<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 10, 1999
-------------
HCSB FINANCIAL CORPORATION
--------------------------
(Exact name of registrant
as specified in its charter)
SOUTH CAROLINA TO BE ASSIGNED 57-1079444
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
5009 BROAD STREET, LORIS, SOUTH CAROLINA 29569
----------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (843)756-6333
-------------
HORRY COUNTY STATE BANK ( HCSB FINANCIAL CORPORATION IS A SUCCESSOR ISSUER UNDER
- --------------------------------------------------------------------------------
RULE 15D-5 OF THE SECURITIES EXCHANGE ACT OF 1934)
--------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 5. OTHER EVENTS.
HCSB Financial Corporation is a one-bank holding company formed for the
purpose of acquiring all of the common stock of Horry County State Bank, a South
Carolina state bank. HCSB Financial Corporation completed its acquisition of the
Bank pursuant to a statutory share exchange effective on June 10, 1999. Upon
completion of the share exchange, the assets and liabilities of HCSB Financial
Corporation were substantially the same as those of Horry County State Bank.
Horry County State Bank's common stock was registered with the Federal
Deposit Insurance Corporation pursuant to Section 12(i) of the Securities
Exchange Act of 1934 and the Bank filed periodic reports under the Exchange Act
with the Federal Deposit Insurance Corporation.
This Form 8-K is being filed for the purpose of including in the files
of the Securities and Exchange Commission the annual report on Form 10-K for the
year ended December 31, 1998 previously filed by Horry County State Bank with
the Federal Deposit Insurance Corporation so that this document may be
incorporated by reference into filings with the Commission as a filing of a
predecessor registrant to HCSB Financial Corporation. This document is filed as
an exhibit hereto, is incorporated by reference herein, and specifically made a
part hereof.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) The following information is filed as an exhibit to the
Current Report on Form 8-K:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
99.1 Form 10-K for Horry County State Bank for the year
ended December 31, 1998
</TABLE>
<PAGE> 3
SIGNATURES
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 hereunto duly authorized.
HCSB Financial Corporation
By: /s/ James R. Clarkson
--------------------------------------
James R. Clarkson
President and Chief Executive Officer
Dated: August 5, 1999
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
99.1 Form 10-K for Horry County State Bank for the year ended
December 31, 1998
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
FDIC Certificate No. 27139
HORRY COUNTY STATE BANK
A SOUTH CAROLINA CORPORATION
I.R.S. Employer Identification No. 57-0835531
5009 Broad Street, Loris, South Carolina 29569
Telephone Number: (843) 756-6333
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class of securities
---------------------------------
Common Stock ($5.00 par value)
Number of shares of Common Stock Outstanding
478,150
Indicate by check mark whether the registration (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 reports), and (2) has been subject to such
filings requirements for the past ninety days. YES (X) NO ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment of this Form 10-K. ( )
The aggregate market value of total voting stock held by non-affiliates of the
registrant as of March 10, 1999 is $13,866,350. The aggregate market value is
computed using a per share value of $29.00, which is the actual price paid to
purchase shares in the most recent transaction of which management is aware.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the year ended December 31,
1998 referenced in Part II and Part IV.
2. Proxy Statement for the Annual Meeting of Shareholders to be
held April 22, 1999 referenced in Part I and Part III.
PART I
ITEM 1 - Business
A. GENERAL INFORMATION
Horry County State Bank (hereafter called the "Bank") was incorporated under the
laws of the State of South Carolina as a state chartered bank on December 18,
1987. The Bank operates under the jurisdiction of the South Carolina State Board
of Financial Institutions, and its deposits are insured by the Federal Deposit
Insurance Corporation of which the Bank is a member. The Bank is not a member of
the Federal Reserve System.
On January 4, 1988, the Bank began operations at 5009 Broad Street, Loris, South
Carolina. As of that time, there were issued and outstanding 207,071 shares of
common stock held of record by 1,005 shareholders. As of December 31, 1998,
478,150 shares were issued and outstanding and were held of record by
approximately 1,664 shareholders.
The Bank opened a full-service branch at 1627-A, Conway, South Carolina in
February, 1998. During 1998 the Bank also placed in operation drive-up automated
teller machines (ATM's) at its offices at 5009 Broad Street, Loris, South
Carolina, 3201 Hwy 701 N., Loris, South Carolina and 3189 Hwy 9, Little River,
South Carolina as well as a walk-up ATM at the new Conway branch mentioned
above.
The primary market area of the Bank is in an area including Horry and Marion
Counties in South Carolina and Columbus County, North Carolina. (See also
"Competition and Market Area" below).
B. DESCRIPTION OF BUSINESS
The Bank's primary purpose is to serve local banking needs in its primary market
area. The Bank is chiefly engaged in the business of attracting deposits from
the general public and using these deposits together with other funds to make
commercial, agricultural and consumer loans. The Bank's operating results depend
to a substantial extent on the difference between interest and fees earned on
loans and other investments and services, and the Bank's interest expense,
consisting principally of interest paid on deposits and the Bank's borrowings.
Unlike most industrial companies, virtually all of the assets and liabilities of
financial institutions are monetary. As a result, interest rates have a great
effect on the financial institution's performance. In recent years, the interest
expense of most financial institutions has increased significantly due to
substantial deregulation of interest rates and increased competition for
deposits with other financial institutions. Moreover, financial institutions
have been forced to compete for savings dollars with nontraditional financial
intermediaries such as mutual funds. At the same time, interest income has
fallen due to market factors and the policies of the
2
<PAGE> 3
Federal Reserve Board. Lower interest rates on loans have intensified
competition for loans and put pressure on profit margins. Bank management uses
interest-sensitive adjustable rate loans to protect its profit margins in the
event of rate changes. The Bank offers standard consumer loans in addition to
certain other services such as safe deposit boxes and automated teller machines
(ATM's). (See also "Banking Service" below).
There are no material concentrations of deposits to any single customer or group
of customers. There are no significant loan concentrations to a customer, group
of customers, industry or market segment.
COMPETITION AND MARKET AREA
The market area is one that is fairly diversified with employment ranging from
the agricultural segment to heavy industry. Nonagricultural employers in the
area are textiles, farm and commercial equipment, construction, wholesale and
retail trade tourism-related businesses and local utility companies.
With the exception of certain governmental deposits, including state, county and
municipal districts, there were no material concentrations of deposits from any
single customers or group of customers. Governmental entities accounted for
approximately 5.02% of the Bank's total deposits as of December 31, 1998. There
are no material or seasonal factors that would have an adverse effect on the
Bank. The Bank does not rely on foreign sources of funds or income nor does it
solicit brokered deposits. Management has no reason to believe that the loss of
any one depositor or a few of the larger depositors would have a materially
adverse effect upon the Bank's operations or erode its deposit base.
Within its market area, Horry County State Bank competes for deposits and loans
with several large regional commercial banks, other community banks, savings and
loan associations and a credit union. There are forty-two (42) other financial
institution offices located in the Bank's market area, including The National
Bank of South Carolina, Branch Banking & Trust Co., Beach First National Bank,
Wachovia Bank of South Carolina, First Palmetto Savings Bank, First Citizen's
Bank, NationsBank, The Anchor Bank, Anderson Brothers Bank, Conway National
Bank, Waccamaw Bank, Carolina First FSB and Carolina Bank. The thrift
institutions in the Bank's trade area include Peoples Federal Savings & Loan
Association, Cooperative Bank for Savings and Coastal Federal Savings Bank. The
Carolina Trust Federal Credit Union also has a branch in Horry County.
Since state banking laws allows statewide branching and also Southeastern bank
holding companies to acquire banking institutions in South Carolina, competition
for banking customers is keen. These financial institutions in the Bank's market
area offer a variety of services ranging from depository and automatic teller
machine ("ATM") facilities to mortgage loan facilities and in general, full
service banking. The larger banking competitors generally have larger capital
bases, broader geographic markets and higher lending limits than Horry County
State Bank and thus may make more effective use of media advertising, support
services and electronic technology than can Horry County State Bank.
3
<PAGE> 4
According to market share analysis provided by the Federal Deposit Insurance
Corporation as of June 30, 1998, however, Horry County Bank has competed quite
favorably when considering the competitive nature of its market. This report
indicated that within the Loris, South Carolina market itself, the Bank had
30.42% deposits of financial institutions with offices in Loris. The Bank's
percentage of market share in Horry County, South Carolina was 3.15% among
financial institutions as of the same date.
On December 31, 1998 total deposits of Horry County State Bank were distributed
as follows:
<TABLE>
<S> <C>
NON-INTERST BEARING DEMAND 8.60%
INTEREST BEARING TRANSACTION ACCOUNT 13.59%
SAVINGS 20.80%
TIME DEPOSITS 57.01%
</TABLE>
BANKING SERVICES
The Bank conducts substantially the same business operations as a typical
commercial bank. The major services provided by the Bank include checking, NOW
accounts, savings and other time deposits of various types, and loans for
business, agriculture, real estate, and consumer purposes. It also offers
travelers checks, safe deposit boxes, Master Card and Visa accounts, ATM cards,
Debit Cards, automated teller machines, and overdraft lines of credit. The Bank
does not offer trust services.
The Bank makes seasonal agricultural loans to farmers in its primary marketing
area. Although management does not believe this has an adverse effect on the
Bank's operations, it does cause fluctuations in certain key ratios,
particularly loan to deposit and liquidity ratios. Management sets the Bank's
deposit rates to fund the seasonal loans and has established alternative sources
of borrowing to provide liquidity.
The Bank expanded its ability to provide funds for residential mortgage loans at
competitive long-term interest rates in 1998 by linking with Surety Mortgage
Corporation, Columbia, South Carolina. This affiliation provides the Bank with
an opportunity to be more aggressive in this aspect of lending without
allocating its own resources and also while avoiding potential interest rate
volatility risks.
MISCELLANEOUS
The Bank holds no patents or registered trademarks, licenses (other than those
required by regulatory authorities), franchises or concessions.
The Bank has undertaken no material research activities relating to new services
or improvement of existing services.
The number of persons employed by the Bank as of December 31, 1998, was
fifty-one (51), including full and part-time employees.
4
<PAGE> 5
ITEM 2 - PROPERTIES
The Bank's principal office is owned in fee simple and is located at 5009 Broad
Street, Loris, South Carolina. The building houses all deposit and computer
operations facilities of the Bank and the executive offices of the Bank, as well
as a full service branch.
The branch location at 5264 Highway #9, Green Sea, South Carolina is owned in
fee simple and was opened for business on March 2, 1995 in a temporary building.
A permanent facility was completed and opened in February, 1998.
In January, 1997, the Bank purchased a commercial lot a former banking office at
4011 Meeting Street, Loris, South Carolina. The building was renovated to house
a small branch facility as well as the Bank's central credit operations. This
facility was opened for use in May, 1997.
The Bank purchased a lot and building at East 5th Street, Tabor City, North
Carolina in July, 1997 in anticipation of filing an Application to Establish a
Branch at this location after the interstate branching legislation (Reigle-Neal
Act) would allow such expansion effective June 1, 1997. At a late time in May,
1997, however, the North Carolina legislative rescinded its earlier position on
interstate branching and extended its moratorium on such branching into North
Carolina until June 1, 1999. The Bank still owns this property, however, and its
plans for use or disposition thereof are contingent upon the actions, of the
North Carolina legislation in 1999.
Having been thwarted by this legislative change, the Bank entered into an
agreement to lease a lot bordering the South Carolina-North Carolina line. The
lease included an initial five (5) - year term with four (4), five (5) year
renewal options. The Bank received regulatory approval to establish a branch
bank at this location and opened for business in a temporary facility on October
1, 1997. The bank plans to build a 3,300 square foot permanent facility on this
site in the future, although these plans are contingent upon the North Carolina
interstate branching statutes.
In January, 1998 the Bank purchased a 0.83 - acre lot on Broad Street in Loris
for the location of a future central operations facility. Plans are being
prepared for the renovation of the existing building on this property with
construction expected to start during the second quarter of 1999.
In November, 1997, the Bank entered into an agreement to lease a lot and bank
building at 1627-A Church Street, Conway, South Carolina. This agreement
included an initial five (5) - year rental term with four (4), five (5) year
renewal options, as well as an option for the Bank to purchase this property at
any time during the first five (5) year lease term. The Bank received regulatory
approval in December, 1997 to establish a branch at this location, and this
office opened on February 17, 1998. Subsequently, on April 30, 1998, the Bank
purchased this property.
5
<PAGE> 6
ITEM 3 - LEGAL PROCEEDINGS
The Bank was not involved as a defendant in any litigation effort as of December
31, 1998, nor is management aware of any potential such litigation to be filed
in1999.
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to Proxy Statement for the Annual Meeting of Shareholders to be held
April, 22, 1999. Exhibit II, Pages 15-16.
PART II
ITEM 5 - MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
Refer to Exhibit I Annual Report to Shareholders for the Year Ended December 31,
1998, Page 5.
ITEM 6 - SELECTED FINANCIAL DATA
Refer to Exhibit I Annual Report to Shareholders for the Year Ended December 31,
1998, Page 4.
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Refer to Exhibit I Annual Report to Shareholders for the Year Ended December 31,
1998, Pages 6-21
The Bank's Board of Directors voted unanimously on January 14, 1999 to recommend
to the Bank's shareholders that they approve the formation of a holding company
at the Annual Meeting of Shareholders on April 22, 1999. For additional
information on this matter, refer to Proxy Statement for the Annual Meeting of
Shareholders to be held April 22, 1999. Exhibit II, Pages 1-11.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to Exhibit I Annual Report to Shareholders for the Year Ended December 31,
1998, Pages 22-40.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
6
<PAGE> 7
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS OF THE BANK
Refer to Proxy Statement of the Annual Meeting of Shareholders
to be held April 22, 1999. Exhibit II, Page 3.
B. PRINCIPAL OFFICERS OF THE BANK
Set forth below are the names, ages and positions of the
officers of the Bank. For the purposes of this report, the
term "officer" means any officer (as defined in section
335.2(s) of the Federal Deposit Insurance Corporation's
regulations) who participates in major policy making functions
(other than in the capacity of a director).
<TABLE>
<CAPTION>
Name Age Position With Bank
<S> <C> <C>
James R. Clarkson 47 President and Chief
Executive Officer
</TABLE>
Principal business experience:
President and CEO of Horry County State Bank since its origination in
1987. Formerly employed by Southern National Bank of S.C., Horry County
National Bank and the National Bank of South Carolina.
<TABLE>
<CAPTION>
Name Age Position With Bank
<S> <C> <C>
Bernice S. Hammond 54 Vice President
</TABLE>
Principal business experience:
Joined the Bank in April, 1994, after 24 years with First Citizens
Bank. Serves as manager of the Bank's branch office at 5264 Hwy. 9,
Green Sea, S.C.
<TABLE>
<CAPTION>
Name Age Position With Bank
<S> <C> <C>
Walter R. Williamson 52 Vice President
</TABLE>
Principal business experience:
Joined the Bank in January, 1997 as a loan officer. Presently serves as
manager of the Bank's branch office at 3101 Hwy. 701 N., Loris, S.C.
Previous banking experience with United Carolina Bank (8 years) and
Cape Fear Farm Credit Service (15 years).
7
<PAGE> 8
<TABLE>
<CAPTION>
Name Age Position With Bank
<S> <C> <C>
Glenn R. Bullard 49 Vice President
</TABLE>
Principal business experience:
Joined the Bank in January, 1997 as a loan officer. Presently serves as
manager of the Bank's branch office at 3189 Hwy. 9, Little River, S.C.
Has 13 years of prior banking experience with Wachovia Bank of S.C. and
South Carolina National Bank.
<TABLE>
<CAPTION>
Name Age Position With Bank
<S> <C> <C>
James F. Lewis 53 Vice President
</TABLE>
Principal business experience:
Joined the Bank in August, 1997, after 24 years experience with C&S
National Bank, NationsBank, and Anchor Bank. Presently serves as
manager of the Bank's branch office at 1627-A Church Street, Conway,
S.C.
All officers of the bank are elected for a one year term by the Board
of Directors, effective the first board meeting following the Annual
Shareholders meeting.
ITEM 11 - EXECUTIVE COMPENSATION
Refer to Proxy Statement for the Annual Meeting of Shareholders to be held April
22, 1999. Exhibit II, Page 13.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT
Bank Directors and Principal Officers are subject to Section 16 of the
Securities Exchange Act of 1934, thereby requiring each Director and Principal
Officer to file applicable Beneficial Ownership Report forms F-7, F-8, and F-8A
with the Federal Deposit Insurance Corporation. These reports regard
acquisitions and dispositions of the Bank's common stock. All applicable reports
have been filed with the Federal Deposit Insurance Corporation.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Proxy Statement for the Annual Meeting of Shareholders to be held April
22, 1999. Exhibit II, Page 13.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. CONTENTS:
(1) Financial Statements:
Balance Sheet - Incorporated by Reference in Annual Report to
Shareholders as of December 31, 1998, Page 23.
8
<PAGE> 9
Statement of Income - Incorporated by Reference in Annual
Report to Shareholders as of December 31, 1998. Page 24.
Statement of Cash Flows - Incorporated by Reference in Annual
Report to Shareholders as of December 31, 1998. Page 27.
Notes to Financial Statements - Incorporated by Reference in
Annual Report to Shareholders as of December 31, 1998. Page
28-40.
Independent Auditor's Report - Incorporated by reference in
Annual Report to Shareholders as of December 31, 1998. Page
22.
(2) Additional financial statement schedules furnished pursuant to
the requirements of Form 10-K:
I. U.S. Treasury Securities, Obligations of other U.S.
Government Agencies and Corporations, Obligations of
States and Political Subdivisions, and other Bonds,
Notes and Debentures: Refer to Annual Report to
Shareholders as of December 31, 1998. Note D, page
32.
II. Loans to Officers, Directors, Principal Security
Holders, and any Associates of the Foregoing Persons;
Refer to Annual Report of the Shareholders as of
December 31, 1998. Note E, page 33.
III. Loans: Refer to Annual Report to Shareholders as of
December 31, 1998. Note E, pages 33-34.
IV. Bank Premises and Equipment: Refer to Annual Report
to Shareholders as of December 31, 1998. Note F, page
34.
Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the information required thereby is
included in the financial statement or notes thereto.
B. REPORTS ON FORM 8-K
No reports of Form 8-K were filed during the last quarter of the year
ended December 31, 1998.
C. EXHIBITS
(1) Articles of Incorporation and By Laws: No change from the 1992
Form F-2 Report
(2) Instruments defining the rights of Security Holders Including
Indentures: None
9
<PAGE> 10
(3) Material Contracts: None
(4) Statement Re: Computation of Per Share Earnings: Not
Applicable
(5) Statement Re: Computation of Ratios: Not Applicable
(6) I - Annual Reports to Shareholders for December 31, 1998
II - Proxy Statement for the Annual Meeting of Shareholders
by held April 22, 1999
III - Independent Auditor's Report
(7) Letter Re: Changes in Accounting Principals: Not Applicable
(8) Previously Unfiled Documents: None
(9) Subsidiaries of the Bank: The Bank has no subsidiaries
10
<PAGE> 11
HCSB (LOGO)
HORRY COUNTY STATE BANK
Loris, South Carolina
Annual Report
1998
<PAGE> 12
HORRY COUNTY STATE BANK
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Ten Year History 2
Message to Shareholders 3
Selected Financial Data 4
Description of Bank's Business 5
Market for Common Stock and Dividends 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-21
Independent Accountants' Report 22
Balance Sheets 23
Statements of Income 24
Statements of Changes in Comprehensive Income 25
Statements of Changes in Stockholders' Equity 26
Statements of Cash Flows 27
Notes to Financial Statements 28-40
Directors and Officers of the Board 41
Officers and Employees 42-43
</TABLE>
HEADQUARTERS
5009 Broad Street Mailing Address:
Loris, South Carolina 29569 Post Office Box 218
(803) 756-6333 Loris, South Carolina 29569
Horry County State Bank will furnish free of charge a copy of the annual report
on Form 10K upon written request to James R. Clarkson, President and C.E.O.,
Horry County State Bank, Post Office Box 218, Loris, South Carolina 29569.
This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT furnished
pursuant to Part 350 of the Federal Deposit Insurance Corporation Rules and
Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR
RELEVANCE BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
11
<PAGE> 13
HORRY COUNTY STATE BANK
TEN YEAR HISTORY
(OMIT 000'S)
<TABLE>
<CAPTION>
Year Assets Deposits Loans (net) Capital Earnings
------- -------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1989 $ 13,635 $ 11,217 $ 9,565 $ 2,100 $ 15
1990 17,996 15,389 11,155 2,224 125
1991 21,968 19,265 14,833 2,391 167
1992 24,725 21,884 17,483 2,617 227
1993 31,280 28,121 20,432 2,888 274
1994 38,009 34,109 22,158 3,644 345
1995 45,913 41,542 28,959 4,006 202
1996 49,405 42,851 35,556 5,495 556
1997 72,156 63,885 40,711 7,473 429
1998 83,586 69,970 55,061 8,024 511
</TABLE>
2
<PAGE> 14
MESSAGE TO SHAREHOLDERS
As we projected in our plans to expand Horry County State Bank's branch network,
our newest offices at Tabor City, North Myrtle Beach, and Conway began to make
significant contributions in 1998 which enabled us to show good growth last
year.
Total assets grew by 15.8% to $83,586,000 at year-end 1998. Net Loans increased
by 35.2% to $55,061,00 and Deposits were up by 9.5% to $69,970,000. The slight
decrease in our time deposits was largely attributable to declining interest
rates which resulted in some shifts by some depositors to more liquid deposit
plans, such as money market savings accounts, where we experienced deposit
increases.
Although we began 1998 slowly from an earnings standpoint in the aftermath of
opening our Tabor City and North Myrtle Beach branches and while starting up our
Conway office, our trend in profitability during the last six months and last
quarter of 1998 improved to levels that we had experienced in prior years. Net
Income for 1998 was $511,000, which represented a 19.1% improvement over 1997.
In fact, each of these new offices was operating profitably during the final
quarter of 1998.
In addition to the challenges of getting our newer branches growing and
profitable in 1998, last year unexpectedly presented a significant challenge to
our older Loris and Mt. Olive offices with the severe drought that crippled the
yields on crops in these communities. When combined with the overall very weak
price structure on agricultural commodities, last year was generally the worst
year our farmers had experienced in many years. We continue to be fortunate to
have a quality cast of farming customers, however, and thus we again had very
good collection results from this sector of our loan portfolio.
Certainly the year 1999 presents new challenges and opportunities, many of which
revolve around the upcoming move into the Year 2000. Surely you have read or
heard some of the gloomy forecasts and the forewarnings of steps you should take
in preparation for potential inconveniences that might occur on January 1, 2000,
one of which includes the idea that everyone should withdraw a supply of their
bank deposits in December 1999.
At Horry County State Bank, we have been working diligently to be ready for the
new millennium well in advance. We installed upgrades to our various software
programs last year and we have placed special emphasis on complying with the
strict guidelines of the banking regulatory agencies in this regard, which
includes a detailed testing of our software using a range of critical dates
ranging from April 1999 through the Year 2001. In short, we have identified our
potential problem areas well in advance and implemented strategies and
procedures to avoid significant discrepancies in our daily operations, just as
we do with our contingency plans for hurricanes or other natural disasters. We
have no doubt that our depositors' money will be much safer in Horry County
State Bank on January 1, 2000, than it would be if placed under their bed
mattresses or in their cookie jars!
We look forward to the challenges of 1999 as they give us an opportunity to fine
tune our technology and services for the future. With the trends in growth and
profitability of our branches, we are confident 1999 will be a very good year
for us.
As always, we genuinely appreciate your support of Horry County State Bank.
Most respectfully,
James R. Clarkson
President & CEO
3
<PAGE> 15
HORRY COUNTY STATE BANK
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning the
Bank. The selected financial data has been derived from the financial statements
which have been audited by Tourville, Simpson & Henderson, L.L.P. independent
accountants. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996 1995 1994
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share)
FINANCIAL CONDITION:
Investment securities $ 19,640 $ 12,597 $ 8,553 $ 10,025 $ 8,196
Allowance for loan losses 880 911 549 398 295
Net loans 55,061 40,711 35,556 28,959 22,158
Premises and equipment, net 3,504 2,493 1,430 1,071 1,024
Total assets 83,586 72,156 49,405 45,913 38,009
Noninterest-bearing deposits 6,358 4,814 3,297 2,417 2,419
Interest-bearing deposits 63,612 59,071 39,554 39,125 31,690
Total deposits 69,970 63,885 42,851 41,542 34,109
Advance from the FHLB 5,000 350 450 - -
Total liabilities 75,562 64,683 43,910 41,907 34,365
Total stockholders' equity 8,024 7,473 5,495 4,006 3,644
RESULTS OF OPERATIONS:
Interest income $ 6,387 $ 5,200 $ 4,172 $ 3,446 $ 2,545
Interest expense 3,257 2,368 2,026 1,862 1,113
-------- -------- --------- --------- --------
Net interest income 3,130 2,832 2,146 1,584 1,432
Provision for loan losses 100 480 222 197 122
-------- -------- --------- --------- --------
Net interest income after provision 3,030 2,352 1,924 1,387 1,310
Other income 682 434 353 278 275
Other expenses 2,929 2,143 1,425 1,385 1,072
Income tax expense 272 214 296 78 168
-------- -------- --------- --------- --------
Income before accounting change 511 429 556 202 345
Cumulative effect of accounting change - - - - 5
-------- -------- --------- --------- --------
Net income $ 511 $ 429 $ 556 $ 202 $ 345
======== ======== ========= ========= ========
PER SHARE DATA (1):
Average common shares outstanding 502,058 449,960 410,418 385,536 355,483
Income before accounting change $ 1.02 $ 0.95 $ 1.35 $ 0.52 $ 0.97
Accounting change - - - - -
Net income 1.02 0.95 1.35 0.52 0.97
Period end book value 15.98 14.88 12.68 10.41 9.47
</TABLE>
(1) Adjusted for the effects of the 5% stock dividend declared in January
1999 and the 10% stock dividends declared in December 1996 and 1995.
4
<PAGE> 16
HORRY COUNTY STATE BANK
DESCRIPTION OF BANK'S BUSINESS
Horry County State Bank (the Bank) is a state-chartered bank incorporated on
December 18, 1987 and located at 5009 Broad Street, Loris, South Carolina. The
Bank's primary market is Horry and Marion Counties in South Carolina and
Columbus County in North Carolina. From its six office locations, the Bank
offers a full range of deposit services which includes checking accounts,
savings accounts, certificates of deposit, money market accounts, and IRA's.
The Bank is primarily engaged in the business of attracting deposits from the
general public and using these deposits together with other funds to make
commercial, consumer, and real estate loans. The Bank's operating results depend
to a substantial extent on the difference between interest and fees earned on
loans and investments and the Bank's interest expense, consisting principally of
interest paid on deposits. 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 Bank
also competes for savings dollars with non-traditional financial intermediaries
such as mutual funds. This has resulted in a highly competitive market area
which demands the type of personal service and attention granted by Horry County
State Bank.
The operating results of the Bank are influenced by the volume of agricultural
lending in the Bank's geographic marketplace. The Bank makes seasonal loans to
farmers during the first quarter of the year to finance crop production
expenses, and the loans are usually repaid during the third and fourth quarters.
The seasonality of these loans significantly impacts the Bank's asset/liability
management and liquidity.
In June of 1997, the State Board of Financial Institutions and the FDIC approved
the Bank's applications to open three branches in North Myrtle Beach, Tabor
City, and Loris. As a condition of approval, the Bank was required to obtain an
additional $2,000,000 in capital. In response, the Bank issued 65,805 shares for
$1,542,000, net of expenses, during 1997 and 42,027 shares for $967,000 during
1996. The Loris branch was opened for business on June 9, 1997, and the Tabor
City and North Myrtle Beach branches were opened on October 5 and 6, 1997,
respectively.
The Bank's application to open a branch in Conway, South Carolina was approved
by the State Board of Financial Institutions and the FDIC in December of 1997.
The branch opened for business on February 17, 1998.
MARKET FOR COMMON STOCK AND DIVIDENDS
Although the common stock of Horry County State Bank is traded from time to time
on an individual basis, no established trading market has developed. Trading in
the Bank's common stock has not been extensive since its January 4, 1988
issuance pursuant to the initial public stock offering. The common stock is not
a NASDAQ quoted stock, nor is it quoted by the National Quotation Bureau, Inc.
During 1997, the Bank sold 65,805 shares of common stock, pursuant to an
Offering Circular, at a price of $24 per share. In the most recent trades of
which management is aware through March 3, 1999, purchases have been made at a
price of $29 per share.
As of March 3, 1999, there were 1,664 holders of record of the Bank's common
stock, excluding individual participants in security position listings.
No cash dividends have ever been declared or paid by the Bank; however, the
Board of Directors approved a 10% stock dividend for each of the five years
ending December 31, 1996. The most recent stock dividend was a 5% stock dividend
approved on January 14, 1999 to stockholders of record February 1, 1999.
Management does not expect the Bank to pay cash dividends in the foreseeable
future. South Carolina banking regulations restrict the amount of cash dividends
that can be paid to stockholders. All of the Bank's cash dividends are subject
to the prior approval of the South Carolina State Board of Financial
Institutions.
5
<PAGE> 17
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of Horry County State Bank.
This commentary should be read in conjunction with the financial statements,
related notes, and other statistical information in this report.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net income for the year ended December 31, 1998 was $511,000 or $1.02 per share,
compared to $429,000 or $.95 per share, for the year ended December 31, 1997.
The decrease in the amount charged to the provision for loan losses was one of
the primary reasons for the increase in net income. For the year ended December
31, 1998, the Bank charged $100,000 to the provision for loan losses as compared
to $380,000 for the year ended December 31, 1997. An improvement in the overall
asset quality of the loan portfolio contributed to the reduction in the
provision for loan losses. An increase in net interest income was also a
contributing factor to the increase in net income. Net interest income increased
by $298,000, or 10.5% to $3,130,000 for the year ended December 31, 1998.
Average earning assets increased as a result of the growth from the new branches
in 1998. The increases discussed above were partially offset by increases in
noninterest expenses as a result of the additional branches opened in late 1997
and early 1998. Noninterest expense increased $786,000 or 36.7% to $2,929,000
for the year ended December 31, 1998 as compared to 1997.
1997 COMPARED TO 1996
For the year ended December 31, 1997, the Bank's net income was $429,000, or
$0.95 per share, a decrease of $127,000 when compared to the $556,000 net income
for 1996. Increases in all categories of noninterest expense were the main
contributing factors for the reduction in earnings, due to the opening of three
new branches in 1997 and a fourth in early 1998. Salaries and employee benefits
for 1997 were $1,122,000, an increase of $405,000 over the amount reported in
1996. This increase was caused by employee additions for the new branches and
annual pay increases. Other expenses were $727,000 and $471,000 during 1997 and
1996, respectively. Additionally, the provision for loan losses increased
$258,000 to $480,000 in 1997 from $222,000 in 1996. The increase was primarily
attributable to growth in the loan portfolio and a change in the loan
risk-grading system which reflects a more conservative approach by management in
establishing the allowance for loan losses. The negative effects of the increase
in noninterest expense were partially offset by a $686,000 improvement in net
interest income, due mainly to growth in the loan portfolio and improvements in
the net yield on earning assets and the interest rate spread.
6
<PAGE> 18
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
The Bank 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 Bank's average balance
sheets for the last two fiscal years.
BALANCE SHEET CATEGORIES AS A PERCENT OF AVERAGE TOTAL ASSETS
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS:
Interest earning assets:
Federal funds sold 9.12% 8.20%
Investment securities 17.61 14.14
Loans 64.03 69.84
------- -------
Total interest earning assets 90.76 92.18
Cash and due from banks 1.83 2.87
Allowance for loan losses (1.08) (1.15)
Premises and equipment 5.59 3.18
Other assets 2.90 2.92
------- -------
Total assets 100.00% 100.00%
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing deposits 81.12% 80.89%
Federal funds purchased -- 0.03
Advances from the Federal Home Loan Bank 1.46 0.65
------- -------
Total interest bearing liabilities 82.58 81.57
Non-interest bearing deposits 7.26 6.80
Accrued interest and other liabilities 0.51 0.94
------- -------
Total liabilities 90.35 89.31
------- -------
Stockholders' equity 9.65 10.69
------- -------
Total liabilities and stockholders' equity 100.00% 100.00%
======= =======
</TABLE>
7
<PAGE> 19
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME
Earnings are dependent to a large degree on net interest income. It 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 Bank'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.
1998 COMPARED TO 1997
For the year ended December 31, 1998, net interest income increased $298,000, or
10.5%, over the 1997 amount of $2,832,000. The increase was attributable to the
significant growth in assets that occurred during 1998. Average earning assets
were $73,072,000 for 1998 compared to $54,822,000 for 1997, an increase of
$18,250,000 or 33.29%. This growth in assets was funded mostly by the
$17,979,000 increase in average interest-bearing liabilities. The interest rate
spread was 3.84% in 1998 and 4.61% in 1997, while the net yield on earning
assets was 4.28% and 5.17% for 1998 and 1997, respectively. The decline during
1998 in the interest rate spread and net yield on earning assets of 77 and 89
basis points, respectfully, was the result of not being able to invest the
deposits that were generated during the first half of 1998 in a manner that
produced a favorable mix of earnings assets. Consequently, interest rates paid
for deposits were lowered for the remainder of the year. However, the average
rates paid on certificates of deposit for 1998 increased to 5.64% compared to
5.59% for 1997. Also, the average volume of loans as a percentage of total
interest earning assets declined during 1998 to 70.54% compared to 75.76% for
1997. Loans are the highest yielding component of earnings assets for the Bank.
1997 COMPARED TO 1996
Net interest income increased from $2,146,000 in 1996 to $2,832,000 in 1997, an
increase of $686,000 or 32.0%. Gross interest income increased $1,028,000 due to
the $8,778,000 growth in average earnings assets and a 43 basis point
improvement in the yield on earning assets. The growth in assets was funded by
the $7,902,000 increase in average interest-bearing deposits. Most of the
deposit growth was from certificates of deposit which are typically the most
expensive source of funds for a bank. The average rate paid on deposits was
4.87% in 1997 compared to 4.91% in 1996. The interest rate spread and net yield
on earning assets were positively affected by both the decrease in the cost of
funds and the increase in the yield on earning assets, particularly the 71 basis
point increase in the yield on loans. The interest rate spread was 4.61% and
4.13% in 1997 and 1996, respectively. The net yield on earning assets during
1997 was 5.17% compared to 4.66% in 1996.
8
<PAGE> 20
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ----------------------------------
(Dollars in thousands) AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST /RATE BALANCE INTEREST /RATE
------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Taxable securities $ 12,754 $ 824 6.46% $ 7,487 $ 499 6.66%
Tax-exempt securities 1,426 65 4.56 921 44 4.78
Federal funds sold 7,345 401 5.46 4,879 272 5.57
Loans (1) 51,547 5,097 9.89 41,535 4,385 10.56
--------- -------- ---------- ---------
Total earning assets 73,072 6,387 8.74 54,822 5,200 9.49
-------- ---------
Cash and due from banks 1,474 1,707
Allowance for loan losses (872) (682)
Premises and equipment 4,497 1,890
Other assets 2,337 1,734
--------- ----------
Total assets $ 80,508 $ 59,471
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits $ 65,312 $ 3,202 4.90% $ 48,108 $ 2,341 4.87%
Other borrowings 1,178 55 4.67 403 27 6.70
--------- -------- ---------- ---------
Total interest-
bearing liabilities 66,490 3,257 4.90 48,511 2,368 4.88
-------- ---------
Noninterest-bearing deposits 5,841 4,045
Accrued interest and
other liabilities 407 559
Stockholders' equity 7,770 6,356
--------- ----------
Total liabilities and
stockholders' equity $ 80,508 $ 59,471
========= ==========
Net interest income/
interest rate spread $ 3,130 3.84% $ 2,832 4.61%
======== ==== ========= ====
Net yield on earning assets 4.28% 5.17%
==== ====
</TABLE>
(1) The effects of loans in nonaccrual status and fees collected are not
significant to the computations.
9
<PAGE> 21
HORRY COUNTY STATE BANK
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 Bank'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:
<TABLE>
<CAPTION>
1998 COMPARED TO 1997
DUE TO INCREASE (DECREASE) IN
Volume
(Dollars in thousands) Volume Rate Rate Total
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Interest income:
Taxable securities $ 351 $ (15) $ (11) $ 325
Tax-exempt securities 24 (2) (1) 21
Federal funds sold 137 (6) (2) 129
Loans 1,057 (278) (67) 712
-------- --------- --------- --------
Total interest income 1,569 (301) (81) 1,187
-------- --------- --------- --------
Interest expense:
Interest-bearing deposits 837 18 6 861
Other borrowings 49 (9) (12) 28
-------- --------- --------- --------
Total interest expense 886 9 (6) 889
-------- --------- --------- --------
Net interest income $ 683 $ (310) $ (75) $ 298
======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
1997 COMPARED TO 1996
DUE TO INCREASE (DECREASE) IN
Volume
(Dollars in thousands) Volume Rate Rate Total
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Interest income:
Taxable securities $ (22) $ 14 $ - $ (8)
Tax-exempt securities (4) - - (4)
Federal funds sold 200 3 9 212
Loans 536 254 38 828
-------- --------- --------- --------
Total interest income 710 271 47 1,028
-------- --------- --------- --------
Interest expense:
Interest-bearing deposits 388 (19) (4) 365
Other borrowings (25) 14 (12) (23)
-------- --------- --------- --------
Total interest expense 363 (5) (16) 342
-------- --------- --------- --------
Net interest income $ 347 $ 276 $ 63 $ 686
======== ========= ========= ========
</TABLE>
10
<PAGE> 22
HORRY COUNTY STATE BANK
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 1998 and 1997. However, fluctuations in market interest rates do not
necessarily have a significant impact on net interest income, depending on the
Bank's 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 insure 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 through twelve months, rate-sensitive liabilities exceeded
rate-sensitive assets, resulting in a liability sensitive position at the end of
1998 of $30,035,000. 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 Bank's
rate sensitivity at each of the time intervals indicated as of December 31, 1998
and may not be indicative of the Bank's rate-sensitivity position at other
points in time.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
Interest Sensitive Non Interest Sensitive
--------------------------------------- ---------------------------------
Less than 4-6 7-12 1-5 Over 5
(Dollars in thousands) 3 months months months years years Total
--------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities (1) $ 1,994 $ -- $ 1,202 $ 4,337 $12,107 $19,640
Loans, net of unearned income 16,054 2,240 4,285 28,868 4,494 55,941
-------- -------- -------- ------- ------- -------
Total interest-earning assets 18,048 2,240 5,487 $33,205 $16,601 $75,581
-------- -------- -------- ======= ======= =======
Interest-bearing liabilities:
Interest-bearing deposits 31,884 8,700 15,226 $ 7,751 $ 51 $63,612
Federal funds purchased 170 -- -- -- -- 170
Advance from FHLB -- -- -- 5,000 -- 5,000
-------- -------- -------- ------- ------- -------
Total interest-bearing liabilities 32,054 8,700 15,226 $12,751 $ 51 $68,782
-------- -------- -------- ======= ======= =======
Interest sensitivity gap (14,006) (6,460) (9,739)
Cumulative interest
sensitivity gap (14,006) (20,466) (30,205)
Gap ratio 0.56 0.26 0.36
Cumulative gap ratio 0.56 0.50 0.46
</TABLE>
(1) Mortgage-backed securities are included based on their contractual maturity
dates.
11
<PAGE> 23
HORRY COUNTY STATE BANK
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 1998 and 1997 provisions for loan losses and
their related effect of increasing the allowance for loan losses is related to
growth in the loan portfolio. During 1997, management recorded additional
provisions to the allowance for loan losses in response to recommendations by
the State Board of Financial Institutions and management's decision to assign
more conservative risk grades to its 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 1998 and 1997, the provisions for loan losses
were $100,000 and $480,000, respectively.
OTHER INCOME
Other income was $682,000 in 1998, an increase of $248,000, or 57.1%, when
compared with 1997. The majority of the increase was in service charges on
deposit accounts which increased $128,000 from the growth in the number of
deposit accounts generated by the new branches. Insurance commissions were also
substantially higher, increasing $71,000, or 151.1%, to $118,000 from $47,000 in
1997.
In 1997, other income increased $81,000, or 22.9%, to $434,000 from $353,000 in
1996. Service charges on deposit accounts continue to be the largest component
of other income, and increased $54,000, or 21.4%, over 1996 mainly due to the
continued effect of an increase in fees on checks written on insufficient funds
in September of 1996 and growth in deposit accounts from the opening of the new
branches. Other income was also positively impacted by a $10,000 increase in
insurance commissions and by the $27,000 increase in the cash surrender value of
the life insurance policies on directors.
OTHER EXPENSES
Noninterest expense increased $786,000, or 36.7%, during 1998 to $2,929,000.
Salaries and employee benefits, the largest component of noninterest expense,
increased $441,000, or 39.3%, over the 1997 amount of $1,122,000. This increase
reflects a combination of normal salary increases and a full twelve months of
salaries at the new branches opened in 1997. Other categories of noninterest
expense also increased due mainly to a full twelve months in operation for the
new branches. Furniture and equipment expense was $334,000 in 1998 compared to
$198,000 in 1997, and net occupancy expense was $175,000 in 1998 compared to
$96,000 in 1997.
All categories of other expenses increased during 1997 due to both the opening
of three new branches and bank growth. Salaries and employee benefits increased
$405,000, or 56.5%, due to the staffing of the new offices and normal salary
increases among existing employees. Net occupancy and furniture and equipment
expense also increased due mainly to an increase in depreciation expense from
purchases for the new branches. Other operating expenses were $727,000 compared
to $471,000 in 1996. The increase of $256,000 is largely attributable to the
$70,000 increase in stationary and supplies to stock the new branches and the
$63,000 increase in advertising and public relations. Other increases include a
$32,000 increase for consulting fees related to computer systems installation
and an increase of $19,000 in insurance costs.
12
<PAGE> 24
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
The Bank's income tax expense for 1998 was $272,000, an increase of $58,000 from
the 1997 expense of $214,000. The increase in the expense results primarily from
increased income before taxes. The Bank's effective tax rates for the years
ended December 31, 1998 and 1997 were 34.7% and 33.3%, 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. Horry County State Bank manages both assets and liabilities to
achieve appropriate levels of liquidity. Cash and federal funds sold are the
Bank'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 Bank'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 Bank'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. The Bank also has $1,000,000 of unused lines of credit to purchase
federal funds as of December 31, 1998. Management believes that the Bank's
liquidity sources are adequate to meet its operating needs.
The expansion of the Bank's market area, along with the continued demand for
credit has resulted in an increase in the loans to deposits ratio. The ratio of
total loans to total deposits was 80.0% at the end of 1998 compared with 65.2%
at the end of 1997.
IMPACT OF INFLATION AND 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 the 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 Bank 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 Bank uses several indicators of capital strength. The most commonly used
measure is average common equity to average assets which was 9.65% in 1998
compared to 10.69% in 1997. The change from 1997 was negatively affected by the
growth in assets outpacing the increase in equity from 1998 net income.
13
<PAGE> 25
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES - CONTINUED
The Bank is 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 Bank'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 Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require 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 of the Bank consists of common
stockholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Bank's 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 Bank is also required to maintain capital at a minimum level based on
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, 1998, 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.
The Bank's risk-based capital at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
--------- ---------
<S> <C> <C>
Tier 1 capital:
Common stockholders' equity $ 8,024 $ 7,473
Accumulated other comprehensive income (80) (40)
--------- ---------
Total Tier 1 capital 7,944 7,433
Tier 2 capital additions:
Allowable allowance for loan losses (1) 767 585
--------- ---------
Total capital $ 8,711 $ 8,018
========= =========
Risk adjusted assets $ 61,342 $ 46,795
========= =========
Average assets $ 80,508 $ 59,471
========= =========
</TABLE>
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
---------- ---------- --------
<S> <C> <C> <C>
Actual capital ratios:
December 31, 1998 12.95% 14.20% 9.87%
December 31, 1997 15.88 17.13 12.50
Regulatory minimum:
For capital adequacy purposes 4.00 8.00 4.00
To be well-capitalized under prompt corrective action provisions 6.00 10.00 5.00
(1) Limited to 1.25% of risk adjusted assets.
</TABLE>
14
<PAGE> 26
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES - CONTINUED
Management does not expect to pay cash dividends to stockholders during 1999.
INVESTMENT PORTFOLIO
Management classifies investment securities as either held-to-maturity or
available-for-sale based on their intentions and the Bank's ability to hold them
until maturity. In determining such classifications, securities that management
has the positive intent and the Bank 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 stockholders' equity on an
after-tax basis. As of December 31, 1998 and 1997, all securities were
classified 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, 1998.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
Available-for-Sale
----------------------
(Dollars in thousands) 1998 1997
--------- ---------
<S> <C> <C>
Securities of U.S. government agencies and corporations $ 10,310 8,065
Obligations of state and local governments 2,218 1,074
Mortgage-backed securities 7,112 3,458
--------- ---------
Total $ 19,640 $ 12,597
========= =========
</TABLE>
INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
Available-for-Sale
---------------------------
Carrying
(Dollars in thousands) Amount Yield (1)
----------- ----------
<S> <C> <C>
Securities of U.S. government agencies and corporations due:
Within one year $ 1,995 6.79%
After one year but within five years 1,662 6.24
After five years but within ten years 5,654 6.79
After ten years 999 6.53
-----------
10,310 6.68
-----------
Obligations of states and local governments due:
After one year but within five years 956 7.00
After five years but within ten years 1,048 6.40
After ten years 214 6.89
-----------
2,218 6.71
-----------
Mortgage-backed securities 7,112 6.07
-----------
Total $ 19,640 6.46
===========
</TABLE>
(1) For tax-exempt securities, the tax equivalent yield has been calculated
using an incremental rate of 34%.
15
<PAGE> 27
HORRY COUNTY STATE BANK
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, 1998 are limited. There
are no significant concentrations of loans in any particular individuals or
industry or group of related individuals or industries.
The Bank has experienced continued growth of its loan portfolio throughout 1998
and 1997, resulting in an increase of $14,319,000 and $5,517,000, respectively.
Management has concentrated on maintaining quality in the loan port folio while
continuing to increase the depositor base. At December 31, 1998 and 1997, the
loan-to-deposit ratio was 80.0% and 65.2%, respectively. 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. 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
<TABLE>
<CAPTION>
December 31,
--------------------
(Dollars in thousands) 1998 1997
------- -------
<S> <C> <C>
Real estate - construction and land development $ 2,052 $ 2,543
Real estate - other 19,926 15,308
Agricultural 5,694 4,241
Commercial and industrial 15,468 10,335
Consumer 12,278 8,327
All other (including overdrafts) 598 991
------- -------
Total $56,016 $41,745
======= =======
</TABLE>
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 both the process of loan underwriting and loan
administration. The Bank manages credit risk through a strategy of making loans
within the Bank's primary marketplace and within the Bank'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
County in North Carolina. Additionally, since real estate is considered by the
Bank as the most desirable nonmonetary collateral, a significant portion of the
Bank's loans are collateralized by real estate. Even though a substantial
portion of the Bank's loans are collateralized by real estate, 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 Bank as the primary source of repayment for performing loans. The Bank also
seeks to limit total exposure to individual and affiliated borrowers. The Bank
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 Bank's loan officers and loan administration staff are charged with
monitoring the Bank'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 Bank's loan portfolio, several credit risk identification and
monitoring processes are utilized. The Bank 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.
16
<PAGE> 28
HORRY COUNTY STATE BANK
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 borrower's ability 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, 1998 and related interest rate characteristics:
<TABLE>
<CAPTION>
One year One to After
(Dollars in thousands) or less five years five years Total
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Real estate - construction and land development $ 1,082 $ 947 $ 23 $ 2,052
Real estate - other 4,001 12,155 3,770 19,926
Agricultural 2,328 2,272 1,094 5,694
Commercial and industrial 4,394 10,229 845 15,468
Consumer 4,371 7,380 527 12,278
All other (including overdrafts) 421 38 139 598
--------- ---------- ---------- ---------
Total $ 16,597 $ 33,021 $ 6,398 $ 56,016
========= ========== ========== =========
Fixed rate loans, due after one year $ 33,414
=========
Variable rate loans, due after one year $ 6,005
=========
</TABLE>
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 Bank'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.
As of December 31, 1998 and 1997, the Bank had nonaccrual loans of approximately
$288,000 and $81,000, respectively, and loans that were past due 90 days or more
and still accruing interest of approximately $395,000 and $789,000,
respectively, for which impairment had not been recognized. The additional
interest income which would have been recognized into earnings if the Bank's
nonaccrual loans had been current in accordance with their original terms is
immaterial for all years presented. 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, 1998.
17
<PAGE> 29
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LOAN PORTFOLIO - CONTINUED
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---------- ---------
<S> <C> <C>
Loans outstanding at the end of year, net of unearned income $ 55,941 $ 41,622
========== =========
Average amount of loans outstanding $ 51,547 $ 41,535
========== =========
Balance of allowance for loan losses at beginning of year $ 911 $ 549
---------- ---------
Loans charged off:
Real estate 14 3
Commercial 113 151
Consumer 23 27
---------- ---------
Total loans charged off 150 181
Recoveries of loans previously charged off 19 63
---------- ---------
Net charge-offs 131 118
---------- ---------
Provision charged to operations 100 480
---------- ---------
Balance of allowance for loan losses at end of year $ 880 $ 911
========== =========
RATIOS:
Net charge-offs to average loans outstanding 0.25% 0.28%
Net charge-offs to loans at end of year 0.23 0.28
Allowance for loan losses to average loans 1.71 2.19
Allowance for loan losses to loans at end of year 1.57 2.19
Net charge-offs to allowance for loan losses 14.89 12.95
Net charge-offs to provisions for loan losses 131.00 24.58
</TABLE>
Management does not allocate specific percentages of the Bank's allowance for
loan losses to the various categories of loans but evaluates the adequacy on an
overall portfolio basis utilizing its risk grading system.
The Bank's provision and allowance for loan losses is subjective in nature and
relies on judgments and assumptions about future economic conditions and other
factors affecting borrowers. Management, based on recommendations by the State
Board of Financial Institutions and increases in the volume of classified and
past due loans, determined that additional provisions were needed in 1997 to
increase the allowance for loan losses to a level that will absorb known and
inherent losses in the loan portfolio.
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, 1998 and 1997, management considers the allowances for loan
losses adequate based on their judgments, evaluations, and analysis of the loan
portfolio.
18
<PAGE> 30
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AVERAGE DAILY DEPOSITS
The following table summarizes the Bank's average daily deposits for the years
ended December 31, 1998 and 1997. These totals include certificates of deposit
$100,000 and over which at December 31, 1998 totaled $12,118,000. Of this total,
scheduled maturities within three months were $2,275,000; within three to six
months $2,454,000; within six to twelve months $4,907,000; and $2,482,000
maturing thereafter.
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
Average Average Average Average
(Dollars in thousands) Amount Rate Paid Amount Rate Paid
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 5,841 - $ 4,045 -
Interest-bearing transaction accounts 7,906 1.53% 5,818 1.72%
Money market savings account 9,725 4.60 7,677 4.66
Other savings accounts 1,830 2.51 1,691 2.60
Certificates of deposit 45,851 5.64 32,922 5.59
--------- ---------
Total $ 71,153 $ 52,153
========= =========
</TABLE>
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 equity divided by average
total assets) for the period indicated. Since its inception, the Bank has not
paid cash dividends.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Return on average assets 0.63% 0.72%
Return on average equity 6.58 6.75
Equity to assets ratio 9.65 10.69
</TABLE>
ACCOUNTING AND FINANCIAL REPORTING ISSUES
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
provides guidance on the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. Initial application of this SOP is to be reported as the
cumulative effect of a change in accounting principle.
This SOP is effective for fiscal years beginning after December 15, 1998. The
Bank adopted this SOP as of January 1, 1999.
In June 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SAS) 133, "Accounting for Derivative Instruments
and Hedging Activities." SAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair values. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Bank generally does not purchase
derivative instruments or enter into hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999.
19
<PAGE> 31
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INDUSTRY DEVELOPMENTS
In February, 1998, the Supreme Court ruled that federal credit unions must limit
its membership to employees of the company that sponsors it. Banking leaders
throughout the country have argued that credit unions have an unfair competitive
advantage because they do not pay income taxes and are not subject to the same
level of regulatory oversight. The Supreme Court ruling applies only to federal
credit unions. State-chartered credit unions were not directly affected by the
ruling. The lower courts will determine whether current members who are not
employed by the credit union sponsor will be forced to close their accounts.
Management does not expect the ruling to have an immediate effect on the
financial position or results of operations of the Bank. The effects on future
periods has not yet been determined.
THE YEAR 2000
YEAR 2000 ISSUES - Some computers, software, and other equipment include
programming codes in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the 'Year
2000 Problem."
ASSESSMENT - The Year 2000 Problem could affect computers, software, and other
equipment that the Bank uses. Accordingly, the Bank has completed its review of
its internal computer programs and systems to determine whether they will be
Year 2000 compliant. The Bank believes that its computer systems will be Year
2000 compliant in a timely manner. However, while the Bank does not expect the
cost of these efforts to be material to its financial position or any year's
operating results, there can be no assurance to this effect.
INTERNAL INFRASTRUCTURE - The Bank utilizes an in-house data processing system
for most of its accounting functions. The Bank believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption of
its business. Management has completed upgrading and is in the process of
testing the systems that it has determined are not prepared for the year 2000.
Management believes that the testing of its systems should be completed by March
31, 1999. The Bank also has a number of personal computers, some of which, due
to their age, are not Year 2000 compliant. Management has spent approximately
$25,000 to $30,000 to get all of its systems Year 2000 compliant. The Bank does
not believe that the cost related to these efforts will be material to its
business, financial condition, or operating results.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS - In addition to computers and
related systems, the operation of the Bank's office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems, and
other devices, may be affected by the Year 2000 Problem. The Bank has completed
its assessment of the potential effect of, and the costs of remediating, the
Year 2000 Problem on this equipment. The Bank estimates that its total cost of
completing any required modifications, upgrades, or replacements of these
internal systems will not have a material effect on its business, financial
condition, or operating results.
20
<PAGE> 32
HORRY COUNTY STATE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE YEAR 2000 - CONTINUED
SUPPLIERS AND OTHER THIRD PARTIES - The Bank has been gathering information from
and has initiated communications with its suppliers and other third parties to
identify and, to the extent possible, resolve issues involving the Year 2000
Problem. However, the Bank has limited or no control over the actions of its
suppliers and others. Therefore, while the Bank expects that it will be able to
resolve any significant Year 2000 Problem with its own system, it cannot
guarantee that its suppliers or others will resolve any or all Year 2000
Problems with their systems before the occurrence of a material disruption to
its business. Any failure of these suppliers or others to resolve the Year 2000
Problems with their systems in a timely manner could have a material adverse
effect on the Bank's business, financial condition, or operating results.
CUSTOMERS - The Bank believes that the largest Year 2000 Problem exposure to
most banks is the preparedness of the customers of the banks. Management is
addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Bank may experience an increase in loan defaults. The amount of potential loss
from this issue is not quantifiable. Management is attempting to reduce this
exposure by educating its customers. The Bank has implemented a comprehensive
credit review policy for all existing loans identified as having some degree of
Year 2000 risk, as well as an underwriting policy for all new loan requests. At
present, the Bank's review indicates that the Bank's exposure to credit risks
associated with Year 2000 is considered to be low. The Bank's credit review
procedures will continue to include these policies throughout 1999.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS - The Bank expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business, financial condition, or operating results. However, the Bank 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 Bank 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. As a result, the Bank expects that it could possibly suffer the
following consequences:
- A number of operational inconveniences and inefficiencies for
the Bank, its service providers, or its customers that may
divert the Bank's time and attention and financial and human
resources from its ordinary business activities;
- System malfunctions that may require significant efforts by
the Bank or its service providers or customers to prevent or
alleviate material business disruptions.
CONTINGENCY PLANS - The Bank is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Bank expects to complete its contingency
plans by the end of the first quarter of 1999. Depending on the systems
affected, these plans could include (a) accelerated replacement of affected
equipment or software; (b) short term use of backup equipment and software; (c)
increased work hours for the Bank's personnel or use of contract personnel to
correct on an accelerated schedule any Year 2000 Problems which arise; and (d)
other similar approaches. If the Bank is required to implement any of these
contingency plans, these plans could have a material adverse effect on its
business, financial condition, or operating results.
21
<PAGE> 33
[TOURVILLE, SIMPSON & HENDERSON, L.L.P. LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Horry County State Bank
Loris, South Carolina
We have audited the accompanying balance sheets of Horry County State Bank (the
Bank) as of December 31, 1998 and 1997, and the related statements of income,
changes in comprehensive income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit 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 1998 and 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Horry County State
Bank as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Tourville, Simpson & Henderson, L.L.P.
Columbia, South Carolina
February 26, 1999
22
<PAGE> 34
HORRY COUNTY STATE BANK
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks (Note C) $ 2,573 $ 2,578
Federal funds sold -- 11,750
Time deposits with other banks 500 --
-------- --------
Total cash and cash equivalents 3,073 14,328
Securities available-for-sale (Note D) 19,640 12,597
Loans (Note E) 56,016 41,745
Less, unearned income (75) (123)
Less, allowance for loan losses (Note E) (880) (911)
-------- --------
Loans, net 55,061 40,711
Premises and equipment, net (Note F) 3,504 2,493
Accrued interest receivable 857 817
Other assets (Note G) 1,451 1,210
-------- --------
Total assets $ 83,586 $ 72,156
======== ========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 6,358 $ 4,814
Interest-bearing transaction accounts 9,168 6,650
Money market savings accounts 12,702 8,033
Other savings accounts 1,851 1,626
Certificates of deposit $100M and over (Note H) 12,118 14,091
Other time deposits (Note H) 27,773 28,671
-------- --------
Total deposits 69,970 63,885
Accrued interest payable 221 317
Federal funds purchased 170 --
Advance from the Federal Home Loan Bank (Note I) 5,000 350
Other liabilities 201 131
-------- --------
Total liabilities 75,562 64,683
-------- --------
STOCKHOLDERS' EQUITY (Note L)
Common stock, $5.00 par value; authorized 1,000,000 shares; issued and
outstanding 478,150 shares in 1998 and 1997 2,391 2,391
Capital surplus 4,865 4,865
Undivided profits 688 177
Accumulated other comprehensive income 80 40
-------- --------
Total stockholders' equity 8,024 7,473
-------- --------
Total liabilities and stockholders' equity $ 83,586 $ 72,156
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 35
HORRY COUNTY STATE BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands, except per share) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 5,097 $ 4,385 $ 3,557
Investment securities:
Taxable 824 499 507
Tax-exempt 65 44 48
Federal funds sold 401 272 60
-------- -------- --------
Total interest income 6,387 5,200 4,172
-------- -------- --------
INTEREST EXPENSE:
Certificates of deposit $100M and over 674 573 481
Other deposits 2,528 1,768 1,494
Advances from the Federal Home Loan Bank 55 25 41
Federal funds purchased -- 2 10
-------- -------- --------
Total interest expense 3,257 2,368 2,026
-------- -------- --------
NET INTEREST INCOME 3,130 2,832 2,146
Provision for loan losses (Note E) 100 480 222
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,030 2,352 1,924
-------- -------- --------
OTHER INCOME:
Service charges on deposit accounts 434 306 252
Credit life insurance commissions 118 47 37
Other income 130 81 64
-------- -------- --------
Total other income 682 434 353
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 1,563 1,122 717
Net occupancy expense 175 96 70
Furniture and equipment expense 334 198 167
Other expense (Note O) 857 727 471
-------- -------- --------
Total other expenses 2,929 2,143 1,425
-------- -------- --------
INCOME BEFORE INCOME TAXES 783 643 852
Income tax expense (Note P) 272 214 296
-------- -------- --------
NET INCOME $ 511 $ 429 $ 556
======== ======== ========
BASIC EARNINGS PER SHARE 1.02 .95 1.35
DILUTED EARNINGS PER SHARE 1.02 .95 1.35
PER SHARE:
Weighted average shares outstanding 502,058 449,960 410,418
Net income (Note L) 1.02 .95 1.35
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE> 36
HORRY COUNTY STATE BANK
STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
NET INCOME $511 $429 $ 556
---- ---- -----
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities during the period 40 10 (34)
Less: reclassification adjustment for gains included in net income -- -- --
---- ---- -----
Other comprehensive income 40 10 (34)
---- ---- -----
COMPREHENSIVE INCOME $551 $439 $ 522
==== ==== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 37
HORRY COUNTY STATE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common Stock Common
------------------- Stock Accumulated
Number Dividends Other Comp-
(Dollars in thousands, of Distri- Capital Undivided rehensive
except per share) Shares Amount butable Surplus Profits Income Total
------ ------ ------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 303,452 $1,518 $ 149 $2,219 $ 56 $ 64 $ 4,006
Net income -- -- -- -- 556 -- 556
Issuance of stock dividend 29,862 149 (149) -- -- -- --
Issuance of common stock 42,027 210 -- 757 -- -- 967
10% stock dividend declared -- -- 188 676 (864) -- --
Other comprehensive income -- -- -- -- -- (34) (34)
------- ------ ----- ------ ----- ---- -------
BALANCE, DECEMBER 31, 1996 375,341 1,877 188 3,652 (252) 30 5,495
Net income -- -- -- -- 429 -- 429
Issuance of stock dividend 37,004 185 (188) -- -- -- (3)
Issuance of common stock 65,805 329 -- 1,213 -- -- 1,542
Other comprehensive income -- -- -- -- -- 10 10
------- ------ ----- ------ ----- ---- -------
BALANCE, DECEMBER 31, 1997 478,150 2,391 -- 4,865 177 40 7,473
Net income -- -- -- -- 511 -- 511
Other comprehensive income -- -- -- -- -- 40 40
------- ------ ----- ------ ----- ---- -------
BALANCE, DECEMBER 31, 1998 478,150 $2,391 $ -- $4,865 $ 688 $ 80 $ 8,024
======= ====== ===== ====== ===== ==== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 38
HORRY COUNTY STATE BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 511 $ 429 $ 556
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Provision for loan losses 100 480 222
Deferred income tax provision (benefit) 19 (147) (39)
Depreciation and amortization 241 132 104
Premium amortization less accretion 6 4 8
Amortization of net deferred loan costs 80 70 70
Loss (gain) on disposals of premises and equipment (2) 9 (5)
Increase in interest receivable (40) (185) (23)
(Decrease) increase in interest payable (96) (36) 12
(Increase) decrease in other assets (179) (637) 10
(Decrease) increase in other accrued expenses 70 (125) 232
--------- --------- ----------
Net cash (used) provided by operating activities 710 (6) 1,147
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (15,630) (8,489) (626)
Maturities of securities available-for-sale 8,644 4,458 2,036
Net increase in loans made to customers (14,571) (5,809) (6,815)
Purchases of premises and equipment (1,224) (1,190) (450)
Proceeds from sales of premises and equipment 13 2 14
Proceeds from sales of other real estate - 70 42
Investment in Federal Home Loan Bank stock (102) (10) (24)
--------- --------- ----------
Net cash used by investing activities (22,870) (10,968) (5,823)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, interest-bearing
transaction accounts and savings accounts 8,956 3,160 (1,629)
Net increase (decrease) in time deposits (2,871) 17,874 2,938
Net increase in federal funds purchased 170 - -
Advances from the Federal Home Loan Bank 5,325 - 4,000
Repayment of advances from the Federal Home Loan Bank (675) (100) (3,550)
Cash paid for fractional shares - (3) -
Proceeds from issuance of common stock - 1,542 967
--------- --------- ----------
Net cash provided by financing activities 10,905 22,473 2,726
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,255) 11,499 (1,950)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,328 2,829 4,779
--------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,073 $ 14,328 $ 2,829
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE> 39
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying financial statements include the
accounts of Horry County State Bank (the Bank), which was incorporated on
December 18, 1987 and opened for operations on January 4, 1988. The principal
business activity of the Bank is to provide commercial banking services in Horry
County, South Carolina. The Bank is a state-chartered bank, and its deposits are
insured by the Federal Deposit Insurance Corporation (the FDIC).
MANAGEMENT'S ESTIMATES - In preparing the 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 revenues 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 Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgements 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.
INVESTMENT SECURITIES - Investment securities available-for-sale by the Bank are
carried at amortized cost and adjusted to their estimated market value. The
unrealized gain or loss is recorded in stockholders' 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 market 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.
Investment securities held-to-maturity are those securities which management has
the intent and the Bank has the ability to hold until maturity. Securities
held-to-maturity are carried at cost and adjusted for amortization of premiums
and accretion of discounts, both computed by the straight-line method.
Reductions in market value considered by management to be other than temporary
are reported as a realized loss and a reduction in the cost basis of the
security.
LOANS - Loans are stated at their unpaid principal balance. Interest income on
certain installment loans is computed using a sum-of-the months digits method.
Interest income on all other 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 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 being deferred and amortized to
income over the contractual life of the related loans or commitments, adjusted
for prepayments, using the straight-line method.
28
<PAGE> 40
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
Under Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for the Impairment of a Loan", and Statement of Financial Accounting
Standards 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 Bank 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 Bank'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 that the borrower
may be unable to meet payments as they become due.
ALLOWANCE FOR LOAN LOSSES - An allowance for possible 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 which are deemed to be uncollectible are charged off and deducted
from the allowance. The provision for possible loan losses, including provisions
for loan impairment, and recoveries on loans previously charged off are added to
the allowance.
PREMISES AND EQUIPMENT - Premises 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.
OTHER REAL ESTATE OWNED - Other real estate owned includes real estate acquired
through foreclosure and loans accounted for as in-substance foreclosures.
Collateral is considered foreclosed in substance when the borrower has little or
no equity in the fair value of the collateral, proceeds for repayment of the
debt can be expected to come only from the sale of the collateral, and it is
doubtful that the borrower can rebuild equity or otherwise repay the loan in the
foreseeable future. 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 writedowns at the dates of acquisition are charged to the allowance for loan
losses. Expenses to maintain such assets, subsequent writedowns, and gains and
losses on disposal are included in other expenses.
FEDERAL HOME LOAN BANK STOCK AND COMMUNITY FINANCIAL SERVICES STOCK - Other
assets include the Bank'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 in other income.
At December 31, 1998 and 1997, the investment in Federal Home Loan Bank stock
was $250,000 and $148,200, respectively. At both December 31, 1998 and 1997, the
investment in Community Financial Services stock was $59,612.
29
<PAGE> 41
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued
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 Bank'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.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
NET INCOME PER SHARE - Net income per share is calculated by dividing net income
by the weighted average number of shares outstanding during the year.
Retroactive recognition has been given for the effects of all stock dividends in
computing the weighted average number of shares. See Note L.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Bank to concentrations of credit risk consist principally of loans
receivable, investment securities, federal funds sold, and amounts due from
banks. Management is not aware of any concentrations of loans to classes of
borrowers or industries that would be similarly affected by economic conditions.
Although the Bank's loan portfolio is diversified, a substantial portion of its
borrowers' ability to honor the terms of their loans is dependent on business
and economic conditions in Horry County and the surrounding areas. Management
does not believe credit risk is associated with obligations of the United
States, its agencies, or its corporations. The Bank has invested in obligations
of states and political subdivisions. All are within the state of South
Carolina. Management believes that the credit risk associated with these
securities is limited due to the diversity of the portfolio. The Bank places its
deposits and correspondent accounts with and sells federal funds to high credit
quality institutions. Although the Bank's balances may periodically exceed
federally insured limits, management believes credit risk associated with these
financial instruments is not significant.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, the Bank
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.
The following summarizes supplemental cash flow information for 1998, 1997, and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(Dollars in thousands)
Cash paid for interest $3,353 $2,411 $2,014
Cash paid for income taxes 246 557 82
Supplemental noncash investing and financing activities:
Foreclosures on loans 46 104 --
Financing of sales of other real estate -- -- 74
</TABLE>
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Bank has entered 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.
RECLASSIFICATIONS - Certain captions and amounts in the financial statements of
1997 and 1996 were reclassified to conform with the 1998 presentation.
30
<PAGE> 42
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE B - ADOPTION OF ACCOUNTING PRINCIPLE
As of January 1, 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting comprehensive income. Comprehensive income
includes net income and other comprehensive income which is defined as non-owner
related transactions in equity. Prior periods have been reclassified to reflect
the application of the provisions of SFAS 130. The following tables set forth
the amounts of other comprehensive income included in equity along with the
related tax effects for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
(Dollars in thousands) Pre-tax (Expense) Net of tax
Amount Benefit Amount
------- --------- ----------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ 63 $(23) $ 40
Less: reclassification adjustment
for gains realized in net income -- -- --
---- ---- ----
Net unrealized gains (losses) on securities 63 (23) 40
---- ---- ----
Other comprehensive income $ 63 $(23) $ 40
==== ==== ====
FOR THE YEAR ENDED DECEMBER 31, 1997:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ 17 $ (7) $ 10
Less: reclassification adjustment for
gains realized in net income -- -- --
---- ---- ----
Net unrealized gains (losses) on securities 17 (7) 10
---- ---- ----
Other comprehensive income $ 17 $ (7) $ 10
==== ==== ====
FOR THE YEAR ENDED DECEMBER 31, 1996:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $(54) $ 20 $(34)
Less: reclassification adjustment for
gains realized in net income -- -- --
---- ---- ----
Net unrealized gains (losses) on securities (54) 20 (34)
---- ---- ----
Other comprehensive income $(54) $ 20 $(34)
==== ==== ====
</TABLE>
NOTE C - 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, 1998, the requirements were
satisfied by vault cash and amounts due from correspondent banks.
31
<PAGE> 43
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES
Securities available-for-sale as of December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Securities of U.S. Government
agencies and corporations $ 10,266 $ 49 $ 5 $ 10,310
Mortgage-backed securities 7,071 54 13 7,112
Obligations of states and local governments 2,176 46 4 2,218
--------- --------- --------- ----------
Total $ 19,513 $ 149 $ 22 $ 19,640
========= ========= ========= ==========
DECEMBER 31, 1997
Securities of U.S. Government
agencies and corporations $ 8,031 $ 35 $ 1 $ 8,065
Mortgage-backed securities 3,452 10 4 3,458
Obligations of states and local governments 1,050 24 - 1,074
--------- --------- --------- ----------
Total $ 12,533 $ 69 $ 5 $ 12,597
========= ========= ========= ==========
</TABLE>
The following is a summary of maturities of securities available-for-sale as of
December 31, 1998. 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.
<TABLE>
<CAPTION>
(Dollars in thousands) Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
Due within one year $ 1,999 $ 1,995
Due after one year but within five years 2,574 2,618
Due after five years but within ten years 6,656 6,702
Due after ten years 1,213 1,213
--------- ----------
12,442 12,528
Mortgage-backed securities 7,071 7,112
--------- ----------
Total $ 19,513 $ 19,640
========= ==========
</TABLE>
At December 31, 1998 and 1997, investment securities with a book value of
$3,290,000 and $5,281,000, respectively, and a market value of $3,322,000 and
$5,311,000, respectively, were pledged as collateral to secure public deposits.
There were no sales of securities in 1998 or 1997.
32
<PAGE> 44
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE E - LOANS
Loans as of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
(Dollars in thousands) 1998 1997
------- -------
<S> <C> <C>
Real estate - construction and land development $ 2,052 $ 2,543
Real estate - other 19,926 15,308
Agricultural 5,694 4,241
Commercial and industrial 15,468 10,335
Consumer 12,278 8,327
All other (including overdrafts) 598 991
------- -------
Total $56,016 $41,745
======= =======
</TABLE>
Certain parties (principally certain directors and officers of the Bank, their
immediate families, and business interests) were loan customers and had other
transactions in the normal course of business with the Bank. 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 amount of loans to related parties was $1,226,000 and
$926,000 at December 31, 1998 and 1997, respectively. During 1998, $1,172,000 of
new loans were made to related parties, and repayments totaled $872,000.
Transactions in the allowance for loan losses for the years ended December 31,
1998, 1997, and 1996 are summarized below:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
(Dollars in thousands) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Balance at January 1 $ 911 $ 549 $ 398
Provision charged to expense 100 480 222
Recoveries 19 63 67
Charge-offs (150) (181) (138)
----- ----- -----
Balance at December 31 $ 880 $ 911 $ 549
===== ===== =====
</TABLE>
Loans on the Bank'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.
As of December 31, 1998 and 1997, the Bank had nonaccrual loans of approximately
$288,000 and $81,000, respectively, and loans that were past due 90 days or more
of approximately $395,000 and $789,000, respectively, for which impairment had
not been recognized. The additional interest income which would have been
recognized into earnings if the Bank's nonaccrual loans had been current in
accordance with their original terms is immaterial for all years presented.
The Bank 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.
33
<PAGE> 45
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE E - LOANS - Continued
The Bank'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 Bank 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 Bank 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.
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 Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank 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 Bank's off-balance sheet financial instruments whose contract
amounts represent credit risk:
<TABLE>
<CAPTION>
December 31,
-----------------
(Dollars in thousands) 1998 1997
------ ------
<S> <C> <C>
Commitments to extend credit $4,180 $2,494
Standby letters of credit 30 25
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
December 31,
-----------------
(Dollars in thousands) 1998 1997
------ ------
<S> <C> <C>
Land $ 935 $ 533
Building and land improvements 1,867 1,271
Furniture and equipment 1,281 923
Construction in process 121 272
------ ------
Total 4,204 2,999
Less, accumulated depreciation (700) (506)
------ ------
Premises and equipment, net $3,504 $2,493
====== ======
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997, and 1996 was
$202,000, 116,000, and $82,000, respectively.
Construction in process represents construction costs for permanent facilities
at the Tabor City and North Myrtle Beach branches and renovations for the future
location of the Bank's operations department. Management anticipates completion
of all three projects in 1999. In 1998, the Bank capitalized $10,000 of interest
during the construction and renovation of new branches.
34
<PAGE> 46
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE G - OTHER ASSETS
As of December 31, 1998 and 1997, other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
(Dollars in thousands) 1998 1997
------ ------
<S> <C> <C>
Cash value of life insurance $ 681 $ 545
Other real estate 105 64
Federal Home Loan Bank stock, at cost 250 148
Community Financial Services stock, at cost 60 60
Prepaid expenses 66 73
Unamortized software 115 83
Net deferred tax asset 160 202
Other 14 35
------ ------
Total $1,451 $1,210
====== ======
</TABLE>
NOTE H - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Amount
-------
<S> <C>
1999 $32,067
2000 7,371
2001 82
2002 154
2003 and thereafter 217
-------
Total $39,891
=======
</TABLE>
As of December 31, 1998, certificates of deposit totaling $4,051,000 are held by
two customers and represent 5.79% of total deposits. Overdrawn deposit accounts
in the amount of $94,000 are classified as loans as of December 31, 1998.
NOTE I - ADVANCE FROM THE FEDERAL HOME LOAN BANK
As of December 31, 1998, the Bank owes $5,000,000 on an advance from the Federal
Home Loan Bank which originated on October 16, 1998 in the amount of $5,000,000.
The terms of the agreement are quarterly interest payments of $55,000 based on a
fixed rate of 4.41%. The entire principal balance is due October 16, 2003. As
collateral, the Bank has pledged its portfolio of first mortgage loans on
one-to-four family residential properties aggregating approximately $9,750,000
at December 31, 1998 and its investment in Federal Home Loan Bank stock which is
included in other assets.
NOTE J - LEASE COMMITMENTS
On October 3, 1997, the Bank entered into a lease agreement for land and a
building on which to operate its Conway branch location. The lease has an
initial five-year term which expires September 30, 2002 and is renewable at the
Bank's option for a five-year term. During the first five years of the lease,
the Bank will pay $2,875 per month. The rental amount shall increase 15% at the
beginning of each option period.
35
<PAGE> 47
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE J - LEASE COMMITMENTS - Continued
On May 15, 1997, the Bank entered into a lease agreement for land on which to
operate its Tabor City branch location. The lease has an initial five-year term
which expires June 5, 2002 and is renewable at the Bank's option for seven
five-year terms. During the first five years of the lease, the Bank will pay
$600 per month. Beginning with the first option period, the rental amount shall
increase to the then current rental amount.
Future minimum lease payments over the next five years for these long-term
operating leases are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Amount
------
<S> <C>
1999 $ 42
2000 42
2001 42
2002 43
2003 47
------
Total $ 216
=====
</TABLE>
NOTE K - COMMITMENTS AND CONTINGENCIES
The Bank is subject to claims and lawsuits which arise primarily in the ordinary
course of business. At December 31, 1998, management is 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.
NOTE L - STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK - In June of 1997, the State Board of Financial
Institutions and the FDIC approved the Bank's applications to open three
branches in North Myrtle Beach, Tabor City, and Loris. As a condition of
approval, the Bank was required to obtain an additional $2,000,000 in capital.
In response, the Bank issued 65,805 shares for $1,542,000 during 1997 and 42,027
shares for $967,000 during 1996. The Loris branch was opened for business on
June 9, 1997, and the Tabor City and North Myrtle Beach branches were opened on
October 5 and 6, 1997, respectively.
STOCK DIVIDENDS - On January 14, 1999, the Board of Directors approved a 5%
stock dividend payable to shareholders of record on February 1, 1999. The stock
dividend, based on the estimated fair value of the shares, will be paid on March
15, 1999. Appropriately, all share and per share data in these financial
statements and notes hereto have been adjusted to reflect this stock dividend.
RESTRICTIONS ON DIVIDENDS - South Carolina banking regulations restrict the
amount of dividends that can be paid to stockholders. All of the Bank's
dividends to stockholders are subject to the prior approval of the Commissioner
of Banking and are payable only from the undivided profits.
NOTE M - CAPITAL REQUIREMENTS
The Bank is 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 Bank'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 Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
36
<PAGE> 48
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE M - CAPITAL REQUIREMENTS - Continued
Quantitative measures established by regulation to ensure capital adequacy
require 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 stockholders' 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 Bank is also required to maintain capital at a minimum level based on
average assets (as defined), which is known as the leverage ratio. Only the
strongest institutions are allowed to maintain capital at the minimum
requirement. All others are subject to maintaining ratios 1% to 2% above the
minimum.
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
Bank's categories.
The following table summarizes the capital ratios and the regulatory minimum
requirements of the Bank at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
DECEMBER 31, 1998
Total capital (to risk weighted assets) $8,711 14.2% $4,907 8.0% $6,134 10.0%
Tier 1 capital (to risk weighted assets) 7,944 13.0 2,454 4.0 3,681 6.0
Tier 1 capital (to average assets) 7,944 9.9 3,220 4.0 4,025 5.0
DECEMBER 31, 1997
Total capital (to risk weighted assets) $8,018 17.1% $3,744 8.0% $4,679 10.0%
Tier 1 capital (to risk weighted assets) 7,433 15.9 1,872 4.0 2,808 6.0
Tier 1 capital (to average assets) 7,433 12.5 2,886 4.0 3,608 5.0
</TABLE>
NOTE N - RETIREMENT & EMPLOYEE BENEFITS
The Bank has a Simplified Employee Pension plan under section 408(k) of the
Internal Revenue Code covering employees who have completed one year of service
and have reached the age of twenty-one. The Bank is not required to make
contributions to the plan in a given year but may do so at the discretion of
management. Any contribution must be allocated to all eligible employees based
on the percentage of each employee's eligible compensation. Once the
contributions have been made, eligible employees are fully vested and control
their investments. The Bank contributed $55,000, $35,000, and $31,000 to the
plan during 1998, 1997, and 1996, respectively.
In 1997, the Board of Directors approved a deferred compensation plan whereby
directors may elect to defer the payment of their fees. Under the terms of the
plan, the Bank 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
Bank has purchased life insurance contracts on each of the participating
directors to fund the Bank's liability. For the years ended December 31, 1998
and 1997, $53,000 and $22,000, respectively, of directors' fees were deferred
and included in other liabilities.
37
<PAGE> 49
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE O - OTHER EXPENSES
Other expenses are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Dollars in thousands) 1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Stationery, printing and postage $191 $ 182 $112
Advertising and promotion 110 125 62
Professional services 127 127 83
Insurance 52 48 19
ATM services 50 23 18
Collection and repossession 29 27 8
Other 298 195 169
---- ----- ----
Total $857 $ 727 $471
==== ===== ====
</TABLE>
NOTE P - INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Dollars in thousands) 1998 1997 1996
---- ----- ----
Current portion:
<S> <C> <C> <C>
Federal $231 $ 329 $307
State 22 32 28
---- ----- ----
Total current 253 361 335
---- ----- ----
Deferred portion:
Federal 38 (125) (53)
State 4 (15) (6)
---- ----- ----
Total deferred 42 (140) (59)
---- ----- ----
Total $295 $ 221 $276
====
Income tax expense is allocated as follows:
To continuing operations $272 $ 214 $296
To stockholders' equity 23 7 (20)
---- ----- ----
Total $295 $ 221 $276
==== ===== ====
</TABLE>
The significant components of the deferred tax expense (benefit) in 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
(Dollars in thousands) 1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Allowance for loan losses $ 20 $(139) $(52)
Accumulated depreciation 29 (2) 6
Net capitalized loan costs (18) (1) 2
Software amortization 4 5 --
Other real estate owned (4) (2) --
Deferred directors' fees (12) (8) 5
---- ----- ----
Deferred tax benefit attributable to continuing operations 19 (147) (39)
Deferred tax expense (benefit) attributable to stockholders' equity 23 7 (20)
---- ----- ----
Total $ 42 $(140) $(59)
==== ===== ====
</TABLE>
38
<PAGE> 50
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE P - INCOME TAXES - Continued
The components of the net deferred tax asset as of December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
----------------
1997 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $274 $294
Net capitalized loan costs 3 --
Other real estate owned 5 2
Deferred directors' fees 20 8
---- ----
Total deferred tax assets 302 304
---- ----
Deferred tax liabilities:
Accumulated depreciation 81 53
Net capitalized loan costs -- 15
Unrealized gain on securities available-for-sale 47 24
Software amortization 14 10
---- ----
Total deferred tax liabilities 142 102
---- ----
Net deferred tax asset $160 $202
==== ====
</TABLE>
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, 1998 and 1997 will
be realized and, accordingly, has not established a valuation allowance.
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:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
(Dollars in thousands) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Tax expense at statutory rate $ 266 $ 219 $ 290
State income tax, net of Federal income tax effect 23 20 25
Tax exempt interest income (31) (18) (18)
Other 14 (7) (1)
----- ----- -----
Total $ 272 $ 214 $ 296
===== ===== =====
</TABLE>
NOTE Q - UNUSED LINES OF CREDIT
As of December 31, 1998, the Bank had unused lines of credit to purchase federal
funds from unrelated banks totaling $1,000,000. 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 Bank
may also borrow additional amounts 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 Bank to pledge additional collateral.
39
<PAGE> 51
HORRY COUNTY STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE R - THE YEAR 2000
The Bank has conducted a comprehensive review of its computer hardware and
software systems to identify those systems that could be affected by the Year
2000 issue. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to represent the applicable year. Any
of the Bank's software systems that have date-sensitive routines or hardware
that has imbedded chips with date-sensitive algorithms may recognize a date of
"00" as the year 1900 rather than 2000. This could result in a major system
failure or errors and miscalculations in processing information. The Bank
presently believes that, with modifications to existing hardware and software
and replacing non-compliant systems with Year 2000 compliant systems, the Year
2000 problem will not pose significant operational problems for the Bank's
computer systems as so modified and converted. However, management cannot
guarantee with any certainty the effect that the Year 2000 will ultimately have
on the Bank or its operations.
NOTE S - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board released Statement of
Financial Account Standards (SFAS) 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair values. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Bank generally does not purchase
derivative instruments or enter into hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999.
40
<PAGE> 52
HORRY COUNTY STATE BANK
BOARD OF DIRECTORS
<TABLE>
<S> <C>
D. Singleton Bailey...............................................................President, Loris Drug Store, Inc.
Franklin C. Blanton...............................................................President, Blanton Supplies, Inc.
Russell R. Burgess, Jr................................................................Owner, Aladdin Realty Company
Owner and Broker-In-Charge
Burgess Realty & Appraisal Service
William H. Caines.......................................................President, Caines Realty & Appraisals, Inc.
President, Blackburn Insurance, Inc.
James R. Clarkson................................................................................President and CEO,
Horry County State Bank
J. Lavelle Coleman..................................................................President, Tabor City Oil, Inc.
Boyd R. Ford, Jr................................................................Retired, Ford's Fuel Services, Inc.
& Ford's Propane Gas, Inc.
Charles F. Freeman............................................................................Chairman & President,
Aetna Freight Lines Inc.
Chairman & President Atlas Transport Brokerage, Inc.
Chairman & President, Felburn Foundation, Arlington, VA
Vice President, Isle Base, Ltd., Hamilton, Bermuda
Tommie W. Grainger..................................................................President, Coastal Timber, Inc.
Randy B. Hardee..........................................................................President, Hardee Business
Services, P.C.
Gwyn G. McCutchen...........................................................................................Dentist
T. Freddie Moore................................................................President, Gateway Drug Store, Inc.
Carroll D. Padgett, Jr.....................................................................................Attorney
Bill G. Page.....................................................................President, Page Chemical Co., Inc.
</TABLE>
OFFICERS OF THE BOARD OF DIRECTORS
Carroll D. Padgett, Jr. T. Freddie Moore
Chairman Vice Chairman
Randy B. Hardee James R. Clarkson
Secretary President and CEO
41
<PAGE> 53
HORRY COUNTY STATE BANK
OFFICERS AND EMPLOYEES
LORIS OFFICES:
(1) BROAD STREET
<TABLE>
<S> <C> <C>
Lewis C. Shannon JoAnn D. Floyd Diana Elliot
Loan Officer Banking Officer Asst. Vice President
Greta W. Todd Debra C. Todd Crystal H. Gerald
Teller/Customer Head Teller Teller
Service Representative
Lou Sherry Grissett Amy Cannon Stephanie L. Boyd
Teller Loan Officer/Compliance Officer Receptionist
(2) MEETING STREET
Margaret C. Fowler Rachel G. Bullard Carla Chestnutt
Branch Manager/ Head Teller Teller
Loan Operations Supervisor
MT. OLIVE OFFICE:
Bernice S. Hammond Vivian B. Williamson Tammy M. Huggins
Vice President Asst. Vice President Head Teller/Customer
Service Representative
Gloria T. Woodbury Martha Cannon
Teller Teller
N. MYRTLE BEACH OFFICE:
Glenn R. Bullard Rhonda W. Bell Cameron Jackson
Vice President Customer Service Representative Loan Officer
Wendy R. Poole Ruthmary C. Tadlock Delola C. Lee
Head Teller Teller Teller
TABOR CITY OFFICE:
Walter R. Williamson Phyllis F. Coleman Diana G. Hardwick
Vice President Asst. Vice President Head Teller
Terry E. Stevens Tammy S. Cribb Amanda P. Stanley
Teller Customer Service Representative Teller
CONWAY OFFICE:
James F. Lewis John D. Gore Tina M. Martin
Vice President Asst. Branch Manager Head Teller
Christy M. Trichell Tabitha N. Lee Marie Maslich
Customer Service Representative Teller Customer Service Representative/
Head Teller
</TABLE>
42
<PAGE> 54
HORRY COUNTY STATE BANK
OFFICERS AND EMPLOYEES
SUPPORT SERVICES:
(1) DEPOSIT OPERATIONS
<TABLE>
<S> <C> <C>
Cindy W. King Brett W. Roth Melissa Holmes
Asst. Vice President/ Network Operations Assistant ATM Representative
Operations Officer
Carol A. Reichert Lila T. Tyler Verna Ford
Bookkeeper/Proof Operator Head Bookkeeper Bookkeeper
Saundra C. Stevens Shelby C. Elliot Jennifer C. Spencer
Bookkeeper Bookkeeper Bookkeeper/Proof Operator
Alicia Williams Joseph J. Jones
Bookkeeper/Computer Processor Courier
(2) LOAN OPERATIONS
April J. Hardwick S. Neil Prince Sheila H. Riley
Loan Processor Documentation Assistant Documentation Assistant
RESIDENTIAL MORTGAGE LENDING:
Kerry P. Rogers
Assistant Vice President
EXECUTIVE OFFICES:
James R. Clarkson V. Denise Carpenter Loretta B. Gerald
President & C.E.O. Administrative Assistant Assistant Vice President/
Internal Auditor/Cashier
Sharon C. Vaught Heather Watts
Audit Assistant/Accounts Payable Audit/Compliance Assistant
</TABLE>
43
<PAGE> 55
HORRY COUNTY STATE BANK
5009 Broad Street
Loris, South Carolina 29569
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Dear Fellow Shareholder:
We cordially invite you to attend the 1999 Annual Meeting of
Shareholders of Horry County State Bank. At the meeting, we will report on our
performance in 1998 and answer your questions. We are excited about our
accomplishments in 1998 and look forward to discussing both our accomplishments
and our plans with you.
At the meeting, we will also ask you to approve the formation of a
holding company for our bank. The formation of a holding company will not change
the amount or percentage of stock you own or result in any change in the bank's
management. It will, however, provide us with a great deal more flexibility
through which we can grow and continue to serve your financial needs. We explain
our reasons for the holding company formation in the enclosed proxy statement.
We will also answer any questions you may have about the bank or the formation
of a holding company at the annual meeting. We hope that you can attend the
meeting and look forward to seeing you there.
This letter serves as your official notice that we will hold the
meeting on April 22, 1999 at 7:00 p.m. at the Loris Community Hospital Center
for Health & Fitness, 3207 Casey Street, Loris, South Carolina 29569, for the
following purposes:
1. To elect all members to the Board of Directors;
2. To consider a proposal to approve the reorganization of the
bank into a holding company structure; and
3. To transact any other business that may properly come before
the meeting or any adjournment of the meeting.
Shareholders owning our common stock at the close of business on March
15, 1999 are entitled to attend and vote at the meeting. A complete list of
these shareholders will be available at the bank's offices prior to the meeting.
Please use this opportunity to take part in the affairs of your bank by
voting on the business to come before this meeting. Even if you plan to attend
the meeting, we encourage you to complete and return the enclosed proxy to us as
promptly as possible.
By Order of the Board of Directors,
/s/ James R. Clarkson
James R. Clarkson
President and Chief Executive Officer
March 29, 1999
Loris, South Carolina
<PAGE> 56
HORRY COUNTY STATE BANK
5009 Broad Street
Loris, South Carolina 29569
PROXY STATEMENT FOR ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 22, 1999
INTRODUCTION
Our Board of Directors is soliciting proxies for the 1999 Annual
Meeting of Shareholders (the "Annual Meeting") of Horry County State Bank (the
"Bank"). This proxy statement contains important information for you to consider
when deciding how to vote on the matters brought before the meeting. The proxy
statement also serves as the offering circular for the proposed new holding
company, as it relates to the 501,385 shares of the holding company common stock
to be issued to the shareholders of the Bank in exchange for their shares of
Bank common stock. We encourage you to read this Proxy Statement/Offering
Circular carefully.
At the Annual Meeting, shareholders will be asked to approve the
reorganization of the Bank into a holding company structure (the
"Reorganization") in accordance with the Reorganization Agreement and Plan of
Exchange dated as of March 19, 1999 (the "Reorganization Plan"), a copy of which
is attached as Appendix A to this Proxy Statement/Offering Circular. The
Reorganization Plan provides for a statutory share exchange between the
shareholders of the Bank and HCSB Financial Corporation, a South Carolina
corporation recently organized to serve as the holding company for the Bank (the
"Holding Company"). At the effective date of the Reorganization, each
outstanding share of common stock of the Bank will be exchanged, in a tax-free
transaction, for one share of common stock of the Holding Company (the "Share
Exchange"). After consummation of the Reorganization, the Bank will conduct its
business as a wholly-owned subsidiary of the Holding Company in substantially
the same manner and from the same offices as the Bank did before the
Reorganization, and all current shareholders of the Bank will become
shareholders of the Holding Company. See "The Proposed Reorganization."
At the Annual Meeting, you also will vote on the election of all of the
directors of the Bank for a one-year term. All of the existing directors of the
Bank have been nominated for reelection.
VOTING INFORMATION
The Board set March 15, 1999 as the record date for the meeting.
Shareholders owning our common stock at the close of business on that date are
entitled to attend and vote at the meeting, with each share entitled to one
vote. There were 501,385 shares of common stock outstanding on the record date.
A majority of the outstanding shares of common stock represented at the meeting
will constitute a quorum.
When you sign the proxy card, you appoint Hoyt J. Hardee and Larry G.
Floyd as your representatives at the meeting. Mr. Hardee and Mr. Floyd will vote
your proxy as you have instructed them on the proxy card. If you submit a proxy
but do not specify how you would like it to be voted, Mr. Hardee and Mr. Floyd
will vote your proxy for approval of the Reorganization and for the election to
the Board of Directors of all nominees listed below under "Election Of
Directors." We are not aware of any other matters to be considered at the
meeting. However, if any other matters come before the meeting Mr. Hardee and
Mr. Floyd will vote your proxy on such matters in accordance with their
judgment.
You may revoke your proxy and change your vote at any time before the
polls close at the meeting. You may do this by (i) submitting a properly signed
written notice of revocation to James R. Clarkson at the Bank's principal
address; (ii) signing and delivering another proxy with a later date, or (iii)
by voting in person at the meeting.
We are paying for the costs of preparing and mailing the proxy
materials and of reimbursing brokers and others for their expenses of forwarding
copies of the proxy materials to our shareholders. Our officers and employees
may assist in soliciting proxies but will not receive additional compensation
for doing so. We are distributing this proxy statement on or about March 29,
1999.
------------------------------
The date of this Proxy Statement/Offering Circular is March 29, 1999
<PAGE> 57
HCSB FINANCIAL CORPORATION
OFFERING CIRCULAR
--------------------------------
PROXY STATEMENT
for
ANNUAL MEETING OF SHAREHOLDERS OF
HORRY COUNTY STATE BANK
TO BE HELD APRIL 22, 1999
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY........................................................................1
THE PROPOSED REORGANIZATION....................................................2
RIGHTS OF DISSENTING SHAREHOLDERS..............................................7
FEDERAL INCOME TAX CONSEQUENCES................................................9
DIVIDENDS ....................................................................10
PRO FORMA CONDENSED FINANCIAL INFORMATION.....................................11
MANAGEMENT; ELECTION OF DIRECTORS.............................................12
PRINCIPAL SHAREHOLDERS OF THE BANK............................................15
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934..........17
RESTRICTIONS ON TRANSFER OF STOCK
RECEIVED BY CERTAIN INDIVIDUALS......................................17
FINANCIAL STATEMENTS; REPORT ON FORM 10-KSB...................................18
LEGAL MATTERS.................................................................18
INDEPENDENT PUBLIC ACCOUNTANTS................................................18
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS.............18
AVAILABLE INFORMATION.........................................................19
OTHER MATTERS.................................................................19
</TABLE>
APPENDIX A: Reorganization Agreement and Plan of Exchange
APPENDIX B: South Carolina Dissenters Rights Statute
<PAGE> 58
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/ OFFERING
CIRCULAR, IN CONNECTION WITH THE OFFERS MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROXY
STATEMENT/OFFERING CIRCULAR DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY STATE OR OTHER
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/OFFERING CIRCULAR,
NOR ANY OFFER, SOLICITATION OR DISTRIBUTION MADE HEREUNDER, SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS AND ARE NOT INSURED BY
THE FDIC. THESE SECURITIES ARE NOT GUARANTEED BY THE BANK OR BY THE HOLDING
COMPANY AND MAY LOSE VALUE.
<PAGE> 59
SUMMARY
This summary highlights information contained elsewhere in this Proxy
Statement/Offering Circular. Because it is a summary, it may not contain all of
the information about the Annual Meeting that is important to you. We encourage
you to read the entire Proxy Statement/Offering Circular carefully.
ANNUAL MEETING
Date, Time, and Place. The Annual Meeting will be held on April 22,
1999, commencing at 7:00 p.m. Eastern standard time at the Loris Community
Hospital Center for Health & Fitness, 3207 Casey Street, Loris, South Carolina
29569.
Purpose. At the Annual Meeting, the shareholders will be asked to
approve the Reorganization pursuant to which the Bank will become a wholly-owned
subsidiary of the Holding Company. Shareholders will also vote to elect
directors of the Bank for a one-year term and until their successors are elected
and qualified.
Vote Required, Record Date, and Voting Rights. Approval of the
Reorganization will require the affirmative vote of the holders of at least
two-thirds of the Bank's outstanding stock. The Board of Directors of the Bank
has fixed March 15, 1999 as the record date ("Record Date") for the
determination of holders of Bank stock entitled to receive notice of and vote at
the Annual Meeting. At the close of business on the Record Date, there were
issued and outstanding 501,385 shares of Bank common stock entitled to vote at
the Annual Meeting and there were 1,664 shareholders of record. Holders of Bank
common stock are entitled to one vote for each share held of record upon each
matter properly submitted at the Annual Meeting.
The members of the Bank's Board of Directors believe that the
Reorganization is in the Bank's shareholders' best interest because the Holding
Company will have greater business and investment flexibility than the Bank. For
example, the Holding Company can redeem its own shares, issue shares, and borrow
money without regulatory approval, engage through non-bank subsidiaries in
certain banking-related activities, and acquire other banks and thrifts. See
"The Proposed Reorganization - Reasons for the Reorganization."
The Bank's Board of Directors has unanimously approved the
Reorganization and recommends that the shareholders vote in favor of approval.
The Bank's directors and executive officers beneficially owned 16.2% of the
Bank's outstanding common shares as of the Record Date, and they have indicated
that they will vote their shares in favor of the Reorganization. If they vote in
favor of the Reorganization, only 60.2% of the remaining shareholders need to
vote in favor of the Reorganization to approve the plan.
RIGHTS OF DISSENTING SHAREHOLDERS
If the Reorganization is consummated, shareholders who dissent will be
entitled, upon compliance with the provisions of Chapter 13 of Title 33 of the
Code of Laws of South Carolina (the "South Carolina Dissenters Rights Statute")
to receive the value of their shares in cash. Any Bank shareholder intending to
assert dissenters' rights may not vote in favor of the Reorganization and must
file a written notice of intent to demand payment for his shares with the
corporate secretary of the Bank before the vote is taken at the Annual Meeting.
A vote against approval of the Reorganization will not, in and of itself,
satisfy the requirements of the South Carolina Dissenters Rights Statute. See
"Rights of Dissenting Shareholders" and Appendix B.
EFFECT OF REORGANIZATION ON THE BANK'S SHAREHOLDERS
If the Reorganization is consummated, the Bank's shareholders' common
stock will be exchanged for shares of common stock of the Holding Company.
Shareholders should consider carefully the differences in their rights as
shareholders of the Bank and their rights as shareholders of the Holding
Company. For instance, unlike the Bank, the Holding Company's Board of Directors
may authorize the issuance of capital stock without the approval of the South
Carolina State Bank Board, and such stock may be issued for property or services
as well as
1
<PAGE> 60
for cash. Although the Holding Company has no current plans to do so, unlike the
Bank, the Holding Company is permitted to borrow from third party institutions
and pledge all of the Bank's stock as collateral. If the Holding Company were to
borrow such funds, pledge the Bank stock, and default on the loan, the Holding
Company could forfeit the Bank stock. Except as otherwise described in this
Proxy Statement/Offering Circular, Holding Company shareholders will have rights
generally comparable to their present rights as shareholders of the Bank. See
"The Proposed Reorganization - Effect of Reorganization on the Bank's
Shareholders." Also see "Restrictions On Transfer of Stock Received By Certain
Individuals" for a description of resale restrictions applicable to certain
holders of Holding Company stock under the Securities Act of 1933 (the
"Securities Act").
REGULATORY APPROVALS
Before the proposed Reorganization is consummated, the Bank and the
Holding Company must notify the South Carolina Bank Board and the Board of
Governors of the Federal Reserve System ("Federal Reserve"). If the
Reorganization meets certain criteria established by the Federal Reserve (which
the Bank believes it will meet), the Reorganization can be consummated 30 days
after the Federal Reserve receives this notice. We intend to file notice
applications with each of these regulatory authorities in the near future.
TAX CONSEQUENCES AND ACCOUNTING TREATMENT
Under applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), no gain or loss will be recognized for federal income tax
purposes by the Bank, the Holding Company, or the Bank's shareholders who
receive solely stock of the Holding Company in connection with the proposed
Share Exchange. No ruling to that effect will be requested from the Internal
Revenue Service. Cash received by shareholders who exercise their dissenters'
rights will be treated as amounts distributed in redemption of their shares and
will be taxable under the provisions of Section 302 of the Code as either
ordinary income or capital gain or loss, depending upon the circumstances of the
individual shareholder. See "Federal Income Tax Consequences." The Holding
Company intends to account for the Reorganization under the "pooling of
interests" method of accounting.
THE PROPOSED REORGANIZATION
REORGANIZATION AGREEMENT AND PLAN OF EXCHANGE
The description of the Reorganization set forth in this section does
not purport to be complete and it is qualified in its entirety by reference to
the Reorganization Agreement and Plan of Exchange which is attached hereto as
Appendix A.
DESCRIPTION OF THE REORGANIZATION
The Holding Company is a corporation organized under the laws of the
State of South Carolina. If the Bank's shareholders approve the Reorganization,
the Bank's holding company reorganization will be accomplished pursuant to a
statutory share exchange between the Bank and the Holding Company. The share
exchange will be effective and the Reorganization will be consummated as of the
date specified in the certificate of share exchange issued by the South Carolina
Secretary of State's office.
At the effective date of the Reorganization, each outstanding share of
common stock of the Bank will be exchanged, in a tax-free transaction, for one
share of common stock of the Holding Company. After consummation of the
Reorganization, the Bank will conduct its business as a wholly-owned subsidiary
of the Holding Company in substantially the same manner and from the same
offices as the Bank did before the Reorganization, and all current shareholders
of the Bank will become shareholders of the Holding Company. The articles of
incorporation, bylaws, corporate identity, charter, and officers and directors
of the Bank will not be changed as a result of the Reorganization. The
Reorganization will be accounted for as a pooling of interests.
2
<PAGE> 61
The Holding Company was recently organized at the direction of the
management of the Bank to accomplish the Reorganization. The Bank's directors
are also the directors of the Holding Company and, currently, the sole
shareholders of the Holding Company. In connection with the Reorganization, the
Holding Company will redeem the directors' stock in the Holding Company for the
same consideration paid by them for such stock.
REASONS FOR THE REORGANIZATION
We believe the Reorganization is in the best interest of the Bank's
shareholders because the Holding Company will have greater business and
investment flexibility than the Bank in several areas. There are three primary
benefits from the Reorganization.
First, the Bank can raise capital only by selling unissued shares of
its stock or by issuing certain debt instruments, such as subordinated notes. It
must obtain regulatory approval to sell those shares or subordinated notes, and
sales of stock would dilute shareholders' ownership. The Holding Company, on the
other hand, can borrow funds to make capital contributions to the Bank. The Bank
can repay such loans with dividends paid from the Bank to the Holding Company,
and the Holding Company can eliminate the dividends in computing its taxable
income if it and the Bank file a consolidated tax return. Of course, use of Bank
dividends to repay these loans would reduce the amount of dividends available to
be used for other purposes, such as funds for the Holding Company to distribute
as dividends to its shareholders. If the Holding Company prefers to raise money
by issuing stock, it can do so without regulatory approval, subject to federal
and state securities law requirements. The Holding Company has no current plans
to raise additional capital or to borrow funds to make capital contributions to
the Bank.
Second, except in certain unusual circumstances, the Bank is not
permitted to purchase its own stock or to lend money secured by its own stock.
The Holding Company may, within limits, redeem its own stock, and the Bank, as
the Holding Company's subsidiary, may, within limits, make loans secured by
Holding Company stock.
In addition to the benefits discussed above, the Reorganization and the
resulting corporate structure will impose certain additional costs and burdens
relating to the Holding Company, including: (i) direct costs of the
Reorganization, such as legal fees, accounting fees and printing costs, (ii)
additional administrative burdens of operating the holding company, such as
management time and expenses, (iii) regulation by the Federal Reserve at the
Holding Company level, and (iv) Securities Act registration with and Exchange
Act reporting to the Securities and Exchange Commission rather than to the FDIC.
In summary, we believe that the greater business and investment
capabilities of the Holding Company will enable the Bank to compete more
effectively with other financial institutions and will help place the Bank in a
better position for future growth. We believe that these advantages to the
Reorganization outweigh the costs of the Reorganization and the additional
regulatory and administrative burdens associated with the Holding Company.
CONDITIONS TO THE REORGANIZATION
The Reorganization has been unanimously approved by the Boards of
Directors of the Bank and the Holding Company. Consummation of the
Reorganization is conditioned upon approval by holders of two-thirds of the
outstanding shares of the Bank, and upon the receipt of any required approvals
from regulatory agencies, including the South Carolina Bank Board and the
Federal Reserve.
TERMINATION
The Reorganization Plan may be terminated at any time before the
Effective Date if:
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<PAGE> 62
(1) the number of shares of common stock of the Bank
voted against the Reorganization shall make consummation of the
Reorganization unwise in the opinion of the Bank's Board of Directors;
(2) any claim relating to the Reorganization has been
instituted or threatened before any court or administrative body; or
(3) the Bank's Board of Directors subsequently determines
that the Reorganization is inadvisable.
SURRENDER OF CERTIFICATES
Upon consummation of the Reorganization on the Effective Date, the
Bank's shareholders will be furnished instructions for surrendering their
present stock certificates and for replacing any lost, stolen or destroyed
certificates. As of the Effective Date, each certificate representing common
stock of the Bank will be deemed to evidence the right to receive Holding
Company stock as provided by the Reorganization Plan. However, under the terms
of the Reorganization Plan, shareholders who do not surrender their Bank stock
certificates will not be issued certificates representing the shares of Holding
Company common stock they may be entitled to receive and will not be paid
dividends or other distributions. Any such dividends or distributions which such
shareholders would otherwise receive will be held, without interest, for their
accounts until surrender of their Bank stock certificates.
SHAREHOLDER APPROVAL
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of the Bank's common stock entitled to vote at the Annual
Meeting is required for approval of the Reorganization Plan. On the Record Date
for determination of shareholders entitled to notice of and to vote at the
Annual Meeting, the outstanding voting securities of the Bank consisted of
501,385 shares of common stock, with the registered holders thereof being
entitled to one vote per share. Abstentions and broker non-votes will not be
considered to be either affirmative or negative votes.
EFFECT OF REORGANIZATION ON THE BANK'S SHAREHOLDERS
Generally. If the Reorganization is consummated, the Bank's
shareholders will become holders of the same number of shares of Holding Company
common stock as the number of shares of Bank common stock they held prior to the
Reorganization, and their respective percentage ownership interest in the
Holding Company will be identical to their respective percentage ownership
interest in the Bank (except to the extent that such ownership interest may be
increased by the retirement of shares from Bank shareholders who exercise their
statutory right to dissent). After the Reorganization, the rights and privileges
of former Bank shareholders will be governed by the provisions of the South
Carolina Business Corporation Act rather than the provisions of Title 34 of the
Code of Laws of South Carolina (the "South Carolina Bank Act"). Shareholders
should carefully consider the differences between their rights as shareholders
of the Holding Company and their rights as shareholders of the Bank. The
principal differences are described below.
Issuance of Additional Capital Stock. The South Carolina Bank Act
provides that the issuance of stock by the Bank is subject to approval by the
South Carolina Bank Board, and that Bank stock, except for certain limited
exceptions, may be issued only for cash consideration. On the other hand, stock
issuances by the Holding Company will not be subject to such regulatory approval
and stock may be issued by the Holding Company for cash, other property, or
services.
Limitation of Liability. The Holding Company's Bylaws provide or allow
for indemnification of directors, officers and employees. The current Bylaws of
the Bank also contain a similar provision, although it is unclear whether such
provision would be enforceable under all circumstances, especially in the
context of an enforcement action by the FDIC. In addition, the Holding Company's
Articles of Incorporation limit director's
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<PAGE> 63
monetary liability to the fullest extent of South Carolina law. The Bank's
Articles of Incorporation do not contain such a provision. As a result, the
limits on liability available to the Holding Company's directors, officers and
employees may be more favorable to the Holding Company's directors, officers and
employees than the similar provisions available to the Bank's directors,
officers and employees.
Staggered Board of Directors. The Holding Company's Articles of
Incorporation and Bylaws provide for a staggered Board of Directors. The Board
is divided into three classes of directors serving staggered three-year terms,
with approximately one-third of the Board elected at each annual meeting of
shareholders. As a result, at least two annual meetings may be required for the
shareholders to change a majority of the directors, whether or not a change in
the Board of Directors would be beneficial and whether or not a majority of
shareholders believe that such a change would be desirable. The Bank's Articles
of Incorporation and Bylaws do not provide for a staggered board of directors.
The classification of directors of the Holding Company will have the effect of
making it more difficult for shareholders to change the composition of the Board
of Directors.
Control Share Acquisitions. The Holding Company will be subject to the
South Carolina control share acquisitions statute. This statute is designed to
afford shareholders of public companies headquartered in South Carolina
protection against certain types of acquisitions in which a third party seeks to
gain voting control of the company. Generally, the statute applies to
acquisitions of shares which would result in the third party's stock ownership
falling within any one of the following ranges of all voting power of the
company: 20% to 33%, 33% to 50%, or greater than 50%. Shares acquired in a
transaction that would take the third party over one of these milestones will
not have voting rights unless a majority of the disinterested shareholders of
the company (this excludes the third party as well as any insiders of the
company, all of whom must abstain from the vote) vote to accord voting rights to
the shares. Under certain circumstances, the statute permits the third party to
call a special shareholders meeting so that the disinterested shareholders may
conduct this vote. Generally, if the shares are accorded full voting rights and
the third party acquires a majority of all outstanding shares, the other
shareholders will have dissenters' rights to receive fair value for their
shares. Under certain circumstances, the statute also enables the company to
redeem the third party's shares. A company may elect in its articles of
incorporation or bylaws not to be subject to the statute.
Restrictions on Resale of Holding Company Stock. Persons who are
"affiliates" of the Bank at the time that the Reorganization Plan is submitted
to the Bank's shareholders for approval and persons who are or become
"affiliates" of the Holding Company will be subject to restrictions on the
resale of their shares of Holding Company common stock under the Securities Act.
In contrast, affiliates of the Bank are not subject to those resale restrictions
under the Securities Act because stock of a bank is exempt from the registration
provisions of the Securities Act pursuant to Section 3(a)(2) thereof. See
"Restrictions On Transfer Of Stock Received By Certain Individuals."
REGULATION OF THE HOLDING COMPANY
Because it will own the outstanding capital stock of the Bank, the
Holding Company will be a bank holding company within the meaning of the Federal
Bank Holding Company Act of 1956 (the "BHCA") and The South Carolina Bank
Holding Company Act (the "South Carolina Act"). The activities of the Holding
Company will also be governed by the Glass-Steagall Act of 1933 (the
"Glass-Steagall Act").
The BHCA. Under the BHCA, the Holding Company will be subject to
periodic examination by the Federal Reserve and will be required to file
periodic reports of its operations and such additional information as the
Federal Reserve may require. The Holding Company's and the Bank's activities are
limited to banking, managing, or controlling banks; furnishing services to or
performing services for its subsidiaries; and engaging in other activities that
the Federal Reserve determines to be so closely related to banking, managing, or
controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets
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<PAGE> 64
of any bank, (ii) acquiring direct or indirect ownership or control of any
voting shares of any bank if after such acquisition it would own or control more
than 5% of the voting shares of such bank (unless it already owns or controls
the majority of such shares), or (iii) merging or consolidating with another
bank holding company.
In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of disapproval)
prior to any person or company acquiring "control" of a bank holding company,
such as the Holding Company. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities and
either the Holding Company has registered securities under Section 12 of the
Exchange Act (which the Holding Company will be required to do with respect to
the Common Stock) or no other person will own a greater percentage of that class
of voting securities immediately after the transaction. The regulations provide
a procedure for challenge of the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases,
engaging in certain insurance and discount brokerage activities, performing
certain data processing services, acting in certain circumstances as a fiduciary
or investment or financial adviser, owning savings associations, and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board will impose certain capital requirements on
the Holding Company under the BHCA, including a minimum leverage ratio and a
minimum ratio of "qualifying" capital to risk-weighted assets. Subject to its
capital requirements and certain other restrictions, the Holding Company will be
able to borrow money to make a capital contribution to the Bank, and such loans
may be repaid from dividends paid from the Bank to the Holding Company (although
the ability of the Bank to pay dividends will be subject to regulatory
restrictions). The Holding Company will also be able to raise capital for
contribution to the Bank by issuing securities without having to receive
regulatory approval, subject to compliance with federal and state securities
laws. Unlike the Bank, the Holding Company may, subject to certain limitations,
repurchase its own stock.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the Holding Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances in which the Holding Company might not otherwise do so. Under the
BHCA, the Federal Reserve Board may require a bank holding company to terminate
any activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve Board's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other
bank controlled by the Company, which in effect makes the Company's equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed bank subsidiary of the Company.
Glass-Steagall Act. The Holding Company will also be restricted in its
activities by the provisions of the Glass-Steagall Act, which will prohibit the
Holding Company from owning subsidiaries that are engaged principally in the
issue, flotation, underwriting, public sale, or distribution of securities. The
interpretation, scope, and application of the provisions of the Glass-Steagall
Act currently are being considered and reviewed by regulators and legislators,
and the interpretation and application of those provisions have been challenged
in the federal courts.
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<PAGE> 65
South Carolina Act. As a bank holding company registered under the
South Carolina Act, the Holding Company is subject to regulation by the South
Carolina Bank Board. Consequently, the Holding Company must receive the approval
of the South Carolina Bank Board prior to engaging in the acquisition of banking
or nonbanking institutions or assets. The Holding Company must also file with
the South Carolina Bank Board periodic reports with respect to its financial
condition and operations, management, and intercompany relationships between the
Holding Company and its subsidiaries.
RIGHTS OF DISSENTING SHAREHOLDERS
If the Reorganization is consummated, shareholders who dissent will be
entitled, upon compliance with the South Carolina Dissenters Rights Statute
(Chapter 13 of Title 33 of the Code of Laws of South Carolina) to receive the
value of their shares in cash. Set forth below is a summary of the procedures
relating to the exercise of dissenters' rights under the South Carolina
Dissenters Rights Statute, a copy of which is set forth in Appendix B. The
provisions for exercising dissenters' rights are complex and must be complied
with precisely. Any shareholder of the Bank intending to dissent from the
proposed Reorganization should consult carefully the text of Appendix B and is
also advised to consult legal counsel.
Any shareholder of the Bank entitled to vote on the Reorganization has
the right to dissent from the Reorganization and receive payment of the fair
value of his shares of the Bank common stock upon compliance with the South
Carolina Dissenters Rights Statute. A shareholder may not dissent as to less
than all of the shares that he beneficially owns, regardless of the number of
accounts maintained for the benefit of such shareholder. A nominee or fiduciary
may not dissent on behalf of any beneficial owner as to less than all of the
shares of such beneficial owner held of record by such nominee or fiduciary. A
beneficial owner asserting dissenters' rights to shares held on his behalf must
notify the Bank in writing of the names and addresses of the record holders of
the shares, if known to him.
Any Bank shareholder intending to assert dissenters' rights may not
vote in favor of the Reorganization and must file a written notice of intent to
demand payment for his shares (the "Objection Notice") with the corporate
secretary of the Bank before the vote is taken at the Annual Meeting. Objection
notices should be forwarded to the following address: James R. Clarkson, Horry
County State Bank, Loris, South Carolina 29569. The Objection Notice must state
that the shareholder intends to demand payment for his shares of the Bank common
stock if the Reorganization is effected. A vote against approval of the
Reorganization will not, in and of itself, constitute an Objection Notice
satisfying the requirements of Section 33-13-210 of the South Carolina
Dissenters Rights Statute. If the Reorganization is approved by the Bank's
shareholders at the Annual Meeting, each shareholder who has properly filed an
Objection Notice will be notified by the Bank of such approval within 10 days
after the Annual Meeting (the "Dissenters' Notice"). The Dissenters' Notice will
(i) state where dissenting shareholders must (a) send the Payment Demand (as
defined below) and (b) deposit their Bank common stock certificates (the
"Certificates"); (ii) inform holders of uncertificated shares of the Bank common
stock of the extent of any restrictions on the transferability of such shares;
(iii) be accompanied by a form for demanding payment that includes the date of
the first announcement to the news media or to shareholders of the terms of the
proposed Reorganization; (iv) set a date by which (x) the Bank must receive the
Payment Demand, which may not be fewer than 30 or more than 60 days after the
date the Dissenters' Notice is delivered and (y) the Certificates must be
deposited as instructed in the Dissenters' Notice, which may not be earlier than
20 days after the date the Payment Demand is received by the Bank; and (v) be
accompanied by a copy of the South Carolina Dissenters Rights Statute. Within
the time prescribed in the Dissenters' Notice, a shareholder electing to dissent
must make a demand for payment (the "Payment Demand"), certify whether he (or
the beneficial shareholder on whose behalf he is asserting dissenters' rights)
acquired beneficial ownership of the shares of the Bank common stock before the
date of this Proxy Statement/Offering Circular (which is the date of the first
announcement to the Bank's shareholders of the terms of the Reorganization) and
deposit his Certificates in accordance with the terms of the Dissenter's Notice.
Upon filing the Payment Demand and depositing the Certificates, the shareholder
will retain all other rights of a shareholder until these rights are canceled or
modified by the consummation of the Reorganization. Failure to comply
substantially with these procedures will cause the shareholder to lose his
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<PAGE> 66
dissenters' rights to payment for the shares. Consequently, any Bank shareholder
who desires to exercise his rights to payment for his shares is urged to consult
legal counsel before attempting to exercise such rights.
As soon as the Reorganization is consummated, or upon receipt of a
Payment Demand, the Company shall, pursuant to Section 33-13-250 of the South
Carolina Dissenters Rights Statute, pay to each dissenting shareholder who has
substantially complied with the requirements of the South Carolina Dissenters
Rights Statute the amount that the Holding Company estimates to be the fair
value of the shares of the Bank common stock plus accrued interest. Section
33-13-250 of the South Carolina Dissenters Rights Statute requires that payment
be accompanied by (i) certain of the Bank's financial statements, (ii) a
statement of the Holding Company's estimate of the fair value of the shares and
an explanation of how the Holding Company's estimate of the fair value and the
interest were calculated, (iii) notification of rights to demand additional
payment, and (iv) a copy of the South Carolina Dissenters Rights Statute. As
authorized by Section 33-13-270, the Holding Company may delay any payments with
respect to any shares held by a dissenting shareholder which were not held by
such shareholder on the date of this Proxy Statement/Offering Circular of the
terms of the Reorganization, unless the beneficial ownership devolved upon him
by operation of law from a person who was the beneficial owner on such date.
Where payments are so withheld, the South Carolina Dissenters Rights Statute
requires the Holding Company, after the Reorganization, to send to the holder of
such shares an offer to pay the holder an amount equal to the Holding Company's
estimate of their fair value plus accrued interest, together with an explanation
of the calculation of fair value and interest and a statement of the holder's
right to demand additional payment under Section 33-13-280 of the South Carolina
Dissenters Rights Statute.
If the Reorganization is not consummated within 60 days after the date
set for demanding payment and depositing Certificates, the Bank, within the
60-day period, will return the deposited Certificates and release any transfer
restrictions imposed on the uncertificated shares. If, after returning deposited
Certificates and releasing transfer restrictions, the Reorganization is
consummated, the Bank must send a new Dissenters' Notice and repeat the payment
demand procedure.
If the dissenting shareholder believes that the amount paid by the
Holding Company pursuant to Section 33-13-250 of the South Carolina Dissenters
Rights Statute or offered under Section 33-13-270 of the South Carolina
Dissenters Rights Statute is less than the fair value of his shares or that the
interest due is calculated incorrectly, or if the Holding Company fails to make
payment or offer payment (or, if the Reorganization has not been consummated,
the Bank does not return the deposited Certificates or release the transfer
restrictions imposed on uncertificated shares), within 60 days after the date
set in the Dissenters' Notice, then the dissenting shareholder may within 30
days after (i) the Holding Company made or offered payment for the shares or
failed to pay for the shares or (ii) the Bank failed to return deposited
Certificates or release restrictions on uncertificated shares timely, notify the
Holding Company in writing of his own estimate of the fair market value of such
shares (including interest due) and demand payment of such estimate (less any
payment previously received). Failure to notify the Holding Company in writing
of any demand for additional payment within 30 days after the Holding Company
made payment for such shares will constitute a waiver of the right to demand
additional payment.
If the Holding Company and the dissenting shareholder cannot agree on a
fair price within 60 days after the Bank receives such a demand for additional
payment, the Holding Company must institute judicial proceedings to fix (i) the
fair value of the shares and (ii) the accrued interest. The Holding Company must
make all dissenters whose demands for additional payment remain unsettled
parties to the proceeding and all such parties must be served with a copy of the
petition. The court may, in its discretion, appoint an appraiser to receive
evidence and recommend a decision on the question of fair value. The court is
required to issue a judgment for the amount, if any, by which the fair value of
the shares, as determined by the court, plus interest, exceeds the amount paid
by the Holding Company. If the Holding Company does not institute such
proceeding within such 60-day period, the Holding Company shall pay each
dissenting shareholder whose demand remains unsettled the respective amount
demanded by each shareholder.
The court will assess certain costs and expenses of such proceeding
(including reasonable compensation for, and the expenses of, the appraiser)
against the Holding Company, except that the court may assess such costs and
expenses as it deems appropriate against any or all of the dissenting
shareholders if it finds that their demand
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<PAGE> 67
for additional payment was arbitrary, vexatious or otherwise not in good faith.
The court may award fees and expenses of counsel and experts in amounts the
court finds equitable (i) against the Holding Company if the court finds that
the Holding Company did not comply substantially with the relevant requirements
of the South Carolina Dissenters Rights Statute or (ii) against either the
Holding Company or any dissenting shareholder, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously,
or not in good faith.
FEDERAL INCOME TAX CONSEQUENCES
If the Share Exchange and related transactions take place as described
in the Reorganization Plan and at least 50% of the Bank's outstanding common
stock is exchanged for Holding Company common stock in the Share Exchange:
(1) The Share Exchange between the Bank and the Holding Company
should qualify as a "reorganization" within the meaning of Sections 368(a)(1)(B)
of the Code.
(2) Assuming the Share Exchange qualifies as a "reorganization,"
no gain or loss will be recognized by the Holding Company or the Bank as a
result of the Share Exchange.
(3) Assuming the Share Exchange qualifies as a "reorganization,"
no gain or loss will be recognized by any shareholder of the Bank upon the
exchange of his Bank common stock in the Share Exchange solely for Holding
Company common stock.
(4) Cash received by a shareholder of the Bank who perfects his
dissenters' rights will be treated as having been received by such shareholder
in redemption of his Bank common stock, and such redemption will be taxable
under the provisions of Section 302 of the Code as either ordinary income or
capital gain or loss, depending upon the circumstances of the individual
shareholder.
(5) Assuming the Share Exchange qualifies as a "reorganization,"
the aggregate tax basis of the Holding Company common stock received by a Bank
shareholder will be the same as such shareholder's basis in the Bank common
stock exchanged for such Holding Company common stock in the Share Exchange.
(6) Assuming the Share Exchange qualifies as a "reorganization,"
the holding period of the Holding Company common stock received in the Share
Exchange by a Bank shareholder will include the period during which such
shareholder held the Bank common stock exchanged for such Holding Company common
stock, provided that such Bank common stock is held by such shareholder as a
capital asset on the Effective Date.
No ruling will be requested from the Internal Revenue Service ("IRS")
concerning the tax consequences of the Share Exchange. Because no IRS ruling
will be requested, there is a risk that the IRS will determine that the Share
Exchange does not qualify as a "reorganization," resulting in adverse tax
consequences to the Bank, the Holding Company and their shareholders.
The foregoing brief summary is not, and is not intended to be, a
complete analysis of all the federal income tax consequences of the Share
Exchange. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS TO MAKE A
PERSONAL APPRAISAL OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED
TRANSACTION AND IN ORDER TO DETERMINE ANY STATE OR LOCAL TAX CONSEQUENCES OF THE
SHARE EXCHANGE.
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<PAGE> 68
DIVIDENDS
The Bank has paid never paid cash dividends and in the near term
intends to retain any future earnings to finance its growth. However, the Board
of Directors has approved a 10% stock dividend for each of the years 1993
through 1997. The most recent stock dividend was a 5% stock dividend payable on
March 15, 1999 to stockholders of record February 1, 1999. The Bank's ability to
pay dividends is subject to the Bank's profitability and to government
regulations that limit the aggregate amount of cash dividends paid to
shareholders based on then-current income levels. The Holding Company's ability
to pay any cash dividends to its shareholders will depend primarily on the
Bank's ability to pay dividends to the Holding Company. The Bank is subject to
regulatory restrictions on the payment of dividends, including a prohibition of
payment of dividends from its capital. All dividends must be paid out of the
undivided profits then on hand, after deducting expenses, including losses and
bad debts. The Bank must also obtain approval from the South Carolina Bank Board
prior to the payment of any dividends to the Holding Company. In addition, the
Bank may not pay a dividend if, after paying the dividend, the Bank would be
undercapitalized.
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<PAGE> 69
PRO FORMA CONDENSED FINANCIAL INFORMATION
Because the Holding Company was recently formed to acquire the Bank and
has had no operations of its own, and because the Reorganization is expected to
be accounted for in a manner similar to a pooling of interests, the Holding
Company's consolidated balance sheet immediately after consummation of the
Reorganization will be essentially identical to the Bank's balance sheet with
the following changes: (a) Shareholders' equity will be reduced by the amount of
the expenses of the Reorganization (estimated to be about $25,000); and (b)
Shareholders' equity may be further reduced by any amounts that the Holding
Company must pay dissenters. See "Rights of Dissenting Shareholders."
Consummation of the Reorganization will not have any material effect on the
earnings of the Bank and, on a consolidated basis, the pro forma consolidated
results of operations of the Holding Company would be identical to those of the
Bank, with the exception of the estimated expenses of the Reorganization. See
page 14 of the Bank's Annual Report to Shareholders for a discussion of the
Bank's regulatory capital ratios.
The following table sets forth the actual capitalization of the Holding
Company as of March 19, 1999, and the pro forma consolidated capitalization of
the Holding Company and the Bank as of that date using the Bank's actual balance
sheet amounts as of December 31, 1998. The information herein should be read in
conjunction with the financial statements of the Bank from the Bank's 1998
Annual Report to Shareholders, which is being mailed with this Proxy
Statement/Offering Circular.
PRO FORMA CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
Holding Company Pro Forma Holding Company
Prior to the Adjustments (Bank After the
Reorganization (1) Shareholders' Equity) Reorganization
--------------------- --------------------- ---------------
<S> <C> <C> <C>
Shareholders' Equity
- --------------------
Common stock, $.01 par value,
10,000,000 shares authorized
140 shares issued $ 1 $ (1) (2) $ -
501,385 shares issued 0 5,014 (3) 5,014
(Common stock, $5.00 par value,
1,000,000 shares authorized
501,385 shares issued)
(1399) (2)
Additional paid-in capital 1399 7,250,375 (3) 7,250,375
(25,000) (4)
Retained earnings - 688,515 (3) 663,515
Unrealized holding gains and
losses on available-for-sale
securities - 79,877 (3) 79,877
Total shareholders' equity $ 1400 $ 7,997,381 $ 7,998,781
============= =============== ===============
</TABLE>
- ---------------------------------
(1) On March 19, 1999, the Board of Directors of the Bank purchased 140
shares of the common stock of the Holding Company for $10.00 per share
after its incorporation on March 15, 1999.
(2) Redemption on the Effective Date of 140 shares of common stock of the
Holding Company purchased by the Board of Directors of the Bank in
connection with the formation of the Holding Company.
(3) Issuance on the Effective Date of 501,385 shares of common stock of the
Holding Company in exchange for all of the 501,385 outstanding shares
of common stock of the Bank on a one-for-one share basis. Exchange has
been accounted for in a manner similar to a pooling-of-interests and
assumes no cash payments being made to dissenting shareholders of the
Bank. Amounts are derived from the balance sheet of the Bank as of
December 31, 1998.
(4) Assuming $25,000 expenses of the Merger.
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<PAGE> 70
MANAGEMENT; ELECTION OF DIRECTORS
Each of the current 14 directors of the Bank has been nominated for
re-election. Set forth below is certain information about the nominees,
including each nominee's age and position with the Bank. It is the intention of
the persons named as proxies in the accompanying proxy to vote FOR the election
of the nominees identified below to serve for a one-year term and until their
successors are elected. If any nominee is unable or fails to accept nomination
or election (which is not anticipated), the persons named in the proxy as
proxies, unless specifically instructed otherwise in the proxy, will vote for
the election in his stead of such other person as the Bank's existing Board of
Directors may recommend. Executive officers of the Bank serve at the discretion
of the Bank's Board of Directors.
The directors shall be elected by a plurality of the votes cast at the
Meeting. Abstentions and broker non-votes will not be considered to be either
affirmative or negative votes.
THE BOARD RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE NOMINATED
INDIVIDUALS.
<TABLE>
<CAPTION>
NAME AGE DIRECTOR BUSINESS EXPERIENCE
- ---- --- -------- -------------------
SINCE DURING PAST FIVE YEARS
----- ----------------------
<S> <C> <C> <C>
D. Singleton Bailey 48 1988 President, Loris Drug Store,
Inc.
Franklin C. Blanton 54 1988 President, Blanton Supplies,
Inc.; Vice President,
Independent Builders Supply,
Inc.; Vice President, Coastal
Education Foundation
Russell R. Burgess, Jr. 56 1998 Owner, Aladdin Realty Company;
owner & Broker-In-Charge,
Burgess Realty & Appraisal
Service; Member, N. Myrtle Beach
City Council and N. Myrtle Beach
Planning Commission
William H. Caines 62 1988 President, Caines Realty and
Appraisals; President, Blackburn
Insurance, Inc.
James R. Clarkson 47 1988 President & CEO, Horry County
State Bank; Director, East
Carolina Academy
J. Lavelle Coleman 59 1988 President, Tabor City Oil, Inc.;
Partner, R.C. Coleman Tobacco
Warehouse; farmer
Boyd R. Ford, Jr. 59 1988 Retired, Ford's Fuel Service,
Inc. & Ford's Propane Gas, Inc.
Charles F. Freeman 69 1988 Chairman/President, Aetna
Freight Lines, Inc.;
Chairman/President, Atlas
Transportation Brokerage, Inc.;
Chairman/President, Felburn
Foundation; Vice President, Isle
Base Ltd., Bermuda
Tommie W. Grainger 59 1998 President, Coastal Timber Co.,
Inc.; past owner, WJXY, AM/FM
radio station
Randy B. Hardee 41 1988 President, Hardee Business
Services; Director, Loris
Chamber of Commerce; Captain,
Loris Fire Department
Gwyn G. McCutchen 55 1988 Dentist; Consulting Staff, Loris
Healthcare System
T. Freddie Moore 57 1988 President, Gateway Drug Store,
Inc.
Carroll D. Padgett, Jr. 51 1988 Chairman, Horry County State
Bank; Attorney, Carroll D.
Padgett, Jr., P.A.
Bill G. Page 64 1988 President, Page Chemical Co.,
Inc.; Manager, Twin City Farmers
Cooperative, Inc.; farmer
</TABLE>
12
<PAGE> 71
COMPENSATION
The following table sets forth for the past three fiscal years the cash
compensation paid or accrued by the Bank, as well as certain other compensation
paid or accrued for those years, for services in all capacities to the chief
executive officer of the Bank. No executive officer of the Bank earned total
compensation, including salary and bonus, for the fiscal year ended December 31,
1998 in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------
NAME AND ----------------------- SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS UNDERLYING OPTIONS (#) COMPENSATION (1)
- ------------------- ---- ---------- ----- ---------------------- ----------------
<S> <C> <C> <C> <C> <C>
James R. Clarkson, President 1998 $95,000 $1,827 ---- $9,678
and CEO 1997 84,998 2,366 ---- 8,108
1996 73,164 6,407 ---- 8,769
</TABLE>
- ----------
(1) Includes employees life, disability and health insurance benefits,
retirement fund contributions, and directors fees.
COMPENSATION OF DIRECTORS
During the year ended December 31, 1998, outside directors received
fees of $150 for attendance at each Board meeting. Directors were paid $50 for
attending meetings of committees of the Board of Directors.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The law office of Carroll D. Padgett, Jr., P.A. serves as counsel for
the Bank and is paid for legal services rendered to the Bank in that capacity.
Carroll D. Padgett, Jr. is a director of the Bank.
The Bank has had, currently has, and will continue to have banking and
other transactions in the ordinary course of business with directors and
officers of the Bank and their affiliates, including members of their families
or corporations, partnerships, or other organizations in which such officers or
directors have a controlling interest, on substantially the same terms
(including price, or interest rates and collateral) as those prevailing at the
time for comparable transactions with unrelated parties. The Bank believes that
such transactions do not involve more than the normal risk of collectibility nor
present other unfavorable features to the Bank. The Bank is subject to a limit
on the aggregate amount it could lend to its and the Bank's directors and
officers as a group equal to its unimpaired capital and surplus (or, under a
regulatory exemption available to banks with less than $100 million in deposits,
twice that amount). Loans to individual directors and officers must also comply
with the Bank's lending policies and statutory lending limits, and directors
with a personal interest in any loan application are excluded from the
consideration of such loan application.
BOARD MEETINGS AND COMMITTEES
The Bank's Board of Directors held 14 meetings in 1998. All directors
attended at least 75% of such meetings and the meetings of each committee of
which they are members, with the exception of Franklin C. Blanton, J. Lavelle
Coleman, Boyd R. Ford, Jr., and Charles F. Freeman (all of whom attended at
least two-thirds of such meetings). The Board of Directors has established an
Audit Committee and an Executive
13
<PAGE> 72
Committee; it has not established a Nominating Committee. Information about the
functions, members and meetings of those committees is set forth below.
Audit Committee. The Audit Committee recommends engaging and
discharging the independent account firms, reviews the examination reports of
the Bank's regulatory supervisory agencies, establishes and monitors internal
audit procedures, reviews reports of the Bank's Internal Auditor, and conducts
surprise audits of the Bank's tellers' and vault cash.. During 1998, the Audit
Committee held 20 meetings. In 1998, the members of the Audit Committee were
Randy B. Hardee (Chairman), D. Singleton Bailey, Boyd R. Ford, Jr., J. Lavelle
Coleman, and William H. Caines.
Executive Committee. The Executive Committee supervises and reviews the
Bank's investment portfolio, the Bank's Asset/Liability Management Policy and
Reports, and, in general, reviews the overall operations of the Bank. During
1998, the Executive Committee held 13 meetings. In 1998, the members of the
Executive Committee were James R. Clarkson, Randy B. Hardee, Gwyn McCutchen, T.
Freddie Moore, and Carroll D. Padgett, Jr.
Personnel Committee. The Personnel Committee supervises the Bank's
adherence to the Personnel Policy, makes recommendations to the Board of
Directors as to compensation of the Bank's President, the overall annual salary
increases, the employee benefits package, contributions to the employee
retirement fund, and staffing requirements. During 1998, the Personnel Committee
held 2 meetings. In 1998, the members of the Personnel Committee were D.
Singleton Bailey, Russel R. Burgess, Jr., Randy B. Hardee, Gwen G. McCutchen,
and Bill G. Page.
Upon consummation of the Reorganization, the individuals serving as the
directors of the Holding Company will be the same individuals serving as the
directors of the Bank. As the Holding Company will have a staggered board, Class
I Directors (term will expire in 2000) will be D. Singleton Bailey, Franklin C.
Blanton, Charles F. Freeman, T. Freddie Moore, and Carroll D. Padgett, Jr.;
Class II Directors (term will expire in 2001) will be William H. Caines, James
R. Clarkson, J. Lavelle Coleman, Boyd R. Ford, Jr., and Randy B. Hardee; and
Class III Directors (term will expire in 2002) will be Russell R. Burgess, Jr.,
Tommie W. Grainger, Gwyn G. McCutchen, and Bill G. Page. The only executive
officer of the Holding Company will be James R. Clarkson.
14
<PAGE> 73
PRINCIPAL SHAREHOLDERS OF THE BANK
The following table sets forth as of March 15, 1999, certain
information as to those persons who were known to the Bank to be beneficial
owners of more than 5% of the Bank's outstanding shares, and as to the Bank's
shares beneficially owned by each director and all officers and directors as a
group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED
- ---------------- --------------------- ------------------
<S> <C> <C>
D. Singleton Bailey 8,074(2) 1.6%
Franklin C. Blanton 12,905(3) 2.6%
Russell R. Burgess, Jr. 105 *
William H. Caines 1,861(4) 0.4%
James R. Clarkson 4,865(5) 1.0%
J. Lavelle Coleman 3,007 0.6%
Boyd R. Ford, Jr. 16,820(6) 3.4%
Charles F. Freeman 8,057(7) 1.6%
Tommie W. Grainger 2,740 0.6%
Randy B. Hardee 6,101(8) 1.2%
Gwyn McCutchen 4,983(9) 1.0%
T. Freddie Moore 3,378(10) 0.7%
Carroll D. Padgett, Jr. 5,101(11) 1.0%
Bill G. Page 2,136 0.4%
Executive officers and directors 81,360 16.2%
as a group (17 persons)
</TABLE>
* Less than 0.1%
(1) Information relating to beneficial ownership of Common Stock is based
upon "beneficial ownership" concepts set forth in rules of the SEC
under Section 13(d) of the Securities Exchange Act of 1934. Under these
rules a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power," which includes the power to
vote or direct the voting of such security, or "investment power,"
which includes the power to dispose or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
security of which that person has the right to acquire beneficial
ownership within sixty days. Under the rules, more than one person may
be deemed to be a beneficial owner of the same securities, and a person
may be deemed to be a beneficial owner of securities as to which he has
no beneficial interest. For instance, beneficial ownership includes
spouses, minor children and other relatives residing in the same
household, and trusts, partnerships, corporations or deferred
compensation plans which are affiliated with the principal.
(2) Includes 5,516 shares held jointly with Cheryl A. Bailey (wife); and
1,690 shares held by Cheryl Bailey (wife) as guardian for Miles Douglas
Bailey (son).
(3) Includes 3,498 shares held jointly with wife Nancy T. Blanton; includes
6,641 shares held by Blanton Supplies of Little River, Inc.; 844 shares
held by Blanton Supplies of Loris, Inc. (companies which Director
controls in excess of 10% ownership); 216 shares held by Eric C.
Blanton (son); 614 shares held
15
<PAGE> 74
jointly by Nancy T. Blanton (wife) and Fannie B. Tyler; 536 shares held
by Nancy T. Blanton (wife), Individual Retirement Account.
(4) Includes 38 shares held by Billie Faye Caines (wife).
(5) Includes 2,268 shares held jointly with Teresa N. Clarkson (wife);
1,207 shares held by Teresa N. Clarkson (wife), Individual Retirement
Account, 386 shares held jointly with Julie Marie Clarkson (daughter)
and Teresa N. Clarkson (wife); 386 shares held jointly with Nancy Lynn
Clarkson (daughter) and Teresa N. Clarkson (wife).
(6) Includes 8,786 shares held by Norma Jean Ford (wife); 2,383 shares held
by Norma Jean Ford (wife), Individual Retirement Account.
(7) Includes 337 shares held in the name of Charlotte P. Freeman (wife).
(8) Includes 766 shares held jointly with Wanda L. Hardee (wife) and Arthur
Lee Hardee (son); 168 shares held by Wanda L. Hardee (wife).
(9) Includes 2,304 shares held jointly with Lisa H. McCutchen (wife); 630
shares held by Lisa H. McCutchen (wife), Individual Retirement Account
and 63 shares held by Lisa H. McCutchen (wife).
(10) Includes 160 shares held by Ruby Moore (wife).
(11) Includes 1,270 shares jointly with Sandra L. Padgett (wife) and 494
shares held by Sandra L. Padgett (wife), Individual Retirement Account.
16
<PAGE> 75
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
As required by Section 16(a) of the Securities Exchange Act of 1934,
the Bank's directors, its executive officers and certain individuals are
required to report periodically their ownership of the Bank's Common Stock and
any changes in ownership to the Federal Deposit Insurance Corporation. Based on
a review of Forms 7, 8, and 8A and any representations made to the Bank, it
appears that all such reports for these persons were filed in a timely fashion
during 1998.
RESTRICTIONS ON TRANSFER OF STOCK
RECEIVED BY CERTAIN INDIVIDUALS
Upon completion of the Reorganization, the Holding Company will have
501,385 shares of common stock outstanding, assuming no shareholders exercise
their statutory dissenters' rights. The shares issued in the Reorganization will
be freely tradable, without restriction or registration under the Securities
Act, except for shares issued to "affiliates" of the Bank at the time the
Reorganization is submitted to shareholders of the Bank for their approval and
shares issued to persons who are or become "affiliates" of the Holding Company.
These shares will be subject to resale restrictions under the Securities Act.
An "affiliate" of a company is defined in Rule 144 under the Securities
Act as a person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with the company. Rule
405 under the Securities Act defines the term "control" to mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of the person whether through the ownership of voting
securities, by contract, or otherwise.
Securities held by affiliates may be eligible for sale in the open
market without registration in accordance with the provisions of Rule 144
promulgated under the Securities Act. In general, under Rule 144 a shareholder
(or shareholders whose shares are aggregated) who has beneficially owned for at
least one year, but less than two years, shares privately acquired directly or
indirectly from the Holding Company or from an "affiliate" (in general, a
director, officer or controlling shareholder of the Holding Company), and
persons who are affiliates of the Holding Company, are entitled to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of common stock or the average weekly
trading volume in the common stock during the four calendar weeks preceding the
sale and may only sell such shares through unsolicited brokers' transactions. A
shareholder who is not an affiliate of the Holding Company and has not been an
affiliate for at least 90 days and who has beneficially owned shares of common
stock for at least two years is entitled to sell such shares under Rule 144
without regard to the volume limitations and the other restrictions described
above.
Rule 144 also requires that the securities must be sold in "brokers'
transactions," as defined in the Securities Act, and the person selling the
securities may not solicit orders or make any payment in connection with the
offer or sale of the securities to any person other than the broker who executes
the order to sell the securities. This requirement may make the sale of the
common stock of the Holding Company pursuant to Rule 144 difficult if no trading
market develops in the Common Stock. The requirement does not apply to sales of
restricted securities held by non-affiliates for at least two years or to sales
by persons who were affiliates of the Bank at the time of the shareholder vote
on the Reorganization who have held nonrestricted securities for at least two
years (if they are not then affiliates of the Holding Company).
In addition, the protections afforded by Rule 144 are available
generally only if the Holding Company meets the requirement that adequate
current public information be available with respect to it. That requirement is
met generally if the Holding Company (i) has securities registered pursuant to
Section 12 of the Exchange Act or has securities registered pursuant to the
Securities Act, and (ii) has been subject to the periodic reporting requirements
of the Exchange Act for at least 90 days and has filed all reports required
under specified sections of
17
<PAGE> 76
the Exchange Act for the preceding 12 months (or such shorter period as it is
required to have filed such reports). The Holding Company will be subject to the
registration requirements of the Exchange Act.
Shares of the Bank's common stock held by affiliates of the Bank are
not subject to resale restrictions under the Securities Act because bank stock,
unlike stock of a holding company, is accorded exempt status under Section
3(a)(2) of the Securities Act.
FINANCIAL STATEMENTS; REPORT ON FORM 10-KSB
The Bank's annual report to shareholders containing financial
statements for the last three years, prepared in accordance with generally
accepted accounting principles, accompany this Proxy Statement/Offering
Circular. The financial statements are being furnished as supplemental
information only. They are not part of this Proxy Statement/Offering Circular
and are not incorporated herein by reference. STOCKHOLDERS MAY OBTAIN COPIES OF
THE BANK'S ANNUAL REPORT ON FORM 10-KSB REQUIRED TO BE FILED WITH THE FEDERAL
DEPOSIT INSURANCE CORPORATION UNDER 12 C.F.R. SS. 335.311 FOR THE YEAR ENDED
DECEMBER 31, 1998, FREE OF CHARGE BY REQUESTING SUCH FORM IN WRITING FROM JAMES
R. CLARKSON, 5009 BROAD STREET, LORIS, SOUTH CAROLINA 29596. In addition, 12
C.F.R. Part 350 requires the Bank to designate and make available to the public
upon request its Annual Disclosure Statement. The accompanying annual report to
shareholders is designated as the Bank's Annual Disclosure Statement and will be
made available upon request in person at an office of the Bank or in writing to
James R. Clarkson at the address above.
LEGAL MATTERS
The legality of the shares of common stock of the Holding Company to be
issued in the Reorganization has been passed upon by Nelson Mullins Riley &
Scarborough, L.L.P., Atlanta, Georgia.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Tourville, Simpson & Henderson, Certified Public
Accountants, to serve as the Bank's independent certified public accountants for
1999. It is expected that representatives from this firm will be present and
available to answer appropriate questions at the annual meeting, and will have
the opportunity to make a statement if they desire to do so.
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS
If shareholders wish a proposal to be included in the Bank's proxy
statement and form of proxy relating to the 2000 annual meeting, they must
deliver a written copy of their proposal to the principal executive offices of
the company no later than November 29, 1999, in accordance with Rule 14a-8 of
the Securities Exchange Act of 1934. To ensure prompt receipt by the Bank, the
proposal should be sent certified mail, return receipt requested. Proposals must
comply with the Bank's bylaws relating to shareholder proposals in order to be
included in the Bank's proxy materials. Any materials submitted by a shareholder
outside the processes of Rule 14a-8 for presentation at the Bank's next annual
meeting will be considered untimely for purposes of Rule 14a-4 and 14a-5 if
received by the Bank after February 8, 2000.
18
<PAGE> 77
AVAILABLE INFORMATION
The Bank is, and the Holding Company will be, a reporting company
subject to the full informational requirements of the Exchange Act. In
accordance therewith, the Bank is required to file reports, proxy statements,
and other information with the FDIC. These reports and documents may be obtained
by writing the FDIC's Registration, Disclosure and Securities Operations Unit at
550 17th Street, N.W., Room F-6043, Washington, D.C. 20429 or calling
202-898-8913 or by FAX at 202-898-3909. Once the reorganization, if approved by
the shareholders, is completed, the Holding Company will file these reports and
documents at the Public Reference Section of the Securities and Exchange
Commission at Room 1024, 450 Fifth Street, N.W., Washington D.C., 20549.
OTHER MATTERS
The management of the Bank knows of no matters other than those stated
above which may be brought before the Annual Meeting. However, if any other
matter or matters should properly come before the Annual Meeting, the persons
named in the enclosed proxy will vote such proxy in accordance with their
judgment on such matters.
19
<PAGE> 78
APPENDIX A
REORGANIZATION AGREEMENT AND PLAN OF EXCHANGE
THIS REORGANIZATION AGREEMENT AND PLAN OF EXCHANGE (the "Reorganization Plan'),
dated as of the March 19, 1999, is entered into between Horry County State Bank
(the "Bank") and HCSB Financial Corporation (the "Holding Company").
RECITALS:
The parties acknowledge the following to be true and correct:
1. The Bank is a state bank duly organized under the laws of the State of
South Carolina and has its principal office and place of business in Loris,
South Carolina. The Bank is authorized by its articles of incorporation to
issue up to 1,000,000 shares of common stock, par value $5.00 per share,
501,385 shares of which are issued and outstanding.
2. The Holding Company is a corporation duly organized under the laws of the
State of South Carolina, having its principal place of business in Loris,
South Carolina. As of the Effective Date of the Share Exchange (as such
terms are defined below), the Holding Company will have authorized and
unissued 10,000,000 shares of common stock of a par value of $0.01 per
share. In connection with the formation of the Holding Company, 140 shares
of Holding Company common stock will be issued at $10 per share to the
existing members of the Board of Directors of the Bank. All such shares
will be redeemed at $10 per share upon the Effective Date.
3. The Board of Directors of the Bank and Holding Company desire to establish
a holding company structure pursuant to which the Bank will become a
wholly-owned subsidiary of the Holding Company.
4. A majority of the entire Board of Directors of each of the Bank and the
Holding Company has deemed advisable a share exchange transaction between
the Bank and the Holding Company (the "Share Exchange") in order to
establish the holding company structure and has approved this
Reorganization Plan and authorized its execution.
In consideration of the premises, the Bank and the Holding Company
enter into this Reorganization Plan and prescribe the terms and conditions of
the Share Exchange and the mode of carrying it into effect as follows:
ARTICLE I: THE ACQUIRING CORPORATION
The name of the acquiring corporation is HCSB Financial Corporation
(the Holding Company). The entity whose shares will be acquired is Horry County
State Bank (the Bank).
ARTICLE II: TERMS AND CONDITIONS OF THE EXCHANGE
1. When the Share Exchange becomes effective, each issued and outstanding
share of common stock of the Bank shall be exchanged for one share of
common stock of the Holding Company. As a result of the Share Exchange,
the Holding Company shall become the sole shareholder of the Bank and
the Bank will continue in existence as a wholly-owned subsidiary of the
Holding Company. The articles of incorporation, bylaws, corporate
identity, charter, and officers and directors of the Bank will not be
changed as a result of the Share Exchange. In addition, the 140 shares
of Holding Company common stock issued at $10 per share to the existing
members of the Board of Directors of the Bank in connection with the
formation of the Holding Company will automatically be redeemed by the
Holding Company on the Effective Date at $10 per share. Consequently,
as a result of the Share Exchange, the existing shareholders of the
Bank will become the only shareholders of the Holding Company and the
Holding Company will have 501,385 shares of Common Stock issued and
outstanding (assuming no exercise of dissenters rights).
A-1
<PAGE> 79
2. Consummation of the Share Exchange is conditioned upon approval by
holders of two-thirds of the outstanding shares of the Bank as required
by law, and upon the receipt of any required approvals from regulatory
agencies, including the South Carolina Board of Financial Institutions
and the Federal Reserve.
3. The Reorganization Plan shall be submitted to the shareholders of the
Bank for approval at a meeting to be called and held in accordance with
the applicable provisions of law and the Articles of Incorporation and
Bylaws of the Bank. The Bank and the Holding Company shall proceed
expeditiously and cooperate fully in the procurement of any other
consents and approvals and the taking of any other action, and the
satisfaction of all other requirements prescribed by law or otherwise,
necessary for consummation of the Share Exchange at time provided
herein.
4. Upon satisfaction of the requirements of law and the conditions
contained in this Reorganization Plan, the Share Exchange shall become
effective upon the filing of Articles of Share Exchange with the South
Carolina Secretary of State (the "Effective Date").
5. If the Share Exchange becomes effective, the Bank and the Holding
Company shall each pay their own expenses, if any, incurred in the
proposed transaction. If the Share Exchange does not become effective,
the Bank shall pay all reasonable and necessary expenses associated
with the transaction proposed herein.
6. Any shareholder of the Bank who objects to the Share Exchange and who
properly dissents from the Share Exchange pursuant to Chapter 13 of
Title 33 of the Code of Laws of South Carolina shall have the rights of
a "dissenting shareholder" and the right to receive cash for the value
of such dissenting shares.
ARTICLE III: MANNER AND BASIS OF EXCHANGING SHARES
On the Effective Date:
1. Each share of common stock of the Bank issued and outstanding
immediately prior to the Effective Date shall, without any action on
the part of the holder thereof, be converted into the right to receive
one share of capital stock of the Holding Company.
2. Each holder of common stock of the Bank shall cease to be a shareholder
of the Bank and the ownership of all shares of the issued and
outstanding common stock of the Bank shall thereupon automatically vest
in the Holding Company as the acquiring corporation.
3. As of the Effective Date, until surrendered for exchange in accordance
with this Reorganization Plan, each certificate theretofore
representing common stock of the Bank will be deemed to evidence the
right to receive Holding Company stock. However, shareholders who do
not surrender their Bank stock certificates will not be issued
certificates representing the shares of Holding Company common stock
they may be entitled to receive and will not be paid dividends or other
distributions. Any such dividends or distributions which such
shareholders would otherwise receive will be held, without interest,
for their accounts until surrender of their Bank stock certificates.
The Holding Company shall not be obligated to deliver certificates for
shares of Holding Company common stock to any former Bank shareholder
until such shareholder surrenders his or her Bank stock certificates.
4. After the Effective Date, the Bank's shareholders will be furnished
instructions for surrendering their present stock certificates and for
replacing any lost, stolen or destroyed certificates.
ARTICLE IV: TERMINATION
The Reorganization Plan may be terminated, in the sole discretion of
the Bank's Board of Directors, at any time before the Effective Date if:
A-2
<PAGE> 80
(1) the number of shares of common stock of the Bank
voted against the Share Exchange, or in respect of which written notice
is given purporting to dissent from the Share Exchange, shall make
consummation of the Share Exchange unwise in the opinion of the Bank's
Board of Directors;
(2) any act, suit, proceeding or claim relating to the
Share Exchange has been instituted or threatened before any court or
administrative body; or
(3) the Bank's Board of Directors subsequently determines
that the Share Exchange is inadvisable.
Upon termination by written notice as provided in this Article IV, this
Reorganization Plan shall be void and of no further effect, and there shall be
no liability by reason of this Reorganization Plan or the termination thereof on
the part of either the Bank, the Holding Company, or the directors, officers,
employees, agents or shareholders of either of them.
IN WITNESS WHEREOF, the Bank and the Holding Company have caused this
Reorganization Plan to be executed and attested in counterparts by their duly
authorized officers and directors, and their corporate seals to be hereunto
affixed as of the day and year first above written.
HORRY COUNTY STATE BANK
By:
-------------------------------------
James R. Clarkson, President
HCSB FINANCIAL CORPORATION
By:
-------------------------------------
James R. Clarkson, President
A-3
<PAGE> 81
APPENDIX B
CHAPTER 13 OF THE SOUTH CAROLINA BUSINESS CORPORATION ACT
SECTION 33-13-101. DEFINITIONS.
In this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 33-13-102 and who exercises that right
when and in the manner required by Sections 33-13-200 through
33-13-280.
(3) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be
inequitable. The value of the shares is to be determined by techniques
that are accepted generally in the financial community.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by
the corporation on its principal bank loans or, if none, at a rate that
is fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 33-13-102. RIGHT TO DISSENT.
(a) A shareholder is entitled to dissent from, and obtain payment of the
fair value of, his shares in the event of any of the following
corporate actions:
(1) consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger
by Section 33-11-103 or the articles of incorporation and the
shareholder is entitled to vote on the merger or (ii) if the
corporation is a subsidiary that is merged with its parent
under Section 33-11-104 or 33-11-108 or if the corporation is
a parent that is merged with its subsidiary under Section
33-11-108;
(2) consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares are to
be acquired, if the shareholder is entitled to vote on the
plan;
(3) consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the
usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order
or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale must be
distributed to the shareholders within one year after the date
of sale;
(4) an amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's
shares because it:
(i) alters or abolishes a preferential right of the
shares;
(ii) creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the
shares;
(iii) alters or abolishes a preemptive right of the holder
of the shares to acquire shares or other securities;
(iv) excludes or limits the right of the shares to vote on
any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or
other securities with similar voting rights; or
B-1
<PAGE> 82
(v) reduces the number of shares owned by the shareholder
to a fraction of a share if the fractional share so
created is to be acquired for cash under Section
33-6-104; or
(5) in the case of corporations which are not public corporations,
the approval of a control share acquisition under Article 1 of
Chapter 2 of Title 35;
(6) any corporate action to the extent the articles of
incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) Notwithstanding subsection (a), no dissenters' rights under this
section are available for shares of any class or series of shares
which, at the record date fixed to determine shareholders entitled to
receive notice of a vote at the meeting of shareholders to act upon the
agreement of merger or exchange, were either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc.
SECTION 33-13-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose
behalf he asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares to which he
dissents and his other shares were registered in the names of different
shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if he dissents with respect to all shares of
which he is the beneficial shareholder or over which he has power to
direct the vote. A beneficial shareholder asserting dissenters' rights
to shares held on his behalf shall notify the corporation in writing of
the name and address of the record shareholder of the shares, if known
to him.
SECTION 33-13-200. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, the
meeting notice must state that shareholders are or may be entitled to
assert dissenters' rights under this chapter and be accompanied by a
copy of this chapter.
(b) If corporate action creating dissenters' rights under Section 33-13-102
is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in
Section 33-13-220.
SECTION 33-13-210. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights (1) must give to
the corporation before the vote is taken written notice of his intent
to demand payment for his shares if the proposed action is effectuated
and (2) must not vote his shares in favor of the proposed action. A
vote in favor of the proposed action cast by the holder of a proxy
solicited by the corporation shall not disqualify a shareholder from
demanding payment for his shares under this chapter.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this chapter.
SECTION 33-13-220. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of Section 33-13-210(a).
(b) The dissenters' notice must be delivered no later than ten days after
the corporate action was taken and must:
(1) state where the payment demand must be sent and where
certificates for certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent
transfer of the shares is to be restricted after the payment
demand is received;
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(3) supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the
person asserting dissenters' rights certify whether or not he
or, if he is a nominee asserting dissenters' right on behalf
of a beneficial shareholder, the beneficial shareholder
acquired beneficial ownership of the shares before that date;
(4) set a date by which the corporation must receive the payment
demand, which may not be fewer than thirty nor more than sixty
days after the date the subsection (a) notice is delivered and
set a date by which certificates for certificated shares must
be deposited, which may not be earlier than twenty days after
the demand date; and
(5) be accompanied by a copy of this chapter.
SECTION 33-13-230. SHAREHOLDERS' PAYMENT DEMAND.
(a) A shareholder sent a dissenters' notice described in Section 33-13-220
must demand payment, certify whether he (or the beneficial shareholder
on whose behalf he is asserting dissenters' rights) acquired beneficial
ownership of the shares before the date set forth in the dissenters'
notice pursuant to Section 33-13-220(b)(3), and deposit his
certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not comply substantially with the requirements
that he demand payment and deposit his share certificates where
required, each by the date set in the dissenters' notice, is not
entitled to payment for his shares under this chapter.
SECTION 33-13-240. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for payment for them is received until the proposed
corporate action is taken or the restrictions are released under
Section 33-13-260.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed
corporate action.
SECTION 33-13-250. PAYMENT.
(a) Except as provided in Section 33-13-270, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who substantially complied with
Section 33-13-230 the amount the corporation estimates to be the fair
value of his shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of
payment, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
(2) a statement of the corporation's estimate of the fair value of
the shares and an explanation of how the fair value was
calculated;
(3) an explanation of how the interest was calculated;
(4) a statement of the dissenter's right to demand additional
payment under Section 13-33-280; and (5) a copy of this
chapter.
SECTION 33-13-260. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share
certificates, the corporation, within the same sixty-day period, shall
return the deposited certificates and release the transfer restrictions
imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a
new dissenters' notice under Section 33-13-220 and repeat the payment
demand procedure.
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SECTION 33-13-270. AFTER-ACQUIRED SHARES.
(a) A corporation may elect to withhold payment required by Section
33-13-250 from a dissenter as to any shares of which he (or the
beneficial owner on whose behalf he is asserting dissenters' rights)
was not the beneficial owner on the date set forth in the dissenters'
notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action, unless the
beneficial ownership of the shares devolved upon him by operation of
law from a person who was the beneficial owner on the date of the first
announcement.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares, an
explanation of how the fair value and interest were calculated, and a
statement of the dissenter's right to demand additional payment under
Section 33-13-280.
SECTION 33-13-280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due and demand
payment of his estimate (less any payment under Section 33-13-250) or
reject the corporation's offer under Section 33-13-270 and demand
payment of the fair value of his shares and interest due, if the:
(1) dissenter believes that the amount paid under Section
33-13-250 or offered under Section 33-13-270 is less than the
fair value of his shares or that the interest due is
calculated incorrectly;
(2) corporation fails to make payment under Section 33-13-250 or
to offer payment under Section 33-13-270 within sixty days
after the date set for demanding payment; or
(3) corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty
days after the date set for demanding payment.
(b) A dissenter waives his right to demand additional payment under this
section unless he notifies the corporation of his demand in writing
under subsection (a) within thirty days after the corporation made or
offered payment for his shares.
SECTION 33-13-300. COURT ACTION.
(a) If a demand for additional payment under Section 33-13-280 remains
unsettled, the corporation shall commence a proceeding within sixty
days after receiving the demand for additional payment and petition the
court to determine the fair value of the shares and accrued interest.
If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit court of
the county where corporation's principal office (or, if none in this
State, its registered office) is located. If the corporation is a
foreign corporation without a registered office in this State, it shall
commence the proceeding in the county in this State where the principal
office (or, if none in this State, the registered office) of the
domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this State) whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties must be served with a
copy of the petition. Nonresidents may be served by registered or
certified mail or by publication, as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint
persons as appraisers to receive evidence and recommend decisions on
the question of fair value. The appraisers have the powers described in
the order appointing them or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil
proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation.
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SECTION 33-13-310. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under Section 33-13-300
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the
court may assess costs against all or some of the dissenters, in
amounts the court finds equitable, to the extent the court finds the
dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under Section 33-13-280.
(b) The court also may assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all dissenters
if the court finds the corporation did not comply
substantially with the requirements of Sections 33-13-200
through 33-13-280; or
(2) against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily,
vexatiously or not in good faith with respect to the rights
provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be
paid out of the amounts awarded the dissenters who were benefited.
(d) In a proceeding commenced by dissenters to enforce the liability under
Section 33-13-300(a) of a corporation that has failed to commence an
appraisal proceeding within the sixty-day period, the court shall
assess the costs of the proceeding and the fees and expenses of
dissenters' counsel against the corporation and in favor of the
dissenters.
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PROXY SOLICITED FOR ANNUAL MEETING
OF SHAREHOLDERS OF
HORRY COUNTY STATE BANK
TO BE HELD ON APRIL 22, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby constitutes and appoints Hoyt J. Hardee and
Larry G. Floyd, and each of them, his or her true and lawful agents and proxies
with full power of substitution in each, to represent and vote, as indicated
below, all of the shares of Common Stock of Horry County State Bank that the
undersigned would be entitled to vote at the Annual Meeting of Shareholders of
the bank to be held at the Loris Community Hospital Center for Health & Fitness,
3207 Casey Street, Loris, South Carolina 29569, on April 22, 1999 at 7:00 p.m.
local time, and at any adjournment, upon the matters described in the
accompanying Notice of Annual Meeting of Shareholders and Proxy Statement,
receipt of which is acknowledged. These proxies are directed to vote on the
matters described in the Notice of Annual Meeting of Shareholders and Proxy
Statement as follows:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED: (I) "FOR" PROPOSAL NO. 1 TO APPROVE THE REORGANIZATION
AGREEMENT AND PLAN OF EXCHANGE WITH HCSB FINANCIAL CORPORATION; AND (II) "FOR"
PROPOSAL NO. 2 TO ELECT THE 14 DIRECTORS TO SERVE ON THE BOARD OF DIRECTORS EACH
FOR ONE-YEAR TERMS.
1. PROPOSAL to approve the Reorganization Agreement and Plan of Exchange
with HCSB Financial Corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL to elect the 14 identified directors to serve for one-year
terms.
D. Singleton Bailey Charles F. Freeman
Franklin C. Blanton Tommie W. Grainger
Russell R. Burgess, Jr. Randy B. Hardee
William H. Caines Gwyn G. McCutchen
James R. Clarkson T. Freddie Moore
J. Lavelle Coleman Carroll D. Padgett, Jr.
Boyd R. Ford, Jr. Bill G. Page
[ ] FOR all nominees [ ] WITHHOLD AUTHORITY
listed (except as marked to to vote for all nominees
the contrary)
(INSTRUCTION: To withhold authority to vote for any individual
nominee(s), write that nominees name(s) in the space
provided below).
<PAGE> 87
Dated: , 1999
-----------------------------
-------------------------------------------
Signature of Shareholder(s)
-------------------------------------------
Signature of Shareholder(s)
Please sign exactly as name or names appear
on your stock certificate. Where more than
one owner is shown on your stock
certificate, each owner should sign. Persons
signing in a fiduciary or representative
capacity shall give full title. If a
corporation, please sign in full corporate
name by authorized officer. If a
partnership, please sign in partnership name
by authorized person.
