**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

| **x** | **ANNUAL REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2008**

 

**CommissionFile Number:  000-26995**

** **

**HCSBFINANCIAL CORPORATION**

(Name of smallbusiness Issuer in its charter)

 

| **South  Carolina**

(State or other  jurisdiction  of incorporation or organization)    |   | **57-1079444**

(I.R.S. Employer  Identification No.) |
|------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                                     |   |                                                  |
| **5201  Broad Street  Loris, South Carolina**

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

(Zip Code)                                 |

 

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

 

Securitiesregistered under Section 12(b) of the Exchange Act:  **None**

 

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

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.
|   | Yes  o | No  x |
|--------|-------------|------------|

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.
|   | Yes  o | No  x |
|--------|-------------|------------|

 
| Indicate  by check mark whether the registrant (1) has filed all reports required  to be filed by Section 13 or 15(d) of the Exchange Act of 1934  during the past 12 months (or for such shorter period that the registrant was  required to file such reports), and |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) has  been subject to such filing requirements for the past 90 days.                                                                                                                                                                                                         | Yes  x | No  o |

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statement incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large  accelerated filer  o                                                    |   | Accelerated filer  o         |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|
| Non-accelerated  filer  o  (Do  not check if a smaller reporting company) |   | Smaller reporting company  x |

 

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

 

Theestimated aggregate market value of the Common Stock held by non-affiliates(shareholders holding less than 5% of an outstanding class of stock, excludingdirectors and executive officers) of the Company on June 30, 2008 was$32,456,046.**** We have used our book value of $8.57 as of June 30,2008, to calculate our public float, because there is not an active tradingmarket for the Common Stock.  The Company’smanagement is also aware of several trades prior to this date in our CommonStock of $27.00 per share, but believes such trades do not accurately presentthe fair market value of our Common Stock.

 

The number of shares outstanding of the issuer’scommon stock, as of March 13, 2009 was 3,787,170.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **
| Annual  Report to Shareholders for the                  | Part II  (Items 5-7)                      |
|---------------------------------------------------------|------------------------------------------------|
| Year  Ended December 31, 2008                      |                                           |
|                                                    |                                           |
| Proxy  Statement for the Annual Meeting of Shareholders | Part III (Portions of  Items 9-12 and 14) |
| to be held on  April 23, 2009                      |                                           |

 

 

 

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# **PART I**

# ** **

**Item1.  Description of Business.**

 

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

 
| · | significant increases  in competitive pressure in the banking and financial services industries;                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | changes in the interest  rate environment which could reduce anticipated or actual margins;                                                                                                                            |
| · | changes in political  conditions or the legislative or regulatory environment;                                                                                                                                         |
| · | general economic  conditions, either nationally or regionally and especially in our primary  service area, becoming less favorable than expected resulting in, among other  things, a deterioration in credit quality; |
| · | changes occurring in  business conditions and inflation;                                                                                                                                                               |
| · | changes in technology;                                                                                                                                                                                                 |
| · | changes in monetary and  tax policies;                                                                                                                                                                                 |
| · | the level of allowance  for loan loss;                                                                                                                                                                                 |
| · | the rate of  delinquencies and amounts of charge-offs;                                                                                                                                                                 |
| · | the rates of loan  growth;                                                                                                                                                                                             |
| · | adverse changes in  asset quality and resulting credit risk-related losses and expenses;                                                                                                                               |
| · | loss of consumer  confidence and economic disruptions resulting from terrorist activities;                                                                                                                             |
| · | changes in the  securities markets; and                                                                                                                                                                                |
| · | other risks and  uncertainties detailed from time to time in our filings with the Securities  and Exchange Commission (“SEC”).                                                                               |

 

# **GeneralOverview**

# ** **

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

 

**Operatingand Growth Strategy**

** **

Our goal is to bethe leading community bank in our market area. We intend to achieve this goal chiefly by providing personalized serviceto our customers.  Other strategies thatwe use to support our goal are hiring, developing, and retaining high caliberand motivated employees, focusing each of our branches on the unique needs andcultures of the community in which it is located, maintaining high asset quality,increasing asset size through internal growth and branch expansion, andoffering our customers a breadth of products competitive with those offered bymuch larger institutions.  These goalsare intended to build long-term shareholder value.

 

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

 

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products tosatisfy them, knowing our customers by name, and providing our products withsuperior levels of quality and service. We seek customers who prefer to conduct business with a locally ownedand managed bank that demonstrates an active interest in their business andpersonal financial affairs.  We believethat by consistently providing high levels of service to customers who valuethat service, we develop and strengthen relationships that provide acompetitive advantage.

 

·                  *Motivated Employees. *Webelieve that the key to our success lies with our employees, because it isthrough our employees that we are able to provide our customers with the highlevel of service and attention that they expect and deserve.  To this end, we hire people who are familiarwith their community and are committed to providing a superior level of bankingservice to our customers.  By selectingonly knowledgeable and committed employees, we believe we can provide anunsurpassed level of customer service and satisfaction.  We strive to develop, sustain the motivationof, and retain our employees through training, personal attention, recognition,and competitive compensation.  Weencourage and equip each employee to focus on the individual needs of ourcustomers and to deliver the specific products and services that will best helpthese customers achieve their financial goals.

 

·                  *Community Focus.*  Weapproach banking with a community focus, particularly at the branch level.  We operate each branch as an independentbusiness unit and encourage our branch managers to promote those products thatbest meet the need of their customer base. This strategy enables our branches to serve diverse populations andeconomies effectively.  We support ourbranches by supporting the economic development of our communities and byencouraging our employees to be active in community affairs.  We have located our existing offices, andplan to locate proposed offices, in communities in which we believe we candevelop strong relationships.  We favorgrowth areas and areas in which there are opportunities to differentiateourselves by providing customers with superior service.

 

·                  *High Asset Quality.* We place a great deal of emphasis on maintaining high asset quality andbelieve that the outstanding asset quality experienced to date is principallydue to the closeness of our lenders, senior officers, and directors to ourcustomers and their significant knowledge of the communities in which theyreside.

 

·                  *Internal Growth, Branch Expansion.*  We have grown significantly over the lastfive years.  We will continue to focus onacquiring market share, particularly from large Southeastern regional bankholding companies, by emphasizing our local management and decision-making andpersonal services.

 

·                  *Broad Range of Products and Services.*  We strive to provide our customers with thebreadth of products and services comparable to a regional bank, whilemaintaining the quick response and personal service of a locally owned andmanaged bank.  In addition to offering afull range of deposit services and commercial and personal loans, we offerproducts such as mortgage loan originations, on-line banking, and investmentproducts and brokerage services through a third party arrangement.

* *

**Locationand Service Area**

 

Our primary marketsinclude Horry County, South Carolina and Columbus and Brunswick Counties, NorthCarolina.  Most of the banks in theseareas are now local branches of large regional banks.  Although size gives the larger banks certainadvantages in competing for business from large corporations, including higherlending limits and the ability to offer services in other areas of SouthCarolina and North Carolina, we believe that there is a void in the communitybanking market in our market that we successfully fill.  We also believe that the Horry County marketwill continue to grow, particularly along the Atlantic coast.  We intend to continue to expand our branchnetwork to take advantage of opportunities caused by this growth.  We generally do not attempt to compete forthe banking relationships of large corporations, but concentrate our efforts onsmall- to medium-sized businesses and on individuals.

 

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**BankingServices**

 

We offer a full range of deposit servicesthat are typically available in most banks and savings and loan associations,including checking accounts, NOW accounts, savings accounts, and other timedeposits of various types, ranging from daily money market accounts tolonger-term certificates of deposit.  Thetransaction accounts and time certificates are tailored to our principal marketarea at rates competitive to those offered in our market area.  In addition, we offer certain retirementaccount services, such as Individual Retirement Accounts.  All deposit accounts are insured by the FDICup to the maximum amount allowed by law (generally, $250,000 per depositor,subject to aggregation rules).  Wesolicit these accounts from individuals, businesses, associations andorganizations, and governmental authorities.

 

**LendingActivities**

** **

*General*.  We emphasize a range of lending services,including real estate, commercial, agricultural and consumer loans, toindividuals and small to medium-sized businesses and professional concerns thatare located in or conduct a substantial portion of their business in our marketarea. The characteristics of our loan portfolio and our underwritingprocedures, collateral types, risks, approval process and lending limits arediscussed below.

 

*RealEstate Loans.* The primary component of our loan portfolio isreal estate mortgage loans, which made up approximately 59.1% of our loanportfolio at December 31, 2008. These loans are secured generally by first or second mortgages onresidential or commercial property. These loans consist of commercial real estate loans, construction anddevelopment loans, and residential real estate loans (but exclude home equityloans, which are classified as consumer loans).

 

*CommercialLoans. *At December 31,2008, approximately 19.7% of our loan portfolio consisted of commercialloans.  Commercial loans consist ofsecured and unsecured loans, lines of credit, and working capital loans.  We make these loans to various types ofbusinesses.  Included in this categoryare loans to purchase equipment, finance accounts receivable or inventory, andloans made for working capital purposes.

 

*ConsumerLoans.*  Consumer loansmade up approximately 4.6% of our loan portfolio at December 31,2008.  These are loans made toindividuals for personal and household purposes, such as secured and unsecuredinstallment and term loans, home equity loans and lines of credit, andrevolving lines of credit such as overdraft protection.  Automobiles and small recreational vehiclesare pledged as security for their purchase.

 

*AgriculturalLoans. *Approximately1.8% of our loan portfolio consisted of agricultural loans at December 31,2008.  These are loans made toindividuals and businesses for agricultural purposes, including loans tofinance crop production and livestock operating expenses, to purchase farmequipment, and to store crops.  Theseloans are secured generally by liens on growing crops and farm equipment.  Also included in this category are loans toagri-businesses, which are substantially similar to commercial loans, asdiscussed above.

 

*Constructionand Development Loans.* The remaining 14.1% of our loan portfolio at December 31, 2008 wascomposed of consumer and commercial real estate construction and commercialdevelopment loans.  These loans aresecured by the real estate for which construction is planned and, in manycases, by supplementary collateral.

 

*UnderwritingProcedures, Collateral, and Risk. *Weuse our established credit policies and procedures when underwriting each typeof loan.  Although there are minorvariances in the characteristics and criteria for each loan type, which mayrequire additional underwriting procedures, we generally evaluate borrowersusing the following defined criteria:

 

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·                  Character– we evaluate whether the borrower has sound character and integrity byexamining the borrower’s history.

·                  Capital– we evaluate the borrower’s overall financial strength, as well as the equityinvestment in the asset being financed.

·                  Collateral– we evaluate whether the collateral is adequate from the standpoint ofquality, marketability, value and income potential.

·                  Capacity– we evaluate the borrower’s ability to service the debt.

·                  Conditions– we underwrite the credit in light of the effects of external factors, such aseconomic conditions and industry trends.

 

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

 

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

 

Each real estate loan issensitive to fluctuations in the value of the real estate that secures thatloan.  Certain types of real estate loanshave specific risk characteristics that vary according to the type of collateralthat secures the loan, the terms of the loan, and the repayment sources for theloan.  Construction and development realestate loans generally carry a higher degree of risk than long term financingof existing properties.  These projectsare usually dependent on the completion of the project on schedule and withincost estimates and on the timely sale of the property.  Inferior or improper construction techniques,changes in economic conditions during the construction and marketing period,and rising interest rates which may slow the sale of the property are all risksunique to this type of loan.  Residentialmortgage loans, in contrast to commercial real estate loans, generally havelonger terms and may have fixed or adjustable interest rates.

 

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

 

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

 

*LoanApproval and Review*. Our loan approval policies provide for various levels of officer lendingauthority.  When the amount of aggregateloans to a single borrower exceeds that individual officer’s lending authority,the loan request is considered by an officer with a higher lending limit.  Any loan in excess of this lending limit isapproved by the directors’ loan committee. We do not make any loans to any of our directors or executive officersunless the loan is approved by a three-fourth’s vote of

 

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the board of directors ofthe bank and is made on terms not more favorable to such person than would beavailable to a person not affiliated with us. Aggregate credit in excess of 10% of the bank’s aggregate capital,surplus, retained earnings, and reserve for loan losses must be approved by athree-fourth’s vote of our bank’s board of directors.

 

*ResidentialMortgage Loans*.  Weoffer a variety of residential mortgage lending products, including loans withfixed rates for fifteen and thirty years as well as adjustable rate mortgages(ARMs).  Typically, we close these loanswith funds provided by a secondary market investor, although we may close themin the Bank’s name under a pre-approved commitment to sell the loans to aninvestor within a few weeks from the date the loan is closed.

* *

*LendingLimits.*  Our lendingactivities are subject to a variety of lending limits imposed by federallaw.  While differing limits apply tocertain loan types or borrowers, in general we are subject to aloan-to-one-borrower limit.  These limitsincrease or decrease as our capital increases or decreases.  Unless we sell participations in loans toother financial institutions, we are not able to meet all of the lending needsof loan customers requiring aggregate extensions of credit above these limits.

 

**Other Banking and Related Services**

** **

Other bankservices which are in place or planned include cash management services, sweepaccounts, repurchase agreements, cellular phone banking, remote depositcapture, safe deposit boxes, travelers checks, direct deposit of payroll andsocial security checks, on-line banking and automatic drafts for variousaccounts.  We are associated with ashared network of automated teller machines that may be used by our customersthroughout South Carolina and other regions. One of our non-executive officers is a registered representative ofUVEST, and he effects transactions in securities and other non-depositinvestment products.  We also offerMasterCard and VISA credit card services through a third party vendor.  We continue to seek and evaluateopportunities to offer additional financial services to our customers.

 

**Competition**

 

The banking business is highly competitive.  We compete with other commercial banks,savings and loan associations, credit unions, and money market mutual fundsoperating in our service area and elsewhere. According to the FDIC data as of June 30, 2008, there were 24financial institutions operating in Horry County, 13 financial institutionsoperating in Brunswick County and 7 financial institutions operating inColumbus County.  We believe that ourcommunity bank focus, with our emphasis on service to small businesses,individuals, and professional concerns, gives us an advantage in ourmarkets.  Nevertheless, a number of thesecompetitors are well established in our service area.  Most of them have substantially greaterresources and lending limits than the bank and offer certain services, such asextensive and established branch networks and trust services, that we do notprovide.  As a result of these competitivefactors, we may have to pay higher rates of interest to attract deposits.

** **

**Employees**

** **

As of March 15, 2009, we had 158 full-timeemployees and 1 part-time employee.  Weare not a party to a collective bargaining agreement, and we consider ourrelations with our employees to be good.

 

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**SUPERVISIONAND REGULATION**

 

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

 

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

 

**HCSBFinancial Corporation**

 

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

 

***Permitted Activities.*** Under the Bank Holding Company Act, a bankholding company is generally permitted to engage in, or acquire direct orindirect control of more than 5% of the voting shares of any company engagedin, the following activities:

 

·                  banking or managing or controllingbanks;

 

·                  furnishing services to or performingservices for our subsidiaries; and

 

·                  any activity that the Federal Reservedetermines to be so closely related to banking as to be a proper incident tothe business of banking.

 

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

 

·                  factoring accounts receivable;

 

·                  making, acquiring, brokering orservicing loans and usual related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depositoryinstitution, such as a savings association;

 

·                  trust company functions;

 

·                  financial and investment advisoryactivities;

 

·                  conducting discount securitiesbrokerage activities;

 

·                  underwriting and dealing ingovernment obligations and money market instruments;

 

·                  providing specified managementconsulting and counseling activities;

 

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·                  performing selected data processingservices and support services;

 

·                  acting as agent or broker in sellingcredit life insurance and other types of insurance in connection with credittransactions; and

 

·                  performing selected insuranceunderwriting activities.

 

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

 

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

 

***Change in Control.***  In addition, and subject to certainexceptions, the Bank Holding Company Act and the Change in Bank Control Act,together with regulations promulgated there under, require Federal Reserveapproval prior to any person or company acquiring “control” of a bank holdingcompany.  Control is conclusivelypresumed to exist if an individual or company acquires 25% or more of any classof voting securities of a bank holding company. Following the relaxing of these restrictions by the Federal Reserve in September 2008,control will be rebuttably presumed to exist if a person acquires more than 33%of the total equity of a bank or bank holding company, of which it may own,control or have the power to vote not more than 15% of any class of votingsecurities.

 

***Source of Strength****.*  In accordance with Federal Reserve Boardpolicy, we are expected to act as a source of financial strength to the bankand to commit resources to support the bank in circumstances in which we mightnot otherwise do so.  If the bank were tobecome “undercapitalized” (see below “Horry County State Bank — Prompt CorrectiveAction”), we would be required to provide a guarantee of the bank’s plan toreturn to capital adequacy. Additionally, under the bank Holding Company Act, the Federal ReserveBoard may require a bank holding company to terminate any activity or relinquishcontrol of a nonbank subsidiary, other than a nonbank subsidiary of a bank,upon the Federal Reserve Board’s determination that such activity or controlconstitutes a serious risk to the financial soundness or stability of anydepository institution subsidiary of the bank holding company.  Further, federal bank regulatory authoritieshave additional discretion to require a bank holding company to divest itselfof any bank or nonbank subsidiaries if the agency determines that divestituremay aid the depository institution’s financial condition.  Further, any loans by a bank holding companyto a subsidiary bank are subordinate in right of payment to deposits andcertain other indebtedness of the subsidiary bank.  In the event of a bank holding company’sbankruptcy, any commitment by the bank holding company to a federal bankregulatory agency to maintain the capital of a subsidiary bank at a certainlevel would be assumed by the bankruptcy trustee and entitled to prioritypayment.

 

***CapitalRequirements.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the bank described below under “Horry County State Bank- Capital Regulations.”  However, TheFederal Reserve guidelines contain an exemption from the capital requirementsfor “small bank holding companies” which in 2006 were amended to cover mostbank holding companies with less than $500 million in total assets that do nothave a material amount of debt or equity securities outstanding registered withthe SEC.  Although our class of commonstock is registered under Section 12 of the Securities Exchange Act, webelieve that because our stock is not listed on any exchange or otherwiseactively traded, the Federal Reserve Board will interpret its new guidelines tomean that we qualify as a

 

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small bank holdingcompany.  Nevertheless, our Bank remainssubject to these capital requirements. Failure to meet minimum capital requirements can initiate certainmandatory and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the Bank’s financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities, and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The Bank’s capital amounts and classifications are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.  Regardless, our Bank is “wellcapitalized” under these minimum capital requirements as set per bankregulatory agencies.

 

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

 

***SouthCarolina State Regulation.***  As a South Carolina bank holding companyunder the South Carolina Banking and Branching Efficiency Act, we are subjectto limitations on sale or merger and to regulation by the South Carolina Boardof Financial Institutions.  We are notrequired to obtain the approval of the South Carolina Board prior to acquiringthe capital stock of a national bank, but we must notify them at least 15 daysprior to doing so.  We must receive theBoard’s approval prior to engaging in the acquisition of a South Carolina statechartered bank or another South Carolina bank holding company.

 

**Horry County State Bank**

 

Thebank operates as a state bank incorporated under the laws of the State of SouthCarolina and is subject to examination by the South Carolina Board of FinancialInstitutions.  Deposits in the bank areinsured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximumamount, which  is currently $100,000 foreach non-retirement depositor and $250,000 for certain retirement-accountdepositors.  However, the FDIC hasincreased the coverage up to $250,000 for each non-retirement depositor throughDecember 31, 2009, and the bank is participating in the FDIC’s TemporaryLiquidity Guarantee Program (discussed below in greater detail) which, in part,fully insures non-interest bearing transaction accounts.

 

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

 

·                  security devicesand procedures;

 

·                  adequacy ofcapitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances ofsecurities;

 

·                  payment ofdividends;

 

·                  interest ratespayable on deposits;

 

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·                  interest ratesor fees chargeable on loans;

 

·                  establishment ofbranches;

 

·                  corporatereorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carryon safe lending and deposit gathering practices.

 

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

 

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

 

·                  internal controls;

 

·                  information systems and auditsystems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

·                  interest rate risk exposure; and

 

·                  asset quality.

 

***Prompt Corrective Action. ***As an insured depository institution, the bank isrequired to comply with the capital requirements promulgated under the FederalDeposit Insurance Act and the regulations thereunder, which set forth****five capital categories, each with specific regulatoryconsequences.  Under these regulations,the categories are:

 

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

 

·                  Adequately Capitalized — The institutionmeets the required minimum level for each relevant capital measure.  No capital distribution may be made thatwould result in the institution becoming undercapitalized.  An adequately capitalized institution is one (i) havinga total capital ratio of 8% or greater, (ii) having a tier 1 capital ratioof 4% or greater and (iii) having a leverage capital ratio of 4% orgreater or a leverage capital ratio of 3% or greater if the institution israted composite 1 under the CAMELS (Capital, Assets, Management, Earnings,Liquidity and Sensitivity to market risk) rating system.

 

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

 

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

 

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

 

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

 

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

 

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

 

Asof December 31, 2008, the bank was deemed to be “well capitalized.”

 

***Standardsfor Safety and Soundness.  ***TheFederal Deposit Insurance Act (“FDIA”) also requires the federal bankingregulatory agencies to prescribe, by regulation or guideline, operational andmanagerial standards for all insured depository institutions relating to: (i) internalcontrols, information systems, and internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth.  Theagencies also must prescribe standards for asset quality, earnings, and stockvaluation, as well as standards for compensation, fees, and benefits.  The federal banking agencies have adoptedregulations and Interagency Guidelines Prescribing Standards for Safety andSoundness to implement these required standards.  These guidelines set forth the safety andsoundness standards that the 

 

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federal banking agenciesuse to identify and address problems at insured depository institutions beforecapital becomes impaired.  Under theregulations, if the FDIC determines that the bank fails to meet any standardsprescribed by the guidelines, the agency may require the bank to submit to theagency an acceptable plan to achieve compliance with the standard, as requiredby the FDIC.  The final regulationsestablish deadlines for the submission and review of such safety and soundnesscompliance plans.

 

***Transactionswith Affiliates and Insiders.***  The company is a legal entity separate anddistinct from the bank and its other subsidiaries.  Various legal limitations restrict the bankfrom lending or otherwise supplying funds to the company or its non-banksubsidiaries.  The company and the bankare subject to Section 23A and 23B of the Federal Reserve Act and FederalReserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  The aggregateof all covered transactions is limited in amount, as to any one affiliate, to10% of the bank’s capital and surplus and, as to all affiliates combined, to20% of the bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each coveredtransaction must meet specified collateral requirements.  The bank is forbidden to purchase low qualityassets from an affiliate.

 

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

 

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

 

The bank is also subjectto certain restrictions on extensions of credit to executive officers,directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must bemade on substantially the same terms, including interest rates and collateral,as those prevailing at the time for comparable transactions with third partiesand (ii) must not involve more than the normal risk of repayment orpresent other unfavorable features.

 

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

 

***Anti-TyingRestrictions***.  Under amendments to the Bank Holding Company Act and Federal Reserveregulations, a bank is prohibited from engaging in certain tying or reciprocityarrangements with its customers.  Ingeneral, a bank may not extend credit, lease, sell property, or furnish anyservices or fix or vary the consideration for these on the condition that (i) thecustomer obtain or provide some additional credit, property, or services fromor to the bank, the bank holding company or subsidiaries thereof or (ii) thecustomer may not obtain some other credit, property, or services from acompetitor, except to the extent reasonable conditions are imposed to assurethe soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balanceproducts and may otherwise offer more favorable terms if a customer obtains twoor more traditional bank products; and certain foreign transactions are exemptfrom the general rule.  A bank holdingcompany or any bank affiliate also is subject to anti-tying requirements inconnection with electronic benefit transfer services.

 

***CommunityReinvestment Act****.*  The Community Reinvestment Act (“CRA”)requires that, in connection with examinations of financial institutions withintheir respective jurisdictions, a financial institution’s primary regulator,which is the FDIC for the bank, shall evaluate the record of each financialinstitution in meeting the credit needs of its local community, including lowand moderate income neighborhoods.  Thesefactors are also considered in evaluating mergers, acquisitions, andapplications to 

 

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open a branch orfacility.  Failure to adequately meetthese criteria could impose additional requirements and limitations on ourbank.  Additionally, we must publiclydisclose the terms of various Community Reinvestment Act-related agreements.

 

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

 

***Consumer Protection Regulations.*** Activities of the bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the bank are subject to state usury laws and federal lawsconcerning interest rates.  The bank’sloan operations are also subject to federal laws applicable to credittransactions, such as the:

 

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

 

·                  The Home Mortgage Disclosure Act of1975, requiring financial institutions to provide information to enable thepublic and public officials to determine whether a financial institution isfulfilling its obligation to help meet the housing needs of the community itserves;

 

·                  The Equal Credit Opportunity Act,prohibiting discrimination on the basis of race, creed or other prohibitedfactors in extending credit;

 

·                  The Fair Credit Reporting Act of1978, as amended by the Fair and Accurate Credit Transactions Act, governingthe use and provision of information to credit reporting agencies, certainidentity theft protections and certain credit and other disclosures;

 

·                  The Fair Debt Collection Act,governing the manner in which consumer debts may be collected by collectionagencies; and

 

·                  The Rules and regulations of thevarious federal agencies charged with the responsibility of implementing thesefederal laws.

 

Thedeposit operations of the bank also are subject to:

 

·                  the Right to Financial Privacy Act,which imposes a duty to maintain confidentiality of consumer financial recordsand prescribes procedures for complying with administrative subpoenas offinancial records; and

 

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

 

***EnforcementPowers.***  The bankand its “institution-affiliated parties,” including its management, employees,agents, independent contractors, and consultants such as attorneys andaccountants and others who participate in the conduct of the financialinstitution’s affairs, are subject to potential civil and criminal penaltiesfor violations of law, regulations or written orders of a government agency.These practices can include the failure of an institution to timely filerequired reports or the filing of false or misleading information or thesubmission of inaccurate reports.  Civilpenalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financialinstitution crimes have been increased to 20 years. 

 

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In addition, regulatorsare provided with greater flexibility to commence enforcement actions againstinstitutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

***Anti-MoneyLaundering.***  Financial institutions must maintain anti-money laundering programs thatinclude established internal policies, procedures, and controls; a designatedcompliance officer; an ongoing employee training program; and testing of theprogram by an independent audit function. The company and the bank are alsoprohibited from entering into specified financial transactions and accountrelationships and must meet enhanced standards for due diligence and “knowingyour customer” in their dealings with foreign financial institutions andforeign customers.  Financialinstitutions must take reasonable steps to conduct enhanced scrutiny of accountrelationships to guard against money laundering and to report any suspicioustransactions, and recent laws provide law enforcement authorities withincreased access to financial information maintained by banks.  Anti-money laundering obligations have beensubstantially strengthened as a result of the USA Patriot Act, enacted in 2001and renewed in 2006.  Bank regulatorsroutinely examine institutions for compliance with these obligations and arerequired to consider compliance in connection with the regulatory review of applications.  The regulatory authorities have been activein imposing “cease and desist” orders and money penalty sanctions againstinstitutions found to be violating these obligations.

 

***USA PATRIOT Act. ***The USA PATRIOTAct became effective on October 26, 2001, amended, in part, the BankSecrecy Act, and provides, in part, for the facilitation of information sharingamong governmental entities and financial institutions for the purpose ofcombating terrorism and money laundering by enhancing anti-money laundering andfinancial transparency laws, as well as enhanced information collection toolsand enforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports by brokers and dealers if they believe a customer may be violating U.S.laws and regulations and requires enhanced due diligence requirements forfinancial institutions that administer, maintain, or manage private bankaccounts or correspondent accounts for non-U.S. persons.  Bankregulators routinely examine institutions for compliance with these obligationsand are required to consider compliance in connection with the regulatory reviewof applications.

 

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

 

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

 

***Privacy and Credit Reporting*. **Financial institutions are required todisclose their policies for collecting and protecting confidentialinformation.  Customers generally mayprevent financial institutions from sharing nonpublic personal financial informationwith nonaffiliated third parties except under narrow 

 

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circumstances, such asthe processing of transactions requested by the consumer or when the financialinstitution is jointly sponsoring a product or service with a nonaffiliatedthird party.  Additionally, financialinstitutions generally may not disclose consumer account numbers to anynonaffiliated third party for use in telemarketing, direct mail marketing orother marketing to consumers.  It is thebank’s policy not to disclose any personal information unless required by law.

 

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

 

***Payment of Dividends.*** A South Carolina state bankmay not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, afterdeducting expenses, including reserves for losses and bad debts.  The bank is authorized to pay cash dividendsup to 100% of net income in any calendar year without obtaining the priorapproval of the South Carolina Board of Financial Institutions, provided thatthe bank received a composite rating of one or two at the last federal or stateregulatory examination.  The bank mustobtain approval from the South Carolina Board of Financial Institutions priorto the payment of any other cash dividends. In addition, under the FDIC Improvement Act, the bank may not pay adividend if, after paying the dividend, the bank would be undercapitalized.

 

***Check 21.*** The Check Clearing for the 21st Century Act gives “substitute checks,”such as a digital image of a check and copies made from that image, the samelegal standing as the original paper check. Some of the major provisions include:

 

·                                          allowingcheck truncation without making it mandatory;

 

·                                          demandingthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

 

·                                          legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

 

·                                          retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

 

·                                          requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

 

·                                          requiringthe re-crediting of funds to an individual’s account on the next business dayafter a consumer proves that the financial institution has erred.

 

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

 

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

 

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***RecentLegislative and Regulatory Initiatives to Address Financial and EconomicCrises. ***TheCongress, Treasury Department and the federal banking regulators, including theFDIC, have taken broad action since early September 2008 to addressvolatility in the U.S. banking system.

 

In October 2008, theEmergency Economic Stabilization Act of 2008 (“EESA”) wasenacted. The EESA authorizes the Treasury Department to purchase fromfinancial institutions and their holding companies up to $700 billion inmortgage loans, mortgage-related securities and certain other financialinstruments, including debt and equity securities issued by financialinstitutions and their holding companies in a troubled asset relief program (“TARP”).  Thepurpose of TARP is to restore confidence and stability to the U.S. bankingsystem and to encourage financial institutions to increase their lending tocustomers and to each other.  The Treasury Department has allocated$250 billion towards the TARP Capital Purchase Program (“CPP”).  Underthe CPP, Treasury will purchase debt or equity securities from participatinginstitutions.  The TARP also will include direct purchases orguarantees of troubled assets of financial institutions. Participants inthe CPP are subject to executive compensation limits and are encouraged toexpand their lending and mortgage loan modifications.

 

On March 6, 2009, aspart of the TARP CPP, we entered into a Letter Agreement and SecuritiesPurchase Agreement (collectively, the “Purchase Agreement”) with the TreasuryDepartment, pursuant to which we sold (i) 12,895 shares of our Fixed RateCumulative Perpetual Preferred Stock, Series T (the “Series TPreferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 91,714shares of our common stock for an aggregate purchase price of $12,895,000millionin cash.  We also entered into a letteragreement with the Treasury (the “Letter Agreement”) confirming theapplicability of the provisions of the American Recovery and Reinvestment Actof 2009 (the “ARRA”) to the company.

 

The Series TPreferred Stock will qualify as Tier 1 capital and will be entitled tocumulative dividends at a rate of 5% per annum for the first five years, and 9%per annum thereafter, but will be paid only if, as, and when declared by ourboard of directors. The Series T Preferred Stock has no maturity date andranks senior to the common stock with respect to the payment of dividends anddistributions and amounts payable upon liquidation, dissolution and winding upof the company. The Series T Preferred Stock generally is non-voting.

 

Pursuant to the terms ofthe certificate of designations creating the Series T Preferred Stock, wemay only redeem the Series T Preferred Stock at par after May 15,2012. Prior to this date, we may redeem the Series T Preferred Stock atpar if (i) we have raised aggregate gross proceeds in one or moreQualified Equity Offerings (as defined in the Purchase Agreement) in excess ofapproximately $3.2 million, and (ii) the aggregate redemption price doesnot exceed the aggregate net proceeds from such Qualified Equity Offerings. Anyredemption is subject to the consent of the Board of Governors of the FederalReserve System.  However, pursuant to theterms of ARRA and the ARRA Letter Agreement, we may, upon consultation with ourprimary federal regulator, repay the amount received for the Series TPreferred Stock at any time, without regard to whether we have replaced suchfunds from any source or to any waiting period. Upon repayment of the amountreceived for the Series T Preferred Stock, the Treasury Department willalso liquidate the associated Warrant in accordance with ARRA and any rules andregulations thereunder.

 

EESA also increased FDICdeposit insurance on most accounts from $100,000 to $250,000.  Thisincrease is in place until the end of 2009 and is not covered by depositinsurance premiums paid by the banking industry.

 

Following a systemic riskdetermination, the FDIC established the Temporary Liquidity Guarantee Program (“TLGP”)on October 14, 2008.  The TLGP includes the Transaction AccountGuarantee Program (“TAGP”), which provides unlimited deposit insurance coveragethrough December 31, 2009 for noninterest-bearing transaction accounts(typically business checking accounts) and certain funds swept intononinterest-bearing savings accounts.  Institutions participating inthe TLGP pay a 10 basis points fee (annualized) on the balance of each coveredaccount in excess of $250,000, while the extra deposit insurance is inplace.  The TLGP also includes the Debt Guarantee Program (“DGP”),under which the FDIC guarantees certain senior unsecured debt of FDIC-insuredinstitutions and their holding companies.  The unsecured debt must beissued on or after October 14, 2008 and not later than June 30, 

 

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2009, and the guaranteeis effective through the earlier of the maturity date or June 30,2012.  On March 17, 2009, the FDIC adopted an interim rule thatextends the DGP and imposes surcharges on existing rates for certain debtissuances.  This extension allowsinstitutions that have issued guaranteed debt before April 1, 2009 toissue guaranteed debt during the extended issuance period that ends on October 31,2009. For such institutions, the guarantee on debt issued on or after April 1,2009, will expire no later than December 31, 2012.  The DGP coveragelimit is generally 125% of the eligible entity’s eligible debt outstanding on September 30,2008 and scheduled to mature on or before June 30, 2009 or, for certaininsured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debt maturity, the nonrefundableDGP fee ranges from 60 to 110 basis points (annualized) for covered debtoutstanding until the earlier of maturity or June 30, 2012 and 75 to 125basis points (annualized) for covered debt outstanding until after June 30,2012.  The TAGP and DGP are in effect for all eligible entities, unlessthe entity opted out on or before December 5, 2008.  We willparticipate in the TAGP but will not participate in the DGP.

 

***Insurance of Accounts and Regulation by the FDIC.*****  Deposits at the bank areinsured up to applicable limits by the Deposit Insurance Fund of theFDIC.  The Deposit Insurance Fund is the successor to the BankInsurance Fund and the Savings Association Insurance Fund, which were mergedeffective March 31, 2006.  As insurer, the FDIC imposes depositinsurance premiums and is authorized to conduct examinations of and to requirereporting by FDIC insured institutions.  It also may prohibit anyFDIC insured institution from engaging in any activity the FDIC determines byregulation or order to pose a serious risk to the insurancefund.  The FDIC also has the authority to initiate enforcementactions against savings institutions, after giving the Office of ThriftSupervision an opportunity to take such action, and may terminate the depositinsurance if it determines that the institution has engaged in unsafe orunsound practices or is in an unsafe or unsound condition.

 

Under regulations effective January 1, 2007, the FDIC adopted anew risk-based premium system that provides for quarterly assessments based onan insured institution’s ranking in one of four risk categories based uponsupervisory and capital evaluations.   For deposits held as of March 31,2009, institutions are assessed at annual rates ranging from 12 to 50basis points, depending on each institution’s risk of default as measuredby regulatory capital ratios and other supervisorymeasures.   Effective April 1, 2009, assessments willtake into account each institution’s reliance on securedliabilities and brokered deposits.   This will result inassessments ranging from 7 to 77.5 basis points.  We anticipate our futureinsurance costs to be higher than in previous periods.   Based on current FDIC requirements and ourcurrent status, and assuming our status would be the same on April 1,2009, we would anticipate quarterly assessments in the range of $100,000 to135,000.

 

FDIC insured institutions are required to pay a Financing Corporationassessment, in order to fund the interest on bonds issued to resolve thriftfailures in the 1980s.  For the  first quarter of 2009, theFinancing Corporation assessment equaled 1.14 basis points for domesticdeposits.    These assessments, which may be revised basedupon the level of deposits, will continue until the bonds mature in the years2017 through 2019.

 

The FDIC may terminate the deposit insurance of any insured depositoryinstitution, including the bank, if it determines after a hearing that theinstitution has engaged in unsafe or unsound practices, is in an unsafe orunsound condition to continue operations or has violated any applicable law,regulation, rule, order or condition imposed by the FDIC or theOCC.  It also may suspend deposit insurance temporarily duringthe hearing process for the permanent termination of insurance, if theinstitution has no tangible capital.  If insurance of accounts isterminated, the accounts at the institution at the time of the termination,less subsequent withdrawals, shall continue to be insured for a period of sixmonths to two years, as determined by the FDIC.  Management of thebank is not aware of any practice, condition or violation that might lead totermination of the bank’s deposit insurance.

 

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**Item1A.  Risk Factors.**

 

*Our business, financial condition, and results of operationscould be harmed by any of the following risks, or other risks that have notbeen identified or which we believe are immaterial or unlikely.  Shareholders should carefully consider therisks described below in conjunction with the other information in this Form 10-Kand the information incorporated by reference in this Form 10-K, includingour consolidated financial statements and related notes.*

 

***Recentnegative developments in the financial industry and the domestic andinternational credit markets may adversely affect our operations and results.***

 

Negative developments inthe latter half of 2007 and during 2008 in the global credit and securitizationmarkets have resulted in uncertainty in the financial markets in general withthe expectation of the general economic downturn continuing into 2009.  As a result of this “credit crunch,”commercial as well as consumer loan portfolio performances have deteriorated atmany institutions and the competition for deposits and quality loans hasincreased significantly.  In addition,the values of real estate collateral supporting many commercial loans and homemortgages have declined and may continue to decline.  Global securities markets, and bank holdingcompany stock prices in particular, have been negatively affected, as has theability of banks and bank holding companies to raise capital or borrow in thedebt markets.  As a result, significantnew federal laws and regulations relating to financial institutions, including,without limitation, the EESA and the U.S. Treasury Department’s CPP, have beenadopted.  Furthermore, the potentialexists for additional federal or state laws and regulations regarding, amongother matters, lending and funding practices and liquidity standards, and bankregulatory agencies are expected to be active in responding to concerns andtrends identified in examinations, including the expected issuance of manyformal enforcement orders.  Negativedevelopments in the financial industry and the domestic and internationalcredit markets, and the impact of new legislation in response to thosedevelopments, may negatively impact our operations by restricting our businessoperations, including our ability to originate or sell loans, and adverselyimpact our financial performance.  We canprovide no assurance regarding the manner in which any new laws and regulationswill affect us.

 

***There can be no assurance that recentlyenacted legislation will help stabilize the U.S. financial system.***

 

The EESA was signed intolaw on October 3, 2008 in response to the financial crises affecting thebanking system and financial markets and going concern threats to investmentbanks and other financial institutions. Pursuant to EESA, the Treasury Department has the authority to, amongother things, purchase up to $700 billion of mortgages, mortgage-backedsecurities and certain other financial instruments from financial institutionsfor the purpose of stabilizing and providing liquidity to the U.S. financialmarkets.  The Treasury Departmentannounced the CPP under EESA pursuant to which it has purchased and maycontinue to purchase senior preferred stock in participating financialinstitutions.  On March 6, 2009, weentered into the CPP Purchase Agreement with the Treasury providing for ourissuance of the Series T Preferred Stock and the Warrant to the Treasury.

 

In addition, the FDICcreated the TGLP as part of a larger government effort to strengthen confidenceand encourage liquidity in the nation’s banking system.  The TLGP has two components. First, the TLGPincludes the TAGP, which provides unlimited deposit insurance coverage through December 31,2009 for noninterest-bearing transaction accounts (typically business checkingaccounts) and certain funds swept into noninterest-bearing savingsaccounts.  Institutions participating inthe TLGP pay a 10 basis points fee (annualized) on the balance of each coveredaccount in excess of $250,000, while the extra deposit insurance is inplace.  Second, the TLGP includes theDGP, under which the FDIC guarantees certain senior unsecured debt ofFDIC-insured institutions and their holding companies.  The unsecured debt must be issued on or afterOctober 14, 2008 and not later than June 30, 2009, and the guaranteeis effective through the earlier of the maturity date or June 30,2012.  On March 17,2009, the FDIC adopted 

 

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aninterim rule that extends the DGP and imposes surcharges on existing ratesfor certain debt issuances.  Thisextension allows institutions that have issued guaranteed debt before April 1,2009 to issue guaranteed debt during the extended issuance period that ends on October 31,2009. For such institutions, the guarantee on debt issued on or after April 1,2009, will expire no later than December 31, 2012.  The DGP coveragelimit is generally 125% of the eligible entity’s eligible debt outstanding on September 30,2008 and scheduled to mature on or before June 30, 2009 or, for certaininsured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debtmaturity, the nonrefundable DGP fee ranges from 60 to 110 basis points(annualized) for covered debt outstanding until the earlier of maturity or June 30,2012 and 75 to 125 basis points (annualized) for covered debt outstanding untilafter June 30, 2012.  The TAGP and DGP are in effectfor all eligible entities, unless the entity opted out on or before December 5,2008.  We will participate in theTAGP and will not participate in the DGP.

 

On February 17,2009, the ARRA was signed into law in an effort to, among other things, createjobs and stimulate growth in the United States economy.  The ARRA specifies appropriations ofapproximately $787 billion for a wide range of Federal programs and willincrease or extend certain benefits payable under the Medicaid, unemploymentcompensation, and nutrition assistance programs.  The ARRA also reduces individual andcorporate income tax collections and makes a variety of other changes to taxlaws.  The ARRA also imposes certainlimitations on compensation paid by participants in the TARP, which includesprograms under TARP such as the CPP in which we participate.

 

There can be no assurancethat these government actions will achieve their purpose.  The failure of the financial markets tostabilize, or a continuation or worsening of the current financial marketconditions, could have a material adverse affect on our business, our financialcondition, the financial condition of our customers, our common stock tradingprice, as well as our ability to access credit.  It could also resultin declines in our investment portfolio which could be “other-than-temporaryimpairments.”

 

***Becauseof our participation in the Treasury Department’s CPP, we are subject toseveral restrictions including restrictions on compensation paid to ourexecutives.***

 

Pursuant to the terms ofthe CPP Purchase Agreement between us and the Treasury Department, we adoptedcertain standards for executive compensation and corporate governance for theperiod during which the Treasury Department holds the equity issued pursuant tothe CPP Purchase Agreement, including the common stock which may be issuedpursuant to the Warrant.  These standardsgenerally apply to our Chief Executive Officer, Chief Financial Officer and thethree next most highly compensated senior executive officers. The standardsinclude (1) ensuring that incentive compensation for senior executivesdoes not encourage unnecessary and excessive risks that threaten the value ofthe financial institution; (2) required clawback of any bonus or incentivecompensation paid to a senior executive based on statements of earnings, gainsor other criteria that are later proven to be materially inaccurate; (3) prohibitionon making golden parachute payments to senior executives; and (4) agreementnot to deduct for tax purposes executive compensation in excess of $500,000 foreach senior executive.  In particular,the change to the deductibility limit on executive compensation may likelyincrease the overall cost of our compensation programs in future periods andmay make it more difficult to attract suitable candidates to serve as executiveofficers.

 

***Legislation or regulatory changes could cause us to seek torepurchase the preferred stock and warrants that we sold to the TreasuryDepartment pursuant to the CPP.***

 

Legislation that has beenadopted after we closed on our sale of Series T Preferred Stock and theWarrants to the Treasury for $12,895,000 million pursuant to the CPP on March 6,2009, or any legislation or regulations that may be implemented in the future,may have a material impact on the terms of our CPP transaction with theTreasury Department.   If we determinethat any such legislation or any regulations, in whole or in part, alter theterms of our CPP transaction with the Treasury Department in ways that webelieve are adverse to our ability to effectively manage our business, then itis possible that we may seek to unwind, in whole or in part, the CPPtransaction by repurchasing some or all of the Series T Preferred Stockand Warrants that we sold to the Treasury Department pursuant to the CPP.  If we were to repurchase

 

19

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all or a portion of such Series TPreferred Stock or Warrants, then our capital levels could be materiallyreduced.

 

***Continuation of theeconomic downturn could reduce our customer base, our level of deposits, anddemand for financial products such as loans.***

 

Our success significantlydepends upon the growth in population, income levels, deposits, and housingstarts in our markets.  The currenteconomic downturn has negatively affected the markets in which we operate and,in turn, the quality of our loan portfolio. If the communities in which we operate do not grow or if prevailingeconomic conditions locally or nationally remain unfavorable, our business maynot succeed.  A continuation of theeconomic downturn or prolonged recession would likely result in the continueddeterioration of the quality of our loan portfolio and reduce our level ofdeposits, which in turn would hurt our business.  Interest received on loans representedapproximately 82.2% of our interest income for the year ended December 31,2008.  If the economic downturn continuesor a prolonged economic recession occurs in the economy as a whole, borrowerswill be less likely to repay their loans as scheduled.  Moreover, in many cases the value of realestate or other collateral that secures our loans has been adversely affectedby the economic conditions and could continue to be negatively affected.  Unlike many larger institutions, we are notable to spread the risks of unfavorable local economic conditions across alarge number of diversified economies.  Acontinued economic downturn could, therefore, result in losses that materiallyand adversely affect our business.

 

***Our small- to medium-sizedbusiness target markets may have fewer financial resources to weather acontinued downturn in the economy.***

 

We target the banking andfinancial services needs of small- and medium-sized businesses.  These businesses generally have fewerfinancial resources in terms of capital borrowing capacity than largerentities.  If general economic conditionscontinue to negatively impact these businesses in the markets in which weoperate, our business, financial condition, and results of operation may beadversely affected.

 

***Weare exposed to changes in the regulation of financial services companies.***

 

                Proposals for further regulation of the financialservices industry are continually being introduced in the Congress of theUnited States of America and the General Assembly of the State of SouthCarolina.  The agencies regulating thefinancial services industry also periodically adopt changes to theirregulations.  On September 7, 2008,the Treasury Department announced that Fannie Mae (along with Freddie Mac) hasbeen placed into conservatorship under the control of the newly created FederalHousing Finance Agency.  On October 3,2008, EESA was signed into law, and on October 14, 2008 the U.S. TreasuryDepartment announced the CPP under EESA. It is possible that additional legislative proposals may be adopted orregulatory changes may be made that would have an adverse effect on ourbusiness.  See “*Risk Factors— We are subject to extensive regulation that could restrict our activities”*above.

 

***The FDICDeposit Insurance assessments that we are required to pay may materiallyincrease in the future, which would have an adverse effect on our earnings andour ability to pay our liabilities as they come due.***

 

As a member institution of the FDIC, we arerequired to pay semi-annual deposit insurance premium assessments to theFDIC.  During the year ended December 31,2008, we paid $284,776 in deposit insurance assessments.  Due to the recent failure of severalunaffiliated FDIC insurance depository institutions, and the FDIC’s new TLGP,the deposit insurance premium assessments paid by all banks will likelyincrease.  In addition, new FDICrequirements shift a greater share of any increase in such assessments ontoinstitutions with higher risk profiles, including banks with heavy reliance onbrokered deposits, such as our bank.

 

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

 

We are required byregulatory authorities to maintain adequate levels of capital to support ouroperations.  To support our continuedgrowth, we may need to raise additional capital.  In addition, we

 

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intend to redeem the Series T PreferredStock that we issued to the Treasury Department under the CPP before thedividends on the Series T Preferred Stock increase from 5% per annum to 9%per annum in 2014, and we may need to raise additional capital to do so.  Our ability to raise additional capital, ifneeded, will depend in part on conditions in the capital markets at that time,which are outside our control. Accordingly, we cannot assure you of our ability to raise additionalcapital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability tofurther expand our operations through internal growth and acquisitions could bematerially impaired.  In addition, if wedecide to raise additional equity capital, your interest could be diluted.

 

***Weare exposed to the possibility of technology failure.***

 

We rely on our computersystems and the technology of outside service providers. Our daily operationsdepend on the operational effectiveness of their technology. We rely on oursystems to accurately track and record our assets and liabilities. If ourcomputer systems or outside technology sources become unreliable, fail, orexperience a breach of security, our ability to maintain accurate financialrecords may be impaired, which could materially affect our business operationsand financial condition.

 

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

 

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

 

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

 

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

 

·                  theduration of the credit;

·                  credit risks of a particularcustomer;

·                  changes in economic and industryconditions; and

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

 

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

 

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

·                  ourhistorical loan loss experience;

·                  evaluation of economic conditions;

·                  regular reviews of loan delinquenciesand loan portfolio quality; and

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

 

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

 

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While we generallyunderwrite the loans in our portfolio in accordance with our own internalunderwriting guidelines and regulatory supervisory guidelines, in certaincircumstances we have made loans, which exceed either our internal underwritingguidelines, supervisory guidelines, or both. The aggregate amount of all loansin excess of the supervisory loans-to-value limits should not exceed 100% ofour bank’s capital.  As of December 31,2008, approximately $17.5 million of our loans, or 39.9% of our bank’s capital,had loan-to-value ratios that exceeded regulatory supervisory guidelines.  In addition, within the aggregate limit notedabove, total loans for all commercial, agricultural, multifamily or other non1-4 family residential properties should not exceed 30% of total capital.  At December 31, 2008, loanscollateralized by commercial, agricultural, multifamily or other non 1-4 familyresidential properties that exceeded the supervisory loan to value ratio were$9.2 million, or 21.0% of the bank’s capital. During the first quarter of 2008, a loan for $4,085,000 was paid-off,which will reduce this ratio to 23.8% and will be in compliance with the 30% ofcapital threshold.  The number of loansin our portfolio with loan-to-value ratios in excess of supervisory guidelines,our internal guidelines, or both could increase the risk of delinquencies anddefaults in our portfolio.

 

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

 

A significant portion ofour loan portfolio is secured by real estate. As of December 31, 2008, approximately 73.2% of our loans had realestate as a primary or secondary component of collateral.  The real estate collateral in each caseprovides an alternate source of repayment in the event of default by theborrower and may deteriorate in value during the time the credit isextended.  The recent weakening of thereal estate market in the Myrtle Beach area could result in an increase in thenumber of borrowers who default on their loans and a reduction in the value of thecollateral securing their loans, which in turn could have an adverse effect onour profitability and asset quality.  Ifwe are required to liquidate the collateral securing a loan to satisfy the debtduring a period of reduced real estate values, our earnings and capital couldbe adversely affected.  Acts of nature,including hurricanes, tornados, earthquakes, fires and floods, which may causeuninsured damage and other loss of value to real estate that secures theseloans, may also negatively impact our financial condition.

 

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

 

All of the loans that wemake are subject to written loan policies adopted by our board of directors andto supervisory guidelines imposed by our regulators.  Our loan policies are designed to reduce therisks associated with the loans that we make by requiring our loan officers totake certain steps that vary depending on the type and amount of the loan, priorto closing a loan.  These steps include,among other things, making sure the proper liens are documented and perfectedon property securing a loan, and requiring proof of adequate insurance coverageon property securing loans.  Loans thatdo not fully comply with our loan policies are known as “exceptions.”  We categorize exceptions as policyexceptions, financial statement exceptions and collateral exceptions.  As a result of these exceptions, such loansmay have a higher risk of loan loss than the other loans in our portfolio thatfully comply with our loan policies.  Inaddition, we may be subject to regulatory action by federal or state bankingauthorities if they believe the number of exceptions in our loan portfoliorepresents an unsafe banking practice. Although we have taken steps to enhance the quality of our loanportfolio, we may not be successful in reducing the number of exceptions.

 

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

 

Due to the growth of ourbank into new markets over the past several years and our short operatinghistory in these communities, a large portion of the loans in our loanportfolio and of our lending relationships are of relatively recent origin.  In general, loans do not begin to show signsof credit deterioration or default until they have been outstanding for someperiod of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because a substantial portion of our loanportfolio is relatively new, the current level of delinquencies and defaultsmay not be representative of the level that will prevail when the portfoliobecomes more seasoned, which may be higher than current levels.  If delinquencies and defaults

 

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increase, we may be required to increase our provision for loan losses,which would adversely affect our results of operations and financial condition.

 

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

 

Our results of operationsdepend in large part upon the level of our net interest income, which is thedifference between interest income from interest-earning assets, such as loansand mortgage-backed securities, and interest expense on interest-bearingliabilities, such as deposits and other borrowings.  Depending on the terms and maturities of ourassets and liabilities, a significant change in interest rates could have amaterial adverse effect on our profitability. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While we intend to managethe effects of changes in interest rates by adjusting the terms, maturities,and pricing of our assets and liabilities, our efforts may not be effective andour financial condition and results of operations could suffer.  During the second half of 2007, the FederalReserve began to reduce short-term interest rates, which had an adverse effecton our earnings in 2008 and may continue to negatively impact our earnings in2009.

 

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

 

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

** **

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

** **

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

 

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

 

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

 

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

 

During 2008, managementhas evaluated and reported on the internal controls of the company in which ourindependent registered public accounting firm will attest to our internalcontrols for fiscal year 2009.  We are performing the system and processevaluation and testing (and any necessary remediation) required to comply withthe management certification and auditor attestation requirements of Section 404of the Sarbanes-Oxley Act. While we currently anticipate that we will be ableto fully implement the requirements relating to internal controls and all otheraspects of Section 404 in a timely manner, as

 

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required by Section 404and the SEC’s related regulations, we could identify deficiencies that wemay not be able to remediate in time to meet this deadline. If we are not ableto implement or maintain the requirements of Section 404 in a timelymanner or with adequate compliance, we could be subject to scrutiny byregulatory authorities and the trading price of our stock coulddecline.  Moreover, effective internal controls are necessaryfor us to produce reliable financial reports and are important to helpingprevent financial fraud. If we cannot provide reliable financial reports orprevent fraud, our business and operating results could be harmed, investorsand regulators could lose confidence in our reported financial information, andthe trading price of our stock could drop significantly.   Wecurrently anticipate that we will fully implement the requirementsrelating to internal controls and all other aspects of Section 404 withinthe required time frames.

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  takingadditional time and creating expense associated with identifying and evaluatingpotential acquisitions and merger partners;

·                  usinginaccurate estimates and judgments to evaluate credit, operations, management,and market risks with respect to the target institution or assets;

·                  dilutingour existing shareholders in an acquisition;

·                  takingadditional time and creating expense associated with evaluating new markets forexpansion, hiring experienced local management, and opening new offices, asthere may be

 

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a substantial time lag between these activities beforewe generate sufficient assets and deposits to support the costs of theexpansion;

·                  takinga significant amount of time negotiating a transaction or working on expansionplans, resulting in management’s attention being diverted from the operation ofour existing business;

·                  takingtime and creating expense integrating the operations and personnel of thecombined businesses;

·                  creatingan adverse short-term effect on our results of operations; and

·                  losingkey employees and customers as a result of an acquisition that is poorlyreceived.

 

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

 

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

 

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

 

**Item 2.  Description of Property.**

** **

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

 

The bank presently owns11 lots on which we have branch banking facilities in addition to thepreviously mentioned lot which houses our present Operations Center and thefive-acre tract in the Loris Commerce Center. In addition, the bank has entered into one long-term lease agreement fora lot on which we have built a branch banking facility at 3210 Highway 701Bypass, Loris, South Carolina, 29569. The bank also entered into a two-year lease agreement in May, 2007 for abuilding in the Plaza at Gator Hole at 596 Highway 17 North, North MyrtleBeach, South Carolina, 29582.

 

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

 

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The bank purchased anadditional lot at 609 Highway 17 South, North Myrtle Beach, South Carolina,29582 in 2008 and expects to begin construction of its permanent Ocean DriveBeach branch on this site during the first quarter of 2009.

 

**Item3.  Legal Proceedings.**

** **

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

 

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

** **

No matters were submittedduring the fourth quarter of the fiscal year ended December 31, 2008 to avote of security holders through the solicitation of proxies or otherwise.

 

**PART II**

** **

**Item 5.  Marketfor Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

** **

The information requiredby Item 5 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2008.

 

**Item 6.  SelectedFinancial Data.**

** **

**N/A.**

** **

**Item 7. Management’s Discussion and Analysis or Plan of Operation.**

** **

The information requiredby Item 6 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2008.

 

**Item8.  Financial Statements andSupplementary Data.**

** **

The information requiredby Item 7 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2008.

 

**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

** **

None

 

**Item 9A(T). Controls and Procedures.**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of December 31,2008.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2008 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

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

 

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**Management’s Annual Report onInternal Controls Over Financial Reporting**

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in the Exchange Act Rules 13a-15(f).  A system of internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

 

Under the supervision andwith the participation of management, including the principal executive officerand the principal financial officer, the Company’s management has evaluated theeffectiveness of its internal control over financial reporting as of December 31,2008 based on the criteria established in a report entitled “*Internal Control - Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission*” and theinterpretive guidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, the Company’smanagement has evaluated and concluded that the Company’s internal control overfinancial reporting was effective as of December 31, 2008.

 

The Company is continuouslyseeking to improve the efficiency and effectiveness of its operations and ofits internal controls. This results in modifications to its processesthroughout the Company. However, there has been no change in its internalcontrol over financial reporting that occurred during the Company’s most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

This annual report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the company to provide only management’s report in this annualreport.

 

**ITEM 9B.  Other Information.**

 

N/A.

 

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** **

**PART III**

** **

**Item 10.  Directors, Executive Officers and CorporateGovernance**

 

*Code of Ethics*

 

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

 

Additional information requiredby Item 9 is hereby incorporated by reference from our proxy statement for our2009 annual meeting of shareholders to be held on April 23, 2009.

 

**Item11.  Executive Compensation.**

 

Information required byItem 10 is hereby incorporated by reference from our proxy statement for our2009 annual meeting of shareholders to be held on April 23, 2009.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

Thefollowing table sets forth the equity compensation plan information at December 31,2008.

 

**EquityCompensation Plan Information**

 
| **Plan Category**                                      | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights(a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (c)  (excluding securities  reflected in column(a)) (1)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                                                |       |                                                                                                                 |       |                                                                                                                                                                                                                     |       |
| Equity  compensation plans approved by security holders     |       | 82,788                                                                                                                                              |       | $                                                                                                                    | 14.14      |                                                                                                                                                                                                                     | 341,572    |   |
| Equity  compensation plans not approved by security holders |       | 0                                                                                                                                                   |       | $                                                                                                                    | 0.00       |                                                                                                                                                                                                                     | 0          |   |
|                                                        |       |                                                                                                                                                |       |                                                                                                                 |       |                                                                                                                                                                                                                     |       |
| Total                                                       |       | 82,788                                                                                                                                              |       | $                                                                                                                    | 14.14      |                                                                                                                                                                                                                     | 341,572    |   |

 

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(1)          The HCSB Financial Corporation Omnibus Stock Ownership and Long TermIncentive Plan authorizes the grant of options and the award of restrictedstock from time to time during the term of the plan.  The employees included in the plan includethe executive officers of the corporation as well as certain non-executiveofficer employees.  This column includes156,681 options and 184,891 shares of restricted stock.

 

Additional informationrequired by Item 11 is hereby incorporated by reference from our proxystatement for our 2009 annual meeting of shareholders to be held on April 23,2009.

 

**Item 13.  Certain Relationships and RelatedTransactions, and Director Independence.**

 

In response to this Item12, the information contained on page 8 of our Proxy Statement for theAnnual Meeting of Shareholders to be held on April 23, 2009 isincorporated herein by reference.

 

28

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

 

Information required byItem 10 is hereby incorporated by reference from our proxy statement for our2009 annual meeting of shareholders to be held on April 23, 2009.

 

**Item15.  Exhibits**

 
| 3.1    | Articles of  Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 1999).                                                                                                                                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                   |
| 3.2    | Bylaws (incorporated by  reference to Exhibit 3.2 to the Company’s Form 10-KSB for the  fiscal year ended December 31, 1999).                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 3.3    | Articles  of Amendment to Authorize Preferred Shares, filed March 2, 2009  (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K  filed March 6, 2009).                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 3.4    | Articles  of Amendment to the Company’s Restated Articles of Incorporation establishing  the terms of the Series T Preferred Stock (incorporated by reference to  Exhibit 3.1 to the Company’s Form 8-K filed March 10, 2009).                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 4.1    | Warrant  to Purchase up to 91,714 shares of Common Stock (incorporated by reference to  Exhibit 4.1 to the Company’s Form 8-K filed March 10, 2009).*                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 4.2    | Form of  Series T Preferred Stock Certificate (incorporated by reference to  Exhibit 4.2 to the Company’s Form 8-K filed March 10, 2009).*                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.1   | HCSB Financial  Corporation Omnibus Stock Ownership and Long Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 2003).*                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.2   | Form of Restricted  Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.3   | Form of Incentive  Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.4   | Form of Director  Deferred Compensation Agreement adopted in 1997 by and between the Board of  Directors and Horry County State Bank (incorporated by reference to  Exhibit 10.4 to the Company’s Form 10-KSB for the fiscal year ended  December 31, 2006).*                                                 |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.5   | Letter Agreement, dated  March 6, 2009, including Securities Purchase Agreement — Standard Terms  incorporated by reference therein, between the Company and the United States  Department of the Treasury (incorporated by reference to Exhibit 10.1 to  the Company’s Form 8-K filed March 10, 2009).* |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.6   | ARRA Side Letter  Agreement, dated March 6, 2009, between the Company and the United  States Department of the Treasury (incorporated by reference to  Exhibit 10.2 to the Company’s Form 8-K filed March 10, 2009).*                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.7   | Form of Waiver,  executed by each of Messrs. James R. Clarkson, Edward L.  Loehr, Jr., and Glenn R. Bullard (incorporated by reference to  Exhibit 10.3 to the Company’s Form 8-K filed March 10, 2009).*                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.8   | Form of Letter  Amendment, executed by each of Messrs. James R. Clarkson, Edward L.  Loehr, Jr., and Glenn R. Bullard with the Company (incorporated by  reference to Exhibit 10.4 to the Company’s Form 8-K filed March 10,  2009).*                                                               |
|   |                                                                                                                                                                                                                                                                                                                                   |
| 10.9   | Form of Salary  Continuation Agreement adopted April 4, 2008 (incorporated by reference  to Exhibit 10.1 to the Company’s Form 8-K filed April 9,  2008).*                                                                                                                                               |

 

29

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| 10.10  | Amendment No. 1 to  the HCSB Financial Corporation Omnibus Stock Ownership and Long Term  Incentive Plan adopted October 16, 2008.* |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                          |
| 13     | The Company’s 2008  Annual Report.                                                                                                       |
|   |                                                                                                                                          |
| 21     | Subsidiaries of  Registrant.                                                                                                                  |
|   |                                                                                                                                          |
| 24     | Power of Attorney  (contained on signature pages herewith).                                                                              |
|   |                                                                                                                                          |
| 31.1   | Rule 13a-14(a) Certification  of the Chief Executive Officer.                                                                       |
|   |                                                                                                                                          |
| 31.2   | Rule 13a-14(a) Certification of the  Principal Financial Officer.                                                                   |
|   |                                                                                                                                          |
| 32     | Section 1350  Certifications.                                                                                                            |

 

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| * | Management  contract of compensatory plan or arrangement required to be filed as an  Exhibit to this Annual Report on Form 10-K. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------|

 

30

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                       |                           | **HCSB FINANCIAL CORPORATION** |
|----------------------------|--------------------------------|--------------------------------|
|                       |                           |
| Date: March 19,  2009 | By:                            | /s/James  R. Clarkson          |
|                       | James  R. Clarkson, President  |
|                       | &  Chief Executive Officer |

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appearsbelow constitutes and appoints James R. Clarkson, his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution,for him and in his name, place and stead, in any and all capacities, to signany and all amendments to this Annual Report on Form 10-K, and to file thesame, with all exhibits thereto, and other documents in connection therewith,with the Securities and Exchange Commission, granting unto attorney-in-fact andagent full power and authority to do and perform each and every act and thingrequisite or necessary to be done in and about the premises, as fully to allintents and purposes as he might or could do in person, hereby ratifying andconfirming all that attorney-in-fact and agent, or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

 

In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant in the capacities and on the dates indicated.

 
| By:    | /s/Michael S. Addy                                             |   | Date: March 19,  2009 |
|--------|----------------------------------------------------------------|--------|----------------------------|
|   | Michael S. Addy, Director                                      |   |                       |
|   |                                                           |   |                       |
| By:    | /s/Johnny C.  Allen                                            |   | Date: March 19,  2009 |
|   | Johnny C. Allen,  Director                                     |   |                       |
|   |                                                           |   |                       |
| By:    | /s/Clay D.  Brittain, III                                 |   | Date: March 19,  2009 |
|   | Clay D.  Brittain, III, Director                          |   |                       |
|   |                                                           |   |                       |
| By:    | /s/Rachel B.  Broadhurst                                       |   | Date: March 19,  2009 |
|   | Rachel B.  Broadhurst, Director                                |   |                       |
|   |                                                           |   |                       |
| By:    | /s/Russell R.  Burgess, Jr.                               |   | Date: March 19,  2009 |
|   | Russell R.  Burgess, Jr., Director                        |   |                       |
|   |                                                           |   |                       |
| By:    | /s/D. Singleton  Bailey                                        |   | Date: March 19,  2009 |
|   | D. Singleton  Bailey, Director                                 |   |                       |
|   |                                                           |   |                       |
| By:    | /s/Franklin C.  Blanton                                        |   | Date: March 19,  2009 |
|   | Franklin C.  Blanton, Director                                 |   |                       |
|   |                                                           |   |                       |
| By:    | /s/James R.  Clarkson                                          |   | Date: March 19,  2009 |
|   |   James  R. Clarkson, Director, President & |   |
|   |   Chief  Executive Officer                           |   |                       |
|   |                                                           |   |                       |
| By:    | /s/J. Lavelle  Coleman                                         |   | Date: March 19,  2009 |
|   | J. Lavelle  Coleman, Director                                  |   |                       |

 

31

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| By:    | /s/Larry G.  Floyd                      |   | Date: March 19,  2009 |
|--------|-----------------------------------------|--------|----------------------------|
|   | Larry G. Floyd,  Director               |   |                       |
|   |                                    |   |                       |
| By:    | /s/Boyd R.  Ford, Jr.              |   | Date: March 19,  2009 |
|   | Boyd R.  Ford, Jr., Director       |   |                       |
|   |                                    |   |                       |
| By:    | /s/Tommie W.  Grainger                  |   | Date: March 19,  2009 |
|   | Tommie W.  Grainger, Director           |   |                       |
|   |                                    |   |                       |
| By:    | /s/Gwyn G.  McCutchen                   |   | Date: March 19,  2009 |
|   | Gwyn G.  McCutchen, Director            |   |                       |
|   |                                    |   |                       |
| By:    | /s/T. Freddie  Moore                    |   | Date: March 19,  2009 |
|   | T. Freddie  Moore, Director             |   |                       |
|   |                                    |   |                       |
| By:    | /s/Carroll D.  Padgett, Jr.        |   | Date: March 19,  2009 |
|   | Carroll D.  Padgett, Jr., Director |   |                       |

 

32

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**EXHIBITINDEX**

 
| 3.1    |   | Articles of  Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 1999).                                                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Bylaws (incorporated by  reference to Exhibit 3.2 to the Company’s Form 10-KSB for the  fiscal year ended December 31, 1999).                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 3.3    |   | Articles of Amendment  to Authorize Preferred Shares, filed March 2, 2009 (incorporated by  reference to Exhibit 3.1 to the Company’s Form 8-K filed  March 6, 2009).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 3.4    |   | Articles of Amendment  to the Company’s Restated Articles of Incorporation establishing the terms of  the Series T Preferred Stock (incorporated by reference to  Exhibit 3.1 to the Company’s Form 8-K filed March 10, 2009).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 4.1    |   | Warrant to Purchase up  to 91,714 shares of Common Stock (incorporated by reference to  Exhibit 4.1 to the Company’s Form 8-K filed March 10, 2009).*                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 4.2    |   | Form of  Series T Preferred Stock Certificate (incorporated by reference to  Exhibit 4.2 to the Company’s Form 8-K filed March 10, 2009).*                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | HCSB Financial  Corporation Omnibus Stock Ownership and Long Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to the Company’s  Form 10-KSB for the fiscal year ended December 31, 2003).*                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | Form of Restricted  Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.3   |   | Form of Incentive  Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the  Company’s Form 10-KSB for the fiscal year ended December 31,  2004).*                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Form of Director  Deferred Compensation Agreement adopted in 1997 by and between the Board of  Directors and Horry County State Bank (incorporated by reference to Exhibit 10.4  to the Company’s Form 10-KSB for the fiscal year ended December 31,  2006).*                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.5   |   | Letter Agreement, dated  March 6, 2009, including Securities Purchase Agreement — Standard Terms  incorporated by reference therein, between the Company and the United States  Department of the Treasury (incorporated by reference to Exhibit 10.1 to  the Company’s Form 8-K filed March 10, 2009).* |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | ARRA Side Letter  Agreement, dated March 6, 2009, between the Company and the United  States Department of the Treasury (incorporated by reference to  Exhibit 10.2 to the Company’s Form 8-K filed March 10, 2009).*                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Form of Waiver,  executed by each of Messrs. James R. Clarkson, Edward L.  Loehr, Jr., and Glenn R. Bullard (incorporated by reference to  Exhibit 10.3 to the Company’s Form 8-K filed March 10, 2009).*                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Form of Letter  Amendment, executed by each of Messrs. James R. Clarkson, Edward L.  Loehr, Jr., and Glenn R. Bullard with the Company (incorporated by  reference to Exhibit 10.4 to the Company’s Form 8-K filed  March 10, 2009).*                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Form of Salary  Continuation Agreement adopted April 4, 2008 (incorporated by reference  to Exhibit 10.1 to the Company’s Form 8-K filed April 9,  2008).*                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Amendment No. 1 to  the HCSB Financial Corporation Omnibus Stock Ownership and Long Term  Incentive Plan adopted October 16, 2008.*                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 13     |   | The Company’s 2008  Annual Report.                                                                                                                                                                                                                                                                                                |

 

33

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| 21     |   | Subsidiaries of  Registrant.                                                |
|--------|--------|-----------------------------------------------------------------------------|
|   |   |                                                                        |
| 24     |   | Power of Attorney  (contained on signature pages herewith).            |
|   |   |                                                                        |
| 31.1   |   | Rule 13a-14(a) Certification  of the Chief Executive Officer.     |
|   |   |                                                                        |
| 31.2   |   | Rule 13a-14(a) Certification of the  Principal Financial Officer. |
|   |   |                                                                        |
| 32     |   | Section 1350  Certifications.                                          |

 

----

| * |   | Management contract of  compensatory plan or arrangement required to be filed as an Exhibit to  this Annual Report on Form 10-K. |
|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

34

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