ | 
|
|Tax expense at statutory rate                       |                          | 
|State income tax, net of federal income tax benefit |                          | 
|Tax-exempt interest income                          |                          | 
|Other                                               |                          | 
|                                                    |                          | 
|Income tax provision                                |                          | 
|                                                    |                          | 

NOTE 17 - UNUSED
LINES OF CREDIT

As of December 31, 2003, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling
$9,000,000. These lines of credit are available on a one to fourteen day basis for general
corporate purposes. The lenders have reserved the right not to renew their respective
lines. The Company may also borrow an additional $17,229,000 from the Federal Home Loan
Bank based on a predetermined formula. Advances are subject to approval by the Federal
Home Loan Bank and may require the Company to pledge additional collateral.

42

---

HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Corporation

NOTE 18 - FAIR VALUE
OF FINANCIAL INSTRUMENTS

The fair value of a financial
instrument is the amount at which the asset or obligation could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. Fair
value estimates are made at a specific point in time based on relevant market information
and information about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based on
judgments regarding future expected loss, current economic conditions, risk
characteristics of various financial instruments, and other factors.

The following methods and assumptions
were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks - The
carrying amount is a reasonable estimate of fair value.

Federal Funds Sold and Purchased
- Federal funds sold and purchased are for a term of one day and the carrying amount
approximates the fair value.

Investment Securities
Available-for-Sale  For securities available-for-sale, fair value equals the
carrying amount which is the quoted market price. If quoted market prices are not
available, fair values are based on quoted market prices of comparable securities.

Nonmarketable Equity Securities
- The carrying amount is a reasonable estimate of fair value since no ready market
exists for these securities.

Mortgage Loans Held-for-Sale -
Fair values of mortgage loans held for sale are based on commitments on hand from
investors or market prices.

Loans Receivable  - For certain
categories of loans, such as variable rate loans which are repriced frequently and have no
significant change in credit risk and credit card receivables, fair values are based on
the carrying amounts. The fair value of other types of loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be made to the
borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of
demand deposits, savings, and money market accounts is the amount payable on demand at the
reporting date. The fair values of certificates of deposit are estimated using a
discounted cash flow calculation that applies current interest rates to a schedule of
aggregated expected maturities.

Advances from the Federal Home Loan
Bank - For the portion of borrowings immediately callable, fair value is based on the
carrying amount. The fair value of the portion maturing at a later date is estimated using
a discounted cash flow calculation that applies the interest rate of the immediately
callable portion to the portion maturing at the future date.

Accrued Interest Receivable and
Payable - The carrying value of these instruments is a reasonable estimate of fair
value.

Commitments to Extend Credit and
Standby Letters of Credit - The contractual amount is a reasonable estimate of fair
value for the instruments because commitments to extend credit and standby letters of
credit are issued on a short-term or floating rate basis and include no unusual credit
risks.

Interest Rate Swaps - Fair
values are based on the present value of future cash flows based on the interest rate
spread between the fixed rate and the floating rate.

43

---

HCSB FINANCIAL CORPORATION
Notes to Consolidated Financial Corporation

NOTE 18 - FAIR VALUE
OF FINANCIAL INSTRUMENTS - continued

The carrying values and estimated
fair values of the Companys financial instruments were as follows:

|                                         |  | December 31, |   |        
|---------------------------------------- |  | ------------ | - | -------
|
|
|
|(Dollars in thousands)Financial Assets:  |  |              |   |        
|Cash and due from banks                  |  |              | $ | 12,741 
|Federal funds sold                       |  |              |   | 22,832 
|Investment securities available-for-sale |  |              |   | 28,115 
|Nonmarketable equity securities          |  |              |   | 1,919  
|Loans and loans held-for-sale            |  |              |   | 192,304
|Accrued interest receivable              |  |              |   | 1,671  
|Other assets - interest rate swaps       |  |              |   | 83     
|Financial Liabilities:                   |  |             
|Demand deposit, interest-bearing         |  |             
|transaction, and savings accounts        |  |              | $ | 122,424
|Certificates of deposit                  |  |              |   | 87,507 
|Advances from the Federal Home           |  |             
|Loan Bank                                |  |              |   | 36,690 
|Accrued interest payable                 |  |              |   | 351    
|Other liabilities - interest rate swaps  |  |              |   | 83     

|                                         | Notional | Estimated Fair | Notional | Estimated Fair
|---------------------------------------- | -------- | -------------- | -------- | --------------
|
|Off-Balance Sheet Financial Instruments: |          |                |          |               
|Commitments to extend credit             |          |                | $        | 23,323        
|Standby letters of credit                |          |                |          | 835           
|Interest rate swaps                      |          |                |          | 14,600        

44

---

HCSB FINANCIAL COPORATION
Notes to Consolidated Financial Corporation

NOTE 19 - HCSB
FINANCIAL CORPORATION (PARENT COMPANY ONLY)

Presented below are the condensed
financial statements for HCSB Financial Corporation (Parent Company Only).

Condensed Balance Sheets

|                                     | December 31, | 
|------------------------------------ | ------------ | 
|
|Assets                               |              | 
|Cash                                 |              | 
|Investment in banking subsidiary     |              | 
|Nonmarketable equity securities      |              | 
|Premises                             |              | 
|Other assets                         |              | 
|                                     |              | 
|Total assets                         |              | 
|                                     |              | 
|Liabilities and shareholders' equity |              | 
|Shareholders' equity                 |              | 
|                                     |              | 

Condensed Statements of Income

|                                                       | Years ended December 31, | 
|------------------------------------------------------ | ------------------------ | 
|
|Income                                                 |                          | 
|Dividends from banking subsidiary                      |                          | 
|                                                       |                          | 
|Expenses                                               |                          | 
|Other expenses                                         |                          | 
|                                                       |                          | 
|Income (loss) before income taxes and equity in        |                          | 
|undistributed earnings of banking subsidiary           |                          | 
|Income tax benefit                                     |                          | 
|Equity in undistributed earnings of banking subsidiary |                          | 
|                                                       |                          | 
|Net income                                             |                          | 
|                                                       |                          | 

45

---

HCSB FINANCIAL
CORPORATION Notes to Consolidated Financial Statements

NOTE 19 - HCSB FINANCIAL CORPORATION (PARENT COMPANY ONLY) - continued

Condensed Statements of
Cash Flows

|                                                            | Years ended December 31, | 
|----------------------------------------------------------- | ------------------------ | 
|
|Cash flows from operating activities:                       |                          | 
|Net income                                                  |                          | 
|Adjustments to reconcile net income to net cash provided by |                          | 
|operating activities:                                       |                          | 
|Equity in undistributed earnings of banking subsidiary      |                          | 
|Increase in other assets                                    |                          | 
|Decrease in other liabilities                               |                          | 
|                                                            |                          | 
|Net cash used by operating activities                       |                          | 
|                                                            |                          | 
|Cash flows from investing activities:                       |                          | 
|Purchase of nonmarketable equity securities                 |                          | 
|Purchase of land and building                               |                          | 
|Proceeds from sale of land and building                     |                          | 
|                                                            |                          | 
|Net cash provided (used) from investing activities          |                          | 
|                                                            |                          | 
|Cash flows from financing activities:                       |                          | 
|Proceeds from stock issuance                                |                          | 
|Transfer of capital to the bank                             |                          | 
|Stock issuance costs                                        |                          | 
|Reimbursement of stock issuance costs                       |                          | 
|Purchase of treasury stock                                  |                          | 
|Sale of treasury stock                                      |                          | 
|Cash paid for fractional shares                             |                          | 
|                                                            |                          | 
|Net cash provided by financing activities                   |                          | 
|                                                            |                          | 
|Increase in cash                                            |                          | 
|Cash and cash equivalents, beginning of year                |                          | 
|                                                            |                          | 
|Cash and cash equivalents, end of year                      |                          | 
|                                                            |                          | 

46

---

HCSB FINANCIAL
CORPORATIONBOARD OF DIRECTORS

|                       | 
|---------------------- | 
|
|Johnny C. Allen        | 
|D. Singleton Bailey    | 
|Franklin C. Blanton    | 
|                       | 
|Clay D. Brittain, III  | 
|Russell R. Burgess, Jr | 
|                       | 
|                       | 
|William H. Caines      | 
|James R. Clarkson      | 
|                       | 
|                       | 
|J. Lavelle Coleman     | 
|Larry G. Floyd         | 
|                       | 
|Boyd R. Ford, Jr       | 
|                       | 
|Tommie W. Grainger     | 
|Randy B. Hardee        | 
|Gwyn G. McCutchen      | 
|T. Freddie Moore       | 
|Carroll D. Padgett, Jr | 

OFFICERS OF THE BOARD
OF DIRECTORS

|                       | 
|---------------------- | 
|
|Russell R. Burgess, Jr | 
|Chairman               | 
|James R. Clarkson      | 
|President and CEO      | 

47

---

HCSB
FINANCIAL CORPORATION

HORRY COUNTY STATE BANK
EMPLOYEES

James R. Clarkson,
President/CEOGlenn R. Bullard, Executive Vice PresidentMichael W. Hambrick,
Vice President/CFOLoretta B. Gerald, Vice President/Cashier/Internal Auditor Margaret H. Fowler,
Vice President/Operations Officer

|                    |  | 
|------------------- |  | 
|
|Loris Office        |  | 
|Jimmy Nealey        |  | 
|Amy Cannon          |  | 
|Debra Todd          |  | 
|Luise Boyd          |  | 
|Crystal Gerald      |  | 
|Lou Sherry Grissett |  | 
|Stephanie Greenwood |  | 
|                    |  | 
|Tabor City          |  | 
|Walter Williamson   |  | 
|Phyllis Coleman     |  | 
|Whitney Hughes      |  | 
|JoAnn Floyd         |  | 
|Gina Fogle          |  | 
|Lynn Cox            |  | 
|Amantha Blackstock  |  | 
|                    |  | 
|Homewood            |  | 
|John Naughton       |  | 
|Lori Pharr          |  | 
|Brenda Hill         |  | 
|Amy Branton         |  | 
|Laurie Johnson      |  | 
|                    |  | 

48

---

HCSB FINANCIAL
CORPORATIONHORRY COUNTY STATE BANK EMPLOYEE

|                     |  | 
|-------------------- |  | 
|
|Windy Hill           |  | 
|Charles Sprinkle     |  | 
|Diana Elliott        |  | 
|Evelyn Perez         |  | 
|Dawnna Ward          |  | 
|Betty Thomas         |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|                     |  | 
|Residential Mortgage |  | 
|Robert Levine        |  | 
|Greta Todd           |  | 
|Renee Ward           |  | 
|Regina Taylor        |  | 
|Kristina Ringer      |  | 

49