SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-26995
HCSB FINANCIAL CORPORATION*
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(Exact name of Registrant as specified in its charter)
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SOUTH CAROLINA 57-1079444
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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5201 BROAD STREET, LORIS, SOUTH CAROLINA 29569
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 843/756-6333
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent fliers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value (computed on the basis of the most recent trades of
which the Registrant was aware) of shares of the Common Stock ($.01 par value
per share) held by non-affiliates of the registrant as of March 24, 2000 was
$17,047,090. The market value calculation assumes that all shares beneficially
owned by members of the Board of Directors of the Registrant are shown owned by
"affiliates", a status which each of the directors individually disclaims.
The number of shares outstanding of the issuer's classes of common stock as of
March 24, 2000 - 1,002,770 shares of Common Stock, $.01 Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 1999 fiscal year end are incorporated by reference into Part III of
this report.
*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 1 of 47 sequentially numbered pages.
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PART I
ITEM 1. BUSINESS
GENERAL. HCSB Financial Corporation (the "Company or "Registrant") is a South
Carolina corporation organized for the purpose of becoming a bank holding
company for Horry County State Bank (the "Bank"), under the Bank Holding Company
Act. Effective June 10, 1999 the Registrant acquired, in exchange for its own
shares of common stock, all of the outstanding common stock of the Bank.
SUBSIDIARY. Horry County State Bank is a state-chartered commercial bank
operating from seven offices located in Horry and Marion Counties in South
Carolina and Columbus and Brunswick Counties in North Carolina. The Bank's
primary market area is in these counties in South Carolina and North Carolina.
Depository accounts are insured by the Federal Deposit Insurance Corporation up
to the maximum amount permitted by law. The Bank received its charter on
December 18, 1987, and opened for business on January 4, 1988.
The Bank offers a full range of deposit services for individuals and businesses.
Deposit products include checking accounts, savings accounts, certificate of
deposit, money market accounts and IRA's.
The Bank offers short to intermediate term commercial and consumer loans for a
variety of purposes on both a secured and unsecured basis. The primary
commercial market for these loans is small to medium sized businesses located in
the Horry and Marion Counties in South Carolina and Columbus and Brunswick
Counties in North Carolina. Commercial loans may be made to companies to acquire
fixed assets, for general operating purposes, or to finance inventory or
accounts receivables, as well as for other purposes. Consumer loans are made to
finance the purchase of real estate, automobiles, mobile homes, boats, other
recreational items, or for home improvements, education or personal investments.
The Bank has not obtained a material portion of its deposits from any single
person or few persons nor is a material portion of the Bank's loans concentrated
within a single industry or group of related industries. Management has no
reason to believe that the loss of any depositor or a few of the larger
depositors would have a materially adverse effect upon the operations of the
Bank or erode its deposit base.
EMPLOYEES. As of March 24, 2000, the Company and the Bank had sixty full-time
and four part-time employees. Neither the Company nor the Bank is a party to a
collective bargaining agreement, and they consider their relations with
employees to be good.
COMPETITION AND MARKET AREA. The Company and the Bank conduct business in terms
substantially the same as a typical commercial bank offering a full range of
banking services, with the exception of trust services. The Company's
capitalization allows the Company to compete effectively in it's market.
Correspondent banks are used to meet customer credit needs that exceed the
Bank's lending limits.
The Bank competes in a very competitive market for deposits and loans against
commercial banks, savings and loans and credit unions. Several of the bank's
competitors are headquartered in Horry County. The Bank prides itself in
providing prompt, efficient, courteous service and subscribes to the theory that
funds resulting from local depositors should be reinvested in the depositor's
community.
The Bank strongly feels that decisions regarding credit and services of a bank
can best be made at a local level and that stability and continuity of
management within a bank without frequent transfers is important to the
financial well-being of its customers.
Page 2 of 47 sequentially numbered pages.
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SUPERVISION AND REGULATION. The Company is a bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended (the "Act"), and is
registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and the South Carolina State Board of Financial
Institutions (the "State Board"). The Company is required to file semi-annual
reports with the Federal Reserve Board and such additional information as that
Board may require pursuant to the Act, and to file annual reports with the State
Board.
The Company also is subject to examination by the Federal Reserve Board and the
State Board and is required to obtain Federal Reserve Board and State Board
approval prior to acquiring, directly or indirectly, ownership or control of any
voting shares of a bank if, after such acquisition, it would own or control,
directly or indirectly, more than 5% of the voting stock of such bank, unless it
already owns a majority of the voting stock of such bank. Furthermore, a bank
holding company is, with limited exceptions, prohibited from acquiring direct or
indirect ownership or control of any voting stock of any company which is not a
bank or a bank holding company and must engage only in the business of banking
or managing and controlling banks or furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of a company, the activities of which the Federal
Reserve Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or
provisions of any property or service. Thus, an affiliate of a bank holding
company may not extend credit, lease or sell property, furnish any services or
fix or vary the consideration for such on the condition that (I) the customer
must obtain or provide some additional credit, property or services from or to
its bank holding company or subsidiaries thereof, or (ii) the customer may not
obtain some other credit, property or services from a competitor, except to the
extent reasonable conditions are imposed to assure the soundness of the credit
extended.
Stockholders of the Company's common stock are entitled to receive dividends as
and when declared by the Company's Board of Directors out of funds legally
available therefore under the laws of the State of South Carolina. The Company's
ability to pay dividends is dependent on the amount of dividends paid by the
Bank and any other subsidiary of the Company.
In August 1989, the Financial Institutions Reform Recovery and Enforcement Act
of 1989 ("FIRREA") was enacted. FIRREA provides, among other things, for a
phased-in increase in the rate on annual insurance assessments paid by a bank,
including the Bank, whose deposits are insured by the new Bank Insurance Fund of
the FDIC. FIRREA also imposes liability on an institution, the deposits of which
are insured by the FDIC for certain potential obligations to the FDIC incurred
in connection with assistance to other FDIC insured institutions under common
control with such institutions.
In December 1991, a major banking bill entitled the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA substantially
revised the bank regulatory and funding provisions of the Federal Deposit
Insurance Act and makes other revisions to several other federal banking
statutes. Among other things, FDICIA defined new regulatory standards in such
areas as asset quality, earnings and competition and revised existing regulatory
standards for powers of state banks, real estate lending, capital adequacy, and
other items.
On September 29, 1994, the federal government enacted the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "1994 Act"). The provisions of
the 1994 Act became effective on September 29, 1995, at which time eligible bank
holding companies in any state were permitted, with Federal Reserve Board
approval, to acquire banking organizations in any other state. As such, all
existing regional compacts and substantially all existing regional limitations
on interstate acquisitions of banking organizations have been eliminated.
Page 3 of 47 sequentially numbered pages.
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The 1994 Act also removed substantially all of the existing prohibitions on
interstate branching by banks. On and after June 1, 1997, a bank operating in
any state may establish one or more branches within any other state without, as
currently required, the establishment of a separate banking structure within the
other state. Interstate branching is allowed earlier than the automatic phase-in
date of June 1, 1997, as long as the legislatures of both states involved have
adopted statutes expressly permitting such branching to take place at an earlier
date.
On May 7, 1996, South Carolina adopted the South Carolina Act which became
effective on July 1, 1996. The South Carolina Act permits the acquisition of
South Carolina banks and bank holding companies by, and mergers with,
out-of-state banks and bank holding companies with the prior approval of the
State Board. The South Carolina Act also permits South Carolina state banks,
with prior approval of the State Board, to operate branches outside the State of
South Carolina. Although the 1994 Act has the potential to increase the number
of competitors in the marketplace of the Bank, the Company cannot predict the
actual impact of such legislation on the competitive position of the Bank.
The Company cannot predict what other legislation might be enacted or what other
regulations might be adopted, or if enacted or adopted, the affect thereof on
the Company and/or the Bank.
SOURCES AND AVAILABILITY OF FUNDS. The resources essential to the business of
the Company and its subsidiary, the Bank, consist primarily of funds derived
from deposits. The Company's banking subsidiary uses these funds to make loans
and to fund its investment portfolio. The availability of such funds is
primarily dependent upon the economic policies of the government, the economy in
general and the general credit market for loans.
MONETARY POLICY AND ECONOMIC CONTROLS. The earnings of the Company's subsidiary
bank, and therefore, to a large extent the earnings of the Company, are affected
by the policies of regulatory authorities, including the Federal Reserve System.
An important function of the Federal Reserve System is to regulate the national
supply of bank credit in order to combat recession and curb inflation. Among the
instruments used to attain these objectives are open market operations in U.S.
Government securities and changes in the reserve requirements applicable to
member bank deposits. These instruments are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use also may affect interest rates charged on loans or paid
for deposits.
DEPENDENCE UPON SINGLE CUSTOMER OR GROUP OF CUSTOMERS. Neither the Company nor
the Bank is dependent upon a single customer or a group of a few customers.
ADVISORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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Certain of the statements contained in this PART I, Item 1 (Business) and in
Part II, Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) that are not historical facts are forward-looking
statements subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. The Company cautions readers of this Annual
Report on Form 10-K that such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Although the
Company's management believes that their expectations of future performance are
based on reasonable assumptions within the bounds of their knowledge of their
business and operations, there can be no assurance that actual results will not
differ materially from their expectations.
Page 4 of 47 sequentially numbered pages.
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ITEM 2. PROPERTIES
The organizers of Horry County State Bank purchased a lot at 5009 Broad Street,
Loris, South Carolina in 1987, and the Bank initially opened for business in
January, 1988 in a modular facility on this site. The Bank subsequently built a
permanent building in this same site, moved its entire operation into this
facility in April, 1999 and sold the modular building. The permanent building
was enlarged several years later to accommodate the bank's growth and need to
expand its support operations area. Today this building houses the Bank's main
branch bank in Loris and the Bank's Residential Mortgage Loan Department. The
Bank owns this property in fee simple title.
In 1994 the Bank purchased a lot in fee simple at 5264 Hwy. 9, Green Sea, South
Carolina and opened a full-service branch bank on this site in March, 1995 in a
modular building. The Bank subsequently constructed a 2,300 square foot building
on this site and relocated its branch operations into this permanent facility in
February, 1998. The Bank still owns the modular building, which is presently
unoccupied.
In January, 1997, the Bank purchased a commercial lot and former banking office
at 4011 Meeting Street, Loris, South Carolina, and renovated this building to
accommodate a second branch facility in Loris as well as the Bank's central
credit operations department. This Bank opened this facility in May, 1997. It
presently serves solely as a branch banking facility. The Bank owns this
property in fee simple.
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 Banking Facility at this location based on the fact that the Reigle-Neal
Act would authorize interstate branching into North Carolina effective June 1,
1997. Late in May, 1997, however the North Carolina legislature rescinded its
earlier position on interstate branching and extended its moratorium on such
branching into North Carolina until June 1, 1999. Since that time, this
moratorium has been extended permanently. The Bank still owns this property in
fee simple and has it available for sale. HCSB Financial Corporation has
considered establishing a Consumer Finance Company at this location, but no
decision has yet been rendered in this regard.
Having been thwarted by the North Carolina banking statute change, the Bank
entered into a long-term lease agreement to lease a lot at 3201 Hwy. 701 North,
Loris, South Carolina which borders the South Carolina-North Carolina boundary.
The lease included an initial five (5)-year term with four (4), five (5)-year
renewal options. The Bank opened a full-service branch operation in a modular
facility on this site in October, 1997. The Bank expects to build a permanent
facility on this site in the future.
In March, 1996 the Bank purchased in fee simple a 2.82 acre tract on Hwy. 9,
Little River, South Carolina and subsequently purchased a modular banking
facility for location on this site. The Bank opened this branch bank in October,
1997, at 3189 Hwy. 9, Little River, South Carolina. In November, 1999, the Bank
completed and moved this branch banking operation into a new 3,300 square foot
permanent building on this same property although the physical address changed
to 3187 Hwy. 9, Little River, South Carolina. In March, 2000, the Bank sold the
modular building and presently has a 1.17 acre portion of this tract advertised
for sale.
In November, 1997, the Bank entered into an agreement to lease a commercial lot
and former bank building at 1627-A Church Street, Conway, South Carolina. The
Bank opened a full-service branching operation at this location in February,
1998, and subsequently purchased this property in April, 1998. The Bank now owns
this property in fee simple.
In January, 1998, the Bank purchased a commercial lot and building at 5201 Broad
Street, Loris, South Carolina, which is adjacent to the Bank's main branch
office in Loris. After remodeling and adding on to this building, the Bank in
March, 2000, relocated its Executive Offices, Audit Department, Central Deposit
Operations, Central Credit Operations and Computer Operations into this 10,000
square foot facility.
Page 5 of 47 sequentially numbered pages.
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In August, 1999, the Bank purchased a 0.84 acre commercial lot at 3201 Hwy. 701
North, Conway, South Carolina. In conjunction with this purchase the Bank also
acquired three (3) lifetime easements on adjoining properties totaling 0.19
acre. Construction of a 3,300 square foot building on this site began in March,
2000, and the Bank expects to complete this construction and open a full service
branch banking operation in this facility in August, 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company nor Bank were involved as a defendant in any litigation effort as of
December 31, 1999, nor is management aware of any potential such litigation to
be filed in 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year ended
December 31, 1999 to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of December 31, 1999, there were approximately 1,628 holders of the Company's
Common Stock. Currently, there is no established trading market for the
Company's Common Stock. Based on information known to management, its Common
Stock has traded at approximately $17.00 per share.
Holders of the Company's Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available thereof. The Company has never declared or paid cash dividends. Any
cash dividends paid by the Bank are paid to the Company as the sole shareholder
of the Bank. Management does not expect to pay cash dividends in the foreseeable
future.
The future dividend policy of the Company is subject to the discretion of the
Board of Directors and will depend upon a number of factors, including future
earnings, financial condition, cash need, and general business conditions. The
Company's ability to pay dividends will depend entirely upon the Bank's
abilities to distribute dividends to the Company. As a state bank, the Bank is
subject to legal limitations on the amount of dividends it is permitted to pay.
Furthermore, neither the Bank nor the Company may declare or pay a cash dividend
on any of their capital stock if they are insolvent or if the payment of the
dividend would render them insolvent or unable to pay their obligations as they
become due in the ordinary course of business.
The Board of Directors approved a 10% stock dividend for each of the five years
ending December 31, 1996. The Company also declared a 5% stock dividend on
January 14, 1999 for stockholders of record February 1, 1999. The most recent
stock dividend was a two-for-one stock split in the form of a 100% stock
dividend approved on January 27, 2000 to stockholders of record February 15,
2000.
Page 6 of 47 sequentially numbered pages.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning the
Company. The selected financial data has been derived from the financial
statements which have been audited by Tourville, Simpson & Caskey, L.L.P.,
independent accountants. This information should be read in conjunction with the
financial statements of the Company, including the accompanying notes, included
elsewhere herein.
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Year ended December 31, 1999 1998 1997 1996 1995
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
FINANCIAL CONDITION:
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Investment securities $ 23,892 $ 19,640 $ 12,597 $ 8,553 $ 10,025
Allowance for loan losses 922 880 911 549 398
Net loans 74,871 55,061 40,711 35,556 28,959
Premises and equipment, net 4,417 3,504 2,493 1,430 1,071
Total assets 114,326 83,586 72,156 49,405 45,913
Noninterest-bearing deposits 7,998 6,358 4,814 3,297 2,417
Interest-bearing deposits 86,831 63,612 59,071 39,554 39,125
Total deposits 94,829 69,970 63,885 42,851 41,542
Advance from the FHLB 10,000 5,000 350 450 -
Total liabilities 105,985 75,562 64,683 43,910 41,907
Total stockholders' equity 8,341 8,024 7,473 5,495 4,006
RESULTS OF OPERATIONS:
Interest income $ 7,920 $ 6,387 $ 5,200 $ 4,172 $ 3,446
Interest expense 3,804 3,257 2,368 2,026 1,862
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Net interest income 4,116 3,130 2,832 2,146 1,584
Provision for loan losses 190 100 480 222 197
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Net interest income after provision 3,926 3,030 2,352 1,924 1,387
Other income 819 682 434 353 278
Other expenses 3,227 2,929 2,143 1,425 1,385
Income tax expense 524 272 214 296 78
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Net income $ 994 $ 511 $ 429 $ 556 $ 202
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PER SHARE DATA (1):
Average common shares outstanding 1,002,770 1,002,770 899,920 820,836 771,072
Net income 0.99 0.51 0.48 0.68 0.26
Period end book value 8.32 8.00 8.30 6.69 5.20
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(1) Adjusted for the effects of the two-for-one stock split in the form of a
100% stock dividend declared in January 2000, the 5% stock dividend
declared in January 1999 and the 10% stock dividends declared in December
1996 and 1995.
Page 7 of 47 sequentially numbered pages.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE PRECEDING
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES
THERETO AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.
DESCRIPTION OF COMPANY'S BUSINESS
HCSB Financial Corporation (the Company) was incorporated on June 10, 1999. The
Company's only significant asset is its wholly owned subsidiary, Horry County
State Bank (the Bank). The Bank is a state-chartered bank incorporated on
December 18, 1987 and located at 5009 Broad Street, Loris, South Carolina. The
Company's primary market is Horry and Marion Counties in South Carolina and
Columbus and Brunswick Counties in North Carolina. From its six branch
locations, the Company offers a full range of deposit services which includes
checking accounts, savings accounts, certificates of deposit, money market
accounts, and IRA's.
The Company is primarily engaged in the business of attracting deposits from the
general public and using these deposits together with other funds to make
commercial, consumer, and real estate loans. The Company's operating results
depend to a substantial extent on the difference between interest and fees
earned on loans and investments and the Company's interest expense, consisting
principally of interest paid on deposits. Unlike most industrial companies,
virtually all of the assets and liabilities of financial institutions are
monetary. As a result, interest rates have a greater effect on the financial
institution's performance. In addition to competing with other traditional
financial institutions, the Company also competes for savings dollars with
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 HCSB Financial Corporation.
The operating results of the Company are influenced by the volume of
agricultural lending in the Company's geographic marketplace. The Company 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
Company's asset/liability management and liquidity.
In June of 1997, the State Board of Financial Institutions and the FDIC approved
the Company's applications to open three branches in North Myrtle Beach, Tabor
City, and Loris. As a condition of approval, the Company was required to obtain
an additional $2,000,000 in capital. In response, the Company 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 Company'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 HCSB Financial Corporation is traded from time to
time on an individual basis, no established trading market has developed.
Trading in the Company'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 Company 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 6, 2000, purchases have been made at a
price of $33 per share.
As of March 6, 2000, there were 1,628 holders of record of the Company's common
stock, excluding individual participants in security position listings.
No cash dividends have ever been declared or paid by the Company; however, the
Board of Directors approved a 10% stock dividend for each of the five years
ending December 31, 1996. The Company also declared a 5% stock dividend on
January 14, 1999 for stockholders of record February 1, 1999. The most recent
stock dividend was a two-for-one stock split in the form of a 100% stock
dividend approved on January 27, 2000 to stockholders of record February 15,
2000. Management does not expect the Company to pay cash dividends in the
foreseeable future. South Carolina banking regulations restrict the amount of
cash dividends that can be paid to HCSB Financial Corporation from the Bank.
Page 8 of 47 sequentially numbered pages.
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RESULTS OF OPERATIONS
This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of HCSB Financial Corporation.
This commentary should be read in conjunction with the financial statements,
related notes, and other statistical information in this report.
1999 COMPARED TO 1998
For the year ended December 31, 1999, the Company's net income was $994,000, or
$0.99 per share, an increase of $483,000 when compared to the $511,000 net
income, or $0.51 per share, for 1998. The increase in net income was primarily
due to the growth of loans at new branches in North Myrtle Beach, Tabor City and
Loris. Overall, loans net of unearned income increased $19,852,000 from 1998 to
1999. This led to an increase in net interest income of $986,000 from the year
ended December 31, 1998 to the year ended December 31, 1999. The increase in the
loan portfolio also contributed to a $90,000 increase in the provision for loan
losses from $100,000 in the year ended December 31, 1998 to $190,000 in the year
ended December 31, 1999. An increase in service charges on deposit accounts of
$105,000 over the year ended December 31, 1998 amount of $434,000 also
contributed to the increase in net income. These increases were partially offset
by the $298,000 increase in non-interest expense and $252,000 increase in income
tax expense over their year ended December 31, 1998 values of $2,929,000 and
$272,000, respectively.
1998 COMPARED TO 1997
Net income for the year ended December 31, 1998 was $511,000 or $0.51 per share,
compared to $429,000 or $0.48 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 Company charged $100,000 to the provision for loan losses as
compared to $480,000 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.
Page 9 of 47 sequentially numbered pages.
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DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
The Company has sought to maintain a conservative approach in determining the
distribution of its assets and liabilities. The following table presents the
percentage relationships of significant components of the Company's average
balance sheets for the last two fiscal years.
BALANCE SHEET CATEGORIES AS A PERCENT OF AVERAGE TOTAL ASSETS
1999 1998
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ASSETS:
Interest earning assets:
Federal funds sold 2.82% 9.12%
Investment securities 22.80 17.61
Loans 66.06 64.03
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Total interest earning assets 91.68 90.76
Cash and due from banks 3.03 1.83
Allowance for loan losses (.92) (1.08)
Premises and equipment 3.72 5.59
Other assets 2.49 2.90
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Total assets 100.00% 100.00%
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing deposits 76.86% 81.12%
Federal funds purchased .12 -
Advances from the Federal Home Loan Bank 6.83 1.46
Repurchase agreements .17 -
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Total interest bearing liabilities 83.98 82.58
Non-interest bearing deposits 7.23 7.26
Accrued interest and other liabilities .81 0.51
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Total liabilities 92.02 90.35
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Stockholders' equity 7.98 9.65
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Total liabilities and stockholders' equity 100.00% 100.00%
====== ======
Page 10 of 47 sequentially numbered pages.
<PAGE>
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 Company's net interest income. The interest rate
spread is the difference between the yield on average earning assets and the
rate on average interest bearing liabilities. The net yield on earning assets is
computed by dividing net interest income by the average earning assets.
1999 COMPARED TO 1998
Net interest income increased from $3,130,000 for the year ended December 31,
1998 to $4,116,000 for the year ended December 31, 1999, an increase of $986,000
or 31.50%. Total interest income increased $1,533,000 due to the $20,554,000
growth in average earnings assets. The growth in assets was funded by the
$13,179,000 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 4.41% in 1999
compared to 4.90% in 1998. The interest rate spread and net yield on earning
assets were positively affected by the decrease in the cost of funds,
particularly the 49 basis point decrease in the yield on certificates of
deposit. The interest rate spread was 4.02% and 3.84% in 1999 and 1998,
respectively. The net yield on earning assets during 1999 was 4.40% compared to
4.28% in 1998.
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, respectively, 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
Company.
Page 11 of 47 sequentially numbered pages.
<PAGE>
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>
1999 1998
----------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST /RATE BALANCE INTEREST /RATE
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Taxable securities $ 19,516 $ 1,222 6.26% $ 12,754 $ 824 6.46%
Tax-exempt securities 3,773 168 4.45 1,426 65 4.56
Federal funds sold 2,880 141 4.90 7,345 401 5.46
Loans (1) 67,457 6,389 9.47 51,547 5,097 9.89
--------- -------- ---------- ---------
Total earning assets 93,626 7,920 8.46 73,072 6,387 8.74
-------- ---------
Cash and due from banks 3,086 1,474
Allowance for loan losses (943) (872)
Premises and equipment 3,803 4,497
Other assets 2,547 2,337
--------- ----------
Total assets $ 102,119 $ 80,508
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits $ 78,491 $ 3,462 4.41% $ 65,312 $ 3,202 4.90%
Other borrowings 7,271 342 4.70 1,178 55 4.67
--------- -------- ---------- ---------
Total interest-
bearing liabilities 85,762 3,804 4.44 66,490 3,257 4.90
-------- ---------
Noninterest-bearing deposits 7,385 5,841
Accrued interest and
other liabilities 824 407
Stockholders' equity 8,148 7,770
--------- ----------
Total liabilities and
stockholders' equity $ 102,119 $ 80,508
========= ==========
Net interest income/
interest rate spread $ 4,116 4.02% $ 3,130 3.84%
======== ====== ========= ======
Net yield on earning assets 4.40% 4.28%
====== ======
</TABLE>
(1) The effects of loans in nonaccrual status and fees collected are not
significant to the computations.
Page 12 of 47 sequentially numbered pages.
<PAGE>
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
rates and changing volume. The following table describes the extent to which
changes in interest rates and changes in the volume of earning assets and
interest- bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information on changes in each
category attributable to (I) changes due to volume (change in volume multiplied
by prior period rate), (ii) changes due to rates (changes in rates multiplied by
prior period volume) and (iii) changes in rate and volume (change in rate
multiplied by the change in volume) is provided as follows:
<TABLE>
<CAPTION>
1999 COMPARED TO 1998
DUE TO INCREASE (DECREASE) IN
Volume
(DOLLARS IN THOUSANDS) Volume Rate Rate Total
-------- --------- ---------- ------
<S> <C> <C> <C> <C>
Interest income:
Taxable securities $ 437 $ (25) $ (14) $ 398
Tax-exempt securities 107 (2) (2) 103
Federal funds sold (244) (41) 25 (260)
Loans 1,573 (215) (66) 1,292
-------- --------- --------- --------
Total interest income 1,873 (283) (57) 1,533
-------- --------- --------- --------
Interest expense:
Interest-bearing deposits 646 (322) (65) 259
Other borrowings 271 - 17 288
-------- --------- -------- --------
Total interest expense 917 (322) (48) 547
-------- --------- --------- --------
Net interest income $ 956 $ 39 $ (9) $ 986
======== ========= ========= ========
<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>
Page 13 of 47 sequentially numbered pages.
<PAGE>
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 1999 and 1998. However, fluctuations in market interest rates do not
necessarily have a significant impact on net interest income, depending on the
Company'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 ensure the adequacy of net interest income and to control the
risks to net interest income associated with movements in interest rates. The
following table, "Interest Rate Sensitivity Analysis," indicates that, on a
cumulative basis through twelve months, rate-sensitive liabilities exceeded
rate-sensitive assets, resulting in a liability sensitive position at the end of
1999 of $55,784,000. 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 Company's
rate sensitivity at each of the time intervals indicated as of December 31, 1999
and may not be indicative of the Company's rate-sensitivity position at other
points in time.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
After One After Three Greater Than
Within Through Through One Year
One Three Twelve Within or Non-
(DOLLARS IN THOUSANDS) Month Months Months One Year sensitive Total
-------- -------- -------- -------- -------- --------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Loans (1) $ 17,721 $ 2,533 $ 8,032 $ 28,286 $ 47,499 $ 75,785
Securities -- 225 541 766 23,126 23,892
Federal funds sold 2,190 -- -- 2,190 -- 2,190
-------- -------- -------- -------- -------- --------
Total earning assets 19,911 2,758 8,573 31,242 70,625 101,867
-------- -------- -------- -------- -------- --------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Demand deposits 8,238 -- -- 8,238 -- 8,238
Savings deposits 18,832 -- -- 18,832 -- 18,832
Time deposits 4,934 10,371 39,651 54,956 4,805 59,761
-------- -------- -------- -------- -------- --------
Total interest-bearing
deposits 32,004 10,371 39,651 82,026 4,805 86,831
Advances from the Federal 5,000 -- -- 5,000 5,000 10,000
Home Loan Bank
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 37,004 10,371 39,651 87,026 9,805 96,831
-------- -------- -------- -------- -------- --------
Period gap $(17,093) $ (7,613) $(31,078) $(55,784) $ 60,820
======== ======== ======== ======== ========
Cumulative gap $(17,093) $(24,706) $(55,784) $(55,784) $ 5,036
======== ======== ======== ======== ========
Ratio of cumulative gap to total
earning assets (16.78)% (24.25)% (54.76)% (54.76)% 4.94%
</TABLE>
(1) Excludes nonaccrual loans.
Page 14 of 47 sequentially numbered pages.
<PAGE>
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 1999 and 1998 provisions for loan losses and
their related effect of increasing the allowance for loan losses is related to
growth in the loan portfolio. Please refer to the section "Loan Portfolio" for a
discussion of management's evaluation of the adequacy of the allowances for loan
losses. In 1999 and 1998, the provisions for loan losses were $190,000 and
$100,000, respectively.
OTHER INCOME
Other income was $819,000 for the year ended December 31, 1999, an increase of
$137,000, or 20.1%, when compared with the year ended December 31, 1998. The
majority of the increase was in service charges on deposit accounts which
increased $105,000 as a result of the growth in the number of deposit accounts
generated by the new branches. Insurance commissions were also substantially
higher, increasing $32,000, or 27.1%, to $150,000 from $118,000 for the year
ended December 31, 1998.
Other income was $682,000 for the year ended December 31, 1998, an increase of
$248,000, or 57.1%, when compared with the year ended December 31, 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 for the year ended
December 31, 1997.
OTHER EXPENSES
All categories of other expenses increased during 1999 due to growth of the
Company. Salaries and employee benefits increased $155,000, or 9.9%, due to an
increase in staffing and normal salary increases among existing employees. Net
occupancy and furniture and equipment expense also increased due mainly to an
increase in depreciation expense, insurance, and real estate taxes resulting
from the purchase of a new bank building in North Myrtle Beach. Other operating
expenses were $912,000 for the year ended December 31, 1999 compared to $857,000
for the year ended December 31, 1998. The increase of $55,000 is primarily
attributable to the expenses associated with the formation of the holding
company.
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.
INCOME TAXES
The Company's income tax expense for 1999 was $524,000, an increase of $252,000
from the 1998 expense of $272,000. The increase in the expense results primarily
from increased income before taxes. The Company's effective tax rates for the
years ended December 31, 1999 and 1998 were 34.5% and 34.7%, respectively.
Page 15 of 47 sequentially numbered pages.
<PAGE>
LIQUIDITY
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. HCSB Financial Corporation manages both assets and liabilities to
achieve appropriate levels of liquidity. Cash and federal funds sold are the
Company's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both deposits and loans. The
investment securities portfolio is the Company's principal source of secondary
asset liquidity. However, the availability of this source of funds is influenced
by market conditions. Individual and commercial deposits are the Company's
primary source of funds for credit activities. Although not historically used as
principal sources of liquidity, federal funds purchased from correspondent banks
and advances from the Federal Home Loan Bank are other options available to
management. The Company also has $3,500,000 of unused lines of credit to
purchase federal funds as of December 31, 1999. Management believes that the
Company's liquidity sources are adequate to meet its operating needs.
The expansion of the Company's market area has contributed to an increase in
both loans and deposits. These increases did not significantly affect the loans
to deposits ratio. The ratio of total loans to total deposits was 79.9% at the
end of 1999 compared with 80.0% at the end of 1998.
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 liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
While the effect of inflation on a bank is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. Interest rates generally increase as the
rate of inflation increases, but the magnitude of the change in rates may not be
the same. While interest rates have traditionally moved with inflation, the
effect on income is diminished because both interest earned on assets and
interest paid on liabilities vary directly with each other unless the Company is
in a high liability sensitive position. Also, general increases in the price of
goods and services will result in increased operating expenses.
CAPITAL RESOURCES
The Company uses several indicators of capital strength. The most commonly used
measure is average common equity to average assets which was 7.98% in 1999
compared to 9.65% in 1998. The change from 1998 was negatively affected by the
growth in assets outpacing the increase in equity from 1999 net income and the
decrease in equity attributable to the decrease in the fair market value of
available-for-sale securities.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Company's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgements
by the regulators about components, risk weightings, and other factors.
Page 16 of 47 sequentially numbered pages.
<PAGE>
CAPITAL RESOURCES - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios of Tier 1 and total
capital as a percentage of assets and off-balance-sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Tier 1 capital consists of common
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 regulatory minimum requirements are 4% for Tier 1 and 8% for
total risk-based capital.
The Company and the Bank are also required to maintain capital at a minimum
level based on quarterly average assets, which is known as the leverage ratio.
Only the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above
the minimum.
As of December 31, 1999, 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 Company and the Bank are required to maintain certain risk-based and
leverage ratios. The Company and the Bank exceeded these regulatory capital
ratios at December 31, 1999 and 1998 as set forth in the following table.
<TABLE>
<CAPTION>
ANALYSIS OF CAPITAL AND CAPITAL RATIOS The Company The Bank
(DOLLARS IN THOUSANDS) 1999 1999 1998
-------------- ------------ -------------
<S> <C> <C> <C>
Tier 1 capital $ 9,499 $ 9,476 $ 7,944
Tier 2 capital 922 922 767
-------------- ------------ -------------
Total qualifying capital $ 10,421 $ 10,398 $ 8,711
============== ============ =============
Risk-adjusted total assets
(including off-balance sheet exposures) $ 83,628 $ 83,611 $ 61,342
============== ============ =============
.
Tier 1 risk-based capital ratio 11.36% 11.33% 12.95 %
Total risk-based capital ratio 12.46 12.44 14.20
Tier 1 leverage ratio 8.69 8.67 9.87
</TABLE>
Management does not expect to pay cash dividends to stockholders during 2000.
INVESTMENT PORTFOLIO
Management classifies investment securities as either held-to-maturity or
available-for-sale based on their intentions and the Company's ability to hold
them until maturity. In determining such classifications, securities that
management has the positive intent and the Company has the ability to hold until
maturity are classified as held-to-maturity and carried at amortized cost. All
other securities are designated as available-for-sale and carried at estimated
fair value with unrealized gains and losses included in stockholders' equity on
an after-tax basis. As of December 31, 1999 and 1998, all securities were
classified available-for-sale.
Page 17 of 47 sequentially numbered pages.
<PAGE>
INVESTMENT PORTFOLIO - CONTINUED
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, 1999.
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
Available-for-Sale
------------------
(DOLLARS IN THOUSANDS) 1999 1998
----------- ---------
<S> <C> <C>
Securities of U.S. Government agencies and corporations $ 14,593 10,310
Obligations of state and local governments 4,166 2,218
Mortgage-backed securities 5,133 7,112
--------- ---------
Total $ 23,892 $ 19,640
========= =========
INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE
<CAPTION>
Available-for-Sale
------------------
Carrying
(DOLLARS IN THOUSANDS) Amount Yield (1)
----------- -----------
Securities of U.S. Government agencies and corporations due:
<S> <C> <C>
After one year but within five years $ 4,695 6.32%
After five years but within ten years 8,052 6.50
After ten years 1,846 6.77
----------- --------------
14,593 6.48
----------- --------------
Obligations of states and local governments due:
Within one year 222 5.92%
After one year but within five years 1,081 6.46
After five years but within ten years 847 3.59
After ten years 2,016 6.63
----------- --------------
4,166 5.61
----------- --------------
Mortgage-backed securities 5,133 6.13%
----------- --------------
Total $ 23,892 6.25%
=========== ==============
</TABLE>
(1) For tax-exempt securities, the tax equivalent yield has been calculated
using an incremental rate of 34%.
LOAN PORTFOLIO
Management believes the loan portfolio is adequately diversified. There are no
foreign loans, and agricultural loans as of December 31, 1999 are limited. There
are no significant concentrations of loans in any particular individuals or
industry or group of related individuals or industries.
The Company has experienced continued growth of its loan portfolio throughout
1999 and 1998, resulting in an increase of $19,852,000 and $14,319,000,
respectively. Management has concentrated on maintaining quality in the loan
portfolio. The loan-to-deposit ratio is used to monitor a financial
institution's potential profitability and efficiency of asset distribution and
utilization. Generally, a higher loan-to-deposit ratio is indicative of higher
interest income since loans yield a higher return than other interest-earning
assets. 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.
Page 18 of 47 sequentially numbered pages.
<PAGE>
LOAN PORTFOLIO - CONTINUED
LOAN PORTFOLIO COMPOSITION
December 31,
------------------------
(DOLLARS IN THOUSANDS) 1999 1998
------------- ---------
Real estate - construction and land development $ 3,983 $ 2,052
Real estate - other 26,601 19,926
Agricultural 5,961 5,694
Commercial and industrial 22,796 15,468
Consumer 16,193 12,278
All other (including overdrafts) 305 598
---------- ---------
Total $ 75,839 $ 56,016
=========== =========
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 Company manages credit risk through a strategy of making
loans within the Company's primary marketplace and within the Company's limits
of expertise. Although management seeks to avoid concentrations of credit by
loan type or industry through diversification, a substantial portion of the
borrowers' ability to honor the terms of their loans is dependent on the
business and economic conditions in Horry and Marion Counties in South Carolina
and Columbus and Brunswick Counties in North Carolina. Additionally, since real
estate is considered by the Company as the most desirable nonmonetary
collateral, a significant portion of the Company's loans are collateralized by
real estate. Even though a substantial portion of the Company'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 Company as the
primary source of repayment for performing loans. The Company also seeks to
limit total exposure to individual and affiliated borrowers. The Company manages
risk specific to individual borrowers through the loan underwriting process and
through an ongoing analysis of the borrower's ability to service the debt as
well as the value of the pledged collateral.
The Company's loan officers and loan administration staff are charged with
monitoring the Company's loan portfolio and identifying changes in the economy
or in a borrower's circumstances which may affect the ability to repay the debt
or the value of the pledged collateral. In order to assess and monitor the
degree of risk in the Company's loan portfolio, several credit risk
identification and monitoring processes are utilized. The Company assesses
credit risk initially through the assignment of a risk grade to each loan based
upon an assessment of the borrower's financial capacity to service the debt and
the presence and value of any collateral.
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.
Page 19 of 47 sequentially numbered pages.
<PAGE>
LOAN PORTFOLIO - CONTINUED
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:
The following table summarizes the loan maturity distribution, by type, at
December 31, 1999 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 $ 1,925 $ 2,023 $ 35 $ 3,983
Real estate - other 4,215 18,670 3,716 26,601
Agricultural 3,479 2,050 432 5,961
Commercial and industrial 6,534 15,550 712 22,796
Consumer 4,194 11,420 579 16,193
All other (including overdrafts) 167 13 125 305
--------- ---------- ---------- ---------
Total $ 20,514 $ 49,726 $ 5,599 $ 75,839
========= ========== ========== =========
Fixed rate loans, due after one year $ 47,499
=========
Variable rate loans, due after one year $ 7,826
=========
</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 Company's problem loan watch list are considered potentially
impaired loans. These loans are evaluated in determining whether all outstanding
principal and interest are expected to be collected. Loans are not considered
impaired if a minimal delay occurs and all amounts due, including accrued
interest at the contractual interest rate for the period of delay, are expected
to be collected.
As of December 31, 1999 and 1998, the Company had nonaccrual loans of
approximately $54,000 and $288,000, respectively, and loans that were past due
90 days or more and still accruing interest of approximately $16,000 and
$107,000, respectively, for which impairment had not been recognized. The
additional interest income which would have been recognized into earnings if the
Company's nonaccrual loans had been current in accordance with their original
terms 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, 1999.
Page 20 of 47 sequentially numbered pages.
<PAGE>
LOAN PORTFOLIO - CONTINUED
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
-------------- ------------
<S> <C> <C>
Loans outstanding at the end of year, net of unearned income $ 75,793 $ 55,941
========== =========
Average amount of loans outstanding $ 67,457 $ 51,547
========== =========
Balance of allowance for loan losses at beginning of year $ 880 $ 911
---------- ---------
Loans charged off:
Real estate - 14
Commercial 126 113
Consumer & credit card 36 23
---------- ---------
Total loans charged off 162 150
Recoveries of loans previously charged off 14 19
---------- ---------
Net charge-offs 148 131
---------- ---------
Provision charged to operations 190 100
---------- ---------
Balance of allowance for loan losses at end of year $ 922 $ 880
========== =========
RATIOS:
Net charge-offs to average loans outstanding .22% 0.25%
Net charge-offs to loans at end of year .20 0.23
Allowance for loan losses to average loans 1.37 1.71
Allowance for loan losses to loans at end of year 1.22 1.57
Net charge-offs to allowance for loan losses 16.05 14.89
Net charge-offs to provisions for loan losses 77.89 131.00
</TABLE>
Management does not allocate specific percentages of the Company'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.
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, 1999 and 1998, management considers the allowances for loan
losses adequate based on their judgments, evaluations, and analysis of the loan
portfolio.
Page 21 of 47 sequentially numbered pages.
<PAGE>
AVERAGE DAILY DEPOSITS
The following table summarizes the Company's average daily deposits for the
years ended December 31, 1999 and 1998. These totals include certificates of
deposit $100,000 and over which at December 31, 1999 totaled $22,567,000. Of
this total, scheduled maturities within three months were $8,447,000; within
three to six months $9,627,000; within six to twelve months $3,821,000; and
$672,000 maturing thereafter.
<TABLE>
<CAPTION>
1999 1998
--------------------- ----------------------
Average Average Average Average
(DOLLARS IN THOUSANDS) Amount Rate Paid Amount Rate Paid
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 7,385 - $ 5,841 -
Interest-bearing transaction accounts 8,496 1.02% 7,906 1.53%
Money market savings account 14,517 4.37 9,725 4.60
Other savings accounts 2,145 2.19 1,830 2.51
Certificates of deposit 53,333 5.05 45,851 5.64
--------- ---------
Total $ 85,876 $ 71,153
========= =========
</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 Company has not
paid cash dividends.
1999 1998
---------- ----------
Return on average assets 0.97% 0.63%
Return on average equity 12.20 6.58
Equity to assets ratio 7.98 9.65
ACCOUNTING AND FINANCIAL REPORTING ISSUES
In February 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." SFAS 132 amends SFAS 87, 88, and
106 and revises employer's disclosures about pensions and other post-retirement
benefit plans. It does not change the measurement or recognition of those plans.
At December 31, 1999, the Company was not affected by this Statement.
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
Company adopted this SOP as of January 1, 1999.
Page 22 of 47 sequentially numbered pages.
<PAGE>
ACCOUNTING AND FINANCIAL REPORTING ISSUES - CONTINUED
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 Company generally does not
purchase derivative instruments or enter into hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999.
The Company was not affected by Financial Accounting Standards Board Statements
134, 135 or 136.
In 1999, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." As stated, this Statement delays the effective date for the
implementation of SFAS 133. This Statement is effective for fiscal years
beginning after June 15, 2000.
INDUSTRY DEVELOPMENTS
On November 4, 1999, the U.S. Senate and House of Representatives each passed
the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton in
November 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new "financial holding company" under
the Bank Holding Company Act, which will permit holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities. The Act is intended to grant to
community banks certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis. Nevertheless, the Act may have the result
of increasing the amount of competition that the Company faces from larger
institutions and other types of companies. In fact, it is not possible to
predict the full effect that the Act will have on the Company.
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect the
Company.
Page 23 of 47 sequentially numbered pages.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 14 of this Report on Form 10-K are
included herein on pages 26 through 46.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Information called for by Part III (Items 10, 11, 12 and 13) of this Report on
Form 10-K have been omitted as the Company has filed a definitive Proxy
Statement pursuant to Regulation 14A promulgated under the Securities and
Exchange Act of 1934 which includes this information.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Page 24 of 47 sequentially numbered pages.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
The consolidated financial statements and schedules of the Company identified in
the accompanying index to financial statements at page 26 herein are filed as
part of this report.
(a)(3) Listing of Exhibits that are included and filed as part of this reprot:
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
(a)(3) 21 Subsidiaries of Registrant
Horry County State Bank is the only subsidiary of HCSB Financial
Corporation.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter ended December
31, 1999.
* Incorporated by reference as indicated.
Page 25 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
Consolidated Financial Statements
Years Ended December 31, 1999, 1998, 1997
INDEX TO FINANCIAL STATEMENTS
Page #
------
Report of Tourville, Simpson & Caskey, L.L.P.
Independent Auditors............................................. 27
Consolidated Balance Sheets as of
December 31, 1999 and 1998....................................... 28
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997................................ 29
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997............ 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................ 31
Notes to Consolidated Financial Statements............................... 32
Page 26 of 47 sequentially numbered pages.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HCSB Financial Corporation
Loris, South Carolina
We have audited the accompanying consolidated balance sheets of HCSB Financial
Corporation (formerly Horry County State Bank) as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in stockholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 1999 and 1998 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HCSB
Financial Corporation (formerly Horry County State Bank) as of December 31, 1999
and 1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ TOURVILLE, SIMPSON & CASKEY, L.L.P.
Tourville, Simpson & Caskey, L.L.P.
Columbia, South Carolina
February 25, 2000
Page 27 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
------------ ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks (Note C) $ 5,708 $ 2,573
Federal funds sold 2,190 -
Time deposits with other banks - 500
--------- ----------
Total cash and cash equivalents 7,898 3,073
Securities available-for-sale (Note D) 23,892 19,640
Loans (Note E) 75,839 56,016
Less, unearned income (46) (75)
Less, allowance for loan losses (Note E) (922) (880)
--------- ----------
Loans, net 74,871 55,061
Premises and equipment, net (Note F) 4,417 3,504
Accrued interest receivable 1,204 857
Other assets (Note G) 2,044 1,451
--------- ----------
Total assets $ 114,326 $ 83,586
========= ==========
LIABILITIES
Deposits:
Noninterest-bearing transaction accounts $ 7,998 $ 6,358
Interest-bearing transaction accounts 8,238 9,168
Money market savings accounts 16,752 12,702
Other savings accounts 2,080 1,851
Certificates of deposit $100,000 and over (Note H) 22,567 12,118
Other time deposits (Note H) 37,194 27,773
--------- ----------
Total deposits 94,829 69,970
Accrued interest payable 403 221
Federal funds purchased - 170
Advance from the Federal Home Loan Bank (Note I) 10,000 5,000
Other liabilities 753 201
--------- ----------
Total liabilities 105,985 75,562
--------- ----------
Commitments and contingencies (Notes E, J and K)
STOCKHOLDERS' EQUITY (Note L)
Common stock, $0.01 par value; authorized 10,000,000 shares; issued and
outstanding 501,385 shares in 1999 and 478,150 shares in 1998 5 5
Capital surplus 7,878 7,251
Undivided profits 1,037 688
Accumulated other comprehensive income (loss) (579) 80
--------- ----------
Total stockholders' equity 8,341 8,024
--------- ----------
Total liabilities and stockholders' equity $ 114,326 $ 83,586
========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 28 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE) 1999 1998 1997
------------- ------------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 6,389 $ 5,097 $ 4,385
Investment securities:
Taxable 1,222 824 499
Tax-exempt 168 65 44
Federal funds sold 141 401 272
--------- --------- ----------
Total interest income 7,920 6,387 5,200
--------- --------- ----------
INTEREST EXPENSE:
Certificates of deposit $100,000 and over 160 674 573
Other deposits 3,302 2,528 1,768
Advances from the Federal Home Loan Bank 325 55 25
Federal funds purchased 17 - 2
--------- --------- ----------
Total interest expense 3,804 3,257 2,368
--------- --------- ----------
NET INTEREST INCOME 4,116 3,130 2,832
Provision for loan losses (Note E) 190 100 480
--------- --------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,926 3,030 2,352
--------- --------- ----------
OTHER INCOME:
Service charges on deposit accounts 539 434 306
Credit life insurance commissions 150 118 47
Other income 130 130 81
--------- --------- ----------
Total other income 819 682 434
--------- --------- ----------
OTHER EXPENSES:
Salaries and employee benefits 1,718 1,563 1,122
Net occupancy expense 193 175 96
Furniture and equipment expense 404 334 198
Other expense (Note O) 912 857 727
--------- --------- ----------
Total other expenses 3,227 2,929 2,143
--------- --------- ----------
INCOME BEFORE INCOME TAXES 1,518 783 643
Income tax expense (Note P) 524 272 214
--------- --------- ----------
NET INCOME $ 994 $ 511 $ 429
========= ========= ==========
PER SHARE:
Weighted average shares outstanding 1,002,770 1,002,770 899,920
Net income (Note L) $ 0.99 $ 0.51 $ 0.48
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 29 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Common Stock Common
------------------ Stock Accumulated
Number Dividends Other Comp-
(DOLLARS IN THOUSANDS, of Distri- Capital Undivided rehensive
EXCEPT NUMBER OF SHARES) Shares Amount butable Surplus Profits Income Total
-------- ---------- --------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 375,341 $ 4 $ 188 $ 5,525 $ (252) $ 30 $ 5,495
Net income - - - - 429 - 429
Other comprehensive income (loss),
net of tax loss of $7 - - - - - 10 10
------
Comprehensive income - - - - - - 439
------
Issuance of stock dividend 37,004 - (188) 185 - - (3)
Issuance of common stock 65,805 1 - 1,541 - - 1,542
-------- --------- --------- --------- -------- --------- ------
BALANCE, DECEMBER 31, 1997 478,150 5 - 7,251 177 40 7,473
Net income - - - - 511 - 511
Other comprehensive income (loss),
net of tax loss of $23 - - - - - 40 40
------
Comprehensive income - - - - - - 551
-------- --------- --------- --------- -------- --------- ------
BALANCE, DECEMBER 31, 1998 478,150 5 - 7,251 688 80 8,024
Net income - - - - 994 - 994
Other comprehensive income (loss),
net of tax benefit of $388 - - - - - (659) (659)
------
Comprehensive income - - - - - - 335
------
Payment for fractional shares - - - - (18) - (18)
Issuance of stock dividend 23,235 - - 627 (627) - -
-------- --------- --------- --------- -------- --------- ------
BALANCE, DECEMBER 31, 1999 501,385 $ 5 $ - $ 7,878 $ 1,037 $ (579) $ 8,341
======== ========= ========= ========= ======== ========= ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 30 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 994 $ 511 $ 429
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 190 100 480
Deferred income tax provision (benefit) (20) 19 (147)
Depreciation and amortization 303 241 132
Premium amortization less accretion 14 6 4
Amortization of net deferred loan costs 100 80 70
Loss on sale of other real estate owned 17 - 1
Loss (gain) on disposals of premises and equipment (5) (2) 8
Increase in interest receivable (347) (40) (185)
Increase (decrease) in interest payable 182 (96) (36)
(Increase) decrease in other assets (84) (179) (637)
Increase (decrease) in other accrued expenses 551 70 (125)
--------- --------- ----------
Net cash provided (used) by operating activities 1,895 710 (6)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (11,631) (15,630) (8,489)
Maturities of securities available-for-sale 6,318 8,644 4,458
Net increase in loans made to customers (20,100) (14,571) (5,809)
Purchases of premises and equipment (1,182) (1,224) (1,190)
Proceeds from sales of premises and equipment 15 13 2
Proceeds from sales of other real estate owned 88 - 70
Investment in Federal Home Loan Bank stock (250) (102) (10)
--------- --------- ----------
Net cash used by investing activities (26,742) (22,870) (10,968)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts 4,989 8,956 3,160
Net increase (decrease) in time deposits 19,871 (2,871) 17,874
Net (decrease) increase in federal funds purchased (170) 170 -
Advances from the Federal Home Loan Bank 5,000 5,325 -
Repayment of advances from the Federal Home Loan Bank - (675) (100)
Cash paid for fractional shares (18) - (3)
Proceeds from issuance of common stock - - 1,542
--------- --------- ----------
Net cash provided by financing activities 29,672 10,905 22,473
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,825 (11,255) 11,499
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,073 14,328 2,829
--------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,898 $ 3,073 $ 14,328
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 31 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION - The accompanying consolidated
financial statements include the accounts of HCSB Financial Corporation (the
Company) and its wholly owned subsidiary Horry County State Bank (the Bank). The
Company was incorporated on June 10, 1999. The Bank was incorporated on December
18, 1987 and opened for operations on January 4, 1988. The principal business
activity of the Company is to provide commercial banking services in Horry
County, South Carolina. 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 Company's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's
activities are with customers located within Horry and Marion Counties in South
Carolina and Columbus County in North Carolina. The types of securities in which
the Company invests are discussed in Note 3. The types of lending that the
Company engages in are discussed in Note 4. The Company does not have any
significant concentrations to any one industry or customer.
INVESTMENT SECURITIES - Investment securities available-for-sale by the Company
are carried at amortized cost and adjusted to their estimated fair value. The
unrealized gain or loss is recorded in 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 fair value considered by management to be other than temporary are
reported as a realized loss and a reduction in the cost basis in the security.
The adjusted cost basis of securities available-for-sale is determined by
specific identification and is used in computing the realized gain or loss from
a sales transaction.
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.
Page 32 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO CONSOLIDATED 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 Company considers its consumer installment portfolio, credit
card loans and home equity lines as such exceptions. Therefore, the real estate
and commercial loan portfolios are primarily affected by these statements.
Impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the fair value of
the collateral if the loan is collateral dependent. When management determines
that a loan is impaired, the difference between the Company's investment in the
related loan and the present value of the expected future cash flows, or the
fair value of the collateral, is charged to bad debt expense with a
corresponding entry to the allowance for loan losses. The accrual of interest is
discontinued on an impaired loan when management determines 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 Company's investments in the stock of the Federal Home Loan
Bank and Community Financial Services. The stocks are carried at cost because
they have no quoted market value and no ready market exists. Investment in
Federal Home Loan Bank stock is a condition of borrowing from the Federal Home
Loan Bank, and the stock is pledged to collateralize the borrowings. Dividends
received on Federal Home Loan Bank stock and Community Financial Services stock
are included in other income.
At December 31, 1999 and 1998, the investment in Federal Home Loan Bank stock
was $500,000 and $250,000, respectively. At both December 31, 1999 and 1998, the
investment in Community Financial Services stock was $59,612.
Page 33 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO CONSOLIDATED 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 Company's assets and liabilities. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Management has determined that it is more likely than not that the entire
deferred tax asset at December 31, 1999 will be realized, and accordingly, has
not established a valuation allowance. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
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.
COMPREHENSIVE INCOME - The Company adopted SFAS 130, REPORTING COMPREHENSIVE
INCOME, as of January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS 130 had no effect on
the Company's net income or stockholders' equity.
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Unrealized holding gains on available-for-sale securities $ (1,047) $ 63 $ 17
Reclassification adjustment for losses (gains) in realized income - - -
---------- ---------- -----------
Net unrealized gains (1,047) 63 17
Tax effect 388 (23) (7)
---------- ---------- -----------
Net-of-tax amount $ (659) $ 40 $ 10
========== ========== ===========
</TABLE>
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows, the Company
considers certain highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents include amounts
due from banks, federal funds sold, and time deposits with other banks.
The following summarizes supplemental cash flow information for 1999, 1998, and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash paid for interest $ 3,622 $ 3,353 $ 2,411
Cash paid for income taxes 171 246 557
Supplemental noncash investing and financing activities:
Foreclosures on loans - 46 104
</TABLE>
Page 34 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company 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
1998 and 1997 were reclassified to conform with the 1999 presentation.
NOTE B - CORPORATE REORGANIZATION
On May 13, 1999, the stockholders of Horry County State Bank approved a plan of
corporate reorganization under which Horry County State Bank became a wholly
owned subsidiary of HCSB Financial Corporation, which was organized at the
direction of the Bank's management. The original authorized common stock of HCSB
Financial Corporation is 10,000,000 shares with a par value of $0.01 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 year ended December 31, 1999 are presented as if the reorganization had
occurred on January 1, 1999. The accompanying financial statements for the years
ended December 31, 1998 and December 31, 1997 are unchanged from the amounts
previously reported by Horry County State Bank.
The following is a summary of Horry County State Bank's operations and
stockholders' equity for the period January 1, 1999 through June 9, 1999.
(DOLLARS IN THOUSANDS)
Interest income $ 3,151
Interest expense 1,487
-------
Net interest income 1,664
Provision for loan losses 120
-------
Net interest income after provision for loan losses 1,544
Other income 326
Other expense 1,447
-------
Net income $ 423
=======
Stockholders' equity, January 1, 1999 $ 8,024
Net income for the period 423
Change in fair value during the period (271)
Payments for fractional shares (18)
-------
Stockholders' equity, June 9, 1999 $ 8,158
=======
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, 1999, the requirements were
satisfied by vault cash.
Page 35 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INVESTMENT SECURITIES
Securities available-for-sale as of December 31, 1999 and 1998 consisted 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, 1999
Securities of U.S. Government
agencies and corporations $ 15,202 $ - $ 609 $ 14,593
Mortgage-backed securities 5,254 - 121 5,133
Obligations of states and local governments 4,356 - 190 4,166
--------- --------- --------- ----------
Total $ 24,812 $ - $ 920 $ 23,892
========= ========= ========= ==========
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
========= ========= ========= ==========
</TABLE>
The following is a summary of maturities of securities available-for-sale as of
December 31, 1999. 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.
(DOLLARS IN THOUSANDS) Amortized Estimated
Cost Fair Value
-------- ----------
Due within one year $ 224 $ 222
Due after one year but within five years 5,883 5,776
Due after five years but within ten years 9,286 8,899
Due after ten years 4,164 3,862
--------- ----------
19,557 18,759
Mortgage-backed securities 5,255 5,133
--------- ----------
Total $ 24,812 $ 23,892
========= ==========
At December 31, 1999 and 1998, investment securities with a book value of
$14,469,000 and $3,290,000, respectively, and a market value of $13,955,000 and
$3,322,000, respectively, were pledged as collateral to secure public deposits.
There were no sales of securities in 1999 or 1998.
Page 36 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE E - LOANS
Loans as of December 31, 1999 and 1998 consisted of the following:
December 31,
------------------------
(DOLLARS IN THOUSANDS) 1999 1998
------------ ---------
Real estate - construction and land development $ 3,983 $ 2,052
Real estate - other 26,601 19,926
Agricultural 5,961 5,694
Commercial and industrial 22,796 15,468
Consumer 16,193 12,278
All other (including overdrafts) 305 598
--------- ---------
Total $ 75,839 $ 56,016
========= =========
Certain parties (principally certain directors and officers of the Company,
their immediate families, and business interests) were loan customers and had
other transactions in the normal course of business with the Company. Related
party loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of loans to related parties was $1,825,000 and
$1,226,000 at December 31, 1999 and 1998, respectively. During 1999, $944,000 of
new loans were made to related parties, and repayments totaled $345,000.
Transactions in the allowance for loan losses for the years ended December 31,
1999, 1998, and 1997 are summarized below:
Year ended December 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
------------ ------------ ----------
Balance at January 1 $ 880 $ 911 $ 549
Provision charged to expense 190 100 480
Recoveries 14 19 63
Charge-offs (162) (150) (181)
--------- --------- ----------
Balance at December 31 $ 922 $ 880 $ 911
========= ========= ==========
Loans on the Company's problem loan watch list are considered potentially
impaired loans. These loans are evaluated in determining whether all outstanding
principal and interest are expected to be collected. Loans are not considered
impaired if a minimal delay occurs and all amounts due, including accrued
interest at the contractual interest rate for the period of delay, are expected
to be collected.
As of December 31, 1999 and 1998, the Company had nonaccrual loans of
approximately $54,000 and $288,000, respectively, and loans that were past due
90 days or more of approximately $16,000 and $107,000, respectively, for which
impairment had not been recognized. The additional interest income which would
have been recognized into earnings if the Company's nonaccrual loans had been
current in accordance with their original terms is immaterial for all years
presented.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets.
Page 37 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE E - LOANS - CONTINUED
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter-party.
Collateral held for commitments to extend credit and standby letters of credit
varies but may include accounts receivable, inventory, property, plant,
equipment, and income-producing commercial properties. The following table
summarizes the Company's off-balance sheet financial instruments whose contract
amounts represent credit risk:
December 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
---------------- -------------
Commitments to extend credit $ 5,290 $ 4,180
Standby letters of credit 272 30
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1999 and 1998 consisted of the
following:
December 31,
--------------------------
(DOLLARS IN THOUSANDS) 1999 1998
------------ ------------
Land $ 1,011 $ 935
Building and land improvements 2,342 1,867
Furniture and equipment 1,617 1,281
Construction in process 388 121
--------- ----------
Total 5,358 4,204
Less, accumulated depreciation (941) (700)
--------- ----------
Premises and equipment, net $ 4,417 $ 3,504
========= ==========
Depreciation expense for the years ended December 31, 1999 and 1998 was $259,000
and $202,000, respectively.
Construction in process represents construction costs for renovations for the
future location of the Company's operations center. Management anticipates
completion of the project in 2000. In 1999 and 1998, the Company capitalized
$18,000 and $10,000 of interest, respectively, during the construction and
renovation of new branches and the operations center.
Page 38 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE G - OTHER ASSETS
As of December 31, 1999 and 1998, other assets consisted of the following:
December 31,
------------------------
(DOLLARS IN THOUSANDS) 1999 1998
----------- -----------
Cash value of life insurance $ 695 $ 681
Other real estate - 105
Federal Home Loan Bank stock, at cost 500 250
Community Financial Services stock, at cost 60 60
Prepaid expenses 72 66
Unamortized software 138 115
Net deferred tax asset 568 160
Other 11 14
----------- -----------
Total $ 2,044 $ 1,451
=========== ===========
NOTE H - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
(DOLLARS IN THOUSANDS) Amount
--------
2000 $ 54,956
2001 4,232
2002 331
2003 110
2004 and thereafter 132
---------
Total $ 59,761
=========
As of December 31, 1999, certificates of deposit totaling $9,166,000 are held by
one customer and represent 9.67% of total deposits. Overdrawn deposit accounts
in the amount of $23,000 are classified as loans as of December 31, 1999.
NOTE I - ADVANCE FROM THE FEDERAL HOME LOAN BANK
As of December 31, 1999, the Company owes $10,000,000 on advances from the
Federal Home Loan Bank. The first originated on October 16, 1998 in the amount
of $5,000,000 and the second originated on August 6, 1999 for an additional
$5,000,000. The terms of the agreement are quarterly interest payments of
$55,000 based on a fixed rate of 4.41% for the first $5,000,000 advance and
$62,000 based on a fixed rate of 4.95% for the second $5,000,000 advance. The
principal balance of the first $5,000,000 advance is due October 16, 2003. The
principal balance of the second $5,000,000 advance is due on August 7, 2009, but
is subject to early termination with a two day notice. As collateral, the
Company has pledged its portfolio of first mortgage loans on one-to-four family
residential properties aggregating approximately $10,898,000 at December 31,
1999 and its investment in Federal Home Loan Bank stock of $500,000 which is
included in other assets.
NOTE J - LEASE COMMITMENTS
On May 15, 1997, the Company entered into a lease agreement for land on which to
operate its Tabor City branch. The lease has an initial five-year term which
expires June 5, 2002 and is renewable at the Company's option for seven
five-year terms. During the first five years of the lease, the Company will pay
$600 per month. Beginning with the first option period, the rental amount will
increase to the then current rental amount.
Page 39 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE J - LEASE COMMITMENTS - CONTINUED
Future minimum lease payments over the next five years for this long-term
operating leases are as follows:
(DOLLARS IN THOUSANDS) Amount
--------
2000 $ 7
2001 7
2002 7
2003 7
2004 8
---------
Total $ 36
=========
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits which arise primarily in the
ordinary course of business. At December 31, 1999, 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 Company's applications to open three
branches in North Myrtle Beach, Tabor City, and Loris. As a condition of
approval, the Company was required to obtain an additional $2,000,000 in
capital. In response, the Company 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, was paid on March 15,
1999. The cost to purchase fractional shares was $18,000. Appropriately, all
share and per share data in these financial statements and notes hereto have
been adjusted to reflect this stock dividend.
On January 27, 2000, the Company's Board of Directors declared a two-for-one
stock split effected in the form of a 100% stock dividend payable on March 15,
2000 to stockholders of record on February 15, 2000. Net income per share and
average shares outstanding have been adjusted to reflect the stock distribution
for all periods presented.
RESTRICTIONS ON DIVIDENDS - South Carolina banking regulations restrict the
amount of dividends that can be paid to shareholders. All of the Bank's
dividends to HCSB Financial Corporation are payable only from the undivided
profits of the Bank. At December 31, 1999, the Bank's undivided profits were
$1,015,000. The Bank is authorized to pay cash dividends up to 100% of net
income in any calender year without obtaining the prior approval of the
Commissioner of Banking provided that the Bank received a composite rating of
one or two at the last Federal or State regulatory examination. Under Federal
Reserve Board regulations, the amounts of loans or advances from the Bank to the
parent company are also restricted.
NOTE 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 judgments by the regulators about components, risk weightings, and
other factors.
Page 40 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY 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
quarterly average assets (as defined), which is known as the leverage ratio.
Only the strongest institutions are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above
the minimum.
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, 1999 and 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ----------- ------- ---------- ------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 10,398 12.44% $ 6,689 8.00% $ 8,361 10.00%
Tier 1 capital (to risk weighted assets) 9,476 11.33 3,344 4.00 5,017 6.00
Tier 1 capital (to average assets) 9,476 8.67 4,373 4.00 5,466 5.00
DECEMBER 31, 1998
Total capital (to risk weighted assets) $ 8,711 14.20% $ 4,907 8.00% $ 6,134 10.00%
Tier 1 capital (to risk weighted assets) 7,944 12.95 2,454 4.00 3,681 6.00
Tier 1 capital (to average assets) 7,944 9.87 3,220 4.00 4,025 5.00
</TABLE>
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies of less than
$150,000,000 in consolidated assets.
NOTE N - RETIREMENT & EMPLOYEE BENEFITS
On June 10, 1999 the Board of Directors approved a trusteed retirement savings
plan which provides retirement benefits to substantially all officers and
employees who meet certain age and service requirements. The plan includes a
"salary reduction" feature pursuant to Section 401(k) of the Internal Revenue
Code. Under the plan and present policies, participants are permitted to make
contributions up to 15% of their annual compensation. At its discretion, the
Company can make matching contributions up to 4% of the participants'
compensation. The Company charged $4,000 to earnings for the retirement savings
plan in 1999.
The Company has discontinued its Simplified Employee Pension plan under section
408(k) of the Internal Revenue Code. The Company contributed $65,000, $55,000,
and $35,000 to the plan during 1999, 1998, and 1997, respectively.
Page 41 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE N - RETIREMENT & EMPLOYEE BENEFITS - CONTINUED
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 Company accrues an expense equal to the amount deferred plus an
interest component based on the prime rate of interest at the beginning of each
year. The Company has purchased life insurance contracts on each of the
participating directors to fund the Company's liability. For the years ended
December 31, 1999, 1998 and 1997, $87,000, $53,000 and $22,000, respectively, of
directors' fees were deferred and included in other liabilities.
NOTE O - OTHER EXPENSES
Other expenses are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Stationery, printing and postage $ 219 $ 191 $ 182
Advertising and promotion 102 110 125
Professional services 132 127 127
Insurance 37 52 48
ATM services 63 50 23
Collection and repossession 13 29 27
Organizational expense 45 - -
Other 301 298 195
--------- --------- ----------
Total $ 912 $ 857 $ 727
========= ========= ==========
NOTE P - INCOME TAXES
Income tax expense is summarized as follows:
<CAPTION>
Year ended December 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Current portion:
Federal $ 497 $ 231 $ 329
State 47 22 32
--------- --------- ----------
Total current 544 253 361
--------- --------- ----------
Deferred portion:
Federal (330) 38 (125)
State (78) 4 (15)
--------- --------- ----------
Total deferred (408) 42 (140)
--------- --------- ----------
Total $ 136 $ 295 $ 221
========= ========= ==========
Income tax expense is allocated as follows:
To continuing operations $ 524 $ 272 $ 214
To stockholders' equity (388) 23 7
--------- --------- ----------
Total $ 136 $ 295 $ 221
========= ========= ==========
</TABLE>
Page 42 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY 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, 1999 and 1998
are as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
December 31,
--------------------------------
1999 1998
---------------- -------------
Deferred tax assets:
Allowance for loan losses $ 282 $ 274
Net capitalized loan costs 22 3
Net unrealized loss on securities available-for-sale 340 -
Other real estate owned - 5
Deferred directors' fees 33 20
Organizational expenses 16 -
----------- ----------
Total deferred tax assets 693 302
----------- -----------
Deferred tax liabilities:
Accumulated depreciation 109 81
Net unrealized gain on securities available-for-sale - 47
Software amortization 16 14
----------- -----------
Total deferred tax liabilities 125 142
----------- -----------
Net deferred tax asset $ 568 $ 160
=========== ===========
</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, 1999 and 1998 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) 1999 1998 1997
---------------- ---------------- -------------
<S> <C> <C> <C>
Tax expense at statutory rate $ 516 $ 266 $ 219
State income tax, net of Federal income tax effect 28 23 20
Tax exempt interest income (60) (31) (18)
Other 40 14 (7)
----------- ----------- -----------
Total $ 524 $ 272 $ 214
============ =========== ============
</TABLE>
NOTE Q - UNUSED LINES OF CREDIT
As of December 31, 1999, the Company had unused lines of credit to purchase
federal funds from unrelated banks totaling $3,500,000. These lines of credit
are available on a one to fourteen day basis for general corporate purposes. The
lenders have reserved the right not to renew their respective lines. The Company
may also borrow 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 Company to pledge additional collateral.
Page 43 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
CASH AND DUE FROM BANKS - The carrying amount is a reasonable estimate of fair
value.
Federal Funds Sold - Federal funds sold are for a term of one day and the
carrying amount approximates the fair value.
Investment Securities - For securities available-for-sale, fair value equals the
carrying amount which is the quoted market price. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
securities.
Loans - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk and credit
card receivables, fair values are based on the carrying amounts. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to the borrowers with
similar credit ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market accounts
is the amount payable on demand at the reporting date. The fair values of
certificates of deposit are estimated using a discounted cash flow calculation
that applies current interest rates to a schedule of aggregated expected
maturities.
OTHER BORROWINGS - For the portion of borrowings immediately callable, fair
value is based on the carrying amount. The fair value of the portion maturing at
a later date is estimated using a discounted cash flow calculation that applies
the interest rate of the immediately callable portion to the portion maturing at
the future date.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying value of these
instruments is a reasonable estimate of fair value.
Off-Balance Sheet Financial Instruments - The contractual amount is a reasonable
estimate of fair value for the instruments because commitments to extend credit
and standby letters of credit are issued on a short-term or floating rate basis.
Page 44 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1999 were as follows:
1999
------------------------
(DOLLARS IN THOUSANDS) Carrying Estimated
FINANCIAL ASSETS: Amount Fair Value
--------- ----------
Cash and due from banks $ 5,708 $ 5,708
Federal funds sold 2,190 2,190
Investments available-for-sale 23,892 23,892
Loans 75,839 75,698
Allowance for loan losses (922) (922)
Accrued interest receivable 1,204 1,204
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing
transaction, and savings accounts $ 35,068 $ 35,068
Certificates of deposit 59,761 59,966
Other borrowings 10,000 9,918
Accrued interest payable 403 403
OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit $ 5,290 $ 5,290
Standby letters of credit 272 272
NOTE S - HCSB FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Presented below are the condensed financial statements for HCSB Financial
Corporation (Parent Company Only).
BALANCE SHEET
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
ASSETS
Cash $ 4
Investment in banking subsidiary 8,318
Due from banking subsidiary 5
Deferred tax asset 16
------------
Total assets $ 8,343
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 2
------------
Stockholders' equity 8,341
------------
Total liabilities and stockholders' equity $ 8,343
============
Page 45 of 47 sequentially numbered pages.
<PAGE>
HCSB FINANCIAL CORPORATION
(FORMERLY HORRY COUNTY STATE BANK)
NOTES TO FINANCIAL STATEMENTS
NOTE S - HCSB FINANCIAL CORPORATION (PARENT COMPANY ONLY) - CONTINUED
STATEMENT OF INCOME
FOR THE PERIOD JUNE 10, 1999 THROUGH DECEMBER 31, 1999
INCOME
Dividends from banking subsidiary $ 55
EXPENSES
Organizational expenses 45
Other expenses 8
------------
53
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY 2
Income tax benefit (21)
Equity in undistributed earnings of banking subsidiary 548
------------
NET INCOME $ 571
============
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 10, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income $ 571
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed earnings of banking subsidiary (548)
Increase in other assets (21)
Increase in other liabilities 2
------------
Net cash provided by operating activities 4
------------
INCREASE IN CASH 4
CASH, BEGINNING -
------------
CASH, ENDING $ 4
============
</TABLE>
Page 46 of 47 sequentially numbered pages.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HCSB Financial Corporation
Date: March 29, 2000 By: /s/ JAMES R. CLARKSON
---------------------
James R. Clarkson, President
& Chief Executive Officer
Date: March 29, 2000 By: /s/ LORETTA G. GERALD
---------------------
Loretta B. Gerald, Assistant Vice President
& Cashier (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
By: Date: March 29, 2000
------------------------------------------
D. Singleton Bailey
By: Date: March 29, 2000
------------------------------------------
Franklin C. Blanton
By: Date: March 29, 2000
------------------------------------------
Russell R. Burgess, Jr.
By: Date: March 29, 2000
------------------------------------------
William H. Caines
By: Date: March 29, 2000
------------------------------------------
James R. Clarkson
By: Date: March 29, 2000
------------------------------------------
J. Lavelle Coleman
By: Date: March 29, 2000
------------------------------------------
Boyd R. Ford, Jr.
By: Date: March 29, 2000
------------------------------------------
Charles F. Freeman
By: Date: March 29, 2000
------------------------------------------
Tommie W. Grainger
By: Date: March 29, 2000
------------------------------------------
Randy B. Hardee
By: Date: March 29, 2000
------------------------------------------
Gwyn G. McCutchen
By: Date: March 29, 2000
------------------------------------------
T. Freddie Moore
By: Date: March 29, 2000
------------------------------------------
Carroll D. Padgett, Jr.
By: Date: March 29, 2000
------------------------------------------
Bill G. Page
Page 47 of 47 sequentially numbered pages.
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
HCSB FINANCIAL CORPORATION
ARTICLE ONE
NAME
The name of the corporation is HCSB Financial Corporation (the
"Corporation").
ARTICLE TWO
ADDRESS AND REGISTERED AGENT
----------------------------
The street address of the initial registered office of the Corporation
shall be 5009 Broad Street, Loris, South Carolina 29569. The name of the
Corporation's initial registered agent at such address shall be James R.
Clarkson.
ARTICLE THREE
CAPITALIZATION
--------------
The Corporation shall have the authority, exercisable by its board of
directors (the "Board of Directors"), to issue up to 10,000,000 shares of voting
common stock, par value $.01 per share (the "Common Stock").
ARTICLE FOUR
PREEMPTIVE RIGHTS
-----------------
The shareholders shall not have any preemptive rights to acquire
additional stock in the Corporation.
ARTICLE FIVE
NO CUMULATIVE VOTING RIGHTS
---------------------------
The Corporation elects not to have cumulative voting, and no shares issued
by this Corporation may be cumulatively voted for directors of the Corporation
(or for any other decision).
<PAGE>
ARTICLE SIX
LIMITATION ON DIRECTOR LIABILITY
--------------------------------
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of the duty of
care or any other duty as a director, except that such liability shall not be
eliminated for:
(I) any breach of the director's duty of loyalty to the Corporation
or its shareholders;
(ii) acts or omissions not in good faith or which involve gross
negligence, intentional misconduct, or a knowing violation of law;
(iii) liability imposed under Section 33-8-330 (or any successor
provision or redesignation thereof) of the Act; and
(iv) any transaction from which the director derived an improper
personal benefit.
If at any time the Act shall have been amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
each director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Act, as so amended, without further action by the
shareholders, unless the provisions of the Act, as amended, require further
action by the shareholders.
Any repeal or modification of the foregoing provisions of this Article Six
shall not adversely affect the elimination or limitation of liability or alleged
liability pursuant hereto of any director of the Corporation for or with respect
to any alleged act or omission of the director occurring prior to such a repeal
or modification.
ARTICLE SEVEN
CONSIDERATION OF OTHER CONSTITUENCIES
-------------------------------------
In discharging the duties of their respective positions and in determining
what is in the best interests of the Corporation, the Board of Directors,
committees of the Board of Directors, and individual directors, in addition to
considering the effects of any actions on the Corporation and its shareholders,
may consider the interests of the employees, customers, suppliers, creditors,
and other constituencies of the Corporation and its subsidiaries, the
communities and geographical areas in which the Corporation and its subsidiaries
operate or are located, and all other factors such directors consider pertinent.
This provision solely grants discretionary authority to the directors and shall
not be deemed to provide to any other constituency any right to be considered.
ARTICLE EIGHT
NAME AND ADDRESS OF THE SOLE INCORPORATOR
-----------------------------------------
The sole incorporator is James R. Clarkson, whose address is 5009 Broad
Street, Loris, South Carolina 29569.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation as of the date indicated below.
___________________________
James R. Clarkson
Sole Incorporator
Date: ____________, 1999
<PAGE>
CERTIFICATION
-------------
I, Daniel J. Fritz, an attorney licensed to practice in the State of South
Carolina, certify that the Corporation has complied with the requirements of
Chapter 2, Title 33 of the Code of Laws of South Carolina 1976, relating to the
Articles of Incorporation.
Date: ____________, 1999
____________________________________________
(Signature)
Nelson Mullins Riley & Scarborough, L.L.P.
1330 Lady Street, Third Floor
Keenan Building
Columbia, South Carolina 29201
EXHIBIT 3.2
BYLAWS
OF
HCSB FINANCIAL CORPORATION
<PAGE>
HCSB FINANCIAL CORPORATION
TABLE OF CONTENTS
-----------------
ARTICLE 1
OFFICES...................................................................1
Section 1: Registered Office and Agent.................................1
Section 2: Other Offices...............................................1
ARTICLE 2
SHAREHOLDERS..............................................................1
Section 1: Place of Meetings...........................................1
Section 2: Annual Meetings.............................................1
Section 3: Special Meetings............................................1
Section 4: Notice......................................................2
Section 5: Quorum......................................................2
Section 6: Majority Vote; Withdrawal of Quorum.........................3
Section 7: Method of Voting............................................3
Section 8: Record Date.................................................3
Section 9: Shareholder Proposals.......................................3
ARTICLE 3
DIRECTORS.................................................................4
Section 1: Management..................................................4
Section 2: Number, Classification and Terms of Office of Directors.....4
Section 3: Qualifications of Directors.................................5
Section 4: Election of Directors.......................................5
Section 5: Nomination of Directors.....................................5
Section 6: Retirement of Directors.....................................6
Section 7: Emeritus Directors..........................................6
Section 8: Vacancies...................................................7
Section 9: Removal of Directors........................................7
Section 10: Place of Meetings..........................................7
Section 11: Regular Meetings...........................................7
Section 12: Special Meetings...........................................7
Section 13: Telephone and Similar Meetings.............................7
Section 14: Quorum; Majority Vote......................................8
Section 15: Compensation...............................................8
Section 16: Procedure..................................................8
Section 17: Action Without Meeting.....................................8
ARTICLE 4
BOARD COMMITTEES..........................................................8
Section 1: Designation................................................8
Section 2: Meetings...................................................9
Section 3: Quorum; Majority Vote......................................9
Section 4: Procedure..................................................9
Section 5: Action Without Meeting.....................................9
Section 6: Telephone and Similar Meetings.............................9
<PAGE>
ARTICLE 5
OFFICERS...................................................................9
Section 1: Offices......................................................9
Section 2: Term........................................................10
Section 3: Vacancies...................................................10
Section 4: Compensation................................................10
Section 5: Removal.....................................................10
Section 6: Chairman of the Board.......................................10
Section 7: Chief Executive Officer.....................................10
Section 8: President...................................................10
Section 9: Vice Presidents.............................................10
Section 10: Secretary..................................................11
Section 11: Assistant Secretary........................................11
Section 12: Treasurer..................................................11
ARTICLE 6
INDEMNIFICATION...........................................................12
Section 1: Indemnification of Directors................................12
Section 2: Advancement of Expenses.....................................12
Section 3: Indemnification of Officers, Employees and Agents...........13
Section 4: Insurance...................................................13
Section 5: Nonexclusivity of Rights; Agreements........................13
Section 6: Continuing Benefits; Successors.............................14
Section 7: Interpretation; Construction................................14
Section 8: Amendment...................................................14
Section 9: Severability................................................14
ARTICLE 7
CERTIFICATES AND SHAREHOLDERS.............................................15
Section 1: Certificates................................................15
Section 2: Issuance of Shares..........................................15
Section 3: Rights of Corporation with Respect to Registered Owners.....15
Section 4: Transfers of Shares.........................................15
Section 5: Registration of Transfer....................................16
Section 6: Lost, Stolen or Destroyed Certificates......................16
Section 7: Restrictions on Shares......................................16
Section 8: Voting of Stock Held........................................16
ARTICLE 8
GENERAL PROVISIONS........................................................17
Section 1: Distributions...............................................17
Section 2: Books and Records...........................................17
Section 3: Execution of Documents......................................17
Section 4: Fiscal Year.................................................17
Section 5: Seal........................................................17
Section 6: Resignation.................................................17
Section 7: Computation of Days.........................................17
Section 8: Amendment of Bylaws.........................................18
Section 9: Construction................................................18
Section 10: Headings...................................................18
<PAGE>
BYLAWS
OF
HCSB FINANCIAL CORPORATION
ARTICLE 1: OFFICES
Section 1: Registered Office and Agent. The registered office of the
Corporation shall be at 5009 Broad Street, Loris, South Carolina 29569. The
registered agent shall be James R. Clarkson.
Section 2: Other Offices. The Corporation may also have offices at
such other places within and without the State of South Carolina as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE 2: SHAREHOLDERS
Section 1: Place of Meetings. Meetings of shareholders shall be held
at the time and place, within or without the State of South Carolina, stated in
the notice of the meeting or in a waiver of notice.
Section 2: Annual Meetings. An annual meeting of the shareholders
shall be held each year on the third Thursday of April, if not a legal holiday,
but if a legal holiday, then on the next Thursday not a legal holiday, or on
such other date and at a time to be set by the Board of Directors in accordance
with all applicable notice requirements. At the meeting, the shareholders shall
elect directors and transact such other business as may properly be brought
before the meeting.
Section 3: Special Meetings.
(a) Special meetings of the shareholders, for any purpose or
purposes, unless otherwise required by the South Carolina Business Corporation
Act of 1988, as amended from time to time (the "Act"), the Articles of
Incorporation of the Corporation (the "Articles"), or these Bylaws, may be
called by the chief executive officer, the president, the chairman of the Board
of Directors or a majority of the Board of Directors.
(b) In addition to a special meeting called in accordance with
subsection 3(a) of this Article 2, the Corporation shall, if and to the extent
that it is required by applicable law, hold a special meeting of shareholders if
the holders of at least ten percent of all the votes entitled to be cast on any
issue proposed to be considered at such special meeting sign, date and deliver
to the secretary of the Corporation one or more written demands for the meeting.
Such written demands shall be delivered to the secretary by certified mail,
return receipt requested. Such written demands sent to the secretary of the
Corporation shall set forth as to each matter the shareholder or shareholders
propose to be presented at the special meeting (i) a description of the purpose
or purposes for which the meeting is to be held (including the specific
proposal(s) to be presented); (ii) the name and record address of the
shareholder or shareholders proposing such business; (iii) the class and number
of shares of the Corporation that are owned of record by the shareholder or
shareholders as of a date within ten days of the delivery of the demand; (iv)
the class and number of shares of the Corporation that are held beneficially,
but not held of record, by the shareholder or shareholders as of a date within
ten days of the delivery of the demand; and (v) any interest of the shareholder
or shareholders in such business. Any such special shareholders' meeting shall
be held at a location designated by the Board of Directors. The Board of
Directors may set such rules for any such meeting as it may deem appropriate,
including when the meeting will be held (subject to any requirements of the
Act), the agenda for the meeting (which may include any proposals made by the
Board of Directors), who may attend the meeting in addition to shareholders of
record and other such matters.
(c) Business transacted at any special meeting shall be
confined to the specific purpose or purposes stated in the notice of the
meeting.
<PAGE>
Section 4: Notice.
(a) Written or printed notice stating the place, day and hour
of the meeting and, in the case of a special meeting, the specific purpose or
purposes for which the meeting is called, shall be delivered by the Corporation
not less than ten nor more than sixty days before the date of the meeting,
either personally or by mail, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed effective when deposited
with postage prepaid in the United States mail, addressed to the shareholder at
the address appearing on the stock transfer books of the Corporation. Except as
may be expressly provided by law, no failure or irregularity of notice of any
regular meeting shall invalidate the same or any proceeding thereat.
(b) The notice of each special shareholders meeting shall
include a description of the specific purpose or purposes for which the meeting
is called. Except as provided by law, the Articles or these Bylaws, the notice
of an annual shareholders meeting need not include a description of the purpose
or purposes for which the meeting is called.
Section 5: Quorum. The holders of a majority of the shares issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall be requisite and shall constitute a quorum at meetings of the
shareholders for the transaction of business except as otherwise provided by
statute, by the Articles or by these Bylaws. If a quorum is not present or
represented at a meeting of the shareholders, the shareholders entitled to vote,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present or represented. At an adjourned meeting at
which a quorum is present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. Once a share
is represented for any purpose at a meeting it is deemed present for quorum
purposes.
Section 6: Majority Vote; Withdrawal of Quorum. Except in regards to
the election of directors, when a quorum is present at a meeting, the vote of
the holders of a majority of the shares having voting power, present in person
or represented by proxy, shall decide any question brought before the meeting,
unless the question is one on which, by express provision of the statutes, the
Articles or these Bylaws, a higher vote is required in which case the express
provision shall govern. Directors shall be elected by a plurality vote of the
shareholders. The shareholders present at a duly constituted meeting may
continue to transact business until adjournment, despite the withdrawal of
enough shareholders to leave less than a quorum.
Section 7: Method of Voting. Each outstanding share of common stock
shall be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. Each outstanding share of other classes of stock, if any, shall
have such voting rights as may be prescribed by the Board of Directors. Proxies
delivered by facsimile to the Corporation, if otherwise in order, shall be
valid. Votes shall be taken by voice, by hand or in writing, as directed by the
chairman of the meeting. Voting for directors shall be in accordance with
Article 3, Section 3 of these Bylaws.
Section 8: Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, including any
special meeting, or shareholders entitled to receive payment of dividends, or in
order to make a determination of shareholders for any other purpose, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not less than ten nor
more than seventy days prior to the date on which the particular action,
requiring such determination of shareholders, is to be taken. Except as
otherwise provided by law, if no record date is fixed for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders, or
of shareholders entitled to receive payment of dividends, the date on which
notice of the meeting is mailed, or the date on which the resolution of the
Board of Directors declaring such dividend is adopted, as the case may be, shall
be the record date.
<PAGE>
Section 9: Shareholder Proposals.
(a) To the extent required by applicable law, a shareholder
may bring a proposal before an annual meeting of shareholders as set forth in
this Section 9. To be properly brought before an annual meeting of shareholders,
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors; (ii) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors; or (iii) otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the secretary of the
Corporation. To be timely, a shareholder's notice must be given, either by
personal delivery or by United States mail, postage prepaid, return receipt
requested, to the secretary of the Corporation not less than 30 nor more than 60
days in advance of the annual meeting (provided, however, that if less than 31
days' notice of the meeting is given to shareholders, such written notice shall
be delivered or mailed, as prescribed, to the Secretary of Corporation not later
than the close of the tenth day following the day on which notice of the meeting
was mailed to shareholders). A shareholder's notice to the secretary of the
Corporation shall set forth for each matter the shareholder proposes to bring
before the annual meeting (i) a description of the business desired to be
brought before the annual meeting (including the specific proposal(s) to be
presented) and the reasons for conducting such business at the annual meeting;
(ii) the name and record address of the shareholder proposing such business;
(iii) the class and number of shares of the Corporation that are owned of
record, and the class and number of shares of the Corporation that are held
beneficially, but not held of record, by the shareholder as of the record date
for the meeting, if such date has been made publicly available, or as of a date
within ten days of the effective date of the notice by the shareholder if the
record date has not been made publicly available; and (iv) any interest of the
shareholder in such business. In the event that a shareholder attempts to bring
business before an annual meeting without complying with the provisions of this
Section 9, the chairman of the meeting shall declare to the meeting that the
business was not properly brought before the meeting in accordance with the
foregoing procedures, and such business shall not be transacted. The chairman of
any annual meeting, for good cause shown and with proper regard for the orderly
conduct of business at the meeting, may waive in whole or in part the operation
of this Section 9.
(b) If any shareholder of the Corporation notifies the
Corporation that such shareholder intends to present a proposal for action at a
forthcoming meeting of the Corporation's shareholders and requests that the
Corporation include the proposal in its proxy statement and such shareholder
complies with all the requirements of Rule 14a-8 promulgated under the
Securities Exchange Act of 1934, the Corporation shall consider inclusion of
such proposal in the proxy statement unless it determines that the proposal is
inappropriate for consideration by the shareholders at the meeting.
ARTICLE 3: DIRECTORS
Section 1: Management. The business and affairs of the Corporation
shall be managed by the Board of Directors who may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law, the
Articles or these Bylaws directed or required to be done or exercised by the
shareholders.
<PAGE>
Section 2: Number, Classification and Terms of Office of Directors.
Unless otherwise provided in the Articles of Incorporation, the number of
directors of the Corporation shall be that number as may be fixed from time to
time by resolution of the Board of Directors, but in no event shall the number
be less than seven or greater than 25. The initial number of directors shall be
fourteen. The number of members of the Board of Directors can be increased or
decreased within the foregoing range at any time by the Board of Directors. In
addition, unless provided otherwise by resolution of the Board of Directors, if,
in any case after proxy materials for an annual meeting of shareholders have
been mailed to shareholders, any person named therein to be nominated at the
direction of the Board of Directors becomes unable or unwilling to serve, the
number of authorized directors shall be automatically reduced by a number equal
to the number of such persons. At any time that the Board has six or more
members, unless provided otherwise by the Articles of Incorporation, the terms
of office of directors will be staggered by dividing the total number of
directors into three classes, with each class accounting for one-third, as near
as may be, of the total. The terms of directors in the first class expire at the
first annual shareholders' meeting after their election, the terms of the second
class expire at the second annual shareholders' meeting after their election,
and the terms of the third class expire at the third annual shareholders'
meeting after their election. At each annual shareholders' meeting held
thereafter, directors shall be chosen for a term of three years to succeed those
whose terms expire. If the number of directors is changed, any increase or
decrease shall be so apportioned among the classes as to make all classes as
nearly equal in number as possible, and when the number of directors is
increased and any newly created directorships are filled by the board, the terms
of the additional directors shall expire at the next election of directors by
the shareholders. Each director, except in the case of his earlier death,
written resignation, retirement, disqualification or removal, shall serve for
the duration of his term, as staggered, and thereafter until his successor shall
have been elected and qualified.
Section 3: Qualifications of Directors. The members of the Board of
Directors must be shareholders, but they need not be residents of any particular
state. No individual who is or becomes a Business Competitor (as defined below)
or who is or becomes affiliated with, employed by or a representative of any
individual, corporation, association, partnership, firm, business enterprise or
other entity or organization which the Board of Directors, after having such
matter formally brought to its attention, determines to be in competition with
the Corporation or any of its subsidiaries (any such individual, corporation,
association, partnership, firm, business enterprise or other entity or
organization being hereinafter referred to as a "Business Competitor") shall be
eligible to serve as a director if the Board of Directors determines that it
would not be in the Corporation's best interests for such individual to serve as
a director of the Corporation. Such affiliation, employment or representation
may include, without limitation, service or status as an owner, partner,
shareholder, trustee, director, officer, consultant, employee, agent, or
counsel, or the existence of any relationship which results in the affected
person having an express or implied obligation to act on behalf of a Business
Competitor; provided, however, that passive ownership of a debt or equity
interest not exceeding 1% of the outstanding debt or equity, as the case may be,
in any Business Competitor shall not constitute such affiliation, employment or
representation. Any financial institution having branches or affiliates in Horry
County, South Carolina, or in Columbus County, North Carolina, shall be presumed
to be a Business Competitor unless the Board of Directors determines otherwise.
Section 4: Election of Directors. Directors shall be elected by a
plurality vote.
<PAGE>
Section 5: Nomination of Directors.
(a) Nomination of persons to serve as directors of the
Corporation, other than those made by or on behalf of the Board of Directors of
the Corporation, shall be made in writing and shall be delivered either by
personal delivery or by United States mail, postage prepaid, return receipt
requested, to the secretary of the Corporation no later than (i) with respect to
an election to be held at an annual meeting of shareholders, ninety days in
advance of such meeting; and (ii) with respect to an election to be held at a
special meeting of shareholders for the election of directors, the close of
business on the seventh day following the date on which notice of such meeting
is first given to shareholders. Each notice shall set forth: (i) the name and
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (iii) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (iv) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (v) the consent of each
nominee to serve as a director of the Corporation if so elected. The chairman of
the meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure. The chairman of any such meeting, for
good cause shown and with proper regard for the orderly conduct of business at
the meeting, may waive in whole or in part the oeration of this Section 4.
(b) Notwithstanding subsection (a) of this Section 4, if the
Corporation or any banking subsidiary of the Corporation is subject to the
requirements of Section 914 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, then no person may be nominated by a shareholder for
election as a director at any meeting of shareholders unless the shareholder
furnishes the written notice required by subsection (a) of this Section 4 to the
secretary of the Corporation at least ninety days prior to the date of the
meeting and the nominee has received regulatory approval to serve as a director
prior to the date of the meeting.
Section 6: Retirement of Directors. No person shall be elected or
reelected a director of the Corporation after attaining the age of 70.
Section 7: Emeritus Directors. The Board of Directors may, from time
to time, appoint individuals (including individuals who have retired from the
Board of Directors) to serve as members of the Emeritus Board of Directors of
the Corporation. Each member of the Emeritus Board of Directors of the
Corporation, except in the case of his earlier death, resignation, retirement,
disqualification or removal, shall serve until the next succeeding annual
meeting of the Board of Directors of the Corporation. Members of the Emeritus
Board of Directors may be removed without cause by a vote of the members of the
Board of Directors. Any individual appointed as a member of the Emeritus Board
of Directors of the Corporation may, but shall not be required to, attend
meetings of the Board of Directors of the Corporation and may participate in any
discussions at such meetings, but such individual may not vote or be counted in
determining a quorum at any meeting of the Board of Directors of the
Corporation. It shall be the duty of the members of the Emeritus Board of
Directors of the Corporation to serve as goodwill ambassadors of the
Corporation, but such individuals shall not have any responsibility or be
subject to any liability imposed upon a member of the Board of Directors of the
Corporation or in any manner otherwise be deemed to be a member of the Board of
Directors of the Corporation. Each member of the Emeritus Board of Directors of
the Corporation shall be paid such compensation as may be set from time to time
by the Chairman of the Board of Directors of the Corporation and shall remain
eligible to participate in any stock option plan in which directors are eligible
to participate which is maintained by, or participated in, from time to time by
the Corporation, according to the terms and conditions thereof.
<PAGE>
Section 8: Vacancies. Except as otherwise provided by law, in the
Articles of Incorporation, or in these Bylaws (a) the office of a director shall
become vacant if he dies, resigns, or is removed from office, and (b) the Board
of Directors may declare vacant the office of a director if (i) he is
interdicted or adjudicated an incompetent, (ii) an action is filed by or against
him, or any entity of which he is employed as his principal business activity,
under the bankruptcy laws of the United States, (iii) in the sole opinion of the
Board of Directors he becomes incapacitated by illness or other infirmity so
that he is unable to perform his duties for a period of six months or longer, or
(iv) he ceases at any time to have the qualifications required by law, the
Articles of Incorporation or these Bylaws. The remaining directors may, by a
majority vote, fill any vacancy on the Board of Directors (including any vacancy
resulting from an increase in the authorized number of directors, or from the
failure of the shareholders to elect the full number of authorized directors)
for an unexpired term; provided that the shareholders shall have the right at
any special meeting called for such purpose prior to action by the Board of
Directors to fill the vacancy.
Section 9: Removal of Directors. Unless provided otherwise by the
Articles of Incorporation, directors may be removed with or without cause by the
affirmative vote of the holders of at least a majority of the shares entitled to
vote at an election of directors, such vote being taken at a meeting of the
shareholders called for that purpose at which a quorum is present.
Section 10: Place of Meetings. Meetings of the Board of Directors,
regular or special, may be held either within or without the State of South
Carolina.
Section 11: Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board of Directors.
Section 12: Special Meetings. Special meetings of the Board of
Directors may be called by the chairman, the chief executive officer, or the
president of the Corporation, on not less than twenty-four hours' notice. Notice
of a special meeting may be given by personal notice, telephone, facsimile,
electronic communication, overnight courier or United States mail to each
director. Any such special meeting shall be held at such time and place as shall
be stated in the notice of the meeting. The notice need not describe the purpose
or purposes of the special meeting.
Section 13: Telephone and Similar Meetings. Directors may
participate in and hold a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting shall constitute
presence in person at the meeting, except where a person participates in the
meeting for the express purpose of objecting to the holding of the meeting or
the transacting of any business at the meeting on the ground that the meeting is
not lawfully called or convened, and does not thereafter vote for or assent to
action taken at the meeting.
Section 14: Quorum; Majority Vote. At meetings of the Board of
Directors a majority of the number of directors then in office shall constitute
a quorum for the transaction of business. The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, except as otherwise specifically provided by law, the Articles or
these Bylaws. If a quorum is not present at a meeting of the Board of Directors,
the directors present may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present.
Section 15: Compensation. Each director shall be entitled to receive
such reasonable compensation as may be determined by resolution of the Board of
Directors. By resolution of the Board of Directors, the directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of committees may, by resolution of the Board of Directors, be allowed
compensation for attending committee meetings.
Section 16: Procedure. The Board of Directors shall keep regular
minutes of its proceedings. The minutes shall be placed in the minute book of
the Corporation.
<PAGE>
Section 17: Action Without Meeting. Any action required or permitted
to be taken at a meeting of the Board of Directors may be taken without a
meeting if the action is assented to by all the members of the Board. Such
consent shall have the same force and effect as a meeting vote and may be
described as such in any document.
ARTICLE 4: BOARD COMMITTEES
Section 1: Designation. The Board of Directors may, by resolution
adopted by a majority of the full Board, designate one or more committees. Each
committee must have two or more members who serve at the pleasure of the Board
of Directors. To the extent specified by the Board of Directors, in the Articles
or in these Bylaws, each committee may exercise the authority of the Board of
Directors. So long as prohibited by law, however, a committee of the Board may
not (a) authorize distributions; (b) approve or propose to shareholders action
required by the Act to be approved by shareholders; (c) fill vacancies on the
Board of Directors or on any of its committees; (d) amend the Articles; (e)
adopt, amend or repeal these Bylaws; (f) approve a plan of merger not requiring
shareholder approval; (g) authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the Board of Directors; or (h)
authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences and limitations of a
class or series of shares, except that the Board of Directors may authorize a
committee (or a senior executive officer of the Corporation) to do so within
limits specifically prescribed by the Board of Directors. Any director may serve
one or more committee. Any committee appointed under this Section 1 shall
perform such duties and assume such responsibility as may from time to time be
placed upon it by the Board of Directors.
Section 2: Meetings. Time, place and notice of all committee
meetings shall be as called and specified by the chief executive officer, the
committee chairman or any two members of each committee.
Section 3: Quorum; Majority Vote. At meetings of committees, a
majority of the number of members designated by the Board of Directors shall
constitute a quorum for the transaction of business. The act of a majority of
the members present at any meeting at which a quorum is present shall be the act
of such committee, except as otherwise specifically provided by the Act, the
Articles or these Bylaws. If a quorum is not present at a meeting of the
committee, the members present may adjourn the meeting from time to time,
without notice other than an announcement at the meeting, until a quorum is
present.
Section 4: Procedure. Committees shall keep regular minutes of their
proceedings and report the same to the Board of Directors at its next regular
meeting. The minutes of the proceedings of the committee shall be placed in the
minute book of the Corporation.
Section 5: Action Without Meeting. Any action required or permitted
to be taken at a meeting of any committee may be taken without a meeting if the
action is assented to by all the members of the committee. Such consent shall
have the same force and effect as a meeting vote and may be described as such in
any document.
Section 6: Telephone and Similar Meetings. Committee members may
participate in and hold a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting shall constitute
presence in person at the meeting, except where a person participates in the
meeting for the express purpose of objecting to the holding of the meeting or
the transacting of any business at the meeting on the ground that the meeting is
not lawfully called or convened, and does not thereafter vote for or assent to
action taken at the meeting.
<PAGE>
ARTICLE 5: OFFICERS
OFFICERS
Section 1: Offices. The officers of the Corporation shall consist of
a chief executive officer, president and secretary, each of whom shall be
elected by the Board of Directors. The Board of Directors may also create and
establish the duties of other offices as it deems appropriate. The Board of
Directors shall also elect a chairman of the Board and may elect a vice chairman
of the Board from among its members. The Board of Directors from time to time
may appoint, or may authorize the president to appoint or authorize specific
officers to appoint, the persons who shall hold such other offices as may be
established by the Board of Directors, including one or more vice presidents
(including executive vice presidents, senior vice presidents, assistant vice
presidents), one or more assistant secretaries, and one or more assistant
treasurers. Any two or more offices may be held by the same person.
Section 2: Term. Each officer shall serve at the pleasure of the
Board of Directors (or, if appointed pursuant to this Article, at the pleasure
of the Board of Directors, the president, or the officer authorized to have
appointed the officer) until his or her death, resignation, or removal, or until
his or her replacement is elected or appointed in accordance with this Article.
Section 3: Vacancies. Any vacancy occurring in any office of the
Corporation may be filled by the Board of Directors. Any vacancy in an office
which was filled by the president or another officer may also be filled by the
president or by any officer authorized to have filled the office vacant.
Section 4: Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors or by a committee or
officer appointed by the Board of Directors. Officers may serve without
compensation.
Section 5: Removal. All officers (regardless of how elected or
appointed) may be removed, with or without cause, by the Board of Directors. Any
officer appointed by the president or another officer may also be removed, with
or without cause, by the president or by any officer authorized to have
appointed the officer to be removed. Removal will be without prejudice to the
contract rights, if any, of the person removed, but shall be effective
notwithstanding any damage claim that may result from infringement of such
contract rights.
Section 6: Chairman of the Board. The office of the chairman of the
board may be filled by the Board at its pleasure by the election of one of its
members to the office. The chairman shall preside at all meetings of the Board
and meetings of the shareholders and shall perform such other duties as may be
assigned to him by the Board of Directors. No director may serve as Chairman of
Board for more than three consecutive years.
Section 7: Chief Executive Officer. The chief executive officer
shall be responsible for the general and active management of the business and
affairs of the Corporation, and shall see that all orders and resolutions of the
Board are carried into effect. He shall perform such other duties and have such
other authority and powers as the Board of Directors may from time to time
prescribe.
Section 8: President. The president shall be responsible for the
general and active management of the business and affairs of the Corporation,
and shall see that all orders and resolutions of the Board are carried into
effect. He shall perform such other duties and have such other authority and
powers as the Board of Directors may from time to time prescribe. The president
shall preside as chairman of the Board of Directors during the absence of the
Board chairman.
Section 9: Vice Presidents. The vice presidents (executive, senior,
or assistant), as such offices are appointed by the Board of Directors upon the
recommendation of the President, in the order of their seniority, unless
otherwise determined by the Board of Directors, shall, in the absence or
disability of the president, perform the duties and have the authority and
exercise the powers of the president. They shall perform such other duties and
have such other authority and powers as the Board of Directors may from time to
time prescribe or as the president may from time to time delegate.
<PAGE>
Section 10: Secretary.
(a) The secretary shall attend all meetings of the Board of
Directors and all meetings of the shareholders and record all votes, actions and
the minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the executive and other committees when required.
(b) The secretary shall give, or cause to be given, notice of
all meetings of the shareholders and special meetings of the Board of Directors.
(c) The secretary shall keep in safe custody the seal of the
Corporation and, when authorized by the Board of Directors or the executive
committee, affix it to any instrument requiring it. When so affixed, it shall be
attested by the secretary's signature or by the signature of the treasurer or an
assistant secretary.
(d) The secretary shall be under the supervision of the
president and shall perform such other duties and have such other authority and
powers as the Board of Directors may from time to time prescribe or as the
president may from time to time delegate.
Section 11: Assistant Secretary. The assistant secretaries, as such
offices are created by the Board of Directors, in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the secretary, perform the duties and have the authority and
exercise the powers of the secretary. They shall perform such other duties and
have such other powers as the Board of Directors may from time to time prescribe
or as the president may from time to time delegate.
Section 12: Treasurer.
(a) The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements of the Corporation and shall deposit all moneys and other
valuables in the name and to the credit of the Corporation in appropriate
depositories.
(b) The treasurer shall disburse the funds of the Corporation
ordered by the Board of Directors and prepare financial statements as they
direct.
(c) The treasurer shall perform such other duties and have
such other authority and powers as the Board of Directors may from time to time
prescribe or as the president may from time to time delegate.
(d) The treasurer's books and accounts shall be opened at any
time during business hours to the inspection of any directors of the
Corporation.
ARTICLE 6: INDEMNIFICATION
Section 1: Indemnification of Directors.
(a) The Corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law, any person (an "Indemnified Person")
who was or is a party or is threatened to be made a party to or is otherwise
involved in any threatened, pending or completed action, suit or other
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal, by reason of the fact that he, or a person for whom he is a
legal representative (or other similar representative), is or was a director of
the Corporation or is or was serving at the Corporation's request as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines, amounts paid in
settlement or other similar costs actually and reasonably incurred in connection
with such action, suit or proceeding. For purposes of this Article 6, all terms
used herein that are defined in Section 33-8-500 of the Act or any successor
provision or provisions shall have the meanings so prescribed in such Section.
<PAGE>
(b) Without limiting the provisions of Section 1(a) of this
Article 6, the Corporation shall indemnify a director who was wholly successful,
on the merits or otherwise, in the defense of any proceeding to which he was a
party because he is or was a director of the Corporation against reasonable
expenses incurred by him in connection with the proceeding. In addition, the
Corporation shall indemnify an individual made a party to a proceeding because
he is or was a director against liability incurred in the proceeding if: (i) he
conducted himself in good faith; (ii) he reasonably believed: (A) in the case of
conduct in his official capacity with the Corporation, that his conduct was in
its best interest; and (B) in all other cases, that his conduct was at least not
opposed to its best interest; and (iii) in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful. The termination
of a proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent is not, of itself, determinative that the
director did not meet the standard of conduct described in this subsection (b).
The determination of whether the director met the standard of conduct described
in this subsection (b) shall be made in accordance with Section 33-8-550 of the
Act or any successor provision or provisions.
Section 2: Advancement of Expenses.
(a) With respect to any proceeding to which an Indemnified
Person is a party because he is or was a director of the Corporation, the
Corporation shall, to the fullest extent permitted by applicable law, pay for or
reimburse the Indemnified Person's reasonable expenses (including, but not
limited to, attorneys' fees and disbursements, court costs, and expert witness
fees) incurred by the Indemnified Person in advance of final disposition of the
proceeding.
(b) Without limiting the provisions of Section 2(a) of this
Article 6, the Corporation shall, to the fullest extent permitted by applicable
law, pay for or reimburse the reasonable expenses (including, but not limited
to, attorneys' fees and disbursements, court costs and expert witness fees)
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding if: (a) the director furnishes the Corporation a
written affirmation of his good faith belief that he has met the standard of
conduct described in Section 1(b) of this Article 6; (b) the director furnishes
the Corporation a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he did not meet such
standard of conduct; and (c) a determination is made that the facts then known
to those making the determination would not preclude indemnification under this
Article 6. The Corporation shall expeditiously pay the amount of such expenses
to the director following the director's delivery to the Corporation of a
written request for an advance pursuant to this Section 2 together with a
reasonable accounting of such expenses. The undertaking required by this Section
2 shall be an unlimited general obligation of the director but need not be
secured and may be accepted without reference to financial ability to make
repayment. Determinations and authorizations of payments under this Section 2
shall be made in the manner specified in Section 33-8-550 of the Act or any
successor provision or provisions.
Section 3: Indemnification of Officers, Employees and Agents. An
officer of the Corporation who is not a director is entitled to the same
indemnification rights which are provided to directors of the Corporation in
Section 1 of this Article 6 and the Corporation shall advance expenses to
officers of the Corporation who are not directors to the same extent and in the
same manner as to directors as provided in Section 2 of this Article 6. In
addition, the Board of Directors shall have the power to cause the Corporation
to indemnify, hold harmless and advance expenses to any officer, employee or
agent of the Corporation who is not a director to the fullest extent permitted
by public policy, by adopting a resolution to that effect identifying such
officers, employees or agents (by position and name) and specifying the
particular rights provided, which may be different for each of the persons
identified. Any officer entitled to indemnification pursuant to the first
sentence of this Section 3 and any officer, employee or agent granted
indemnification by the Board of Directors in accordance with the second sentence
of this Section 3 shall, to the extent specified herein or by the Board of
Directors, be an "Indemnified Party" for the purposes of the provisions of this
Article 6.
<PAGE>
Section 4: Insurance. The Corporation may purchase and maintain
insurance on behalf of an individual who is or was a director, officer, employee
or agent of the Corporation, or who, while a director, officer, employee or
agent of the Corporation, is or was serving at the request of the Corporation as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against liability asserted against or incurred by him in
that capacity or arising from his status as a director, officer, employee or
agent, whether or not the Corporation would have the power to indemnify him
against the same liability under this Article 6.
Section 5: Nonexclusivity of Rights; Agreements. The rights
conferred on any person by this Article 6 shall neither limit nor be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, agreement, provision of the Articles, these Bylaws, vote of
shareholders or otherwise. The provisions of this Article 6 shall be deemed to
constitute an agreement between the Corporation and each person entitled to
indemnification hereunder. In addition to the rights provided in this Article 6,
the Corporation shall have the power, upon authorization by the Board of
Directors, to enter into an agreement or agreements providing to any person who
is or was a director, officer, employee or agent of the Corporation certain
indemnification rights. Any such agreement between the Corporation and any
director, officer, employee or agent of the Corporation concerning
indemnification shall be given full force and effect, to the fullest extent
permitted by applicable law, even if it provides rights to such director,
officer, employee or agent more favorable than, or in addition to, those rights
provided under this Article 6.
Section 6: Continuing Benefits; Successors. The indemnification and
advancement of expenses provided by or granted pursuant to this Article 6 shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person. For
purposes of this Article 6, the term "Corporation" shall include any
corporation, joint venture, trust, partnership or unincorporated business
association that is the successor to all or substantially all of the business or
assets of this Corporation, as a result of merger, consolidation, sale,
liquidation or otherwise, and any such successor shall be liable to the persons
indemnified under this Article 6 on the same terms and conditions and to the
same extent as this Corporation.
Section 7: Interpretation; Construction. This Article 6 is intended
to provide indemnification to the directors and permit indemnification to the
officers of the Corporation to the fullest extent permitted by applicable law as
it may presently exist or may hereafter be amended and shall be construed in
order to accomplish this result. To the extent that a provision herein prevents
a director or officer from receiving indemnification to the fullest extent
intended, such provision shall be of no effect in such situation. If at any time
the Act is amended so as to permit broader indemnification rights to the
directors and officers of this Corporation, then these Bylaws shall be deemed to
automatically incorporate these broader provisions so that the directors and
officers of the Corporation shall continue to receive the intended
indemnification to the fullest extent permitted by applicable law.
Section 8: Amendment. Any amendment to this Article 6 that limits or
otherwise adversely affects the right of indemnification, advancement of
expenses or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to claims, actions, suits or proceedings based on
actions, events or omissions (collectively, "Post Amendment Events") occurring
after such amendment and after delivery of notice of such amendment to the
Indemnified Person so affected. Any Indemnified Person shall, as to any claim,
action, suit or proceeding based on actions, events or omissions occurring prior
to the date of receipt of such notice, be entitled to the right of
indemnification, advancement of expenses and other rights under this Article 6
to the same extent as if such provisions had continued as part of the Bylaws of
the Corporation without such amendment. This Section 8 cannot be altered,
amended or repealed in a manner effective as to any Indemnified Person (except
as to Post Amendment Events) without the prior written consent of such
Indemnified Person.
<PAGE>
Section 9: Severability. Each of the Sections of this Article 6, and
each of the clauses set forth herein, shall be deemed separate and independent,
and should any part of any such Section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any separate Section or clause of this Article 6 that is not declared
invalid or unenforceable.
ARTICLE 7: CERTIFICATES AND SHAREHOLDERS
Section 1: Certificates. Certificates in the form determined by the
Board of Directors shall be delivered representing all shares of which
shareholders are entitled. Certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued. At a
minimum, each share certificate must state on its face: (a) the name of the
Corporation and that it is organized under the laws of South Carolina; (b) the
name of the person to whom the certificate is issued; and (c) the number and
class of shares and the designation of the series, if any, the certificate
represents. Each share certificate (a) must be signed (either manually or in
facsimile) by at least two officers, including the president, the secretary, or
such other officer or officers as the Board of Directors shall designate; and
(b) may bear the corporate seal or its facsimile. If the person who signed
(either manually or in facsimile) a share certificate no longer holds office
when the certificate is issued, the certificate is nevertheless valid.
Section 2: Issuance of Shares. The Board of Directors may authorize
shares to be issued for consideration consisting of any tangible or intangible
property or benefit to the Corporation, including cash, promissory notes,
services performed, written contracts for services to be performed or other
securities of the Corporation. Before the Corporation issues shares, the Board
of Directors must determine that the consideration received or to be received
for shares to be issued is adequate. That determination by the Board of
Directors is conclusive insofar as the adequacy of consideration for the
issuance of shares relates to whether the shares are validly issued, fully paid
and nonassessable. When the Corporation receives the consideration for which the
Board of Directors authorized the issuance of shares, the shares issued therefor
are fully paid and nonassessable.
Section 3: Rights of Corporation with Respect to Registered Owners.
Prior to due presentation for transfer of registration of its shares, the
Corporation may treat the registered owner of the shares as the person
exclusively entitled to vote the shares, to receive any dividend or other
distribution with respect to the shares, and for all other purposes; and the
Corporation shall not be bound to recognize any equitable or other claim to or
interest in the shares on the part of any other person, whether or not it has
express or other notice of such a claim or interest, except as otherwise
provided by law.
Section 4: Transfers of Shares. Transfers of shares shall be made
upon the books of the Corporation kept by the Corporation or by the transfer
agent designated to transfer the shares, only upon direction of the person named
in the certificate or by an attorney lawfully constituted in writing. Before a
new certificate is issued, the old certificate shall be surrendered for
cancellation or, in the case of a certificate alleged to have been lost, stolen
or destroyed, the provisions of these Bylaws shall have been complied with.
Section 5: Registration of Transfer. The Corporation shall register
the transfer of a certificate for shares presented to it for transfer if: (a)
the certificate is properly endorsed by the registered owner or by his duly
authorized attorney; (b) the signature of such person has been guaranteed by a
commercial bank or brokerage firm that is a member of the National Association
of Securities Dealers and reasonable assurance is given that such endorsements
are effective; (c) the Corporation has no notice of an adverse claim or has
discharged any duty to inquire into such a claim; (d) any applicable law
relating to the collection of taxes has been complied with; and (e) the transfer
is in compliance with applicable provisions of any transfer restrictions of
which the Corporation shall have notice.
<PAGE>
Section 6: Lost, Stolen or Destroyed Certificates. The Corporation
shall issue a new certificate in place of any certificate for shares previously
issued if the registered owner of the certificate: (a) makes proof in affidavit
form that the certificate has been lost, destroyed or wrongfully taken; (b)
requests the issuance of a new certificate before the Corporation has notice
that the certificate has been acquired by a purchaser for value in good faith
and without notice of an adverse claim; (c) gives a bond in such form, and with
such surety or sureties, with fixed or open penalty, as the Corporation may
direct, to indemnify the Corporation (and its transfer agent and registrar, if
any) against any claim that may be made on account of the alleged loss,
destruction or theft of the certificate; and (d) satisfies any other reasonable
requirements imposed by the Corporation. When a certificate has been lost,
apparently destroyed or wrongfully taken, and the holder of record fails to
notify the Corporation within a reasonable time after he has notice of it, and
the Corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the Corporation for the transfer or for
a new certificate.
Section 7: Restrictions on Shares. The Board of Directors, on behalf
of the Corporation, or the shareholders may impose restrictions on the transfer
of shares (including any security convertible into, or carrying a right to
subscribe for or acquire shares) to the maximum extent permitted by law. A
restriction does not affect shares issued before the restriction was adopted
unless the holders of the shares are parties to the restriction agreement or
voted in favor of the restriction. A restriction on the transfer of shares is
valid and enforceable against the holder or a transferee of the holder if the
restriction is authorized by this Section 7 and its existence is noted
conspicuously on the front or back of the certificate.
Section 8: Voting of Stock Held. Unless otherwise provided by
resolution of the Board of Directors, the president or any executive vice
president shall from time to time appoint an attorney or attorneys or agent or
agents of this Corporation, in the name and on behalf of this Corporation, to
cast the vote which this Corporation may be entitled to cast as a shareholder or
otherwise in any other corporation, any of whose stock or securities may be held
by this Corporation, at meetings of the holders of the stock or other securities
of such other corporation, or to consent in writing to any action by any of such
other corporation, and shall instruct the person or persons so appointed as to
the manner of casting such votes or giving such consent and may execute or cause
to be executed on behalf of this Corporation and under its corporate seal or
otherwise, such written proxies, consents, waivers or other instruments as may
be necessary or proper; or, in lieu of such appointment, the president or any
executive vice president may attend in person any meetings of the holders of
stock or other securities of any such other corporation and their vote or
exercise any or all power of this Corporation as the holder of such stock or
other securities of such other corporation.
ARTICLE 8: GENERAL PROVISIONS
Section 1: Distributions. The Board of Directors may authorize, and
the Corporation may make, distributions (including dividends on its outstanding
shares) in the manner and upon the terms and conditions provided by applicable
law and the Articles.
Section 2: Books and Records. The Corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders and Board of Directors.
Section 3: Execution of Documents. The Board of Directors or these
Bylaws shall designate the officers, employees and agents of the Corporation who
shall have the power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks and other documents for and in the name of the Corporation,
and may authorize such officers, employees and agents to delegate such power
(including authority to redelegate) to other officers, employees or agents of
the Corporation. Unless so designated or expressly authorized by these Bylaws,
no officer, employee or agent shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable pecuniarily for any purpose or any amount.
Section 4: Fiscal Year. The fiscal year of the Corporation shall be
the same as the calendar year.
<PAGE>
Section 5: Seal. The Corporation may provide a seal which contains
the name of the Corporation and the name of the state of incorporation. The seal
may be used by impressing it or reproducing a facsimile of it or otherwise.
Section 6: Resignation. A director may resign by delivering written
notice to the Board of Directors, the chairman or the Corporation. Such
resignation of a director is effective when the notice is delivered unless the
notice specifies a later effective date. An officer may resign at any time by
delivering notice to the Corporation. Such resignation of an officer is
effective when the notice is delivered unless the notice specifies a later
effective date. If a resignation of an officer is made effective at a later date
and the Corporation accepts the future effective date, the Board of Directors
may fill the pending vacancy before the effective date if the Board of Directors
provides that the successor does not take office until the effective date.
Section 7: Computation of Days. In computing any period of days
prescribed hereunder the day of the act after which the designated period of
days begins to run is not to be included. The last day of the period so computed
is to be included.
Section 8: Amendment of Bylaws.
(a) Except to the extent required otherwise by law, these
Bylaws, or the Articles of Incorporation, these Bylaws may be altered, amended
or repealed or new Bylaws may be adopted at any meeting of the Board of
Directors at which a quorum is present, by the affirmative vote of a majority of
the directors then in office, provided notice of the proposed alteration,
amendment or repeal is contained in the notice of the meeting.
(b) Except to the extent required otherwise by law, these
Bylaws, or the Articles of Incorporation, these Bylaws may also be altered,
amended or repealed or new Bylaws may be adopted at any meeting of the
shareholders at which a quorum is present or represented by proxy, by the
affirmative vote of the holders of a majority of each class of shares entitled
to vote thereon, provided notice of the proposed alteration, amendment or repeal
is contained in the notice of the meeting.
(c) Upon adoption of any new bylaw by the shareholders, the
shareholders may provide expressly that the Board of Directors may not adopt,
amend or repeal that bylaw or any bylaw on that subject.
Section 9: Construction. If any portion of these Bylaws shall be
invalid or inoperative, then, so far as is reasonable and possible: (a) the
remainder of these Bylaws shall be considered valid and operative and (b) effect
shall be given to the intent manifested by the portion held invalid or
inoperative.
Section 10: Headings. The headings are for convenience of reference
only and shall not affect in any way the meaning or interpretation of these
Bylaws.
The undersigned, as President of the Corporation, hereby certifies
that the bylaws contained herein are the true and correct bylaws adopted by the
Corporation's board of directors in compliance with any procedural requirements
of the Corporation's Articles of Incorporation and the laws of the State of
South Carolina, and the rules and regulations promulgated thereunder.
James R. Clarkson
President
Date:
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