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

For Immediate Release

HCSB Financial Corporation Announces Second Quarter 2016

Financial Results

Loris, SC, July 29, 2016----HCSB Financial Corporation (OTC Pink: HCFB), the holding company for Horry County State Bank, announced today financial results for the second quarter ended June 30, 2016. The Company announced net earnings per share available to common shareholders of $0.03 per share, an increase from the loss of $0.96 per share at the end of the first quarter of 2016.

“We have made tremendous progress during the second quarter and through the first half of 2016. The capital raise, the repurchase of our senior securities, and the hiring of key executives, are all important accomplishments on our road to profitability, efficiency, and increased loan production. Our Company is now well-capitalized, and we have a strong team of commercial bankers in place to begin building our loan portfolio with quality commercial loans in our markets,” remarked Jan Hollar, Chief Executive Officer of the Company and the Bank.

The new executive team is now in place and leading the Bank into its next chapter. In addition to Jan Hollar as CEO, the Company announced the following additions to the executive team during the first half of 2016: Jack McElveen as Chief Credit Officer, Rick Patterson as Chief Operating Officer, and Jennifer Harris as Chief Financial Officer.

Financial Highlights

During the second quarter, the Company raised $45 million in capital in an offering led by a group of accredited institutional investors, as well as $1.4 million in a follow-on offering to legacy shareholders, employees, and other investors. Portions of this capital has already been used to accomplish several of the Company’s goals. First, the Company repurchased all of its outstanding trust preferred securities as well as the preferred stock issued to the United States Treasury as part of the Troubled Asset Relief Program (TARP), ending the Company’s obligation to Treasury. In addition, the Company was able to repurchase subordinated debt that the Company issued to certain accredited investors in 2010.

The Company is committed to improving its asset quality through a planned bulk sale of nonperforming assets. A portion of the capital raised is being used for this purpose. The terms of the sale have been finalized, and the sale closed early in the third quarter of 2016.

Also during the second quarter, the Company booked $9 million in new loans, the largest portion of which were in the commercial real estate category. This uptick in loan production is in line with the Bank’s strategy to increase lending within prudent limits and high standards of credit quality.

Interest Income and Net Interest Margin

Net interest income was up quarter over quarter, totaling $2.4 million for the second quarter of 2016 as compared to $1.9 million in the first quarter of 2016. The Company also experienced a 39 basis point increase in its net interest margin to 2.84% for the quarter ended June 30, 2016 from 2.45% for the quarter ended March 31, 2016. The increase in margin is primarily the result of a 380 basis point decrease in cost of borrowings, as trust preferred securities were repurchased and subordinated debt was settled early in the second quarter of 2016.

Non-Interest Income

Non-interest income increased to $19.5 million in the second quarter of 2016 compared to $416,000 in the first quarter of 2016. The current quarter included $19.1 million of gains on the extinguishment of debt related to the settlement of subordinated debt noted above. Also included in non-interest income for the quarter ended June 30, 2016 was a $102,000 loss on the sale of securities, as the Company begins to restructure its current portfolio to better mitigate interest rate risk within the portfolio. This compares to a gain on sale of securities of $17,000 in the first quarter of 2016. Excluding the gain on extinguishment of debt and gain (loss) on the sale of securities for each quarter, non-interest income increased $41,000 in the second quarter of 2016 as compared to the first quarter of 2016.

Asset Quality

During the second quarter, asset quality improved significantly due to the asset disposition plan put into place following the capital raise. Other real estate owned (OREO) decreased by $4.0 million during the quarter to $7.3 million at June 30, 2016 due to the write down and sale of several properties. Nonperforming loans decreased by $1.8 million to $4.3 million at June 30, 2016, of which $4.28 million are classified as held-for-sale as the Company finalizes the sale of those assets in early third quarter. The ratio of nonperforming assets to total assets dropped to 3.03%, as compared to 4.78% at March 31, 2016 and the ratio of nonperforming loans to total loans dropped to 2.18% at the end of the second quarter of 2016 as compared to 3.06% at the end of the first quarter of 2016. The Company expects continued improvement in these ratios and other asset quality metrics as the classified asset reduction plan is completed in the third quarter of 2016.

Allowance for Loan Losses

At June 30, 2016, the allowance for loan losses was $4.5 million, compared to $3.7 million at March 31, 2016. As a percentage of total loans held-for-investment, the allowance for loan losses was 2.26% in the second quarter of 2016, up from 1.86% in the first quarter of 2016. Our reserves increased modestly due to charge-offs taken during the quarter,the extension of the lookback period in the calculation of historic loss rates, as well as an increase in qualitative factors which management felt prudent given significant changes in credit administration. Out of the $4.5 million in total allowance for loan losses at June 30, 2016, specific allowances for impaired loans accounted for $845,000 as compared to $1.2 million in the first quarter due to the sale and resolution of nonperforming loans.

Balance Sheet and Capital

Total assets increased $19.1 million during the second quarter of 2016, and gross loans (including loans held-for-sale) increased $3.7 million compared to the first quarter of 2016 as the Company saw solid loan production during the quarter. Total deposits decreased $12.2 million, which primarily resulted from the maturity of $9.9 million in internet-based time deposits.

The Company’s capital ratios have improved significantly following the capital raise in April 2016. As of June 30, 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 9.90%, 16.32%, 16.32% and 17.58%, 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 8 branches across Horry County, South Carolina. Horry County State Bank’s website is www.hcsbaccess.com. HSCB shares are quoted on the OTC Pink 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:

Jan H. Hollar

Chief Executive Officer

(843) 716-6117

jhollar@horrycountystatebank.com

 HCSB Financial Corporation 

 Condensed Consolidated Balance Sheet (Unaudited) 

	As of
	June 30,			March 31,			December 31,			September 30,			June 30,
	2016			2016			2015*			2015			2015
	($ in thousands)
ASSETS
Cash and due from banks	$	64,024		$	41,652		$	22,137		$	29,185		$	43,085
Investment securities available for sale		80,969			83,205			89,701			84,291			91,466
Nonmarketable equity securities		1,090			1,276			1,330			1,330			1,330
Loans held for sale		4,280			—			—			—			6,179
Loans		199,072			199,635			209,367			219,982			225,576
Allowance for loan losses		(4,492	)		(3,719	)		(4,601	)		(5,021	)		(5,599	)
Net loans		194,580			195,916			204,766			214,961			219,977
Premises and equipment, net		14,591			15,758			15,917			16,069			16,178
Assets held-for-sale		768			—			—			—			—
Other real estate owned		7,256			11,270			13,624			18,510			17,897
Bank-owned life insurance		11,481			11,400			11,319			11,239			11,159
Other assets		3,441			2,886			2,629			2,962			6,599
Total assets	$	382,480		$	363,363		$	361,423		$	378,547		$	413,870
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand noninterest-bearing	$	44,077		$	40,227		$	40,182		$	45,135		$	46,155
Money market, NOW and savings		119,191			122,613			116,678			121,965			138,076
Time deposits		159,974			172,621			173,971			180,514			200,275
Total deposits		323,242			335,461			330,831			347,614			384,506
Short-term borrowings		1,659			1,248			1,716			1,119			1,066
Long-term debt		17,000			34,141			34,138			34,248			34,248
Accrued expenses and other liabilities		3,312			7,161			6,988			6,741			6,168
Total liabilities		345,213			378,011			373,673			389,722			425,988
Shareholders’ equity:
Preferred stock		9			12,895			12,895			12,895			12,895
Common stock		3,633			38			38			38			38
Warrants		—			1,012			1,012			1,012			1,012
Additional paid-in capital		81,903			30,220			30,220			30,214			30,214
Retained deficit		(48,177	)		(58,090	)		(54,807	)		(54,398	)		(54,766	)
Accumulated other comprehensive loss		(101	)		(723	)		(1,608	)		(936	)		(1,511	)
Total shareholders’ equity		37,267			(14,648	)		(12,250	)		(11,175	)		(12,118	)
Total liabilities and shareholders’ equity	$	382,480		$	363,363		$	361,423		$	378,547		$	413,870
Common shares issued and outstanding		363,314,783			3,846,340			3,846,340			3,816,340			3,816,340

* Derived from audited financial statements.

 HCSB Financial Corporation 

 Condensed Consolidated Income Statement (Unaudited) 

	At or For the Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2016			2016			2015			2015			2015
	($ in thousands, except per share amounts)
Interest income
Loans, including fees	$	2,581		$	2,483		$	2,753		$	3,088		$	2,954
Investment securities		386			461			479			506			510
Nonmarketable equity securities		14			14			14			8			15
Interest on deposits at banks		73			31			14			16			21
Total interest income		3,054			2,989			3,260			3,618			3,500
Interest expense
Money market, NOW and savings deposits		100			96			98			108			112
Time deposits		412			427			450			487			529
Borrowings		97			523			518			510			497
Total interest expense		609			1,046			1,066			1,105			1,138
Net interest income		2,445			1,943			2,194			2,513			2,362
Provision for loan losses		3,560			1,424			—			—			—
Net interest income (loss) after provision		(1,115	)		519			2,194			2,513			2,362
Noninterest income
Service charges on deposit accounts		189			161			163			197			201
Mortgage banking income		—			—			6			50			63
Income from bank-owned life insurance		110			110			109			109			106
Gain (loss) on sale of securities available for sale		(102	)		17			—			20			78
Gain (loss) on sale of assets		—			—			(4	)		736			(9	)
Gain on extinguishment of debt		19,115			—			—			—			—
Other noninterest income		141			128			149			231			227
Total noninterest income		19,453			416			423			1,343			666
Noninterest expenses
Salaries and employee benefits		1,668			1,286			1,228			1,330			1,402
Occupancy and equipment		486			499			493			558			534
Legal and professional fees		1,076			215			494			488			372
Deposit charges and FDIC insurance		206			309			320			346			363
Loss on disposal of fixed assets		247			—			—			—			—
Net cost of operation of other real estate owned		3,273			1,564			167			382			365
Other noninterest expense		549			345			364			349			394
Total noninterest expenses		7,505			4,218			3,066			3,453			3,430
Income (loss) before income taxes		10,833			(3,283	)		(449	)		403			(402	)
Income tax expense (benefit)		920			—			(40	)		35			5
Net income (loss)		9,913			(3,283	)		(409	)		368			(407	)
Preferred dividends		—			(398	)		(405	)		(514	)		(296	)
Net income (loss) available to common shareholders	$	9,913		$	(3,681	)	$	(814	)	$	(146	)	$	(703	)
Earnings per common share, fully diluted	$	0.03		$	(0.96	)	$	(0.21	)	$	(0.04	)	$	(0.18	)
Weighted average diluted common shares		319,862,554			3,846,340			3,846,340			3,816,340			3,816,640

 HCSB Financial Corporation 

Average Balance Sheets and Net Interest Analysis (Unaudited)

	For the Three Months Ended
	June 30, 2016								June 30, 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)	$	201,380		$	2,581		5.15	%	$	231,604		$	2,954		5.17	%
Interest-bearing deposits		66,958			73		0.44	%		33,129			21		0.26	%
Investment securities		76,970			386		2.01	%		103,333			510		1.97	%
Other interest-earning assets		1,090			14		5.17	%		1,144			15		5.32	%
Total interest-earning assets		346,398			3,054		3.55	%		369,210			3,500		3.84	%
Allowance for loan losses		(3,821	)							(5,477	)
Cash and due from banks		1,762								2,108
Premises and equipment		15,676								20,140
Other assets		24,650								32,786
Total assets	$	384,665							$	418,767
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand	$	40,565		$	18		0.18	%	$	43,090		$	16		0.15	%
Money market, NOW and savings		78,870			82		0.42	%		92,553			96		0.42	%
Time deposits		164,464			412		1.01	%		205,823			529		1.04	%
Total interest-bearing deposits		283,899			512		0.73	%		341,466			641		0.76	%
Short-term borrowings		1,418			1		0.28	%		1,084			1		0.37	%
Long-term debt		19,017			96		2.03	%		34,248			496		5.87	%
Total borrowed funds		20,435			97		1.91	%		35,332			497		5.70	%
Total interest-bearing liabilities		304,334			609		0.80	%		376,798			1,138		1.22	%
Net interest rate spread					2,445		2.75	%					2,362		2.62	%
Noninterest-bearing demand deposits		40,568								46,608
Other liabilities		4,142								6,413
Shareholders’ equity		35,621								(11,052	)
Total liabilities and shareholders’ equity	$	384,665							$	418,767
Net interest margin							2.84	%							2.59	%

(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
	June 30,			March 31,			December 31,			September 30,			June 30,
	2016			2016			2015			2015			2015
	($ in thousands, except per share amounts)
Per Share Data:
Basic Earnings (Loss) per Common Share	$	0.03		$	(0.96	)	$	(0.21	)	$	(0.04	)	$	(0.18	)
Book value per common share (1)	$	0.10		$	(7.16	)	$	(6.54	)	$	(6.31	)	$	(6.55	)
Common shares outstanding		363,314,783			3,846,340			3,846,340			3,816,340			3,816,640
Weighted average dilutive common shares outstanding		319,862,554			3,846,340			3,846,340			3,816,340			3,816,640
Selected Performance Ratios:
Return on Average Assets		10.36	%		-3.67	%		-0.44	%		0.37	%		-0.39	%
Return on Average Equity (2)		111.93	%		N/A			N/A			N/A			N/A
Net interest margin (non-tax equivalent)		2.84	%		2.45	%		2.66	%		2.86	%		2.59	%
Non-interest Income as a % of Revenue		86.43	%		12.22	%		11.49	%		27.07	%		15.99	%
Non-interest Income as a % of Average Assets		5.06	%		0.12	%		0.11	%		0.34	%		0.16	%
Non-interest Expense as a % of Average Assets		1.95	%		1.17	%		0.83	%		0.87	%		0.82	%
Asset Quality:
Past due 30-59 days (and still accruing)	$	636		$	3,667		$	3,897		$	2,058		$	623
Past due 60-89 days (and still accruing)		159			647			244			808			331
Past due 90 days plus (and still accruing)		—			—			—			—			2
Nonaccrual loans		332			6,115			8,742			6,792			9,000
Nonperforming loans		332			6,115			8,742			6,792			9,002
Nonperforming loans held for sale (nonaccruing)		4,012			—			—			—			—
OREO		7,256			11,270			13,624			18,510			17,897
Nonperforming assets		11,600			17,385			22,366			25,302			26,899
Nonperforming loans to total loans		2.18	%		3.06	%		4.18	%		3.09	%		3.99	%
Nonperforming assets to total assets		3.03	%		4.78	%		6.19	%		6.68	%		6.50	%
Allowance to total loans held-for-investment		2.26	%		1.86	%		2.20	%		2.28	%		2.48	%
Allowance to nonperforming loans		103.41	%		60.82	%		52.63	%		73.93	%		62.20	%
Allowance to nonperforming assets		38.72	%		21.39	%		20.57	%		19.84	%		20.81	%
Net charge-offs (recoveries) to average loans		5.57	%		4.52	%		0.78	%		1.02	%		-0.36	%
(annualized)
Capital Ratios (Bank):
Common Equity Tier 1 (CET1) capital	$	38,114		$	9,238		$	12,135		$	12,169			11,434
Tier 1 capital		38,114			9,238			12,135			12,169		$	11,434
Tier 2 capital		2,939			2,962			3,267			3,497			3,708
Total risk based capital		41,053			12,200			15,402			15,666			15,142
Risk weighted assets		233,528			236,204			260,024			278,214			294,742
Average assets for leverage ratio		384,914			360,649			370,482			400,954			418,697
Common Equity Tier 1 (CET1) ratio		16.32	%		3.91	%		4.67	%		4.37	%		3.88	%
Tier 1 ratio		16.32	%		3.91	%		4.67	%		4.37	%		3.88	%
Total risk based capital ratio		17.58	%		5.17	%		5.92	%		5.63	%		5.14	%
Tier 1 leverage ratio		9.90	%		2.56	%		3.28	%		3.04	%		2.73	%

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

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