SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE) FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
- ---- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________TO_________
Commission File Number 000-26995
HCSB FINANCIAL CORPORATION*
(Exact name of registrant as specified in its charter)
South Carolina 57-1079444
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5009 BROAD STREET
LORIS, SC 29569
(Address of principal executive
offices, including zip code)
(843) 756-6333
(Registrant's telephone number, including area code)
------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the date of this filing.
501,385 SHARES OF COMMON STOCK, $0.01 PAR VALUE
PAGE 1 OF 17
EXHIBIT INDEX ON PAGE 2
* The registrant is a successor issuer, within the meaning of Rule 15d-5 under
the Securities Exchange Act of 1934, to Horry County State Bank, Loris, South
Carolina.
<PAGE>
HCSB FINANCIAL CORPORATION
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
<S> <C>
Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998............................3
Condensed Consolidated Statements of Income - Nine months ended September 30, 1999 and 1998
and Three months ended September 30, 1999 and 1998..........................................................4
Condensed Consolidated Statements of Comprehensive Income - Nine months ended September 30, 1999
and 1998 and Three months ended September 30, 1999 and 1998.................................................5
Condensed Consolidated Statement of Shareholders' Equity - Nine months ended September 30, 1999.............6
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 1998.............7
Notes to Condensed Consolidated Financial Statements......................................................8-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................9-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................................................17
(a) Exhibits...............................................................................................17
(b) Reports on Form 8-K....................................................................................17
2
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS) September 30, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 2,609 $ 2,573
Time deposits with other banks - 500
------------------- -------------------
2,609 3,073
Securities available-for-sale 24,189 19,640
Loans receivable 71,758 56,016
Less unearned income (67) (75)
Less allowance for loan losses (954) (880)
------------------- -------------------
Loans, net 70,737 55,061
Accrued interest receivable 1,669 857
Premises, furniture & equipment, net 4,079 3,504
Other assets 2,061 1,451
------------------- -------------------
Total assets $ 105,344 $ 83,586
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing $ 7,349 $ 6,358
Interest bearing 77,513 63,612
------------------- -------------------
84,862 69,970
Accrued interest payable 394 221
Federal funds purchased 1,430 170
Advances from the Federal Home Loan Bank 10,000 5,000
Other liabilities 557 201
------------------- -------------------
Total liabilities 97,243 75,562
------------------- -------------------
SHAREHOLDERS' EQUITY:
Common stock, $5.00 par value, 1,000,000 shares
authorized, 478,150 shares issued and outstanding - 2,391
Common stock, $0.01 par value, 10,000,000 shares
authorized, 501,385 shares issued and outstanding 5 -
Capital surplus 7,878 4,865
Accumulated other comprehensive income (546) 80
Retained earnings 764 688
------------------- -------------------
Total shareholders' equity 8,101 8,024
------------------- -------------------
Total liabilities and shareholders' equity $ 105,344 $ 83,586
=================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ------------ ----------- ------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans, including fees $ 4,638 $ 3,784 $ 1,679 $ 1,409
Investment securities:
Taxable 892 625 330 224
Tax-exempt 119 45 48 16
Other interest income 114 323 46 51
----------- ------------ ----------- -----------
Total 5,763 4,777 2,103 1,700
----------- ------------ ----------- -----------
INTEREST EXPENSE:
Certificates of deposit $100M and over 350 563 113 166
Other deposits 2,186 1,934 822 694
Other interest expense 206 8 95 -
----------- ------------ ----------- -----------
2,742 2,505 1,030 860
----------- ------------ ----------- -----------
NET INTEREST INCOME 3,021 2,272 1,073 840
Provision for loan losses 170 55 30 45
----------- ------------ ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,851 2,217 1,043 795
----------- ------------ ----------- -----------
OTHER OPERATING INCOME:
Service charges on deposit accounts 393 312 147 120
Credit life insurance commissions 105 81 34 29
Other operating income 97 71 32 35
----------- ------------ ----------- -----------
Total 595 464 213 184
----------- ------------ ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,266 1,211 453 398
Net occupancy expense 131 125 46 38
Furniture and equipment expense 283 185 97 29
Other operating expenses 663 688 226 249
----------- ------------ ----------- -----------
Total 2,343 2,209 822 714
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES 1,103 472 434 265
Income tax provision 382 164 146 92
----------- ------------ ----------- -----------
NET INCOME $ 721 $ 308 $ 288 $ 173
=========== ============ =========== ===========
BASIC EARNINGS PER SHARE $ 1.44 $ .61 $ .57 $ .35
DILUTED EARNINGS PER SHARE $ 1.44 $ .61 $ .57 $ .35
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------- -------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1999 1998
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Net income $ 721 $ 308 $ 288 $ 173
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
during the period (626) 35 (132) 35
Less: reclassification adjustment
for gains included in net income - - - -
------------- ------------ ------------ ----------
Other comprehensive income (626) 35 (132) 35
------------- ------------ ------------ ----------
COMPREHENSIVE INCOME $ 95 $ 343 $ 156 $ 208
============= ============ ============ ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
-------------------------- Capital Comprehensive Retained Shareholders'
(DOLLARS IN THOUSANDS) Shares Amount Surplus Income Earnings Equity
------------ ------------ ------------ ------------- ------------ ------------
BALANCE,
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998 478,150 $ 2,391 $ 4,865 $ 80 $ 688 $ 8,024
Net income
for the period 721 721
5% stock dividend 23,235 116 511 (645) (18)
Acquisition of the Bank's
common stock by HCSB
Financial Corporation (2,502) 2,502
Other comprehensive
income (626) (626)
------------ ------------ ------------ ------------- -------------- ----------
BALANCE,
SEPTEMBER 30, 1999 501,385 $ 5 $ 7,878 $ (546) $ 764 $ 8,101
============ ============ ============ ============= ============== ==========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
(DOLLARS IN THOUSANDS) September 30,
-----------------------------------
1999 1998
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 721 $ 308
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 183 149
Provision for possible loan losses 170 55
Amortization less accretion on investments 18 8
Amortization of deferred loan costs 73 61
Loss (gain) on sale of premises and equipment - 2
(Increase) decrease in interest receivable (812) (621)
Increase (decrease) in interest payable (173) (72)
(Increase) decrease in other assets 354 (17)
Increase (decrease) in other liabilities 356 184
------------- -------------
Net cash provided by operating activities 890 57
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans to customers (15,919) (12,944)
Purchases of securities available-for-sale (11,631) (8,030)
Maturities of securities available-for-sale 6,070 5,643
Purchases of premises and equipment (758) (1,201)
Purchase of Federal Home Loan Bank stock (250) (66)
------------- -------------
Net cash used by investing activities (22,488) (16,598)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits accounts 14,892 8,293
Increase (decrease) in short-term borrowings 1,260 (350)
Advances from Federal Home Loan Bank 5,000 -
Cash paid in lieu of fractional shares (18) -
------------- -------------
Net cash provided by financing activities 21,134 7,943
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (464) (8,598)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,073 14,328
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,609 $ 5,730
============= =============
Cash paid during the period for:
Income taxes $ 181 $ 89
Interest $ 2,569 $ 2,577
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
HCSB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the requirements for interim financial statements and,
accordingly, they are condensed and omit disclosures which would substantially
duplicate those contained in the most recent annual report to shareholders. The
financial statements as of September 30, 1999 and for the interim periods ended
September 30, 1999 and 1998 are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation. The financial information as of December 31,
1998 has been derived from the audited financial statements as of that date. For
further information, refer to the financial statements and the notes included in
Horry County State Bank's 1998 Annual Report.
NOTE 2 - REORGANIZATION OF HORRY COUNTY STATE BANK
On April 22, 1999, the stockholders of Horry County State Bank (the Bank)
approved a plan of corporate reorganization under which Horry County State Bank
became a wholly owned subsidiary of HCSB Financial Corporation (the Company),
which was organized at the direction of the Bank. The original authorized common
stock of HCSB Financial Corporation is 10,000,000 shares with a par value of
$.01 per share. Pursuant to the reorganization, the Company issued 501,385
shares of its common stock in exchange for all of the 501,385 outstanding common
shares of the Bank. The effective date of the reorganization was June 10, 1999
and was accounted for as if it were a pooling of interests. As a result, the
financial statements for the period ended September 30, 1999 are presented as if
the reorganization had occurred on January 1, 1999. The accompanying financial
statements for the periods ended in 1998 are unchanged from the amounts
previously reported by Horry County State Bank.
NOTE 3 - COMPREHENSIVE INCOME
The following table sets forth the amounts of other comprehensive income
included in equity along with the related tax effect for the nine months ended
September 30, 1999 and 1998 and for the three months ended September 30, 1999
and 1998:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Pre-tax (Expense) Net of tax
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: Amount Benefit Amount
------------ ------------ ----------
<S> <C> <C> <C> <C>
Net unrealized gains (losses) on securities
available for sale arising in 1999 $ (994) $ 368 $ (626)
------------ ------------ ----------
Other comprehensive income $ (994) $ 368 $ (626)
============ ============ ==========
Pre-tax (Expense) Net of tax
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998: Amount Benefit Amount
------------- ------------ ------------
Net unrealized gains (losses) on securities
available for sale arising in 1998 $ 56 $ (21) $ 35
------------- ------------ -----------
Other comprehensive income $ 56 $ (21) $ 35
============= ============ ===========
</TABLE>
8
<PAGE>
HCSB FINANCIAL CORPORATION
NOTE 3 - COMPREHENSIVE INCOME -- continued
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) Pre-tax (Expense) Net of tax
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999: Amount Benefit Amount
-------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net unrealized gains (losses) on securities
available for sale arising in 1999 $ (210) $ 78 $ (132)
------------------- ------------------- ----------------
Other comprehensive income $ (210) $ 78 $ (132)
=================== =================== ================
Pre-tax (Expense) Net of tax
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998: Amount Benefit Amount
-------------------- ------------------ ----------------
Net unrealized gains (losses) on securities
available for sale arising in 1998 $ 56 $ (21) $ 35
------------------- ------------------- ----------------
Other comprehensive income $ 56 $ (21) $ 35
=================== =================== ================
</TABLE>
Accumulated other comprehensive income consists solely of the unrealized gain on
securities available for sale, net of the deferred tax effects.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following is a discussion of the Company's financial condition as of
September 30, 1999 compared to December 31, 1998, and the results of operations
for the three and nine months ended September 30, 1999 compared to the three and
nine months ended September 30, 1998. These comments should be read in
conjunction with the Company's condensed consolidated financial statements and
accompanying footnotes appearing in this report. This report contains
"forward-looking statements" relating to, without limitation, future economic
performance, plans and objectives of management for future operations, and
projections of revenues and other financial items that are based on the beliefs
of the Company's management, as well as assumptions made by and information
currently available to the Company's management. The words "expect," "estimate,"
"anticipate," and "believe," as well as similar expressions, are intended to
identify forward-looking statements.
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the nine months ended September 30, 1999, net interest income increased
$749,000, or 32.97%, over the same period in 1998. Interest income from loans,
including fees, increased $854,000, or 22.57%, from the nine months ended
September 30, 1998 to the comparable period in 1999 as demand for loans in the
Company's marketplace continued to grow and the Company's new branches in Conway
(which opened in February 1998), North Myrtle Beach (which opened in October
1997) and Tabor City developed the necessary presence to generate loan growth.
Also contributing to the overall increase in net interest income was an increase
of $341,000 in income from investment securities. Interest expense at September
30, 1999 was $2,742,000 compared to $2,505,000 for the same period in 1998. The
net interest margin realized on earning assets was 4.08% for the nine months
ended September 30, 1999, while the interest rate spread was 3.80%.
Net interest income increased from $840,000 for the quarter ending September 30,
1998 to $1,073,000 for the quarter ending September 30, 1999. This represents an
increase of $233,000, or 27.74%. Interest income from loans, including fees,
increased to $1,679,000 for the quarter ended September 30, 1999 from $1,409,000
for the quarter ended September 30, 1998. This increase was also primarily due
to the establishment of the new branches. Interest income from investment
securities for the quarter ending September 30, 1999 increased $138,000, or
57.50%, over the same period in 1998.
9
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the charge to operating earnings that
management believes is necessary to maintain the allowance for possible loan
losses at an adequate level. For the nine months ended September 30, 1999, the
provision charged to expense was $170,000. The increase of $115,000 from the
comparable period in 1998 is a result of management's efforts to increase the
allowance for loan losses to match the $17,316,000 growth in the loan portfolio
since September 30, 1998. For the quarter ended September 30, 1999, the
provision charged to expense was $30,000. There was no provision charged to
expense for the quarter ended September 30, 1998. There are risks inherent in
making all loans, including risks with respect to the period of time over which
loans may be repaid, risks resulting from changes in economic and industry
conditions, risks inherent in dealing with individual borrowers, and, in the
case of a collateralized loan, risks resulting from uncertainties about the
future value of the collateral. The Company maintains an allowance for loan
losses based on, among other things, historical experience, an evaluation of
economic conditions, and regular reviews of delinquencies and loan portfolio
quality. Management's judgment about the adequacy of the allowance is based upon
a number of assumptions about future events which it believes to be reasonable
but which may not prove to be accurate. Thus, there is a risk that charge-offs
in future periods could exceed the allowance for loan losses or that substantial
additional increases in the allowance for loan losses could be required.
Additions to the allowance for loan losses would result in a decrease of the
Company's net income and, possibly, its capital.
NONINTEREST INCOME
Noninterest income during the nine months ended September 30, 1999 was $595,000,
an increase of $131,000, or 28.23%, from the comparable period in 1998. Growth
resulting from the new branches generated income from deposit accounts as well
as other sources of noninterest income. The increase is primarily a result of an
increase in service charges on deposit accounts from $312,000 at September 30,
1998 to $393,000 at September 30, 1999. This change is a result of an increase
in deposit accounts over the two periods. Deposits at September 30, 1998 were
$72,178,000 compared to $84,862,000 at September 30, 1999.
For the quarter ended September 30, 1999, noninterest income increased $29,000,
or 15.76%, over the same period in 1998. This increase is primarily due to
service charges on deposit accounts which increased $27,000, or 22.50%, from the
quarter ended September 30, 1998 to the quarter ended September 30, 1999.
NONINTEREST EXPENSE
Total noninterest expense for the nine months ended September 30, 1999 was
$2,343,000, or 6.07% higher than the nine months ended September 30, 1998. The
primary reason for the $134,000 increase in noninterest expense over the two
periods was attributable to furniture and equipment expense, which increased
$98,000, or 52.97% over the same period in 1998. This increase was related
primarily to the furnishing of the new branches. Salaries and employee benefits,
traditionally the largest component of non-interest expense, increased from
$1,211,000 for the period ended September 30, 1998 to $1,266,000 for the period
ended September 30, 1999.
For the quarter ended September 30, 1999, noninterest expense increased
$108,000, or 15.13% over the same period in 1998. The largest increase between
the quarter ended September 30, 1999 and the quarter ended September 30, 1998
was in furniture and equipment which increased $68,000, or 234.48%.
10
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
INCOME TAXES
The income tax provision for the nine months ended September 30, 1999 was
$382,000 as compared to $164,000 for the same period in 1998. The effective tax
rates were 34.63% and 34.75% at September 30, 1999 and 1998, respectively. The
effective tax rates were 33.64% and 34.72% for the quarter ended September 30,
1999 and September 30, 1998, respectively.
NET INCOME
Although net interest income increased substantially during the first nine
months of 1999 compared to the comparable period in 1998, the Company had only a
slight increase in noninterest expense during these time periods. The primary
component of noninterest expense was salaries and employee benefits, which was
$1,266,000 and $1,211,000 for both the nine months ended September 1999 and the
nine months ended September 30, 1998, respectively. The combination of the above
factors resulted in net income for the nine months ended September 30, 1999 of
$721,000 as compared to $308,000 for the same period in 1998. This represents an
increase of $413,000, or 134.09%, over the same period in 1998. For the quarter
ended September 30, 1999, net income was $288,000 as compared to $173,000 for
the quarter ended September 30, 1998. This represents an increase of $115,000,
or 66.47%, from the quarter ending September 30, 1998.
ASSETS AND LIABILITIES
During the first nine months of 1999, total assets increased $21,758,000, or
26.03%, when compared to December 31, 1998. The primary reason for the increase
in assets was due to an increase in loans of $15,742,000 during the first nine
months of 1999. It is typical for the Company to have an increase in loans,
especially in the area of agricultural loans, during this time of the year. In
addition, investment securities increased $4,549,000, or 23.16%, from December
31, 1998 to September 30, 1999. Total deposits increased $14,892,000, or 21.28%,
from the December 31, 1998 amount of $69,970,000. Within the deposit area,
interest bearing deposits increased $13,901,000, or 21.85%, and non- interest
bearing deposits increased $991,000, or 15.59%, during the first nine months of
1999.
INVESTMENT SECURITIES
Investment securities increased from $19,640,000 at December 31, 1998 to
$24,189,000 at September 30, 1999. Much of the increase was in U.S. Agencies,
which increased $4,940,000, or 48.12%, from December 31, 1998 to September 30,
1999. The excess funds generated from the growth in deposits and from Advances
from the Federal Home Loan Bank that were not invested in loans were invested in
securities.
11
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
LOANS
Net loans increased $15,676,000, or 28.47%, during the nine month period ended
September 30, 1999. There were two primary reasons for this growth. First, loan
demand in general continued to increase in the Company's market areas in the
first nine months of 1999. Second, the Company has begun to establish a presence
through its new branches in Conway, North Myrtle Beach, and Tabor City, which
opened in late 1997 and early 1998. As expected during this time of year,
agricultural loans increased $2,413,000, or 42.38%, from December 31, 1998.
Balances within the major loans receivable categories as of September 30, 1999
and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(DOLLARS IN THOUSANDS) 1999 1998
---------------------- ---------------------
<S> <C> <C>
Real estate - construction and land development $ 2,367 $ 2,052
Real estate - other 25,428 19,926
Agricultural 8,107 5,694
Commercial and industrial 21,222 15,468
Consumer 14,473 12,278
Other, net 161 598
-------------------- --------------------
$ 71,758 $ 56,016
==================== ====================
</TABLE>
RISK ELEMENTS IN THE LOAN PORTFOLIO
The following is a summary of risk elements in the loan portfolio:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
-------------------- ---------------------
<S> <C> <C>
Loans: Nonaccrual loans $ 289 $ 47
Accruing loans more than 90 days past due $ 16 $ 357
Loans identified by the internal review mechanism:
Criticized $ 742 $ 1,522
Classified $ 799 $ 1,226
Activity in the Allowance for Loan Losses is as follows:
September 30,
---------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
-------------------- ---------------------
Balance, January 1, $ 880 $ 911
Provision for loan losses for the period 170 55
Net loans charged off for the period (96) (98)
-------------------- --------------------
Balance, end of period $ 954 $ 868
==================== ====================
Gross loans outstanding, end of period $ 71,758 $ 54,442
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Allowance for Loan Losses to
loans outstanding 1.33% 1.59%
</TABLE>
13
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
DEPOSITS
At September 30, 1999, total deposits increased by $14,892,000, or 21.28%, from
December 31, 1998. Expressed in percentages, non-interest bearing deposits
increased 15.59% and interest bearing deposits increased 21.85%. The growth in
deposits was primarily attributable to the establishment of several new
branches. Deposits at the Conway branch (which opened in February 1998)
increased $1,747,000 from December 31, 1998. Deposits at the North Myrtle Beach
branch (which opened in October 1997) increased $3,547,000 since December 31,
1998.
Balances within the major deposit categories as of September 30, 1999 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(DOLLARS IN THOUSANDS) 1999 1998
--------------- ---------------
<S> <C> <C>
Non-interest bearing demand deposits $ 7,349 $ 6,358
Interest bearing demand deposits 8,414 9,168
Savings and money market deposits 17,685 14,553
Certificates of deposit 51,414 39,891
--------------- ----------------
$ 84,862 $ 69,970
=============== ================
</TABLE>
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank totaled $10,000,000 at September 30,
1999. Of this total, $5,000,000 bears interest at a fixed rate of 4.41% and
matures in 2003. The remaining $5,000,000 bears interest at a fixed rate of
4.95% and matures in 2009. The option to call all $10,000,000 of these advances
can be exercised in 2000.
LIQUIDITY
Liquidity needs are met by the Company through scheduled maturities of loans and
investments on the asset side and through pricing policies on the liability side
for interest-bearing deposit accounts and borrowings from the FHLB. The level of
liquidity is measured by the loans-to-total borrowed funds ratio, which was at
74.45% at September 30, 1999 and 74.45% at December 31, 1998.
Securities available-for-sale, which totaled $24,189,000 at September 30, 1999,
serve as a ready source of liquidity. The Company also has lines of credit
available with correspondent banks to purchase federal funds for periods from
one to seven days. At September 30, 1999, unused lines of credit totaled
$1,000,000.
CAPITAL RESOURCES
Total shareholders' equity increased from $8,024,000 at December 31, 1998 to
$8,101,000 at September 30, 1999. The increase of $77,000 is attributable to
earnings for the period of $721,000. However, earnings were offset by the
negative charge to equity of $626,000 relating to the change in fair value of
investment securities. In addition, the Company declared a 5% stock dividend in
January 1999 which was paid on March 15, 1999. The only effect on equity as a
result of the stock dividend was a charge of $18,000 for the payment of cash in
lieu of fractional shares.
14
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
CAPITAL RESOURCES -- continued
Bank holding companies, such as the Company, and their banking subsidiaries are
required by banking regulators to meet certain minimum levels of capital
adequacy which are expressed in the form of certain ratios. Capital is separated
into Tier 1 capital (essentially common shareholders' equity less intangible
assets) and Tier 2 capital (essentially the allowance for loan losses limited to
1.25% of risk-weighted assets). The first two ratios, which are based on the
degree of credit risk in the Company's assets, provide the weighting of assets
based on assigned risk factors and include off-balance sheet items such as loan
commitments and stand-by letters of credit. The ratio of Tier 1 capital to
risk-weighted assets must be at least 4.0% and the ratio of total capital (Tier
1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.
The capital leverage ratio supplements the risk-based capital guidelines. Banks
and bank holding companies are required to maintain a minimum ratio of Tier 1
capital to adjusted quarterly average total assets of 3.0%.
The following table summarizes the Company's risk-based capital at September 30,
1999:
(DOLLARS IN THOUSANDS)
Shareholders' equity $ 8,647
Less: intangibles -
--------------------
Tier 1 capital 8,647
Plus: allowance for loan losses (1) 954
--------------------
Total capital $ 9,601
====================
Risk-weighted assets $ 79,390
====================
Risk based capital ratios
Tier 1 10.89%
Total capital 12.09%
Leverage ratio 8.98%
(1) limited to 1.25% of risk-weighted assets
REGULATORY MATTERS
On November 4, 1999, the U.S. Senate and House of Representatives each passed
the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act is expected to be signed into law by
President Clinton in early November 1999. Among other things, the Act repeals
the restrictions on banks affiliating with securities firms contained in
sections 20 and 32 of the Glass-Steagall Act. The Act also creates a new
"financial holding company" under the Bank Holding Company Act, which will
permit holding companies to engage in a statutorily provided list of financial
activities, including insurance and securities underwriting and agency
activities, merchant banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are "complementary" to
financial activities. The Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis. Nevertheless, the Act may have the result of increasing the amount of
competition that the Company faces from larger institutions and other types of
companies. In fact, it is not possible to predict the full effect that the Act
will have on the Company.
15
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
YEAR 2000
Like many financial institutions, the Bank relies upon computers for the daily
conduct of its business and for information systems processing. There is concern
among industry experts that on January 1, 2000 computers will be unable to
"read" the new year, which may result in widespread computer malfunctions. While
the Bank believes that it has available resources and has adopted a plan to
address Year 2000 compliance, it is still dependent to a certain degree on other
third party vendors. The Bank believes that its data processing system is Year
2000 compliant. Testing for this system was completed as of March 31, 1999. All
phases of the testing were considered to be successful. The Bank has incurred
costs that would normally be incurred in upgrading its hardware and software.
Any other costs associated with upgrading are not expected to be material.
The Bank anticipates that the costs to upgrade other ancillary systems will not
materially differ from normal costs incurred during prior years to upgrade and
maintain its computer systems. The Bank has completed an evaluation of all its
internal systems and software and the network connections it maintains, and it
may incur only minor additional costs. The Bank is seeking assurances about the
Year 2000 compliance with respect to the other third party hardware and software
systems it uses, and the Bank believes that its internal systems and software
and the network connections it maintains will be adequately programmed to
address the Year 2000 issue. The Bank has completed testing all ancillary
systems, such as telephone systems and security devices, as of March 31, 1999.
There can be no assurances that all hardware and software that the Bank uses
will be Year 2000 compliant, and the Bank cannot predict with any certainty the
costs it will incur to respond to any Year 2000 issues. Factors which may affect
the amount of these costs include the Bank's inability to control third party
modification plans, the Bank's ability to identify and correct all relevant
computer codes, the availability and cost of engaging personnel trained in
solving Year 2000 issues, and other similar uncertainties.
The Company believes that the largest Year 2000 Problem exposure to most
financial institutions is the preparedness of their customers. The Company is
addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an increase in loan defaults. The amount of potential
loss from this issue is not quantifiable. The Company is attempting to reduce
this exposure by educating its customers. The Company has implemented a
comprehensive Year 2000 credit review policy for all existing loans that exceed
$100,000 as well as an underwriting policy for all new loan requests. At
present, the Company's review indicates that the Company's exposure to credit
risks associated with Year 2000 is considered to be low. The Company's credit
review procedures will continue to include these policies throughout 1999.
The Bank has developed a Contingency Plan (Plan) to ensure its ability to
continue as a functioning entity after January 1, 2000. The Plan includes
remediation contingency planning and business resumption contingency planning.
The remediation contingency plans are designed to ensure that responsible
personnel, vendors and service providers adhere to the Bank's Year 2000 plans
and objectives. The business resumption contingency plans are designed to
provide assurance that mission-critical functions will continue in the event
that systems or applications fail as a result of year 2000 problems.
The Company expects to identify and resolve all Year 2000 Problems that could
materially adversely affect its business. However, the Company believes that it
is not possible to determine with complete certainty that all Year 2000 Problems
affecting it have been identified or corrected. The number of devices that could
be affected and the interactions among these devices are simply too numerous. In
addition, the Company cannot accurately predict how many failures related to the
Year 2000 Problem will occur with its suppliers, customers, or other third
parties or the severity, duration, or financial consequences of such failures.
16
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
YEAR 2000 -- continued
As a result, the Company expects that it could possibly suffer the following
consequences:
o A number of operational inconveniences and inefficiencies for the
Company, its service providers, or its customers that may divert the
Company's time and attention and financial and human resources from its
ordinary business activities; and
o System malfunctions that may require significant efforts by the Company
or its service providers or customers to prevent or alleviate material
business disruptions.
Additionally, there may be a higher than usual demand for liquidity immediately
prior to the century change due to deposit withdrawals by customers concerned
about Year 2000 issues. To address this possible demand, the Company has secured
additional lines of credit with several correspondent banks.
17
<PAGE>
HCSB FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 5, 1999. This Form 8-K was
filed for the purpose of including in the files of the Securities and Exchange
Commission the annual report on Form 10-KSB for the year ended December 31, 1998
and the Form 10-QSB for the quarter ended March 31, 1999 previously filed by
Horry County State Bank with the Federal Deposit Insurance Corporation so that
such documents may be incorporated by reference into filings with the Commission
as filings of a predecessor registrant to HCSB Financial Corporation.
Items 1, 2, 3, 4 and 5 are not applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By:_____________________________
James R. Clarkson
President
Date:_____________ By:_____________________________
Loretta B. Gerald
Assistant Vice President & Cashier
(Principal Accounting Officer)
18
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<PERIOD-START> JAN-01-1999
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