Rule 424B3
Registration Number 333-69492
PROSPECTUS
500,000 Shares Of Common Stock
$22.00 per share
HCSB FINANCIAL CORPORATION
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Common Stock
We are offering a minimum of 77,200 shares and a maximum of 500,000
shares of common stock of HCSB Financial Corporation to fund our continued
expansion through Horry County State Bank and through the formation of a new
community bank to be located in North Carolina. Prior to the offering, there has
been only limited trading in our common stock and no established market for the
common stock has existed. The shares will not be listed on the Nasdaq Stock
Market or any national exchange. The minimum purchase requirement by any
investor is 100 shares and the maximum purchase allocation is 5% of the
offering, although we reserve the right to accept subscriptions for more or
less.
The offering will be made primarily by our executive officers and
directors as well as by Mark S. Buckner as a registered representative of UVEST
Investment Services, Inc. Mr. Buckner is also our vice president and senior
investment consultant. Neither our executive officers or directors nor Mr.
Buckner will receive any commissions for any sales they make. UVEST will serve
as the selling agent and North Carolina-sponsoring dealer for the offering.
UVEST will act on a "best efforts" basis and will not have any obligation or
commitment to sell any specific dollar amount or number of shares of common
stock or to acquire any shares of common stock for its own account or with a
view to their distribution. We intend to make offers and sales to North Carolina
residents exclusively through Mr. Buckner. We will pay UVEST a fee of $125,000
following the completion of the offering, in lieu of any per share commission.
We will terminate this offering upon the sale of 500,000 shares or
December 31, 2003, whichever occurs first, but we reserve the right to terminate
the offering at any time after the sale of the minimum offering of 77,200
shares. Until 77,200 shares are sold, all of the money that we receive from this
offering will be held in an escrow account by Horry County State Bank, our
wholly-owned subsidiary. Once 77,200 shares are sold, proceeds from this
offering will be immediately available to us. If we fail to sell at least 77,200
shares or otherwise terminate this offering, we will return all funds received
to the subscriber promptly, without interest.
Investing in our common stock involves risk.
See "Risk Factors" beginning on page 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This table summarizes the amounts that we expect to receive, and the
sales agency fee that we expect to pay, if we sell the minimum number of shares
offered and if the offering is fully successful.
Per Share Per Share Total Total
(Minimum) (Maximum) (Minimum) (Maximum)
Price to Public $ 22.00 $ 22.00 $ 1,698,400 $ 11,000,000
Sales Agency Fee (a fixed fee payable upon completion) $ 1.62 $ .25 $ 125,000 $ 125,000
Proceeds to HCSB Financial Corporation (before expenses) $ 20.38 $ 21.75 $ 1,573,400 $ 10,875,000
Based on information available to us from a limited number of sellers
and purchasers of common stock who have engaged in privately negotiated
transactions of which we are aware, we believe transactions in the common stock
ranged from $20.00 to $22.00 per share from January 27, 2000 through December 8,
2001.
Please note that these securities:
o are not bank deposits
o are not federally insured by the FDIC; and
o are not insured by any other state or federal agency
January 25, 2002
HCSB FINANCIAL CORPORATION
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The shaded portion of the map represents our bank's primary service area.
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"It's the little things that make a little bank . . . BIG!"
PROSPECTUS SUMMARY
We encourage you to read the entire prospectus carefully before investing.
Who We Are
HCSB Financial Corporation is a South Carolina bank holding company
formed on June 10, 1999 to serve as a holding company for Horry County State
Bank. We maintain our headquarters in Loris, South Carolina. Our bank is a state
chartered bank incorporated on December 18, 1987 and operating from eight
offices located in Horry County, servicing customers in Horry County in South
Carolina and Columbus County in North Carolina. We have added five of our eight
offices after 1996.
We engage in a general commercial and retail community banking
business characterized by personalized service and local decision-making,
emphasizing the banking needs of small- to medium-sized businesses, professional
concerns, farmers, and individuals. We attribute our success to date to our
location in a growing market area and our focus on attracting customers in our
service area who prefer to conduct business with a locally owned and managed
institution that demonstrates an active interest in their business and personal
financial affairs.
Why We Are Expanding
Our primary service area currently includes Horry County, South
Carolina and portions of Columbus County in North Carolina. We intend to use a
portion of the proceeds of this offering to expand and better serve our primary
service area over the next 18 to 24 months by increasing the loans made through
our existing offices, by opening two additional branches in South Carolina, by
establishing a new bank with one or more offices in North Carolina, or by some
combination of these activities. We believe that there is an opportunity in
Columbus and Brunswick Counties in North Carolina for a new, community-oriented
bank to provide services to individuals, farmers, and small businesses. We
intend to expand our service area to encompass these counties with a goal of
becoming the leading community bank in our expanded service area.
We intend to continue to expand in Horry County, especially in its
coastal region, because we believe that its economy will continue to grow and
provide us with a favorable business climate. According to 1999 U.S. Census
data, the population of Horry County increased by nearly 24%, from 144,053 in
1990 to an estimated 178,550 in 1999, and is projected to reach 202,500 in 2005
and 225,800 in 2010. According to the 1998 South Carolina Statistical Abstract,
Horry County's per capita income rose 17.6% from $19,626 in 1995 to $23,088 in
1998, while median family income rose 14.8% from $32,500 to $37,300 for the same
period. In recent years, both The Wall Street Journal and Money magazine rated
the Grand Strand, which largely consists of the eastern coastline of Horry
County, as one of the nation's top retirement locations.
We believe that the extension of our market into North Carolina is a
logical step for us because of the geographical proximity of Columbus and
Brunswick counties to Horry County, our perception of a strong potential market
for community banking services in these counties, our preparation to expand into
North Carolina since 1997, and the economic similarities between Columbus and
Brunswick counties and Horry County.
Columbus and Brunswick counties form the northeastern border of
Horry County, which is also the border between North Carolina and South
Carolina, from the Atlantic coastline to the Little Pee Dee River. Like that of
our current service area, the economy of Brunswick and Columbus counties
consists of a blend of tourism, agriculture, small business, professional
services and industry. Brunswick County, one of North Carolina's fastest growing
areas, is expected to double in population between 1990 and 2010 and has already
grown 43.5% from 1990 to 2000, to 73,143, while North Carolina's population as a
whole grew 21.4%. As is the case with the Grand Strand area of South Carolina to
its south, tourism and recreation is a significant, and growing, portion of the
economy of Brunswick County.
We believe that Columbus County also provides a favorable business
climate. Although its economy is largely driven by the agricultural, industrial,
and retail sectors, Columbus County's rank for economic development has
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continued to increase, and it received the highest ranking of all southeastern
North Carolina counties in a recent composite of economic factors.
Our principal executive offices are located at 5201 Broad Street,
Loris, South Carolina. Our telephone number is (843) 756-6333.
The Offering
Common stock offered............................................. Minimum: 77,200 shares
Maximum: 500,000 shares
Common stock outstanding prior to the offering................... 1,052,175 shares
Common stock to be outstanding after the offering................ Minimum: 1,129,375 shares
Maximum: 1,552,175 shares
Public Offering Price............................................ $22.00 per share
Estimated Net Proceeds (after deducting a sales agency fee of
$125,000 and offering expenses of approximately $130,000)........ Minimum: $1.44 million
Maximum: $10.75 million
Although they have not promised to do so, our officers and directors may
purchase shares in the offering, including up to 100% of the offering. All
shares purchased by such persons will be for investment and not intended for
resale. Because purchases by our officers and directors may be substantial, you
should not assume that the sale of a specified minimum offering amount indicates
the merits of this offering. For an explanation of the factors we considered in
determining the offering price, please see the section entitled "Determination
of the Offering Price" on page 13.
Use of Proceeds
We intend to use the first $3.5 million of the net proceeds of the
offering to purchase land for, construct, and outfit two new branch offices
within the next 18 to 24 months. We intend to use approximately $6.0 million of
any remaining net proceeds to form a new state-chartered bank in North Carolina,
with one office in Columbus County and one office in Brunswick County. We will
then use any remaining proceeds to support loan growth for both banks or for
other general corporate purposes. If we do not receive sufficient net proceeds
to capitalize the North Carolina bank, or if we do not form it for any other
reason, we will use any remaining proceeds to support loan growth in our
existing bank and for general corporate purposes. If we do not receive net
proceeds sufficient to establish two new branch offices, we will use the net
proceeds we do receive to establish one branch office or to support loan growth
in our existing bank and for general corporate purposes. If we sell only the
minimum number of shares offered, we intend to use the net proceeds to support
loan growth in our existing bank and for general corporate purposes.
Plan of Distribution
Offers and sales of the common stock will be made primarily by our
executive officers and directors and by Mr. Buckner, all of whom will be
reimbursed for their reasonable expenses but will not receive commissions or
other remuneration for their sales efforts. We believe our executive officers
and directors will not be deemed to be brokers or dealers under the Securities
Exchange Act of 1934 due to Rule 3a4-1. Mr. Buckner will not participate in
sales outside North Carolina.
We must arrange for a North Carolina-registered dealer to "sponsor"
our application to sell securities in North Carolina. We have appointed UVEST as
our "sponsoring dealer" in North Carolina. We intend to make offers and sales to
North Carolina residents exclusively through Mr. Buckner, a vice president and
senior investment consultant of our bank. We employ Mr. Buckner on a full-time
basis to provide securities brokerage services to our customers, which he does
as a registered representative of UVEST. UVEST has no obligation or commitment
to purchase any of the shares offered or to assure the sale of any particular
number of shares.
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We have agreed to pay UVEST a fee of $125,000 following the
completion of the offering. If the offering is terminated for any reason prior
to its consummation, we will reimburse UVEST for all accountable out-of-pocket
expenses up to $50,000.
How to Subscribe
If you desire to purchase shares in this offering, you will need to:
1) Complete, date and execute the subscription agreement which you
received with this prospectus; Make a check, bank draft, or money order
payable to "Horry County State Bank," in the amount of $22.00 times the
number of shares you wish to purchase; and
2) Deliver the completed subscription agreement, a completed UVEST Direct
Account Form (if applicable), and the check in accordance with the
instructions given in the "How to Subscribe" section beginning on page
11.
If you should have any questions about the offering or how to
subscribe, please call Mr. Clarkson at (843) 756-6333.
Risk Factors
Investment in our common stock involves a significant degree of risk
due to factors such as:
o the differences among the $22.00 per share offering price, per
share book value, and the average price per share paid by existing
shareholders;
o the fact that we established the offering price arbitrarily, rather than
through a public market having depth and liquidity;
o the fact that our establishment of a new bank is likely to
decrease our net income over the next one to three years and may not
result in increased assets or revenues for us.
Prior to making an investment decision, you should read carefully
the "Risk Factors" section, beginning on page 7, for a discussion of specific
risks related to an investment in our common stock.
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Summary Consolidated Financial Data
(Dollars in thousands, except per share data)
The following consolidated financial data for each of the three
years ended December 31, 2000, 1999, and 1998, and for the nine months ended
September 30, 2001 and 2000, are derived from our financial statements and other
data about us. The consolidated financial statements for the years ended
December 31, 2000, 1999, and 1998 have been audited by Tourville, Simpson &
Caskey L.L.P., independent auditors. The consolidated financial data for the
nine months ended September 30, 2001 and 2000 have not been audited but, in our
opinion, contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly our financial position and results of
operations as of such dates and for such periods in accordance with generally
accepted accounting principles. All share and per share data has been adjusted
to reflect the 5% stock dividend paid in March 2001, the 100% stock dividend
paid in March 2000, and the 5% stock dividend paid in March 1999. The
consolidated financial data should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
Nine Months Ended
September 30, Years Ended December 31,
--------------------------------------- ---------------------------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Net interest income................ $ 4,015 $ 3,556 $ 4,737 $ 4,143 $ 3,146
Provision for loan losses.......... 238 196 271 190 100
Noninterest income................ 983 706 1,188 792 666
Noninterest expense................ 3,752 2,997 4,069 3,227 2,929
Net income after tax............... 658 698 1,037 994 511
Balance Sheet Data:
Total assets....................... $ 155,623 $ 140,345 $ 143,718 $ 114,326 $ 83,586
Earning assets..................... 132,471 127,030 132,866 101,921 76,156
Investment securities ............. 20,552 22,376 20,877 23,892 19,640
Loans, net of unearned income ..... 110,920 91,268 91,319 75,793 55,941
Allowance for loan losses.......... 1,061 1,014 1,019 922 880
Deposits........................... 129,476 115,434 123,500 94,829 69,970
Shareholders' equity............... 10,680 9,143 9,781 8,341 8,024
Basic Share Data:
Net income per share............... $ 0.63 $ 0.70 $ 0.99 $ 0.95 $ 0.49
Net tangible book value
per share (period end) ............ $ 10.15 $ 8.69 $ 9.30 $ 7.93 $ 7.63
Weighted average shares outstanding 1,052,175 1,052,175 1,052,175 1,052,175 1,052,175
Performance Ratios:
Return on average assets........... 0.44% 0.75% 0.82% 0.97% 0.63%
Return on average equity........... 6.46% 10.91% 11.85% 12.20% 6.58%
Net interest margin ............... 3.93% 4.17% 4.10% 4.40% 4.28%
Efficiency ratio................... 75.16% 70.32% 68.51% 65.39% 76.84%
Asset Quality Ratios:
Allowance for loan losses to
period end loans................... 0.96% 1.11% 1.12% 1.22% 1.57%
Net charge-offs to average loans... 0.19% 0.16% 0.20% 0.22% 0.25%
Nonperforming assets to
period end loans and
foreclosed property ........... 0.59% 0.30% 1.02% 0.09% 0.71%
Nonperforming assets to period
end total assets................. 0.42% 0.20% 0.65% 0.06% 0.47%
Capital and Liquidity Ratios:
Average equity to average assets... 6.87% 6.91% 6.93% 7.98% 9.65%
Leverage........................... 7.06% 7.26% 7.11% 8.69% 9.87%
Risk-based capital
Tier 1.......................... 8.81% 10.11% 9.54% 11.36% 12.95%
Total........................... 9.69% 11.18% 10.54% 12.46% 14.20%
Average loans to average deposits.. 83.61% 75.59% 83.99% 78.55% 72.45%
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RISK FACTORS
An investment in our common stock involves a significant degree of risk and you
should not invest in our common stock unless you can afford to lose some or all
of your investment. Please read the entire prospectus for a more thorough
discussion of the risks of an investment in our common stock.
Opening a new branch or establishing a new bank may not result in increased
assets or revenues for us.
We will use the proceeds of the offering to enhance our capital
position and to support our proposed growth and expansion, including the
establishment of two additional branch offices in South Carolina and a new bank
in North Carolina within the next 18 to 24 months. There is a risk that we will
not actually experience any further asset growth, open any additional branch
offices, or establish a new bank; there is also a risk that we will not
experience any favorable results if such growth or branch expansion occurs or
if we establish a new bank. We would expect this bank to lose money for at
least the first one to three years of its existence. Our status as a South
Carolina corporation may hinder our development of relationships with North
Carolina customers who are seeking a community bank. Because of the
significance of our proposed growth and branch expansion, our historical
results of operations are not necessarily indicative of our future operations.
The likelihood of our continued success must be considered in light of the
problems, expenses, complications, and delays frequently encountered in
connection with the establishment of new branches and new banks and the
competitive environment in which the new branches and new banks will operate.
We cannot open a new bank or branch for business until we receive regulatory
approvals, and any delay in opening the bank or branch will cause our expenses
to increase.
We cannot begin to operate a new bank or branch until we receive all
required regulatory approvals. We have not filed any applications to open a
bank or a branch. We have not yet filed applications to open a new branch in
South Carolina or to form a new bank in North Carolina. We expect to file the
branch application in the first quarter of 2002 and to receive approval to open
this branch in the first quarter of 2002, but it may take longer. Provided that
we raise at least $9.0 million in this offering, we also expect to file an
application to form a bank in North Carolina. We cannot file this application
until we have at least $3.0 million of available capital, which is one-half of
the capital we believe to be sufficient to open the bank. Thus, under our
current plans, we would have to raise at least $6.5 million in this offering
before we would file the application. We expect to receive permission to
operate a North Carolina bank within three months of filing our application. If
the opening of the bank or branch is delayed, the expenses associated with
opening that bank or branch will increase and will not be offset by any
additional operating revenue that would be associated with an operational bank
or branch.
We cannot form a North Carolina bank until we identify and form an organizing
group and identify an executive to lead the bank.
Although we are in discussions with prominent members of communities
in Columbus and Brunswick counties, we have not yet identified members of the
organizing group for the North Carolina bank that we intend to form. We also
have not yet identified or hired an executive to lead the bank we intend to
form. If we fail to assemble an organizing group and hire a suitable executive
to lead the bank, we will not be able to form the bank.
The loss of or failure to hire additional key personnel could hurt our business.
Our growth and development to date have been largely the result of
the contributions of certain of our senior executive officers, including James
R. Clarkson, our president and chief executive officer, Glenn R. Bullard, our
executive vice president, and Loretta B. Gerald, our vice president, cashier,
and internal auditor. If we lose the services of Mr. Clarkson, Mr. Bullard, or
Ms. Gerald, our business and development could be materially and adversely
affected. There is a risk we may not find suitable replacements for any of these
officers. In addition, our continued growth will require that we attract and
retain additional personnel with a variety of skills and experience. In our
experience, it can take a significant period of time to identify and hire
personnel with the combination of skills and experience required to carry out
our strategy.
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Our common stock may not be worth as much as $22.00 per share.
The factors that we used to determine the offering price are not
necessarily related to the market value of our common stock. The most
significant factor in our determination of the offering price was the price at
which our stock traded from January 1, 2001 through December 8, 2001 in those
privately negotiated trades of which we are aware. We are aware of only 18
trades involving our common stock during that period. There is a risk that the
prices for these trades do not reflect the value of our common stock. Other
factors that we considered were our stock's historical lack of volatility, our
capital needs, the ratio of the offering price to our book value, and our
offering price to earnings ratio. We estimate that the ratio of the offering
price to our book value per share was approximately 2.13 at December 31, 2001
and that the ratio of our offering price to our earnings per share was between
22.4 and 23.7 at December 31, 2001. We did not consider these factors
separately, but considered all of these factors together as a whole. There is a
risk that none of the factors that we considered may be relevant to, much less
determinative of, the present or future market value of our common stock.
Therefore, there is a risk that the market value of our common stock may be less
than $22.00 per share.
We face strong competition for customers, which could prevent us from obtaining
customers and may cause us to pay higher interest rates to attract customers.
We encounter strong competition from existing banks and other types
of financial institutions operating in Horry County and elsewhere. Some of these
competitors have been in business for a long time and have already established
their customer base and name recognition. Most are larger than we are and have
greater financial and personnel resources than we have. Some are large national
and regional banks, like BB&T, Bank of America, First Union, Wachovia, Carolina
First, and NBSC. These institutions have an advantage in obtaining the latest
developments in technology, and they offer services, such as extensive and
established branch networks, trust services, and internet banking, that we do
not provide. Due to this competition, we may have to pay higher rates of
interest to attract deposits. In addition, competitors that are not depository
institutions are generally not subject to the extensive regulations that apply
to our bank.
Changes in interest rates may reduce our profitability.
Our results of operations depend in large part upon the level of our
net interest income, which is the difference between interest income from
interest-earning assets, such as loans and securities, and interest expenses on
interest-bearing liabilities, such as deposits and other borrowings. Depending
on the terms and maturities of our assets and liabilities, a significant change
in interest rates could have a material adverse effect on our profitability.
Many factors cause changes in interest rates, including governmental monetary
policies and domestic and international economic and political conditions.
As of September 30, 2001, we had a cumulative one-year negative gap
position of 25.85% of total interest-bearing assets. With a negative gap
position, the rates on our interest-bearing liabilities will likely adjust to
changes in market interest rates at a faster rate than the yields on our
interest-earning assets. Although we have recently experienced an environment of
falling interest rates, a rapid economic recovery and a resultant rise in
interest rates may have the effect of requiring us to pay higher rates on our
deposits while being unable to increase the rates we charge for approximately
one-fourth of our loan portfolio. Therefore, a rise in interest rates could
cause our net interest margin to decrease and adversely affect our net interest
income. While we intend to manage the effects of changes in interest rates
by adjusting the terms, maturities, and pricing of our assets and liabilities,
our efforts may not be effective and our financial condition and results of
operations could suffer.
An economic downturn, especially one affecting Horry County, South Carolina,
could reduce our customer base, our level of deposits, and the demand for our
financial products such as loans.
An economic downturn would likely a deterioration in the quality of
our loan portfolio and may reduce the level of deposits in the bank. This would
hurt our business. Interest received on loans represented approximately 83% of
our interest income for the year ended December 31, 2000. If an economic
downturn occurs in the economy as a whole, or in our service area, borrowers may
be less likely to repay their loans as scheduled. Moreover, the value of real
estate or other collateral that may secure our loans could be adversely
affected. It appears to us that the terrorist attacks that occurred in New York
City and Washington, D.C. on September 11, 2001, and the United States'
subsequent response
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to these events have resulted in a general economic slowdown that may adversely
affect our banking business. This slowdown seems to have especially affected the
tourism and recreation sectors of the economy, which have particular
significance to the economy of Horry County. We intend to closely monitor the
effect of these events upon our business, and make adjustments to our business
strategy as we deem necessary.
Recent legislation will change the way financial institutions conduct their
business, and we cannot predict the effect it will have upon us.
The Gramm-Leach-Bliley Act was signed into law on November 12, 1999.
Among other things, the Act repeals restrictions on banks affiliating with
securities firms. It also permits bank holding companies that become financial
holding companies to engage in additional financial activities, including
insurance and securities underwriting and agency activities, merchant banking,
and insurance company portfolio investment activities. The Act is intended, in
part, 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 competition we face from larger banks and
other companies, especially as we seek to expand our current service area by
opening new branches and establishing a state-chartered bank in North Carolina.
It is not possible to predict the full effect that the Act will have on us. In
addition, we expect other changes to be proposed to laws affecting the banking
industry from time to time, and these changes could have a material effect on
our business and prospects. We cannot predict the nature or the extent of the
effect on our business and earnings of future fiscal or monetary policies,
economic controls, or new federal or state legislation.
Our stock is not traded on an established exchange.
Prior to this offering, there has been no established or other
active or liquid market for our common stock. We do not expect an active trading
market for our common stock to develop for several years, if at all. A public
market having depth and liquidity depends on having enough buyers and sellers at
any given time. Because of the relatively small size of both this offering and
our shareholder base, we do not expect to have enough shareholders or
outstanding shares to support an active trading market. Accordingly, investors
should consider the potential lack of liquidity of an investment in our common
stock and be prepared to hold our stock for an indefinite period of time.
Our stock price may fluctuate and be volatile.
The prices at which our stock has traded may not be indicative of
future market prices. As a result, the trading price of our common stock could
fluctuate significantly, especially in light of the illiquid market for our
common stock. Volatility in our stock price could also result from the following
factors, among others:
o variations in quarterly operating results;
o announcements of technological innovations or new services
or products by us or our competitors;
o a large number of shares being bought or sold;
o changes in financial estimates by securities analysts;
o the operating and stock price performance of other
companies in our industry; and
o general stock market or economic conditions.
The stock market in recent years has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of affected companies. We cannot guarantee that investors
will be able to sell their shares at or above our offering price or at all.
We have broad discretion in allocating the net proceeds from this
offering.
We intend to use the proceeds from this offering to support our
expansion in our current service area by opening two branch offices and to
expand our service area into Columbus and Brunswick counties in North Carolina
by establishing a new bank with one or more offices. We also intend to use
proceeds from this offering to support loan growth and for general corporate
purposes. However, there is a risk we will not raise sufficient funds in this
offering to accomplish our objectives. To the extent we receive net proceeds
between approximately $3.5 million but less than approximately $9.5 million, we
will have significant flexibility in applying the net proceeds of this offering.
Our failure
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to apply these funds effectively could have a material adverse effect on our
business. See "Use of Proceeds" for a description of how we intend to allocate
the net proceeds of this offering.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements are based on many
assumptions and estimates and are not guarantees of future performance. Our
actual results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words "may," "would,"
"could," "will," "expect," "anticipate," "believe," "intend," "plan," and
"estimate," as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to:
o significant increases in competitive pressure in the banking
and financial services industries;
o changes in the interest rate environment which could reduce
anticipated or actual margins;
o changes in political conditions or the legislative or
regulatory environment;
o general economic conditions, either nationally or
regionally and especially in our primary service area,
becoming less favorable than expected resulting in, among
other things, a deterioration in credit quality;
o changes occurring in business conditions and inflation;
o changes in technology;
o changes in monetary and tax policies;
o changes in the securities markets; and
o other risks and uncertainties detailed from time to time in
our filings with the Securities and Exchange Commission.
THE OFFERING
We are offering a minimum of 77,200 shares and a maximum of 500,000
shares of common stock of HCSB Financial Corporation to fund our continued
expansion through Horry County State Bank and through the formation of a new
community bank to be located in North Carolina. Prior to the offering, there has
been only limited trading in our common stock and no established market for the
common stock has existed. The shares will not be listed on the Nasdaq Stock
Market or any national exchange. The minimum purchase requirement by any
investor is 100 shares and the maximum purchase allocation is 5% of the
offering, although we reserve the right to accept subscriptions for more or
less.
The offering will be made by our executive officers and directors,
as well as by Mark S. Buckner, whom we employ on a full-time basis as our vice
president and senior investment consultant. Mr. Buckner is also a registered
representative of UVEST Investment Services, Inc., which permits him to buy and
sell securities on behalf of our customers under the supervision and licenses of
UVEST. Neither our executive officers or directors nor Mr. Buckner will receive
any compensation for their work in connection with this offering; however, we
will continue to pay salaries to our executive officers and salary and
commissions on sales of securities other than our stock to Mr. Buckner.
UVEST will serve as the selling agent and North Carolina-sponsoring
dealer for the offering, effecting the public offer and sale of the shares to
residents of North Carolina. UVEST will act on a "best efforts" basis and will
not have any obligation or commitment to acquire any shares of common stock for
its own account or with a view to their distribution. We intend to make offers
and sales to North Carolina residents exclusively through Mr. Buckner.
We will terminate this offering upon the sale of 500,000 shares or
December 31, 2003, which ever occurs first, but we reserve the right to
terminate the offering at any time after the sale of the minimum offering of
77,200 shares. Until 77,200 shares are sold, all of the money that we receive
from this offering will be held in an escrow account by Horry County State Bank,
our wholly-owned subsidiary. Once 77,200 shares are sold, proceeds from this
offering will be immediately available to us. If we fail to sell at least 77,200
shares by January 25, 2003 or otherwise terminate this offering, we will return
all funds received to the subscriber promptly, without interest. If we fail to
sell the minimum number of shares, the subscriber could be deprived of the use
of funds delivered to us for up to one year.
10
Subscription proceeds for the initial 77,200 shares subscribed for
in this offering will be promptly deposited in an escrow account with the Horry
County State Bank, our wholly-owned subsidiary, until the conditions to this
offering have been satisfied or the offering has been terminated. The offering
will be terminated, no shares will be issued, and no subscription proceeds will
be released from escrow unless we have accepted subscriptions and payment in
full for a minimum of 77,200 shares which will result in gross offering proceeds
of approximately $1.7 million. Although they have not promised to do so, our
officers and directors may purchase shares in the offering, including up to 100%
of the offering. All shares purchased by such persons will be for investment and
not intended for resale. Because purchases by our officers and directors may be
substantial, you should not assume that the sale of a specified minimum offering
amount indicates the merits of this offering. Any subscription proceeds accepted
after satisfaction of the conditions set forth above but before termination of
this offering will not be deposited in escrow but will be immediately available
to us.
PLAN OF DISTRIBUTION
Offers and sales of the common stock outside of North Carolina will
be made by our officers and directors, who will not receive commissions or other
remuneration for their sales efforts, although they may be reimbursed for
reasonable expenses, if any, incurred in connection therewith. We intend to
advertise this offering, in accordance with Rule 134, in local newspapers with
circulation in our market area and by solicitation of our current customers and
shareholders. We believe our officers and directors will not be deemed to be
brokers or dealers under the Securities Exchange Act of 1934 due to Rule 3a4-1.
We must arrange for a North Carolina-registered dealer to "sponsor"
our application to sell securities in North Carolina. We have appointed UVEST as
our "sponsoring dealer" in North Carolina. UVEST will perform the functions
necessary to effect the public offer and sale of our common stock in North
Carolina, including the distribution of our prospectus to persons that we
identify as well as those North Carolina residents who request it. As such,
UVEST will be an "underwriter" as that term is defined by the Securities Act of
1933. We do not anticipate that UVEST will actively identify prospective
investors, although UVEST may do so. UVEST will act on a "best efforts" basis
and will not have any commitment to acquire any shares of common stock for its
own account or with a view to their distribution, nor has UVEST been involved in
the determination of the public offering price of the shares. UVEST has no
obligation or commitment to purchase any of the shares offered or to assure the
sale of any particular number of shares. We intend to make offers and sales to
North Carolina residents exclusively through Mr. Buckner, who is a vice
president and senior investment consultant of our bank and a registered
representative of UVEST. We have agreed to indemnify UVEST against certain
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in this prospectus, including liabilities under the
Securities Act of 1933. The SEC has advised us that it believes indemnification
against liabilities under the Securities Act of 1933 is against public policy
and is, therefore, unenforceable.
In lieu of any per share commission for its services, we will pay
UVEST a fee of $125,000 following the completion of the offering. If the
offering is terminated for any reason prior to its consummation, we will
reimburse UVEST for all accountable out-of-pocket expenses up to $50,000.
HOW TO SUBSCRIBE
If you desire to purchase shares in this offering, you should:
1) Complete, date and execute the subscription agreement which you
received with this prospectus; Make a check, bank draft, or money order
payable to "Horry County State Bank," in the amount of $22.00 times the
number of shares you wish to purchase; and
2) North Carolina residents should deliver the completed subscription
agreement, completed UVEST Direct Account Form and check (payable to
"Horry County State Bank") to UVEST Investment Services at the
following address:
UVEST Investment Services
128 S. Tryon Street
Suite 1340
Charlotte, NC 28202
Attn: HCSB Offering
11
Residents of South Carolina and the other states in which the offer
and sale of these securities is permitted should deliver the
completed subscription agreement and check (payable to "Horry County
State Bank") to HCSB Financial Corporation at the following address:
Mr. James R. Clarkson
HCSB Financial Corporation
5201 Broad Street
PO Box 218
Loris, South Carolina 29569
If you should have any questions about the offering or how to
subscribe, please call Mr. Clarkson at (843) 756-6333. If you subscribe, you
should retain a copy of the completed subscription agreement for your records.
You must pay the subscription price at the time you deliver the subscription
agreement, which is binding and irrevocable once delivered by you and accepted
by us.
USE OF PROCEEDS
We estimate that the sale of the common stock in this offering at a
public offering price of $22.00 per share will result in our receipt of net
proceeds between approximately $1.44 million (based on the minimum offering of
77,200 shares ) and $10.75 million (based on the maximum offering of 500,000
shares), after deducting a sales agency fee of $125,000 and offering expenses of
approximately $130,000.
We intend to use the first $3.5 million of the net proceeds to
purchase land for, construct, and outfit two new branch offices within the next
18 to 24 months. We expect that these locations will be situated in North Myrtle
Beach, Myrtle Beach, or the South Strand areas of Surfside Beach, Garden City
Beach and Murrell's Inlet, all along either U.S. Hwy. 17 or U.S. Hwy. 17 Bypass.
We anticipate spending approximately $1.75 million for each of these branches,
although the actual cost could be significantly higher since we have not yet
entered into any agreement to acquire any of these potential sites. If we do not
receive net proceeds sufficient to establish two new branch offices, we will use
the net proceeds we do receive to establish one branch office or to support loan
growth and for general corporate purposes.
We intend to use approximately $6.0 million of any remaining net
proceeds to form a new state-chartered bank in North Carolina, with one office
in Columbus County and one office in Brunswick County. We will then use any
remaining proceeds to support loan growth or for other general corporate
purposes. If we are unable to capitalize the North Carolina bank with
approximately $6.0 million, or if we do not form it for any other reason, we
will use any remaining proceeds to support loan growth and for general corporate
purposes. If we do not raise approximately $9.0 million or more in net proceeds
from this offering, we do not intend to form a North Carolina bank. If we sell
only the minimum number of shares offered, we intend to use the net proceeds to
support loan growth in our existing bank and for general corporate purposes. If
we receive more net proceeds than what is required to accomplish the objectives
discussed above (which we believe will require approximately $9.5 million), we
will use any remaining proceeds to support loan growth and for other general
corporate purposes.
Although we own a lot in Columbus County, we have not entered into
any agreement to acquire any other sites, nor have we entered into any agreement
for the construction of facilities for a new branch or new bank. Therefore, we
cannot determine with certainty the cost to open such a branch or bank, and the
actual cost could be significantly higher than our projections.
We intend to invest any proceeds not immediately required for the
purposes described above in United States government securities, short-term
certificates of deposit, money market funds, as a deposit in our bank, or in
other short-term interest-bearing investments.
MARKET FOR COMMON STOCK
As of the date of this prospectus, there were 1,052,175 shares of
our common stock outstanding held by approximately 1,660 shareholders of record.
In our most recent offering in May 1997, we issued 65,805 shares of our common
stock at a price per share of $12.00. There is currently no established public
trading market in our common stock, and trading and quotations of our common
stock have been limited and sporadic. Because there has not been an
12
established market for our common stock, we may not be aware of all prices at
which our common stock has been traded. We have not determined whether the
trades of which we are aware were the result of arm's-length negotiations
between the parties. Based on information available to us from a limited number
of sellers and purchasers of common stock who have engaged in privately
negotiated transactions of which we are aware, we believe transactions in our
common stock can be fairly summarized as follows for the periods indicated:
Number of
Period Per Share Price Trades
------ --------------- ------
Year ended December 31, 1997................ $11.50 to $12.00 9
Year ended December 31, 1998................ $12.00 to $14.00 10
Year ended December 31, 1999................ $14.50 to $16.00 11
Year ended December 31, 2000................ $16.50 to $20.00 9
January 1, 2001 through December 8, 2001.... $20.00 to $22.00 (1) 17 (1)
(1) We are also aware of one trade in which 105 shares our common
stock were traded for $25.00 each. We have not included this trade in the
summary above because of the small number of shares involved.
All share and per share data has been adjusted to reflect the 5%
stock dividend paid in March 2001, the 100% stock dividend paid in March 2000,
and the 5% stock dividend paid in March 1999. The information presented above
describes only those trades of which we are aware.
DETERMINATION OF THE OFFERING PRICE
The trades listed above were the primary factor that we considered
in determining the offering price. Other factors that we considered were our
stock's historical lack of volatility, our capital needs, the ratio of the
offering price to our book value, and our offering price to earnings ratio. We
estimate that the ratio of the offering price to our book value per share was
approximately 2.13 at December 31, 2001 and that the ratio of our offering price
to our earnings per share was between 22.4 and 23.7 at December 31, 2001. We did
not consider these factors separately, but considered all of these factors
together as a whole. We believe that all these factors together support our
determination of the offering price. Nevertheless, we recognize that none of
these factors may be relevant to, much less determinative of, the present or
future market value of our common stock. Therefore, we consider our
determination of the offering price to be arbitrary. There is no assurance that
either the offering price or the prices at which our stock has traded reflect
the present or future value of our common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock.
For the foreseeable future we do not intend to declare cash dividends. We have,
however, paid stock dividends. All share and per share data has been adjusted to
reflect the 5% stock dividend paid in March 2001, the 100% stock dividend paid
in March 2000, and the 5% stock dividend paid in March 1999. We intend to retain
earnings to grow our business and strengthen our capital base. In addition, the
South Carolina Board of Financial Institutions regulates the dividends payable
by our subsidiary, Horry County State Bank. Our ability to pay dividends is
dependent on our receipt of dividends from our bank subsidiary. See "Supervision
and Regulation - Horry County State Bank - Dividends" on page 42.
13
DILUTION
Dilution per share to new investors represents the amount per share
paid by investors in this offering less the pro forma book value of the common
stock immediately following the offering. Our net tangible book value as of
September 30, 2001 was $10.68 million, or $10.15 per share of common stock. The
formula for calculating net tangible book value per share is total tangible
assets less total liabilities, divided by the total number of shares of common
stock outstanding. After giving effect to the sale of all 500,000 shares of
common stock in this offering, and our application of the estimated net proceeds
as set forth under "Use of Proceeds," our adjusted net tangible book value as of
September 30, 2001 would have been $21.43 million, or $13.80 per share. This
amount represents an immediate increase in net tangible book value of $3.65 per
share to existing shareholders and an immediate dilution of $8.20 per share to
new investors. We illustrate this per share dilution in the following table:
Offering price per share $ 22.00
Net tangible book value per share as of September 30, 2001...... $ 10.15
Increase in net tangible book value per share attributable
to new investors................................................ 3.65
---------
Adjusted net tangible book value after the offering ................. 13.80
-----------
Dilution per share to new investors................................... $ 8.20
===========
In the following tables we summarize the number of shares of common
stock we have sold prior to this offering and the maximum and minimum number of
shares we propose to sell in this offering, and the total cash consideration and
average price per share paid by our existing shareholders and to be paid by new
investors in this offering.
Based on the maximum:
Shares Purchased Total Cash Consideration Average Price
----------------------- ---------------------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ----------
Existing shareholders......... 1,052,175 67.8% $ 5,340,482 32.7% $ 5.08
New investors................. 500,000 32.2% 11,000,000 67.3 $ 22.00
--------- ------ ----------- -----
Total.................. 1,552,175 100.0% $ 16,340,482 100.0%
========= ====== =========== =====
Based on the minimum:
Shares Purchased Total Cash Consideration Average Price
---------------------- ---------------------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing shareholders......... 1,052,175 93.2% $ 5,340,482 75.9% $ 5.08
New investors................. 77,200 6.8% 1,698,400 24.1 $ 22.00
--------- ----- ----------- -----
Total.................. 1,129,375 100.0% $ 7,038,882 100.0%
========= ===== =========== =====
14
CAPITALIZATION
The following table sets forth our consolidated capitalization at
September 30, 2001, both actual and as adjusted to reflect the sale of a minimum
of 77,200 and a maximum of 500,000 shares of common stock in this offering after
deducting the expenses of the offering and applying the net proceeds of this
offering as set forth under "Use of Proceeds."
September 30, 2001
-----------------------------------------------------------------
As Adjusted, As Adjusted,
Actual Minimum Offering Maximum Offering
------ ----------------- ----------------
(Dollars in thousands)
Shareholders' equity:
Common stock, par value $0.01 per share;
10,000,000 shares authorized, 1,052,175 shares
issued and outstanding - actual; 1,129,375 shares
issued and outstanding - as adjusted for the
minimum offering; 1,552,175 shares issued and
outstanding - as adjusted for the maximum
offering.......................................... $ 11 $ 11 $ 16
Additional paid-in capital............................. 8,833 10,276 19,573
Retained earnings...................................... 1,725 1,725 1,725
Unrealized gain on securities available for sale....... 111 111 111
--------------- --------------- ------------------
Total shareholders' equity................................ $ 10,680 $ 12,123 $ 21,425
=============== =============== ==================
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
HCSB Financial Corporation is a South Carolina bank holding company
formed on June 10, 1999 to serve as a holding company for Horry County State
Bank. Our bank is a state chartered bank incorporated on December 18, 1987, and
operating from eight offices located in Horry County in South Carolina.
We have expanded our operations and service area significantly over
the past five years. In 1997, we opened our third, fourth, and fifth branch
offices, including a branch located in North Myrtle Beach, South Carolina and
one just south of Tabor City, North Carolina. We opened our sixth branch in
February 1998, our seventh branch in 2000, and our eighth branch, located in the
Socastee section of Myrtle Beach, South Carolina, in February 2001. As a result
of our growth strategy, we have grown from approximately $49.4 million in total
assets, $35.6 million in loans, $42.9 million in deposits, and $5.5 million in
shareholders' equity at December 31, 1996, to approximately $155.6 million in
total assets, $110.9 million in loans, $129.5 million in deposits, and $10.7
million in shareholders' equity at September 30, 2001.
The following table sets forth selected measures of our financial
performance for the periods indicated:
Years Ended December 31,
(Dollars in thousands)
- ----------------------- -----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ----------- ------------- ------------
Total Revenues (1)..... $ 5,925 $ 4,935 $ 3,812 $ 3,266 $ 2,499
Net Income............. 1,037 994 511 429 556
Total Assets........... 143,718 114,326 83,586 72,156 49,405
Total Loans (Net)...... 90,300 74,841 55,061 40,711 35,556
Total Deposits......... 123,500 94,829 69,970 63,885 42,851
(1) Total revenue equals net interest income plus total noninterest income
The following discussion contains our analysis of our financial
condition and results of operations beginning with the year ended December 31,
1998. The following discussion should be read in conjunction with the preceding
"Selected Consolidated Financial Data" and the Financial Statements and related
notes and the other financial data included elsewhere in this prospectus.
Analysis of the Fiscal Years Ended December 31, 1998 and 1999 and 2000 and the
Nine Months Ended September 30, 2001
Results Of Operations
2000 compared to 1999
For the year ended December 31, 2000, our net income was $1.04
million, or $1.03 per share, an increase of $43,000, or 4.3%, when compared to
the $994,000 net income, or $0.99 per share, for 1999. The increase in net
income was primarily due to the growth of loans at the branches in North Myrtle
Beach and Conway. Overall, loans net of unearned income increased $15.5 million,
or 20.4%, from $75.8 million at December 31, 1999 to $91.3 million at December
31, 2000. This led to an increase in net interest income of $594,000, or 14.3%,
from $4.1 million for the year ended December 31, 1999 to $4.7 million for the
year ended December 31, 2000. The increase in the loan portfolio also
contributed to an $81,000 increase in the provision for loan losses from
$190,000 for the year ended December 31, 1999 to $271,000 for the year ended
December 31, 2000. An increase in service charges on deposit accounts of
$151,000, to $690,000 for the year ended December 31, 2000 from $539,000 for the
year ended December
16
31, 1999, also contributed to the increase in net income. These increases were
offset by an $842,000 increase in noninterest expense, to $4.1 million for the
year ended December 31, 2000 from $3.2 million for the year ended December 31,
1999.
1999 compared to 1998
For the year ended December 31, 1999, our net income was $994,000,
or $0.99 per share, an increase of $483,000, or 94.5%, 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 $19.9
million, or 35.5%, from $55.9 million in 1998 to $75.8 million in 1999. This led
to an increase in net interest income of $1.0 million, or 31.7%, from $3.1
million for the year ended December 31, 1998 to $4.1 million for the year ended
December 31, 1999. The increase in the loan portfolio also contributed to an
increase of $90,000, or 90%, 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, or 24.2%,
to $539,000 for 1999 from $434,000 for 1998, also contributed to the increase in
net income. These increases were partially offset by the increase of $298,000
increase in noninterest expense and $252,000 increase in income tax expense over
the year ended December 31, 1998 amounts of $2.9 million and $272,000,
respectively.
Nine Months Ended September 30, 2001
Although net interest income and noninterest income increased during
the first nine months of 2001 compared to the same period in 2000, we also
experienced a significant increase in noninterest expense during these time
periods. The increase of noninterest expense was primarily due to salaries and
employee benefits, which increased $489,000 from the nine months ended September
30, 2000 to the nine months ended September 30, 2001, and was related primarily
due to the opening of our Socastee and Homewood branches. The combination of the
above factors resulted in net income for the nine months ended September 30,
2001 of $658,000 as compared to $698,000 for the same period in 2000, a decrease
of $40,000, or 5.7%. For the quarter ended September 30, 2001, net income was
$302,000 as compared to $241,000 for the quarter ended September 30, 2000. This
represents an increase of $61,000, or 25.3%, from the quarter ended September
30, 2000.
Assets, Liabilities, and Shareholders' Equity
During the twelve months ended December 31, 2000, total assets
increased by $29.4 million, or 25.7%, to $143.7 million from $114.3 million at
December 31, 1999 and $83.6 million at December 31, 1998. The primary reasons
for the increase in assets during 2000 were increases in loans of $15.5 million
and in federal funds sold of $17.7 million during the period. The increase in
loans was primarily due to the growth of loans at the branches in North Myrtle
Beach and Conway. The increase in federal funds sold was primarily due to
deposit growth in the same offices. The primary reasons for the $34.7 million
increase in assets during 1999 were increases in loans of $19.9 million, cash
and cash equivalents of $4.8 million, and securities available-for-sale of $4.3
million. Total deposits have increased from $70.0 million at December 31, 1998
to $94.8 million at December 31, 1999 to $123.5 million at December 31, 2000.
Deposits have increased as we have opened new branches. Shareholders' equity has
increased from $8.0 million at December 31, 1998 to $8.3 million at December 31,
1999 to $9.8 million at December 31, 2000. The increase in our shareholders'
equity has been primarily due to our retention of earnings.
During the first nine months of 2001, total assets increased $11.9
million, or 8.3%, when compared to December 31, 2000. The primary reason for the
increase in assets was due to an increase in loans of $19.6 million during the
first nine months of 2001. It is typical for us to experience an increase in
loans, especially in the area of agricultural loans, during this period. Total
deposits increased $6.0 million, or 4.8%, from the December 31, 2000 amount of
$123.5 million. Within the deposit area, interest-bearing deposits increased
$1.0 million, or 0.9%, and noninterest-bearing deposits increased $4.9 million,
or 59.6%, during the first nine months of 2001. We believe that the increase in
deposits is due to perceived volatility in the equities markets, with the low
interest rate environment making noninterest-bearing deposits relatively
attractive. The increase in deposits has allowed us to keep pace with the rapid
growth in loans. In addition, we have increased our borrowings with the Federal
Home Loan Bank by $5.0 million, or 52.1%, from $9.6 million at December 31, 2000
to $14.6 million at September 30, 2001.
17
We have sought to maintain a conservative approach in determining
the distribution of our assets and liabilities. The following table presents the
percentage relationships of significant components of our average balance sheets
at for the periods indicated.
Balance Sheet Categories as a Percent of Average Total Assets
As of December 31,
As of -------------------------------------------------------------
September 30, 2001 2000 1999 1998
------------------ ------------------- ---------------- -----------------
Assets:
Interest earning assets:
Federal funds sold................... 6.29% 4.45% 2.82 % 9.12 %
Investment securities................ 16.16 18.00 23.17 17.92
Loans................................ 69.80 69.04 66.06 64.03
----------- ----------- ----------- -----------
Total interest earning assets........ 92.25 91.49 92.05 91.07
Cash and due from banks................. 1.66 2.74 3.03 1.83
Allowance for loan losses............... (0.71) (0.79) (0.92) (1.08)
Premises and equipment.................. 3.75 3.93 3.72 5.59
Other assets............................ 3.05 2.63 2.12 2.59
----------- ----------- ----------- -----------
Total assets......................... 100.00% 100.00% 100.00 % 100.00 %
====== ====== ====== ======
Liabilities and stockholders' equity:
Interest-bearing liabilities............
Interest-bearing deposits............ 77.28% 75.63% 76.86 % 81.12 %
Federal funds purchased.............. ----- 0.60 0.12 ----
Advances from the Federal
Home Loan Bank....................... 8.84 9.43 6.83 1.46
Repurchase agreements................ 0.02 ----- 0.17 ----
----------- ----------- ----------- ------------
Total interest-bearing liabilities... 86.14 85.66 83.98 82.58
Noninterest-bearing deposits.................. 6.19 6.58 7.23 7.26
Accrued interest and other liabilities........ 0.80 0.83 0.81 0.51
----------- ----------- ----------- -----------
Total liabilities.................... 93.13 93.07 92.02 90.35
----------- ----------- ----------- -----------
Shareholders' equity.......................... 6.87 6.93 7.98 9.65
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity.... 100.00% 100.00% 100.00 % 100.00 %
====== ====== ====== ======
Net Interest Income
Earnings are dependent to a large degree on net interest income,
which 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 our 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 average earning assets.
2000 compared to 1999
Net interest income increased from $4.1 million for the year ended
December 31, 1999 to $4.7 million for the year ended December 31, 2000, an
increase of $594,000 or 14.3%. Total interest income increased $2.6 million due
to the $21.5 million, or 22.8%, growth in average earning assets, from $94
million for the twelve months ended December
18
31, 1999 to $115.5 million for the twelve months ended December 31, 2000. The
growth in assets was funded by a $17.0 million 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 5.34% in 2000 compared to 4.41% in 1999. The
interest rate spread and net yield on earning assets were negatively affected by
the increase in the cost of funds, particularly the 118 basis point increase in
the yield on money market deposit accounts and 96 basis point increase in the
yield on certificates of deposit. The interest rate spread was 3.75% and 4.01%
in 2000 and 1999, respectively. The net yield on earning assets during 2000 was
4.10% compared to 4.40% in 1999.
1999 compared to 1998
Net interest income increased from $3.1 million for the year ended
December 31, 1998 to $4.1 million for the year ended December 31, 1999, an
increase of $1.0 million, or 31.7%. Total interest income increased $1.5 million
due to the $20.7 million, or 28.24%, growth in average earning assets, from
$73.3 million for the twelve months ended December 31, 1998 to $94.0 million for
the twelve months ended December 31, 1999. The growth in assets was funded by a
$13.2 million increase in average interest-bearing deposits. Most of the deposit
growth was from certificates of deposit. 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 4.01% in 1999 as compared to 3.83% in
1998. The net yield on earning assets during 1999 was 4.40% compared to 4.28% in
1998.
Nine Months Ended September 30, 2001
For the nine months ended September 30, 2001, net interest income
was $4.0 million, an increase of $459,000, or 12.9%, over $2.4 million for the
same period in 2000. Interest income from loans, including fees, was $7.5
million, an increase of $1.0 million, or 18.9%, over $7.4 million for the nine
months ended September 30, 2000, as demand for loans in our marketplace
continued to grow. Also contributing to the overall increase in net interest
income was an increase of $161,000 in other interest income to $270,000 for the
nine months ended September 30, 2001. Interest expense at September 30, 2001 was
$4.9 million compared to $4.2 million for the same period in 2000. The net
interest margin realized on earning assets was 3.93% for the nine months ended
September 30, 2001, as compared to 4.18% for the nine months ended September 30,
2000. The interest rate spread was 3.59% for the nine months ended September 30,
2001, compared to 3.77% for the nine months ended September 30, 2000.
Net interest income increased by $269,000, or 22.6%, from $1.2
million for the quarter ended September 30, 2000 to $1.5 million for the quarter
ended September 30, 2001. Interest income from loans, including fees, increased
by $286,000, or 13.6%, to $2.6 million for the quarter ended September 30, 2001
from $2.3 million for the quarter ended September 30, 2000. Interest expense
decreased $86,000, or 5.4%, to $1.5 million for the three months ended September
30, 2001 compared to $1.6 million for the three months ended September 30, 2000.
Average Balances, Income and Expenses, and Rates
The following tables set 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.
19
Average Balances, Income and Expenses, and Rates
(Dollars in thousands)
2000 1999 1998
-------------------------------- ----------------------------- -------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- ---------- ------ -------- --------- -------- ------------ --------- ------
Assets:
Earning Assets
Securities, taxable..... $ 18,304 $ 1,243 6.79% $ 19,516 $ 1,222 6.26% $ 12,754 $ 824 6.46%
Securities, nontaxable.. 3,718 165 4.44 3,773 168 4.45 1,426 65 4.56
Loans................... 87,180 8,738 10.02 67,457 6,389 9.47 51,547 5,097 9.89
Federal funds sold...... 5,614 357 6.36 2,880 141 4.90 7,345 401 5.46
Nonmarketable equity
securities.............. 705 49 6.95 375 27 7.20 250 16 6.40
---------- --------- ---------- ---------- ---------- ---------
Total earning assets. 115,521 10,552 9.13 94,001 7,947 8.45 73,322 6,403 8.73
---------- --------- ---------- ---------- ---------
Cash and due from banks.... 3,465 3,086 1,474
Allowance for loan losses.. (992) (943) (872)
Premises and equipment..... 4,961 3,803 4,497
Other assets............... 3,312 2,172 2,087
---------- ---------- ----------
Total assets............ $ 126,267 $ 102,119 $ 80,508
========== ========== ==========
Liabilities:
Interest-Bearing Liabilities
Interest-bearing deposits $ 95,490 5,099 5.34% $ 78,491 3,461 4.41% $ 65,312 3,202 4.90%
Other borrowings........... 12,673 716 5.65 7,271 343 4.72 1,178 55 4.68
---------- --------- ---------- ---------- ---------- ---------
Total interest-bearing
Liabilities............. 108,163 5,815 5.38 85,762 3,804 4.44 66,490 3,257 4.90
---------- --------- ---------- ---------- ---------- ---------
Noninterest-bearing deposits 8,308 7,385 5,841
Accrued interest and other
liabilities................ 1,046 824 407
Shareholders' equity....... 8,750 8,148 7,770
---------- ---------- ----------
Total liabilities and
Shareholders' equity...... $ 126,267 $ 102,119 $ 80,508
========= ========= ==========
Net interest spread........ 3.75% 4.01% 3.83%
Net interest income........ $ 4,737 $ 4,143 $ 3,146
========= ========== =========
Net interest margin........ 4.10% 4.40% 4.28%
September 30, 2001 September 30, 2000
------------------------------------------ -----------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- ------------ -------- ------------ ----------- --------
Assets:
Earning Assets..........................
Securities, taxable.................. $ 19,765 $ 983 6.67% $ 19,788 $ 948 6.4%
Securities, nontaxable............... 3,428 114 4.46 3,818 127 4.4
Loans................................ 103,583 7,467 9.66 86,118 6,444 10.0
Federal funds sold................... 9,338 332 4.77 3,666 171 6.2
Nonmarketable equity securities...... 790 41 6.96 677 34 6.7
---------- ---------- ---------- ----------
Total earning assets.............. 136,904 8,937 8.75 114,067 7,724 9.0
---------- ---------- ---------- ----------
Cash and due from banks................. 2,468 3,427
Allowance for loan losses............... (1,059) (984)
Premises and equipment.................. 5,562 4,851
Other assets............................ 4,530 2,070
---------- ----------
Total assets......................... $ 148,405 $ 123,431
========== ==========
Liabilities:
Interest-Bearing Liabilities............
Interest-bearing deposits............ $ 114,697 4,342 5.08% $ 91,898 3,611 5.27%
Other borrowings........................ 13,143 580 5.92 13,436 557 5.56
---------- ---------- ---------- ---------
Total interest-bearing liabilities... 127,840 4,922 5.12 105,334 4,168 5.30
---------- ---------- ---------- ---------
Noninterest-bearing deposits............ 9,188 8,587
Accrued interest and other liabilities.. 1,185 975
Stockholders' equity.................... 10,192 8,535
---------- ----------
Total liabilities and
stockholders' equity.................... $ 148,405 $ 123,431
========== ==========
Net interest spread..................... 3.59% 3.77%
Net interest income..................... $ 4,015 $ 3,556
========== =========
Net interest margin..................... 3.93% 4.18%
20
Rate/Volume Analysis
- --------------------
Net interest income can also be analyzed in terms of the impact of
changing rates and changing volume. The following tables describe the extent to
which changes in interest rates and changes in the volume of earning assets and
interest- bearing liabilities have affected our 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:
Analysis of Changes in Net Interest Income
(Dollars in thousands)
2000 compared to 1999
Due to increase (decrease) in
Volume Rate Volume/Rate Total
-------- --------- -------------------------- -----------
Interest income:
Taxable securities........... $ (76) $ 103 $ (6) $ 21
Tax-exempt securities......... (2) (1) - (3)
Loans......................... 1,868 372 109 2,349
Federal funds sold............ 134 42 40 216
Nonmarketable equity
Securities.................... 24 (1) (1) 22
-------------- ----------------- ------------------- -------------
Total interest income...... 1,948 515 142 2,605
-------------- ---------------- ------------------ -------------
Interest expense:
Interest-bearing deposits..... 764 712 162 1,638
Other borrowings.............. 259 67 47 373
-------------- ---------------- ------------------ -------------
Total interest expense..... 1,023 779 209 $ 2,011
-------------- ---------------- ------------------ -------------
Net interest income....... $ 925 $ (264) $ (67) $ 594
============== ================ ================== =============
1999 compared to 1998
Due to increase (decrease) in
Volume Rate Volume/Rate Total
-------- --------- ----------------------- -----------
Interest income:
Taxable securities............ $ 437 $ (25) $ (14) $ 398
Tax-exempt securities......... 107 (2) (2) 103
Loans......................... 1,573 (215) (66) 1,292
Federal funds sold............ (244) (41) 25 (260)
Non marketable equity......... 8 2 1 11
-------------- ---------------- ------------------ -------------
Total interest income...... 1,881 (281) (56) 1,544
-------------- ----------------- ------------------- -------------
Interest expense:
Interest bearing deposits..... 659 (342) (58) 259
Other borrowings.............. 286 - 2 288
-------------- ---------------- ------------------ --------------
Total interest expense..... 945 (342) (56) 547
-------------- ----------------- ------------------ --------------
Net interest income........ $ 936 $ 61 $ - $ 997
============== ================ ================== ==============
September 30, 2001 compared to September 30, 2000
Due to increase (decrease) in
Volume Rate Volume/Rate Total
-------- --------- --------------------------- -----------
Interest income:
Taxable securities............ $ (1) $ 36 $ 0 $ 35
Tax-exempt securities......... (13) 0 0 (13)
Loans......................... 1,307 (236) (48) 1,023
Federal funds sold............ 265 (41) (63) 161
Non marketable equity......... 6 1 0 7
-------------- ---------------- ------------------ -------------
Total interest income...... 1,564 (240) (111) 1,213
-------------- ---------------- ------------------ -------------
Interest expense:
Interest bearing deposits..... 940 (208) (1) 731
Other borrowings.............. (17) 29 11 23
-------------- ---------------- ------------------ -------------
Total interest expense..... 923 (179) 10 754
-------------- ---------------- ------------------ -------------
Net interest income........ $ 641 $ (61) $ (121) $ 459
============== ================ ================== ==============
21
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 2000 and 1999. However, fluctuations in market interest rates
do not necessarily have a significant impact on net interest income, depending
on our 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 tables indicate 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 2000 of $48.2 million. 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 tables present our rate sensitivity at each of the time
intervals indicated as of the dates indicated and may not be indicative of our
rate-sensitivity position at other points in time.
Interest Rate Sensitivity Analysis
(Dollars in thousands)
After One Greater
Through Total Than One
December 31, 2000 Within One Three After Three Within One Year or Non
Month Months Months Year Sensitive Total
----------- ---------- ------------ ------------- ----------- -------
Assets
Earning Assets...................
Loans $ 29,257 $ 3,490 $ 9,825 $ 42,572 $ 48,624 $ 91,196
Securities.................... - - - - 20,877 20,877
Federal funds sold............ 19,870 - - 19,870 - 19,870
------------- ----------- ----------- ----------- ------------ ------------
Total earning assets....... 49,127 3,490 9,825 62,442 69,501 131,943
------------- ----------- ----------- ----------- ------------ ------------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits
Demand deposits............ 10,310 - - 10,310 - 10,310
Savings deposits........... 21,994 - - 21,994 - 21,994
Time deposits.............. 5,793 10,682 61,861 78,336 4,587 82,923
-------------- ----------- ----------- ----------- ------------ ------------
Total interest bearing
deposits................ 38,097 10,682 61,861 110,640 4,587 115,227
-------------- ----------- ----------- ----------- ------------ ------------
Federal Home Loan Bank
Advances - - - - 9,600 9,600
-------------- ----------- ----------- ----------- ------------ ------------
Total interest-bearing
liabilities................... 38,097 10,682 61,861 110,640 14,187 124,827
-------------- ----------- ----------- ----------- ------------ ------------
Period gap....................... $ 11,030 $ (7,192) $ (52,036) $ (48,198) $ 55,314
============== =========== =========== =========== ============
Cumulative gap................... $ 11,030 $ 3,838 $ (48,198) $ (48,198) $ 7,116
============== =========== =========== =========== ============
Ratio of cumulative gap to
Total earning assets............. 8.36% 2.91 % (36.53%) (36.53%) 5.39 %
22
After One Greater
Through Total Than One
Within One Three After Three Within One Year or Non
December 31, 1999 Month Months Months Year Sensitive Total
-------------- --------------- ---------------- --------------- ---------------- -------------
Assets
Earning Assets:.................
Loans $ 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 -- 8,236
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
---------- ---------- ------------ ------------ ------------ -------------
Federal Home Loan Bank
Advances 5,000 -- -- 5,000 5,000 10,000
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%
After One Greater
Through Total Than One
Within One Three After Three Within One Year or Non
September 30, 2001 Month Months Months Year Sensitive Total
-------------- --------------- ---------------- ---------------- --------------- ---------
Assets
Earning Assets:.................
Loans $ 39,108 $ 4,809 $ - $ 53,164 $ 57,756 $ 110,920
Securities................... - -- 310 310 20,242 20,552
Federal funds sold........... 12,246 -- -- 12,246 -- 12,246
---------- ---------- ------------ ----------- ----------- ------------
Total earning assets...... 51,354 4,809 9,557 65,720 77,998 143,718
---------- ---------- ------------ ----------- ----------- ------------
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits
Demand deposits........... 10,896 -- -- 10,896 -- 10,896
Savings deposits.......... 21,766 -- -- 21,766 -- 21,766
Time deposits............. 11,976 22,458 35,780 70,214 13,400 83,614
---------- ---------- ------------ ----------- ----------- ------------
Total interest-
bearing deposits....... 44,638 22,458 35,780 102,876 13,400 116,276
---------- ---------- ------------ ----------- ----------- ------------
Federal Home Loan Bank -- -- -- -- 14,600 14,600
Advances
Total interest-
bearing liabilities.... 44,638 22,458 35,780 102,876 28,000 130,876
---------- ---------- ------------ ----------- ----------- ------------
Period gap...................... $ 6,716 $ (17,649) $ (26,223) $ (37,156) $ 49,998
Cumulative gap.................. $ 6,716 $ (10,933) $ (37,156) $ (37,156) $ 12,842
Ratio of cumulative gap to
Total earning assets............ 4.67% 7.61% (25.85%) (25.85%) 8.94%
23
Provision For Loan Losses
The provision for loan losses is charged to earnings based upon our
evaluation of specific loans in our portfolio and general economic conditions
and trends in the marketplace. The 2000, 1999, and 1998 provisions for loan
losses and their related effect of increasing the allowance for loan losses are
related to growth in the loan portfolio. Please refer to the section "Loan
Portfolio" for a discussion of our evaluation of the adequacy of the allowances
for loan losses. In 2000, 1999, and 1998, the provisions for loan losses were
$271,000, $190,000, and $100,000, respectively.
For the nine months ended September 30, 2001, the provision charged
to expense was $238,000 compared to $196,000 for the nine months ended September
30, 2000. For the quarter ended September 30, 2001, the provision charged to
expense was $88,000 as compared to the $70,000 provision for the quarter ended
September 30, 2000.
Other Income
Other income was $1.2 million for the year ended December 31, 2000,
an increase of $396,000, or 50.0%, when compared with the year ended December
31, 1999. The majority of the increase was because of a $215,000 gain on the
sale of land in North Myrtle Beach. Also, service charges on deposit accounts
increased $151,000 as a result of the growth in the number of deposit accounts
generated by the new branches.
Other income was $792,000 for the year ended December 31, 1999, an
increase of $126,000, or 18.9%, when compared with the year ended December 31,
1998. The majority of the increase was in service charges on deposit accounts
which increased by $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.
Noninterest income during the nine months ended September 30, 2001
was $983,000, an increase of $277,000, or 39.2%, from the comparable period in
2000. The increase is primarily a result of an increase in service charges on
deposit accounts from $507,000 at September 30, 2000 to $645,000 at September
30, 2001, which increase corresponds to an increase in deposit accounts to
$129.5 million at September 30, 2001 as compared to $115.4 million at September
30, 2000. For the quarter ended September 30, 2001, noninterest income increased
$124,000, or 48.3%, over the same period in 2000. This increase is primarily due
to service charges on deposit accounts, which increased $48,000, or 25.8%, from
$186,000 for the quarter ended September 30, 2000 to $234,000 for the quarter
ended September 30, 2001 and $55,514 in commissions from brokerage services,
which we commenced this year.
Other Expenses
All categories of other expenses increased during 2000 due to our
growth. Salaries and employee benefits increased $529,000, or 30.8%, 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 opening of the new operations center and the purchase of a new bank
building in Homewood. Other operating expenses were $1.0 million for the year
ended December 31, 2000 compared to $912,000 for the year ended December 31,
1999.
All categories of other expenses increased during 1999 due to our
growth. 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.
Total noninterest expense for the nine months ended September 30,
2001 was $3.8 million, an increase of $755,000, or 25.2%, from $3.0 million for
the nine months ended September 30, 2000. The primary reason for the increase in
noninterest expense over the two periods was salaries and employee benefits,
which increased $489,000 over
24
the same period in 2000. This increase was largely the result of the opening of
the Socastee and Homewood branches. For the quarter ended September 30, 2001,
noninterest expense increased $265,000, or 25.8%, over the same period in 2000.
The primary component of the increase between the quarter ended September 30,
2001 and the quarter ended September 30, 2000 was in salaries and benefits,
which increased $163,000, or 27.4%.
Income Taxes
Our income tax expense for 2000 was $548,000, an increase of $24,000
from the 1999 expense of $524,000. The increase in the expense results primarily
from increased income before taxes. Our effective tax rates for the years ended
December 31, 2000 and 1999 were 34.6% and 34.5%, respectively.
Our income tax expense for 1998 was $272,000 and our effective rate for
1998 was 34.7%. The increase in the expense from 1998 to 1999 resulted primarily
from increased income before taxes.
The income tax provision for the nine months ended September 30, 2001
was $350,000 as compared to $371,000 for the same period in 2000. The effective
tax rates were 34.8% and 34.7% at September 30, 2001 and 2000, respectively. The
effective tax rates were 34.7% and 31.7% for the quarter ended September 30,
2001 and September 30, 2000, respectively.
Liquidity
Liquidity is the ability to meet current and future obligations
through liquidation or maturity of existing assets or the acquisition of
additional liabilities. We manage both assets and liabilities to achieve
appropriate levels of liquidity. Cash and federal funds sold are our 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 our principal source of secondary asset liquidity.
However, the availability of this source of funds is influenced by market
conditions. Individual and commercial deposits are our 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 us. We also had $17
million of unused lines of credit to purchase federal funds as of December 31,
2000. We believe that our liquidity sources are adequate to meet our operating
needs.
The level of liquidity is measured by the loans-to-total borrowed
funds ratio, which was at 77.0% at September 30, 2001 and 68.6% at December 31,
2000.
Securities available-for-sale, which totaled $19.8 million at
September 30, 2001, serve as a ready source of liquidity. We also have lines of
credit available with correspondent banks to purchase federal funds for periods
from one to seven days. At September 30, 2001, unused lines of credit totaled
$13.2 million.
The expansion of our 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 74.0% at the
end of 2000 compared with 79.9% at the end of 1999.
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
25
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 we are in a highly liability-sensitive position. Also, general increases
in the price of goods and services will result in increased operating expenses.
Capital Resources
We use several indicators to measure our capital strength. The most
commonly used measure is average common equity to average assets which was 6.93%
in 2000 compared to 7.98% in 1999. The change from 1999 was negatively affected
by the growth in assets outpacing the increase in equity from 2000 net income
despite the increase in equity attributable to the decrease in the fair market
value of available-for-sale securities.
Total shareholders' equity increased by $899,000, or 9.2%, from $9.8
million at December 31, 2000 to $10.7 million at September 30, 2001. This
increase is primarily attributable to net income of $658,000 and net unrealized
gain on available-for-sale securities of $287,000. In addition, we declared a
five percent stock dividend in February 2001, which was paid on March 15, 2001,
which resulted in a charge of $15,000 to retained earnings for cash paid for
fractional shares.
We 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 our financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require us 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 shareholders' 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.
We 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, 2000, 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 we believe have changed the bank's category. As set forth in the
following tables, we exceeded the risk-based and leverage ratios that we are
required to maintain in both the company and the bank as of the dates shown.
26
Regulatory Capital
(Dollars in thousands)
-------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------
2000 1999
----------------------------------- ---------------------------------
The Company
Tier 1 capital................................... $ 9,781 $ 9,499
Tier 2 capital................................... 1,018 922
------------------- ------------------
Total qualifying capital...................... $ 10,799 $ 10,421
================== ==================
Risk-adjusted total assets..........................
(including off-balance-sheet exposures).......... $ 102,494 $ 83,628
================== ==================
Tier 1 risk-based capital ratio..................... 9.54 % 11.36 %
Total risk-based capital ration..................... 10.54 % 12.46 %
Tier 1 leverage ratio............................... 7.11 % 8.69 %
December 31,
-------------------------------------------------------------------------
2000 1999
----------------------------------- ---------------------------------
The Bank
Tier 1 capital................................... $ 9,736 $ 9,476
Tier 2 capital................................... 1,018 922
------------------- ------------------
Total qualifying capital...................... $ 10,754 $ 10,398
================== ==================
Risk-adjusted total assets..........................
(including off-balance-sheet exposures).......... $ 102,453 $ 83,611
================== ==================
Tier 1 risk-based capital ratio..................... 9.50 % 11.33 %
Total risk-based capital ratio...................... 10.50 % 12.44 %
Tier 1 leverage ratio............................... 7.08 % 8.67 %
Investment Portfolio
We classify investment securities as either held-to-maturity or
available-for-sale based on our intentions and our ability to hold them until
maturity. In determining such classifications, securities that we have the
positive intent and 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 shareholders' equity on an after-tax
basis. As of December 31, 2000 and 1999, all securities were classified as
available-for-sale.
Investment securities decreased by $1.1 million, or 5.3%, from $20.9
million at December 31, 2000 to $19.8 million at September 30, 2001.
27
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, 2000 and 1999.
Carrying Value of Investment Securities
(Dollars in thousands)
-------------------------------------------------
December 31,
-------------------------------------------------
2000 1999
-------------------- ---------------------
Securities of U.S. Government Agencies and Corporations................ $ 14,304 $ 14,593
Obligations of state and local governments............................. 3,375 4,166
Mortgage-backed securities............................................. 3,198 5,133
Nonmarketable equity securities........................................ 790 560
------------------ -------------------
Total Securities.................................................... $ 21,667 $ 24,452
================= ====================
Investment Securities Portfolio Maturity Schedule
(Dollars in thousands)
December 31, 2000 Available-for-Sale
Carrying
Amount Yield (1)
------------------ -----------------------
Securities of U.S. Government agencies and corporations due:
After one year but within five years............................... $ 5,082 6.35 %
After five years but within ten years............................... 7,293 6.54
After ten years..................................................... 1,929 6.77
------------------
14,304 6.51
------------------
Obligations of states and local governments due:
After one year but within five years................................ 729 5.78
After five years but within ten years............................... 1,688 6.21
After ten years..................................................... 958 6.90
------------------
3,375 6.31
------------------
Mortgage-backed securities............................................. 3,198 6.27 %
------------------
Total $ 20,877 6.44 %
==================
(1) For tax-exempt securities, the tax equivalent yield has been
calculated using an incremental rate of 34%.
28
December 31, 1999 Available-for-Sale
Carrying
Amount Yield (1)
--------- --------
Securities of U.S. Government agencies and corporations due:
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%
===============
(1) For tax-exempt securities, the tax equivalent yield has been calculated
using an incremental rate of 34%.
Loan Portfolio
We believe that our loan portfolio is adequately diversified. There
are no foreign loans and there are no significant concentrations of loans in any
particular individuals or industry or group of related individuals or
industries.
We have experienced continued growth of our loan portfolio
throughout 2000 and 1999, resulting in an increase of $15.5 million and $19.9
million, respectively. We have 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. We intend 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 we will be able to execute our strategy or that loan demand
will continue to support growth.
Net loans increased $19.6 million, or 21.7%, during the nine month
period ended September 30, 2001. Loan demand in general continued to increase in
our market areas in the first nine months of 2001. As expected during this time
of year, agricultural loans increased $2.1 million, or 39.5%, from December 31,
2000.
Loan Portfolio Composition
(Dollars in thousands)
September 30, December 31,
2001 % 2000 % 1999 %
------------- ------------ -------------- --------- ----------- ---------
Real estate - construction
and land development.......... $ 6,399 5.77% $ 5,122 5.61% 3,983 5.25%
Real estate - other 39,567 35.67% 32,178 35.23% 26,601 35.08%
Agricultural 7,570 6.83% 5,427 5.94% 5,961 7.86%
Commercial and industrial 37,152 33.49% 30,451 33.34% 22,796 30.06%
Consumer 19,037 17.16% 17,482 19.14% 16,193 21.35%
All other loans (including overdrafts) 1,197 1.08% 669 0.74% 305 0.40%
-------- ------ ------------- ---------- ------------ ------
Total gross loans $110,922 100.00% $ 91,329 100.00% $ 75,839 100.00%
======== ============= ============
29
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 the processes of loan underwriting and loan administration.
We seek to manage credit risk through a strategy of making loans within our
primary marketplace and within our limits of expertise. Although we seek to
avoid concentrations of credit by loan type or industry through diversification,
a substantial portion of the borrowers' ability to honor the terms of their
loans is dependent on the business and economic conditions in Horry and Marion
Counties in South Carolina and Columbus County in North Carolina. Additionally,
since we consider real estate as the most desirable nonmonetary collateral, a
significant portion of our loans are collateralized by real estate; however, the
cash flow of the borrower or the business enterprise is generally considered as
the primary source of repayment. Generally, we do not consider the value of real
estate as the primary source of repayment for performing loans. We also seek to
limit total exposure to individual and affiliated borrowers. We seek to manage
risks 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.
Our loan officers and loan administration staff are charged with
monitoring our 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 our loan portfolio, we utilize several credit risk identification and
monitoring processes. We assess 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.
We adjust credit grading during the life of the loan to reflect
economic and individual changes having an impact on the borrowers' ability to
honor the terms of their commitments. We use 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.
The following table summarizes the loan maturity distribution, by type,
and related interest rate characteristics for the dates indicated:
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
(Dollars in thousands)
December 31, 2000 Over One Year
One Year or Though Five Over Five
Less Years Years Total
------------- ----------------- ------------ ---------------
Real estate - construction
and land development................ $ 3,819 $ 1,290 $ 13 $ 5,122
Real estate - other................. 7,317 21,963 2,898 32,178
Agricultural........................ 3,256 1,760 411 5,427
Commercial and industrial 12,463 16,623 1,365 30,451
Consumer............................ 4,991 12,029 462 17,482
All other loans (including overdrafts) 446 135 88 669
--------------- --------------- --------- -------------
$ 32,292 $ 53,800 $ 5,237 $ 91,329
=============== =============== ========= =============
Loans maturing after one year with:
Fixed interest rates................ $ 48,757
Floating interest rates............. 10,280
-------------
$ 59,037
=============
30
December 31, 1999 Over One Year
One Year or Though Five Over Five
Less Years Years Total
------------- --------------- ----------- ---------------
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 loans (including overdrafts) 167 13 125 305
------------- ---------- ----------- --------------
$ 20,514 $ 49,726 $ 5,599 $ 75,839
============= ========== =========== ==============
Loans maturing after one year with:
Fixed interest rates................ $ 47,499
Floating interest rates............. 7,826
--------------
$ 55,325
==============
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 our problem loan watch list are considered potentially
impaired loans. We evaluate these loans in determining whether all outstanding
principal and interest are expected to be collected. We do not consider loans to
be 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, 2000 and 1999, we had nonaccrual loans of
approximately $133,000 and $54,000, respectively, and loans that were past due
90 days or more and still accruing interest of approximately $804,000 and
$16,000, respectively, for which impairment had not been recognized. The
additional interest income, which would have been recognized into earnings if
our nonaccrual loans had been current in accordance with their original terms,
is immaterial for all years presented. We considered the amount of both
nonaccrual loans and loans past due 90 days or more in computing the allowance
for loan losses.
31
Summary of Loan Loss Experience
(Dollars in thousands)
December 31
---------------------------------------------
September 30, 2001 2000 1999
------------------------- ----------------- -----------------
Total loans outstanding at end
of period, net of unearned income....................... $ 110,920 $ 91,319 $ 75,793
================== ================ ================
Average loans outstanding, net
of unearned income..................................... $ 103,583 $ 87,180 $ 67,457
================== ================ ================
Balance of allowance for loan losses
at beginning of period................................. $ 1,019 $ 922 $ 880
Loan losses:
Real estate.......................................... 1 3 -
Commercial........................................... 44 125 126
Consumer and credit card............................. 168 62 36
------------------ -------------- ----------------
Total loan losses.................................... 213 190 162
Recoveries of loans previously charged-off.............. 17 16 14
------------------ -------------- ----------------
Net charge-offs...................................... 196 174 148
------------------ -------------- ----------------
Provisions charged to operations........................ 238 271 190
------------------ -------------- ----------------
Balance of allowance for loan losses at end of period...
$ 1,061 $ 1,019 $ 922
------------------ -------------- ----------------
Ratios:
Net charge-offs to average loans outstanding............ 0.19% 0.20% 0.22%
Net charge-offs to loans at end of period............... 0.18% 0.19% 0.20%
Allowance for loan losses to average loans.............. 1.02% 1.17% 1.37%
Allowance for loan losses to loans at end of period..... 0.96% 1.12% 1.22%
Net charge-offs to allowance for loan losses............ 18.47% 17.08% 16.05%
Net charge-offs to provisions for loan losses........... 82.35% 64.21% 77.89%
We have established an allowance for loan losses through a provision
for loan losses charged to expense. The allowance represents an amount which we
believe will be adequate to absorb probable losses on existing loans that may
become uncollectible. We do not allocate specific percentages of our allowance
for loan losses to the various categories of loans but evaluate the adequacy on
an overall portfolio basis utilizing several factors. The primary factor that we
consider is our credit risk grading system, which we apply to each loan. We also
consider the amount of both nonaccrual loans and loans past due 90 days or more.
We also consider historical loan loss experience, the size of our lending
portfolio, and current and anticipated economic conditions in determining the
provision for loan losses. We adjust the amount of the allowance periodically
based in changing circumstances. Recognized losses are charged to the allowance
for loan losses, while subsequent recoveries are added to the allowance.
Based on our judgments, evaluation, and analysis of the loan
portfolio, we consider the allowances for loan losses adequate and we expect
charge-offs for the fiscal year ending December 31, 2002 to be consistent with
our historical experience. However, there is always a risk that future charges
to the allowance for loan losses or provisions for loan losses may be
significant to a particular accounting period.
32
Average Daily Deposits
The following tables summarize our average daily deposits at the
dates indicated. These totals include certificates of deposit $100,000 and over
which at December 31, 2000 totaled $26.4 million. Of this total, scheduled
maturities within three months were $6.4 million; within three to six months
$10.9 million; within six to twelve months $8.0 million; and $1.1 million
maturing thereafter.
At September 30, 2001, total deposits decreased by $6.0 million, or
4.8%, from December 31, 2000. Expressed in percentages, noninterest-bearing
deposits increased 59.6% and interest-bearing deposits increased 0.9%.
Deposits
(Dollars in thousands)
December 31, 2000 December 31, 1999
----------------- ------------------
Average Average Rate Average Average Rate
Amount Paid Amount Paid
------ ---- ------ ----
Noninterest-bearing demand
deposits................................. $ 8,308 -- % $ 7,385 -- %
Interest-bearing demand deposits......... 10,078 1.28 8,496 1.02
Money market savings account............. 18,392 5.55 14,517 4.37
Other savings account.................... 2,281 2.50 2,145 2.19
Certificates of deposits................. 64,739 5.95 53,333 5.05
----------------- ------------------
Total deposits........................... $ 103,798 $ 85,876
================= ==================
September 30, 2001
------------------
Average Average Rate
Amount Paid
------ -----------
Noninterest-bearing demand............... $ 9,188 -- %
Interest-bearing transaction documents... 10,897 0.96
Money market savings account............. 18,486 3.84
Other savings account.................... 2,592 1.91
Certificates of deposits................. 82,722 5.99
-----------------
Total deposits........................... $ 123,885
=================
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 periods indicated. Since our inception, we have
not paid cash dividends.
2000 1999
---------- --------
Return on average assets.................... 0.82 % 0.97 %
Return on average equity.................... 11.85 % 12.20 %
Equity to assets ratio...................... 6.93 % 7.98 %
Accounting, Financial Reporting And Regulatory Issues
In June 1998, the FASB issued Statement (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, effective for fiscal years
beginning after June 15, 2000. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities, including
certain derivative instruments embedded in other contracts, and requires that an
entity recognize all derivatives as assets or liabilities in the balance sheet
and measure them at fair value. The accounting for changes in the fair value of
a derivative depends on how the derivative is used
33
and how the derivative is designated. We adopted SFAS No. 133 on July 1, 2000.
The adoption of SFAS No. 133 did not have a material impact on the consolidated
financial statements.
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. We cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect us.
34
BUSINESS
General Overview
HCSB Financial Corporation was incorporated as a South Carolina
corporation on June 10, 1999 to serve as the holding company for Horry County
State Bank. The bank commenced operations on January 4, 1988. The bank is a
state-chartered commercial bank operating from eight offices located in Horry
County and servicing Horry County in South Carolina and Columbus County in North
Carolina. We have added five of our eight offices after 1996. As a result of
this expansion, we have grown from approximately $49.4 million in total assets,
$35.6 million in loans, $42.9 million in deposits, and $5.5 million in
shareholders' equity at December 31, 1996, to approximately $155.6 million in
total assets, $110.9 million in loans, $129.5 million in deposits, and $10.7
million in shareholders' equity at September 30, 2001. We offer a full range of
deposit services for individuals and businesses. Deposit products include
checking accounts, savings accounts, certificates of deposit, money market
accounts, and IRAs.
Operating and Growth Strategy
Our goal is to be the leading community bank in our market area. We
intend to achieve this goal chiefly by providing personalized service to our
customers. Other strategies that we will use to support our goal are hiring,
developing, and retaining high caliber and motivated employees, focusing each of
our branches on the unique needs and cultures of the community in which it is
located, maintaining high asset quality, increasing asset size through internal
growth and branch expansion, and offering our customers a breadth of products
competitive with those offered by much larger institutions. These goals are
intended to build long-term shareholder value.
o Personalized Service. We view banking as a service industry in
which personal relationships can provide a competitive
advantage. This paradigm is captured in our marketing tagline
"It's the little things that make a little bank . . . BIG!" We
strive to be "BIG" (important) to our customers by doing
"little" things like identifying our customers' needs and
promoting products to satisfy them, knowing our customers by
name, and providing our products with superior levels of quality
and service. We seek customers who prefer to conduct business
with a locally owned and managed bank that demonstrates an
active interest in their business and personal financial
affairs. We believe that by consistently providing high levels
of service to customers who value that service, we develop and
strengthen relationships that provide a competitive advantage.
o Motivated Employees. We believe that the key to our success lies
with our employees, because it is through our employees that we
are able to provide our customers with the high level of service
and attention that they expect and deserve. To this end, we hire
people who are familiar with their community and are committed
to providing a superior level of banking service to our
customers. By selecting only knowledgeable and committed
employees, we believe we can provide an unsurpassed level of
customer service and satisfaction. We strive to develop, sustain
the motivation of, and retain our employees through training,
personal attention, recognition, and competitive compensation.
We encourage and equip each employee to focus on the individual
needs of our customers and to deliver the specific products and
services that will best help these customers achieve their
financial goals.
o Community Focus. We approach banking with a community focus,
particularly at the branch level. We operate each branch as an
independent business unit and encourage our branch managers to
promote those products that best meet the need of their customer
base. This strategy enables our branches to serve diverse
populations and economies effectively. We support our branches
by supporting the economic development of our communities and by
encouraging our employees to be active in community affairs. We
have located our existing offices, and plan to locate proposed
offices, in communities in which we believe we can develop
strong relationships. We favor growth areas and areas in which
there are opportunities to differentiate ourselves by providing
customers with superior service.
o High Asset Quality. We place a great deal of emphasis on
maintaining high asset quality and believe that the outstanding
asset quality experienced to date is principally due to the
closeness of our lenders, senior officers, and directors to our
customers and their significant knowledge of the communities in
which they reside. Since December 31, 1996 through September 30,
2001, we have had an average net charge- off ratio of 0.20%. We
intend to continue to emphasize high asset quality.
35
o Internal Growth, Branch Expansion. We have grown significantly
since December 31, 1996. We intend to use the proceeds of this
offering to support our continued growth, including funding
additional loans, the opening two additional branch offices in
our South Carolina service area, establishing a new bank in our
North Carolina service area, or some combination thereof during
the next 18 to 24 months. Although growth through branch
expansion is generally less expensive than growth by opening a
new bank, North Carolina and federal law prohibits us from
establishing branches in North Carolina without first
establishing or acquiring a bank in North Carolina. Therefore,
in order to grow by enhancing our presence in North Carolina, we
will need to acquire an existing North Carolina bank or to open
a new bank. Because we have found no suitable acquisition
candidates and because we believe we can provide better service
to our North Carolina customers through a new bank, we currently
intend to expand into North Carolina by forming rather than
acquiring a North Carolina bank. Following the offering, we will
continue to focus on acquiring market share, particularly from
large Southeastern regional bank holding companies, by
emphasizing our local management and decision-making and
personal services.
o Broad Range of Products and Services. We strive to provide our
customers with the breadth of products and services comparable
to a regional bank, while maintaining the quick response and
personal service of a locally owned and managed bank. In
addition to offering a full range of deposit services and
commercial and personal loans, we offer products such as
mortgage loan originations, accounts receivable financing, and
investment products and brokerage services through a third party
arrangement.
Marketing Strategy
Most of the banks in Horry County in South Carolina and Brunswick
and Columbus counties in North Carolina are now local branches of large regional
banks. Although size gives the larger banks certain advantages in competing for
business from large corporations, including higher lending limits and the
ability to offer services in other areas of South Carolina and Horry County in
South Carolina and Brunswick and Columbus counties in North Carolina, we believe
that there is a void in the community banking market in Brunswick and Columbus
counties in North Carolina which we can successfully fill by forming a new bank.
We also believe that the Horry County market will continue to grow, particularly
along the Atlantic coast. We intend to continue to expand our branch network to
take advantage of opportunities caused by this growth. We generally do not
attempt to compete for the banking relationships of large corporations, but
concentrate our efforts on small- to medium-sized businesses and on individuals.
Banking Services
We offer a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts, and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to our
principal market area at rates competitive to those offered in our market area.
In addition, we offer certain retirement account services, such as Individual
Retirement Accounts (IRAs). All deposit accounts are insured by the FDIC up to
the maximum amount allowed by law (generally, $100,000 per depositor, subject to
aggregation rules). We solicit these accounts from individuals, businesses,
associations and organizations, and governmental authorities.
Lending Activities
General. We emphasize a range of lending services, including real
estate, commercial, agricultural and consumer loans, to individuals and small to
medium-sized businesses and professional concerns that are located in or conduct
a substantial portion of their business in our market area. The characteristics
of our loan portfolio and our underwriting procedures, collateral types, risks,
approval process and lending limits are discussed below. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Loan Losses" on page 22 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Loan Portfolio on page 27.
36
Real Estate Loans. The primary component of our loan portfolio is
real estate mortgage loans, which make up approximately 35.68% of our loan
portfolio. These loans are secured generally by first or second mortgages on
residential or commercial property. These loans consist of commercial real
estate loans, construction and development loans, and residential real estate
loans (but exclude home equity loans, which are classified as consumer loans).
Commercial Loans. Approximately 33.49% of our loan portfolio
consists of commercial loans. Commercial loans consist of secured and unsecured
loans, lines of credit, and working capital loans. We make these loans to
various types of businesses. Included in this category are loans to purchase
equipment, finance accounts receivable or inventory, and loans made for working
capital purposes.
Consumer Loans. Consumer loans make up approximately 18.24% of our
loan portfolio. These are loans made to individuals for personal and household
purposes, such as secured and unsecured installment and term loans, home equity
loans and lines of credit, and revolving lines of credit such as overdraft
protection. Automobiles and small recreational vehicles are pledged as security
for their purchase.
Agricultural Loans. Approximately 6.82% of our loan portfolio
consists of agricultural loans. These are loans made to individuals and
businesses for agricultural purposes, including loans to finance crop production
and livestock operating expenses, to purchase farm equipment, and to store
crops. These loans are secured generally by liens on growing crops and farm
equipment. Also included in this category are loans to agri-businesses, which
are substantially similar to commercial loans, as discussed above.
Construction and Development Loans. The remaining 5.77% of our loan
portfolio is composed of consumer and commercial real estate construction and
commercial development loans. These loans are secured by the real estate for
which construction is planned and, in many cases, by supplementary collateral.
Underwriting Procedures, Collateral, and Risk. We use our
established credit policies and procedures when underwriting each type of loan.
Although there are minor variances in the characteristics and criteria for each
loan type, which may require additional underwriting procedures, we generally
evaluate borrowers using the following defined criteria:
o Character - we evaluate whether the borrower has sound character
and integrity by examining the borrower's history.
o Capital - we evaluate the borrower's overall financial strength,
as well as the equity investment in the asset being financed.
o Collateral - we evaluate whether the collateral is adequate from the
standpoint of quality, marketability, value and income potential.
o Capacity - we evaluate the borrower's ability to service the debt.
o Conditions - we underwrite the credit in light of the effects of
external factors, such as economic conditions and industry trends.
It is our practice to obtain collateral for most loans to help
mitigate the risk associated with lending. We generally limit our loan-to-value
ratio to 80%. For example, we obtain a security interest in real estate for
loans secured by real estate, including construction and development loans, and
other commercial loans. For commercial loans, we typically obtain security
interests in equipment and other company assets. For agricultural loans, we
typically obtain a security interest in growing crops, farm equipment, or real
estate. For consumer loans used to purchase vehicles, we obtain appropriate
title documentation. For secured loans that are not associated with real estate,
or for which the mortgaged real estate does not provide an acceptable
loan-to-value ratio, we typically obtain other available collateral such as
stocks or savings accounts.
Every loan carries a credit risk, simply defined as the potential
that the borrower will not be willing or able to repay the debt. While this risk
is common to all loan types, each type of loan may carry risks that distinguish
it from other loan types. The following paragraphs discuss certain risks that
are associated with each of our loan types.
37
Each real estate loans is sensitive to fluctuations in the value of
the real estate that secures that loan. Certain types of real estate loans have
specific risk characteristics that vary according to the type of collateral that
secures the loan, the terms of the loan, and the repayment sources for the loan.
Commercial real estate loans have risk that the primary source of repayment will
be insufficient to service the debt. Construction and development real estate
loans generally carry a higher degree of risk than long term financing of
existing properties. These projects are usually dependent on the completion of
the project on schedule and within cost estimates and on the timely sale of the
property. Inferior or improper construction techniques, changes in economic
conditions during the construction and marketing period, and rising interest
rates which may slow the sale of the property are all risks unique to this type
of loan. Residential mortgage loans, in contrast to commercial real estate
loans, generally have longer terms and may have fixed or adjustable interest
rates.
Commercial loans primarily have risk that the primary source of
repayment will be insufficient to service the debt. Often this occurs as the
result of changes in economic conditions in the location or industry in which
the borrower operates which impact cash flow or collateral value. Consumer
loans, other than home equity loan products, are generally considered to have
more risk than loans to individuals secured by first or second mortgages on real
estate due to dependence on the borrower's employment status as the sole source
of repayment. Agricultural loans carry the risk of crop failure, which adversely
impacts both the borrower's ability to repay the loan and the value of the
collateral.
By following defined underwriting criteria as noted above, we can
help to reduce these risks. Additionally we help to reduce the risk that the
underlying collateral may not be sufficient to pay the outstanding balance by
using appraisals or taking other steps to determine that the value of the
collateral is adequate, and lending amounts based upon lower loan-to-value
ratios. We also control risks by reducing concentration of our loan portfolio in
any one type of loan.
Loan Approval and Review. Our loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds that individual officer's lending authority, the
loan request is considered by an officer with a higher lending limit. Any loan
in excess of this lending limit is approved by the directors' loan committee. We
do not make any loans to any of our directors or executive officers unless the
loan is approved by a three-fourth's vote of the board of directors of the bank
and is made on terms not more favorable to such person than would be available
to a person not affiliated with us. Aggregate credit in excess of 10% of the
bank's aggregate capital, surplus, retained earnings, and reserve for loan
losses must be approved by a three-fourth's vote of our bank's board of
directors.
Lending Limits. Our lending activities are subject to a variety of
lending limits imposed by federal law. While differing limits apply to certain
loan types or borrowers, in general we are subject to a loan-to-one-borrower
limit. These limits increase or decrease as our capital increases or decreases.
Unless we sell participations in loans to other financial institutions, we are
not able to meet all of the lending needs of loan customers requiring aggregate
extensions of credit above these limits.
Other Banking and Related Services
Other bank services which are in place or planned include cash
management services, safe deposit boxes, travelers checks, direct deposit of
payroll and social security checks, and automatic drafts for various accounts.
We are associated with a shared network of automated teller machines that may be
used by our customers throughout South Carolina and other regions. One of our
non-executive officers is a registered representative of UVEST and effects
transactions in securities and other non-deposit investment products. We also
offer MasterCard and VISA credit card services through a correspondent bank as
an agent for the bank. We continue to seek and evaluate opportunities to offer
additional financial services to our customers.
38
Location and Service Area
We engage in a general commercial and retail banking business,
emphasizing the needs of small- to medium-sized businesses, professional
concerns, farmers, and individuals. Our primary service area presently
encompasses the northern portion of Horry County, South Carolina, the Conway
area and the Socastee area of Myrtle Beach, South Carolina as well as the
southern portion of Columbus County, North Carolina, most notably including the
Town of Tabor City and surrounding areas. We have offices located in the
following South Carolina communities: Conway, Green Sea, Little River, Loris,
and Myrtle Beach.
We intend to continue to expand in Horry County because we believe
that its economy will continue to grow and provide us with a favorable business
climate. Horry County is located on the Atlantic coast of the state of South
Carolina. Loris, South Carolina is located within Horry County. According to
1999 U.S. Census data, the population of Horry County increased by nearly 24%,
from 144,053 in 1990 to an estimated 178,550 in 1999, and is projected to reach
202,500 in 2005 and 225,800 in 2010. According to the 1998 South Carolina
Statistical Abstract, Horry County's per capita income rose 17.6% from $19,626
in 1995 to $23,088 in 1998, while median family income rose 14.8% from $32,500
to $37,300 for the same period. The principal component of the economy of Horry
County is vacation, sport, and entertainment tourism, with vital agricultural,
small business, professional services, and industrial sectors. In recent years,
both The Wall Street Journal and Money magazine rated the Grand Strand, which
largely consists of the eastern coastline of Horry County, as one of the
nation's top retirement locations.
We intend to look for opportunities to branch further in North
Myrtle Beach, Myrtle Beach and the South Strand areas of Surfside Beach, Garden
City Beach and Murrell's Inlet as well as in Carolina Forest. With the
additional new roads in these areas, such as S.C. Hwy. 22 (Conway Bypass) and
the Carolina Bays Parkway, and the construction of several bridges across the
Intracoastal Waterway, these areas are all projected to experience continued
growth in population.
We intend to expand our market area into Brunswick County, North
Carolina and further develop our market in Columbus County, North Carolina by
forming a North Carolina bank and locating offices in Shalotte and Tabor City.
We believe that the extension of our market into North Carolina is a logical
step for us because of the geographical proximity of Columbus and Brunswick
counties to our current service area, the economic similarities between Columbus
and Brunswick counties and Horry County, and our perception of an opportunity
for a strong community oriented bank with the flexibility to adapt its services
and policies to reflect the needs of the local communities.
Columbus and Brunswick counties form the northeastern border of
Horry County, which is also the border between North Carolina and South
Carolina, from the Atlantic coastline to the Little Pee Dee River. Through our
North Carolina bank, we would continue to be an avid supporter of the credit
services needs of farmers and agribusiness entities. We would also provide an
alternative for deposit, credit and nondeposit services to small to medium-sized
businesses and families that are often not the primary target market of the
large regional and national banks.
We have been preparing to expand into North Carolina since 1997,
when we purchased a lot in Tabor City in anticipation of establishing a branch
office as authorized by federal interstate branching legislation (the
Reigle-Neal Act) and action by the North Carolina legislature. The North
Carolina legislature rescinded its action that permitted interstate branching
after we had committed to purchase the lot, which we purchased and continue to
own. In addition to holding the lot, we have continued to maintain our ties to
Columbus County through relationships that we formed and through our branch
office located along the state line adjacent to the corporate limits of Tabor
City.
After 1999, when the North Carolina legislature again failed to
permit interstate branching, we began planning to form or acquire a bank in
North Carolina. We have not been able to locate a suitable bank to acquire.
Therefore, we have held discussions with community leaders in Columbus and
Brunswick counties and North Carolina banking officials regarding the formation
of a bank chartered in North Carolina. North Carolina will not act on our
application to form a state-chartered bank until we have raised at least $3.0
million, which represents one-half of the capital we believe to be sufficient
for its formation. We intend to form a North Carolina bank upon receiving
approximately $9.0 million in net
39
proceeds from this offering, of which approximately $6.0 million will be used to
capitalize the bank. See "Use of Proceeds" on page 10.
Like that of our current market area, the economy of Brunswick and
Columbus counties consists of a blend of tourism, agriculture, small business,
professional services and industry. Brunswick County, the southernmost county in
North Carolina, is also one of North Carolina's fastest growing areas. Brunswick
County's population is expected to double between 1990 and 2010; having already
grown 43.5% from 1990 to 2000, to 73,143, while North Carolina's population as a
whole grew 21.4%. A vast majority of this increase is due to retirees taking up
residence in Brunswick County. International Paper has unveiled plans for a new
Brunswick County development, Brunswick Forest, which will include 8,035
single-family homes, 1,280 condominiums, and 800 assisted living units.
As is the case with the Grand Strand area of South Carolina to its
south, tourism and recreation is important to the economy of Brunswick County.
Between 1998 and 1999, spending by out-of-state tourists grew 10.8%. In addition
to tranquil beach communities, Brunswick County also boasts 21 championship golf
courses, including Rivers Edge which was featured in the May 2000 issue of Golf
Magazine. Rivers Edge was also rated one of the top 30 communities in the South
in a recent issue of Living Southern Style Magazine. Fishing is also a popular
past time with six area piers available. Area museums include Coastal Museum of
North Carolina in Ocean Isle Beach and the North Carolina Aquarium. Another town
in Brunswick County, Calabash, the "Seafood Capital of the World," has over 22
seafood restaurants and hosts more than one million dinners per year. Shalotte,
where we intend to locate the main office of the North Carolina bank, is the
commercial hub of the South Brunswick Islands area.
There are approximately 1,700 business establishments in Brunswick
County. The workforce is 24% retail, 19% service, 18% government, and 12%
manufacturing. Some of the largest manufacturers include DuPont, Archer Daniels
Midland Co, and SL Outer Banks.
Columbus County is North Carolina's third largest county in land
area. As is the case with the inland portions of Horry County, agriculture is
the primary industry in Columbus County. Tobacco, sweet potatoes, corn,
soybeans, and pork are important to the local economy. There are approximately
1,200 nonfarm business establishments in Columbus County, the most significant
segment of which is retail stores. Columbus County also supports paper
manufacturing, with International Paper, which employs approximately 1,100
people, being the largest industrial operation and employer in the county.
Despite its agricultural, industrial and retail economy, Columbus
County's rank for economic development has continued to increase. Most recently,
Columbus County ranked the highest of all southeastern North Carolina counties
in a composite made up of factors such as ability to create jobs, ability to
earn adequate income, ability to keep the local labor force employed, ability to
attract income from other regions, and an ability to increase the standard of
living of its residents.
Competition
The banking business is highly competitive. We compete with other
commercial banks, savings and loan associations, credit unions, and money market
mutual funds operating in our service area and elsewhere. As of June 2001, there
were seventeen commercial banks and three savings banks operating in Horry
County. We believe that our community bank focus, with our emphasis on service
to small businesses, individuals, and professional concerns, gives us an
advantage in this market. Nevertheless, a number of these competitors are well
established in our service area. Most of them have substantially greater
resources and lending limits than the bank and offer certain services, such as
extensive and established branch networks and trust services, that we do not
provide. As a result of these competitive factors, we may have to pay higher
rates of interest to attract deposits.
40
The following table reflects our market share of deposits as of June
30, 2000 and 1999 in the Horry County service area (based on figures reported by
the financial institutions to the FDIC, with the numbers in parentheses
representing the number of branches, if more than one, of each financial
institution in the relevant market).
Horry County Market
June 30,
2000 versus 1999
June 30, 2000 June 30, 1999 Increase (decrease)
----------------------------- ----------------------------- ---------------------------
Percent of Percent of
Deposits Market Deposits Market Amount Percent
----------- -------------- ---------- ----------- ------------ ------------
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Horry County State Bank..................... $ 102,238 3.63% $ 91,651 3.42% $ 10,587 11.55%
- ----------------------------------------------------------------------------------------------------------------------------------
Conway National Bank........................ 382,737 13.59% 388,787 14.49% (6,050) (1.56%)
Coastal Federal Savings Bank................ 376,289 13.36% 343,628 12.81% 32,661 9.50%
Wachovia Bank, National
Association................................. 334,253 11.87% 355,066 13.24% (20,813) (5.86%)
Anchor Bank*................................ 320,768 11.39% 310,334 11.57% 10,434 3.36%
Bank of America, National
Association................................. 261,462 9.28% ___ ___ 261,462 n/a
Branch Banking and Trust Company of South
Carolina.................................... 235,137 8.35% 202,889 7.56% 32,248 15.89%
National Bank of South Carolina............. 192,699 6.84% 182,209 6.79% 10,490 5.76%
Peoples Federal Savings and
Loan Association of South
Carolina.................................... 189,271 6.72% 193,748 7.22% (4,477) (2.31%)
Carolina First Bank*........................ 161,672 5.74% 135,945 5.07% 25,727 18.92%
First Citizens Bank and Trust
Company of South Carolina................... 70,974 2.52% 64,411 2.40% 6,563 10.19%
Beach First National Bank................... 48,171 1.71% 33,185 1.24% 14,986 45.16%
First Palmetto Savings Bank................. 39,620 1.41% 27,137 1.01% 12,483 46.00%
First Union National Bank................... 38,464 1.37% 29,602 1.10% 8,862 29.94%
Anderson Brothers Bank...................... 33,259 1.18% 29,364 1.09% 3,895 13.26%
Centura Bank................................ 13,095 0.46% 11,226 0.42% 1,869 16.65%
Plantation Federal Savings Bank ............ 8,406 0.30% __ __ 8,406 n/a
Sandhills Bank.............................. 7,981 0.28% __ __ 7,981 n/a
--------- --------- ------------ ------- --------- -----------
$ 2,816,496 100.00% $ 2,399,182 100.00% $ 417,314 17.40%
========= ========= ============ ======= ========= ===========
-------------------------------
*Merged together, June 6, 2000
Legal Proceedings
In the ordinary course of operations, we are a party to various
legal proceedings. Our management does not believe that there is any pending or
threatened proceeding against us which, if determined adversely, would have a
material effect on our business, results of operations, or financial position.
41
SUPERVISION AND REGULATION
Both our company and our bank are subject to extensive state and
federal banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight of virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summary is qualified by
reference to the statutory and regulatory provisions discussed below.
Significant changes to the regulatory structure of the financial services
industry were enacted in 1999 and additional changes have been proposed. From
time to time other changes are proposed to laws and the policies of various
regulatory authorities affecting the Banking industry, and these changes could
have a material effect on our operations, business, and prospects. We cannot
predict the effect that fiscal or monetary policies, economic control, or new
federal or state legislation may have on our business and earnings in the
future.
Gramm-Leach-Bliley Act
In November 1999, the Gramm-Leach-Bliley Act, previously known as
the Financial Services Modernization Act of 1999, was signed into law. 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 permits bank 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, in part, 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 we face 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 us.
The Gramm-Leach-Bliley Act also contains provisions regarding
consumer privacy. These provisions require financial institutions to disclose
their policy for collecting and protecting confidential information. Customers
generally may prevent financial institutions from sharing personal financial
information with nonaffiliated third parties except for third parties that
market an institution's own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing, or
other marketing to the consumer.
HCSB Financial Corporation
Because it owns the outstanding capital stock of our bank, our
holding company is a bank holding company under the federal Bank Holding Company
Act of 1956 and the South Carolina Banking and Branching Efficiency Act.
The Bank Holding Company Act. Under the Bank Holding Company Act,
the company is subject to periodic examination by the Federal Reserve and
required to file periodic reports of its operations and any additional
information that the Federal Reserve may require. Our activities at the bank and
holding company level are limited to:
o banking and managing or controlling banks;
o furnishing services to or performing services for its
subsidiaries; and
o engaging in other activities that the Federal
Reserve determines to be so closely related to banking and
managing or controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited
exceptions, the Bank Holding Company Act requires every bank holding company to
obtain the prior approval of the Federal Reserve before:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting
shares of any bank if after the acquisition it would own or control
more than 5% of the voting shares of such bank (unless it already
owns or controls the majority of such shares); or
o merging or consolidating with another bank holding company.
42
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with regulations
thereunder, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. The
company's common stock is registered under the Securities Exchange Act of 1934.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the Bank Holding Company Act, a bank holding company is
generally prohibited from engaging in, or acquiring direct or indirect control
of more than 5% of the voting shares of any company engaged in nonbanking
activities unless the Federal Reserve Board, by order or regulation, has found
those activities to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the activities that the
Federal Reserve Board has determined by regulation to be proper incidents to the
business of a bank holding company include:
o making or servicing loans and certain types of leases;
o engaging in certain insurance and discount brokerage activities;
o performing certain data processing services;
o acting in certain circumstances as a fiduciary or investment or
financial adviser;
o owning savings associations; and
o making investments in certain corporations or projects designed
primarily to promote community welfare.
The Federal Reserve Board imposes certain capital requirements on
the company under the Bank Holding Company Act, including a minimum leverage
ratio and a minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Regulations." Subject to its
capital requirements and certain other restrictions, the company is able to
borrow money to make a capital contribution to the bank, and these loans may be
repaid from dividends paid from the bank to the company. Our ability to pay
dividends is subject to regulatory restrictions as described below in "People's
Community Bank of South Carolina - Dividends." The company is also able to raise
capital for contribution to the bank by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal
Reserve Board policy, the company is expected to act as a source of financial
strength to the bank and to commit resources to support the bank in
circumstances in which the company might not otherwise do so. Under the Bank
Holding Company Act, the Federal Reserve Board may require a bank holding
company to terminate any activity or relinquish control of a nonbank subsidiary,
other than a nonbank subsidiary of a bank, upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the
bank's holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition.
South Carolina State Regulation. As a bank holding company
registered under the South Carolina Banking and Branching Efficiency Act, we are
subject to limitations on sale or merger and to regulation by the South Carolina
Board of Financial Institutions. We must receive the Board's approval prior to
engaging in the acquisition of banking or nonbanking institutions or assets, and
we must file periodic reports with respect to our financial condition and
operations, management, and intercompany relationships between the company and
its subsidiaries.
Horry County State Bank
The bank operates as a South Carolina state chartered bank and is
subject to examination by the South Carolina Board of Financial Institutions.
Deposits in the bank are insured by the FDIC up to a maximum amount, which is
generally $100,000 per depositor subject to aggregation rules.
43
The South Carolina Board of Financial Institutions and the FDIC
regulate or monitor virtually all areas of the bank's operations, including:
o security devices and procedures;
o adequacy of capitalization and loss reserves;
o loans;
o investments;
o borrowings;
o deposits;
o mergers;
o issuances of securities;
o payment of dividends;
o interest rates payable on deposits;
o interest rates or fees chargeable on loans;
o establishment of branches;
o corporate reorganizations;
o maintenance of books and records; and
o adequacy of staff training to carry on safe lending and
deposit gathering practices.
The South Carolina Board of Financial Institutions requires the bank
to maintain specified capital ratios and imposes limitations on the bank's
aggregate investment in real estate, bank premises, and furniture and fixtures.
The FDIC requires the bank to prepare quarterly reports on the bank's financial
condition and to conduct an annual audit of its financial affairs in compliance
with its minimum standards and procedures.
Under the FDIC Improvement Act, all insured institutions must
undergo regular on site examinations by their appropriate banking agency. The
cost of examinations of insured depository institutions and any affiliates may
be assessed by the appropriate agency against each institution or affiliate as
it deems necessary or appropriate. Insured institutions are required to submit
annual reports to the FDIC, their federal regulatory agency, and their state
supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop
a method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. The FDIC
Improvement Act also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating, among other things, to the
following:
o internal controls;
o information systems and audit systems;
o loan documentation;
o credit underwriting;
o interest rate risk exposure; and
o asset quality.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund and Savings Association Insurance Fund are
maintained for commercial banks and savings associations with insurance premiums
from the industry used to offset losses from insurance payouts when banks and
thrifts fail. In 1993, the FDIC adopted a rule which establishes a risk-based
deposit insurance premium system for all insured depository institutions. Under
this system, until mid-1995 depository institutions paid to Bank Insurance Fund
or Savings Association Insurance Fund from $0.23 to $0.31 per $100 of insured
deposits depending on its capital levels and risk profile, as determined by its
primary federal regulator on a semiannual basis. Once the Bank Insurance Fund
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually eliminating premiums for
well-capitalized banks, with a minimum semiannual assessment of $1,000. However,
in 1996 Congress enacted the Deposit Insurance Funds Act of 1996, which
eliminated even this minimum assessment. It also separated the Financial
Corporation assessment to service the interest
44
on its bond obligations. The amount assessed on individual institutions by the
Financial Corporation assessment is in addition to the amount paid for deposit
insurance according to the risk-related assessment rate schedule. Increases in
deposit insurance premiums or changes in risk classification will increase the
bank's cost of funds, and we may not be able to pass these costs on to our
customers.
Transactions with Affiliates and Insiders. The bank is subject to
the provisions of Section 23A of the Federal Reserve Act, which places limits on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. The
aggregate of all covered transactions is limited in amount, as to any one
affiliate, to 10% of the bank's capital and surplus and, as to all affiliates
combined, to 20% of the bank's capital and surplus. Furthermore, within the
foregoing limitations as to amount, each covered transaction must meet specified
collateral requirements. Compliance is also required with certain provisions
designed to avoid the taking of low quality assets.
The bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibits an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies. The bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Dividends. The bank is subject to regulatory restrictions on the
payment of dividends, including a prohibition of payment of dividends from its
capital. All dividends must be paid out of the undivided profits then on hand,
after deducting expenses, including losses and bad debts. The bank is authorized
to pay cash dividends up to 100% of net income in any calendar year without
obtaining the prior approval of the South Carolina Board of Financial
Institutions provided that the bank received a composite rating of one or two at
the last federal or state regulatory examination. The bank must obtain approval
from the South Carolina Board of Financial Institutions prior to the payment of
any other cash dividends. In addition, under the FDIC Improvement Act, the bank
may not pay a dividend if, after paying the dividend, the bank would be
undercapitalized. See "Capital Regulations" below.
Branching. Under current South Carolina law, we may open bank
branch offices throughout South Carolina with the prior approval of the South
Carolina Board of Financial Institutions. In addition, with prior regulatory
approval, the bank may acquire existing banking operations in South Carolina.
Furthermore, federal legislation generally permits interstate branching by
authorizing out-of-state acquisitions by bank holding companies, interstate
branching by banks if allowed by state law, interstate merging by banks, and de
novo branching by banks if allowed by state law. However, North Carolina does
not permit de novo branching by South Carolina banks.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, a financial institution's primary federal regulator
(this is the FDIC for our bank) shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on the bank.
Other Regulations. Interest and other charges collected or
contracted for by the bank are subject to state usury laws and federal laws
concerning interest rates. The bank's loan operations are also subject to
federal laws applicable to credit transactions, such as:
o the federal Truth-In-Lending Act, governing disclosures of
credit terms to consumer borrowers;
o the Home Mortgage Disclosure Act of 1975,
requiring financial institutions to provide information to
enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves;
45
o the Equal Credit Opportunity Act, prohibiting discrimination
on the basis of race, creed or other prohibited factors in
extending credit;
o the Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
o the Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection
agencies; and
o the rules and regulations of the various federal agencies
charged with the responsibility of implementing such federal
laws.
The deposit operations of the bank also are subject to:
o the Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative
subpoenas of financial records; and
o the Electronic Funds Transfer Act and Regulation E
issued by the Federal Reserve Board to implement that act,
which governs automatic deposits to and withdrawals from
deposit accounts and customers' rights and liabilities arising
from the use of automated teller machines and other electronic
banking services.
Capital Regulations. The federal bank regulatory authorities have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies and account
for off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios in excess of the minimums. We have not
received any notice indicating that either the company or the bank is subject to
higher capital requirements. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1
capital includes common shareholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of consolidated subsidiaries,
but excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred stock
not included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets
are given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain
off-balance sheet items are given credit conversion factors to convert them to
asset equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
The FDIC Improvement Act established a new capital-based regulatory
scheme designed to promote early intervention for troubled banks which requires
the FDIC to choose the least expensive resolution of bank failures. The new
capital-based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%, and
the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. Currently, we
qualify as "well capitalized."
46
Under the FDIC Improvement Act regulations, the applicable agency
can treat an institution as if it were in the next lower category if the agency
determines (after notice and an opportunity for hearing) that the institution is
in an unsafe or unsound condition or is engaging in an unsafe or unsound
practice. The degree of regulatory scrutiny of a financial institution
increases, and the permissible activities of the institution decreases, as it
moves downward through the capital categories. Institutions that fall into one
of the three undercapitalized categories may be required to do some or all of
the following:
o submit a capital restoration plan;
o raise additional capital;
o restrict their growth, deposit interest rates, and other
activities;
o improve their management;
o eliminate management fees; or
o divest themselves of all or a part of their operations.
Bank holding companies controlling financial institutions can be called upon to
boost the institutions' capital and to partially guarantee the institutions'
performance under their capital restoration plans.
These capital guidelines can affect us in several ways. If we grow
at a rapid pace, our capital may be depleted too quickly, and a capital infusion
from the holding company may be necessary which could impact our ability to pay
dividends. Our capital levels currently are adequate; however, rapid growth,
poor loan portfolio performance, poor earnings performance, or a combination of
these factors could change our capital position in a relatively short period of
time.
Failure to meet these capital requirements would mean that a bank
would be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time.
Securities Regulation. One non-executive officer of the bank is
licensed with the National Association of Securities Dealers, Inc. (NASD), and
with the State of North Carolina as a registered representative of UVEST, an
NASD-member firm. This officer is subject to the rules and policies of the NASD.
The networking and brokerage affiliate arrangements between UVEST and the bank
are governed by a written agreement. Representatives of UVEST, the North
Carolina Securities Division, the NASD, and the Securities and Exchange
Commission may inspect the bank's records regarding securities transactions.
Enforcement Powers. The Financial Institution Report Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs. These practices can include the failure of an institution
to timely file required reports or the filing of false or misleading information
or the submission of inaccurate reports. Civil penalties may be as high as
$1,000,000 a day for such violations. Criminal penalties for some financial
institution crimes have been increased to 20 years. In addition, regulators are
provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, banking agencies'
power to issue cease-and-desist orders were expanded. Such orders may, among
other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected
by domestic economic conditions and the monetary and fiscal policies of the
United States government and its agencies. The Federal Reserve Bank's monetary
47
policies have had, and are likely to continue to have, an important impact on
the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or
combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through
its open market operations in United States government securities and through
its regulation of the discount rate on borrowings of member banks and the
reserve requirements against member bank deposits. It is not possible to predict
the nature or impact of future changes in monetary and fiscal policies.
Regulation of our proposed North Carolina Bank
General. Our proposed bank will operate as a North Carolina state
chartered bank and is subject to examination by the North Carolina Commissioner
of Banks, under the direction and supervision of the North Carolina State
Banking Commission. Deposits in the bank will be insured by the FDIC up to a
maximum amount, which is generally $100,000 per depositor subject to aggregation
rules. The North Carolina Commissioner of Banks, under the direction and
supervision of the North Carolina State Banking Commission, and the FDIC will
regulate or monitor virtually all areas of the bank's operations, including:
o security devices and procedures;
o adequacy of capitalization and loss reserves;
o loans;
o investments;
o borrowings;
o deposits;
o mergers;
o issuances of securities;
o payment of dividends;
o interest rates payable on deposits;
o interest rates or fees chargeable on loans;
o establishment of branches;
o corporate reorganizations;
o maintenance of books and records; and
o adequacy of staff training to carry on safe lending and deposit
gathering practices.
Regulation of the bank that we propose to charter in North Carolina
will, in many ways, be similar to the regulation of Horry County State Bank.
Like Horry County State Bank, the proposed bank will be subject to federal
legislation and regulation regarding deposit insurance, transactions with
affiliates and insiders, capital regulation, the enforcement powers of federal
regulators, federal monetary policy, the Community Reinvestment Act and other
federal legislation and regulations. See "Deposit Insurance," "Transactions with
Affiliates and Insiders," "Capital Regulations," "Enforcement Powers,"
"Community Reinvestment Act," "Effect of Federal Monetary Policy," and "Other
Regulations" above.
Dividends. The bank will be subject to regulatory restrictions on
the payment of dividends, including a prohibition of payment of dividends from
its capital. All dividends must be paid out of the undivided profits then on
hand, after deducting expenses, including losses and bad debts. The bank must
also reserve a portion of its undivided profits until its reserves reach certain
ratios mandated by North Carolina statute. In addition, under the FDIC
Improvement Act, the bank may not pay a dividend if, after paying the dividend,
the bank would be undercapitalized. See "Capital Regulations" above.
Branching. Under current North Carolina law, we may open bank
branch offices throughout North Carolina with the prior approval of the North
Carolina Commissioner of Banks. In addition, with prior regulatory approval, the
bank may acquire existing banking operations in North Carolina and may be
acquired by out-of-state financial service companies. Furthermore, federal
legislation generally permits interstate branching by authorizing out-of-state
acquisitions by bank holding companies, interstate branching by banks if allowed
by state law, interstate merging by banks, and de novo branching by banks if
allowed by state law. North Carolina permits de novo branching by North Carolina
banks with the prior approval of the North Carolina Commissioner of Banks.
48
MANAGEMENT
Executive Officers and Directors of the Company
The following sets forth certain information regarding our executive
officers and directors as of the date of this prospectus. Our articles of
incorporation provide for a classified board of directors, so that, as nearly as
possible, one-third of the directors are elected each year to serve three-year
terms. The terms of office of the classes of directors expire as follows: Class
I at the 2003 annual meeting of shareholders, Class II at the 2004 annual
meeting of shareholders, and Class III at the 2002 annual meeting of
shareholders. Our executive officers serve at the discretion of our board of
directors. Set forth below is information about each of our directors and each
of our executive officers. Each director is an organizer and a director of Horry
County State Bank with the exception of Russell R. Burgess, Jr. and Tommie W.
Grainger, who became directors in April 1998.
Name Age Position with the Company
- ---- --- -------------------------
D. Singleton Bailey 51 Class I Director
Franklin C. Blanton 57 Class I Director
Glenn R. Bullard 52 Executive Vice President
Russell R. Burgess, Jr. 59 Class III Director
William H. Caines 65 Class II Director
James R. Clarkson 50 Class II Director, President and CEO
J. Lavelle Coleman 62 Class II Director
Boyd R. Ford, Jr. 62 Class II Director
Loretta B. Gerald 54 Vice President, Internal Auditor,
and Cashier
Tommie W. Grainger 62 Class III Director
Randy B. Hardee 44 Class II Director
Gwyn G. McCutchen 57 Class III Director
T. Freddie Moore 61 Class I Director
Carroll D. Padgett, Jr. 54 Class I Director
Bill G. Page 67 Class III Director
D. Singleton Bailey has served as a director of the company since
its formation in 1999 and of the bank since 1987. Mr. Bailey is the president of
Loris Drug Store, Inc., located in Loris, South Carolina. Mr. Bailey received a
B.A. from Wofford College in 1972.
Franklin C. Blanton has served as a director of the company since
its formation in 1999 and of the bank since 1987. Mr. Blanton is the president
of Blanton Supplies, Inc., and has served as president of Independent Builders
Supply, Inc. and also the vice president of the Coastal Carolina Education
Foundation. Mr. Blanton attended Campbell University and received a B.S. degree
in Business Administration in 1968.
Glenn R. Bullard is the executive vice president of the bank. Mr.
Bullard served as a vice president and manager of the bank's Little River office
from February 1997 through December 1999. Mr. Bullard received his B.S. in
Business from the University of South Carolina in 1977.
Russell R. Burgess, Jr. has served as a director of the company
since its formation in 1999 and of the bank since 1998. Mr. Burgess is the owner
of Aladdin Realty Company and also the owner and broker-in-charge of Burgess
Realty & Appraisal Service. Mr. Burgess is serving his fourth term as a member
of the North Myrtle Beach City Council. Mr. Burgess has been a member of the
North Myrtle Beach Planning Commission for the past six years. Mr. Burgess
received a B.S. degree in biology from Campbell University in 1966. Mr. Burgess
is a licensed real estate broker.
William H. Caines has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Caines is currently the
president of Caines Realty and Appraisals Inc. and of Blackburn Insurance, Inc.
49
James R. Clarkson has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Clarkson is the president and
chief executive officer of the company and the bank. Mr. Clarkson also serves as
a director of the Horry Telephone Coop., Inc. Mr. Clarkson received his B.A.
degree in economics from Clemson University in 1973.
J. Lavelle Coleman has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Coleman is the president of
Tabor City Oil, Inc. Mr. Coleman serves on the board of directors of Tabor City
Recreation Community. Mr. Coleman attended East Carolina University.
Boyd R. Ford, Jr. has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Ford is retired from Ford's
Fuel Service, Inc. and Ford's Propane Gas, Inc. Mr. Ford received a business
degree from the University of South Carolina in 1962.
Loretta B. Gerald is our vice president, cashier, and internal
auditor. Ms. Gerald, who attended Coastal Carolina University, joined us in
December 1987 in our operations area and has held positions of increasing
responsibility since then, including management of the accounting, proofing, and
auditing departments and assistant vice president.
Tommie W. Grainger has served as a director of the company since its
formation in 1999 and of the bank since 1998. Mr. Grainger is the president of
Coastal Timber Co., Inc. Mr. Grainger previously owned WJXY, an AM/FM radio
station. Mr. Grainger attended the Forest Ranger School of the University of
Florida in 1959.
Randy B. Hardee has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Hardee is the president of
Hardee Business Services. Mr. Hardee received his B.S. degree in accounting from
Clemson University in 1979.
Gwyn G. McCutchen has served as a director of the company since its
formation in 1999 and of the bank since 1987. Dr. McCutchen is a dentist. Dr.
McCutchen received his B.S. in 1966 from Presbyterian College and his D.D.S.
from the Medical College of Virginia Dentistry in 1970.
T. Freddie Moore has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Moore is the president of
Gateway Drug Store, Inc. Mr. Moore received his B.S. from The Citadel, in 1963.
Carroll D. Padgett, Jr. has served as a director of the company
since its formation in 1999 and of the bank since 1987. Mr. Padgett is a
practicing attorney at Carroll D. Padgett, Jr., P.A. Mr. Padgett is a graduate
of the University of Georgia and received his law degree from the University of
South Carolina School of Law in 1972.
Bill G. Page has served as a director of the company since its
formation in 1999 and of the bank since 1987. Mr. Page is the president of Page
Chemical Co., Inc. Mr. Page is also the Manager of Twin City Farmers
Cooperative, Inc. Mr. Page received his B.S. from Clemson College in 1956, with
a major in agricultural education.
50
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Summary of Cash and Certain Other Compensation
The following table shows the cash compensation paid by our company
or its subsidiary bank to our chief executive officer and president for the
years ended December 31, 2000, 1999 and 1998. No other executive officers of the
company or the bank earned total annual compensation, including salary and
bonus, in excess of $100,000 in 2000.
Summary Compensation Table
Long Term
Annual Compensation (1) Compensation Awards
Other Annual Number of Securities Underlying
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ---- ------ ----- ------------ -------
2000 $120,000 $4,800 $14,668 ____
James R. Clarkson 1999 $107,719 $2,019 $11,217 ____
President and CEO 1998 $ 95,000 $1,827 $ 9,678 ____
(1) Includes employees life, disability and health insurance benefits,
retirement fund contributions, and directors fees.
Director Compensation
During the year ended December 31, 2000, directors received fees of
$250 per month in director fees and $100 for attendance at each committee
meeting.
51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Interests of Management and Others in Certain Transactions
We enter into banking and other transactions in the ordinary course
of business with our directors and officers and their affiliates. It is our
policy that these transactions be on substantially the same terms (including
price, or interest rates and collateral) as those prevailing at the time for
comparable transactions with unrelated parties. We do not expect these
transactions to involve more than the normal risk of collectability nor present
other unfavorable features to us. Loans to individual directors and officers
must also comply with our bank's lending policies and statutory lending limits,
and directors with a personal interest in any loan application are excluded from
the consideration of the loan application. We intend for all of our transactions
with our affiliates to be on terms no less favorable to us than could be
obtained from an unaffiliated third party and to be approved by a majority of
disinterested directors.
Exculpation and Indemnification
Our articles of incorporation contain a provision which, subject to
certain exceptions described below, eliminates the liability of a director or
officer to the company or shareholders for monetary damages for any breach of
duty as a director or officer. This provision does not eliminate such liability
to the extent the director or officer engaged in willful misconduct or a knowing
violation of criminal law or of any federal or state securities law, including,
without limitation, laws proscribing insider trading or manipulation of the
market for any security.
Under our bylaws, we must indemnify any person who becomes subject
to a lawsuit or proceeding by reason of service as a director of the company or
the bank or any other corporation which the person served as a director at the
request of the company. Except as noted in the next paragraph, directors are
entitled to be indemnified against judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the director in connection with the
proceeding. Our directors are also entitled to have the company advance any such
expenses prior to final disposition of the proceeding, upon delivery of a
written affirmation by the director of his good faith belief that the standard
of conduct necessary for indemnification has been met and a written undertaking
to repay the amounts advanced if it is ultimately determined that the standard
of conduct has not been met.
Under our bylaws, indemnification will be disallowed if it is
established that the director engaged in willful misconduct or a knowing
violation of the criminal law. In addition to our bylaws, Section 33-8-520 of
the South Carolina Business Corporation Act of 1988 requires that "a corporation
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." The Corporation Act also provides that upon
application of a director a court may order indemnification if it determines
that the director is entitled to such indemnification under the applicable
standard of the Corporation Act.
The board of directors of our company also has the authority to
extend to officers, employees, and agents the same indemnification rights held
by directors, subject to all of the accompanying conditions and obligations. The
board of directors has extended or intends to extend indemnification rights to
all of our executive officers.
52
PRINCIPAL SHAREHOLDERS
The following table shows how much common stock is owned by our
directors and executive officers and by owners of more than 5% of the
outstanding common stock, as of December 8, 2001.
Number of Shares Percentage of Beneficial
Name Owned(1) Ownership
---- -------- ------------
D. Singleton Bailey 16,952 1.61%
Franklin C. Blanton 32,296(2) 3.07%
Glenn R. Bullard 2,092 *
Russell R. Burgess, Jr. 805 *
William H. Caines 2,058 *
James R. Clarkson 8,613 *
J. Lavelle Coleman 6,314 *
Boyd R. Ford, Jr. 36,583 3.48%
Loretta B. Gerald 463 *
Tommie W. Grainger 7,282 *
Randy B. Hardee 12,808 1.22%
Gwyn G. McCutchen 10,461 *
T. Freddie Moore 7,093 *
Carroll D. Padgett, Jr. 10,747 1.02%
Bill G. Page 3,553 *
Executive officers and directors as a group (15 158,048 15.02%
persons)
* Less than 1%
(1) Includes shares for which the named person:
o has sole voting and investment power,
o has shared voting and investment power with a spouse or
other person, or
o holds in an IRA or other retirement plan program, unless otherwise
indicated in these footnotes.
(2) The 32,296 shares listed for Mr. Blanton include 14,361 shares held
by Blanton Supplies of Little River, Inc., 1,772 shares held by
Blanton Supplies of Loris, Inc., and 1,076 shares held by Blanton
Family Partnership, each of which Mr. Blanton controls in excess
of 10% ownership.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of HCSB Financial Corporation consists
of 10,000,000 shares of common stock, par value $0.01 per share. The following
summary describes the material terms of HCSB's capital stock. For a detailed
description of the provisions summarized below please see the articles of
incorporation of HCSB Financial Corporation filed as an exhibit to the
Registration Statement of which this prospectus forms a part.
53
Common Stock
Holders of shares of the common stock are entitled to receive such
dividends as may from time to time be declared by the board of directors out of
funds legally available for distribution. We do not plan to declare any
dividends in the immediate future. See "Dividend Policy" on page 11. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote and do not have any cumulative
voting rights. Shareholders do not have preemptive, conversion, redemption, or
sinking fund rights. In the event of a liquidation, dissolution, or winding-up
of the company, holders of common stock are entitled to share equally and
ratably in the assets of the company, if any, remaining after the payment of all
debts and liabilities of the company and the liquidation preference of any
outstanding preferred stock. The outstanding shares of common stock are, and the
shares of common stock offered by the company hereby when issued will be, fully
paid and non-assessable. The rights, preferences and privileges of holders of
common stock are subject to any classes or series of preferred stock that the
company may issue in the future.
Anti-takeover Effects
The provisions of the articles, the bylaws, and South Carolina law
summarized in the following paragraphs may have anti-takeover effects and may
delay, defer, or prevent a tender offer or takeover attempt that a shareholder
might consider to be in such shareholder's best interest, including those
attempts that might result in a premium over the market price for the shares
held by shareholders, and may make removal of management more difficult.
Control Share Act. HCSB Financial Corporation has specifically
elected to opt out of a provision of South Carolina law which may deter or
frustrate unsolicited attempts to acquire certain South Carolina corporations.
This statute, commonly referred to as the "Control Share Act" applies to public
corporations organized in South Carolina, unless the corporation specifically
elects to opt out. The Control Share Act generally provides that shares of a
public corporation acquired in excess of certain specific thresholds will not
possess any voting rights unless such voting rights are approved by a majority
vote of the corporation's disinterested shareholders.
Authorized but Unissued Stock. The authorized but unissued shares of
common stock will be available for future issuance without shareholder approval.
These additional shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions, and employee benefit plans. The existence of authorized but
unissued and unreserved shares of common stock and preferred stock may enable
the board of directors to issue shares to persons friendly to current
management, which could render more difficult or discourage any attempt to
obtain control of HCSB Financial Corporation by means of a proxy contest, tender
offer, merger or otherwise, and thereby protect the continuity of the company's
management.
Number of Directors. The bylaws provide that the number of directors
shall be fixed from time to time by resolution by at least a majority of the
directors then in office, but may not consist of fewer than five nor more than
25 members.
Classified Board of Directors. Our articles and bylaws divide the
board of directors into three classes of directors serving staggered three-year
terms. As a result, approximately one-third of the board of directors will be
elected at each annual meeting of shareholders. The classification of directors,
together with the provisions in the articles and bylaws described below that
limit the ability of shareholders to remove directors and that permit the
remaining directors to fill any vacancies on the board of directors, will have
the effect of making it more difficult for shareholders to change the
composition of the board of directors. As a result, at least two annual meetings
of shareholders may be required for the shareholders to change a majority of the
directors, whether or not a change in the board of directors would be beneficial
and whether or not a majority of shareholders believe that such a change would
be desirable.
Number, Term, and Removal of Directors. We currently have thirteen
directors, but our bylaws authorize this number to be increased or decreased by
our board of directors. Our directors are elected to three
54
year terms by a plurality vote of our shareholders. Our bylaws provide that our
shareholders, by a majority vote of those entitled to vote in an election of
directors, or our board of directors, by a unanimous vote, excluding the
director in question, may remove a director with or without cause. Our bylaws
provide that all vacancies on our board may be filled by a majority of the
remaining directors for the unexpired term.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The bylaws establish advance notice procedures with regard to
shareholder proposals and the nomination, other than by or at the direction of
the board of directors or a committee thereof, of candidates for election as
directors. These procedures provide that the notice of shareholder proposals
must be in writing and delivered to the secretary of the company no earlier than
30 days and no later than 60 days in advance of the annual meeting. Shareholder
nominations for the election of directors must be made in writing and delivered
to the secretary of the company no later than 90 days prior to the annual
meeting, and in the case of 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 the meeting is first given to
shareholders. We may reject a shareholder proposal or nomination that is not
made in accordance with such procedures.
Nomination Requirements. Pursuant to the bylaws, we have established
certain nomination requirements for an individual to be elected as a director,
including that the nominating party provide (i) notice that such party intends
to nominate the proposed director; (ii) the name of and certain biographical
information on the nominee; and (iii) a statement that the nominee has consented
to the nomination. The chairman of any shareholders' meeting may, for good cause
shown, waive the operation of these provisions. These provisions could reduce
the likelihood that a third party would nominate and elect individuals to serve
on the board of directors.
Shares Eligible for Future Sale
Upon completion of this offering (assuming sale of the maximum
offering), we will have 1,552,175 shares of common stock outstanding. The shares
sold in this offering will be freely tradable, without restriction or
registration under the Securities Act of 1933, except for shares purchased by
"affiliates" of HCSB Financial Corporation, which will be subject to resale
restrictions under the Securities Act of 1933. An affiliate of the issuer is
defined in Rule 144 under the Securities Act of 1933 as a person that directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with the issuer. Rule 405 under the Securities Act of
1933 defines the term "control" to mean the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of the
person whether through the ownership of voting securities, by contract or
otherwise. Directors and executive officers will be deemed to be affiliates.
These securities held by affiliates may be sold without registration in
accordance with the provisions of Rule 144 or another exemption from
registration.
In general, under Rule 144, an affiliate of the company or a person
holding restricted shares may sell, within any three-month period, a number of
shares no greater than 1% of the then outstanding shares of the common stock or
the average weekly trading volume of the common stock during the four calendar
weeks preceding the sale, whichever is greater. Rule 144 also requires that the
securities must be sold in "brokers' transactions," as defined in the Securities
Act of 1933, and the person selling the securities may not solicit orders or
make any payment in connection with the offer or sale of securities to any
person other than the broker who executes the order to sell the securities. This
requirement may make the sale of the common stock by affiliates of HCSB
Financial Corporation pursuant to Rule 144 difficult if no trading market
develops in the common stock. Rule 144 also requires persons holding restricted
securities to hold the shares for at least one year prior to sale.
55
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon
for HCSB Financial Corporation by Nelson Mullins Riley & Scarborough, L.L.P.,
Greenville, South Carolina.
EXPERTS
HCSB Financial Corporation financial statements for the years ended
December 31, 2000 and 1999 have been audited by Tourville, Simpson & Caskey,
L.L.P., as stated in their report appearing elsewhere herein, and have been so
included in reliance on the report of this firm given upon their authority as an
expert in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-2
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement"), under the Securities Act of 1933 and the rules and
regulations thereunder, for the registration of the common stock offered hereby.
This prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement. For
further information with respect to HCSB Financial Corporation, Horry County
State Bank, and the common stock, you should refer to the Registration Statement
and the exhibits thereto.
You can examine and obtain copies of the Registration Statement at
the Public Reference Section of the SEC, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a Web site at http://www.sec.gov that contains all of the reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC using the EDGAR filing system, including
HCSB FINANCIAL CORPORATION.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have been filed by the company
(Commission File No. 333-69492) with the Commission are incorporated herein by
reference as if fully set forth herein:
(i) Our Annual Report on Form 10-KSB for the year ended
December 31, 2000; and
(ii) Our Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 2001, June 30, 2001, and September 30, 2001.
All documents filed by the company with the Commission pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the shares of
common stock offered hereby shall likewise be incorporated herein by reference
and shall become a part hereof from and after the time such documents are filed.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
We will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents referred to above which have been
incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to Horry County State
Bank, Attention: James R. Clarkson.
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(AUDITED and UNAUDITED)
HCSB FINANCIAL CORPORATION
Report of Independent Auditor..............................................................................................F-2
Consolidated Balance Sheets at December 31, 2000 and 1999..................................................................F-3
Consolidated Statements of Income for the Years Ended December 31, 2000, 1999, and 1998....................................F-4
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income
for the Years Ended December 31, 2000, 1999 and 1998.......................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999,
and 1998..................................................................................................................F-6
Notes to Financial Statements................................................................................ F-7 through F-22
(UNAUDITED) FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
Condensed Consolidated Balance Sheets- September 30, 2001 and December 31, 2000...........................................F-23
Condensed Consolidated Statements of Income - Nine Months Ended September 30, 2001
and 2000 and Three Months Ended September 30, 2001 and 2000...............................................................F-24
Condensed Consolidated Statements of Shareholder's Equity and Comprehensive Income - Nine Months
Ended September 30, 2001..................................................................................................F-25
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001
and 2000.................................................................................................................F-26
Notes to Condensed Consolidated Financial Statements.........................................................F27- through F-28
F-1
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 as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity and comprehensive income,
and cash flows for each of the three years in the period ended December 31,
2000. 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 2000 and 1999 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HCSB
Financial Corporation as of December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with generally accepted accounting
principles.
Tourville, Simpson & Caskey, L.L.P.
Columbia, South Carolina
January 25, 2001
F-2
HCSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS) 2000 1999
----- ----
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 3,534 $ 5,708
Federal funds sold 19,870 2,190
---------- --------
Total cash and cash equivalents 23,404 7,898
---------- --------
Investment securities:
Securities available-for-sale 20,877 23,892
Nonmarketable equity securities 790 560
---------- ---------
Total investment securities 21,667 24,452
---------- ---------
Loans receivable: 91,329 75,839
Less unearned income (10) (46)
Less allowance for loan loses (1,019) (922)
---------- ----------
Loans, net 90,300 74,871
Premises, furniture, and equipment, net 5,502 4,417
Accrued interest receivable 1,415 1,204
Other assets 1,430 1,484
---------- ---------
Total assets $ 143,718 $ 114,326
========== =========
LIABILITIES:
Deposits:
Noninterest-bearing transaction accounts $ 8,273 $ 7,998
Interest-bearing transaction accounts 10,310 8,238
Money market savings accounts 19,841 16,752
Other savings accounts 2,153 2,080
Certificates of deposit $100,000 and over 26,429 22,567
Other time deposits 56,494 37,194
------- -------
Total deposits 123,500 94,829
Advances from the Federal Home Loan Bank 9,600 10,000
Accrued interest payable 310 403
Other liabilities 527 753
-------- --------
Total liabilities 133,937 105,985
-------- --------
Commitments and Contingencies (Notes 4, 9 and 10)
SHAREHOLDERS' EQUITY:
Common shares, $.01 par value, 10,000,000 shares authorized; 10 5
1,002,770 shares issued and outstanding
Capital surplus 7,878 7,878
Undivided profits 2,069 1,037
Accumulated other comprehensive income (loss) (176) (579)
---------- ---------
Total shareholders' equity 9,781 8,341
---------- ---------
Total liabilities and shareholders' equity $ 143,718 $ 114,326
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
HCSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE) 2000 1999 1998
---- ---- ----
INTEREST INCOME:
Loans, including fees $ 8,738 $ 6,389 $ 5,097
Investment securities:
Taxable 1,243 1,222 824
Tax-exempt 165 168 65
Nonmarketable equity securites 49 27 16
Federal funds sold 357 141 401
------- ------ ------
Total 10,552 7,947 6,403
------- ------ ------
INTEREST EXPENSE:
Deposits 5,099 3,462 3,202
Advances from the Federal Home Loan Bank 668 325 55
Federal funds purchased 48 17 -
------- ------ ------
Total 5,815 3,804 3,257
------- ------ ------
NET INTEREST INCOME 4,737 4,143 3,146
Provision for loan losses 271 190 100
------- ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,466 3,953 3,046
------- ------ ------
OTHER OPERATING INCOME:
Service charges on deposit accounts 690 539 434
Credit life insurance commissions 141 150 118
Gain on sale of land 215 - -
Other income 142 103 114
------- ------ ------
Total 1,188 792 666
------- ------ ------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,247 1,718 1,563
Net occupancy expense 271 193 175
Furniture and equipment expense 471 404 334
Net loss on sale of available-for-sale securities 32 - -
Other operating expenses 1,048 912 857
------- ------ ------
Total 4,069 3,227 2,929
------- ------ ------
INCOME BEFORE INCOME TAXES 1,585 1,518 783
Income tax provision 548 524 272
------- ------ ------
NET INCOME $ 1,037 $ 994 $ 511
======= ====== ======
EARNINGS PER SHARE
Weighted-average common shares outstanding 1,002,770 1,002,770 1,002,770
Net income $ 1.03 $ 0.99 $ 0.51
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
HCSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
ACCUMULATED
OTHER
(DOLLARS IN THOUSANDS) COMMON STOCK CAPITAL UNDIVIDED COMPREHENSIVE
SHARES AMOUNT SURPLUS PROFITS INCOME TOTAL
------ ------ -------- --------- ------------- -----
Balance,
December 31, 1997 478,150 $ 5 $ 7,251 $ 177 $ 40 $ 7,473
Net income 511 511
Other comprehensive
income (loss), net of tax
benefit of $23 40 40
-------
Comprehensive income 551
------- ------ ------ ------ ----- -------
Balance, 478,150 5 7,251 688 80 8,024
December 31, 1998
Net income 994 994
Other comprehensive
income (loss), net of tax
expense of $388 (659) (659)
-------
Comprehensive income 335
-------
Payment for (18) (18)
fractional shares
Issuance of stock
dividend 23,235 627 (627)
------- ------ ------ ------ ----- -------
BALANCE,
DECEMBER 31, 1999 501,385 5 7,878 1,037 (579) 8,341
Net income 1,037 1,037
Other comprehensive
income (loss), net of tax
benefit of $237 403 403
------
Comprehensive income 1,440
------
Two for one stock
split effected in the
form of a stock
dividend 501,385 5 (5)
------- ------ ------ ------ ----- -------
BALANCE,
DECEMBER 31, 2000 1,002,770 $ 10 $ 7,878 $ 2,069 $ (176) $ 9,781
========== ====== ======= ======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(DOLLARS IN THOUSANDS) 2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,037 $ 994 $ 511
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for possible loan losses 271 190 100
Deferred income tax provision (benefit) 75 (20) 19
Depreciation and amortization expense 325 303 241
Premium amortization less accretion 6 14 6
Amortization of net deferred loan costs 120 100 80
Net gain on sale of securities available-for-sale 32 - -
Loss (gain) on sale of other real estate owned - 17 -
Gain on disposal of premises and equipment (215) (5) (2)
(Increase) decrease in interest receivable (211) (347) (40)
Increase (decrease) in interest payable (93) 182 (96)
Increase in other assets (148) (84) (179)
Increase (decrease) in other liabilities (226) 551 70
Net cash provided by operating activities 973 1,895 710
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (800) (11,631) (15,630)
Maturities of securities available-for-sale 2,954 6,318 8,644
Proceeds from sales of securities available-for-sale 1,463 - -
Net increase in loans to customers (15,930) (20,100) (14,571)
Purchase of premises and equipment (1,617) (1,182) (1,224)
Proceeds from sale of premises and equipment 422 15 13
Proceeds from sale of other real estate owned - 88 -
Purchase of Federal Home Loan Bank stock (230) (250) (102)
Net cash used by investing activities (13,738) (26,742) (22,870)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts 5,509 4,989 8,956
Net increase (decrease) in time deposits 23,162 19,871 (2,871)
Net increase (decrease) in federal funds purchased - (170) 170
Advances from the Federal Home Loan Bank 9,600 5,000 5,325
Repayments of advances from the Federal Home Loan Bank (10,000) - (675)
Cash paid for fractional shares - (18) -
Net cash provided by financing activities 28,271 29,672 10,905
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,506 4,825 11,255
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,898 3,073 14,328
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,404 $ 7,898 $ 3,073
========= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - 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 and Marion Counties, South Carolina and in Columbus County, North
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 shareholders' 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.
NONMARKETABLE EQUITY SECURITIES - Nonmarketable equity securities 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 as a
separate component in interest income.
At December 31, 2000 and 1999, the investment in Federal Home Loan Bank stock
was $730,000 and $500,000, respectively. At December 31, 2000 and 1999, the
investment in Community Financial Services stock was $59,612.
F-7
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-8
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 write-downs at the dates of acquisition are charged to the allowance for
loan losses. Expenses to maintain such assets, subsequent write-downs, and gains
and losses on disposal are included in other expenses.
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, 2000 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 11.
COMPREHENSIVE INCOME - 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 components of other comprehensive income and related tax effects are as
follows:
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Unrealized gains (losses) on
available-for-sale securities $ 671 $ (1,047) $ 63
Reclassification adjustment for gains (losses)
realized in net income (32) - -
------- -------- ------
Net unrealized gains (losses) on securities 639 (1,047) 63
Tax effect (236) 388 (23)
------- -------- ------
Net-of-tax amount $ 403 $ (659) $ 40
======= ======== ======
F-9
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and federal funds sold.
The following summarizes supplemental cash flow information for 2000, 1999, and
1998:
(DOLLARS IN THOUSANDS) 2000 1999 1998
----- ----- ----
Cash paid for interest $ 5,908 $ 3,622 $ 3,353
Cash paid for income taxes 472 171 246
Supplemental noncash investing and financing activities:
Foreclosures on loans 110 - 46
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company enters 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.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued Statement
(SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. The accounting
for changes in the fair value of a derivative depends on how the derivative is
used and how the derivative is designated. The Company adopted SFAS on July 1,
2000. The adoption of SFAS No. 133 did not have a material impact on the
consolidated financial statements.
RECLASSIFICATIONS - Certain captions and amounts in the 1999 and 1998 financial
statements were reclassified to conform with the 2000 presentation.
NOTE 2 - 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, 2000, the requirements were
satisfied by vault cash.
F-10
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
Securities available for sale as of December 31, 2000 and 1999 consisted of the
following:
ESTIMATED
AMORTIZED GROSS UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
----- ------ ------- -----
December 31, 2000
Securities of other U.S. government agencies $ 14,499 $ 2 $ 197 $ 14,304
and corporations
Mortgage-backed securities 3,242 - 44 3,198
Obligations of state and local governments 3,416 9 50 3,375
--------- ----- ------ --------
Total $ 21,157 $ 11 $ 291 $ 20,877
========= ===== ====== ========
DECEMBER 31, 1999
Securities of other U.S. government agencies $ 15,202 $ - $ 609 $ 14,593
and corporations
Mortgage-backed securities 5,254 - 121 5,133
Obligations of state and local governments 4,356 - 190 4,166
--------- ---- ------ --------
Total $ 24,812 $ - $ 920 $ 23,892
========= ==== ====== ========
The following is a summary of maturities of securities available for sale as of
December 31, 2000. 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) SECURITIES
AVAILABLE FOR SALE
--------------------
AMORTIZED ESTIMATED FAIR
COST VALUE
--------- --------------
Due after one year but within five years $ 5,832 $ 5,811
Due after five years but within ten years 9,118 8,981
Due after ten years 2,965 2,887
-------------- --------------
17,915 17,679
Mortgage-backed securities 3,242 3,198
-------------- --------------
Total $ 21,157 $ 20,877
============== ==============
At December 31, 2000 and 1999, investment securities with a book value of
$5,538,000 and $14,469,000, respectively, and a market value of $5,453,000 and
$13,955,000, respectively, were pledged as collateral to secure public deposits.
Gross realized gains on sales of available-for-sale securities were $3,000 in
2000. Gross realized losses on sales of available-for-sale securities were
$35,000 in 2000. There were no sales of securities in 1999 or 1998.
F-11
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LOANS
Loans as of December 31, 2000 and 1999 consisted of the following:
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
Real estate - construction and land development $ 5,122 $ 3,983
Real estate - other 32,178 26,601
Agricultural 5,427 5,961
Commercial and industrial 30,451 22,796
Consumer 17,482 16,193
All other loans (including overdrafts) 669 305
--------- --------
Total gross loans $ 91,329 $ 75,839
========= ========
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 $2,089,000 and
$1,825,000 at December 31, 2000 and 1999, respectively. During 2000, $1,300,000
of new loans were made to related parties, and repayments totaled $1,036,000.
Transactions in the allowance for loan losses for the years ended December 31,
2000, 1999, and 1998 are summarized below:
(DOLLARS IN THOUSANDS) 2000 1999 1998
----- ----- ----
Balance, beginning of year $ 922 $ 880 $ 911
Provision charged to operations 271 190 100
Recoveries on loans previously charged off 16 14 19
Loans charged off (190) (162) (150)
----- ----- -----
Balance, end of year $1,019 $ 922 $ 880
====== ===== =====
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, 2000 and 1999, the Company had nonaccrual loans of
approximately $133,000 and $54,000, respectively, and loans that were past due
90 days or more of approximately $804,000 and $16,000, 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.
F-12
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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:
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
Commitments to extend credit $ 7,161 $ 5,290
Standby letters of credit 298 272
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 2000 and 1999 consisted of the
following:
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
Land $ 904 $ 1,011
Buildings and land improvements 3,348 2,342
Furniture and equipment 2,093 1,617
Construction in progress 413 388
------ ------
6,758 5,358
Less accumulated depreciation (1,256) (941)
------ ------
Premises and equipment, net $ 5,502 $ 4,417
======= =======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$280,000, $259,000 and $202,000, respectively.
Construction in progress represents construction costs for renovations for the
future location of the Socastee branch. Management anticipates completion of the
project in 2001. In 2000, 1999 and 1998, the Company capitalized $13,000,
$18,000, and $10,000 of interest, respectively, during the construction and
renovation of new branches and the operations center.
F-13
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - OTHER ASSETS
As of December 31, 2000 and 1999, other assets consisted of the following:
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
Cash value of life insurance $ 727 $ 695
Other real estate 110 -
Prepaid expenses 159 72
Unamortized software 105 138
Net deferred tax asset 256 568
Other 73 11
------ -------
Total $ 1,430 $ 1,484
======= =======
NOTE 7 - DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits were as follows:
(DOLLARS IN THOUSANDS)
MATURING IN AMOUNT
2001 $ 78,336
2002 4,196
2003 188
2004 130
2005 and thereafter 73
------
Total $ 82,923
=======
As of December 31, 2000, certificates of deposit totaling $16,625,000 were held
by one customer and represented 13.46% of total deposits. Overdrawn deposit
accounts in the amount of $89,000 were classified as loans as of December 31,
2000.
NOTE 8 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
As of December 31, 2000, the Company owed $9,600,000 on advances from the
Federal Home Loan Bank. The first originated on February 25, 2000 in the amount
of $5,000,000 and the second originated on May 18, 2000 for an additional
$4,600,000. The terms of the agreement are quarterly interest payments of
$74,000 based on a fixed rate of 5.92% for the first $5,000,000 advance and
quarterly interest payments of $75,000 based on a fixed rate of 6.49% for the
second $4,600,000 advance. The principal balance of the first $5,000,000 advance
is due March 1, 2010 but is subject to early termination with a two day notice.
The principal balance of the second $4,600,000 advance is due on May 24, 2010,
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 $14,972,000 at December 31,
2000 and its investment in Federal Home Loan Bank stock of $730,000 which is
included in nonmarketable equity securities.
F-14
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - 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. Future minimum lease payments for
the remainder of 2002 and the years 2003 through 2005 are based on the terms of
the initial lease.
Future minimum lease payments over the next five years for this long-term
operating leases are as follows:
(DOLLARS IN THOUSANDS) AMOUNT
------
2001 $ 7
2002 7
2003 7
2004 7
2005 8
----
Total $ 36
====
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits which arise primarily in the
ordinary course of business. At December 31, 2000, management was 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 11 - SHAREHOLDERS' EQUITY
STOCK DIVIDENDS - 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 shareholders 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.
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.
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, 2000, the Bank's undivided profits were
$2,029,000. The Bank is authorized to pay cash dividends up to 100% of net
income in any calendar 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.
F-15
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - 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.
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 shareholders' 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, 2000 and 1999.
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
(DOLLARS IN THOUSANDS) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- -------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
DECEMBER 31, 2000
Total capital (to risk-weighted assets) $ 10,754 10.50% $ 8,196 8.00% $ 10,245 10.00%
Tier 1 capital (to risk-weighted assets) 9,736 9.50% 4,098 4.00% 6,147 6.00%
Tier 1 capital (to average assets) 9,736 7.08% 5,499 4.00% 6,874 5.00%
DECEMBER 31, 1999
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%
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.
F-16
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 $60,000 and $4,000 to earnings for the
retirement savings plan in 2000 and 1999, respectively.
The Company has discontinued its Simplified Employee Pension plan under Section
408(k) of the Internal Revenue Code. The Company contributed $55,000, $65,000,
and $55,000 to the plan during 2000, 1999, and 1998, respectively.
In 1997, the Board of Directors approved a deferred compensation plan whereby
directors may elect to defer the payment of their fees. Under the terms of the
plan, the 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, 2000, 1999, and 1998, $142,000, $87,000, and $53,000, respectively,
of directors' fees were deferred and included in other liabilities.
NOTE 14 - OTHER EXPENSES
Other expenses are summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
---- ---- ----
Stationery, printing, and postage $ 233 $ 219 $ 191
Advertising and promotion 142 102 110
Professional fees 194 132 127
Insurance 46 37 52
ATM services 55 63 50
Collection and repossession 15 13 29
Organizational expense - 45 -
Other 363 301 298
---- ---- ----
Total $ 1,048 $ 912 $ 857
======== ===== =====
F-17
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES
Income tax expense is summarized as follows:
(DOLLARS IN THOUSANDS) 2000 1999 1998
---- ---- ----
Currently payable:
Federal $ 426 $ 497 $ 231
State 46 47 22
---------- --------- ----------
Total current 472 544 253
---------- --------- ----------
Change in deferred income taxes:
Federal 287 (330) 38
State 25 (78) 4
---------- --------- ----------
Total deferred 312 (408) 42
---------- --------- ----------
Income tax expense $ 784 $ 136 $ 295
========== ========= =========
Income tax expense is allocated as follows:
(DOLLARS IN THOUSANDS) $ 548 $ 524 $ 272
236 (388) 23
To continuing operations ---------- --------- ---------
To stockholders' equity
Total $ 784 $ 136 $ 295
========== ========= =========
The components of the net deferred tax asset as of December 31, 2000 and 1999
are as follows:
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
Deferred tax assets:
Allowance for loan losses $ 314 $ 282
Net capitalized loan costs 24 22
Net unrealized loss on securities available-for-sale 103 340
State net operating loss 5 1
Deferred directors' fees 55 33
Organizational costs 12 15
----------- ----------
Total deferred tax assets 513 693
----------- ----------
Deferred tax liabilities:
Accumulated depreciation 155 109
Gain on sale of real estate 83 -
Software amortization 19 16
----------- -----------
Total deferred tax liabilities 257 125
----------- -----------
Net deferred tax asset $ 256 $ 568
=========== ===========
F-18
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES (CONTINUED)
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, 2000 and 1999 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:
(DOLLARS IN THOUSANDS) 2000 1999 1998
---- ----- ----
Tax expense at statutory rate $ 539 $ 516 $ 266
State income tax, net of federal income tax benefit 46 28 23
Tax-exempt interest income 58 (60) (31)
Other (95) 40 14
-------- ------- ---------
Income tax provision $ 548 $ 524 $ 272
========= ======= =========
NOTE 16 - UNUSED LINES OF CREDIT
As of December 31, 2000, the Company had unused lines of credit to purchase
federal funds from unrelated banks totaling $17,400,000. 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.
NOTE 17 - 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.
F-19
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
ADVANCES FROM THE FEDERAL HOME LOAN BANK - 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.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 2000 and 1999 were as follows:
(DOLLARS IN THOUSANDS) 2000 1999
-------------------------- --------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
FINANCIAL ASSETS:
Cash and due from banks $ 3,534 $ 3,534 $ 5,708 $ 5,708
Federal funds sold 19,870 19,870 2,190 2,190
Investments available for sale 20,877 20,877 23,892 23,892
Loans 91,329 91,057 75,839 75,698
Allowance for loan losses (1,019) (1,019) (922) (922)
Accrued interest receivable 1,415 1,415 1,204 1,204
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing transaction,
and savings accounts $ 40,577 $ 40,577 $ 35,068 $ 35,068
Certificates of deposit 82,923 83,271 59,761 59,966
Advances from the Federal Home Loan Bank 9,600 9,600 10,000 9,918
Accrued interest payable 310 310 403 403
NOTIONAL ESTIMATED FAIR NOTIONAL ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------------- -------- --------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit $ 7,161 $ 7,161 $ 5,290 $ 5,290
Standby letters of credit 298 298 272 272
F-20
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - HCSB FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Presented below are the condensed financial statements for HCSB Financial
Corporation (Parent Company Only).
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
ASSETS
Cash $ 4 $ 4
Investment in banking subsidiary 9,736 8,318
Due from banking subsidiary 25 5
Deferred tax asset 16 16
-------- ---------
Total assets $ 9,781 $ 8,343
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ $ 2
Stockholders' equity 9,781 8,341
-------- ---------
Total liabilities and stockholders' equity $ 9,781 $ 8,343
======== =========
STATEMENTS OF INCOME
FOR THE PERIOD JUNE 10, 1999 THROUGH DECEMBER 31, 1999 AND
THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
INCOME
Dividends from banking subsidiary $ 65 $ 55
EXPENSES
Organizational expenses - 45
Other expenses 68 8
------- -------
Total expenses 68 53
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY (3) 2
Income tax benefit (25) (21)
Equity in undistributed earnings of
banking subsidiary 1,015 548
-------- --------
NET INCOME $ 1,037 $ 571
======== ========
F-21
HCSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - HCSB FINANCIAL CORPORATION (PARENT COMPANY ONLY) (CONTINUED)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD JUNE 10, 1999 THROUGH DECEMBER 31, 1999
AND THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS) 2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,037 $ 571
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of banking subsidiary (1,015) (548)
Increase in other assets (20) (21)
Increase (decrease) in other liabilities (2) 2
-------------- -------------
Net cash provided by operating activities - 4
-------------- -------------
INCREASE IN CASH - 4
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4 -
-------------- ------------
CASH AND CASH EQUIVALENTS, ENDING OF PERIOD $ 4 $ 4
============== =============
F-22
HCSB FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(Dollars in thousands) September 30, December 31,
------------- ------------
2001 2000
----- ----
(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks $ 4,426 $ 3,534
Federal funds sold 12,246 19,870
----------------- -----------------
16,672 23,404
----------------- -----------------
Securities available-for-sale 19,762 20,877
Nonmarketable equity securities 790 790
----------------- -----------------
20,552 21,667
----------------- -----------------
Loans receivable 110,922 91,329
Less unearned income (2) (10)
Less allowance for loan losses (1,061) (1,019)
----------------- -----------------
Loans, net 109,859 90,300
----------------- -----------------
Premises and equipment, net 5,459 5,502
Accrued interest receivable 1,684 1,415
Other assets 1,397 1,430
----------------- -----------------
Total assets $ 155,623 $ 143,718
================= =================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 13,200 $ 8,273
Interest-bearing demand deposits 10,896 10,310
Money market 18,848 19,841
Savings 2,918 2,153
Time deposits 83,614 82,923
----------------- -----------------
129,476 123,500
----------------- -----------------
Advances from the Federal Home Loan Bank 14,600 9,600
Accrued interest payable 253 310
Other liabilities 614 527
----------------- -----------------
Total liabilities 144,943 133,937
----------------- -----------------
Shareholders' Equity
Common stock, $.01 par value, 10,000,000 shares authorized,
1,052,175 shares issued and outstanding 11 10
Capital surplus 8,833 7,878
Retained earnings 1,725 2,069
Accumulated other comprehensive income (loss) 111 (176)
----------------- -----------------
Total shareholders' equity 10,680 9,781
----------------- -----------------
Total liabilities and shareholders' equity $ 155,623 $ 143,718
================= =================
See notes to condensed financial statements.
F-23
HCSB FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands) Nine Months Ended Three Months Ended
----------------- ------------------
September 30, September 30,
-------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans, including fees $ 7,467 $ 6,444 $ 2,572 $ 2,286
Investment securities:
Taxable 983 948 270 310
Tax-exempt 114 127 39 37
Nonmarketable equity securities 41 34 12 13
Other interest income 332 171 62 126
--------- -------- --------- ---------
Total 8,937 7,724 2,955 2,772
--------- -------- --------- ---------
Interest expense:
Certificates of deposit $100M and over 946 751 204 244
Other deposits 3,396 2,860 1,077 1,130
Other interest expense 580 557 213 206
--------- -------- --------- ---------
Total 4,922 4,168 1,494 1,580
--------- -------- --------- ---------
Net interest income 4,015 3,556 1,461 1,192
Provision for loan losses 238 196 88 70
--------- -------- --------- ---------
Net interest income after provision 3,777 3,360 1,373 1,122
--------- -------- --------- ---------
for loan losses
Other operating income:
Service charges on deposit accounts 645 507 234 186
Credit life insurance commissions 121 97 45 38
Gain on sale of securities available for sale 6 - - -
Other operating income 211 102 102 33
--------- -------- --------- ---------
Total 983 706 381 257
--------- -------- --------- ---------
Other operating expenses:
Salaries and employee benefits 2,144 1,655 758 595
Net occupancy expense 242 200 83 67
Furniture and equipment expense 417 324 144 102
Loss on sale of securities - 32 - -
Loss on sale of fixed assets 29 21 - -
Other operating expenses 920 765 306 262
--------- -------- --------- ---------
Total 3,752 2,997 1,291 1,026
--------- -------- --------- ---------
Income before income taxes 1,008 1,069 463 353
Income tax provision 350 371 161 112
--------- -------- --------- ---------
Net income $ 658 $ 698 $ 302 $ 241
========= ======== ========= =========
Basic earnings per share $ 0.63 $ 0.70 $ 0.29 $ 0.24
Diluted earnings per share $ 0.63 $ 0.70 $ 0.29 $ 0.24
See notes to condensed financial statements.
F-24
HCSB FINANCIAL CORPORATION
Condensed Consolidated Statement of Shareholders' Equity and
Comprehensive Income
for the nine months ended September 30, 2001
(Unaudited)
Accumulated
Other
(Dollars in thousands) Common Stock Capital Retained Comprehensive
Shares Amount Surplus Earnings Income Total
------ ------ ------- -------- --------------- ---------
Balance, 1,002,770 $ 10 $ 7,878 $ 2,069 $ (176) $ 9,781
December 31, 2000
Net income for the period 658 658
Other comprehensive 287 287
-------
income, net of tax
Comprehensive Income 945
-------
Payment of fractional shares (15) (15)
Issuance of 5% stock dividend 49,405 1 987 (987) 1
Stock issuance costs (32) (32)
--------- ----- ------- ------ ---------
Balance, 1,052,175 $ 11 $ 8,833 $ 1,704 $ 111 $ 10,680
========= ===== ======= ======= ====== =========
September 30, 2001
See notes to condensed financial statements.
F-25
HCSB FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands) Nine Months Ended
-----------------
September 30,
2001 2000
----- ----
Cash flows from operating activities:
Net income $ 658 $ 698
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 292 232
Provision for possible loan losses 238 196
Amortization less accretion on investments - 5
Amortization of deferred loan costs 101 90
Loss (gain) on sale of securities available-for-sale (6) 32
Loss (gain) on sale of premises and equipment 29 21
(Increase) decrease in interest receivable (269) (620)
Increase (decrease) in interest payable (57) (54)
(Increase) decrease in other assets (85) (420)
Increase (decrease) in other liabilities 88 66
------- ------
Net cash provided by operating activities 989 246
------- ------
Cash flows from investing activities:
Net increase in loans to customers (19,949) (15,669)
Purchases of securities available-for-sale (13,954) (100)
Maturities of securities available-for-sale 13,525 1,011
Proceeds for sales of securities available-for-sale 2,006 1,463
Proceeds from disposal of premises and equipment 20 82
Purchases of premises and equipment (298) (1,072)
Purchase of Federal Home Loan Bank stock - (230)
------- ------
Net cash used by investing activities (18,650) (14,515)
------- ------
Cash flows from financing activities:
Net increase in deposits accounts 5,976 20,605
Advances from Federal Home Loan Bank 5,000 4,600
Cash paid in lieu of fractional shares (15) -
Stock issuance costs (32) -
------- ------
Net cash provided by financing activities 10,929 25,205
------- ------
Net increase (decrease) in cash and cash equivalents (6,732) 10,936
Cash and cash equivalents, beginning of period 23,404 7,898
------- ------
Cash and cash equivalents, end of period $ 16,672 $ 18,834
======= =======
Cash paid during the period for:
Income taxes $ 356 $ 579
Interest $ 4,979 $ 4,222
See notes to condensed financial statements.
F-26
HCSB FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the requirements for interim financial statements and,
accordingly, they are condensed and omit disclosures, which would substantially
duplicate those contained in the most recent annual report to shareholders. The
financial statements as of September 30, 2001 and for the interim periods ended
September 30, 2001 and 2000 are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation. The financial information as of December 31,
2000 has been derived from the audited financial statements as of that date. For
further information, refer to the financial statements and the notes included in
HCSB Financial Corporation's 2000 Annual Report.
Note 2 - Comprehensive Income
The following table sets forth the amounts of other comprehensive income
included in equity along with the related tax effect for the nine months ended
September 30, 2001 and 2000 and for the three months ended September 30, 2001
and 2000:
(Dollars in thousands)
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------- ------- ---------
For the Nine Months Ended September 30, 2001:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 462 $ (171) $ 291
Plus: reclassification adjustment for (gains) losses (6) 2 (4)
realized in net income ----- ------ -----
Net unrealized gains (losses) on securities 456 (169) 287
----- ------ -----
Other comprehensive income $ 456 $ (169) $ 287
===== ====== =====
(Dollars in thousands)
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------- ------- ----------
For the Nine Months Ended September 30, 2000:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 165 $ (61) $ 104
Plus: reclassification adjustment for (gains) losses - - -
realized in net income ------ ----- -----
Net unrealized gains (losses) on securities 165 (61) 104
------ ----- -----
Other comprehensive income $ 165 $ (61) $ 104
====== ===== =====
F-27
HCSB FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 - Comprehensive Income - continued
(Dollars in thousands)
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------- ------- ----------
(Dollars in thousands)
For the Three Months Ended September 30, 2001:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 141 $ (52) $ 89
Plus: reclassification adjustment for (gains) losses - - -
realized in net income ----- ----- ------
Net unrealized gains (losses) on securities 141 (52) 89
----- ----- ------
Other comprehensive income $ 141 $ (52) $ 89
===== ===== ======
(Dollars in thousands)
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
------- ------- ----------
(Dollars in thousands)
For the Three Months Ended September 30, 2000:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 295 $ (108) $ 187
Plus: reclassification adjustment for (gains) losses 32 (11) 21
realized in net income ---- ----- ------
Net unrealized gains (losses) on securities 327 (119) 208
---- ----- ------
Other comprehensive income $ 327 $ (119) $ 208
==== ====== ======
Accumulated other comprehensive income consists solely of the unrealized gain on
securities available-for-sale, net of the deferred tax effects.
F-28
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
500,000 Shares
Page
---- HCSB FINANCIAL
Summary .............................3 CORPORATION
Risk Factors.........................7
The Offering........................10 A Bank Holding Company For
Plan of Distribution................11
How to Subscribe....................11 Horry County State Bank
Use of Proceeds ....................12
Market for Common Stock.............12
Determination of Offering Price.....13
Dividend Policy ....................13 Common Stock
Dilution............................14
Capitalization......................15
Management's Discussion and
Analysis of Financial
Condition and Results ------------------------
of Operations.....................16
Business............................35 Prospectus
Supervision and Regulation..........42
Management..........................49
Compensation of Directors ------------------------
and Executive Officers...........51
Certain Relationships and
Related Transactions..............52
Principal Shareholders..............53
Description of Securities...........54
Legal Matters.......................56
Experts.............................56
Additional Information .............56
Index to Financial Statements......F-1
-------------
You should rely only on the
information contained in this
prospectus. We have not authorized
anyone to give any information that is
different from that contained in this
prospectus. This prospectus is not an
offer to sell these securities in any
jurisdiction where the offer or sale is
not permitted. The information in this
prospectus is correct only as of the
date on the prospectus, regardless of
the time of the delivery of this
prospectus or any sale of these
securities.