# Exhibit 13

# HORRY COUNTY STATE BANK

# HCSB FINANCIAL
CORPORATION

Loris, South Carolina

Annual Report

2004

---

# HCSB FINANCIAL CORPORATION

# Contents

Page

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

Headquarters

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

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

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

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

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES MESSAGE TO SHAREHOLDERS

I am very pleased to advise you of
another successful year for HCSB Financial Corporation and its subsidiary, Horry County
State Bank. We experienced growth in deposits, loans, total assets and earnings during the
year.

For the year 2004, deposits increased
by 5.93% and concluded the year at $222.4 million. Our loan portfolio grew by 10.84% to a
year-end balance of $210.6 million, and total assets of our company expanded by 10.05% to
$296.8 million. Net income for the year 2004 was $2.05 million, which represents a 31.06%
improvement over the fine year that we experienced in 2003.

Among our noteworthy accomplishments
in 2004 was the completion of our new 2-story building at 1701 N. Oak Street in Myrtle
Beach in August. We believe that this building is second to none in appearance, and it
obviously gives us ample room for growth in the Myrtle Beach market. More importantly,
however, we have been fortunate to assemble a tremendous team of employees who make the
real difference for Horry County State Bank in Myrtle Beach.

Also, in December we consummated a
purchase of a lot at the corner of Carolina Forest Boulevard and Gateway Avenue in the
Carolina Forest community. We believe this will be an excellent location on which to
construct a branch in the near future, as soon as we may line up the personnel who are
capable of building a successful operation there. This acquisition continues our concept
of building our banks branch network throughout Horry County.

In addition, in order to take
advantage of the opportunity for continued growth that the Horry County marketplace
offers, late last year we completed a trust preferred securities transaction. This $6
million offering will enable us to work aggressively to meet our goals in asset growth and
still maintain a ratio of tier 1 capital to assets as is necessary to be considered a
well-capitalized company in the eyes of the banking regulatory agencies. This trust
preferred securities product has no adverse impact on the percentage of ownership that our
existing shareholders have in HCSB Financial Corporation or in our market price or book
value per share.

As mentioned above, we are indeed
blessed to have our existence in an area like Horry County where the overall economy has
performed at levels much better than not only our national economy, but nearby inland
counties in South Carolina and North Carolina as well. In addition, we are constantly
monitoring the structure of our existing services as well as prospective new services in
order to offer a broad array of high quality financial services.

All of these items have certainly had
positive impacts on our ability to continue to grow our company successfully. Without a
doubt, however, the key factor in our success has been, and will continue to be, the
employees that we are able to attract and the level of service that they provide to our
customers. We have truly been fortunate to have so many fine, professional people working
for us. In order to continue our success story, we must continue to attract, train and
retain personnel of the highest quality, as we are indeed in a service-providing business
where people make the greatest difference.

As we move into the year 2005, the
importance of your Board of Directors decision several years ago to expand our
branch network throughout Horry County has never been more evident. With the numerous
uncertainties facing our local farmers now, the diversification in our marketplace that we
now have is so significant. We continue to analyze every potential branch location with
the belief that we must strategically locate offices in every area of Horry County in
order to maximize our ability to meet the growth opportunities that exist. However, we
shall follow our successful path of building around people, not locations, while at the
same time realizing quite well that good locations enable good people to meet and exceed
their goals.

-2-

---

During the first quarter of 2005 we
will install and implement a new core software system for our company. We have used the
present system for over 17 years, with various upgrades along the way. Although it has
served us well, we must install a new system to remain competitive.

So indeed we have made significant
strides over the last 17 years. We have grown from a bank with one modular-type office in
Loris, with eight employees and $2 million in assets, to a company with 10 offices
throughout Horry County, an Operation Center housing support services, 106 employees, and
nearly $300 million in total assets. This has been the result of a team effort utilizing
the strengths of our shareholders, customers, Board of Directors and employees. Even so,
in todays world HCSB Financial Corporation is still a small company in comparison to
many financial services companies.

Our employees must understand the
important of adherence to our slogan Its the little things that make a little
bank . . . BIG! and strive every day to treat our customers as we employees desire
to be treated. We also need to count on the continued support of our shareholders to
recommend Horry County State Bank at your every opportunity.

Most respectfully,

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

-3-

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

Ten Year History
(Omit 000s)

|Year | Assets | Deposits | Loans (net) | Capital | Earnings
|---- | ------ | -------- | ----------- | ------- | --------
|1995 |        |          | $           | 45,913  |         
|1996 |        |          |             | 49,405  |         
|1997 |        |          |             | 72,156  |         
|1998 |        |          |             | 83,586  |         
|1999 |        |          |             | 114,326 |         
|2000 |        |          |             | 143,718 |         
|2001 |        |          |             | 148,651 |         
|2002 |        |          |             | 211,598 |         
|2003 |        |          |             | 269,714 |         
|2004 |        |          |             | 296,807 |         

-4-

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIESSelected Financial Data

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

|Year Ended December 31,                   | 2004 | 2003 | 2002 | 2001    | 2000
|----------------------------------------- | ---- | ---- | ---- | ------- | ----
|(Dollars in thousands, except per share)  |      |      |      |         |     
|Financial Condition:                      |      |      |      |         |     
|Investment securities, available for sale |      |      | $    | 42,597  |     
|Allowance for loan losses                 |      |      |      | 2,155   |     
|Net loans                                 |      |      |      | 210,649 |     
|Premises and equipment, net               |      |      |      | 11,803  |     
|Total assets                              |      |      |      | 296,807 |     
|Noninterest-bearing deposits              |      |      |      | 27,973  |     
|Interest-bearing deposits                 |      |      |      | 194,416 |     
|Total deposits                            |      |      |      | 222,389 |     
|Advances from the Federal Home            |      |      |      |         |     
|Loan Bank                                 |      |      |      | 43,390  |     
|Total liabilities                         |      |      |      | 273,353 |     
|Total shareholders' equity                |      |      |      | 23,454  |     
|                                          |      |     
|Results of Operations:                    |      |      |      |         |     
|Interest income                           |      |      | $    | 15,172  |     
|Interest expense                          |      |      |      | 4,936   |     
|                                          |      |      |      |         |     
|Net interest income                       |      |      |      | 10,236  |     
|Provision for loan losses                 |      |      |      | 1,285   |     
|                                          |      |      |      |         |     
|Net interest income after provision       |      |      |      |         |     
|for loan losses                           |      |      |      | 8,951   |     
|Other income                              |      |      |      | 2,156   |     
|Other expense                             |      |      |      | 7,961   |     
|                                          |      |      |      |         |     
|Income before income taxes                |      |      |      | 3,146   |     
|Income tax expense                        |      |      |      | 1,091   |     
|                                          |      |      |      |         |     
|Net income                                |      |      | $    | 2,055   |     
|                                          |      |      |      |         |     
|Per Share Data (1):                       |      |      |      |         |     
|Net income                                |      |      | $    | 1.20    |     
|Period end book value                     |      |      | $    | 13.59   |     

|(1) | Adjusted for the effects of the two-for-one share split in the form of a 100%
               share dividend declared in January, 2000, the 5% stock dividends declared in
               February, 2001, February, 2002 and February, 2003, and the 7.5% stock dividend
               declared in January, 2004. Adjustments have also been made for the 3% stock
               dividend declared in January, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-5-

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Description of
Companys Business

HCSB Financial Corporation (the
Company) was incorporated on June 10, 1999 to become a holding company for Horry County
State Bank. The Companys only significant asset is its wholly owned subsidiary,
Horry County State Bank (the Bank). The Bank is a state-chartered bank incorporated on
December 18, 1987 and located at 5201 Broad Street, Loris, South Carolina. The
Companys primary market includes Horry County in South Carolina and Columbus and
Brunswick Counties in North Carolina. From its 10 branch locations, the Company offers 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.

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

In 1995 the Company opened its first
branch office in the Mt. Olive community of Horry County and has since expanded its branch
network to 10 banking offices located throughout Horry County, as well as an Operation
Center in Loris, South Carolina which houses the Companys executive offices and
support services. This expansion of its branch system has enabled the Company to more
effectively compete for deposits and loans. By expanding into different communities, the
Company has been able to substantially diversify its market place from one of a
predominantly agricultural flavor to one which blends residential developments of retirees
and others, tourism, major employment areas, central county government and the
markets most active overall growth areas. In so doing, the Company has reduced
considerably the seasonality in its loan portfolio as well as the risks that are at times
inherent with concentration of loans in one particular segment of the economy.

In order to support this growth in
its branch network, the Company has undertaken several secondary common stock offerings.
Prior to its reorganization from a bank into the holding company, Horry County State Bank
undertook three such secondary offerings of its common stock in efforts to strengthen the
banks regulatory capital position to support projected future growth in assets.
Since the reorganization was consummated in 1999, the Company committed to another
secondary offering in 2002 whereby the Company issued an additional 365,712 shares of
common stock at a price per share of $22.00, resulting in over $8,000,000 in added
capital.

In December, 2004, the Company
participated in the issuance of $6,000,000 of trust preferred securities through its
wholly-owned subsidiary HCSB Financial Trust I (the Trust) to enable the company to pursue
its growth goals and yet maintain a well-capitalized status as defined by
banking regulatory agencies. This method of raising capital only recently became available
to companies such as HCSB Financial Corporation in increments that the Company could
utilize. It allows the Company to continue its growth trends without issuing additional
common stock, and thus there is no dilution of ownership among the Companys
shareholders.

In August, 2004, the Company
relocated its Myrtle Beach office into its newly constructed permanent facility at 1701 N.
Oak Street, Myrtle Beach, South Carolina. This building affords this branch the
opportunity to better maximize its potential in the Myrtle Beach market by providing
services such as drive-up teller facilities and an ATM, neither of which was available at
the temporary facility in which the branch opened initially. The new facility also enables
the bank to expand its staff of employees to better solicit and assist its customer base.

The Company concluded the year 2004
with the purchase of a 2-acre lot at the intersection of Carolina Forest Boulevard and
Gateway Avenue in the Carolina Forest community in Horry County.

-6-

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Market for Common Share
and Dividends

As of December 31, 2004, there were
1,725,261 shares of our common stock outstanding held by approximately 2,204 shareholders
of record. There is currently no established public trading market in our common stock,
and trading and quotations of our common stock have been limited and sporadic. Because
there has not been an established market for our common stock, we may not be aware of all
prices at which our common stock has been traded. We have not determined whether the
trades of which we are aware were the result of arms-length negotiations between the
parties. Beginning in early 2004 our common stock has been quoted on the OTC Bulletin
Board, but there have only been four odd-lot trades and one trade of 100 shares of our
common stock through the OTC Bulletin Board since January 2004. These trades ranged from
$13.43 for 33 shares in January 2004 to $29.50 for 49 shares in October 2004. Because
these shares have been so limited and sporadic, we have not included them in the following
table. Excluding these five trades on the OTC Bulletin Board, based on information
available to us from a limited number of sellers and purchasers of common stock who have
engaged in privately negotiated transactions of which we are aware, we believe
transactions in our common stock can be fairly summarized as follows for the periods
indicated:

| | 2004 | Low | High          
| | ---- | --- | --------------
| |      |     | Fourth Quarter
| |      |     | Third Quarter 
| |      |     | Second Quarter
| |      |     | First Quarter 
| |      |    
| |      |     | 2003          
| |      |     | Fourth Quarter
| |      |     | Third Quarter 
| |      |     | Second Quarter
| |      |     | First Quarter 

All share and per share data in this
report has been adjusted to reflect all stock dividends declared by the Company.

No cash dividends have ever been
declared or paid by the Company. However, the Board of Directors approved a 10% stock
dividend for each of the five years ending December 31, 1996. The Company also paid a
two-for-one stock split in the form of a 100% stock dividend in 2000, a 5% stock dividend
in each of the years 2001, 2002, and 2003, and a 7.5% stock dividend in 2004. The Board of
Directors has declared a 3% stock dividend payable March 12, 2005 to shareholders of
record February 11, 2005. Management does not expect the Company to pay cash dividends in
the foreseeable future. The Companys ability to pay dividends depends on the ability
of its subsidiary, Horry County State Bank, to pay dividends to the Company. As a South
Carolina state bank, the Bank may only pay dividends out of its net profits, after
deducting expenses, including losses and bad debts. In addition, the Bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals its
stated capital.

-7-

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

INTRODUCTION

The following discussion describes
our results of operations for 2004 as compared to 2003 and also analyzes our financial
condition as of December 31, 2004 as compared to December 31, 2003. Like most community
banks, we derive most of our income from interest we receive on our loans and investments.
Our primary source of funds for making these loans and investments is our deposits, both
interest-bearing and noninterest-bearing. Consequently, one of the key measures of our
success is our amount of net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our
interest-bearing liabilities, such as deposits and borrowed funds. In order to maximize
our net interest income, we must not only manage the volume of these balance sheet items,
but also the yields that we earn on our interest-earning assets and the rates that we pay
on interest-bearing liabilities.

We have included a number of tables
to assist in our description of these measures. For example, the Average
Balances table shows the average balance during 2004, 2003, and 2002 of each
category of our assets and liabilities, as well as the yield we earned or the rate we paid
with respect to each category. A review of this table shows that our loans typically
provide higher interest yields than do other types of interest earning assets, which is
why we direct a substantial percentage of our earning assets into our loan portfolio.
Similarly, the Rate/Volume Analysis table helps demonstrate the impact of
changing interest rates and changing volume of assets and liabilities during the years
shown. We also track the sensitivity of our various categories of assets and liabilities
to changes in interest rates, and we have included an Interest Rate Sensitivity
Analysis table to help explain this. Finally, we have included a number of tables
that provide details about our investment securities, our loans, and our deposits and
other borrowings.

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

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

GENERAL

The Company continued to grow in
2004, despite the persistent and low interest rate environment. Total assets increased by
$27,093,000, or 10.05%, and net loans increased by $20,594,000, or 10.84%. Much of this
growth is attributable to the success of our two newest branch offices in the Windy Hill
community and in downtown Myrtle Beach.

Profitability continued a steady
upward trend in 2004. Net income increased by 31.06%, from $1,568,000 in 2003 to
$2,055,000 in 2004, primarily as a result of increased income from loans and related fees.
The growth of the loan portfolio resulted in a loan to deposit ratio of 95.69%, a
$6,700,000 increase in advances from the Federal Home Loan Bank and the issuance of junior
subordinated debentures. The Company will need to attract additional deposits, borrow more
money, or a combination of the two to continue expansion of the loan portfolio. A more
detailed discussion of the factors contributing to growth and challenges is presented
below.

-8-

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# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

The Company experienced an increase
of $809,000, or 6.17%, in interest income on loans and related fees for the year ended
December 31, 2004. Because of the low interest rate environment, total interest expense
decreased $604,000, or 10.90%, to $4,936,000 despite the overall growth in
interest-bearing deposits and other borrowings. Although net interest income increased
significantly during 2004 when compared to 2003, the Company also experienced a
significant increase in noninterest expense during 2004. The primary factor contributing
to the increase of noninterest expense was salaries and employee benefits, which increased
$257,000, or 5.95%, from $4,319,000 for the year ended December 31, 2003. This increase
was primarily a result of normal salary increases of existing employees during the year
and the staffing of the new branches. Overall, the Company had net income for the year
ended December 31, 2004 of $2,055,000, compared to $1,568,000 for the year ended December
31, 2003. This represents an increase in net income of $487,000, or 31.06%. An interest
rate swap transaction conducted by the Company during the third quarter of 2003 reduced
the Companys interest expense for the year 2004 by $292,000.

ASSETS, LIABILITIES,
AND SHAREHOLDERS EQUITY

During the twelve months ended
December 31, 2004, total assets increased $27,093,000, or 10.05%, when compared to
December 31, 2003. The primary reason for the increase in total assets was an increase in
net loans of $20,594,000, or 10.84%, during 2004 from $190,055,000 at December 31, 2003.
Total deposits increased $12,458,000, or 5.93%, from the December 31, 2003 amount of
$209,931,000. Within the deposit area, interest-bearing deposits increased $7,634,000, or
4.09%, and noninterest-bearing deposits increased $4,824,000, or 20.84%, during 2004. The
increase in deposits was primarily due to the offering of a higher yielding Prestige
checking account, which increased by $10,107,000, from $54,515,000 at the end of 2003 to
$64,622,000 at the end of 2004. In order to better match maturities of liabilities with
the loan portfolio, the Company has chosen to increase its borrowings with the Federal
Home Loan Bank rather than concentrate totally on increasing deposits at this time. This
also allows the Company to lock in low rates for a longer period of time. As a result,
borrowings with the Federal Home Loan Bank have increased by $6,700,000, or 18.26%, to
$43,390,000 from $36,690,000 at December 31, 2003. In addition, the Company entered into a
trust preferred securities transaction which resulted in $6,186,000 in junior subordinated
debentures.

DISTRIBUTION OF ASSETS,
LIABILITIES, AND SHAREHOLDERS EQUITY

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

-9-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY - continued

Balance Sheet Categories
as a Percent of Average Total Assets

|                                           | 2004 | 2003 | 2002
|------------------------------------------ | ---- | ---- | ----
|Assets:                                    |      |      |     
|Interest earning assets:                   |      |      |     
|Federal funds sold                         |      |      |     
|Time deposits with other banks             |      |      |     
|Investment securities                      |      |      |     
|Loans                                      |      |      |     
|                                           |      |      |     
|Total interest earning assets              |      |      |     
|Cash and due from banks                    |      |      |     
|Allowance for loan losses                  |      |      |     
|Premises and equipment                     |      |      |     
|Other assets                               |      |      |     
|                                           |      |      |     
|Total assets                               |      |      |     
|                                           |      |      |     
|Liabilities and shareholders' equity:      |      |      |     
|Interest-bearing liabilities:              |      |      |     
|Interest-bearing deposits                  |      |      |     
|Federal funds purchased                    |      |      |     
|Advances from the Federal Home Loan Bank   |      |      |     
|                                           |      |      |     
|Total interest-bearing liabilities         |      |      |     
|Noninterest-bearing deposits               |      |      |     
|Accrued interest and other liabilities     |      |      |     
|                                           |      |      |     
|Total liabilities                          |      |      |     
|Shareholders' equity                       |      |      |     
|                                           |      |      |     
|Total liabilities and shareholders' equity |      |      |     
|                                           |      |      |     

NET INTEREST INCOME

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

For the year ended December 31, 2004,
net interest income was $10,236,000, an increase of $1,539,000, or 17.70%, over net
interest income of $8,697,000 in 2003. Interest income from loans, including fees, was
$13,921,000, an increase of $809,000, or 6.17%, from 2003 to 2004 as demand for loans in
the Companys marketplace continued to grow. Interest expense for the year ended
December 31, 2004 was $4,936,000, compared to $5,540,000 for 2003. This represents a
decrease of $604,000, or 10.90%, compared to the prior year. The interest rate spread and
net yield on earning assets therefore showed improvement when compared to the previous
year. The net yield realized on earning assets was 3.97% for 2004, compared to 3.74% in
2003. The interest rate spread was 3.75% and 3.50% in 2004 and 2003, respectively.

-10-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

NET INTEREST INCOME
 continued

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

# Average Balances, Income
and Expenses, and Rates

|Year ended December 31,       | 2004 | 2003 | 2002
|----------------------------- | ---- | ---- | ----
|
|
|Assets:                       |      |      |     
|Earning Assets:               |      |      |     
|Securities, taxable           |      |      |     
|Securities, nontaxable        |      |      |     
|Loans (1)                     |      |      |     
|Federal funds sold            |      |      |     
|Time deposits with            |      |      |     
|other banks                   |      |      |     
|Nonmarketable equity          |      |      |     
|securities                    |      |      |     
|                              |      |      |     
|Total earning assets          |      |      |     
|                              |      |      |     
|Cash and due from banks       |      |      |     
|Allowance for loan losses     |      |      |     
|Premises and equipment        |      |      |     
|Other assets                  |      |      |     
|                              |      |      |     
|Total assets                  |      |      |     
|                              |      |      |     
|Liabilities:                  |      |      |     
|Interest-Bearing Liabilities: |      |     
|Interest-bearing deposits     |      |      |     
|Other borrowings              |      |      |     
|                              |      |      |     
|Total interest-bearing        |      |      |     
|liabilities                   |      |      |     
|                              |      |      |     
|Noninterest-bearing deposits  |      |      |     
|Accrued interest and other    |      |      |     
|liabilities                   |      |      |     
|Shareholders equity          |      |      |     
|                              |      |      |     
|Total liabilities and         |      |      |     
|shareholders equity          |      |      |     
|                              |      |      |     
|Net interest income/spread    |      |      |     
|                              |      |      |     
|Net interest margin           |      |      |     

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

-11-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

RATE/VOLUME ANALYSIS

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

|                                | 2004 compared to 2003
|------------------------------- | ---------------------
|
|
|Interest income:                |                      
|Taxable securities              |                      
|Nontaxable securities           |                      
|Loans                           |                      
|Federal funds sold              |                      
|Time deposits with other banks  |                      
|Nonmarketable equity securities |                      
|                                |                      
|Total interest income           |                      
|                                |                      
|Interest expense:               |                      
|Interest-bearing deposits       |                      
|Other borrowings                |                      
|                                |                      
|Total interest expense          |                      
|                                |                      
|Net interest income             |                      
|                                |                      

|                                | 2003 compared to 2002
|------------------------------- | ---------------------
|
|
|Interest income:                |                      
|Taxable securities              |                      
|Nontaxable securities           |                      
|Loans                           |                      
|Federal funds sold              |                      
|Time deposits with other banks  |                      
|Nonmarketable equity securities |                      
|                                |                      
|Total interest income           |                      
|                                |                      
|Interest expense:               |                      
|Interest-bearing deposits       |                      
|Other borrowings                |                      
|                                |                      
|Total interest expense          |                      
|                                |                      
|Net interest income             |                      
|                                |                      

(1)    
          Volume-rate changes have been allocated to each category based on a consistent
          basis between rate and volume.

-12-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

RATE SENSITIVITY

Interest rates paid on deposits and
borrowed funds and interest rates earned on loans and investments have generally followed
the fluctuations in market rates in 2004 and 2003. However, fluctuations in market
interest rates do not necessarily have a significant impact on net interest income,
depending on the Companys interest rate sensitivity position. A rate-sensitive asset
or liability is one that can be repriced either up or down in interest rate within a
certain time interval. When a proper balance exists between rate-sensitive assets and
rate-sensitive liabilities, market interest rate fluctuations should not have a
significant impact on liquidity and earnings. The larger the imbalance, the greater the
interest rate risk assumed and the greater the positive or negative impact of interest
fluctuations on liquidity and earnings.

Interest rate sensitivity management
is concerned with the management of both the timing and the magnitude of repricing
characteristics of interest-earning assets and interest-bearing liabilities and is an
important part of asset/liability management. The objectives of interest rate sensitivity
management are to ensure the adequacy of net interest income and to control the risks to
net interest income associated with movements in interest rates. The following table,
Interest Rate Sensitivity Analysis, indicates that, on a cumulative basis,
after three through twelve months, rate-sensitive liabilities exceeded rate-sensitive
assets, resulting in a twelve month liability sensitive position. For a bank with a
liability-sensitive position, or negative gap, falling interest rates would generally be
expected to have a positive effect on net interest income, and rising interest rates would
generally be expected to have the opposite effect. The following table presents the
Companys rate sensitivity at each of the time intervals indicated as of December 31,
2004 and may not be indicative of the Companys rate-sensitivity position at other
points in time:

Interest Rate Sensitivity
Analysis

|                                 |  | After One | After Three |         | Greater |  
|-------------------------------- |  | --------- | ----------- | ------- | ------- | -
|
|
|
|Assets                           |  |           |             |         |         |  
|Interest-earning assets          |  |           |             |         |         |  
|Federal fund sold                |  |           | $           | 12,270  |         | $
|Loans                            |  |           |             | 77,170  |         |  
|Securities                       |  |           |             | -       |         |  
|                                 |  |           |             |         |         |  
|Total earning assets             |  |           |             | 89,440  |         |  
|                                 |  |           |             |         |         |  
|Liabilities                      |  |           |             |         |         |  
|Interest-bearing liabilities:    |  |           |             |         |         |  
|Interest-bearing deposits:       |  |           |             |         |         |  
|Demand deposits                  |  |           |             | 86,287  |         |  
|Savings deposits                 |  |           |             | 25,405  |         |  
|Time deposits                    |  |           |             | 3,016   |         |  
|                                 |  |           |             |         |         |  
|Total interest-bearing           |  |           |             |         |         |  
|deposits                         |  |           |             | 114,708 |         |  
|Other borrowings                 |  |           |             | -       |         |  
|                                 |  |           |             |         |         |  
|Total interest-bearing           |  |           |             |         |         |  
|liabilities                      |  |           |             | 114,708 |         |  
|                                 |  |           |             |         |         |  
|Period gap                       |  |           | $           | (25,268 | )       | $
|                                 |  |           |             |         |         |  
|Cumulative gap                   |  |           | $           | (25,268 | )       | $
|                                 |  |           |             |         |         |  
|Ratio of cumulative gap to total |  |           |             |         |         |  
|earning assets                   |  |           |             | (9.44   | )%      |  

-13-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

PROVISION FOR LOAN
LOSSES

The provision for loan losses is
charged to earnings based upon managements evaluation of specific loans in its
portfolio and general economic conditions and trends in the marketplace. The 2004 and 2003
provisions for loan losses and their related effect of increasing the allowance for loan
losses are related to growth in the loan portfolio. Please refer to the section Loan
Portfolio for a discussion of managements evaluation of the adequacy of the
allowances for loan losses. In 2004 and 2003, the provisions for loan losses were
$1,285,000 and $857,000, respectively.

OTHER INCOME

Other income was $2,156,000 for the
year ended December 31, 2004, an increase of $154,000, or 7.69%, when compared with the
year ended December 31, 2003. The increase is primarily a result of an increase of
$56,000, or 4.44%, in service charges on deposit accounts from $1,261,000 for 2003 to
$1,317,000 for 2004, which corresponds to an increase in average demand deposits and
savings accounts to $136,736,000 during 2004 as compared to $116,820,000 during 2003. The
Company also recognized gains of sales of securities in 2004 of $99,000, as compared to
$92,000 in 2003.

OTHER EXPENSES

Most categories of other expenses
increased during 2004 due to continued growth of the Company. Salaries and employee
benefits increased $257,000 or 5.95%, due to a normal salary increases among existing
employees as well as a slight increase in the number of employees. Net occupancy and
furniture and equipment expenses also increased $71,000 due mainly to an increase in
depreciation expense and the cost of equipment maintenance associated with the
companys newest permanent facilities at Tabor City, Windy Hill and Myrtle Beach.
Other operating expenses were $1,814,000 for the year ended December 31, 2004, compared to
$1,630,000 for the year ended December 31, 2003.

INCOME TAXES

The Companys income tax expense
for 2004 was $1,091,000, an increase of $253,000 from the 2003 expense of $838,000. The
increase in the expense results from increased income before taxes. The Companys
effective tax rates for the years ended December 31, 2004 and 2003 were 34.68% and 34.83%,
respectively.

LIQUIDITY

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

As of December 31, 2004, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling
$13,000,000. These lines of credit are available on a one to fourteen day basis for
general corporate purposes. The lenders have reserved the right not to renew their
respective lines. The Company may also borrow an additional $15,685,000 from the Federal
Home Loan Bank based on a predetermined formula. Securities available-for-sale, which
totaled $42,597,000 at December 31, 2004, also serve as a ready source of liquidity.
Management believes that the Companys liquidity sources are adequate to meet its
operating needs. The level of liquidity is measured by the loans-to-total borrowed funds
ratio, which was at 78.25% and 77.78% at December 31, 2004 and 2003, respectively.

-14-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

IMPACT OF
OFF-BALANCE-SHEET INSTRUMENTS

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

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

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

As of December 31, 2004, commitments
to extend credit totaled $24,458,000 and standby letters of credit totaled $433,000.

The following table sets forth the
length of time until maturity for unused commitments to extend credit and standby letters
of credit at December 31, 2004.

|                          |  | After One | After Three |       |  |  
|------------------------- |  | --------- | ----------- | ----- |  | -
|
|
|
|Unused commitments to     |  |           |             |       |  |  
|extend credit             |  |           | $           | 2,414 |  | $
|Standby letters of credit |  |           |             | -     |  |  
|                          |  |           |             |       |  |  
|Totals                    |  |           | $           | 2,414 |  | $
|                          |  |           |             |       |  |  

The Company entered into interest
swap agreements associated with Federal Home Loan Bank advances during the third quarter
of 2004. The interest rate swaps effectively converted the fixed interest rates on the
advances to a variable rate. The notional amount of advances involved in this transaction
totaled $14,600,000. The unrealized gain related to the interest rate swaps was $338,000
at December 31, 2004. The Company believes that the hedging of such debt was very
effective as management protected against further declines in interest rates as well as a
continuation of interest rates at or near their low levels at the time the transaction was
consummated.

-15-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

# IMPACT OF INFLATION ANDH1
CHANGING PRICES

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

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

CAPITAL RESOURCES

The Company uses several indicators
of capital strength. The most commonly used measure is average common equity to average
assets, which was 7.54% in 2004 compared to 7.69% in 2003. This ratio changed very little
as income was realized proportionately to the increase in assets.

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

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

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

As of December 31, 2004, the most
recent notifications from the Banks primary regulator categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective action. There are no
conditions or events that management believes have changed the Banks category.

-16-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

# CAPITAL RESOURCES
 continued

The Company and the Bank are required
to maintain certain risk-based and leverage ratios. The Company and the Bank exceeded
these regulatory capital ratios at December 31, 2004, 2003, and 2002 as set forth in the
following tables.

|December 31,                            | 2004 | 2003 | 2002
|--------------------------------------- | ---- | ---- | ----
|
|The Company                             |      |      |     
|Tier 1 capital                          |      |      | $   
|Tier 2 capital                          |      |      |     
|                                        |      |      |     
|Total qualifying capital                |      |      | $   
|                                        |      |      |     
|Risk-adjusted total assets              |      |      |     
|(including off-balance-sheet exposures) |      |      | $   
|                                        |      |      |     
|Tier 1 risk-based capital ratio         |      |      |     
|Total risk-based capital ratio          |      |      |     
|Tier 1 leverage ratio                   |      |      |     

|December 31,                            | 2004 | 2003 | 2002
|--------------------------------------- | ---- | ---- | ----
|
|The Bank                                |      |      |     
|Tier 1 capital                          |      |      | $   
|Tier 2 capital                          |      |      |     
|                                        |      |      |     
|Total qualifying capital                |      |      | $   
|                                        |      |      |     
|Risk-adjusted total assets              |      |      |     
|(including off-balance-sheet exposures) |      |      | $   
|                                        |      |      |     
|Tier 1 risk-based capital ratio         |      |      |     
|Total risk-based capital ratio          |      |      |     
|Tier 1 leverage ratio                   |      |      |     

The Company does not expect to pay
cash dividends to shareholders during 2005.

-17-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

# INVESTMENT PORTFOLIO

Management classifies investment
securities as either held-to-maturity or available-for-sale based on their intentions and
the Companys ability to hold them until maturity. In determining such
classifications, securities that management has the positive intent and the Company has
the ability to hold until maturity are classified as held-to-maturity and carried at
amortized cost. All other securities are designated as available-for-sale and carried at
estimated fair value with unrealized gains and losses included in shareholders
equity on an after-tax basis. As of December 31, 2004 and 2003, all securities were
classified as available-for-sale.

The following tables summarize the
carrying value of investment securities as of the indicated dates and the weighted-average
yields of those securities at December 31, 2004.

# Investment Securities
Portfolio Composition

|December 31,                                            | 2004 | 2003 | 2002
|------------------------------------------------------- | ---- | ---- | ----
|
|Securities of U.S. government agencies and corporations |      |      | $   
|Obligations of state and local governments              |      |      |     
|Taxable obligations of state and local governments      |      |      |     
|Mortgage-backed securities                              |      |      |     
|Nonmarketable equity securities                         |      |      |     
|                                                        |      |      |     
|Total securities                                        |      |      | $   
|                                                        |      |      |     

# Investment Securities Portfolio
Maturity Schedule

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

-18-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

LOAN PORTFOLIO

Management believes the loan
portfolio is adequately diversified. There are no foreign loans, and agricultural loans as
of December 31, 2004 are limited. There are no significant concentrations of loans in any
particular individuals or industry or group of related individuals or industries.

The Company has experienced continued
growth of its loan portfolio throughout 2004 and 2003, resulting in increases of
$20,975,000 and $28,996,000, respectively. Management has concentrated on maintaining
quality in the loan portfolio. The loan-to-deposit ratio is used to monitor a financial
institutions potential profitability and efficiency of asset distribution and
utilization. Generally, a higher loan-to-deposit ratio is indicative of higher interest
income since loans yield a higher return than other interest-earning assets. The
loan-to-deposit ratios were 95.69% and 91.38% at December 31, 2004 and 2003, respectively.
The loans-to-total borrowed funds ratio was 78.25% and 77.78% at December 31, 2004 and
2003, respectively. Management intends to deploy available funds to loans in order to
maximize earnings and achieve its targeted ratio of loans to deposits; however, there can
be no assurance that management will be able to execute its strategy or that loan demand
will continue to support growth.

Loan Portfolio Composition

|December 31,                   | 2004 | 2003 | 2002 | 2001    | 2000
|------------------------------ | ---- | ---- | ---- | ------- | ----
|
|Real estate - construction and |      |      |      |         |     
|land development               |      |      | $    | 8,026   |     
|Real estate - mortgage and     |      |      |      |         |     
|commercial                     |      |      |      | 110,584 |     
|Agricultural                   |      |      |      | 6,136   |     
|Commercial and industrial      |      |      |      | 62,991  |     
|Consumer                       |      |      |      | 22,881  |     
|All other loans (including     |      |      |      |         |     
|overdrafts)                    |      |      |      | 2,186   |     
|                               |      |      |      |         |     
|Total gross loans              |      |      | $    | 212,804 |     
|                               |      |      |      |         |     

Credit Risk Management

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

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

-19-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

LOAN PORTFOLIO
continued

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

Maturities and Sensitivity of Loans
to Changes in Interest Rates:

The following table summarizes the
loan maturity distribution, by type, at December 31, 2004 and related interest rate
characteristics:

|                                       |  | Over One Year |   |       
|-------------------------------------- |  | ------------- | - | ------
|
|
|
|Real estate - construction             |  |               |   |       
|and land development                   |  |               | $ | 7,172 
|Real estate - other                    |  |               |   | 26,028
|Agricultural                           |  |               |   | 2,250 
|Commercial and industrial              |  |               |   | 25,921
|Consumer                               |  |               |   | 5,751 
|All other loans (including overdrafts) |  |               |   | 297   
|                                       |  |               |   |       
|                                       |  |               | $ | 67,419
|                                       |  |               |   |       
|Loans maturing after one year with:    |  |               |   |       
|Fixed interest rates                   |  |               |   |       
|Floating interest rates                |  |               |   |       
|                                       |  |               |   |       
|                                       |  |               |   |       
|                                       |  |               |   |       

# Risk Elements

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

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

The following table sets forth our nonperforming assets for the dates indicated.

# Nonperforming Assets

|(Dollars in thousands)         | 2004 | 2003 | 2002 | 2001  | 2000
|------------------------------ | ---- | ---- | ---- | ----- | ----
|Nonaccrual loans               |      |      | $    | 4,295 |     
|Restricted or impaired loans   |      |      |      | -     |     
|                               |      |      |      |       |     
|Total nonperforming loans      |      |      |      | 4,295 |     
|                               |      |     
|Other real estate owned        |      |      |      | 964   |     
|                               |      |      |      |       |     
|Total nonperforming assets     |      |      | $    | 5,259 |     
|                               |      |      |      |       |     
|Loans 90 days or more past due |      |      |      |       |     
|and still accruing interest    |      |      | $    | 378   |     
|                               |      |     
|Nonperforming assets to period |      |      |      |       |     
|end loans                      |      |      |      | 2.47  | %   

-20-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

LOAN PORTFOLIO 
continued

For loans to be in excess of 90 days delinquent
and still accruing interest, the borrowers must be either remitting payments although not
able to get current, liquidation on loans deemed to be well secured must be near
completion, or the Company must have a reason to believe that correction of the
delinquency status by the borrower is near. The amount of both nonaccrual loans and loans
past due 90 days or more were considered in computing the allowance for loan losses as of
December 31, 2004.

The primary reason for the increase
in nonaccrual loans from December 31, 2003 to December 31, 2004 centered around one
customer relationship involving several entities. Loans to these entities which were on
nonaccrued status at December 31, 2004 totaled $2,875,000. Of this total, $1,247,000 was
guaranteed by the U. S. Small Business Administration (SBA). Interest earned on these
loans but not included in interest income by the Bank totaled $297,000 as of December 31,
2004. With the consent of the SBA the Bank has allowed the customer time to attempt to
liquidate the collateral which secures these loans in order to minimize any potential
losses which may occur due to a possible deficiency in collateral values. Subsequent to
the end of 2004, the customer has contracted to sell the principal company involved, the
purchaser has remitted interest payments of $150,000 on the loans and the Bank, with the
approval of the SBA, has agreed to renegotiate repayment terms on $1,947,000 of these
loans. The Bank is expected to receive an additional $90,000 relating to interest prior to
March 31, 2005. This interest, which has been collected, will be reflected as interest
income for the Bank in 2005. Negotiations continue toward the orderly liquidation of
assets, which collateralize the other loans in this relationship.

# Summary of Loan Loss Experience

|(Dollars in thousands)          | 2004 | 2003 | 2002 | 2001    | 2000
|------------------------------- | ---- | ---- | ---- | ------- | ----
|Total loans outstanding at      |      |      |      |         |     
|end of period                   |      |      | $    | 212,808 |     
|                                |      |      |      |         |     
|Average loans outstanding       |      |      | $    | 211,028 |     
|                                |      |      |      |         |     
|Balance of allowance for loan   |      |      |      |         |     
|losses at beginning of period   |      |      | $    | 1,774   |     
|                                |      |      |      |         |     
|Charge-offs:                    |      |      |      |         |     
|Real estate                     |      |      |      | 354     |     
|Commercial                      |      |      |      | 286     |     
|Consumer and credit card        |      |      |      | 328     |     
|                                |      |      |      |         |     
|Total charge-offs               |      |      |      | 968     |     
|Recoveries of loans previous    |      |      |      |         |     
|charged-off                     |      |      |      | 64      |     
|                                |      |      |      |         |     
|Net charge-offs                 |      |      |      | 904     |     
|                                |      |      |      |         |     
|Provision charged to operations |      |      |      | 1,285   |     
|                                |      |      |      |         |     
|Balance of allowance for loan   |      |      |      |         |     
|losses at end of period         |      |      | $    | 2,155   |     
|                                |      |      |      |         |     
|Ratios:                         |      |      |      |         |     
|Net charge-offs to average      |      |      |      |         |     
|loans outstanding               |      |      |      | 0.43    | %   
|Net charge-offs to loans at     |      |      |      |         |     
|end of year                     |      |      |      | 0.42    | %   
|Allowance for loan losses to    |      |      |      |         |     
|average loans                   |      |      |      | 1.02    | %   
|Allowance for loan losses to    |      |      |      |         |     
|loans at end of year            |      |      |      | 1.01    | %   
|Net charge-offs to allowance    |      |      |      |         |     
|for loan losses                 |      |      |      | 41.95   | %   
|Net charge-offs to provisions   |      |      |      |         |     
|for loan losses                 |      |      |      | 70.35   | %   

-21-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

LOAN PORTFOLIO 
continued

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

Management regularly monitors past
due and classified loans. However, it should be noted that no assurances can be made that
future charges to the allowance for loan losses or provisions for loan losses may not be
significant to a particular accounting period. At December 31, 2004 and 2003, management
considers the allowances for loan losses adequate based on its judgments, evaluations, and
analysis of the loan portfolio.

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

AVERAGE DAILY DEPOSITS

The following table summarizes the
Companys average daily deposits during the years ended December 31, 2004, 2003, and
2002. These totals include time deposits $100,000 and over, which at December 31, 2004
totaled $39,154,000. Of this total, scheduled maturities within three months were
$2,450,000; over three through six months were $649,000; over six through twelve months
were $24,881,000; and over twelve months were $11,174,000.

|                                      | 2004 | 2003 | 2002
|------------------------------------- | ---- | ---- | ----
|
|
|
|Noninterest-bearing demand            |      |      | $   
|Interest-bearing transaction accounts |      |      |     
|Money market savings account          |      |      |     
|Other savings accounts                |      |      |     
|Time deposits                         |      |      |     
|                                      |      |      |     
|Total deposits                        |      |      | $   
|                                      |      |      |     

-22-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

# ADVANCES FROM THE
FEDERAL HOME LOAN BANK

The following table summarizes the
Companys short-term borrowings for the years ended December 31, 2004, 2003 and 2002.

|                                     | Maximum |  | Weighted |       
|------------------------------------ | ------- |  | -------- | ------
|
|
|
|December 31, 2004                    |         |  |          |       
|Advances from Federal Home Loan Bank |         |  | $        | 43,390
|December 31, 2003                    |         |  |          |       
|Advances from Federal Home Loan Bank |         |  | $        | 36,690
|December 31, 2002                    |         |  |          |       
|Advances from Federal Home Loan Bank |         |  | $        | 26,690

Advances from the Federal Home Loan
Bank are collateralized by one-to-four family residential mortgage loans, certain
commercial real estate loans and the Companys investment in Federal Home Loan Bank
stock. Although we expect to continue using Federal Home Loan Bank advances as a secondary
funding source, core deposits will continue to be our primary funding source. Of the
$43,390,000 advances from Federal Home Loan Bank outstanding at December 31, 2004,
$6,700,000 have scheduled principal reductions in 2008 and the remaining balance matures
after five years.

As discussed in the notes to the
financial statements, the Company has entered into interest rate swap agreements
associated with Federal Home Loan Bank advances maturing on March 1, 2010, May 24, 2010
and March 22, 2011. The interest rate swaps effectively converted the fixed interest rates
on the advances to a variable rate. The variable rate was 2.52% at December 31, 2004 and
is based on the three month LIBOR index.

JUNIOR SUBORDINATED
DEBENTURES

On December 17, 2004, HCSB Financial
Trust I (the  Trust), a wholly-owned subsidiary of the Company, issued and
sold a total of 6,000 trust preferred securities, with $1,000 liquidation amount per
capital security (the Capital Securities), to institutional buyers in a pooled
trust preferred issue. The Capital Securities, which are reported on the consolidated
balance sheet as junior subordinated debentures, generated proceeds of $6.0 million. The
Trust loaned these proceeds to the Company to use for general corporate purposes. The
junior subordinated debentures qualify as Tier 1 capital under Federal Reserve Board
guidelines, subject to limitations. See Note 10 to the consolidated financial statements
for more information about the terms of the junior subordinated debentures.

Debt issuance costs, net of
accumulated amortization, from junior subordinated debentures totaled $109,695 at December
31, 2004 and are included in other assets on the consolidated balance sheet. Amortization
of debt issuance cost from junior subordinated debentures totaled $305 and is reported in
other expenses on the consolidated income statement for the year ended December 31, 2004.

RETURN ON EQUITY AND
ASSETS

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

|                         | 2004 | 2003 | 2002
|------------------------ | ---- | ---- | ----
|
|Return on average assets |      |      |     
|Return on average equity |      |      |     
|Equity to assets ratio   |      |      |     

-23-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

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

ACCOUNTING AND
FINANCIAL REPORTING ISSUES

We have adopted various accounting
policies which govern the application of accounting principles generally accepted in the
United States in the preparation of our financial statements. Our significant accounting
policies are described in the footnotes to the consolidated financial statements at
December 31, 2004, as filed on our annual report on Form 10-KSB. Certain accounting
policies involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these accounting
policies to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which we believe to be reasonable under
the circumstances. Because of the nature of the judgments and assumptions we make, actual
results could differ from these judgments and estimates which could have a material impact
on our carrying values of assets and liabilities and our results of operations.

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

INDUSTRY DEVELOPMENTS

Sarbanes-Oxley Act of 2002 
The Congress of the United States of
America passed the Sarbanes-Oxley Act in 2002 in the aftermath of corporate scandals among
several major publicly traded corporations. The intent of the Act was to legislate
corporate governance and better ascertain the accuracy of financial reporting by companies
regulated by the Securities and Exchange Commission.

Section 404 of the Sarbanes-Oxley
Act, which becomes effective for the Company in 2006, requires that the Company adopt and
maintain effective internal controls that will, among other things, permit the preparation
of financial statements in conformity with accounting principles generally accepted in the
United States of America. Management of the Company has the responsibility to adopt sound
accounting policies, maintain an adequate and efficient accounting system, safeguard
assets and devise policies to ensure that the Company complies with applicable laws and
regulations.

To assist in this process the company
has purchased software from the national accounting firm of Crowe Chizek and retained the
services of Elliott Davis, LLC and Crowe Chizek to work with management and participate in
the Section 404 process. Elliott Davis, LLC will perform only those services in this
regard that are acceptable by the Public Company Accounting Oversight Board (PCAOB).
Compliance with Section 404 of the Sarbanes-Oxley Act will certainly add to the
Companys operating expenses due to requirements for additional technology, record
keeping, and professional assistance that is necessary.

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

-24-

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors 
HCSB Financial Corporation and SubsidiariesLoris, South Carolina

We have audited the accompanying
consolidated balance sheets of HCSB Financial Corporation and its subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, changes in
shareholders equity and comprehensive income, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial
statements present fairly, in all material respects, the consolidated financial position
of HCSB Financial Corporation and its subsidiaries as of December 31, 2004 and 2003, and
the consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of
America.

Elliott Davis, LLCColumbia,
South Carolina January 27, 2005

-25-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Consolidated Balance
Sheets

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|Assets:                                                      |             
|Cash and cash equivalents:                                   |             
|Cash and due from banks                                      |             
|Federal funds sold                                           |             
|Time deposits with other banks                               |             
|                                                             |             
|Total cash and cash equivalents                              |             
|                                                             |             
|Investment securities:                                       |             
|Securities available-for-sale                                |             
|Nonmarketable equity securities                              |             
|                                                             |             
|Total investment securities                                  |             
|                                                             |             
|Loans held for sale                                          |             
|                                                             |             
|Loans receivable                                             |             
|Less allowance for loan losses                               |             
|                                                             |             
|Loans, net                                                   |             
|Premises, furniture, and equipment, net                      |             
|Accrued interest receivable                                  |             
|Other assets                                                 |             
|                                                             |             
|Total assets                                                 |             
|                                                             |             
|Liabilities:                                                 |             
|Deposits:                                                    |             
|Noninterest-bearing transaction accounts                     |             
|Interest-bearing transaction accounts                        |             
|Money market savings accounts                                |             
|Other savings accounts                                       |             
|Time deposits $100 and over                                  |             
|Other time deposits                                          |             
|                                                             |             
|Total deposits                                               |             
|Advances from the Federal Home Loan Bank                     |             
|Junior subordinated debentures                               |             
|Accrued interest payable                                     |             
|Other liabilities                                            |             
|                                                             |             
|Total liabilities                                            |             
|                                                             |             
|Commitments and Contingencies (Notes 4, 10 and 11)           |             
|                                                             |             
|Shareholders' Equity:                                        |             
|Common stock, $0.01 par value, 10,000,000 shares authorized; |             
|1,725,261 and 1,662,473 shares issued and outstanding        |             
|in 2004 and 2003, respectively                               |             
|Capital surplus                                              |             
|Nonvested restricted stock                                   |             
|Retained earnings                                            |             
|Accumulated other comprehensive income (loss)                |             
|                                                             |             
|Total shareholders' equity                                   |             
|                                                             |             
|Total liabilities and shareholders' equity                   |             
|                                                             |             

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

-26-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

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

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

-27-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2004 and 2003

|                               |  |  |  |           |   | Accumulated |    | 
|------------------------------ |  |  |  | --------- | - | ----------- | -- | 
|
|
|
|
|
|
|Balance,                       |  |  |  |           |   |             |    | 
|December 31, 2002              |  |  |  | 1,469,767 |   | $           | 15 | 
|Net income                     |  |  |  |           |   |             |    | 
|                               |  | 
|Other comprehensive            |  |  |  |           |   |             |    | 
|income, (loss) net of          |  |  |  |           |   |             |    | 
|tax benefit of $39             |  |  |  |           |   |             |    | 
|                               |  |  |  |           |   |             |    | 
|Comprehensive income           |  |  |  |           |   |             |    | 
|                               |  | 
|Payment for fractional shares  |  |  |  |           |   |             |    | 
|                               |  | 
|Issuance of stock              |  |  |  | 4,829     |   |             |    | 
|                               |  | 
|Issuance of 5% stock dividend  |  |  |  | 72,948    |   |             |    | 
|                               |  | 
|Sale of treasury stock         |  |  |  |           |   |             |    | 
|                               |  | 
|Reimbursement of stock         |  |  |  |           |   |             |    | 
|issuance costs                 |  |  |  |           |   |             |    | 
|                               |  | 
|Declaration of 7.5%            |  |  |  |           |   |             |    | 
|stock dividend on              |  |  |  |           |   |             |    | 
|January 18, 2004               |  |  |  | 114,929   |   |             | 1  | 
|                               |  |  |  |           |   |             |    | 
|Balance,                       |  |  |  |           |   |             |    | 
|December 31, 2003              |  |  |  | 1,662,473 |   |             | 16 | 
|                               |  |  |  |           |   |             |    | 
|Net income                     |  |  |  |           |   |             |    | 
|                               |  | 
|Other comprehensive            |  |  |  |           |   |             |    | 
|income, (loss) net of          |  |  |  |           |   |             |    | 
|tax benefit of $48             |  |  |  |           |   |             |    | 
|                               |  |  |  |           |   |             |    | 
|Comprehensive income           |  |  |  |           |   |             |    | 
|                               |  | 
|Payment for fractional shares  |  |  |  |           |   |             |    | 
|                               |  | 
|Issuance of restricted stock   |  |  |  | 14,484    |   |             |    | 
|                               |  | 
|Forfeiture of restricted stock |  |  |  | (1,946    | ) |             |    | 
|                               |  | 
|Declaration of 3.0%            |  |  |  |           |   |             |    | 
|stock dividend on              |  |  |  |           |   |             |    | 
|January 26, 2005               |  |  |  | 50,250    |   |             | 1  | 
|                               |  |  |  |           |   |             |    | 
|Balance,                       |  |  |  |           |   |             |    | 
|December 31, 2004              |  |  |  | 1,725,261 |   | $           | 17 | 
|                               |  |  |  |           |   |             |    | 

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

-28-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Consolidated Statements
of Cash Flows

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

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

-29-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 1 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and
Consolidation  The accompanying consolidated financial statements include the
accounts of HCSB Financial Corporation and Subsidiaries (the Company) and its wholly owned
subsidiaries, Horry County State Bank (the Bank) and all of the stock of HCSB Financial
Trust I (the Trust). The Company was incorporated on June 10, 1999. The Bank was
incorporated on December 18, 1987, and opened for operations on January 4, 1988. The
principal business activity of the Company is to provide commercial banking services in
Horry County, South Carolina, and in Columbus and Brunswick Counties, North Carolina. The
Bank is a state-chartered bank, and its deposits are insured by the Federal Deposit
Insurance Corporation. The Trust is a special purpose subsidiary organized for the sole
purpose of issuing trust preferred securities. The operations of the Trust have not been
consolidated in these financial statements.

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

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

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

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

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

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

At December 31, 2004 and 2003, the
investment in Federal Home Loan Bank stock was $2,492,000 and $1,834,000, respectively,
and the investment in Community Financial Services stock was $60,000 in both years. During
2003, the Company purchased $25,000 of common stock in Tidelands Bancshares, Inc., the
holding company for Tidelands Bank in Mount Pleasant, South Carolina. Also included in
nonmarketable equities is investment in the Trust which totaled $186,000 at December 31,
2004.

-30-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 1  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

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

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

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

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

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

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

Impairment of a loan is measured
based on the present value of expected future cash flows discounted at the loans
effective interest rate or the fair value of the collateral if the loan is collateral
dependent. When management determines that a loan is impaired, the difference between the
Companys investment in the related loan and the present value of the expected future
cash flows, or the fair value of the collateral, is charged to bad debt expense with a
corresponding entry to the allowance for loan losses. The accrual of interest is
discontinued on an impaired loan when management determines the borrower may be unable to
meet payments as they become due. There were no impaired loans at December 31, 2004 or
2003 that were material to the financial statements.

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

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

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

-31-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 1  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

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

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

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

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

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

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

Income Taxes  Amounts provided
for income taxes are based on income reported for financial statement purposes. Deferred
income taxes are provided for the temporary differences between the financial reporting
basis and the tax basis of the Companys assets and liabilities. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
Management has determined that it is more likely than not that the entire deferred tax
asset at December 31, 2004, will be realized, and accordingly, has not established a
valuation allowance. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

Advertising Expense 
Advertising and public relations costs are generally expensed as incurred. External costs
incurred in producing media advertising are expensed the first time the advertising takes
place. External costs relating to direct mailing costs are expensed in the period in which
the direct mailings are sent. Advertising and public relations costs of $270,000 and
$257,000, were included in the Companys results of operations for 2004 and 2003,
respectively.

Net Income Per Share  Basic
income per share is calculated by dividing net income by the weighted-average number of
shares outstanding during the year. Diluted net income per share is computed based on net
income divided by the weighted average number of common and potential common shares.
Retroactive recognition has been given for the effects of all stock dividends in computing
the weighted-average number of shares. The only potential common share equivalents are
those related to stock options and restricted stock awards. Stock options which are
anti-dilutive are excluded from the calculation of diluted net income per share.

-32-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 1  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Stock-Based Compensation  The
Company adopted a stock-based employee compensation plan in 2004 which is further
described in Note 16. The Company accounts for the plan under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all stock options granted under
these plans had an exercise price equal to the market value of the underlying common stock
on the date of the grant. The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.

|                                       | Year ended
|-------------------------------------- | ----------
|
|
|
|Net income, as reported                |           
|Deduct: Total stock-based employee     |           
|compensation expense determined        |           
|under fair value based method for      |           
|all awards, net of related tax effects |           
|                                       |           
|Pro forma net income                   |           
|                                       |           
|Earnings per share:                    |           
|Basic - as reported                    |           
|                                       |           
|Basic - pro forma                      |           
|                                       |           
|Diluted - as reported                  |           
|                                       |           
|Diluted - pro forma                    |           
|                                       |           

In calculating the pro forma
disclosures, the fair value of options granted is estimated as of the date granted using
the Black-Scholes option pricing model with the following weighted-average assumptions
used for grants in 2004: dividend yield of 0 percent; expected volatility of 55.57
percent; risk-free interest rate of 2.15 percent; and expected life of 7 years. There were
no options granted in 2003.

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

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

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

-33-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

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

The following summarizes supplemental
cash flow information:

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

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

Recent Accounting Pronouncements
 In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.
The amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow exception for nonmonetary exchanges of
similar productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance. Previously, Accounting
Principles Board (APB) Opinion No. 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent interest in
the same or similar productive asset should be based on the recorded amount of the asset
relinquished. APB Opinion No. 29 provided an exception to its basic measurement principle
(fair value) for exchanges of similar productive assets. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this statement shall be
applied prospectively. The adoption of this statement is not expected to have a material
impact on the financial condition or operating results of the Company.

In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123(R)). SFAS No. 123(R) will require companies to measure all employee stock-based
compensation awards using a fair value method and record such expense in its financial
statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting
and disclosure related to the income tax and cash flow effects resulting from share-based
payment arrangements. SFAS No. 123(R) is effective beginning as of the first interim or
annual reporting period beginning after December 15, 2005. The Company is currently
evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial
position, results of operations and cash flows.

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

-34-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 1  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES  continued

Recent Accounting Pronouncements
(continued)  In December 2003, the FASB issued FIN No. 46 (revised),
Consolidation of Variable Interest Entities (FIN No. 46(R)), which
addresses consolidation by business enterprises of variable interest entities. FIN No.
46(R) requires a variable interest entity to be consolidated by a company if that company
is subject to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns, or
both. FIN No. 46(R) also requires disclosures about variable interest entities that a
company is not required to consolidate, but in which it has a significant variable
interest. FIN No. 46(R) provides guidance for determining whether an entity qualifies as a
variable interest entity by considering, among other considerations, whether the entity
lacks sufficient equity or its equity holders lack adequate decision-making ability. The
consolidation requirements of FIN No. 46(R) applied immediately to variable interest
entities created after January 31, 2003. The consolidation requirements applied to
the Companys existing variable interest entities in the first reporting period
ending after December 15, 2004. Certain of the disclosure requirements applied to all
financial statements issued after December 31, 2003, regardless of when the variable
interest entity was established. The adoption of FIN No. 46(R) did not have a material
impact on the Companys financial position or results of operations.

In November 2003, the Emerging Issues
Task Force (EITF) reached a consensus that certain quantitative and
qualitative disclosures should be required for debt and marketable equity securities
classified as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124
that are impaired at the balance sheet date but for which other-than-temporary impairment
has not been recognized. Accordingly the EITF issued EITF No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. This
issue addresses the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under SFAS No. 115
and provides guidance on quantitative and qualitative disclosures. The disclosure
requirements of EITF No. 03-1 are effective for annual financial statements for fiscal
years ending after June 15, 2004. The effective date for the measurement and recognition
guidance of EITF No. 03-1 has been delayed. The FASB staff has issued a proposed
Board-directed FASB Staff Position (FSP), FSP EITF 03-1-a,
Implementation Guidance for the Application of Paragraph 16 of Issue No. 03-1.
The proposed FSP would provide implementation guidance with respect to debt securities
that are impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under the measurement and recognition requirements of EITF
No. 03-1. The delay of the effective date for the measurement and recognition requirements
of EITF No. 03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a.
Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the
Companys financial position or results of operations.

In March 2004, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB)
No. 105, Application of Accounting Principles to Loan Commitments, to inform
registrants of the Staffs view that the fair value of the recorded loan commitments
should not consider the expected future cash flows related to the associated servicing of
the future loan. The provisions of SAB No. 105 must be applied to loan commitments
accounted for as derivatives that are entered into after March 31, 2004. The Staff will
not object to the application of existing accounting practices to loan commitments
accounted for as derivatives that are entered into on or before March 31, 2004, with
appropriate disclosures. The Company adopted the provisions of SAB No. 105 on April 1,
2004. The adoption of SAB No. 105 did not have a material impact on the Companys
financial condition or results of operations.

Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.

-35-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 1  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES  continued

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

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

Reclassifications  Certain
captions and amounts in the 2003 financial statements were reclassified to conform with
the 2004 presentation.

# NOTE 2  CASH AND
DUE FROM BANKS

The Bank is required by regulation to
maintain an average cash reserve balance based on a percentage of deposits. At December
31, 2004 and 2003, the requirements were satisfied by amounts on deposit with the Federal
Reserve Bank and cash on hand.

# NOTE 3  INVESTMENT
SECURITIES

Securities available-for-sale consisted
of the following:

|                                           | Amortized | Gross Unrealized | Estimated
|------------------------------------------ | --------- | ---------------- | ---------
|
|December 31, 2004                          |           |                  |          
|Securities of U.S. government agencies     |           |                  |          
|and corporations                           |           |                  | $        
|Mortgage-backed securities                 |           |                  |          
|Equity securities                          |           |                  |          
|Obligations of state and local governments |           |                  |          
|                                           |           |                  |          
|Total                                      |           |                  | $        
|                                           |           |                  |          
|December 31, 2003                          |           |                  |          
|Securities of U.S. government agencies     |           |                  |          
|and corporations                           |           |                  | $        
|Mortgage-backed securities                 |           |                  |          
|Equity securities                          |           |                  |          
|Obligations of state and local governments |           |                  |          
|                                           |           |                  |          
|Total                                      |           |                  | $        
|                                           |           |                  |          

-36-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 3  INVESTMENT SECURITIES
 continued

The following is a summary of
maturities of securities available-for-sale as of December 31, 2004. The amortized cost
and estimated fair values are based on the contractual maturity dates. Actual maturities
may differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalty.

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

The following table shows gross
unrealized losses and fair value, aggregated by investment category, and length of time
that individual securities have been in a continuous unrealized loss position, at December
31, 2004.

# Securities Available for Sale

|                              | Less than | Twelve months |  
|----------------------------- | --------- | ------------- | -
|
|
|
|
|Securities of U.S. government |           |               |  
|agencies and corporations     |           |               | $
|Mortgage-backed securities    |           |               |  
|Equity securities             |           |               |  
|Obligations of state and      |           |               |  
|local governments             |           |               |  
|                              |           |               |  
|Total                         |           |               | $
|                              |           |               |  

Management evaluates its investment
portfolio periodically to identify any impairment that is other than temporary. At
December 31, 2004, the Company had two securities that have been in an unrealized loss
position for more than twelve months. Management believes these losses are temporary and
are a result of the current interest rate environment.

At December 31, 2004 and 2003,
investment securities with a book value of $27,011,000 and $15,542,775, respectively, and
a market value of $27,014,000 and $15,544,973, respectively, were pledged as collateral to
secure public deposits.

Gross realized gains on sales of
available-for-sale securities were $103,000 and $92,000 in 2004 and 2003, respectively.
Gross realized losses on available-for-sale securities was $4,000 in 2004. There were no
gross realized losses on sales of available-for-sale securities in 2003. Proceeds from the
sale of securities totaled $9,282,000 and $7,737,000 in 2004 and 2003, respectively.

-37-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 4  LOANS
RECEIVABLE

Loans consisted of the following:

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

Certain parties (principally certain
directors and officers of the Company, their immediate families, and business interests)
were loan customers and had other transactions in the normal course of business with the
Company. Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility. The
aggregate dollar amounts of loans to related parties were $4,166,000 and $2,707,000 at
December 31, 2004 and 2003, respectively. During 2004, advances to related parties totaled
$2,130,000 and repayments totaled $671,000.

Transactions in the allowance for
loan losses are summarized below:

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

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

As of December 31, 2004 and 2003, the
Company had nonaccrual loans of approximately $4,295,000 and $1,641,000, respectively, and
loans that were contractually past due 90 days or more and still accruing interest of
approximately $378,000 and $2,315,000, respectively, for which impairment had not been
recognized. The additional interest income which would have been recognized into earnings
if the Companys nonaccrual loans had been current in accordance with their original
terms was $492,000 during 2004 and was immaterial for 2003. At December 31, 2004 and 2003,
there were no impaired loans that were material to the Companys financial statement.

The majority of the total nonaccrual
loans as of December 31, 2004 relate to a group of loans to one borrower. Most of the
loans are secured by real estate and a portion of them are partially guaranteed by the
U.S. Small Business Administration as well. Management is working with the borrower to
resolve portions of the collateral. Management believes that the allowance for loan losses
has been adequately funded for these specific loans.

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

-38-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 4  LOANS RECEIVABLE
continued

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

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

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

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

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

# NOTE 5  PREMISES,
FURNITURE AND EQUIPMENT

Premises, furniture and equipment
consisted of the following:

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

Depreciation expense for the years
ended December 31, 2004 and 2003 was $485,000 and $441,000, respectively.

In 2004 and 2003, the Company
capitalized $55,000 and $22,000, respectively, of interest during the construction and
renovation of new branches. These amounts are now included as part of buildings and land
improvements.

On December 28, 2004, the Company
purchased a 1.97 acre lot at the intersection of Carolina Forest Boulevard and Gateway
Road for a future branch bank location. The Company paid the full purchase price of
$1,006,000 including closing costs on December 28, 2004.

-39-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 6  OTHER ASSETS

Other assets consisted of the
following:

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

# NOTE 7  DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES

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

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

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

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

The interest rate swap agreements
provide for the Company to make payments at a variable rate determined by a specified
index (three month LIBOR) in exchange for receiving payments at a fixed rate of 3.4%.
During 2004 and 2003, the Company recognized $292,000 and $105,000, respectively, as a
reduction of interest expense on Federal Home Loan Bank Advances as a result of its
interest rate swaps.

-40-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES  continued

At December 31, 2004 and 2003, the
information pertaining to outstanding interest rate swap agreements used to hedge fixed
rate debt is as follows:

|(Dollars in thousands)                                 | 2004 | 2003
|------------------------------------------------------ | ---- | ----
|
|Notional amount                                        |      |     
|Weighted average fixed (receive) rate                  |      |     
|Weighted average variable (pay) rate                   |      |     
|Weighted average maturity in years                     |      |     
|Unrealized gain (loss) relating to interest rate swaps |      |     

No interest rate swap agreements were
used by the Company prior to 2003. At December 31, 2004 and 2003, the unrealized gain of
$338,000 and $83,000, respectively, related to interest rate swaps was recorded in
derivative assets and other liabilities by the same amount.

Risk management results for the year
ended December 31, 2004 and 2003 related to the balance sheet hedging of long-term debt
indicate that the hedges were 100% effective and that there was no component of the
derivative instruments gain or loss which was excluded from the assessment of hedge
effectiveness.

# NOTE 8  DEPOSITS

At December 31, 2004, the scheduled
maturities of time deposits were as follows:

|Maturing In         | Amount
|------------------- | ------
|2005                |       
|2006                |       
|2007                |       
|2008                |       
|2009 and thereafter |       
|                    |       
|Total               |       
|                    |       

Overdrawn transaction accounts in the
amount of $109,000 and $42,000 were classified as loans as of December 31, 2004 and 2003,
respectively.

# NOTE 9  ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

|(Dollars in thousands) | Interest | December 31,
|---------------------- | -------- | ------------
|
|
|March 11, 2008         |          |             
|December 8, 2008       |          |             
|March 1, 2010          |          |             
|May 24, 2010           |          |             
|March 22, 2011         |          |             
|January, 17, 2012      |          |             
|July 23, 2012          |          |             
|September 4, 2012      |          |             
|January 30, 2013       |          |             
|December 8, 2014       |          |             
|                       |          |             
|Total                  |          |             
|                       |          |             

Interest is payable quarterly.
Initially all advances bear interest at a fixed rate; however, the rate can be converted
to a floating rate after a certain period. As of December 31, 2004, all advances were
bearing fixed rates of interest.

-41-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 9  ADVANCES FROM THE FEDERAL HOME LOAN BANK  continued

As of December 31, 2004, scheduled
principal reductions include $6,700,000 in 2008 and the remainder after five years.

As collateral, the Company has
pledged its portfolio of first mortgage one-to-four family residential loans aggregating
$35,574,000 at December 31, 2004, as well as half of its commercial real estate loan
portfolio, totaling $32,799,000 at December 31, 2004. Additionally, it has pledged its
investment in Federal Home Loan Bank stock with a carrying value of $2,492,000.

As discussed in Note 7, the Company
has entered into interest rate swap agreements associated with Federal Home Loan Bank
advances maturing on March 1, 2010, May 24, 2010 and March 22, 2011. The interest rate
swaps effectively converted the fixed interest rates on the advances to a variable rate.
The variable rate of the swap payable was 2.43% at December 31, 2004 and is based on the
three month LIBOR index.

# NOTE 10  JUNIOR
SUBORDINATE DEBENTURES

On December 21, 2004, HCSB Financial
Trust I, (a non-consolidated subsidiary) issued $6.0 million floating rate trust preferred
securities with a maturity of December 31, 2034. The rate is adjusted quarterly and was
2.52% at December 31, 2004. In accordance with the revised FIN 46, the trust has not been
consolidated in these financial statements. The Company received from the Trust the $6.0
million proceeds from the issuance of the securities and the $186,000 initial proceeds
from the capital investment in the Trust, and accordingly has shown the funds due to the
trust as a $6,186,000 junior subordinated debenture. The current regulatory rules allow
certain amounts of junior subordinated debentures to be included in the calculation of
regulatory capital. The debenture issuance costs, net of accumulated amortization, totaled
$110,000 at December 31, 2004 and is included in other assets on the consolidated balance
sheet. Amortization of debt issuance costs totaled $306 for the year ended December 31,
2004 and is included in other borrowings interest expense.

The Company invested $5,880,000 in
the Companys wholly-owned subsidiary, Horry County State Bank. The remaining balance
will be maintained by the Company to fund operations.

# NOTE 11  LEASE
COMMITMENTS

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

On February 15, 1999, The Company
entered into an annual lease agreement for use of a parking lot adjacent to the Meeting
Street branch in Loris, S.C. The initial term was for one year with the renewal thereof
renegotiable annually. The lease has subsequently been renewed each year at an annual cost
of $600. The Company expects to renew this lease again in February, 2005.

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

|(Dollars in thousands) | Amount
|---------------------- | ------
|2005                   |       
|2006                   |       
|2007                   |       
|                       |       
|Total                  |       
|                       |       

-42-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 12 
COMMITMENTS AND CONTINGENCIES

In the ordinary course of business,
the Company may, from time to time, become a party to legal claims and disputes. At
December 31, 2004, management was not aware of any pending or threatened litigation or
unasserted claims that could result in losses, if any, that would be material to the
financial statements.

On May 27, 2004, the Company entered
into a contract with Jack Henry and Associates, Inc. to purchase a new core data
processing system including software and hardware. The total contract price for the core
processing system was $858,000. As of December 31, 2004, the Company has paid $649,000
towards this purchase leaving a balance due of $209,000. The balance will be billed to the
Company upon installation and satisfactory implementation of the system, and the Company
expects to remit payment during the first quarter of 2005.

# NOTE 13 
SHAREHOLDERS EQUITY

Stock Dividends  In January
2005, the Board of Directors declared a 3.0% stock dividend payable on March 14, 2005, to
shareholders of record at February 11, 2005. As a result of the stock dividend, 50,250
shares were issued. The financial statements as of December 31, 2004 have been adjusted to
reflect such transaction and resulted in a reclassification of $1,608,000 from retained
earnings to common stock and capital surplus. In January 2004, the Board of Directors
declared a 7.5% stock dividend payable on March 12, 2004, to shareholders of record at
February 13, 2004. As a result of the dividend, 114,929 shares were issued. The financial
statements as of December 31, 2003 were adjusted to reflect such transactions and resulted
in a reclassification of $2,012,000 from retained earnings to common stock and capital
surplus. All per share amounts have been adjusted to reflect these dividends.

Restrictions on Dividends 
South Carolina banking regulations restrict the amount of dividends that can be paid to
shareholders. All of the Banks dividends to HCSB Financial Corporation and
Subsidiaries are payable only from the undivided profits of the Bank. At December 31,
2004, the Banks undivided profits were $7,847,659. The Bank is authorized to pay
cash dividends up to 100% of net income in any calendar year without obtaining the prior
approval of the Commissioner of Banking provided that the Bank received a composite rating
of one or two at the last Federal or State regulatory examination. Under Federal Reserve
Board regulations, the amounts of loans or advances from the Bank to the parent company
are also restricted.

# NOTE 14  CAPITAL
REQUIREMENTS

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

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

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

-43-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 14  CAPITAL REQUIREMENTS
 continued

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

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

|                                         |  |  |   |        | To Be Well-
|---------------------------------------- |  |  | - | ------ | -----------
|
|
|
|
|December 31, 2004                        |  |  |   |        |            
|The Company                              |  |  |   |        |            
|Total capital (to risk-weighted assets)  |  |  | $ | 31,627 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 29,472 |            
|Tier 1 capital (to average assets)       |  |  |   | 29,472 |            
|                                         |  | 
|The Bank                                 |  |  |   |        |            
|Total capital (to risk-weighted assets)  |  |  | $ | 30,158 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 28,003 |            
|Tier 1 capital (to average assets)       |  |  |   | 28,003 |            
|                                         |  | 
|December 31, 2003                        |  |  |   |        |            
|The Company                              |  |  |   |        |            
|Total capital (to risk-weighted assets)  |  |  | $ | 23,226 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 21,453 |            
|Tier 1 capital (to average assets)       |  |  |   | 21,453 |            
|                                         |  | 
|The Bank                                 |  |  |   |        |            
|Total capital (to risk-weighted assets)  |  |  | $ | 21,790 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 20,017 |            
|Tier 1 capital (to average assets)       |  |  |   | 20,017 |            

# NOTE 15  RETIREMENT
AND BENEFITS

Trusteed Retirement Savings Plan
 The Bank has a trustee retirement savings plan which provides retirement benefits
to substantially all officers and employees who meet certain age and service requirements.
The plan includes a salary reduction feature pursuant to Section 401(k) of the
Internal Revenue Code. Under the plan and present policies, participants are permitted to
contribute up to 15% of their annual compensation. At its discretion, the Bank can make
matching contributions up to 4% of the participants compensation. The Company
charged $129,000 and $118,000 to earnings for the retirement savings plan in 2004 and
2003, respectively.

Directors Deferred Compensation Plan
 The Company has a deferred compensation plan whereby directors may elect to defer
the payment of their fees. Under the terms of the plan, the Company accrues an expense
equal to the amount deferred plus an interest component based on the prime rate of
interest at the beginning of each year. The Company has also purchased life insurance
contracts on each of the participating directors. At December 31, 2004 and 2003, $428,000
and $345,000, respectively, of directors fees were deferred and are included in
other liabilities.

Performance Compensation for
Stakeholders Plan  The Company implemented an employee bonus program in 2003 which
it refers to as its Stakeholder Plan. The plan pays employees based on a schedule of key
performance indicators they are required to meet in order to be rewarded. The plan accrues
for its employee bonuses based on a percentage of each employees annual salary. The
plan has a fiscal year ending on December 31, and pays out on January 30 of the following
year. At December 31, 2004, the plan had an accrued payout of $95,000. The Company charged
$101,000 and $62,000 to earnings for the stakeholder plan in 2004 and 2003, respectively.

-44-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 16  EARNINGS
PER SHARE

Earnings per share  basic is
computed by dividing net income by the weighted average number of common shares
outstanding. Earnings per share  diluted is computed by dividing net income by the
weighted average number of common shares outstanding and dilutive common share equivalents
using the treasury stock method. Dilutive common share equivalents include common shares
issuable upon exercise of outstanding stock options.

|(Dollars in thousands, except share amounts) | Years ended December 31,
|-------------------------------------------- | ------------------------
|
|Basic earnings per share:                    |                         
|                                             |                         
|Net income available to common shareholders  |                         
|                                             |                         
|Average common shares outstanding - basic    |                         
|                                             |                         
|Basic earnings per share                     |                         
|                                             |                         
|Diluted earnings per share:                  |                         
|                                             |                         
|Net income available to common shareholders  |                         
|                                             |                         
|Average common shares outstanding - basic    |                         
|                                             |                         
|Incremental shares from assumed conversion   |                         
|of stock options and restricted stock awards |                         
|                                             |                         
|Average common shares outstanding - diluted  |                         
|                                             |                         
|Diluted earnings per share                   |                         
|                                             |                         

# NOTE 17  STOCK
COMPENSATION PLAN

In 2004, upon shareholder approval,
the Company adopted an Omnibus Stock Ownership and Long Term Incentive Plan (the
Stock Plan). The Stock Plan authorizes the grant of options and awards of
restricted stock to certain of our employees for up to 200,000 shares of the
Companys common stock from time to time during the term of the Stock Plan., subject
to adjustments upon change in capitalization. The Stock Plan is administered by the
Compensation Committee of the Board of Directors of the Company.

Options granted under the Stock Plan
are incentive stock options, and they are vested over a five year period with none vesting
at the time of the grant. All unexercised incentive stock options expire ten years after
the date of the grant. A summary of the Companys incentive stock options as of
December 31, 2004 is as follows:

|                                 |  | Weighted
|-------------------------------- |  | --------
|
|
|
|Outstanding at beginning of year |  |         
|Granted                          |  |         
|Exercised                        |  |         
|Forfeited                        |  |         
|                                 |  |         
|Outstanding at end of year       |  |         
|                                 |  |         

-45-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 17  STOCK COMPENSATION
PLAN  continued

Restricted stock awards included in
the Stock Plan vest after the first three consecutive periods during which the Banks
return on average assets (ROAA) averages 1.15%. At December 31, 2004, none of the
restricted stock had vested; therefore, no compensation expense related to the vesting was
recognized. All ungranted restricted stock awards expire after the date of the award. A
summary of the Companys unrestricted stock awards as of December 31, 2004 is as
follows:

|                                 |  | Weighted
|-------------------------------- |  | --------
|
|
|
|Outstanding at beginning of year |  |         
|Granted                          |  |         
|Exercised                        |  |         
|Forfeited                        |  |         
|                                 |  |         
|Outstanding at end of year       |  |         
|                                 |  |         

# NOTE 18  OTHER
EXPENSES

Other expenses are summarized as
follows:

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

# NOTE 19  INCOME
TAXES

Income tax expense is summarized as
follows:

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

-46-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 19  INCOME TAXES 
continued

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

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

Deferred tax assets represent the
future tax benefit of future deductible differences and, if it is more likely than not
that a tax asset will not be realized, a valuation allowance is required to reduce the
recorded deferred tax assets to net realizable value. Management has determined that it is
more likely than not that the entire deferred tax asset at December 31, 2004 and 2003 will
be realized and, accordingly, has not established a valuation allowance. Deferred tax
assets are included in other assets.

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

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

# NOTE 20  UNUSED
LINES OF CREDIT

As of December 31, 2004, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling
$13,000,000. These lines of credit are available on a one to fourteen day basis for
general corporate purposes. The lenders have reserved the right not to renew their
respective lines. The Company may also borrow an additional $15,685,000 at December 31,
2004 from the Federal Home Loan Bank based on a predetermined formula. Advances are
subject to approval by the Federal Home Loan Bank and may require the Company to pledge
additional collateral.

-47-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 21  FAIR VALUE
OF FINANCIAL INSTRUMENTS

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

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

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

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

Time Deposits with Other Banks  
Time deposits with other banks have a term less than 90 days and the carrying amount
approximates the fair value.

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

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

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

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

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

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

Junior Subordinated Debentures  The
 carrying value of junior subordinated debentures is a reasonable estimate of fair
value since the debentures were issued at a floating rate.

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

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

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

-48-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 21  FAIR VALUE
OF FINANCIAL INSTRUMENTS  continued

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

|                                            | December 31,
|------------------------------------------- | ------------
|
|
|
|Financial Assets:                           |             
|Cash and due from banks                     |             
|Federal funds sold                          |             
|Time deposits with other banks              |             
|Investment securities available-for-sale    |             
|Nonmarketable equity securities             |             
|Loans and loans held-for-sale               |             
|Accrued interest receivable                 |             
|Other assets - interest rate swaps          |             
|                                            |             
|Financial Liabilities:                      |             
|Demand deposit, interest-bearing            |             
|transaction, and savings accounts           |             
|Certificates of deposit                     |             
|Advances from the Federal Home    Loan Bank |             
|Junior subordinated debentures              |             
|Accrued interest payable                    |             
|Other liabilities - interest rate swaps     |             

|                                         | Notional | Estimated | Notional | Estimated
|---------------------------------------- | -------- | --------- | -------- | ---------
|
|Off-Balance Sheet Financial Instruments: |          |           |          |          
|Commitments to extend credit             |          |           | $        | 24,458   
|Standby letters of credit                |          |           |          | 433      
|Interest rate swaps                      |          |           |          | 14,600   

-49-

---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

# NOTE 22  HCSB
FINANCIAL CORPORATION (PARENT COMPANY ONLY)

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

Condensed Balance Sheets

|                                           | December 31,
|------------------------------------------ | ------------
|
|Assets                                     |             
|Cash                                       |             
|Investment in banking subsidiary           |             
|Investment in trust                        |             
|Nonmarketable equity securities            |             
|Land                                       |             
|Other assets                               |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and shareholders' equity       |             
|Interest payable                           |             
|Junior subordinated debentures             |             
|                                           |             
|Total liabilities                          |             
|                                           |             
|Shareholders' equity                       |             
|                                           |             
|Total liabilities and shareholder's equity |             
|                                           |             

# Condensed Statements of
Income

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

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---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# Notes to Consolidated
Financial Statements

NOTE 22 - HCSB FINANCIAL CORPORATION (PARENT COMPANY ONLY)  continued

# Condensed Statements of Cash
Flows

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

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---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# BOARD OF DIRECTORS

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

# OFFICERS OF THE BOARD
OF DIRECTORS

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

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---

# HCSB FINANCIAL
CORPORATION AND SUBSIDIARIES

# HORRY COUNTY STATE BANK
CORPORATE OFFICERS

James R. Clarkson,
President/CEO Glenn R. Bullard, Executive Vice President Denise Floyd, Vice
President/Personnel Officer Margaret H. Fowler, Vice President/Operations Officer 
Loretta B. Gerald, Vice President/Cashier/Internal Auditor

# HORRY COUNTY STATE BANK BRANCHES
AND ATM LOCATIONS

|                                         | 
|---------------------------------------- | 
|Broad Street, Loris Office*              | 
|5009 Broad Street                        | 
|Loris, SC 29569                          | 
|843-756-6333                             | 
|Jimmy D. Nealey, Vice President          | 
|                                         | 
|Mt. Olive Office                         | 
|5264 Hwy. 9                              | 
|Green Sea, SC 29545                      | 
|843-392-6333                             | 
|Bernice S. Hammond, Vice President       | 
|                                         | 
|Little River Office*                     | 
|3187 Hwy. 9 E                            | 
|Little River, SC 29566                   | 
|843-399-9523                             | 
|Amy L. Cannon, Asst. Vice President      | 
|                                         | 
|Conway Office*                           | 
|1627-A Church Street (Hwy. 501)          | 
|Conway, SC 29526                         | 
|843-248-8250                             | 
|James F. Lewis, Senior Vice President    | 
|                                         | 
|Windy Hill Office*                       | 
|4400 Hwy. 17 South                       | 
|North Myrtle Beach, SC 29582             | 
|843-663-5600                             | 
|Charles M. Sprinkle, Jr., Vice President | 

Investment Services
4400 Hwy. 17 South N. Myrtle Beach, S.C. 29582 843-663-5600 Mark S. Buckner, Vice
President

# Residential Mortgage
Lending

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

* Denotes ATM Location

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