UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-KSB

(Mark One)

|X | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------

| | For the fiscal year ended December 31, 2004
| | -------------------------------------------

| | or
| | --

| | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from __________ to ________                             

# Commission File Number
000-26995

| | HCSB FINANCIAL CORPORATION | 
| | -------------------------- | 

| | (Name of Small Business Issuer in Its Charter) | 
| | ---------------------------------------------- | 

|South Carolina                    |  | 57-1079444         
|--------------------------------- |  | -------------------
|(State or Other Jurisdiction      |  | (I.R.S. Employer   
|of Incorporation or Organization) |  | Identification No.)

|5201 Broad Street                        |  |           
|---------------------------------------- |  | ----------
|Loris, South Carolina                    |  | 29569     
|(Address of Principal Executive Offices) |  | (Zip Code)

(843) 756-6333Issuers Telephone Number, Including Area Code 
Securities registered pursuant to Section 12(b) of the Act:  NoneSecurities registered pursuant to Section 12(g) of the
Act:  Common Stock

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

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [  X  ]

The issuers revenue for its
most recent fiscal year was $17,328,000. As of March 18, 2005, 1,724,180 shares of Common
Stock were issued and outstanding.

The aggregate market value of the
Common Stock held by non-affiliates (shareholders holding less than 5% of an outstanding
class of stock, excluding directors and executive officers) of the Company on March 18,
2005 was $20,619,676. Because there is not an active trading market for the Common Stock,
we have used our book value of $13.76 as of February 28, 2005 to calculate our public
float.

Transitional Small Business Disclosure Format.
(Check one):    Yes  NoX

# DOCUMENTS INCORPORATED
BY REFERENCE

The Companys Annual Report to
Shareholders for the year ended December 31, 2004 is incorporated by reference in this
Form 10-KSB in Part II, Items 5 through 7. The Companys Proxy Statement for the
Annual Meeting of Shareholders to be held on April 28, 2005 is incorporated by reference
in this Form 10-KSB in Part III Items 9 through 12 and 14.

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# PART IITEM 1.   Description of
Business

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

# General Overview

HCSB
Financial Corporation was incorporated on June 10, 1999 to become a holding company for
Horry County State Bank. The bank is a state-chartered bank which commenced operations on
January 4, 1988. Our primary market includes Horry County in South Carolina and Columbus
and Brunswick Counties in North Carolina. From our 10 branch locations, we offer a full
range of deposit services, including checking accounts, savings accounts, certificates of
deposit, money market accounts, and IRAs, as well as a broad range of non-deposit
investment services.

# Risk Factors

# Our recent operating
results may not be indicative of our future operating results.

We
may not be able to sustain our historical rates of growth of assets and earnings, and we
may not be able to grow our business at all. Although we have plans for continued
expansion of our company, our historical results of operation will not necessarily be
indicative of our future operations. Various factors, such as economic conditions,
regulatory and legislative considerations, and competition, may also impede our ability to
expand our market presence. If we experience a significant decrease in our historical rate
of growth, our results of operations and financial condition may be adversely affected
because a high percentage of our operating costs are fixed expenses.

# Our decisions regarding
credit risk and reserves for loan losses may materially and adversely affect our business.

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

| | o | the duration of the credit;
| | - | ---------------------------

| | o | credit risks of a particular customer;
| | - | --------------------------------------

| | o | changes in economic and industry conditions; and
| | - | ------------------------------------------------

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

We
attempt to maintain an appropriate allowance for loan losses to provide for potential
losses in our loan portfolio. We periodically determine the amount of the allowance based
on consideration of several factors, including:

| | o | an ongoing review of the quality, mix, and size of our overall loan portfolio;
| | - | ------------------------------------------------------------------------------

| | o | our historical loan loss experience;
| | - | ------------------------------------

| | o | evaluation of economic conditions;
| | - | ----------------------------------

| | o | regular reviews of loan delinquencies and loan portfolio quality; and
| | - | ---------------------------------------------------------------------

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| | o | the amount and quality of collateral, including guarantees, securing the loans.
| | - | -------------------------------------------------------------------------------

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

# Lack of seasoning of our
loan portfolio may increase the risk of credit defaults in the future.

Due
to the growth of our bank into new markets over the past several years and our short
operating history in these communities, a large portion of the loans in our loan portfolio
and of our lending relationships are of relatively recent origin. In general, loans do not
begin to show signs of credit deterioration or default until they have been outstanding
for some period of time, a process we refer to as seasoning. As a result, a
portfolio of older loans will usually behave more predictably than a newer portfolio.
Because a substantial portion of our loan portfolio is relatively new, the current level
of delinquencies and defaults may not be representative of the level that will prevail
when the portfolio becomes more seasoned, which may be higher than current levels. If
delinquencies and defaults increase, we may be required to increase our provision for loan
losses, which would adversely affect our results of operations and financial condition.

# An economic downturn,
especially one affecting Horry County in South Carolina and Columbus and Brunswick
Counties in North Carolina, could reduce our customer base, our level of deposits, and demand for financial products such as
loans.

Our
success significantly depends upon the growth in population, income levels, deposits, and
housing starts in our markets, especially in Horry County, and to a lesser extent in
Columbus and Brunswick Counties in North Carolina. If the communities in which we operate
do not grow or if prevailing economic conditions locally or nationally are unfavorable,
our business may not succeed. An economic downturn would likely contribute to the
deterioration of the quality of our loan portfolio and reduce our level of deposits, which
in turn would hurt our business. If an economic downturn occurs in the economy as a whole,
or especially in Horry County, borrowers may be less likely to repay their loans as
scheduled. Moreover, the value of real estate or other collateral that may secure our
loans could be adversely affected. Unlike many larger institutions, we are not able to
spread the risks of unfavorable local economic conditions across a large number of
diversified economies. An economic downturn could, therefore, result in losses that
materially and adversely affect our business.

# Changes in prevailing
interest rates may reduce our profitability.

Our
results of operations depend in large part upon the level of our net interest income,
which is the difference between interest income from interest-earning assets, such as
loans and mortgage-backed securities, and interest expense on interest-bearing
liabilities, such as deposits and other borrowings. Depending on the terms and maturities
of our assets and liabilities, a significant change in interest rates could have a
material adverse effect on our profitability. Many factors cause changes in interest
rates, including governmental monetary policies and domestic and international economic
and political conditions. While we intend to manage the effects of changes in interest
rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our
efforts may not be effective and our financial condition and results of operations could
suffer. After operating in a historically low interest rate environment, the Federal
Reserve began raising short-term interest rates in the second quarter of 2004. We
anticipate that we will benefit from a rising interest rate environment. However, no
assurance can be given that the Federal Reserve will actually continue to raise interest
rates or that the results we anticipate will actually occur.

# We are dependent on key
individuals and the loss of one or more of these key individuals could curtail our growth and
adversely affect our prospects.

James
R. Clarkson, our president and chief executive officer, has extensive and long-standing

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ties within our primary market area
and 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 be
materially and adversely affected.

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

# We are subject to
extensive regulation that could limit or restrict our activities.

We
operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by various regulatory agencies. Our compliance with these
regulations is costly 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
capitalization guidelines established by our regulators, which require us to maintain
adequate capital to support our growth.

The
laws and regulations applicable to the banking industry could change at any time, and we
cannot predict the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all commercial
banks and bank holding companies, our cost of compliance could adversely affect our
ability to operate profitably.

The
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the
Securities and Exchange Commission that are now applicable to us, have increased the
scope, complexity, and cost of corporate governance, reporting, and disclosure practices.
We have experienced, and we expect to continue to experience, greater compliance costs,
including costs related to internal controls, as a result of the Sarbanes-Oxley Act.

# Our continued pace of
growth may require us to raise additional capital in the future, but that capital may notbe
available when it is needed.

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

# We face strong competition for clients, which could prevent us from obtaining clients and
may cause us to pay higher interest rates to attract clients.

The
banking business is highly competitive, and we experience competition in our market from
many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and other mutual
funds, as well as other super-regional, national, and international financial institutions
that operate offices in our primary market areas and elsewhere. We compete with these
institutions both in attracting deposits and in making loans. In addition, we have to
attract our client base from other existing financial institutions and from new residents.
Many of our competitors are well-established, larger financial institutions. These
institutions offer some services, such as extensive and established branch networks, that
we do not provide. There is a risk that we will not be able to compete successfully with
other financial institutions in our market, and that we may have to pay higher interest
rates to attract deposits, resulting in reduced profitability. In addition, competitors
that are not depository institutions are generally not subject to the extensive
regulations that apply to us.

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# We will face risks with
respect to future expansion and acquisitions or mergers.

We
may seek to acquire other financial institutions or parts of those institutions. We may
also expand into new markets or lines of business or offer new products or services. These
activities would involve a number of risks, including:

| | o | the potential inaccuracy of the estimates and judgments used to evaluate credit,  operations,  management,
and market risks with respect to a target institution;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the time and costs of evaluating new markets, hiring or retaining experienced local
management, and opening new offices and the time lags between these activities and the
generation of sufficient assets and deposits to support the costs of the expansion;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the incurrence and possible impairment of goodwill associated with an acquisition and
possible adverse effects on our results of operations; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | o | the risk of loss of key employees and customers.
| | - | ------------------------------------------------

# Operating and Growth
Strategy

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

| | o | Personalized Service. We view banking as a service industry in which personal
relationships can provide a competitive advantage. This paradigm is captured in our
marketing tagline Its the little things that make a little bank . . .
BIG! We strive to be BIG (important) to our customers by doing
little things like identifying our customers needs and promoting
products to satisfy them, knowing our customers by name, and providing our products with
superior levels of quality and service. We seek customers who prefer to conduct business
with a locally owned and managed bank that demonstrates an active interest in their
business and personal financial affairs. We believe that by consistently providing high
levels of service to customers who value that service, we develop and strengthen
relationships that provide a competitive advantage.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Motivated Employees.We believe that the key to our success lies with our
employees, because it is through our employees that we are able to provide our customers
with the high level of service and attention that they expect and deserve. To this end, we
hire people who are familiar with their community and are committed to providing a
superior level of banking service to our customers. By selecting only knowledgeable and
committed employees, we believe we can provide an unsurpassed level of customer service
and satisfaction. We strive to develop, sustain the motivation of, and retain our
employees through training, personal attention, recognition, and competitive compensation.
We encourage and equip each employee to focus on the individual needs of our customers and
to deliver the specific products and services that will best help these customers achieve
their financial goals.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Community Focus. We approach banking with a community focus, particularly at the
branch level. We operate each branch as an independent business unit and encourage our
branch managers to promote those products that best meet the need of their customer base.
This strategy enables our branches to serve diverse populations and economies effectively.
We support our branches by supporting the economic development of our communities and by
encouraging our employees to be active in community affairs. We have located our existing
offices, and plan to locate proposed offices, in communities in which we believe we can
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | develop strong relationships. We favor growth areas and areas in which there are opportunities to
differentiate ourselves by providing customers with superior service.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | High Asset Quality. We place a great deal of emphasis on maintaining high asset
quality and believe that the outstanding asset quality experienced to date is principally
due to the closeness of our lenders, senior officers, and directors to our customers and
their significant knowledge of the communities in which they reside.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Internal Growth, Branch Expansion. We have grown significantly over the last five
years. We will continue to focus on acquiring market share, particularly from large
Southeastern regional bank holding companies, by emphasizing our local management and
decision-making and personal services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Broad Range of Products and Services. We strive to provide our customers with the
breadth of products and services comparable to a regional bank, while maintaining the
quick response and personal service of a locally owned and managed bank. In addition to
offering a full range of deposit services and commercial and personal loans, we offer
products such as mortgage loan originations, on-line banking, and investment products and
brokerage services through a third party arrangement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Location and Service Area

Our
primary market includes Horry County in South Carolina and Columbus and Brunswick Counties
in North Carolina. Most of the banks in these areas are now local branches of large
regional banks. Although size gives the larger banks certain advantages in competing for
business from large corporations, including higher lending limits and the ability 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 market that we successfully fill. We also
believe that the Horry County market will continue to grow, particularly along the
Atlantic coast. We intend to continue to expand our branch network to take advantage of
opportunities caused by this growth. We generally do not attempt to compete for the
banking relationships of large corporations, but concentrate our efforts on small- to
medium-sized businesses and on individuals.

# Banking Services

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

# Lending Activities

General.
          We emphasize a range of lending services, including real estate, commercial,
          agricultural and consumer loans, to individuals and small to medium-sized
          businesses and professional concerns that are located in or conduct a
          substantial portion of their business in our market area. The characteristics of
          our loan portfolio and our underwriting procedures, collateral types, risks,
          approval process and lending limits are discussed below.

Real Estate Loans. The primary component of our loan portfolio is real estate mortgage
loans, which made up approximately 52.0% of our loan portfolio at December 31, 2004. These
loans are secured generally by first or second mortgages on residential or commercial
property. These loans

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consist of commercial real estate
loans, construction and development loans, and residential real estate loans (but exclude
home equity loans, which are classified as consumer loans).

Commercial
Loans.At December 31, 2004, approximately 29.6% of our loan portfolio consisted of
commercial loans. Commercial loans consist of secured and unsecured loans, lines of
credit, and working capital loans. We make these loans to various types of businesses.
Included in this category are loans to purchase equipment, finance accounts receivable or
inventory, and loans made for working capital purposes.

Consumer
Loans. Consumer loans made up approximately 11.7% of our loan portfolio at December
31, 2004. These are loans made to individuals for personal and household purposes, such as
secured and unsecured installment and term loans, home equity loans and lines of credit,
and revolving lines of credit such as overdraft protection. Automobiles and small
recreational vehicles are pledged as security for their purchase.

Agricultural
Loans.Approximately 2.9% of our loan portfolio consisted of agricultural loans at
December 31, 2004. These are loans made to individuals and businesses for agricultural
purposes, including loans to finance crop production and livestock operating expenses, to
purchase farm equipment, and to store crops. These loans are secured generally by liens on
growing crops and farm equipment. Also included in this category are loans to
agri-businesses, which are substantially similar to commercial loans, as discussed above.

Construction
and Development Loans. The remaining 3.8% of our loan portfolio at December 31, 2004
was composed of consumer and commercial real estate construction and commercial
development loans. These loans are secured by the real estate for which construction is
planned and, in many cases, by supplementary collateral.

Underwriting
Procedures, Collateral, and Risk.We use our established credit policies and
procedures when underwriting each type of loan. Although there are minor variances in the
characteristics and criteria for each loan type, which may require additional underwriting
procedures, we generally evaluate borrowers using the following defined criteria:

| | o | Character  we evaluate whether the borrower has sound character and integrity by
examining the borrowers history.
| | - | -------------------------------------------------------------------------------------------------------------------

| | o | Capital  we evaluate the borrowers overall financial strength, as well as the
equity investment in the asset being financed.
| | - | ------------------------------------------------------------------------------------------------------------------------------

| | o | Collateral  we evaluate whether the collateral is adequate from the standpoint of
quality, marketability, value and income potential.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | o | Capacity  we evaluate the borrowers ability to service the debt.
| | - | ------------------------------------------------------------------

| | o | Conditions  we underwrite the credit in light of the effects of external factors,
such as economic conditions and industry trends.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

It
is our practice to obtain collateral for most loans to help mitigate the risk associated
with lending. We generally limit our loan-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
obtain security interests in equipment and other company assets. For agricultural loans,
we typically obtain a security 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 which the mortgaged
real estate does not provide an acceptable loan-to-value ratio, we typically obtain other
available collateral such as stocks or savings accounts.

Every
loan carries a credit risk, simply defined as the potential that the borrower will not be
willing or able to repay the debt. While this risk is common to all loan types, each type
of loan may carry risks that distinguish it from other loan types. The following
paragraphs discuss certain risks that are associated with each of our loan types.

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Each
real estate loans is sensitive to fluctuations in the value of the real estate that
secures that loan. Certain types of real estate loans have specific risk characteristics
that vary according to the type of collateral that secures the loan, the terms of the
loan, and the repayment sources for the loan. Commercial real estate loans have risk that
the primary source of repayment will be insufficient to service the debt. Construction and
development real estate loans generally carry a higher degree of risk than long term
financing of existing properties. These projects are usually dependent on the completion
of the project on schedule 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 risks unique to this type of loan. Residential mortgage
loans, in contrast to commercial real estate loans, generally have longer terms and may
have fixed or adjustable interest rates.

Commercial
loans primarily have risk that the primary source of repayment will be insufficient to
service the debt. Often this occurs as the result of changes in economic conditions in the
location or industry in which the borrower operates which impact cash flow or collateral
value. Consumer loans, other than home equity loan products, are generally considered to
have more risk than loans to individuals secured by first or second mortgages on real
estate due to dependence on the borrowers employment status as the sole source of
repayment. Agricultural loans carry the risk of crop failure, which adversely impacts both
the borrowers ability to repay the loan and the value of the collateral.

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

Loan
Approval and Review. Our loan approval policies provide for various levels of officer
lending authority. When the amount of aggregate loans to a single borrower exceeds that
individual officers lending authority, the loan request is considered by an officer
with a higher lending limit. Any loan in excess of this lending limit is approved by the
directors loan committee. We do not make any loans to any of our directors or
executive officers unless the loan is approved by a three-fourths vote of the board
of directors of the bank and is made on terms not more favorable to such person than would
be available to a person not affiliated with us. Aggregate credit in excess of 10% of the
banks aggregate capital, surplus, retained earnings, and reserve for loan losses
must be approved by a three-fourths vote of our banks board of directors.

Lending
Limits. Our lending activities are subject to a variety of lending limits imposed by
federal law. While differing limits apply to certain loan types or borrowers, in general
we are subject to a loan-to-one-borrower limit. These limits increase or decrease as 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 requiring
aggregate extensions of credit above these limits.

# Other Banking and
Related Services

Other
bank services which are in place or planned include cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks, and
automatic drafts for various accounts. We are associated with a shared network of
automated teller machines that may be used by our customers throughout South Carolina and
other regions. One of our non-executive officers is a registered representative of UVEST
and effects transactions in securities and other non-deposit investment products. We also
offer MasterCard and VISA credit card services through a correspondent bank as an agent
for the bank. We continue to seek and evaluate opportunities to offer additional financial
services to our customers.

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# Competition

The
banking business is highly competitive. We compete with other commercial banks, savings
and loan associations, credit unions, and money market mutual funds operating in our
service area and elsewhere. As of December 2004, there were 19 financial institutions
operating in Horry County, 10 financial institutions operating in Brunswick County and 5
financial institutions operating in Columbus County. We believe that our community bank
focus, with our emphasis on service to small businesses, individuals, and professional
concerns, gives us an advantage in our markets. Nevertheless, a number of these
competitors are well established in our service area. Most of them have substantially
greater resources and lending limits than the bank and offer certain services, such as
extensive and established branch networks and trust services, that we do not provide. As a
result of these competitive factors, we may have to pay higher rates of interest to
attract deposits.

# Employees

As
of March 15, 2005, we had 103 full-time employees and 1 part-time employee. We are not a
party to a collective bargaining agreement, and we consider our relations with our
employees to be good.

# SUPERVISION AND
REGULATION

Both
the company and the bank are subject to extensive state and federal banking laws and
regulations that impose specific requirements or restrictions on and provide for general
regulatory oversight of virtually all aspects of our operations. These laws and
regulations are generally intended to protect depositors, not shareholders. The following
summary is qualified by reference to the statutory and regulatory provisions discussed.
Changes in applicable laws or regulations may have a material effect on our business and
prospects. Beginning with the enactment of the Financial Institutions Reform Recovery and
Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and the
Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements have been
placed on the banking industry in the past several years, and additional changes have been
proposed. Our operations may be affected by legislative changes and the policies of
various regulatory authorities. We cannot predict the effect that fiscal or monetary
policies, economic control, or new federal or state legislation may have on our business
and earnings in the future.

The
following discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

# USA PATRIOT Act of 2002

In
October 2002, the USA PATRIOT Act of 2002 was enacted in response to the terrorist attacks
in New York, Pennsylvania, and Washington D.C. that occurred on September 11, 2001. The
PATRIOT Act is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety of fronts.
The potential impact of the PATRIOT Act on financial institutions is significant and wide
ranging. The PATRIOT Act contains sweeping anti-money laundering and financial
transparency laws and imposes various regulations, including standards for verifying
client identification at account opening, and rules to promote cooperation among financial
institutions, regulators, and law enforcement entities in identifying parties who may be
involved in terrorism or money laundering.

# Check 21

On
October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century
Act, also known as Check 21. The new law gives substitute checks, such as a
digital image of a check and copies made from that image, the same legal standing as the
original paper check. Some of the major provisions include:

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| | o | allowing check truncation without making it mandatory;
| | - | ------------------------------------------------------

| | o | demanding that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | legalizing substitutions for and replacements of paper checks without agreement from
consumers;
| | - | -----------------------------------------------------------------------------------------------

| | o | retaining in place the previously mandated electronic collection and return
of checks between financial institutions only when individual agreements are in place;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | requiring that when accountholders request verification, financial institutions produce
the original check (or a copy that accurately represents the original) and demonstrate
that the account debit was accurate and valid; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | requiring recrediting of funds to an individuals account on the next business day
after a consumer proves that the financial institution has erred.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

This
new legislation will likely affect bank capital spending as many financial institutions
assess whether technological or operational changes are necessary to stay competitive and
take advantage of the new opportunities presented by Check 21.

# HCSB Financial
Corporation

We
own 100% of the outstanding capital stock of the bank, and therefore we are considered to
be a bank holding company under the federal Bank Holding Company Act of 1956 and the South
Carolina Banking and Branching Efficiency Act.

The
Bank Holding Company Act. Under the Bank Holding Company Act, we are subject to
periodic examination by the Federal Reserve and are required to file periodic reports of
our operations and any additional information that the Federal Reserve may require. Our
activities at the bank and holding company levels are limited to:

| | o | banking and managing or controlling banks;
| | - | ------------------------------------------

| | o | furnishing services to or performing services for our subsidiaries; and
| | - | -----------------------------------------------------------------------

| | o | engaging in other activities that the Federal Reserve determines to be so closely related
to banking and managing or controlling banks as to be a proper incident thereto.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investments,
Control, and Activities. With certain limited exceptions, the Bank Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal Reserve
before:

| | o | acquiring substantially all the assets of any bank;
| | - | ---------------------------------------------------

| | o | acquiring direct or indirect ownership or control of any voting shares of any bank if after the
acquisition it would own or control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | merging or consolidating with another bank holding company.
| | - | -----------------------------------------------------------

In
addition, and subject to certain exceptions, the Bank Holding Company Act and the Change
in Bank Control Act, together with regulations promulgated thereunder, require Federal
Reserve approval prior to any person or company acquiring control of a bank
holding company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of a bank holding company. Control
is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of
any class of voting securities and either the company has registered securities under
Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater
percentage of that class of voting securities immediately after the transaction. Our
common stock is registered under the Securities Exchange Act of 1934. The regulations
provide a procedure for rebutting control when ownership of any class of voting securities
is below 25%.

10

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Under
the Bank Holding Company Act, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities unless the Federal Reserve Board, by order or
regulation, has found those activities to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities that the
Federal Reserve Board has determined by regulation to be proper incidents to the business
of a bank holding company include:

| | o | making or servicing loans and certain types of leases;
| | - | ------------------------------------------------------

| | o | engaging in certain insurance and discount brokerage activities;
| | - | ----------------------------------------------------------------

| | o | performing certain data processing services;
| | - | --------------------------------------------

| | o | acting in certain circumstances as a fiduciary or investment or financial adviser;
| | - | ----------------------------------------------------------------------------------

| | o | owning savings associations; and
| | - | --------------------------------

| | o | making investments in certain corporations or projects designed primarily to promote
community welfare.
| | - | -------------------------------------------------------------------------------------------------------

The
Federal Reserve Board imposes certain capital requirements on the company under the Bank
Holding Company Act, including a minimum leverage ratio and a minimum ratio of
qualifying capital to risk-weighted assets. These requirements are described
below under Horry County State Bank  Capital Regulations. Subject to our
capital requirements and certain other restrictions, we are able to borrow money to make a
capital contribution to the bank, and these loans may be repaid from dividends paid from
the bank to the company. Our ability to pay dividends will be subject to regulatory
restrictions as described below in Horry County State Bank  Dividends.
We are also able to raise capital for contribution to the bank by issuing securities
without having to receive regulatory approval, subject to compliance with federal and
state securities laws.

Source
of Strength; Cross-Guarantee. In accordance with Federal Reserve Board policy, we are
expected to act as a source of financial strength to the bank and to commit resources to
support the bank in circumstances in which we might not otherwise do so. Under the Bank
Holding Company Act, the Federal Reserve Board may require a bank holding company to
terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Boards determination that such
activity or control constitutes a serious risk to the financial soundness or stability of
any depository institution subsidiary of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiaries if the agency determines that
divestiture may aid the depository institutions financial condition.

The
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act was signed into law on November 12,
1999. Among other things, the Act repealed the restrictions on banks affiliating with
securities firms contained in sections 20 and 32 of the Glass-Steagall Act. The Act also
permits bank holding companies that become financial holding companies to engage in a
statutorily provided list of financial activities, including insurance and securities
underwriting and agency activities, merchant banking, and insurance company portfolio
investment activities. The Act also authorizes activities that are
complementary to financial activities. We have not elected to become a
financial holding company.

The
Act is intended, in part, to grant to community banks certain powers as a matter of right
that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may
have the result of increasing the amount of competition that we face from larger
institutions and other types of companies. In fact, it is not possible to predict the full
effect that the Act will have on us.

South
Carolina State Regulation. As a South Carolina bank holding company under the South
Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or
merger and to regulation by the South Carolina Board of Financial Institutions. We are not
required to obtain the approval of the Board prior to acquiring the capital stock of a
national bank, but we must notify them at least 15 days prior to doing so. We must receive
the Boards approval prior to engaging in the acquisition of a South Carolina
state-chartered bank or another South Carolina bank holding company.

11

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# Horry County State Bank

The
bank operates as a state bank incorporated under the laws of the State of South Carolina
and is subject to examination by the South Carolina Board of Financial Institutions.
Deposits in the bank are insured by the FDIC up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.

The
South Carolina Board of Financial Institutions and the FDIC regulate or monitor virtually
all areas of the banks operations, including:

| | o | security devices and procedures;
| | - | --------------------------------

| | o | adequacy of capitalization and loss reserves;
| | - | ---------------------------------------------

| | o | loans;
| | - | ------

| | o | investments;
| | - | ------------

| | o | borrowings;
| | - | -----------

| | o | deposits;
| | - | ---------

| | o | mergers;
| | - | --------

| | o | issuances of securities;
| | - | ------------------------

| | o | payment of dividends;
| | - | ---------------------

| | o | interest rates payable on deposits;
| | - | -----------------------------------

| | o | interest rates or fees chargeable on loans;
| | - | -------------------------------------------

| | o | establishment of branches;
| | - | --------------------------

| | o | corporate reorganizations;
| | - | --------------------------

| | o | maintenance of books and records; and
| | - | -------------------------------------

| | o | adequacy of staff training to carry on safe lending and deposit gathering practices.
| | - | ------------------------------------------------------------------------------------

The
South Carolina Board of Financial Institutions requires the bank to maintain specified
capital ratios and imposes limitations on the banks aggregate investment in real
estate, bank premises, and furniture and fixtures. The South Carolina Board of Financial
Institutions also requires the bank to prepare quarterly reports on the banks
financial condition in compliance with its minimum standards and procedures.

Under
the FDIC Improvement Act, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate. Insured
institutions are required to submit annual reports to the FDIC, their federal regulatory
agency, and their state supervisor when applicable. The FDIC Improvement Act directs the
FDIC to develop a method for insured depository institutions to provide supplemental
disclosure of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. The FDIC Improvement Act also
requires the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding companies
relating, among other things, to the following:

| | o | internal controls;
| | - | ------------------

| | o | information systems and audit systems;
| | - | --------------------------------------

| | o | loan documentation;
| | - | -------------------

| | o | credit underwriting;
| | - | --------------------

| | o | interest rate risk exposure; and
| | - | --------------------------------

| | o | asset quality.
| | - | --------------

Holding
companies which have been registered or have undergone a change in control within the past
two years or which have been deemed by the Federal Reserve Board to be troubled
institutions must give the Federal Reserve Board 30 days prior notice of the
appointment of any senior executive officer or

12

---

director.  Within the 30 day period, the Federal Reserve Board, as the case may be, may
          approve or disapprove any such appointment.

Deposit
Insurance. The FDIC has adopted a risk-based assessment system for determining an
insured depository institutions insurance assessment rate. The system takes into
account the risks attributable to different categories and concentrations of assets and
liabilities. An institution is placed into one of three capital categories: (1) well
capitalized; (2) adequately capitalized; or (3) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subgroups, based on the FDICs determination
of the institutions financial condition and the risk posed to the deposit insurance
funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institutions capital group and supervisory subgroup. Our risk-based assessment rate
is currently zero but may change in the future. The FDIC may increase or decrease the
assessment rate schedule on a semiannual basis. An increase in the BIF assessment rate
could have a material adverse effect on our earnings, depending on the amount of the
increase. In addition, the FDIC imposes assessments to help pay off the $780.0 million in
annual interest payments on the $8.0 billion Financing Corporation (FICO) bonds issued in
the late 1980s as part of the government rescue of the thrift industry.

Transactions
With Affiliates and Insiders.The bank is subject to the provisions of Section 23A of
the Federal Reserve Act, which places limits on the amount of loans or extensions of
credit to, or investments in, or certain other transactions with, affiliates and on the
amount of advances to third parties collateralized by the securities or obligations of
affiliates. The aggregate of all covered transactions is limited in amount, as to any one
affiliate, to 10% of the banks capital and surplus and, as to all affiliates
combined, to 20% of the banks capital and surplus. Furthermore, within the foregoing
limitations as to amount, each covered transaction must meet specified collateral
requirements. Compliance is also required with certain provisions designed to avoid the
taking of low quality assets.

The
bank is subject to the provisions of Section 23B of the Federal Reserve Act which, among
other things, prohibits an institution from engaging in certain transactions with certain
affiliates unless the transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies. The bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.

The
Federal Reserve Board has recently issued Regulation W, which codifies prior regulations
under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with
respect to affiliate transactions. Regulation W incorporates the exemption from the
affiliate transaction rules but expands the exemption to cover the purchase of any type of
loan or extension of credit from an affiliate. In addition, under Regulation W:

| | o | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate; o
covered transactions and other specified transactions between a bank or its subsidiaries
and an
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | affiliate must be on terms and conditions that are consistent with safe and sound banking practices;
and
| | - | --------------------------------------------------------------------------------------------------------

| | o | with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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Regulation
W generally excludes all nonbank and nonsavings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates. Concurrently with the adoption of Regulation W,
the Federal Reserve Board has proposed a regulation which would further limit the amount
of loans that could be purchased by a bank from an affiliate to not more than 100% of the
banks capital and surplus. This regulation has not yet been adopted.

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

Branching.
          Under current South Carolina law, we may open branch offices throughout South
          Carolina with the prior approval of the South Carolina Board of Financial
          Institutions. In addition, with prior regulatory approval, the bank will be able
          to acquire existing banking operations in South Carolina. Furthermore, federal
          legislation has been passed that permits interstate branching by banks if
          allowed by state law, and interstate merging by banks.

Community
Reinvestment Act. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, a financial
institutions primary regulator, which is the FDIC for the bank, shall evaluate the
record of each financial institution in meeting the credit needs of its local community,
including low and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility. Failure
to adequately meet these criteria could impose additional requirements and limitations on
our bank.

The
Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act, subject to certain
conditions imposed by their respective banking regulators, national and state-chartered
banks are permitted to form financial subsidiaries that may conduct financial
or incidental activities, thereby permitting bank subsidiaries to engage in certain
activities that previously were impermissible. The Gramm-Leach-Bliley Act imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
banks equity investment in the financial subsidiary be deducted from the banks
assets and tangible equity for purposes of calculating the banks capital adequacy.
In addition, the Gramm-Leach-Bliley Act imposes new restrictions on transactions between a
bank and its financial subsidiaries similar to restrictions applicable to transactions
between banks and nonbank affiliates.

The
Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy. These
provisions require financial institutions to disclose their policy for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing personal financial information with nonaffiliated third parties
except for third parties that market an institutions own products and services.
Additionally, financial institutions generally may not disclose consumer account numbers
to any nonaffiliated third party for use in telemarketing, direct mail marketing, or other
marketing to the consumer.

Other
Regulations. Interest and other charges collected or contracted for by the bank are
subject to state usury laws and federal laws concerning interest rates. The banks
loan operations are also subject to federal laws applicable to credit transactions, such
as:

| | o | the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
| | - | ----------------------------------------------------------------------------------------------

| | o | the Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable  the  public  and  public  officials  to  determine
whether  a  financial
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| |  | institution  is fulfilling its obligation to help meet the housing needs of the community it serves;
| |  | ----------------------------------------------------------------------------------------------------

| | o | the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | o | the Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies;
| | - | -------------------------------------------------------------------------------------------------------------------

| | o | the Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------

| | o | the rules and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws.
| | - | ----------------------------------------------------------------------------------------------------------------------------

In
addition, the deposit operations of the bank are subject to:

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

| | o | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which govern automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital
Regulations. The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios in excess of the minimums. We have not received any notice
indicating that either the company or the bank is subject to higher capital requirements.
The current guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must
be Tier 1 capital. Tier 1 capital includes common shareholders equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance
for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves for loan and
lease losses up to 1.25% of risk-weighted assets.

Under
these guidelines, banks and bank holding companies assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items are
given credit conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight applies. These computations result in the total risk-weighted
assets. Most loans are assigned to the 100% risk category, except for first mortgage loans
fully secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.

The
federal bank regulatory authorities have also implemented a leverage ratio, which is equal
to Tier 1 capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the leverage ratio
is to place a constraint on the maximum degree to which a bank holding company may
leverage its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional cushion
of at least 100 to 200 basis points.

15

---

The
FDIC Improvement Act established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks which requires the FDIC to choose the least
expensive resolution of bank failures. The new capital-based regulatory framework contains
five categories of compliance with regulatory capital requirements, including well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
To qualify as a well capitalized institution, a bank must have a leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under any order or
directive from the appropriate regulatory agency to meet and maintain a specific capital
level. At December 31, 2004, based on our calculations, we qualified as well
capitalized.

Under
the FDIC Improvement Act regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a
financial institution increases, and the permissible activities of the institution
decreases, as it moves downward through the capital categories. Institutions that fall
into one of the three undercapitalized categories may be required to do some or all of the
following:

| | o | submit a capital restoration plan;
| | - | ----------------------------------

| | o | raise additional capital;
| | - | -------------------------

| | o | restrict their growth, deposit interest rates, and other activities;
| | - | --------------------------------------------------------------------

| | o | improve their management;
| | - | -------------------------

| | o | eliminate management fees; or
| | - | -----------------------------

| | o | divest themselves of all or a part of their operations.
| | - | -------------------------------------------------------

These
capital guidelines can affect us in several ways. If we grow at a rapid pace, our capital
may be depleted too quickly, and a capital infusion from the holding company may be
necessary, which could impact our ability to pay dividends. Our capital levels currently
are more than adequate; however, rapid growth, poor loan portfolio performance, poor
earnings performance, or a combination of these factors could change our capital position
in a relatively short period of time.

Failure
to meet these capital requirements would mean that a bank would be required to develop and
file a plan with its primary federal banking regulator describing the means and a schedule
for achieving the minimum capital requirements. In addition, such a bank would generally
not receive regulatory approval of any application that requires the consideration of
capital adequacy, such as a branch or merger application, unless the bank could
demonstrate a reasonable plan to meet the capital requirement within a reasonable period
of time. A bank that is not well capitalized is also subject to certain
limitations relating to so-called brokered deposits. Bank holding companies
controlling financial institutions can be called upon to boost the institutions
capital and to partially guarantee the institutions performance under their capital
restoration plans.

Enforcement
Powers. The Financial Institutions Reform Recovery and Enforcement Act expanded and
increased civil and criminal penalties available for use by the federal regulatory
agencies against depository institutions and certain institution-affiliated
parties. Institution-affiliated parties primarily include management, employees, and
agents of a financial institution, as well as independent contractors and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs. These practices can include the failure of an institution to
timely file required reports or the filing of false or misleading information or the
submission of inaccurate reports. Civil penalties may be as high as $1,000,000 a day for
such violations. Criminal penalties for some financial institution crimes have been
increased to 20 years. In addition, regulators are provided with greater flexibility to
commence enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance. Furthermore,
banking agencies power to issue cease-and-desist orders were expanded. Such orders
may, among other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or guarantees
against loss. A financial institution may also be ordered to restrict its growth, dispose
of certain assets, rescind agreements or contracts, or take other actions as determined by
the ordering agency to be appropriate.

16

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Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve Banks monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member
bank deposits. It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

Proposed
Legislation and Regulatory Action. New regulations and statutes are regularly proposed
that contain wide-ranging proposals for altering the structures, regulations, and
competitive relationships of the nations financial institutions. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.

# ITEM 2.   Description of
Properties

The main office of the bank is
located at 5009 Broad Street, Loris, South Carolina 29569. Our executive officers are
located at 5201 Broad Street, Loris, South Carolina 29569. The bank presently owns nine
lots in fee simple on which we have branch banking facilities and one lot with a facility
that houses the banks executive offices, central deposit operations, central credit
operations and computer operations. In addition, the bank has entered into one long-term
lease agreement for a lot on which we have built a branch banking facility. Each of these
properties is located within Horry County, South Carolina.

In March 2002, the bank purchased one
of the above-referenced properties at 4400 Hwy. 17 South, North Myrtle Beach, South
Carolina. The bank built a 3,300 square foot banking facility on this property which
opened for business in February 2003.

In October 2002, the bank purchased a
lot at 1701 North Oak Street, Myrtle Beach, South Carolina. The bank completed
construction of a 14,000 square foot banking facility on this property in August 2004 and
relocated its Myrtle Beach office into this new building at that time from its previous
leased facility which was located at 1601 North Oak Street, Myrtle Beach, South Carolina.
The bank terminated the lease on this temporary facility in August 2004.

In December 2004, the company
purchased a lot at the intersection of Carolina Forest Boulevard and Gateway Road in the
Carolina Forest section of Horry County, South Carolina. The bank plans to file in 2004 an
application with the applicable bank regulatory agencies for permission to purchase this
lot from the company and to construct and open a 3,300 square foot banking facility.

# ITEM 3.   Legal Proceedings

In
the ordinary course of operations, we are a party to various legal proceedings. Our
management does not believe that there is any pending or threatened proceeding against us
which, if determined adversely, would have a material effect on our business, results of
operations, or financial position during the year ended December 31, 2004.

# ITEM 4.   Submission of Matters to a Vote of Security Holders

No
matters were submitted during the fourth quarter of the fiscal year ended December 31,
2004 to a vote of security holders, through the solicitation of proxies or otherwise.

17

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# PART II ITEM 5.   Market for
Common Equity and Related Stockholder Matters

In
response to this Item, the information contained on page 7 of the companys Annual
Report to Shareholders for the year ended December 31, 2004 is incorporated herein by
reference.

# ITEM 6.   Management's Discussion and Analysis of Financial Condition and Results of Operations

In
response to this Item, the information contained on pages 8 through 24 of the
companys Annual Report to Shareholders for the year ended December 31, 2004 is
incorporated herein by reference.

# ITEM 7.   Financial
Statements

In
response to this Item, the information contained on pages 26 through 51 of the
companys Annual Report to Shareholders for the year ended December 31, 2004 is
incorporated herein by reference.

# ITEM 8.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

# ITEM 8A.   Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of December 31, 2004. There have been
no significant changes in our internal controls over financial reporting during the fourth
fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# ITEM 8B.   Other
Information

None

# PART III 
ITEM 9.   Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act

# Code of Ethics

We
have adopted a Code of Ethics that applies to our board of directors, principal executive
officer, principal financial officer, senior financial officers, and other executive
officers in accordance with the Sarbanes-Oxley Corporate Responsibility Act of 2002. The
Code of Ethics is available without charge to shareholders upon request. Shareholders
should contact our chief executive officer, James R. Clarkson, at our main office to
obtain a copy.

18

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In
response to this Item, additional information is contained on pages 2 through 3, and page
9 of the companys Proxy Statement for the Annual Meeting of Shareholders to be held
on April 28, 2005 is incorporated herein by reference.

# ITEM 10.   Executive
Compensation

In
response to this Item 10, the information contained on page 4 of our Proxy Statement for
the Annual Meeting of Shareholders to be held on April 28, 2005 is incorporated herein by
reference.

# ITEM 11.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the
equity compensation plan information at December 31, 2004.

# Equity Compensation
Plan Information

|                    |  |  | Number of securities
|------------------- |  |  | --------------------
|
|
|
|
|
|
|
|Equity compensation |  |  |                     
|plans approved by   |  |  |                     
|security holders    |  |  |                     
|                    |  | 
|Total               |  |  |                     

|(1) | The HCSB Financial Corporation Omnibus Stock Ownership and Long Term Incentive
                    Plan authorizes the grant of options and the award of restricted stock from time
                    to time during the term of the plan. The employees included in the plan include
                    the executive officers of the corporation as well as certain non-executive
                    officer employees. This column includes 126,027 options and 132,296 shares of
                    restricted stock. In addition, in 2004 we issued 126,027 shares of restricted
                    stock under this plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
response to this Item 11, additional information is contained on page 5 of our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 28, 2005 and is
incorporated herein by reference.

# ITEM 12.   Certain
Relationships and Related Transactions

In
response to this Item 12, the information contained on page 8 of our Proxy Statement for
the Annual Meeting of Shareholders to be held on April 28, 2005 is incorporated herein by
reference.

# ITEM 13.   Exhibits

|3.1 | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys
Form 10-KSB for the fiscal year ended December 31, 1999).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|3.2 | Bylaws (incorporated by reference to Exhibit 3.2 to the Companys Form 10-KSB for the
fiscal year ended December 31, 1999).
|--- | ---------------------------------------------------------------------------------------------------------------------------

|10.1 | HCSB Financial Corporation Omnibus Stock Ownership and Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-KSB for the
fiscal year ended December 31, 2003).*
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Form of Restricted Stock Option Agreement.*
|---- | -------------------------------------------

19

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|10.3 | Form of Incentive Stock Option Agreement.*
|---- | ------------------------------------------

|10.4 | Restricted Stock Grant Agreement by and between HCSB Financial Corporation and Glenn R.
         Bullard, dated May 19, 2004.*
|---- | ------------------------------------------------------------------------------------------------------------------------------

|10.5 | Restricted Stock Grant Agreement by and between HCSB Financial Corporation and James R.
         Clarkson, dated May 19, 2004.*
|---- | -------------------------------------------------------------------------------------------------------------------------------

|10.6 | Incentive Stock Option Grant Agreement by and between HCSB Financial Corporation and Glenn R.
         Bullard, dated February 23, 2004.*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|10.7 | Incentive Stock Option Grant Agreement by and between HCSB Financial Corporation and James R.
         Clarkson, dated February 23, 2004.*
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|13 | The Companys
2004 Annual Report
|-- | --------------------------------

|21 | Subsidiaries of Registrant
|-- | --------------------------

|24 | Power of Attorney (contained on signature pages herewith)
|-- | ---------------------------------------------------------

|31.1 | Rule 13a-14(a) Certification of the Chief Executive Officer.
|---- | ------------------------------------------------------------

|31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer.
|---- | ----------------------------------------------------------------

|32 | Section 1350 Certifications.
|-- | ----------------------------

---

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

# ITEM 14.   PRINCIPAL
ACCOUNTANT FEES AND SERVICES

In
response to this Item 14, the information contained on pages 8 through 9 of our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 28, 2005 is
incorporated herein by reference.

20

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# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                      |  | HCSB FINANCIAL CORPORATION  
|--------------------- |  | ----------------------------
|                      |  |                             
|Date:  March 25, 2005 |  | By:   /s/  James R. Clarkson
|                      |  | James R. Clarkson, President
|                      |  | & Chief Executive Officer   

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

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

|By:  /s/ Johnny C. Allen
        Johnny C. Allen, Director | Date:  March 25, 2005 | 
|---------------------------------------------------------- | --------------------- | 

|By:  
        Clay D. Brittain, Director | Date:  March 25, 2005 | 
|---------------------------------------- | --------------------- | 

|By:  /s/ Russell R. Burgess, Jr.
        Russell R. Burgess, Jr., Director | Date:  March 25, 2005 | 
|-------------------------------------------------------------------------- | --------------------- | 

|By:  /s/ D. Singleton Bailey
        D. Singleton Bailey, Director | Date:  March 25, 2005 | 
|------------------------------------------------------------------ | --------------------- | 

|By:  /s/ Franklin C. Blanton
        Franklin C. Blanton, Director | Date:  March 25, 2005 | 
|------------------------------------------------------------------ | --------------------- | 

|By:  /s/ William H. Caines
        William H. Caines, Director | Date:  March 25, 2005 | 
|-------------------------------------------------------------- | --------------------- | 

|By:  /s/ James R. Clarkson
        James R. Clarkson, Director, President, 
        Chief Executive Officer, Principal
        Accounting Officer, and Principal Financial Officer | Date:  March 25, 2005 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | 

|By:  

        J. Lavelle Coleman, Director | Date:  March 25, 2005 | 
|------------------------------------------- | --------------------- | 

21

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|By:  /s/ Larry G. Floyd
        Larry G. Floyd, Director | Date:  March 25, 2005 | 
|-------------------------------------------------------- | --------------------- | 

|By:  
        Boyd R. Ford, Jr., Director | Date:  March 25, 2005 | 
|----------------------------------------- | --------------------- | 

|By:  /s/ Tommie W. Grainger
        Tommie W. Grainger, Director | Date:  March 25, 2005 | 
|---------------------------------------------------------------- | --------------------- | 

|By:  /s/ Randy B. Hardee
        Randy B. Hardee, Director | Date:  March 25, 2005 | 
|---------------------------------------------------------- | --------------------- | 

|By:  /s/ Gwyn G. McCutchen
        Gwyn G. McCutchen, Director | Date:  March 25, 2005 | 
|-------------------------------------------------------------- | --------------------- | 

|By:  /s/ T. Freddie Moore
        T. Freddie Moore, Director | Date:  March 25, 2005 | 
|------------------------------------------------------------ | --------------------- | 

|By:  /s/ Carroll D. Padgett, Jr.
        Carroll D. Padgett, Jr., Director | Date:  March 25, 2005 | 
|-------------------------------------------------------------------------- | --------------------- | 

22

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# EXHIBIT INDEX

|3.1 | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys
Form 10-KSB for the fiscal year ended December 31, 1999).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|3.2 | Bylaws (incorporated by reference to Exhibit 3.2 to the Companys Form 10-KSB for the
fiscal year ended December 31, 1999).
|--- | ---------------------------------------------------------------------------------------------------------------------------

|10.1 | HCSB Financial Corporation Omnibus Stock Ownership and Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-KSB for the
fiscal year ended December 31, 2003).*
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Form of Restricted Stock Option Agreement.*
|---- | -------------------------------------------

|10.3 | Form of Incentive Stock Option Agreement.*
|---- | ------------------------------------------

|10.4 | Restricted Stock Grant Agreement by and between HCSB Financial Corporation and Glenn R.
         Bullard, dated May 19, 2004.*
|---- | ------------------------------------------------------------------------------------------------------------------------------

|10.5 | Restricted Stock Grant Agreement by and between HCSB Financial Corporation and James R.
         Clarkson, dated May 19, 2004.*
|---- | -------------------------------------------------------------------------------------------------------------------------------

|10.6 | Incentive Stock Option Grant Agreement by and between HCSB Financial Corporation and Glenn R.
         Bullard, dated February 23, 2004.*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|10.7 | Incentive Stock Option Grant Agreement by and between HCSB Financial Corporation and James R.
         Clarkson, dated February 23, 2004.*
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|13 | The Companys
2004 Annual Report
|-- | --------------------------------

|21 | Subsidiaries of Registrant
|-- | --------------------------

|24 | Power of Attorney (contained on signature pages herewith)
|-- | ---------------------------------------------------------

|31.1 | Rule 13a-14(a) Certification of the Chief Executive Officer.
|---- | ------------------------------------------------------------

|31.2 | Rule 13a-14(a) Certification of the Principal Financial Officer.
|---- | ----------------------------------------------------------------

|32 | Section 1350 Certifications.
|-- | ----------------------------

---

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

23

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