SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE) FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
---- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________TO_________
Commission File Number 000-26995
HCSB FINANCIAL CORPORATION*
(Exact name of registrant as specified in its charter)
South Carolina 57-1079444
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5009 BROAD STREET
LORIS, SC 29569
(Address of principal executive
offices, including zip code)
(843) 756-6333
(Registrant's telephone number, including area code)
------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the date of this filing.
501,385 SHARES OF COMMON STOCK, $0.01 PAR VALUE
PAGE 1 OF 17
EXHIBIT INDEX ON PAGE 2
* The registrant is a successor issuer, within the meaning of Rule 15d-5 under
the Securities Exchange Act of 1934, to Horry County State Bank, Loris, South
Carolina.
<PAGE>
HCSB FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
<S> <C>
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998...............................3
Condensed Consolidated Statements of Income - Six months ended June 30, 1999 and 1998
and Three months ended June 30, 1999 and 1998.............................................................4
Condensed Consolidated Statements of Comprehensive Income - Six months ended June 30, 1999
and 1998 and Three months ended June 30, 1999 and 1998....................................................5
Condensed Consolidated Statement of Shareholders' Equity - Six months ended June 30, 1999.................6
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998.................7
Notes to Condensed Consolidated Financial Statements....................................................8-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................9-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................................................16
Item 6. Exhibits and Reports on Form 8-K.........................................................................16
(a) Exhibits.............................................................................................16
(b) Reports on Form 8-K..................................................................................16
</TABLE>
2
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 2,915 $ 2,573
Federal funds sold & repurchase agreements 3,380 -
Time deposits with other banks - 500
--------------- ---------------
6,295 3,073
Securities available-for-sale 24,809 19,640
Loans receivable 68,560 56,016
Less unearned income (77) (75)
Less allowance for loan losses (991) (880)
--------------- ---------------
Loans, net 67,492 55,061
Accrued interest receivable 1,308 857
Premises, furniture & equipment, net 3,717 3,504
Other assets 1,715 1,451
--------------- ---------------
Total assets $ 105,336 $ 83,586
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Non-interest bearing $ 7,309 $ 6,358
Interest bearing 84,342 63,612
--------------- ---------------
91,651 69,970
Accrued interest payable 341 221
Federal funds purchased - 170
Advances from the Federal Home Loan Bank 5,000 5,000
Other liabilities 399 201
--------------- ---------------
Total liabilities 97,391 75,562
--------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, $5.00 par value, 1,000,000 shares
authorized, 478,150 shares issued and outstanding - 2,391
Common stock, $0.01 par value, 10,000,000 shares
authorized, 501,385 shares issued and outstanding 5 -
Capital surplus 7,878 4,865
Accumulated other comprehensive income (414) 80
Retained earnings 476 688
--------------- ---------------
Total shareholders' equity 7,945 8,024
--------------- ---------------
Total liabilities and shareholders' equity $ 105,336 $ 83,586
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) Six Months Ended June 30, Three Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans, including fees $ 2,959 $ 2,375 $ 1,561 $ 1,266
Investment securities:
Taxable 562 401 309 228
Tax-exempt 71 29 44 15
Other interest income 68 272 35 108
---------- ----------- --------- ---------
Total 3,660 3,077 1,949 1,617
---------- ----------- --------- ---------
INTEREST EXPENSE:
Certificates of deposit $100M and over 237 397 85 204
Other deposits 1,364 1,240 789 656
Other interest expense 111 8 56 3
---------- ----------- --------- ---------
1,712 1,645 930 863
---------- ----------- --------- ---------
NET INTEREST INCOME 1,948 1,432 1,019 754
Provision for loan losses 140 10 80 -
---------- ----------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,808 1,422 939 754
---------- ----------- --------- ---------
OTHER OPERATING INCOME:
Service charges on deposit accounts 246 192 139 105
Credit life insurance commissions 71 52 38 28
Other operating income 65 36 41 17
---------- ----------- --------- ---------
Total 382 280 218 150
---------- ----------- --------- ---------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 813 813 419 340
Net occupancy expense 85 87 42 43
Furniture and equipment expense 186 156 98 86
Other operating expenses 437 439 231 260
---------- ----------- --------- ---------
Total 1,521 1,495 790 729
---------- ----------- --------- ---------
INCOME BEFORE INCOME TAXES 669 207 367 175
Income tax provision 236 72 131 61
---------- ----------- --------- ---------
NET INCOME $ 433 $ 135 $ 236 $ 114
========== =========== ========= =========
BASIC EARNINGS PER SHARE .88 .28 .47 .24
DILUTED EARNINGS PER SHARE .88 .28 .47 .24
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS) Six Months Ended June 30, Three Months Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
NET INCOME $ 433 $ 135 $ 236 $ 114
----------- ----------- ----------- ---------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
during the period (494) - (385) 1
Less: reclassification adjustment
for gains included in net income - - - -
----------- ----------- ----------- ---------
Other comprehensive income (494) - (385) 1
---------- ----------- ---------- ---------
COMPREHENSIVE INCOME $ (61) $ 135 $ (149) $ 115
========== =========== ========== =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Capital Comprehensive Retained Shareholders'
(DOLLARS IN THOUSANDS) Shares Amount Surplus Income Earnings Equity
------------ ------------ ------------ ------------- ------------ ------------
BALANCE,
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998 478,150 $ 2,391 $ 4,865 $ 80 $ 688 $ 8,024
Net income
for the period 433 433
5% stock dividend 23,235 116 511 (645) (18)
Acquisition of the Bank's
common stock by HCSB
Financial Corporation (2,502) 2,502 -
Other comprehensive
income (494) (494)
------- -------- ------- ----- ------ ------
BALANCE,
JUNE 30, 1999 501,385 $ 5 $ 7,878 $(414) $ 476 $7,945
======= ======== ======= ===== ===== =====
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
HCSB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
(DOLLARS IN THOUSANDS) June 30,
- ---------------------- --------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 433 $ 135
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 121 112
Provision for possible loan losses 140 10
Amortization less accretion on investments 13 4
Amortization of deferred loan costs 47 45
Loss (gain) on sale of premises and equipment - 4
(Increase) decrease in interest receivable (451) (389)
Increase (decrease) in interest payable 120 57
(Increase) decrease in other assets 28 (54)
Increase (decrease) in other liabilities 198 64
----------- -----------
Net cash provided by operating activities 649 (12)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans to customers (12,618) (13,315)
Purchases of securities available-for-sale (10,864) (8,030)
Maturities of securities available-for-sale 4,899 5,090
Proceeds from disposal of premises and equipment - (1,103)
Purchases of premises and equipment (334) (66)
Purchase of Federal Home Loan Bank stock (3)
----------- -----------
Net cash used by investing activities (18,920) (17,424)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits accounts 21,681 11,906
Increase (decrease) in short-term borrowings (170) (350)
Cash paid in lieu of fractional shares (18)
----------- -----------
Net cash provided by financing activities 21,493 11,556
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,222 (5,880)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,073 14,328
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,295 $ 8,448
=========== ===========
Cash paid during the period for:
Income taxes $ 121 $ 55
Interest $ 1,592 $ 1,588
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
HCSB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with the requirements for interim financial statements and,
accordingly, they are condensed and omit disclosures which would substantially
duplicate those contained in the most recent annual report to shareholders. The
financial statements as of June 30, 1999 and for the interim periods ended June
30, 1999 and 1998 are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation. The financial information as of December 31, 1998 has been
derived from the audited financial statements as of that date. For further
information, refer to the financial statements and the notes included in Horry
County State Bank's 1998 Annual Report.
NOTE 2 - REORGANIZATION OF HORRY COUNTY STATE BANK
On April 22, 1999, the stockholders of Horry County State Bank (the Bank)
approved a plan of corporate reorganization under which Horry County State Bank
became a wholly owned subsidiary of HCSB Financial Corporation (the Company),
which was organized at the direction of the Bank. The original authorized common
stock of HCSB Financial Corporation is 10,000,000 shares with a par value of
$.01 per share. Pursuant to the reorganization, the Company issued 501,385
shares of its common stock in exchange for all of the 501,385 outstanding common
shares of the Bank. The effective date of the reorganization was June 10, 1999
and was accounted for as if it were a pooling of interests. As a result, the
financial statements for the period ended June 30, 1999 are presented as if the
reorganization had occurred on January 1, 1999. The accompanying financial
statements for the periods ended in 1998 are unchanged from the amounts
previously reported by Horry County State Bank.
NOTE 3 - COMPREHENSIVE INCOME
The following table sets forth the amounts of other comprehensive income
included in equity along with the related tax effect for the six months ended
June 30, 1999 and 1998 and for the three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
Pre-tax (Expense) Net of tax
FOR THE SIX MONTHS ENDED JUNE 30, 1999: Amount Benefit Amount
- --------------------------------------- ------ ------- ------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities
available for sale arising in 1999 $ (783) $ 289 $ (494)
------------------- ------------------- ----------------
Other comprehensive income $ (783) $ 289 $ (494)
=================== =================== ================
Pre-tax (Expense) Net of tax
FOR THE SIX MONTHS ENDED JUNE 30, 1998: Amount Benefit Amount
- --------------------------------------- ------ ------- ------
Net unrealized gains (losses) on securities
available for sale arising in 1998 $ (1) $ 1 $ -
------------------- ------------------- ----------------
Other comprehensive income $ (1) $ 1 $ -
=================== =================== ================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
HCSB FINANCIAL CORPORATION
NOTE 3 - COMPREHENSIVE INCOME -- continued
(DOLLARS IN THOUSANDS)
Pre-tax (Expense) Net of tax
FOR THE THREE MONTHS ENDED JUNE 30, 1999: Amount Benefit Amount
- ----------------------------------------- ------ ------- ------
Net unrealized gains (losses) on securities
<S> <C> <C> <C>
available for sale arising in 1999 $ (610) $ 225 $ (385)
------------------- ------------------- ----------------
Other comprehensive income $ (610) $ 225 $ (385)
=================== =================== ================
Pre-tax (Expense) Net of tax
FOR THE THREE MONTHS ENDED JUNE 30, 1998: Amount Benefit Amount
- ----------------------------------------- ------ ------- ------
Net unrealized gains (losses) on securities
available for sale arising in 1998 $ 1 $ - $ 1
------------------- ------------------- ----------------
Other comprehensive income $ 1 $ - $ 1
=================== =================== ================
</TABLE>
Accumulated other comprehensive income consists solely of the unrealized gain on
securities available for sale, net of the deferred tax effects.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following is a discussion of the Company's financial condition as of June
30, 1999 compared to December 31, 1998, and the results of operations for the
three and six months ended June 30, 1999 compared to the three and six months
ended June 30, 1998. These comments should be read in conjunction with the
Company's condensed consolidated financial statements and accompanying footnotes
appearing in this report. This report contains "forward-looking statements"
relating to, without limitation, future economic performance, plans and
objectives of management for future operations, and projections of revenues and
other financial items that are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. The words "expect," "estimate," "anticipate," and
"believe," as well as similar expressions, are intended to identify
forward-looking statements.
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the six months ended June 30, 1999, net interest income increased $516,000,
or 36.03%, over the same period in 1998. Interest income from loans, including
fees, increased $584,000, or 24.59%, from the six months ended June 30, 1998 to
the comparable period in 1999 as demand for loans in the Company's marketplace
continued to grow and the Company's new branches in Conway, North Myrtle Beach
and Tabor City developed the necessary presence to generate loan growth. Also
contributing to the overall increase in net interest income was an increase of
$203,000 in income from investment securities. Interest expense at June 30, 1999
was $1,712,000 compared to $1,645,000 for the same period in 1998. The net
interest margin realized on earning assets was 4.00% for the six months ended
June 30, 1999, while the interest rate spread was 3.98%.
Net interest income increased from $754,000 for the quarter ending June 30, 1998
to $1,019,000 for the quarter ending June 30, 1999. This represents an increase
of $265,000, or 35.15%. Interest income from loans, including fees, increased to
$1,561,000 for the quarter ended June 30, 1999 from $1,266,000 for the quarter
ended June 30, 1998. This increase was also primarily due to the establishment
of the new branches. Interest income from investment securities for the quarter
ending June 30, 1999 increased $110,000, or 45.27%, over the same period in
1998.
9
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the allowance for possible loan losses
at an adequate level. For the six months ended June 30, 1999, the provision
charged to expense was $140,000. The increase of $130,000 from the comparable
period in 1998 is a result of management's efforts to increase the allowance for
loan losses to match the $12,544,000 growth in the loan portfolio since June 30,
1998. For the quarter ended June 30, 1999, the provision charged to expense was
$80,000. There was no provision charged to expense for the quarter ended June
30, 1998. There are risks inherent in making all loans, including risks with
respect to the period of time over which loans may be repaid, risks resulting
from changes in economic and industry conditions, risks inherent in dealing with
individual borrowers, and, in the case of a collateralized loan, risks resulting
from uncertainties about the future value of the collateral. The Company
maintains an allowance for loan losses based on, among other things, historical
experience, an evaluation of economic conditions, and regular reviews of
delinquencies and loan portfolio quality. Management's judgement about the
adequacy of the allowance is based upon a number of assumptions about future
events which it believes to be reasonable but which may not prove to be
accurate. Thus, there is a risk that charge-offs in future periods could exceed
the allowance for loan losses or that substantial additional increases in the
allowance for loan losses could be required. Additions to the allowance for loan
losses would result in a decrease of the Company's net income and, possibly, its
capital.
NONINTEREST INCOME
Noninterest income during the six months ended June 30, 1999 was $382,000, an
increase of $102,000, or 36.43% from the comparable period in 1998. Growth
resulting from the new branches generated income from deposit accounts as well
as other sources of noninterest income. The increase is primarily a result of an
increase in service charges on deposit accounts from $192,000 at June 30, 1998
to $246,000 at June 30, 1999. This change is a result of an increase in deposit
accounts over the two periods. Deposits at June 30, 1998 were $75,791,000
compared to $91,651,000 at June 30, 1999.
For the quarter ended June 30, 1999, noninterest income increased $68,000, or
45.33% over the same period in 1998. This increase is primarily due to service
charges on deposit accounts which increased $34,000, or 32.38% from the quarter
ended June 30, 1998 to the quarter ended June 30, 1999.
NONINTEREST EXPENSE
Total noninterest expense for the six months ended June 30, 1999 was $1,521,000,
or 1.74% higher than the six months ended June 30, 1998. The primary reason for
the $26,000 increase in noninterest expense over the two periods was
attributable to furniture and equipment expense, which increased $30,000, or
19.23% over the same period in 1998. Salaries and employee benefits,
traditionally the largest component of non-interest expense, remained unchanged
at $813,000 from the period ended June 30, 1998 to the period ended June 30,
1999.
For the quarter ended June 30, 1999, noninterest expense increased $61,000, or
8.37% over the same period in 1998. The largest increase between the quarter
ended June 30, 1999 and the quarter ended June 30, 1998 was in salaries and
benefits which increased $79,000, or 23.23%.
INCOME TAXES
The income tax provision for the six months ended June 30, 1999 was $236,000 as
compared to $72,000 for the same period in 1998. The effective tax rates were
35.28% and 34.78% at June 30, 1999 and 1998, respectively. The effective tax
rates were 35.69% and 34.86% for the quarter ended June 30, 1999 and June 30,
1998, respectively.
10
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
NET INCOME
Although net interest income increased substantially during the first six months
of 1999 compared to the comparable period in 1998, the Company had only a slight
increase in noninterest expense during these time periods. The primary component
of noninterest expense was salaries and employee benefits, which was $813,000
for both the six months ended June 1998 and the six months ended June 30, 1999.
Salaries and employee benefits did not increase over these time periods because
each of the Company's new branches were fully staffed by the beginning of 1998.
The combination of the above factors resulted in net income for the six months
ended June 30, 1999 of $433,000 as compared to $135,000 for the same period in
1998. This represents an increase of $298,000, or 220.74%, over the same period
in 1998. For the quarter ended June 30, 1999, net income was $236,000 as
compared to $114,000 for the quarter ended June 30, 1998. This represents an
increase of $122,000, or 107.01%, from the quarter ending June 30, 1998.
ASSETS AND LIABILITIES
During the first six months of 1999, total assets increased $21,750,000, or
26.02% when compared to December 31, 1998. The primary reason for the increase
in assets was due to an increase in loans of $12,544,000 during the first six
months of 1999. It is typical for the Company to have an increase in loans,
especially in the area of agricultural loans, during this time of the year. In
addition, investment securities increased $5,169,000, or 26.32%, from December
31, 1998 to June 30, 1999. Total deposits increased $21,681,000, or 30.99%, from
the December 31, 1998 amount of $69,970,000. Within the deposit area, interest
bearing deposits increased $20,730,000, or 32.59%, and non- interest bearing
deposits increased $951,000, or 14.96%, during the first six months of 1999.
INVESTMENT SECURITIES
Investment securities increased from $19,640,000 at December 31, 1998 to
$24,809,000 at June 30, 1999. Much of the increase was in U.S. Agencies, which
increased $4,468,000, or 43.33%, from December 31, 1998 to June 30, 1999. The
excess funds generated from the growth in deposits that were not invested in
loans were invested in securities.
LOANS
Net loans increased $12,431,000, or 22.58%, during the six month period ended
June 30, 1999. There were two primary reasons for this growth. First, loan
demand in general continued to increase in the Company's market areas in the
first half of 1999. Second, the Company has begun to establish a presence
through its new branches in Conway, North Myrtle Beach, and Tabor City, which
opened in late 1997 and early 1998. As expected during this time of year,
agricultural loans increased $4,278,000, or 75.13%, from December 31, 1998.
Balances within the major loans receivable categories as of June 30, 1999 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(DOLLARS IN THOUSANDS) 1999 1998
- ---------------------- ---- ----
<S> <C> <C>
Real estate - construction and land development $ 2,011 $ 2,052
Real estate - other 23,387 19,926
Agricultural 9,972 5,694
Commercial and industrial 19,254 15,468
Consumer 13,781 12,278
Other, net 155 598
-------------------- --------------------
$ 68,560 $ 56,016
==================== ====================
</TABLE>
11
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
RISK ELEMENTS IN THE LOAN PORTFOLIO
The following is a summary of risk elements in the loan portfolio:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ---------------------- --------------------- --------------------
<S> <C> <C>
Loans: Nonaccrual loans $ 406 $ 58
Accruing loans more than 90 days past due $ - $ 462
Loans identified by the internal review mechanism:
Criticized $ 1,384 $ 2,168
Classified $ 489 $ 451
Activity in the Allowance for Loan Losses is as follows:
June 30,
---------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
- ---------------------- --------------------- --------------------
Balance, January 1, $ 880 $ 911
Provision for loan losses for the period 140 10
Net loans charged off for the period (29) (98)
-------------------- --------------------
Balance, end of period $ 991 $ 823
==================== ====================
Gross loans outstanding, end of period $ 68,560 $ 54,848
Allowance for Loan Losses to
loans outstanding 1.44% 1.50%
</TABLE>
DEPOSITS
At June 30, 1999, total deposits increased by $21,681,000, or 30.99%, from
December 31, 1998. Expressed in percentages, non-interest bearing deposits
increased 14.96% and interest bearing deposits increased 32.59%. The growth in
deposits was primarily attributable to the establishment of several new
branches. Deposits at the Conway branch (which opened in February 1998)
increased $4,300,000 from December 31, 1998. Deposits at the North Myrtle Beach
branch (which opened in October 1997) increased $3,500,000 since December 31,
1998.
Balances within the major deposit categories as of June 30, 1999 and December
31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-interest bearing demand deposits $ 7,309 $ 6,358
Interest bearing demand deposits 8,237 9,168
Savings and money market deposits 16,209 14,553
Certificates of deposit 59,896 39,891
-------------------- --------------------
$ 91,651 $ 69,970
==================== ====================
</TABLE>
12
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
LIQUIDITY
Liquidity needs are met by the Company through scheduled maturities of loans and
investments on the asset side and through pricing policies on the liability side
for interest-bearing deposit accounts. The level of liquidity is measured by the
loans-to-total borrowed funds ratio, which was at 70.85% at June 30, 1999 and
74.61% at December 31, 1998.
Securities available-for-sale, which totaled $24,809,000 at June 30, 1999, serve
as a ready source of liquidity. The Company also has lines of credit available
with correspondent banks to purchase federal funds for periods from one to seven
days. At June 30, 1999, unused lines of credit totaled $1,000,000.
CAPITAL RESOURCES
Total shareholders' equity decreased from $8,024,000 at December 31, 1998 to
$7,945,000 at June 30, 1999. The decrease of $79,000 is primarily attributable
to the negative charge to equity of $494,000 relating to the change in fair
value of investment securities. The change in fair value was offset by earnings
for the period of $433,000. In addition, the Company declared a 5% stock
dividend in January 1999 which was paid on March 15, 1999. The only effect on
equity as a result of the stock dividend was a charge of $18,000 for the payment
of cash in lieu of fractional shares.
Bank holding companies, such as the Company, and their banking subsidiaries are
required by banking regulators to meet certain minimum levels of capital
adequacy which are expressed in the form of certain ratios. Capital is separated
into Tier 1 capital (essentially common shareholders' equity less intangible
assets) and Tier 2 capital (essentially the allowance for loan losses limited to
1.25% of risk-weighted assets). The first two ratios, which are based on the
degree of credit risk in the Company's assets, provide the weighting of assets
based on assigned risk factors and include off-balance sheet items such as loan
commitments and stand-by letters of credit. The ratio of Tier 1 capital to
risk-weighted assets must be at least 4.0% and the ratio of total capital (Tier
1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.
The capital leverage ratio supplements the risk-based capital guidelines. Banks
and bank holding companies are required to maintain a minimum ratio of Tier 1
capital to adjusted quarterly average total assets of 3.0%.
The following table summarizes the Company's risk-based capital at June 30,
1999:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Shareholders' equity $ 8,359
Less: intangibles -
--------------------
Tier 1 capital 8,359
Plus: allowance for loan losses (1) 960
--------------------
Total capital $ 9,319
====================
Risk-weighted assets $ 76,789
====================
Risk based capital ratios
Tier 1 10.89%
Total capital 12.14%
Leverage ratio 8.30%
(1) limited to 1.25% of risk-weighted assets
</TABLE>
13
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
REGULATORY MATTERS
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. For example, the United States House of
Representatives recently passed House Bill 10, the Financial Services Act of
1999, which, if enacted into law, would make substantial changes to the
regulation of banks and other companies within the United States financial
services industry. The Company cannot predict whether any of these proposals
will be adopted or, if adopted, how these proposals would affect the Company.
YEAR 2000
Like many financial institutions, the Bank relies upon computers for the daily
conduct of its business and for information systems processing. There is concern
among industry experts that on January 1, 2000 computers will be unable to
"read" the new year, which may result in widespread computer malfunctions. While
the Bank believes that it has available resources and has adopted a plan to
address Year 2000 compliance, it is still dependent to a certain degree on other
third party vendors. The Bank believes that its data processing system is Year
2000 compliant. Testing for this system was completed as of March 31, 1999. All
phases of the testing were considered to be successful. The Bank has incurred
costs that would normally be incurred in upgrading its hardware and software.
Any other costs associated with upgrading are not expected to be material.
The Bank anticipates that the costs to upgrade other ancillary systems will not
materially differ from normal costs incurred during prior years to upgrade and
maintain its computer systems. The Bank has completed an evaluation of all its
internal systems and software and the network connections it maintains, and it
may incur only minor additional costs. The Bank is seeking assurances about the
Year 2000 compliance with respect to the other third party hardware and software
systems it uses, and the Bank believes that its internal systems and software
and the network connections it maintains will be adequately programmed to
address the Year 2000 issue. The Bank has completed testing all ancillary
systems, such as telephone systems and security devices, as of March 31, 1999.
There can be no assurances that all hardware and software that the Bank uses
will be Year 2000 compliant, and the Bank cannot predict with any certainty the
costs it will incur to respond to any Year 2000 issues. Factors which may affect
the amount of these costs include the Bank's inability to control third party
modification plans, the Bank's ability to identify and correct all relevant
computer codes, the availability and cost of engaging personnel trained in
solving Year 2000 issues, and other similar uncertainties.
The Company believes that the largest Year 2000 Problem exposure to most
financial institutions is the preparedness of their customers. The Company is
addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an increase in loan defaults. The amount of potential
loss from this issue is not quantifiable. The Company is attempting to reduce
this exposure by educating its customers. The Company has implemented a
comprehensive Year 2000 credit review policy for all existing loans that exceed
$100,000 as well as an underwriting policy for all new loan requests. At
present, the Company's review indicates that the Company's exposure to credit
risks associated with Year 2000 is considered to be low. The Company's credit
review procedures will continue to include these policies throughout 1999.
The Bank has developed a Contingency Plan (Plan) to ensure its ability to
continue as a functioning entity after January 1, 2000. The Plan includes
remediation contingency planning and business resumption contingency planning.
The remediation contingency plans are designed to ensure that responsible
personnel, vendors and service providers adhere to the Bank's Year 2000 plans
and objectives. The business resumption contingency plans are designed to
provide assurance that mission-critical functions will continue in the event
that systems or applications fail as a result of year 2000 problems.
14
<PAGE>
HCSB FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS -- continued
YEAR 2000 -- continued
The Company expects to identify and resolve all Year 2000 Problems that could
materially adversely affect its business. However, the Company believes that it
is not possible to determine with complete certainty that all Year 2000 Problems
affecting it have been identified or corrected. The number of devices that could
be affected and the interactions among these devices are simply too numerous. In
addition, the Company cannot accurately predict how many failures related to the
Year 2000 Problem will occur with its suppliers, customers, or other third
parties or the severity, duration, or financial consequences of such failures.
As a result, the Company expects that it could possibly suffer the following
consequences:
o A number of operational inconveniences and inefficiencies for
the Company, its service providers, or its customers that may
divert the Company's time and attention and financial and
human resources from its ordinary business activities; and
o System malfunctions that may require significant efforts by
the Company or its service providers or customers to prevent
or alleviate material business disruptions.
Additionally, there may be a higher than usual demand for liquidity immediately
prior to the century change due to deposit withdrawals by customers concerned
about Year 2000 issues. To address this possible demand, the Company has secured
additional lines of credit with several correspondent banks.
15
<PAGE>
HCSB FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 22, 1999, the Company held its Annual Meeting of Shareholders for the
purpose of (a) electing directors, (b) electing officers of the Board of
Directors, and (c) approving the formation of a holding company through a
reorganization agreement and plan of exchange with HCSB Financial Corporation.
The nominees for director received the number of affirmative votes of
shareholders required for such nominee's election in accordance with the Bylaws
of the Bank with at least 378,209 shares voting for the nominees out of a total
of 501,385 outstanding shares. There were no withheld and no broker non-votes.
The proposal for the reorganization agreement received the number of affirmative
votes of shares required for approval pursuant to South Carolina law and the
Bylaws of the Bank. Of the 501,385 outstanding shares of the Bank, 382,368
shares were voted for, 1,172 shares were voted against, and 1,810 shares
abstained from voting for the reorganization agreement. There were no withheld
and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
Items 1, 2, 3 and 5 are not applicable.
16
<PAGE>
HCSB FINANCIAL CORPORATION
PART II - OTHER INFORMATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By:
---------------------------------------------
James R. Clarkson
President
Date: By:
---------------------------------------------
Loretta B. Gerald
Assistant Vice President & Cashier (Principal
Accounting Officer)
17
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