HCSB Financial (HCFB) 8-K HCSB Financial Corporation Announces Fourth Quarter 2016

For Immediate Release

HCSB Financial Corporation Announces Fourth Quarter 2016

Financial Results

Loris, SC, January 26, 2017----HCSB Financial Corporation, (the “Company”)(OTCQB: HCFB), the holding company for Horry County State Bank (the “Bank”), announced today financial results for the fourth quarter ended December 31, 2016. The Company announced net income of $1.4 million, or $0.00 per common share, for the fourth quarter of 2016, an increase from a net loss of $1.8 million, or $0.00 per common share at the end of the third quarter of 2016.

“We have wrapped up 2016 on a very positive note, with net income of $1.4 million for the fourth quarter. We believe this gives us great momentum going into 2017 as our focus remains on delivering profitability for our shareholders and valuable financial services to our communities. Our loan production exceeded our internal expectations, and we believe that is poised to continue as our bankers are providing exceptional customer service in each of our markets. In the fourth quarter, we were able to release $1.1 million in loan loss reserves, as the quality of our portfolio has improved significantly with the completion of our asset disposition plan in the second half of the year and the management team gained further understanding about the risk remaining in the loan portfolio. In addition, we have migrated to an independent third party model for calculating our loan loss reserves which gives us great confidence in our estimates and allows us to account for market fluctuations that may occur,” remarked Jan Hollar, Chief Executive Officer of the Company and the Bank.

Financial Highlights

During the fourth quarter, the Company reported net income of $1.4 million, as the Company released $1.1 million in loan loss reserves due to the significant reduction in nonperforming assets, continuing positive trends in past dues, the completion of the accelerated asset disposition plan and management gained an improved understanding of the risk within the loan portfolio. Excluding the reversal of provision, pre-tax net income for the fourth quarter was $29,000, a $1.8 million increase over a net loss of $1.8 million for the third quarter of 2016. Noninterest expense was down $1.7 million quarter-over-quarter as the net cost of operation of other real estate owned (“OREO”) decreased $1.4 million and FDIC insurance expense decreased $183,000.

The Company saw loan growth of $5.9 million, or 3%, for the fourth quarter of 2016 as loan production continues to be a key management focus. Total deposits decreased $10.1 million and totaled $313.3 million at December 31, 2016, compared to $323.4 million at September 30, 2016, as non-interest bearing demand accounts decreased $5.7 million due to seasonality of deposits in our market area, and time deposits decreased $4.3 million primarily due to the maturity of internet-based time deposits which were not renewed.

Interest Income and Net Interest Margin

Net interest income remained flat quarter over quarter, totaling $2.5 million for the fourth and third quarters of 2016. Net interest margin increased 6 basis points to 2.86% for the quarter ended December 31, 2016 from 2.80% for the quarter ended September 30, 2016. The increase in net interest margin is primarily the result of a 5 basis point increase in yields on interest earning assets, and the cost of borrowings remains stable. This increase in yields was due to an increase in yield on other interest-earning assets and a decrease in interest-bearing cash for the quarter.

For the year ended December 31, 2016, net interest income increased $124,000, or 1.3%, as compared to the year ended December 31, 2015. This increase in net interest income was primarily the result of a significant decrease in cost of liabilities, partially offset by a decrease in yields on interest earning assets. The decrease in cost of liabilities was primarily due to the payoff of subordinated debt, while the decrease in yields on interest earning assets was the result of lower yields on securities.

Non-Interest Income

Non-interest income was $412,000 in the fourth quarter of 2016 compared to $334,000 in the third quarter of 2016. The third quarter included a $222,000 loss on sale of assets recorded in the third quarter related to the bulk sale of nonperforming loans announced in the second quarter. Also included in non-interest income for the third quarter was a $153,000 gain on sale of securities. There were no gains or losses on the sale of assets or securities in the fourth quarter of 2016.

Non-interest income for the year ended December 31, 2016 was $20.6 million, which included a $19.1 million gain on the extinguishment of debt, as compared to non-interest income of $3.1 million for the year ended December 31, 2015. Non-interest income for 2016 also included $222,000 of losses on the sale of assets as compared to a gain on sale of assets of $717,000 in 2015. Gain on sale of securities for the year ended December 31, 2016 was $68,000 as compared to a gain on sale of securities of $232,000 for the year ended December 31, 2015.

Asset Quality

Overall asset quality continued to improve in the fourth quarter of 2016, as the Bank’s classified assets to Tier 1 capital ratio decreased to 46.4% at December 31, 2016. This compares to a classified asset to Tier 1 capital ratio of 55.3% and 287.2% at September 30, 2016 and December 31, 2015, respectively. OREO decreased by $1.1 million during the quarter to $2.9 million at December 31, 2016 due to the sale of several properties. Nonperforming loans increased by $1.1 million to $2.0 million at December 31, 2016 due to the repurchase of two loans from the asset disposition. Both loans repurchased are SBA guaranteed loans and no additional losses are anticipated. The ratio of nonperforming assets to total assets was 1.31% at December 31, 2016 as compared to 1.30% at September 30, 2016 and the ratio of nonperforming loans to total loans was 0.94% at the end of the fourth quarter of 2016 as compared to 0.45% at the end of the third quarter of 2016.

Allowance for Loan Losses

At December 31, 2016, the allowance for loan losses was $3.8 million, compared to $4.7 million at September 30, 2016. As a percentage of total loans held-for-investment, the allowance for loan losses was 1.74% in the fourth quarter of 2016, down from 2.24% in the third quarter of 2016 and 2.20% at December 31, 2015. In the fourth quarter of 2016, the Company implemented a new third party software for the calculation of the allowance for loan losses. The new model allowed management to perform further analysis of the portfolio and better identify improving credit trends. Overall, the decrease in the allowance for loan losses as a percentage of total loans was a reflection of improved trends in past dues and significant reductions in nonperforming loans in 2016. Out of the $3.8 million in total allowance for loan losses at December 31, 2016, specific allowances for impaired loans accounted for $643,000 as compared to $788,000 in the third quarter of 2016.

Balance Sheet and Capital

Total assets decreased $5.2 million during the fourth quarter of 2016, while gross loans (including loans held-for-sale) increased $5.9 million compared to the third quarter of 2016 as the Company continued to see solid loan production during the quarter. As discussed earlier, total deposits decreased $10.1 million and totaled $313.3million at December 31, 2016, compared to $323.4 million at September 30, 2016.

As of December 31, 2016 the Bank’s leverage ratio, Common Equity Tier 1 ratio (CET1), Tier 1 risk-based capital ratio, and total risk-based capital ratio were 9.95%, 15.14%, 15.14% and 16.39%, respectively.

About HCSB Financial Corporation

HCSB Financial Corporation is the holding company for Horry County State Bank, a full-service community bank providing services in eight branches across Horry County, South Carolina. Horry County State Bank’s website is www.hcsbaccess.com. HSCB shares are quoted on the OTCQB tier of the OTC Markets Group, Inc. under the symbol “HCFB”.

SAFE HARBOR

This news release contains forward-looking statements, as defined by the federal securities laws, including statement about the Company’s financial outlook and business environment. Forward looking statements generally include words such as “expects,” “projects,” “anticipates,” “believes,” “estimates,” “strategy,” “plan,” “potential,” and other similar expressions. These statements are provided to assist in the understanding of future financial performance and such performance involves risks and uncertainties that may cause actual results to differ materially from those anticipated in such statements. Any such statements are based on current expectations and involve a number of risks and uncertainties. For a discussion of some factors that may cause such forward-looking statements to differ materially from actual results, please refer to the section entitled “Forward-Looking Statements” on pages 1-2 and in the section entitled “Risk Factors” of the Company’s annual report on Form 10-K filed with the SEC for the year ended December 31, 2015. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise forward-looking statements.

For additional information contact:

Jennifer W. Harris

Chief Financial Officer

(843) 716-6407

jharris@horrycountystatebank.com

HCSB Financial Corporation

Condensed Consolidated Balance Sheet (Unaudited)

	As of
	December 31,			September 30,			June 30,			March 31,			December 31,
	2016			2016			2016			2016			2015*
	($ in thousands)
ASSETS
Cash and due from banks	$	25,429		$	31,174		$	64,024		$	41,652		$	22,137
Investment securities available for sale		106,529			111,581			80,969			83,205			89,701
Nonmarketable equity securities		1,345			1,090			1,090			1,276			1,330
Loans held for sale		—			—			4,280			—			—
Loans		215,112			209,176			199,072			199,635			209,367
Allowance for loan losses		(3,750	)		(4,676	)		(4,492	)		(3,719	)		(4,601	)
Net loans		211,362			204,500			194,580			195,916			204,766
Premises and equipment, net		14,314			14,456			14,591			15,758			15,917
Assets held-for-sale		—			—			768			—			—
Other real estate owned		2,887			4,032			7,256			11,270			13,624
Bank-owned life insurance		11,643			11,562			11,481			11,400			11,319
Deferred tax assets		19,646			16,270			16,270			19,587			22,474
Valuation allowance for deferred tax assets		(19,646	)		(16,270	)		(16,270	)		(19,587	)		(22,474	)
Other assets		2,425			2,712			3,441			2,886			2,629
Total assets	$	375,934		$	381,107		$	382,480		$	363,363		$	361,423
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand noninterest-bearing	$	41,324		$	47,060		$	44,077		$	40,227		$	40,182
Money market, NOW and savings		125,714			125,785			119,191			122,613			116,678
Time deposits		146,231			150,505			159,974			172,621			173,971
Total deposits		313,269			323,350			323,242			335,461			330,831
Short-term borrowings		1,983			1,662			1,659			1,248			1,716
Long-term debt		24,000			17,000			17,000			34,141			34,138
Accrued expenses and other liabilities		1,355			2,502			3,312			7,161			6,988
Total liabilities		340,607			344,514			345,213			378,011			373,673
Shareholders' equity:
Preferred stock		—			—			9			12,895			12,895
Common stock		4,958			4,958			3,633			38			38
Warrants		—			—			—			1,012			1,012
Additional paid-in capital		68,411			68,273			81,903			30,220			30,220
Retained deficit		(34,783	)		(36,183	)		(48,177	)		(58,090	)		(54,807	)
Accumulated other comprehensive loss		(3,259	)		(455	)		(101	)		(723	)		(1,608	)
Total shareholders' equity		35,327			36,593			37,267			(14,648	)		(12,250	)
Total liabilities and shareholders' equity	$	375,934		$	381,107		$	382,480		$	363,363		$	361,423
Common shares issued and outstanding		495,763,940			495,763,940			363,314,783			3,846,340			3,846,340

* Derived from audited financial statements.

HCSB Financial Corporation

Condensed Consolidated Income Statement (Unaudited)

	At or For the Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
	2016			2016			2016			2016			2015
	($ in thousands, except per share amounts)
Interest income
Loans, including fees	$	2,630		$	2,667		$	2,581		$	2,483		$	2,753
Investment securities		473			426			386			461			479
Nonmarketable equity securities		13			11			14			14			14
Interest on deposits at banks		37			68			73			31			14
Total interest income		3,153			3,172			3,054			2,989			3,260
Interest expense
Money market, NOW and savings deposits		108			115			100			96			98
Time deposits		385			403			412			427			450
Borrowings		157			150			97			523			518
Total interest expense		650			668			609			1,046			1,066
Net interest income		2,503			2,504			2,445			1,943			2,194
Provision for loan losses		(1,061	)		—			3,560			1,424			—
Net interest income (loss) after provision		3,564			2,504			(1,115	)		519			2,194
Noninterest income
Service charges on deposit accounts		168			188			189			161			163
Mortgage banking income		41			7			—			—			6
Income from bank-owned life insurance		111			110			110			110			109
Gain (loss) on sale of securities available for sale		—			153			(102	)		17			—
Gain (loss) on sale of assets		—			(222	)		—			—			(4	)
Gain on extinguishment of debt		—			—			19,115			—			—
Other noninterest income		92			98			141			128			149
Total noninterest income		412			334			19,453			416			423
Noninterest expenses
Salaries and employee benefits		1,616			1,638			1,668			1,286			1,228
Occupancy and equipment		458			493			486			499			493
Legal and professional fees		351			428			1,076			215			494
FDIC insurance		21			204			206			309			320
Impairment on assets held for sale		—			1			247			—			—
Net cost of operation of other real estate owned		37			1,392			3,273			1,564			167
Other noninterest expense		403			467			549			345			364
Total noninterest expenses		2,886			4,622			7,505			4,218			3,066
Income (loss) before income taxes		1,090			(1,784	)		10,833			(3,283	)		(449	)
Income tax expense (benefit)		(310	)		—			920			—			(40	)
Net income (loss)		1,400			(1,784	)		9,913			(3,283	)		(409	)
Preferred dividends		—			—			—			(398	)		(405	)
Gain on extinguishment of preferred shares		—			—			13,778			—			—
Net income (loss) available to common shareholders	$	1,400		$	(1,784	)	$	23,691		$	(3,681	)	$	(814	)
Earnings per common share, fully diluted	$	0.00		$	(0.00	)	$	0.03		$	(0.96	)	$	(0.21	)
Weighted average diluted common shares		508,945,190			411,085,981			319,862,554			3,846,340			3,846,340

HCSB Financial Corporation

Condensed Consolidated Income Statement (Unaudited)

	At or For the Twelve Months Ended
	December 31,			December 31,			December 31,
	2016			2015			2014
	($ in thousands, except per share amounts)
Interest income
Loans, including fees	$	10,361		$	11,628		$	13,417
Investment securities		1,747			1,980			2,556
Nonmarketable equity securities		52			51			60
Interest on deposits at banks		208			67			62
Total interest income		12,368			13,726			16,095
Interest expense
Money market, NOW and savings deposits		419			423			450
Time deposits		1,626			2,009			2,545
Borrowings		927			2,022			2,059
Total interest expense		2,972			4,454			5,054
Net interest income		9,396			9,272			11,041
Provision for loan losses		3,923			—			1,061
Net interest income (loss) after provision		5,473			9,272			9,980
Noninterest income
Service charges on deposit accounts		706			744			880
Mortgage banking income		48			181			229
Income from bank-owned life insurance		441			431			440
Gain (loss) on sale of securities available for sale		68			232			201
Gain (loss) on sale of assets		(222	)		717			6
Gain on extinguishment of debt		19,115			—			—
Other noninterest income		458			830			1,800
Total noninterest income		20,614			3,135			3,556
Noninterest expenses
Salaries and employee benefits		6,208			5,383			5,606
Occupancy and equipment		1,936			2,133			2,243
Legal and professional fees		2,070			1,708			1,318
FDIC insurance		740			1,391			1,574
Impairment on assets held for sale		248			—			—
Net cost of operation of other real estate owned		6,266			632			1,411
Other noninterest expense		1,763			1,379			1,597
Total noninterest expenses		19,231			12,626			13,749
Income (loss) before income taxes		6,856			(219	)		(213	)
Income tax expense (benefit)		610			27			78
Net income (loss)		6,246			(246	)		(291	)
Preferred dividends		—			(1,512	)		(1,112	)
Gain on extinguishment of preferred shares		13,778
Net income (loss) available to common shareholders	$	20,024		$	(1,758	)	$	(1,403	)
Earnings per common share, fully diluted	$	0.07		$	(0.46	)	$	(0.37	)
Weighted average diluted common shares		317,563,726			3,823,244			3,770,355

HCSB Financial Corporation

Average Balance Sheets and Net Interest Analysis (Unaudited)

	For the Three Months Ended
	December 31, 2016								December 31, 2015
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (2)			Balance			Expense		Rate (2)
Assets	($ in thousands)
Interest-earning assets:
Loans and loans held for sale (1)	$	208,850		$	2,630		5.01	%	$	214,778		$	2,753		5.09	%
Interest-bearing deposits		28,480			37		0.52	%		22,711			14		0.24	%
Investment securities		109,615			473		1.73	%		88,846			479		2.16	%
Other interest-earning assets		1,262			13		4.10	%		1,144			14		4.86	%
Total interest-earning assets		348,207			3,153		3.60	%		327,479			3,260		3.95	%
Allowance for loan losses		(4,716	)							(5,009	)
Cash and due from banks		1,497								1,356
Premises and equipment (net)		14,408								16,011
Other assets		18,432								29,980
Total assets	$	377,828							$	369,817
Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand	$	40,664		$	13		0.13	%	$	39,326		$	16		0.16	%
Money market, NOW and savings		83,394			95		0.45	%		78,739			82		0.41	%
Time deposits		143,939			378		1.04	%		173,916			426		0.97	%
Brokered deposits		4,038			7		0.69	%		3,135			24		3.04	%
Total interest-bearing deposits		272,035			493		0.72	%		295,116			548		0.74	%
Short-term borrowings		1,383			1		0.29	%		992			2		0.80	%
Long-term debt		21,717			156		2.86	%		34,248			516		5.98	%
Total borrowed funds		23,100			157		2.70	%		35,240			518		5.83	%
Total interest-bearing liabilities		295,135			650		0.88	%		330,356			1,066		1.28	%
Net interest rate spread					2,503		2.74	%					2,194		2.67	%
Noninterest-bearing demand deposits		44,241								43,761
Other liabilities		2,116								7,225
Shareholders' equity		36,336								(11,525	)
Total liabilities and shareholders' equity	$	377,828							$	369,817
Net interest margin							2.86	%							2.66	%

(1) Nonaccrual loans are included in the average loan balances.

(2) Yield/ rate calculated on Actual/Actual day count basis, except for yield on investments which is calculated on a 30/360 day count basis.

HCSB Financial Corporation

Selected Ratios (Unaudited)

	At or For the Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,
	2016			2016			2016			2016			2015
	($ in thousands, except per share amounts)
Per Share Data:
Basic Earnings (Loss) per Common Share	$	0.00		$	(0.00	)	$	0.03		$	(0.96	)	$	(0.21	)
Book value per common share (1)	$	0.07		$	0.07		$	0.10		$	(7.16	)	$	(6.54	)
Common shares outstanding		495,763,940			495,763,940			363,314,783			3,846,340			3,846,340
Weighted average dilutive common shares outstanding		508,945,190			411,085,981			319,862,554			3,846,340			3,846,340
Selected Performance Ratios:
Return on Average Assets		1.47	%		-1.85	%		11.07	%		-3.57	%		-0.41	%
Return on Average Equity (2)		15.33	%		-19.92	%		-336.28	%		N/A			N/A
Net interest margin (non-tax equivalent)		2.86	%		2.80	%		2.84	%		2.45	%		2.66	%
Non-interest Income as a % of Revenue		11.56	%		9.53	%		86.43	%		12.22	%		11.49	%
Non-interest Income as a % of Average Assets		0.11	%		0.09	%		5.40	%		0.11	%		0.11	%
Non-interest Expense as a % of Average Assets		0.76	%		1.20	%		2.08	%		1.14	%		0.78	%
Asset Quality:
Past due 30-59 days (and still accruing)	$	888		$	535		$	636		$	3,667		$	3,897
Past due 60-89 days (and still accruing)		150			112			159			647			244
Past due 90 days plus (and still accruing)		—			—			—			—			—
Nonaccrual loans		2,025			931			332			6,115			8,742
Nonperforming loans		2,025			931			332			6,115			8,742
Nonperforming loans held for sale (nonaccruing)		—			—			4,012			—			—
OREO		2,887			4,032			7,256			11,270			13,624
Nonperforming assets		4,912			4,963			11,600			17,385			22,366
Nonperforming loans to total loans		0.94	%		0.45	%		0.17	%		3.06	%		4.18	%
Nonperforming assets to total assets		1.31	%		1.30	%		3.03	%		4.78	%		6.19	%
Allowance to total loans held-for-investment		1.74	%		2.24	%		2.26	%		1.86	%		2.20	%
Allowance to nonperforming loans		185.19	%		502.26	%		1353.01	%		60.82	%		52.63	%
Allowance to nonperforming assets		76.34	%		94.22	%		38.72	%		21.39	%		20.57	%
Net charge-offs (recoveries) to average loans		-0.26	%		-0.36	%		5.46	%		4.32	%		0.74	%
(annualized)
Capital Ratios (Bank):
Common Equity Tier 1 (CET1) capital	$	37,721		$	36,404		$	38,114		$	9,238		$	12,135
Tier 1 capital		37,721			36,404			38,114			9,238			12,135
Tier 2 capital		3,122			3,039			2,939			2,962			3,267
Total risk based capital		40,843			39,443			41,053			12,200			15,402
Risk weighted assets		249,122			241,456			233,528			236,204			260,024
Average assets for leverage ratio		379,052			388,135			384,914			360,649			370,482
Common Equity Tier 1 (CET1) ratio		15.14	%		15.08	%		16.32	%		3.91	%		4.67	%
Tier 1 ratio		15.14	%		15.08	%		16.32	%		3.91	%		4.67	%
Total risk based capital ratio		16.39	%		16.34	%		17.58	%		5.17	%		5.92	%
Tier 1 leverage ratio		9.95	%		9.38	%		9.90	%		2.56	%		3.28	%

(1) Book value per share excludes non-voting preferred shares

(2) Ratio not applicable in prior periods due to negative equity