**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

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

 

**- For thefiscal year ended December 31, 2009**

 

**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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  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                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

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, 2009 was$65,826,720.**** This calculation is based upon an estimate ofthe fair market value of the Common Stock of $20.00 per share, which was theprice of the last several trades of which management is aware prior to thisdate. Because there is not an active trading market for the Common Stock, wehave used our book value of $12.41 as of June 30, 2009 to calculate ourpublic float.

 

The number of shares outstanding of the issuer’scommon stock, as of March 1, 2010 was 3,787,170.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **
| Annual  Report to Shareholders for the Year Ended December 31, 2009                   | Part II  (Items 5, 7-8)             |
|--------------------------------------------------------------------------------------------|------------------------------------------|
|                                                                                       |                                     |
| Proxy  Statement for the Annual Meeting of Shareholders to be held on April 22,  2010 | Part III  (Portions of Items 10-14) |

 

 

 

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# **PART I**

# ** **

**Item1.  Description of Business.**

 

This Report,including information included or incorporated by reference in this document,contains statements which constitute forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934.  Forward-looking statements may relate to our financial condition,results of operation, plans, objectives, or future performance.  These statements are based on manyassumptions and estimates and are not guarantees of future performance.  Our actual results may differ materially fromthose anticipated in any forward-looking statements, as they will depend onmany factors about which we are unsure, including many factors which are beyondour control.  The words “may,”  “would,” “could,” “should,” “will,” “expect,”“anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,”“intend,” “plan,” and “estimate,” as well as similar expressions, are meant toidentify such forward-looking statements. Potential risks and uncertainties that could cause our actual results todiffer from those anticipated in any forward-looking statements include, butare not limited to, those described below under Item 1A- Risk Factors and thefollowing:

 

·                  reduced earnings due to higher credit losses generally and specificallybecause losses in the sectors of our loan portfolio secured by real estate aregreater than expected due to economic factors, including, but not limited to,declining real estate values, increasing interest rates, increasingunemployment, or changes in payment behavior or other factors;

·                  reduced earnings due to higher credit losses because our loans areconcentrated by loan type, industry segment, borrower type, or location of theborrower or collateral;

·                  the high concentration of our real estate-based loans collateralized byreal estate in a weak commercial real estate market;

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

·                  changes in the interest rate environment which could reduce anticipatedmargins;

·                  changes in political conditions or the legislative or regulatoryenvironment;

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

·                  changes occurring in business conditions and inflation;

·                  changes in deposit flows;

·                  changes in technology;

·                  changes in monetary and tax policies;

·                  adequacy of the level of our allowance for loan losses;

·                  the rate of delinquencies and amount of loans charged-off;

·                  the rate of loan growth and the lack of seasoning of our loanportfolio;

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

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

·                  changes in the securities markets; and

·                  other risks and uncertainties detailed from time to time in our filingswith the Securities and Exchange Commission.

 

These risks areexacerbated by the developments over the past two years in national andinternational financial markets, and we are unable to predict what effect theseuncertain market conditions will have on our Company.  During 2008 and 2009, the capital and creditmarkets experienced unprecedented levels of extended volatility and disruption.There can be no assurance that these unprecedented recent developments will notmaterially and adversely affect our business, financial condition and resultsof operations.

 

Allforward-looking statements in this report are based on information available tous as of the date of this report. Although we believe that the expectations reflected in ourforward-looking statements are reasonable, we cannot guarantee you that theseexpectations will be achieved.  Weundertake no 

 

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obligation to publicly update or otherwise revise any forward-lookingstatements, whether as a result of new information, future events, orotherwise.

 

# **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.

 

On March 6, 2009, aspart of the Capital Purchase Program established by the U.S. Department of theTreasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008(the “EESA”), we entered into a Letter Agreement with Treasury pursuant towhich we issued and sold to Treasury (i) 12,895 shares of our Fixed RateCumulative Perpetual Preferred Stock, Series T, having a liquidationpreference of $1,000 per share (the “Series T Preferred Stock”), and (ii) aten-year warrant to purchase up to 91,714 shares of our common stock at aninitial exercise price of $21.09 per share, for an aggregate purchase price of$12,895,000 in cash. The Series T Preferred Stock qualifies as Tier 1capital and is entitled to cumulative dividends at a rate of 5% per annum forthe first five years, and 9% per annum thereafter.  We must consult with the Board of Governorsof the Federal Reserve System before we are able to redeem the Series TPreferred Stock but we may not necessarily be required to raise additionalequity capital in order to redeem this stock.

 

**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 assetquality, increasing asset size through internal growth and branch expansion,and offering our customers a breadth of products competitive with those offeredby much 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 “Bank With Me! atHCSB!”.  It speaks directly to therelationship between our customers and our employees and reminds our employeesthat their actions and attitudes make the difference for our bank.  It reminds our employees that people bankwith HCSB because of what our employees do each day to make our customers feelappreciated.  We seek customers whoprefer to conduct business with a locally owned and managed bank thatdemonstrates an active interest in their business and personal financialaffairs.  We believe that by consistentlyproviding high levels of service to customers who value that service, wedevelop and strengthen relationships that provide a competitive advantage.

 

·*                 **Motivated Employees. *We believe that the key to our success lies with ouremployees, because it is through our employees that we are able to provide ourcustomers with the high level of service and attention that they expect anddeserve.  To this end, we hire people whoare familiar with their community and are committed to providing a superiorlevel of banking service to our customers. By selecting only knowledgeable and committed employees, we believe wecan provide an unsurpassed 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.*  We approach banking with a community focus,particularly at the branch level.  Weoperate each branch as an independent business unit and encourage our branch

 

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managers topromote those products that best meet the needs of their customer base.  This strategy enables our branches to servediverse populations and economies effectively. We support our branches by supporting the economic development of ourcommunities and by encouraging our employees to be active in communityaffairs.  We have located our existingoffices, and expect to locate future offices, in communities in which webelieve we can develop strong relationships. We favor growth areas and areas in which there are opportunities todifferentiate ourselves by providing customers with superior service.

 

·                  *High Asset Quality.* We place a great deal of emphasis on maintaining high asset quality andwill continue to strive to maintain high asset quality through the closeness ofour lenders, senior officers, and directors to our customers and theirsignificant knowledge of the communities in which they reside.

 

·*                 **Internal Growth, BranchExpansion.*  We have grown significantly over the last sixyears.  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 andServices.*  We strive to provide our customers with thebreadth of products and services comparable to a regional bank, while maintainingthe quick response and personal service of a locally owned and managedbank.  In addition to offering a fullrange of deposit services and commercial, agricultural and personal loans, weoffer products such as mortgage loan originations, on-line banking, andinvestment products and brokerage services through a third party arrangement.

 

**Locationand Service Area**

 

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

 

**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 time depositsof various types, ranging from daily money market accounts to longer-termcertificates of deposit.  The transactionaccounts and time certificates are tailored to our principal market area atrates 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, to individuals and small tomedium-sized businesses and professional concerns that are located in orconduct a substantial portion of their business in our market area. Thecharacteristics of our loan portfolio and our underwriting procedures,collateral types, risks, approval process and lending limits are discussedbelow.

 

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*RealEstate Loans.* Theprimary component of our loan portfolio is loans collateralized by real estate,which made up approximately 62.3% of our loan portfolio at December 31,2009.  These loans are secured generallyby first or second mortgages on residential, agricultural or commercialproperty.  These loans consist ofcommercial real estate loans, construction and development loans, andresidential real estate loans (but exclude home equity loans, which areclassified as consumer loans).  Due toconcerns regarding the current economic environment and our concentration ofcommercial real estate loans, which as of December 31, 2009 totaled$251,617,000, or 62.44% of our real estate loans, we anticipate decreasing ouramount of commercial real estate loans in 2010.

 

*CommercialLoans. *At December 31, 2009, approximately 12.3% of ourloan portfolio consisted of commercial loans. Commercial loans consist of secured and unsecured loans, lines ofcredit, and working capital loans.  Wemake these loans to various types of businesses.  Included in this category are loans topurchase equipment, finance accounts receivable or inventory, and loans madefor working capital purposes.

 

*ConsumerLoans.*  Consumer loans made up approximately 3.2% ofour loan portfolio at December 31, 2009. These are loans made to individuals for personal and household purposes,such as secured and unsecured installment and term loans, home equity loans andlines of credit, and revolving lines of credit such as overdraftprotection.  Automobiles and smallrecreational vehicles are pledged as security for their purchase.

 

*AgriculturalLoans. *Approximately 2.1% of our loan portfolio consisted ofagricultural loans at December 31, 2009. These are loans made to individuals and businesses for agriculturalpurposes, including loans to finance crop production and livestock operatingexpenses, to purchase farm equipment, and to store crops.  These loans are secured generally by liens ongrowing crops and farm equipment.  Alsoincluded in this category are loans to agri-businesses, which are substantiallysimilar to commercial loans, as discussed above.

 

*Constructionand Development Loans.*  The remaining 19.4% of our loanportfolio at December 31, 2009 was composed of consumer and commercialreal estate construction and commercial development loans.  These loans are secured by the real estatefor which construction is planned and, in many cases, by supplementarycollateral.

 

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

 

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Other Banking and Related Services**

 

Other bankservices which are in place or planned include cash management services, sweepaccounts, repurchase agreements, cellular phone banking, remote depositcapture, safe deposit boxes,

 

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travelers checks, directdeposit of payroll and social security checks, on-line banking and automaticdrafts for various accounts.  We areassociated with a shared network of automated teller machines that may be usedby our customers throughout South Carolina and other regions.  Three of our non-executive officers areregistered representatives of Nexity Financial Services, and they effecttransactions in securities and other non-deposit investment products.  We also offer MasterCard and VISA credit cardservices through a third party vendor. We continue to seek and evaluate opportunities to offer additionalfinancial services to our customers.

 

**Competition**

 

The banking business is highly competitive.  We compete with other commercial banks, savingsand loan associations, credit unions, and money market mutual funds operatingin our service area and elsewhere. According to the FDIC data as of June 30, 2009, there were 27financial 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, farmers and professional concerns, gives us an advantage in ourmarkets.  Nevertheless, a number of thesecompetitors are well established in our service area.  Many of them have substantially greaterresources and lending limits than the bank and offer certain services, such asextensive and established branch networks and trust services, that we do notprovide.  As a result of thesecompetitive factors, we may have to pay higher rates of interest to attractdeposits.

 

**Employees**

** **

As of March 15, 2010, we had 157 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 laws and regulations that impose specific requirements andrestrictions on and provide for general regulatory oversight of theiroperations.  These laws and regulationsgenerally are intended to protect depositors and not shareholders.  The following summary is qualified byreference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations mayhave 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.

 

**Recent Legislative and RegulatoryDevelopments**

 

The Congress, Treasuryand the federal banking regulators, including the FDIC, have taken broadactions since early September 2008 to address the volatility anddisruption in the U.S. banking system. Several regulatory and governmental actions have been announcedincluding:

 

·                                          In October 2008, the EmergencyEconomic Stabilization Act of 2008 (“EESA”) was enacted. The EESA authorizesTreasury to purchase from financial institutions and their holding companies upto $700 billion in mortgage loans, mortgage-related securities and certainother financial instruments, including debt and equity securities issued byfinancial institutions and their holding companies in a troubled asset reliefprogram (“TARP”).  The purpose of TARP isto restore confidence and stability to the U.S. banking system and to encouragefinancial institutions to increase their lending to customers and to eachother.  The Treasury has allocated $250billion towards the TARP Capital Purchase Program (“CPP”).  Under the CPP, Treasury purchased debt orequity securities from participating institutions.  TARP also includes direct purchases orguarantees of troubled assets of financial institutions. Participants in theCPP are subject to executive compensation limits and are encouraged to expandtheir lending and mortgage loan modifications.

 

·                                          On March 6, 2009, as part of the CPPestablished by Treasury under the EESA, we entered into a Letter Agreement andSecurities Purchase Agreement with Treasury pursuant to which we issued andsold to Treasury (i) 12,895 shares of our Fixed Rate Cumulative PerpetualPreferred Stock, Series T, having a liquidation preference of $1,000 pershare (the “Series T Preferred Stock”), and (ii) a ten-year warrantto purchase up to 91,714 shares of our common stock at an initial exerciseprice of $21.09 per share, for an aggregate purchase price of $12,895,000 incash. The Series T Preferred Stock qualifies as Tier 1 capital and isentitled to cumulative dividends at a rate of 5% per annum for the first fiveyears, and 9% per annum thereafter, but will be paid only if, as, and whendeclared by our board of directors.  The Series TPreferred Stock has no maturity date and ranks senior to the common stock withrespect to the payment of dividends and distributions and amounts payable uponliquidation, dissolution and winding up of the company. The Series TPreferred 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 American Recovery and

 

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Reinvestment Act (the “RecoveryAct”) which modified EESA, we may, upon consultation with our primary federalregulator, repay the amount received for the Series T Preferred Stock atany time, without regard to whether we have replaced such funds from any sourceor to any waiting period. Upon repayment of the amount received for the Series TPreferred Stock, the Treasury Department will also liquidate the associatedWarrant in accordance with the Recovery Act and any rules and regulationsthereunder.

 

·                                          EESA also increased FDIC depositinsurance on most accounts from $100,000 to $250,000.  This increase is in place until the end of2013 and is not covered by deposit insurance premiums paid by the banking industry.

 

·                                          On October 14, 2008, the FDICestablished the Temporary Liquidity Guarantee Program (“TLGP”).  TLGP includes the Transaction AccountGuarantee Program (“TAGP”), which provides unlimited deposit insurance coveragethrough June 30, 2010 for noninterest-bearing transaction accounts(typically business checking accounts) and certain funds swept intononinterest-bearing savings accounts. Institutions participating in TLGP pay a 10 basis points fee(annualized) on the balance of each covered account in excess of $250,000,while the extra deposit insurance is in place. TLGP also includes the Debt Guarantee Program (“DGP”), under which theFDIC guarantees certain newly-issued senior unsecured debt.  The guarantee applied to new debt issued onor before October 31, 2009 and provides protection until December 31,2012.  Participants in DGP pay a 75 basispoint fee for the guarantee.  TAGP andDGP are in effect for all eligible entities, unless the entity opted out on orbefore December 5, 2008.  We are participatingin the TAGP and opted out of the DGP.

 

·                                          On February 10, 2009, Treasuryannounced the Financial Stability Plan, which earmarked $350 billion of theTARP funds authorized under EESA. Among other things, the Financial StabilityPlan includes:

 

·                                          A capital assistance program that invested in mandatoryconvertible preferred stock of certain qualifying institutions determined on abasis and through a process similar to the CPP;

 

·                                          A consumer and business lending initiative to fund newconsumer loans, small business loans and commercial mortgage asset-backedsecurities issuances;

 

·                                          A public-private investment fund program that isintended to leverage public and private capital with public financing topurchase up to $500 billion to $1 trillion of legacy “toxic assets” fromfinancial institutions; and

 

·                                          Assistance for homeowners by providing up to $75billion to reduce mortgage payments and interest rates and establishing loanmodification guidelines for government and private programs.

 

·                                          On February 17, 2009, the RecoveryAct was signed into law in an effort to, among other things, create jobs andstimulate growth in the United States economy. The Recovery Act specifies appropriations of approximately $787 billionfor a wide range of Federal programs and will increase or extend certainbenefits payable under the Medicaid, unemployment compensation, and nutritionassistance programs.  The Recovery Actalso reduces individual and corporate income tax collections and makes avariety of other changes to tax laws. The Recovery Act also imposes certain limitations on compensation paidby participants in TARP.

 

·                                          On March 23, 2009, Treasury, inconjunction with the FDIC and the Federal Reserve, announced the Public-PrivatePartnership Investment Program for Legacy Assets which consists of two separateplans, addressing two distinct asset groups:

 

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·                                          The first plan is the Legacy Loan Program, which has aprimary purpose to facilitate the sale of troubled mortgage loans by eligibleinstitutions, including FDIC-insured federal or state banks and savingsassociations. Eligible assets are not strictly limited to loans; however, whatconstitutes an eligible asset will be determined by participating banks, theirprimary regulators, the FDIC and the Treasury. Under the Legacy Loan Program,the FDIC has sold certain troubled assets out of an FDIC receivership in twoseparate transactions relating to the failed Illinois bank, Corus Bank, NA, andthe failed Texas bank, Franklin Bank, S.S.B. These transactions were completedin September 2009 and October 2009, respectively.

 

·                                          The second plan is the Securities Program, which isadministered by the Treasury and involves the creation of public-privateinvestment funds to target investments in eligible residential mortgage-backedsecurities and commercial mortgage-backed securities issued before 2009 thatoriginally were rated AAA or the equivalent by two or more nationallyrecognized statistical rating organizations, without regard to ratingenhancements (collectively, “Legacy Securities”). Legacy Securities must bedirectly secured by actual mortgage loans, leases or other assets, and may bepurchased only from financial institutions that meet TARP eligibilityrequirements. Treasury received over 100 unique applications to participate inthe Legacy Securities PPIP and in July 2009 selected nine public-privateinvestment fund managers.  As of December 31,2009, public-private investment funds have completed initial and subsequentclosings on approximately $6.2 billion of private sector equity capital, whichwas matched 100% by Treasury, representing $12.4 billion of total equitycapital. Treasury has also provided $12.4 billion of debt capital, representing$24.8 billion of total purchasing power. As of December 31, 2009, public-privateinvestment funds have drawn-down approximately $4.3 billion of total capitalwhich has been invested in certain non-agency residential mortgage backedsecurities and commercial mortgage backed securities and cash equivalentspending investment.

 

·                                          On May 22, 2009, the FDIC levied aone-time special assessment on all banks due on September 30, 2009.

 

·                                          On November 12, 2009, the FDICissued a final rule to require banks to prepay their estimated quarterlyrisk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011and 2012 and to increase assessment rates effective on January 1, 2011.

 

As a result of theenhancements to deposit insurance protection and the expectation that therewill be demands on the FDIC’s deposit insurance fund, our deposit insurancecosts increased significantly in 2009. Regardless of our lack of participation, governmental intervention andnew regulations under these programs could materially and adversely affect ourbusiness, financial condition and results of operation.

 

Although it is likelythat further regulatory actions will arise as the Federal government attemptsto address the economic situation, 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.

 

**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

 

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Holding Company Act andits regulations promulgated thereunder. As a bank holding company located in South Carolina, the South CarolinaBoard of Financial Institutions also regulates and monitors all significant aspectsof our operations.

 

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

 

·                  banking or managing or controlling banks;

 

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

 

·      any activity that the Federal 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 or servicing loans and usual related activities;

 

·                  leasing personal or real property;

 

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

 

·                  trust company functions;

 

·                  financial and investment advisory activities;

 

·                  conducting discount securities brokerage activities;

 

·                  underwriting and dealing in government obligations and money marketinstruments;

 

·                  providing specified management consulting and counseling activities;

 

·                  performing selected data processing services and support services;

 

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

 

·                  performing selected insurance underwriting activities.

 

As a bank holding company we also can elect to be treated as a “financialholding company,” which would allow us to 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 Community Reinvestment Act (CRA) (discussed below).

 

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

 

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***Change in Control.***  In addition,and subject to certain exceptions, the Bank Holding Company Act and the Changein Bank Control Act, together with regulations promulgated thereunder, requireFederal Reserve approval prior to any person or company acquiring “control” ofa bank holding company.  Control isconclusively presumed to exist if an individual or company acquires 25% or moreof any class of voting securities of a bank holding company.  Following the relaxing of these restrictionsby the Federal Reserve in September 2008, control will now be rebuttablypresumed to exist unless a person acquires no more than 33% of the total equityof a bank or bank holding company, of which it may own, control or have thepower to vote not more than 15% of any class of voting securities.

 

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

 

***CapitalRequirements.***  The Federal Reserve Board imposes certaincapital requirements on the bank holding company under the Bank Holding CompanyAct, including a minimum leverage ratio and a minimum ratio of “qualifying”capital to risk-weighted assets.  Theserequirements are essentially the same as those that apply to the bank describedbelow under “Horry County State Bank - Capital Regulations.”  Nevertheless, our bank remains subject tothese capital requirements.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the bank must meet specificcapital guidelines that involve quantitative measures of the bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.  Regardless, our bank is “well capitalized”under these minimum capital requirements as set per bank regulatory agencies.

 

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

 

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

 

**Horry County State Bank**

 

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

 

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insured by the FederalDeposit Insurance Corporation (“FDIC”) up to a maximum amount, which iscurrently $250,000 for each non-retirement depositor and $250,000 for certainretirement-account depositors through December 31, 2013, and the bank isparticipating in the FDIC’s Temporary Liquidity Guarantee Program (discussedbelow in greater detail) which, in part, fully insures non-interest bearingtransaction accounts.

 

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

 

·                  security devices and procedures;

 

·                  adequacy of capitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable on loans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

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

 

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

 

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

 

·                  internal controls;

 

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·                  information systems and audit systems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

·                  interest rate risk exposure; and

 

·                  asset quality.

 

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

 

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

 

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

 

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

 

·                  Significantly Undercapitalized — The institutionis significantly below the required minimum level for any relevant capitalmeasure.  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 interest rates paid on depositsof comparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the bank’snormal market area.  Moreover, if thebank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC. The bank also would become subject to increased regulatory oversight,and is increasingly restricted in the scope of its

 

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permissible activities.  Eachcompany having control over an undercapitalized institution also must provide alimited guarantee that the institution will comply with its capital restorationplan.  Except under limited circumstancesconsistent with an accepted capital restoration plan, an undercapitalizedinstitution may not grow.  Anundercapitalized institution may not acquire another institution, establishadditional branch offices or engage in any new line of business unlessdetermined by the appropriate Federal banking agency to be consistent with anaccepted capital restoration plan, or unless the FDIC determines that theproposed action will further 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 ofsuch a management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

Asof December 31, 2009, the bank was deemed to be “well capitalized.”

 

***Standardsfor Safety and Soundness.  ***The Federal Deposit Insurance Act (“FDIA”)also requires the federal banking regulatory agencies to prescribe, byregulation or guideline, operational and managerial standards for all insureddepository institutions relating to: (i) internal controls, informationsystems, and internal audit systems; (ii) loan documentation; (iii) creditunderwriting; (iv) interest rate risk exposure; and (v) assetgrowth.  The agencies also must prescribestandards for asset quality, earnings, and stock valuation, as well asstandards for compensation, fees, and benefits. The federal banking agencies have adopted regulations and InteragencyGuidelines Prescribing Standards for Safety and Soundness to implement theserequired standards.  These guidelines setforth the safety and soundness standards that the federal banking agencies useto 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 isa legal entity separate and distinct from the bank and its othersubsidiaries.  Various legal limitationsrestrict the bank from lending or otherwise supplying funds to the company orits non-bank subsidiaries.  The companyand the bank are subject to Section 23A and 23B of the Federal Reserve Actand Federal Reserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the bank’s capital and surplus and, as to all affiliatescombined, to 20% of the bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  The bank is forbidden topurchase low quality assets from an affiliate.

 

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

 

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

 

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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 currentSouth Carolina law, we may open branch offices throughout South Carolina withthe prior approval of the South Carolina Board of Financial Institutions andthe FDIC.   In addition, with priorregulatory approval, the bank will be able to acquire existing bankingoperations in South Carolina.  Furthermore,federal legislation has been passed that permits interstate branching by banksif allowed by state law, and interstate merging by banks.  However, South Carolina law, with limitedexceptions, currently permits branching across state lines only throughinterstate mergers.

 

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

 

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

 

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

 

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

 

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

 

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

 

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·                  The Equal Credit Opportunity Act, prohibiting discrimination on thebasis of race, creed or other prohibited factors in extending credit;

 

·                  The Fair Credit Reporting Act of 1978, as amended bythe Fair and Accurate Credit Transactions Act, governing the use and provisionof information to credit reporting agencies, certain identity theft protectionsand certain credit and other disclosures;

 

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

 

·                  The Credit Card Accountability, Responsibility, andDisclosure Act of 2009, governing interest rate increases and fee limits; and

 

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

 

Thedeposit operations of the bank also are subject to:

 

·                  the Right to Financial Privacy Act, which imposes aduty to maintain confidentiality of consumer financial records and prescribesprocedures for complying with administrative subpoenas of financial records;and

 

·                  the Electronic Funds Transfer Act and Regulation Eissued by the Federal Reserve Board to implement that Act, which governsautomatic deposits to and withdrawals from deposit accounts and customers’rights and liabilities arising from the use of automated teller machines andother electronic banking services.

 

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

 

***Anti-MoneyLaundering.***   Financial institutions must maintain anti-moneylaundering programs that include established internal policies, procedures, andcontrols; a designated compliance officer; an ongoing employee trainingprogram; and testing of the program by an independent audit function. Thecompany and the bank are also prohibited from entering into specified financialtransactions and account relationships and must meet enhanced standards for duediligence and “knowing your customer” in their dealings with foreign financialinstitutions and foreign 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 ofapplications.  The regulatory authoritieshave been active in imposing “cease and desist” orders and money penaltysanctions against institutions found to be violating these obligations.

 

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***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 bank accountsor correspondent accounts for non-U.S. persons. Bank regulators routinelyexamine institutions for compliance with these obligations and are required toconsider compliance in connection with the regulatory review of applications.

 

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

 

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

 

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

 

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

 

***Payment of Dividends.*** A South Carolina state bank may not pay dividendsfrom its capital.  All dividends must bepaid out of undivided profits then on hand, after deducting expenses, includingreserves for losses and bad debts.  Inaddition, under the FDIC Improvement Act, the bank may not pay a dividend if,after paying the dividend, the bank would be undercapitalized.  Currently, the bank must receive approvalfrom the Treasury, the FDIC, and the South Carolina Board of FinancialInstitutions prior to declaring a dividend on its shares of common stock..

 

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

 

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·                                          allowing check truncation without makingit mandatory;

 

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

 

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

 

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

 

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

 

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

 

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

 

***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 require reportingby FDIC insured institutions.  It also may prohibit any FDIC insuredinstitution from engaging in any activity the FDIC determines by regulation ororder to pose a serious risk to the insurance fund.  The FDIC alsohas the authority to initiate enforcement actions against savings institutions,after giving the Office of Thrift Supervision an opportunity to take suchaction, and may terminate the deposit insurance if it determines that theinstitution has engaged in unsafe or unsound practices or is in an unsafe orunsound condition.

 

Under regulationseffective January 1, 2007, the FDIC adopted a new risk-based premiumsystem that provides for quarterly assessments based on an insured institution’sranking in one of four risk categories based upon supervisory and capitalevaluations.  For deposits held as of March 31,2009, institutions were assessed at annual rates ranging from 12 to 50 basispoints, depending on each institution’s risk of default as measured byregulatory capital ratios and other supervisory measures.  Effective April 1, 2009, assessmentsalso took into account each institution’s reliance on secured liabilities andbrokered deposits.  This resulted inassessments ranging from 7 to 77.5 basis points.  In May 2009, the FDIC issued a final rule whichlevied a special assessment applicable to all insured depository institutionstotaling 5 basis points of each institution’s total assets less Tier 1 capitalas of June 30, 2009, not to exceed 10 basis points of domesticdeposits.  This special assessment waspart of the FDIC’s efforts to rebuild the Deposit Insurance Fund. We paid thisone-time special assessment in the amount of $326,158 to the FDIC at the end ofthe third quarter 2009.

 

In November 2009, the FDIC issued a rule that required allinsured depository institutions, with limited exceptions, to prepay theirestimated quarterly risk-based assessments for the fourth quarter of 2009 andfor all of 2010, 2011 and 2012.  The FDICalso adopted a uniform three-basis point increase in assessment rates effectiveon January 1, 2011.  In December 2009,we paid $3.7 million in prepaid risk-based assessments, which included $238,939related to the fourth quarter of 2009 that would have been otherwise

 

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payable in thefirst quarter of 2010.  This amount isincluded in deposit insurance expense for 2009. The remaining $3.5 million in prepaid deposit insurance is included inaccrued prepaid expenses for 2009.  As aresult, we incurred increased insurance costs during 2009 than in previousperiods.

 

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, the FinancingCorporation assessment equaled 1.14 basis points for domestic deposits.  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.

 

***ProposedLegislation and Regulatory Action*****.**  Legislative and regulatory proposalsregarding changes in banking, and the regulation of banks, federal savingsinstitutions, and other financial institutions and bank and bank holdingcompany powers are being considered by the executive branch of the federalgovernment, Congress and various state governments. Certain of these proposals,if adopted, could significantly change the regulation or operations of banksand the financial services industry. New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations, and competitive relationships of the nation’s financialinstitutions. On June 17, 2009, the U.S. Treasury released a white paperentitled “Financial Regulatory Reform — A New Foundation: Rebuilding FinancialSupervision and Regulation” (the “Proposal”) which calls for sweepingregulatory and supervisory reforms for the entire financial sector and seeks toadvance the following five key objectives: (i) promote robust supervisionand regulation of financial firms, (ii) establish comprehensivesupervision of financial markets, (iii) protect consumers and investorsfrom financial abuse, (iv) provide the government with additional powersto monitor systemic risks, supervise and regulate financial products andmarkets, and to resolve firms that threaten financial stability, and (v) raiseinternational regulatory standards and improve international cooperation.

 

The Proposal alsoincludes the creation of a new federal agency designed to enforce consumerprotection laws. The Consumer Financial Protection Agency (“CFPA”) would haveauthority to protect consumers of financial products and services and toregulate all providers (bank and non-bank) of such services. The CFPA would beauthorized to adopt rules for all providers of consumer financialservices, supervise and examine such institutions for compliance, and enforcecompliance through orders, fines, and penalties. The rules of the CFPAwould serve as a “floor” and individual states would be permitted to adopt andenforce stronger consumer protection laws.

 

On  November 10,2009, Senate Banking Committee chairman Christopher Dodd proposed a significantregulatory reform bill that includes many of the features of the Proposal,including consolidating financial regulators, imposing higher capitalrequirements on financial institutions, remaking the derivatives industry, andshifting consumer protection from an overlapping patchwork of regulators to asingle new commission, the CFPA.  Thisbill is still pending approval of the US Congress and many subsequent amendmentshave been proposed.  If this bill is adopted as proposed, wemay become subject to multiple laws affecting its provision of loans and othercredit services to consumers, which may substantially increase the cost ofproviding such services.

 

On February 2, 2010,the U.S. President called on the U.S. Congress to create a new Small BusinessLending Fund.  Under this proposal, $30billion in TARP funds would be transferred to a new program outside of TARP tosupport small business lending.  Asproposed, only small- and medium-sized banks would qualify to participate inthe program.

 

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New regulations andstatutes are regularly proposed that contain wide-ranging proposals foraltering the structures, regulations, and competitive relationships of thenation’s financial institutions.  Wecannot predict whether or in what form any proposed regulation or statute willbe adopted or the extent to which our business may be affected by any newregulation or statute.

 

**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.*

 

***Negativedevelopments in the financial industry and the domestic and internationalcredit markets have adversely affected our operations and results.***

 

Negative developmentsfrom the latter half of 2007 through 2009 in the global credit andsecuritization markets have resulted in uncertainty in the financial markets ingeneral with the expectation of the general economic downturn continuing into2010.  As a result of this “creditcrunch,” commercial as well as consumer loan portfolio performances havedeteriorated at many institutions and the competition for deposits and qualityloans has increased significantly.  Inaddition, the values of real estate collateral supporting many commercial loansand home mortgages 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 Treasury’s CPP, have been adopted.  Furthermore, the potential exists foradditional federal or state laws and regulations regarding, among othermatters, lending and funding practices and liquidity standards, and bank regulatoryagencies are expected to be active in responding to concerns and trendsidentified in examinations, including the expected issuance of many formalenforcement orders.  Negativedevelopments in the financial industry and the domestic and international creditmarkets, and the impact of new legislation in response to those developments,may negatively impact our operations by restricting our business operations,including our ability to originate or sell loans, and adversely impact ourfinancial performance.  We can provide noassurance regarding the manner in which any new laws and regulations willaffect us.

 

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

 

Asdescribed above under “Supervision and Regulation,” in response to thechallenges facing the financial services sector, a number of regulatory andgovernmental actions have been enacted or announced.  There can be no assurance that thesegovernment actions will achieve their purpose. The failure of the financial markets to stabilize, or a continuation orworsening of the current financial market conditions, could have a materialadverse affect on our business, our financial condition, the financialcondition of our customers, our common stock trading price, as well as ourability to access credit.  It could also result in declines in ourinvestment portfolio which could be “other-than-temporary impairments.”

 

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

 

Pursuant to the terms ofthe CPP Purchase Agreement between us and Treasury, we adopted certainstandards for executive compensation and corporate governance for the period duringwhich Treasury holds the equity issued pursuant to the CPP Purchase Agreement,including the common stock which may be issued pursuant to the Warrant.  These standards generally apply to our namedexecutive officers. The standards include (1) ensuring that incentivecompensation for senior executives does not encourage unnecessary and excessiverisks that threaten the value of the financial institution; (2) requiredclawback of any bonus or incentive compensation paid to a senior executivebased on statements of earnings, gains or other criteria that are later provento be materially inaccurate; (3) prohibition on making golden parachutepayments to senior executives; (4) prohibition on providing tax gross-upprovisions; and

 

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(5) agreement not todeduct for tax purposes executive compensation in excess of $500,000 for eachsenior executive.  In particular, thechange to the deductibility limit on executive compensation may likely increasethe overall cost of our compensation programs in future periods and may make itmore difficult to attract suitable candidates to serve as executive officers.

 

***Legislation or regulatory changes could cause us to seek torepurchase the preferred stock and warrants that we sold to Treasury pursuantto 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 all or a portion ofsuch Series T Preferred Stock or Warrants, then our capital levels couldbe materially reduced.

 

***The Series TPreferred Stock impacts net income available to our common shareholders andearnings per common share, and the warrant we issued to Treasury may bedilutive to holders of our common stock.***

 

The dividends declared onthe Series T Preferred Stock will reduce the net income available tocommon shareholders and our earnings per common share. The Series TPreferred Stock will also receive preferential treatment in the event ofliquidation, dissolution or winding up of the company.  Additionally, the ownership interest of theexisting holders of our common stock will be diluted to the extent the warrantwe issued to Treasury in conjunction with the sale to Treasury of the Series TPreferred Stock is exercised.  The sharesof common stock underlying the warrant represent approximately 2.43% of theshares of our common stock outstanding as of December 31, 2009 (includingthe shares issuable upon exercise of the warrant in total sharesoutstanding).  Although Treasury hasagreed not to vote any of the shares of common stock it receives upon exerciseof the warrant, a transferee of any portion of the warrant or of any shares ofcommon stock acquired upon exercise of the warrant is not bound by thisrestriction.  We note, however, that theexercise price on Treasury’s warrant is $21.09 and the company’s currenttrading price was approximately $11 at December 31, 2009.

 

Moreover, the securitiespurchase agreement between us and the Treasury pursuant to the CPP providesthat prior to the earlier of (i) three years from the date of sale and (ii) thedate on which all of the shares of the preferred stock have been redeemed by usor transferred by the Treasury to third parties, we may not, without theconsent of the Treasury, (a) pay the cash dividend on our common stock or (b) subjectto limited exceptions, redeem, repurchase or otherwise acquire shares of ourcommon stock or preferred stock (other than the Series T Preferred Stock)or trust preferred securities.

 

***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 the economicdownturn 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 76.2% of our interest income for the year ended December 31,2009.  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

 

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a large number ofdiversified economies.  A continuedeconomic downturn could, therefore, result in losses that materially andadversely affect our business.

 

***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, 2009, approximately 81.7% of our loans had realestate as a primary or secondary component of collateral.  The real estate collateral in each caseprovides an alternate source of repayment in the event of default by theborrower and may deteriorate in value during the time the credit isextended.  The recent weakening of thereal estate market in the Myrtle Beach area could result in an increase in thenumber of borrowers who default on their loans and a reduction in the value ofthe collateral securing their loans, which in turn could have an adverse effecton our profitability and asset quality. If we are required to liquidate the collateral securing a loan tosatisfy the debt during a period of reduced real estate values, our earningsand capital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires andfloods, each of which may be exacerbated by global climate change and may causeuninsured damage and other loss of value to real estate that secures theseloans, may also negatively impact our financial condition.

 

***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.

 

***Our FDIC Deposit Insurance premiums haverisen significantly in the recent past and may continue to increase in thefuture as a result of increased assessment rates imposed by the FDIC***.

 

As a member institution of the FDIC, we arerequired to pay semi-annual deposit insurance premium assessments to theFDIC.  During the year ended December 31,2009, we paid $1,236,950 in deposit insurance assessments.  Due to the recent failure of several unaffiliatedFDIC insurance depository institutions, and the FDIC’s new TLGP, the depositinsurance premium assessments paid by all banks has increased.  In addition, new FDIC requirements shift agreater share of any increase in such assessments onto institutions with higherrisk profiles, including banks with heavy reliance on brokered deposits, suchas our bank.  In the fourth quarter of2009, the FDIC collected prepaid insurance assessments for the three years endingDecember 31, 2012 in an effort to restore fund balances.  We were required to pay approximately $3.5million in prepaid insurance premiums which is included in other assets at December 31,2009.  Continued increases in thisexpense would have a material adverse effect on our financial condition.

 

***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 intend to redeem the Series TPreferred Stock that we issued to Treasury under the CPP before the dividendson the Series T Preferred Stock increase from 5% per annum to 9% per annumin 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.

 

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***Wedepend heavily on out of market deposits as a source of funding.***

 

As of December 31,2009, 18.0% of our deposits were obtained from out of market sources.  To continue to have access to this source offunding, we are required to be classified as a “well capitalized” bank by theFDIC; whereas, if we only “meet” the capital requirement, we must obtainpermission from the FDIC in order to continue utilizing this source of funding.

 

***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 otherextensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

 

·                  the duration of the credit;

·                  credit risks of a particular customer;

·                  changes in economic and industry conditions; and

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

 

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

 

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

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

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

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

 

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

 

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 31,2009, approximately $17.1 million of our loans, or 38.0% of our

 

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bank’s capital, hadloan-to-value ratios that exceeded regulatory supervisory guidelines.  In addition, within the aggregate limit notedabove, total loans for all commercial, agricultural, multifamily or other non1-4 family residential properties should not exceed 30% of total capital.  At December 31, 2009, loanscollateralized by commercial, agricultural, multifamily or other non 1-4 familyresidential properties that exceeded the supervisory loan to value ratio were$7.6 million, or 16.9% of the bank’s capital. The number of loans in our portfolio with loan-to-value ratios in excessof supervisory guidelines, our internal guidelines, or both could increase therisk of delinquencies and defaults in our portfolio.

 

***Apercentage of the loans in our portfolio currently include exceptions to ourloan policies and supervisory guidelines.***

 

All of the loans that wemake are subject to written loan policies adopted by our board of directors andto supervisory guidelines imposed by our regulators.  Our loan policies are designed to reduce therisks associated with the loans that we make by requiring our loan officers totake certain steps that vary depending on the type and amount of the loan,prior to closing a loan.  These stepsinclude, among other things, making sure the proper liens are documented andperfected on property securing a loan, and requiring proof of adequateinsurance coverage on property securing loans. Loans that do 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 loan portfolioand 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 defaults maynot be representative of the level that will prevail when the portfolio becomesmore seasoned, which may be higher than current levels.  If delinquencies and defaults increase, wemay be required to increase our provision for loan losses, which would adverselyaffect 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 securities, and interest expense on interest-bearing liabilities, such asdeposits and other borrowings.  Dependingon the terms and maturities of our assets and liabilities, a significant changein interest rates could have a material adverse effect on ourprofitability.  Many factors causechanges in interest rates, including governmental monetary policies anddomestic and international economic and political conditions.  While we intend to manage the effects ofchanges in interest rates by adjusting the terms, maturities, and pricing ofour assets and liabilities, our efforts may not be effective and our financialcondition 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 2009 and may continue to negatively impact ourearnings in 2010.

 

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

 

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

 

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and adversely affected.

 

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

** **

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

 

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

 

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

 

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

 

During 2009, 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 2010.  We are performing the system and processevaluation and testing (and any necessary remediation) required to comply withthe management certification and auditor attestation requirements of Section 404of the Sarbanes-Oxley Act. While we currently anticipate that we will be ableto fully implement the requirements relating to internal controls and all otheraspects of Section 404 in a timely manner, as required by Section 404and the SEC’s related regulations, we could identify deficiencies that wemay not be able to remediate in time to meet this deadline. If we are not ableto implement or maintain the requirements of Section 404 in a timelymanner or with adequate compliance, we could be subject to scrutiny byregulatory authorities and the trading price of our stock coulddecline.  Moreover, effective internal controls are necessaryfor us to produce reliable financial reports and are important to 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.

 

Proposals for further regulationof the financial services industry are continually be introduced in the U.S.Congress and the General Assembly of the State of South Carolina.  The agencies regulating the financialservices industry also periodically adopt changes to their regulations.  See the “Supervision and Regulation” sectionof this Form 10-K for a summary description of proposed regulations andlegislative action that has been introduced and/or adopted over the past twoyears.  It is possible that additionallegislative proposals may be adopted or regulatory changes may be made thatwould have an adverse effect on our business.

 

***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

 

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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 financial institutions.  Theseinstitutions offer some services, such as extensive and established branchnetworks, that we do not currently provide. Also, a number of community banks are entering our primary servicearea.  They include de novo banks andbranches of established banking operations, both headquartered in-market aswell as out-of-market.  As is the casewith other financial service providers, they are attracted to our primaryservice area’s demographic trends and growing deposit base.  There is a risk that we will not be able tocompete successfully with other financial institutions in our market, and thatwe may have to pay higher interest rates to attract deposits, resulting inreduced profitability.  In addition,competitors that are not depository institutions are generally not subject tothe extensive regulations that apply to us.

 

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

 

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

 

·                  taking additional time and creating expenseassociated with identifying and evaluating potential acquisitions and mergerpartners;

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

·                  diluting our existing shareholders in anacquisition;

·                  taking additional time and creatingexpense associated with evaluating new markets for expansion, hiringexperienced local management, and opening new offices, as there may be asubstantial time lag between these activities before we generate sufficientassets and deposits to support the costs of the expansion;

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

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

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

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

 

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

 

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

 

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

 

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**Item 1B.   UnresolvedStaff Comments.**

 

None.

 

**Item 2.   Descriptionof Property.**

** **

The main office of thebank is located at 5009 Broad Street, Loris, South Carolina, 29569.  Our operational support services andexecutive offices are located in our Operations Center at 3640 Ralph EllisBoulevard, Loris, South Carolina, 29569. Our operational support services include central deposit and central creditoperations, computer operations, audit and compliance operations, humanresources, training, marketing and credit administration operations.  Currently we have for sale or lease ourformer Operations Center at 5201 Broad Street, Loris, South Carolina, 29569.

 

The bank presently owns12 lots on which we have branch banking facilities in addition to thepreviously mentioned lot which houses our former operations facility and thelot which houses our current Operations 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 completedconstruction of a permanent Ocean Drive Beach branch at 609 Highway 17 South,North Myrtle Beach, South Carolina, 29582 in August 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.

 

**Item 4.   (Removed and Reserved.)**

 

**PART II**

** **

**Item 5.   Market for Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities.**

** **

The information requiredby Item 5 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2009.

 

**Item 6.   SelectedFinancial Data.**

** **

**N/A.**

** **

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

** **

The information requiredby Item 7 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2009.

 

**Item8.   Financial Statements and Supplementary Data.**

** **

The information requiredby Item 8 is hereby incorporated by reference from our annual report toshareholders for the year ended December 31, 2009.

 

**Item9.   Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

 

None.

 

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**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 31,2009.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2009 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

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

 

**Management’s Annual Report 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 31,2009 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, 2009.

 

The Company iscontinuously seeking to improve the efficiency and effectiveness of itsoperations and of its internal controls. This results in modifications to itsprocesses throughout the Company. However, there has been no change in itsinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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.**

 

In accordance with theCompany’s corporate governance principles, Boyd R. Ford, Jr. and J.Lavelle Coleman will not stand for re-election to the Board of Directors at theCompany’s 2010 annual meeting of shareholders because they have reached themandatory retirement age of 70. Messrs. Ford and Coleman will completetheir current term on the Board of Directors, which expires at the Company’s2010 annual meeting of shareholders.

 

29

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**PART III**

 

**Item 10. ****Directors, ExecutiveOfficers and Corporate Governance**

 

*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 available toour shareholders via the internet at www.hcsbaccess.com.

 

Additional informationrequired by Item 10 is hereby incorporated by reference from our proxystatement for our 2010 annual meeting of shareholders to be held on April 22,2010.

 

**Item 11.  Executive Compensation.**

 

Information required byItem 11 is hereby incorporated by reference from our proxy statement for our2010 annual meeting of shareholders to be held on April 22, 2010.

 

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

 

Thefollowing table sets forth the equity compensation plan information at December 31,2009.

 

**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    |   |

 

----

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

 

Additional informationrequired by Item 12 is hereby incorporated by reference from our proxystatement for our 2010 annual meeting of shareholders to be held on April 22,2010.

 

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

 

In response to this Item13, the information contained on page 18 of our Proxy Statement for theAnnual Meeting of Shareholders to be held on April 22, 2010 isincorporated herein by reference.

 

30

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**Item14.  Principal Accountant Fees andServices.**

 

Information required byItem 14 is hereby incorporated by reference from our proxy statement for our2010 annual meeting of shareholders to be held on April 22, 2010.

 

**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).*                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 13     |   | The Company’s 2009  Annual Report.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 21     |   | Subsidiaries of  Registrant.                                                                                                                                                                                                                                                                                                           |

 

31

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| 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.                                                                                                          |
|   |   |                                                                                                                                        |
| 99.1   |   | Certification of the  Chief Executive Officer Pursuant to Section 111(b)(4) of the  Emergency Economic Stabilization Act of 2008. |
|   |   |                                                                                                                                        |
| 99.2   |   | Certification of the  Chief Financial Officer Pursuant to Section 111(b)(4) of the  Emergency Economic Stabilization Act of 2008. |

 

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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. |
|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

32

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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 18,  2010 | 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 18,  2010 |
|--------|-----------------------------------------------------------------------------|------------|----------------------------|
|   | Michael S. Addy,  Director                                                  |       |                       |
|   |                                                                        |       |                       |
| By:    | /s/Johnny C.  Allen                                                         |       | Date: March 18,  2010 |
|   | Johnny C. Allen,  Director                                                  |       |                       |
|   |                                                                        |       |                       |
| By:    | /s/Clay D. Brittain, III                                               |       | Date: March 18,  2010 |
|   | Clay D.  Brittain, III, Director                                       | ** ** |                       |
|   |                                                                        |       |                       |
| By:    | /s/Rachel B.  Broadhurst                                                    |       | Date: March 18,  2010 |
|   | Rachel B. Broadhurst,  Director                                             |       |                       |
|   |                                                                        |       |                       |
| By:    | /s/Russell R.  Burgess, Jr.                                            |       | Date: March 18,  2010 |
|   | Russell R.  Burgess, Jr., Director                                     |       |                       |
|   |                                                                        |       |                       |
| By:    | /s/D. Singleton  Bailey                                                     |       | Date: March 18,  2010 |
|   | D. Singleton Bailey,  Director                                              |       |                       |
|   |                                                                        |       |                       |
| By:    | /s/Franklin C.  Blanton                                                     |       | Date: March 18,  2010 |
|   | Franklin C. Blanton,  Director                                              |       |                       |
|   |                                                                        |       |                       |
| By:    | /s/Boyd R.  Ford, Jr.                                                  |       | Date: March 18,  2010 |
|   | Boyd R. Ford, Jr.,  Director                                           | ** ** |                       |
|   |                                                                        |       |                       |
| By:    | /s/James R.  Clarkson                                                       |       | Date: March 18,  2010 |
|   | James R. Clarkson,  Director, President &  Chief Executive Officer |       |
|   |                                                                        |       |                       |
| By:    | /s/J. Lavelle  Coleman                                                      |       | Date: March 18,  2010 |
|   | J. Lavelle Coleman,  Director                                               |       |                       |

 

33

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| By:    | /s/Larry G.  Floyd                      |   | Date: March 18,  2010 |
|--------|-----------------------------------------|--------|----------------------------|
|   | Larry G. Floyd,  Director               |   |                       |
|   |                                    |   |                       |
| By:    | /s/Tommie W.  Grainger                  |   | Date: March 18,  2010 |
|   | Tommie W. Grainger,  Director           |   |                       |
|   |                                    |   |                       |
| By:    | /s/Gwyn G.  McCutchen                   |   | Date: March 18,  2010 |
|   | Gwyn G. McCutchen,  Director            |   |                       |
|   |                                    |   |                       |
| By:    | /s/T. Freddie  Moore                    |   | Date: March 18,  2010 |
|   | T. Freddie Moore,  Director             |   |                       |
|   |                                    |   |                       |
| By:    | /s/Carroll D.  Padgett, Jr.        |   | Date: March 18,  2010 |
|   | Carroll D.  Padgett, Jr., Director |   |                       |

 

34

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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).*                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 13     |   | The Company’s 2009  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.                                                                                                                                                                                                                                                                |

 

35

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| 31.2   |   | Rule 13a-14(a) Certification of the  Principal Financial Officer.                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                        |
| 32     |   | Section 1350  Certifications.                                                                                                          |
|   |   |                                                                                                                                        |
| 99.1   |   | Certification of the  Chief Executive Officer Pursuant to Section 111(b)(4) of the  Emergency Economic Stabilization Act of 2008. |
|   |   |                                                                                                                                        |
| 99.2   |   | Certification of the  Chief Financial Officer Pursuant to Section 111(b)(4) of the  Emergency Economic Stabilization Act of 2008. |

 

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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. |
|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

36

----