10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________to_________

Commission File Number 000-26995

HCSB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

South Carolina	57-1079444
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

5201 Broad Street

Loris, South Carolina 29569

(Address of principal executive offices, including zip code)

(843) 756-6333

(Registrant’s telephone number, including area code)

________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o  No ý

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (do not check if smaller reporting company)	Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,738,337 shares of common stock, par value $.01 per share, were issued and outstanding as of August 12, 2014.

Index

PART I. FINANCIAL INFORMATION		Page No.
Item 1. Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations – Six and three months
	ended June 30, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) – Six and three months
	ended June 30, 2014 and 2013	5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity -
	Six months ended June 30, 2014 and 2013	6
	Condensed Consolidated Statements of Cash Flows –
	Six months ended June 30, 2014 and 2013	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
Item 3. Quantitative and Qualitative Disclosures about Market Risk		62
Item 4. Controls and Procedures		62
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		62
Item 1A. Risk Factors		64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		64
Item 3. Defaults Upon Senior Securities		64
Item 4. Mine Safety Disclosures		64
Item 5. Other Information		64
Item 6. Exhibits		64
SIGNATURES

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Item 1. Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(Dollars in thousands except share amounts)	2014			2013
Assets:	(unaudited)			(audited)
Cash and cash equivalents:
Cash and due from banks	$	29,368		$	28,081
Securities available-for-sale		120,420			94,602
Nonmarketable equity securities		1,567			1,743
Total investment securities		121,987			96,345
Loans receivable		251,372			256,424
Less allowance for loan losses		(6,974	)		(9,443	)
Loans, net		244,398			246,981
Premises and equipment, net		20,564			20,802
Accrued interest receivable		2,049			2,197
Cash value of life insurance		11,167			11,002
Other real estate owned		21,880			24,972
Other assets		1,213			4,206
Total assets	$	452,626		$	434,586
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	44,101		$	33,081
Interest-bearing transaction accounts		40,588			42,723
Money market savings accounts		80,810			78,829
Other savings accounts		10,094			8,872
Time deposits $100 and over		163,710			156,582
Other time deposits		79,838			85,957
Total deposits		419,141			406,044
Repurchase agreements		1,194			1,337
Advances from the Federal Home Loan Bank		22,000			22,000
Subordinated debentures		11,062			11,062
Junior subordinated debentures		6,186			6,186
Accrued interest payable		3,940			3,305
Other liabilities		893			1,094
Total liabilities		464,416			451,028
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $1,000 par value; 5,000,000 shares authorized;
12,895 shares issued and outstanding		12,828			12,771
Common stock, $0.01 par value, 500,000,000 shares authorized; 3,738,337 shares issued and outstanding		37			37
Capital surplus		30,224			30,224
Common stock warrant		1,012			1,012
Retained deficit		(54,027	)		(54,213	)
Accumulated other comprehensive loss		(1,864	)		(6,273	)
Total shareholders’ deficit		(11,790	)		(16,442	)
Total liabilities and shareholders’ deficit	$	452,626		$	434,586

The accompanying notes are an integral part of the condensed consolidated financial statements.

-3-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Six months ended June 30,						Three months ended June 30,
(Dollars in thousands except share amounts)	2014			2013			2014			2013
Interest income:
Loans, including fees	$	6,802		$	7,492		$	3,397		$	3,758
Investment securities:
Taxable		1,384			813			689			418
Tax-exempt		14			23			4			11
Nonmarketable equity securities		26			16			15			8
Other interest income		34			51			16			28
Total		8,260			8,395			4,121			4,223
Interest expense:
Deposits		1,538			1,677			770			818
Borrowings		1,025			1,085			484			547
Total		2,563			2,762			1,254			1,365
Net interest income		5,697			5,633			2,867			2,858
Provision for loan losses		—			(1,497	)		—			(497	)
Net interest income after provision for loan losses		5,697			7,130			2,867			3,355
Noninterest income:
Service charges on deposit accounts		445			449			224			217
Credit life insurance commissions		6			8			2			3
Gains on sales of securities available-for-sale		100			297			49			213
Gains on sales of mortgage loans		114			129			72			52
Other fees and commissions		237			139			143			72
Brokerage commissions		35			117			21			83
Income from cash value of life insurance		218			224			109			110
Other operating income		164			188			86			108
Total		1,319			1,551			706			858
Noninterest expenses:
Salaries and employee benefits		2,860			3,079			1,431			1,508
Net occupancy expense		624			599			322			297
Furniture and equipment expense		514			509			275			247
Marketing expense		11			3			2			1
FDIC insurance premiums		811			783			415			403
Net cost of operations of other real estate owned		161			1,136			324			714
Other operating expenses		1,741			1,831			865			966
Total		6,722			7,940			3,634			4,136
Income (loss) before income taxes		294			741			(61	)		77
Income tax expense		51			—			13			—
Net income (loss)	$	243		$	741		$	(74	)	$	77
Accretion of preferred stock to redemption value		(57	)		(107	)		—			(54	)
Preferred dividends		(461	)		(326	)		(296	)		(163	)
Net income (loss) available to common shareholders	$	(275	)	$	308		$	(370	)	$	(140	)
Net income (loss) per common share
Basic	$	(0.07	)	$	0.08		$	(0.10	)	$	(0.04	)
Diluted	$	(0.07	)	$	0.08		$	(0.10	)	$	(0.04	)
Weighted average common shares outstanding
Basic and diluted		3,738,337			3,738,337			3,738,337			3,738,337

The accompanying notes are an integral part of the condensed consolidated financial statements.

-4-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

	Six months ended June 30,
(Dollars in thousands)	2014			2013
Net income	$	243		$	741
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period		4,509			(3,181	)
Tax expense		—			—
Reclassification to realized gains		(100	)		(297	)
Tax expense		—			—
Other comprehensive income (loss)		4,409			(3,478	)
Comprehensive income (loss)	$	4,652		$	(2,737	)

	Three months ended June 30,
(Dollars in thousands)	2014			2013
Net income (loss)	$	(74	)	$	77
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period		1,891			(3,300	)
Tax expense		—			—
Reclassification to realized gains		(49	)		(213	)
Tax expense		—			—
Other comprehensive income (loss)		1,842			(3,513	)
Comprehensive income (loss)	$	1,768		$	(3,436	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

-5-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six months ended June 30, 2014 and 2013

(unaudited)

																Accumulated
																Other
					Common								Retained			Compre-
	Common Stock				Stock		Preferred Stock				Capital		Earnings			hensive
	Shares		Amount		Warrant		Shares		Amount		Surplus		(Deficit)			Income(Loss)			Total
(Dollars in thousands except share data)
Balance, December 31, 2012		3,738,337	$	37	$	1,012		12,895	$	12,572	$	30,224	$	(55,777	)	$	170		$	(11,762	)
Net income		—		—		—		—		—		—		741			—			741
Other comprehensive loss		—		—		—		—		—		—		—			(3,478	)		(3,478	)
Accretion of preferred stock to redemption value		—		—		—		—		107		—		(107	)		—			—
Balance, June 30, 2013		3,738,337	$	37	$	1,012		12,895	$	12,679	$	30,224	$	(55,143	)	$	(3,308	)	$	(14,499	)
Balance, December 31, 2013		3,738,337	$	37	$	1,012		12,895	$	12,771	$	30,224	$	(54,213	)	$	(6,273	)	$	(16,442	)
Net income		—		—		—		—		—		—		243			—			243
Other comprehensive income		—		—		—		—		—		—		—			4,409			4,409
Accretion of preferred stock to redemption value		—		—		—		—		57		—		(57	)		—			—
Balance, June 30, 2014		3,738,337	$	37	$	1,012		12,895	$	12,828	$	30,224	$	(54,027	)	$	(1,864	)	$	(11,790	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

-6-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)	Six months ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	243		$	741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		404			425
Provision for loan losses		—			(1,497	)
Amortization less accretion on investments		94			228
Net gains on sales of securities available-for-sale		(100	)		(297	)
Net gains on sales of other real estate owned		(337	)		(42	)
Writedowns of other real estate owned		13			556
Increase in accrued interest payable		635			576
Decrease in accrued interest receivable		148			46
(Increase) decrease in other assets		2,993			(157	)
Income (net of mortality cost) on cash value of life insurance		(165	)		(174	)
Increase (decrease) in other liabilities		(201	)		329
Net cash provided by operating activities		3,727			734
Cash flows from investing activities:
Decrease in loans to customers		1,678			7,038
Purchases of securities available-for-sale		(47,826	)		(40,187	)
Maturities, calls and principal paydowns of securities available-for-sale		7,920			7,752
Proceeds from sales of other real estate owned		4,321			2,559
Proceeds from sales of securities available-for-sale		18,503			25,885
Redemptions of nonmarketable equity securities		176			240
Purchases of premises and equipment, net		(166	)		(8	)
Net cash provided by (used by) investing activities		(15,394	)		3,279
Cash flows from financing activities:
Net increase in demand deposits and savings		12,088			10,052
Net increase (decrease) in time deposits		1,009			(12,110	)
Net increase (decrease) in repurchase agreements		(143	)		1,167
Net cash provided by (used by) financing activities		12,954			(891	)
Net increase in cash and cash equivalents		1,287			3,122
Cash and cash equivalents, beginning of period		28,081			46,600
Cash and cash equivalents, end of period	$	29,368		$	49,722
Cash paid during the period for:
Income taxes	$	37		$	—
Interest	$	1,928		$	2,186
Noncash investing and financing activities:
Transfers of loans to other real estate owned	$	905		$	7,094

The accompanying notes are an integral part of the condensed consolidated financial statements.

-7-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED 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”) which was incorporated on June 10, 1999 to serve as a bank holding company for its wholly owned subsidiary, Horry County State Bank (the “Bank”). The Bank was incorporated on December 18, 1987, and opened for operations on January 4, 1988. The principal business activity of the Company is to provide commercial banking services in Horry County, South Carolina, and in Columbus and Brunswick Counties, North Carolina. The Bank is a state-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). HCSB Financial Trust I (the “Trust”) is a special purpose subsidiary organized for the sole purpose of issuing trust preferred securities. The operations of the Trust have not been consolidated in these financial statements.

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of June 30, 2014 and for the interim periods ended June 30, 2014 and 2013 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The financial information as of December 31, 2013 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 2013 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2014.

On March 6, 2009, as part of the Troubled Asset Relief Program Capital Purchase Program (the “CPP”) established by the U.S. Department of the Treasury (the “U.S. Treasury”) under the Emergency Economic Stabilization Act of 2009, the Company issued and sold to the U.S. Treasury (i) 12,895 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series T, having a liquidation preference of $1,000 per share (the “Series T Preferred Stock”), and (ii) a ten-year warrant to purchase up to 91,714 shares of its common stock at an initial exercise price of $21.09 per share (the “CPP Warrant”), for an aggregate purchase price of $12.9 million in cash. Refer to the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

As of February 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulator, has required the Company to defer dividend payments on the 12,895 shares of the Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities issued in December 2004. Therefore, for each quarterly period beginning in February 2011, the Company notified the U.S. Treasury of its deferral of quarterly dividend payments on the Series T Preferred Stock and also informed the Trustee of the trust preferred securities of its deferral of the quarterly interest payments on the trust preferred securities. On May 15, 2014, the dividend rate on the Series T Preferred Stock increased from 5% per annum (approximately $645 thousand annually) to 9% per annum (approximately $1.2 million annually). As of June 30, 2014, the Company had $2.4 million of deferred dividend payments due on the Series T Preferred Stock. Because the Company has deferred these 14 payments, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full. In addition, whenever dividends payable on the shares of the Series T Preferred Stock have been deferred for an aggregate of six or more quarterly dividend periods, the holders of the preferred stock have the right to elect two directors to fill newly created directorships at the Company’s next annual meeting of the shareholders. As a result of the Company’s deferral of dividend payments on the Series T Preferred Stock, the U.S. Treasury, the current holder of all 12,895 shares of the Series T Preferred Stock, requested the Company’s non-objection to appoint a representative to observe monthly meetings of the Company’s Board of Directors. The Company granted the Treasury’s request and a representative of Treasury has attended the Company’s monthly board meetings since June 2012. As of the date of this report, the U.S. Treasury has not exercised its right to elect two directors to fill newly created directorships and has not notified the Company whether it intends to elect two directors to fill newly created directorships at the Company’s 2015 annual meeting of the shareholders.

-8-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

The Company has never paid a cash dividend, but, as a result of the Company’s financial condition and these restrictions on the Company, including the restrictions on the Bank’s ability to pay dividends to the Company, the Company has not been permitted to pay a dividend on its common stock since 2009.

Management’s Estimates - In preparing the consolidated 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 income 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.

Investment Securities - Investment securities available-for-sale owned by the Company are carried at amortized cost and adjusted to their estimated fair value for reporting purposes. The unrealized gain or loss is recorded in shareholders’ equity net of any 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 (the “FHLB”). The FHLB stock is carried at cost because the stock has no quoted market value and no ready market exists. Investment in FHLB stock is a condition of borrowing from the FHLB, and the stock is pledged to collateralize the borrowings. Dividends received on FHLB stock are included as a separate component in interest income.

Loans Receivable - Loans receivable are stated at their unpaid principal balance, less any charge-offs. Interest income on 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 contractually 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 deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method.

-9-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Loans are 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 these 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 and home equity lines as such exceptions. Therefore, loans within the real estate and commercial loan portfolios are reviewed individually.

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 off with a corresponding entry to the allowance for loan losses. The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily throughout Horry County in South Carolina and Columbus and Brunswick counties of North Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. However, the loan portfolio does include a concentration in loans secured by residential and commercial real estate and commercial and industrial non-real estate loans. These loans are especially susceptible to being adversely effected by the current economic downturn. The current downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and these trends may continue, especially in the Myrtle Beach area. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The commercial real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values in our market areas continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

-10-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management’s judgments about the adequacy of the allowance are based on numerous assumptions about current events, which management believes to be reasonable, but which may or may not prove to be accurate. Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company.

The allowance is subject to examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require the Company to adjust its allowance based on information available to them at the time of their examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

Premises, Furniture and Equipment - Premises, furniture 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; and furniture and equipment - three to 25 years. The cost of assets sold or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts, and the resulting gains or losses are reflected in the income statement.

Maintenance and repairs are charged to current expense as incurred, and the costs of major renewals and improvements are capitalized.

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at appraised value.

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 net cost of operations of other real estate owned.

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 – The Company files consolidated federal and state income tax returns. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis. The Company accounts for income taxes based on two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to uncertain tax positions, if any.

-11-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Deferred income taxes are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax impacts of the differences between the book and tax bases of assets and liabilities and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to the Company’s judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties, if any, are recognized as a component of income tax expense.

The Company reviews the deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income available under tax law, including future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, projections of future operating results, cumulative tax losses over the past three years, tax loss deductibility limitations, and available tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance against the deferred tax asset must be established with a corresponding charge to income tax expense. The deferred tax assets and valuation allowance are evaluated each quarter, and a portion of the valuation allowance may be reversed in future periods. The determination of how much of the valuation allowance that may be reversed and the timing is based on future results of operation and the amount and timing of actual loan charge-offs and asset write-downs. At June 30, 2014 and December 31, 2013, the Company’s deferred tax asset was offset in its entirety by a valuation allowance.

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore no reserves for uncertain income tax positions have been recorded.

Net Income (Loss) Per Common Share - Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares. The computation of diluted net loss per share does not include potential common shares as their effect would be anti-dilutive.

Comprehensive Income - Accounting principles generally require recognized income, expenses, gains, and losses to 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.

Statements of Cash Flows - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks, federal funds sold, and interest-bearing deposits with other banks.

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.

-12-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Recently Issued Accounting Pronouncements – The following is a summary of recent authoritative pronouncements.

In January 2014, the Financial Accounting Standards Board (the “FASB”) amended the Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan portfolio that results from a borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

-13-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - continued

Additionally, the Company is subject to certain regulations due to our participation in the CPP. Pursuant to the terms of the CPP Purchase Agreement between us and the U.S. Treasury, we adopted certain standards for executive compensation and corporate governance for the period during which the Treasury holds the equity issued pursuant to the CPP Purchase Agreement, including the common stock which may be issued pursuant to the CPP Warrant. These standards generally apply to our named executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) requiring clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibiting on making golden parachute payments to senior executives; (4) prohibiting tax gross-up provisions; and (5) agreeing not to deduct for tax purposes executive compensation in excess of $500 thousand for each senior executive. In particular, the change to the deductibility limit on executive compensation will likely increase the overall cost of our compensation programs in future periods and may make it more difficult to attract suitable candidates to serve as executive officers.

In February 2005 the Bank purchased a $500 thousand 15-year renewable and convertible term life insurance policy through Banner Life Insurance Company on the life of James R. Clarkson, President and CEO. The Bank is both the owner and the beneficiary of this key person policy. The purpose of securing this policy was to provide the Bank with financial protection in the event of the unexpected death of Mr. Clarkson and better enable the Bank to attract a qualified replacement for Mr. Clarkson in such a situation.

Legislation that has been adopted after we closed on our sale of Series T Preferred Stock and the CPP Warrant to the U.S. Treasury for $12.9 million pursuant to the CPP on March 6, 2009, or any legislation or regulations that may be implemented in the future, may have a material impact on the terms of our CPP transaction with the U.S. Treasury.

Reclassifications - Certain captions and amounts for prior periods have been reclassified to conform to the June 30, 2014 presentation.

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS

Consent Order with the Federal Deposit Insurance Corporation and South Carolina Board of Financial Institutions

On February 10, 2011, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the South Carolina Board of Financial Institutions (the “State Board”). 

The Consent Order conveys specific actions needed to address the Bank’s current financial condition, primarily related to capital planning, liquidity/funds management, policy and planning issues, management oversight, loan concentrations and classifications, and non-performing loans. A summary of the requirements of the Consent Order and the Bank’s status on complying with the Consent Order is as follows:

-14-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

Requirements of the Consent Order	Bank’s Compliance Status
Achieve and maintain, by July 10, 2011, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets.	The Bank did not meet the capital ratios as specified in the Consent Order and, as a result, submitted a revised capital restoration plan to the FDIC on July 15, 2011. The revised capital restoration plan was determined by the FDIC to be insufficient and, as a result, we submitted a further revised capital restoration plan to the FDIC on September 30, 2011. We received the FDIC’s non-objection to the further revised capital restoration plan on December 6, 2011. The Bank is working diligently to increase its capital ratios in order to strengthen its balance sheet and satisfy the commitments required under the Consent Order. The Bank has engaged independent third parties to assist the Bank in its efforts to increase its capital ratios. In addition to continuing to search for additional capital, the Bank is also searching for a potential merger partner. There can be no assurances the Company will either raise additional capital or find a merger partner.
Submit, by April 11, 2011, a written capital plan to the supervisory authorities.	We believe we have complied with this provision of the Consent Order.
Establish, by March 12, 2011, a plan to monitor compliance with the Consent Order, which shall be monitored by the Bank’s Directors’ Committee.	We believe we have complied with this provision of the Consent Order. The Directors’ Committee meets monthly and each meeting includes reviews and discussions of all areas required in the Consent Order.

-15-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

Develop, by May 11, 2011, a written analysis and assessment of the Bank’s management and staffing needs. We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to perform an assessment of the Bank’s staffing needs to ensure the Bank has an appropriate organizational structure with qualified management in place. The Board of Directors has reviewed all recommendations regarding the Bank’s organizational structure.  

Notify the supervisory authorities in writing of the resignation or termination of any of the Bank’s directors or senior executive officers.	We believe we have complied with this provision of the Consent Order.
Eliminate, by March 12, 2011, by charge-off or collection, all assets or portions of assets classified “Loss” and 50% of those assets classified “Doubtful.”	We believe we have complied with this provision of the Consent Order.
Review and update, by April 11, 2011, its policy to ensure the adequacy of the Bank’s allowance for loan and lease losses, which must provide for a review of the Bank’s allowance for loan and lease losses at least once each calendar quarter.	We believe we have complied with this provision of the Consent Order.
Submit, by April 11, 2011, a written plan to the supervisory authorities to reduce classified assets, which shall include, among other things, a reduction of the Bank’s risk exposure in relationships with assets in excess of $750,000 which are criticized as “Substandard” or “Doubtful”.  In accordance with the approved plan, reduce assets classified in the June 30, 2010 Report of Examination by 65% by August 11, 2012 and by 75% by February 9, 2013.	We are not in compliance with this provision of the Consent Order. The written plan was submitted and approved; however, assets classified in the June 30, 2010 Report of Examination had only been reduced by 71.76% as of June 30, 2014 and 68.76% as of December 31, 2013.
Revise, by April 11, 2011, its policies and procedures for managing the Bank’s Adversely Classified Other Real Estate Owned.	We believe we have complied with this provision of the Consent Order.

-16-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

Not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been criticized, in whole or in part, “Substandard” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.	We believe we have complied with this provision of the Consent Order.  In the second quarter of 2010, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.  An independent review of the Bank’s credit portfolio was most recently completed in the second quarter of 2014.
Perform, by April 11, 2011, a risk segmentation analysis with respect to the Bank’s Concentrations of Credit and develop a written plan to systematically reduce any segment of the portfolio that is an undue concentration of credit.	We believe we have complied with this provision of the Consent Order.
Review, by April 11, 2011 and annually thereafter, the Bank’s loan policies and procedures for adequacy and, based upon this review, make all appropriate revisions to the policies and procedures necessary to enhance the Bank’s lending functions and ensure their implementation.	We believe we have complied with this provision of the Consent Order. As noted above, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.
Adopt, by May 11, 2011, an effective internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality.	We believe we have complied with this provision of the Consent Order. As noted above, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.

-17-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

Review and update, by May 11, 2011, its written profit plan to ensure the Bank has a realistic, comprehensive budget for all categories of income and expense, which must address, at minimum, goals and strategies for improving and sustaining the earnings of the Bank, the major areas in and means by which the Bank will seek to improve the Bank’s operating performance, realistic and comprehensive budgets, a budget review process to monitor income and expenses of the Bank to compare actual results with budgetary projections, assess that operating assumptions that form the basis for budget projections and adequately support major projected income and expense components of the plan, and coordination of the Bank’s loan, investment, and operating policies and budget and profit planning with the funds management policy.	We believe we have complied with this provision of the Consent Order.  The Bank engaged an independent third party to assist management with a strategic plan to help restructure its balance sheet, increase capital ratios, return to profitability and maintain adequate liquidity.
Review and update, by May 11, 2011, its written plan addressing liquidity, contingent funding, and asset liability management.	We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to assist management in its development of a strategic plan that achieves all requirements of the Consent Order. The strategic plan reflects the Bank’s plans to restructure its balance sheet, increase capital ratios, return to profitability, and maintain adequate liquidity. The Board of Directors has reviewed and adopted the Bank’s strategic plan.
Eliminate, by March 12, 2011, all violations of law and regulation or contraventions of policy set forth in the FDIC’s safety and soundness examination of the Bank in November 2009.	We believe we have complied with this provision of the Consent Order.
Not accept, renew, or rollover any brokered deposits unless it is in compliance with the requirements of 12 C.F.R. § 337.6(b).	Since entering into the Consent Order, the Bank has not accepted, renewed, or rolled-over any brokered deposits.
Limit asset growth to 5% per annum.	We believe we have complied with this provision of the Consent Order.

-18-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

Not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.	We believe we have complied with this provision of the Consent Order.
The Bank shall comply with the restrictions on the effective yields on deposits as described in 12 C.F.R. § 337.6.	We believe we have complied with this provision of the Consent Order.
Furnish, by March 12, 2011 and within 30 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order.	We believe we have complied with this provision of the Consent Order, and we have submitted the required progress reports to the supervisory authorities.

Submit, by March 12, 2011, a written plan to the supervisory authorities for eliminating its reliance on brokered deposits.	We believe we have complied with this provision of the Consent Order.
Adopt, by April 11, 2011, an employee compensation plan after undertaking an independent review of compensation paid to all of the Bank’s senior executive officers.	We believe we have complied with this provision of the Consent Order.
Prepare and submit, by May 11, 2011, its written strategic plan to the supervisory authorities.	We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to assist management in its development of a strategic plan that achieves all requirements of the Consent Order. The Board of Directors has reviewed and adopted the Bank’s strategic plan.

There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of the Bank’s compliance will be made by the FDIC and the State Board. In addition, the supervisory authorities may amend the Consent Order based on the results of their ongoing examinations. However, we believe we are currently in substantial compliance with the Consent Order except for the requirements to achieve and maintain Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets. Should we fail to comply with the capital requirements in the Consent Order, or suffer a continued deterioration in our financial condition, the Bank may be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed as conservator or receiver.

-19-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited CONDENSED Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

As of June 30, 2014, the Company was categorized as “critically undercapitalized” and the Bank was categorized as “significantly undercapitalized.” Our losses over the past few years have materially adversely impacted our capital. As a result, we have been pursuing a plan through which to achieve the capital requirements set forth under the Consent Order which includes, among other things, the sale of assets, reduction in total assets, and reduction of overhead expenses, as well as raising additional capital at either the Bank or the holding company level and attempting to find a merger partner for the Company or the Bank.

We anticipate that we will need to raise a material amount of capital to return the Bank to an adequate level of capitalization and have been exploring a number of potential sources of capital. We have not had any success to date in raising this capital, and there are no assurances that we will be able to raise this capital on a timely basis or at all.

We are also working to improve asset quality and to reduce the Bank’s investment in commercial real estate loans as a percentage of Tier 1 capital. The Company is reducing its reliance on brokered deposits and is committed to improving the Bank’s capital position.

Written Agreement

On May 9, 2011, the Company entered into a Written Agreement with the Federal Reserve Bank of Richmond.  The Written Agreement is designed to enhance the Company’s ability to act as a source of strength to the Bank.

The Written Agreement contains provisions similar to those in the Bank’s Consent Order. Specifically, pursuant to the Written Agreement, the Company agreed, among other things, to seek the prior written approval of the Federal Reserve Bank of Richmond before undertaking any of the following activities:

· declaring or paying any dividends,

· directly or indirectly taking dividends or any other form of payment representing a reduction in capital from the Bank,

· making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities,

· directly or indirectly, incurring, increasing or guarantying any debt, and

· directly or indirectly, purchasing or redeeming any shares of its stock.

The Company also agreed to comply with certain notice provisions set forth in the Federal Deposit Insurance Act and regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position.  The Company is also required to comply with certain restrictions on indemnification and severance payments pursuant to the Federal Deposit Insurance Act and FDIC regulations.

We believe we are currently in substantial compliance with the Written Agreement.

Going Concern Considerations

The going concern assumption is a fundamental principle in the preparation of financial statements. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In assessing this assumption, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of June 30, 2014. Prior to 2009, the Company had a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank’s financial condition has suffered during the past five years from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression.

-20-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

The effects of the current economic environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans to the Bank. As a result, the Bank’s level of nonperforming assets increased substantially during 2010 and 2011. However, since 2012, the Bank’s nonperforming assets have begun to stabilize. Specifically, nonperforming assets at June 30, 2014 were $56.3 million compared to $60.6 million at December 31, 2013 and $72.2 million at December 31, 2012. As a percentage of total assets, nonperforming assets were 12.45%, 13.95% and 15.39% as of June 30, 2014, and December 31, 2013 and 2012, respectively. While management recognizes the possibility of further deterioration in the loan portfolio, net loan charge-offs have decreased from $17.6 million for the year ended December 31, 2012 to $3.2 million for the year ended December 31, 2013. Year-to-date net charge-offs for the six months ended June 30, 2014 were $2.5 million.

The Company and the Bank operate in a highly regulated industry and must plan for the liquidity needs of each entity separately. A variety of sources of liquidity have historically been available to the Bank to meet its short-term and long-term funding needs. Although a number of these sources have been limited following execution of the Consent Order, management has prepared forecasts of these sources of funds and the Bank’s projected uses of funds during 2014 in an effort to ensure that the sources available are sufficient to meet the Bank’s projected liquidity needs for this period.

Prior to the economic downturn, the Company, if needed, would have relied on dividends from the Bank as its primary source of liquidity. Currently, however, the Company has no available sources of liquidity. The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, the terms of the Consent Order described below further limits the Bank’s ability to pay dividends to the Company to satisfy its funding needs. Unless the Company is able to raise capital, it will have no means of satisfying its funding needs.

Management believes the Bank’s liquidity sources are adequate to meet its needs for at least the next 12 months, but if the Bank is unable to meet its liquidity needs, then the Bank may be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed conservator or receiver.

The Company will also need to raise substantial additional capital to increase the Bank’s capital levels to meet the standards set forth by the FDIC. As a result of the recent downturn in the financial markets and the financial condition of the Company and the Bank, the availability of capital has become significantly restricted or has become increasingly costly as compared to the prevailing market rates prior to the volatility. Management cannot predict when or if the capital markets will return to more favorable conditions. Management is actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the Bank’s projected level of regulatory capital can support its balance sheet. Receivership by the FDIC is based on the Bank’s capital ratios rather than those of the Company. As of June 30, 2014, the Bank is categorized as significantly undercapitalized.

There can be no assurances that the Company or the Bank will be able to raise additional capital. An equity financing transaction by the Company would result in substantial dilution to the Company’s current shareholders and could adversely affect the market price of the Company’s common stock. Likewise, an equity financing transaction by the Bank would result in substantial dilution to the Company’s ownership interest in the Bank. It is difficult to predict if these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company would be unable to realize its assets and discharge its liabilities in the normal course of business.

-21-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS - continued

As a result of management’s assessment of the Company’s ability to continue as a going concern, the accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets. There is substantial doubt about the Company’s ability to continue as a going concern.

NOTE 3 - INVESTMENT SECURITIES

Securities available-for-sale consisted of the following:

	Amortized		Gross Unrealized					Estimated
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2014
Government-sponsored enterprises	$	50,531	$	24	$	(2,080	)	$	48,475
Mortgage-backed securities		70,507		807		(568	)		70,746
Obligations of state and local governments		1,248		—		(49	)		1,199
Total	$	122,286	$	831	$	(2,697	)	$	120,420
December 31, 2013
Government-sponsored enterprises	$	60,628	$	—	$	(5,553	)	$	55,075
Mortgage-backed securities		37,731		167		(864	)		37,034
Obligations of state and local governments		2,516		113		(136	)		2,493
Total	$	100,875	$	280	$	(6,553	)	$	94,602

The following is a summary of maturities of securities available-for-sale as of June 30, 2014. 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.

	Securities
	Available-For-Sale
	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Due after one year but within five years	$	1,491	$	1,501
Due after five years but within ten years		21,156		20,974
Due after ten years		99,639		97,945
Total	$	122,286	$	120,420

-22-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at:

	June 30, 2014
	Less than twelve months					Twelve months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	4,893	$	(107	)	$	38,057	$	(1,973	)	$	42,950	$	(2,080	)
Mortgage-backed securities		13,166		(237	)		9,492		(331	)		22,658		(568	)
Obligations of state and local governments		608		(8	)		591		(41	)		1,199		(49	)
Total	$	18,667	$	(352	)	$	48,140	$	(2,345	)	$	66,807	$	(2,697	)

	December 31, 2013
	Less than twelve months					Twelve months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	47,311	$	(4,433	)	$	7,764	$	(1,120	)	$	55,075	$	(5,553	)
Mortgage-backed securities		17,826		(471	)		7,373		(393	)		25,199		(864	)
Obligations of state and local governments		552		(67	)		568		(69	)		1,120		(136	)
Total	$	65,689	$	(4,971	)	$	15,705	$	(1,582	)	$	81,394	$	(6,553	)

Management evaluates its investment portfolio periodically to identify any impairment that is other than temporary. At June 30, 2014, the Company had 18 government-sponsored enterprise securities, six mortgage-backed securities and one state and local government obligation security that have been in an unrealized loss position for more than twelve months. Management believes these losses are temporary and are a result of the current interest rate environment. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.

At June 30, 2014, investment securities with a book value of $45.3 million and a market value of $44.0 million were pledged to secure deposits.

Proceeds from sales of available-for-sale securities were $18.5 million and $25.9 million for the six-month periods ended June 30, 2014 and 2013, respectively and $11.1 million and $6.4 million for the three-month periods ended June 30, 2014 and 2013, respectively. Gross realized gains and losses on sales of available-for-sale securities for the periods ended were as follows:

(Dollars in thousands)	Three months ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
Gross realized gains	$	71		$	213	$	135		$	297
Gross realized losses		(22	)		—		(35	)		—
Net gain	$	49		$	213	$	100		$	297

-23-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE

Loans consisted of the following:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Residential	$	83,275	$	84,335
Commercial Real Estate		123,744		130,450
Commercial		36,796		33,711
Consumer		7,557		7,928
Total gross loans	$	251,372	$	256,424

Provision and Allowance for Loan Losses

An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent losses in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

In evaluating the adequacy of the Company’s loan loss reserves, management identifies loans believed to be impaired. Impaired loans are those not likely to be repaid as to principal and interest in accordance with the terms of the loan agreement. Impaired loans are reviewed individually by management and the net present value of the collateral is estimated. Reserves are maintained for each loan in which the principal balance of the loan exceeds the net present value of the collateral. In addition to the specific allowance for individually reviewed loans, a general allowance for potential loan losses is established based on management’s review of the composition of the loan portfolio with the purpose of identifying any concentrations of risk, and an analysis of historical loan charge-offs and recoveries. The final component of the allowance for loan losses incorporates management’s evaluation of current economic conditions and other risk factors which may impact the inherent losses in the loan portfolio. These evaluations are highly subjective and require that a great degree of judgmental assumptions be made by management. This component of the allowance for loan losses includes additional estimated reserves for internal factors such as changes in lending staff, loan policy and underwriting guidelines, and loan seasoning and quality, and external factors such as national and local economic trends and conditions.

-24-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

The following table details the activity within our allowance for loan losses as of and for the periods ended June 30, 2014 and 2013 and as of and for the year ended December 31, 2013, by portfolio segment:

June 30, 2014

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,020		$	5,312		$	144		$	2,967		$	9,443
Charge-offs		(278	)		(2,258	)		(283	)		(595	)		(3,414	)
Recoveries		417			353			18			157			945
Provision		(34	)		452			450			(868	)		—
Ending balance	$	1,125		$	3,859		$	329		$	1,661		$	6,974
Ending balances:
Individually evaluated for impairment	$	283		$	910		$	13		$	711		$	1,917
Collectively evaluated for impairment	$	842		$	2,949		$	316		$	950		$	5,057
Loans receivable:
Ending balance, total	$	36,796		$	123,744		$	7,557		$	83,275		$	251,372
Ending balances:
Individually evaluated for impairment	$	4,752		$	26,711		$	503		$	12,306		$	44,272
Collectively evaluated for impairment	$	32,044		$	97,033		$	7,054		$	70,969		$	207,100

-25-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

June 30, 2013

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,982		$	7,587		$	124		$	4,457		$	14,150
Charge-offs		(1,272	)		(1,584	)		(118	)		(373	)		(3,347	)
Recoveries		182			1,186			26			501			1,895
Provision		433			(1,618	)		90			(402	)		(1,497	)
Ending balance	$	1,325		$	5,571		$	122		$	4,183		$	11,201
Ending balances:
Individually evaluated for impairment	$	170		$	2,772		$	17		$	1,328		$	4,287
Collectively evaluated for impairment	$	1,155		$	2,799		$	105		$	2,855		$	6,914
Loans receivable:
Ending balance, total	$	42,554		$	149,454		$	8,050		$	86,592		$	286,650
Ending balances:
Individually evaluated for impairment	$	4,426		$	39,282		$	216		$	12,419		$	56,343
Collectively evaluated for impairment	$	38,128		$	110,172		$	7,834		$	74,173		$	230,307

-26-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

December 31, 2013

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,982		$	7,587		$	124		$	4,457		$	14,150
Charge-offs		(1,691	)		(3,927	)		(217	)		(1,641	)		(7,476	)
Recoveries		724			2,230			48			1,264			4,266
Provision		5			(578	)		189			(1,113	)		(1,497	)
Ending balance	$	1,020		$	5,312		$	144		$	2,967		$	9,443
Ending balances:
Individually evaluated for impairment	$	218		$	2,455		$	18		$	1,105		$	3,796
Collectively evaluated for impairment	$	802		$	2,857		$	126		$	1,862		$	5,647
Loans receivable:
Ending balance, total	$	33,711		$	130,450		$	7,928		$	84,335		$	256,424
Ending balances:
Individually evaluated for impairment	$	3,946		$	29,540		$	223		$	11,970		$	45,679
Collectively evaluated for impairment	$	29,765		$	100,910		$	7,705		$	72,365		$	210,745

Loan Performance and Asset Quality

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed in nonaccrual status, interest accruals are discontinued and income earned but not collected is reversed. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce principal.

-27-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

The following chart summarizes delinquencies and nonaccruals, by portfolio class, as of June 30, 2014 and December 31, 2013.

June 30, 2014

(Dollars in thousands)

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual
Commercial	$	14	$	63	$	38	$	115	$	36,681	$	36,796	$	358
Commercial real estate:
Construction		135		—		505		640		35,596		36,236		2,958
Other		226		92		2,767		3,085		84,423		87,508		2,892
Real Estate:
Residential		756		853		2,736		4,345		78,930		83,275		3,121
Consumer:
Other		8		29		28		65		6,835		6,900		57
Revolving credit		2		1		3		6		651		657		289
Total	$	1,141	$	1,038	$	6,077	$	8,256	$	243,116	$	251,372	$	9,675

December 31, 2013

(Dollars in thousands)

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual
Commercial	$	771	$	146	$	407	$	1,324	$	32,387	$	33,711	$	430
Commercial real estate:
Construction		215		33		2,243		2,491		36,408		38,899		4,208
Other		1,156		—		3,414		4,570		86,981		91,551		4,017
Real Estate:
Residential		2,188		830		1,381		4,399		79,936		84,335		1,936
Consumer:
Other		191		219		35		445		6,710		7,155		40
Revolving credit		18		3		—		21		752		773		—
Total	$	4,539	$	1,231	$	7,480	$	13,250	$	243,174	$	256,424	$	10,631

There were no loans outstanding 90 days or more and still accruing interest at June 30, 2014 or December 31, 2013.

-28-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

The following table summarizes management’s internal credit risk grades, by portfolio class, as of June 30, 2014 and December 31, 2013.

June 30, 2014

(Dollars in thousands)

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	1,400	$	—	$	724	$	—	$	2,124
Grade 2 – Modest		1,123		984		99		1,392		3,598
Grade 3 – Average		3,132		6,000		908		3,334		13,374
Grade 4 – Satisfactory		20,465		65,241		4,889		55,892		146,487
Grade 5 – Watch		2,742		16,921		234		4,946		24,843
Grade 6 – Special Mention		1,643		9,248		152		4,120		15,163
Grade 7 – Substandard		6,291		25,350		551		13,591		45,783
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	36,796	$	123,744	$	7,557	$	83,275	$	251,372

December 31, 2013

(Dollars in thousands)

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	1,364	$	—	$	775	$	—	$	2,139
Grade 2 – Modest		314		1,066		98		1,835		3,313
Grade 3 – Average		4,782		6,412		914		3,437		15,545
Grade 4 – Satisfactory		17,092		67,453		5,045		53,868		143,458
Grade 5 – Watch		3,204		17,288		221		6,933		27,646
Grade 6 – Special Mention		1,788		10,028		133		5,127		17,076
Grade 7 – Substandard		5,167		28,203		742		13,135		47,247
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	33,711	$	130,450	$	7,928	$	84,335	$	256,424

-29-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

Loans graded one through four are considered “pass” credits. As of June 30, 2014, $165.6 million, or 65.9% of the loan portfolio, had a credit grade of “minimal,” “modest,” “average” or “satisfactory.” For loans to qualify for these grades, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment.

Loans with a credit grade of “watch” and “special mention” are not considered classified; however, they are categorized as a watch list credit and are considered potential problem loans. This classification is utilized by us when there is an initial concern about the financial health of a borrower.  These loans are designated as such in order to be monitored more closely than other credits in the portfolio.  Loans on the watch list are not considered problem loans until they are determined by management to be classified as substandard. As of June 30, 2014, loans with a credit grade of “watch” and “special mention” totaled $40.0 million. Watch list loans are considered potential problem loans and are monitored as they may develop into problem loans in the future. 

Loans graded “substandard” or greater are considered classified credits. At June 30, 2014, classified loans totaled $45.8 million, with $38.9 million being collateralized by real estate. Classified credits are evaluated for impairment on a quarterly basis.

The Bank identifies impaired loans through its normal internal loan review process. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis by calculating either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Any resultant shortfall is charged to provision for loan losses and is classified as a specific reserve. When an impaired loan is ultimately charged-off, the charge-off is taken against the specific reserve.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Impaired consumer and residential loans are identified for impairment disclosures, however, it is policy to individually evaluate for impairment all loans with a credit grade of “substandard” or greater that have an outstanding balance of $50 thousand or greater, and all loans with a credit grade of “special mention” that have outstanding principal balance of $100 thousand or greater.

Impaired loans are valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. At June 30, 2014, the recorded investment in impaired loans was $44.3 million, compared to $45.7 million at December 31, 2013.

The following chart details our impaired loans, which includes troubled debt restructurings (“TDRs”) totaling $29.5 million and $31.5 million, by category as of June 30, 2014 and December 31, 2013, respectively:

-30-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to UNAUDITED Condensed Consolidated Financial Statements

NOTE 4 – LOAN PORTFOLIO – continued

June 30, 2014

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,998	$	2,188	$	—	$	2,717	$	26
Commercial real estate		17,948		22,390		—		23,627		642
Residential		4,906		5,913		—		6,245		108
Consumer		347		369		—		558		4
Total:	$	25,199	$	30,860	$	—	$	33,147	$	780
With an allowance recorded:
Commercial		2,754		2,754		283		2,804		48
Commercial real estate		8,763		8,763		910		8,807		216
Residential		7,400		7,400		711		7,422		164
Consumer		156		162		13		161		4
Total:	$	19,073	$	19,079	$	1,917	$	19,194	$	432
Total:
Commercial		4,752		4,942		283		5,521		74
Commercial real estate		26,711		31,153		910		32,434		858
Residential		12,306		13,313		711		13,667		272
Consumer		503		531		13		719		8
Total:	$	44,272	$	49,939	$	1,917	$	52,341	$	1,212

December 31, 2013

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,464	$	1,657	$	—	$	1,621	$	50
Commercial real estate		14,120		17,052		—		14,275		606
Residential		3,729		4,366		—		3,901		206
Consumer		55		79		—		60		7
Total:	$	19,368	$	23,154	$	—	$	19,857	$	869
With an allowance recorded:
Commercial		2,482		2,482		218		2,556		106
Commercial real estate		15,420		15,747		2,455		15,674		469
Residential		8,241		8,454		1,105		8,381		384
Consumer		168		168		18		163		8
Total:	$	26,311	$	26,851	$	3,796	$	26,774	$	967
Total:
Commercial		3,946		4,139		218		4,177		156
Commercial real estate		29,540		32,799		2,455		29,949		1,075
Residential		11,970		12,820		1,105		12,282		590
Consumer		223		247		18		223		15
Total:	$	45,679	$	50,005	$	3,796	$	46,631	$	1,836

-31-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

TDRs are loans which have been restructured from their original contractual terms and include concessions that would not otherwise have been granted outside of the financial difficulty of the borrower. We only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans.

With respect to restructured loans, we grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt, or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. We do not generally grant concessions through forgiveness of principal or accrued interest. Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases.

Success in restructuring loans has been mixed but it has proven to be a useful tool in certain situations to protect collateral values and allow certain borrowers additional time to execute upon defined business plans. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restructured agreement, the loan is placed on nonaccrual status and continues to be written down to the underlying collateral value.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. To date, we have not restored any nonaccrual loan classified as a TDR to accrual status. We believe that all of our modified loans meet the definition of a TDR.

-32-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

The following is a summary of information pertaining to our TDRs:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Nonperforming TDRs	$	4,701	$	6,443
Performing TDRs:
Commercial		3,961		3,496
Commercial real estate		14,317		14,673
Residential		6,361		6,690
Consumer		149		151
Total performing TDRs		24,788		25,010
Total TDRs	$	29,489	$	31,453

The following table summarizes how loans that were considered TDRs were modified during the periods indicated:

For the Six Months ended June 30, 2014

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post-				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		7	$	1,304	$	1,304		—	$	—	$	—
Residential		2		266		266		—		—		—
Commercial		3		1,019		1,019		—		—		—
Total		12	$	2,589	$	2,589		—	$	—	$	—

During the six months ended June 30, 2014, 12 loans were modified that were considered to be TDRs. Term concessions were granted for eight loans, payment deferrals were granted for two loans and both term concessions and payment deferrals were granted for two loans.

For the Three Months ended June 30, 2014

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		4	$	1,127	$	1,127		—	$	—	$	—
Residential		1		235		235		—		—		—
Commercial		3		1,019		1,019		—		—		—
Total		8	$	2,381	$	2,381		—	$	—	$	—

During the quarter ended June 30, 2014, eight loans were modified that were considered to be TDRs. Term concessions were granted for four loans, payment deferrals were granted for two loans and both term concessions and payment deferrals were granted for two loans.

⁽¹⁾ Loans past due 90 days or more are considered to be in default.

-33-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

For the Six Months ended June 30, 2013

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		3	$	540	$	540		—	$	—	$	—
Residential		3		355		355		—		—		—
Commercial		11		681		681		—		—		—
Consumer		2		51		51		—		—		—
Total		19	$	1,627	$	1,627		—	$	—	$	—

During the six months ended June 30, 2013, 19 loans were modified that were considered to be TDRs. Term concessions were granted for fourteen of these loans and other concessions were granted for five loans.

For the Three Months ended June 30, 2013

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		1	$	43	$	43		—	$	—	$	—
Residential		1		241		241		—		—		—
Commercial		3		77		77		—		—		—
Consumer		1		4		4		—		—		—
Total		6	$	365	$	365		—	$	—	$	—

During the quarter ended June 30, 2013, six loans were modified that were considered to be TDRs. Term concessions were granted for five of these loans and other concessions were granted for one loan.

⁽¹⁾ Loans past due 90 days or more are considered to be in default.

-34-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. While management utilizes the best judgment and information available to it, the ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

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.

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. The fair value of standby letters of credit is insignificant.

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:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Commitments to extend credit	$	29,452	$	29,836
Standby letters of credit		415		361

-35-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 5 – OTHER REAL ESTATE OWNED

The following table shows transactions in OREO for the periods ended June 30, 2014 and December 31, 2013:

	June 30,			December 31,
(Dollars in thousands)	2014			2013
Balance, beginning of period	$	24,972		$	19,464
Additions		905			17,659
Sales		(3,984	)		(11,383	)
Write-downs		(13	)		(768	)
Balance, end of period	$	21,880		$	24,972

NOTE 6 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the FHLB consisted of the following at June 30, 2014:

(Dollars in thousands)	Advance	Advance		Advance			Maturing
	Type	Amount		Rate			On
	Convertible Advance	$	5,000		3.24	%		12 /8/14
	Convertible Advance		2,000		3.60	%		9 /4/18
	Convertible Advance		5,000		3.45	%		9 /10/18
	Convertible Advance		5,000		2.95	%		9 /18/18
	Fixed Rate		5,000		3.86	%		8 /20/19
		$	22,000

As of June 30, 2014, we had advances totaling $22.0 million with various interest rates and maturity dates. Interest on fixed rate advances is generally payable monthly and interest on fixed rate advances is payable quarterly. Convertible advances are callable by the FHLB on their respective call dates. The Company has the option to either repay any advance that has been called or to refinance the advance as a convertible advance.

At June 30, 2014, the Company had pledged as collateral for FHLB advances approximately $1.7 million of one-to-four family first mortgage loans, $4.4 million of commercial real estate loans, $4.8 million in home equity lines of credit, $45 thousand in multifamily loans and $19.9 million of agency and private issue mortgage-backed securities. The Company has an investment in FHLBstock of $1.4 million. The Company has $8.7 million in excess borrowing capacity with the FHLBthat is available if liquidity needs should arise. As a result of negative financial performance indicators, there is also a risk that the Bank’s ability to borrow from the FHLB could be curtailed or eliminated, although to date the Bank has not been denied advances from the FHLB or had to pledge additional collateral for its borrowings.

As of June 30, 2014, scheduled principal reductions include $5.0 million in the fourth quarter of 2014, $12.0 million in 2018, and $5.0 million in 2019.

-36-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 7 – JUNIOR SUBORDINATED DEBENTURES

On December 21, 2004, the Trust issued $6.0 million floating rate trust preferred securities with a maturity of December 31, 2034. In accordance with current accounting standards, the trust has not been consolidated in these financial statements. The Company received from the Trust the $6.0 million proceeds from the issuance of the securities and the $186 thousand initial proceeds from the capital investment in the Trust and, accordingly, has shown the funds due to the trust as a $6.2 million junior subordinated debenture. The current regulatory rules allow certain amounts of junior subordinated debentures to be included in the calculation of regulatory capital. The debenture issuance costs, net of accumulated amortization, totaled $75 thousand at June 30, 2014 and are included in other assets on the consolidated balance sheet. Amortization of debt issuance costs totaled $5 thousand for each of the periods ended June 30, 2014 and 2013. The Federal Reserve Bank of Richmond has prohibited the Company from paying interest due on the trust preferred securities since February 2012 and, as a result, the Company has deferred interest payments in the amount of approximately $633 thousand as of June 30, 2014.

NOTE 8 - SUBORDINATED DEBENTURES

On July 31, 2010, the Company completed a private placement of subordinated promissory notes that totaled $12.1 million. The notes initially bear interest at a rate of 9% per annum payable semiannually on April 5^th and October 5^th and are callable by the Company four years after the date of issuance and mature 10 years from the date of issuance. After October 5, 2014 and until maturity, the notes bear interest at a rate equal to the current Prime Rate in effect, as published by the Wall Street Journal, plus 3%; provided, that the rate of interest shall not be less than 8% per annum or more than 12% per annum. The subordinated notes have been structured to fully count as Tier 2 regulatory capital on a consolidated basis.

The Federal Reserve Bank of Richmond has prohibited the Company from paying interest due on the subordinated notes since October 2011 and, as a result, the Company has deferred interest payments in the amount of approximately $3.1 million as of June 30, 2014.

NOTE 9 - SHAREHOLDERS’ EQUITY AND CAPITAL REQUIREMENTS

Preferred Stock – In March 2009, in connection with the CPP, the Company issued to the U.S. Treasury 12,895 shares of the Company’s Series T Preferred Stock. The Series T Preferred Stock has a dividend rate of 5% for the first five years and 9% thereafter, and has a call feature after three years.

In connection with the sale of the Series T Preferred Stock, the Company also issued to the U.S. Treasury the CPP Warrant to purchase up to 91,714 shares of the Company’s common stock at an initial exercise price of $21.09 per share.

As required under the CPP, dividend payments on and repurchases of the Company’s common stock are subject to certain restrictions. For as long as the Series T Preferred Stock is outstanding, no dividends may be declared or paid on the Company’s common stock until all accrued and unpaid dividends on the Series T Preferred Stock are fully paid. In addition, the U.S. Treasury’s consent is required for any increase in dividends on common stock before the third anniversary of issuance of the Series T Preferred Stock and for any repurchase of any common stock except for repurchases of common shares in connection with benefit plans.

The Series T Preferred Stock and the CPP Warrant were sold to the U.S. Treasury for an aggregate purchase price of $12.9 million in cash. The purchase price was allocated between the Series T Preferred Stock and the CPP Warrant based upon the relative fair values of each to arrive at the amounts recorded by the Company. This resulted in the Series T Preferred Stock being issued at a discount which is being amortized on a level yield basis as a charge to retained earnings over an assumed life of five years.

-37-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 9 - SHAREHOLDERS’ EQUITY AND CAPITAL REQUIREMENTS - continued

As of February 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulator, has required the Company to defer dividend payments on the 12,895 shares of the Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities issued in December 2004. Therefore, for each quarterly period beginning in February 2011, the Company notified the U.S. Treasury of its deferral of quarterly dividend payments on the Series T Preferred Stock and also informed the Trustee of the trust preferred securities of its deferral of the quarterly interest payments on the trust preferred securities. On May 15, 2014, the dividend rate on the Series T Preferred Stock increased from 5% per annum (approximately $645 thousand annually) to 9% per annum (approximately $1.2 million annually). As of June 30, 2014, the Company had $2.4 million of deferred dividend payments due on the Series T Preferred Stock. Because the Company has deferred these 14 payments, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full. In addition, whenever dividends payable on the shares of the Series T Preferred Stock have been deferred for an aggregate of six or more quarterly dividend periods, the holders of the preferred stock have the right to elect two directors to fill newly created directorships at the Company’s next annual meeting of the shareholders. As a result of the Company’s deferral of dividend payments on the Series T Preferred Stock, the U.S. Treasury, the current holder of all 12,895 shares of the Series T Preferred Stock, requested the Company’s non-objection to appoint a representative to observe monthly meetings of the Company’s Board of Directors. The Company granted the Treasury’s request and a representative of Treasury has attended the Company’s monthly board meetings since June 2012. As of the date of this report, the U.S. Treasury has not exercised its right to elect two directors to fill newly created directorships and has not notified the Company whether it intends to elect two directors to fill newly created directorships at the Company’s 2015 annual meeting of the shareholders.

The Company has never paid a cash dividend, but, as a result of the Company’s financial condition and these restrictions on the Company, including the restrictions on the Bank’s ability to pay dividends to the Company, the Company has not been permitted to pay a dividend on its common stock since 2009.

Restrictions on Dividends - Under the terms of the Written Agreement, the Company is currently prohibited from declaring or paying any dividends without the prior written approval of the Federal Reserve Bank of Richmond. In addition, because the Company is a legal entity separate and distinct from the Bank and has little direct income itself, the Company relies on dividends paid to it by the Bank in order to pay dividends on its common stock. As a South Carolina state bank, the Bank may only pay dividends out of its net profits, after deducting expenses, including losses and bad debts. Under Federal Deposit Insurance Corporation Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. As of June 30, 2014, the Bank was classified as “significantly undercapitalized;” therefore, it is prohibited under FDICIA from paying dividends until it increases its capital levels. In addition, even if it increases its capital levels, under the terms of the Consent Order, the Bank is prohibited from declaring a dividend on its shares of common stock unless it receives approval from the FDIC and State Board. Further, as a result of the Company’s deferral of dividend payments on the 12,895 shares of Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

-38-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 9 - SHAREHOLDERS’ EQUITY AND CAPITAL REQUIREMENTS - continued

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common 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 Company and the Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

To be considered “well-capitalized,” the Bank must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under these capital guidelines, the Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, the Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. Further, pursuant to the terms of the Consent Order with the FDIC and the State Board, the Bank must achieve and maintain Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%.

At June 30, 2014, the Company was categorized as “critically undercapitalized” and the Bank was categorized as “significantly undercapitalized.” Our losses over the past five years have adversely impacted our capital. As a result, we have been pursuing a plan to increase our capital ratios in order to strengthen our balance sheet and satisfy the commitments required under the Consent Order. However, if we continue to fail to meet the capital requirements in the Consent Order in a timely manner, then this would result in additional regulatory actions, which could ultimately lead to the Bank being taken into receivership by the FDIC. Our auditors have noted that the uncertainty of our ability to obtain sufficient capital raises substantial doubt about our ability to continue as a going concern.

-39-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 9 - SHAREHOLDERS’ EQUITY AND CAPITAL REQUIREMENTS - continued

The following table summarizes the capital ratios and the regulatory minimum requirements for the Company and the Bank.

												Minimum
												To Be Well
							Minimum					Capitalized Under
							Capital					Prompt Corrective
	Actual						Requirement					Action Provisions
(Dollars in thousands)	Amount			Ratio			Amount		Ratio			Amount			Ratio
June 30, 2014
The Company
Total Capital
(to Risk-Weighted Assets)	$	(9,926	)		(3.18	)%	$	24,936		8.00	%		N/A			N/A
Tier I Capital
(to Risk-Weighted Assets)	$	(9,926	)		(3.18	)%	$	12,468		4.00	%		N/A			N/A
Tier I Capital
(to Average Assets)	$	(9,926	)		(2.14	)%	$	18,570		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	14,674			4.71	%	$	24,914		8.00	%	$	31,142			10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	10,743			3.45	%	$	12,457		4.00	%		(1	)		(1	)
Tier I Capital
(to Average Assets)	$	10,743			2.35	%	$	18,312		4.00	%	$	36,624			8.00	%
December 31, 2013
The Company
Total Capital
(to Risk-Weighted Assets)	$	(10,169	)		(3.19	)%	$	25,512		8.00	%		N/A			N/A
Tier I Capital
(to Risk-Weighted Assets)	$	(10,169	)		(3.19	)%	$	12,756		4.00	%		N/A			N/A
Tier I Capital
(to Average Assets)	$	(10,169	)		(2.23	)%	$	18,242		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	13,842			4.34	%	$	25,505		8.00	%	$	31,881			10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	9,789			3.07	%	$	12,753		4.00	%		(1	)		(1	)
Tier I Capital
(to Average Assets)	$	9,789			2.17	%	$	18,067		4.00	%	$	36,135			8.00	%

⁽¹⁾ Minimum capital amounts and ratios presented as of June 30, 2014 and December 31, 2013 are amounts to be well-capitalized under the various regulatory capital requirements administered by the FDIC. On February 10, 2011, the Bank became subject to a regulatory Consent Order with the FDIC. Minimum capital amounts and ratios presented for the Bank as of June 30, 2014 and December 31, 2013 are the minimum levels set forth in the Consent Order. No minimum Tier 1 capital to risk-weighted assets ratio was specified in the Consent Order. Regardless of the Bank’s capital ratios, it is unable to be classified as “well-capitalized” while it is operating under the Consent Order with the FDIC.

-40-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 10 – INCOME (LOSS) PER SHARE

(Dollars in thousands, except	Six Months ended June 30,
per share amounts)	2014			2013
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(275	)	$	308
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Basic income (loss) per common share	$	(0.07	)	$	0.08
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	(275	)	$	308
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Incremental shares		—			—
Weighted average common shares outstanding - diluted		3,738,337			3,738,337
Diluted income (loss) per common share	$	(0.07	)	$	0.08

(Dollars in thousands, except	Three Months ended June 30,
per share amounts)	2014			2013
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(370	)	$	(140	)
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Basic income (loss) per common share	$	(0.10	)	$	(0.04	)
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	(370	)	$	(140	)
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Incremental shares		—			—
Weighted average common shares outstanding - diluted		3,738,337			3,738,337
Diluted income (loss) per common share	$	(0.10	)	$	(0.04	)

For the six and three month periods ended June 30, 2014 and 2013, there were 91,714 common stock equivalents outstanding. These common stock equivalents were not included in the computation of diluted income (loss) per share because their effect would have been anti-dilutive.

-41-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accounting principles establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

-42-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

Financial Instruments

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Cash Equivalents - The carrying amount is a reasonable estimate of fair value.

Securities Available-for-Sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Nonmarketable Equity Securities - The carrying amount is a reasonable estimate of fair value since no ready market exists for these securities.

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to the borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Repurchase Agreements – The carrying value of these instruments is a reasonable estimate of fair value.

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.

Subordinated Debentures - The Company is unable to determine the fair value of these debentures.

Junior Subordinated Debentures - The Company is unable to determine the fair value of these debentures.

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 and include no unusual credit risks.

The carrying values and estimated fair values of the Company’s financial instruments were as follows:

-43-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

June 30, 2014					Fair Value Measurements
(Dollars in thousands)					Quoted		Significant
					market		other		Significant
					price in		observable		unobservable
	Carrying		Estimated		active markets		inputs		inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	29,368	$	29,368	$	29,368	$	—	$	—
Securities available-for-sale		120,420		120,420		—		120,420		—
Nonmarketable equity securities		1,567		1,567		—		—		1,567
Loans, net		244,398		244,793		—		—		244,793
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		175,593		175,593		175,593		—		—
Certificates of deposit		243,548		245,659		—		245,659		—
Repurchase agreements		1,194		1,194		—		1,194		—
Advances from the Federal Home Loan Bank		22,000		24,681		—		24,681		—
Subordinated debentures		11,062		*		—		—		—
Junior subordinated debentures		6,186		*		—		—		—
	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	29,452		n/a
Standby letters of credit		415		n/a

* The Company is unable to determine this value.

-44-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

December 31, 2013					Fair Value Measurements
(Dollars in thousands)					Quoted		Significant
					market		other		Significant
					price in		observable		unobservable
	Carrying		Estimated		active markets		inputs		inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	28,081	$	28,081	$	28,081	$	—	$	—
Securities available-for-sale		94,602		94,602		—		94,602		—
Nonmarketable equity securities		1,743		1,743		—		—		1,743
Loans, net		246,981		248,633		—		—		248,633
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		163,505		163,505		163,505		—		—
Certificates of deposit		242,539		244,463		—		244,463		—
Repurchase agreements		1,337		1,337		—		1,337		—
Advances from the Federal Home Loan Bank		22,000		25,055		—		25,055		—
Subordinated debentures		11,062		*		—		—		—
Junior subordinated debentures		6,186		*		—		—		—
	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	29,836		n/a
Standby letters of credit		361		n/a

* The Company is unable to determine this value.

Fair Value Measurements

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

-45-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific allowance represents loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At June 30, 2014 and December 31, 2013, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of Impaired Loans is generally based on judgment and therefore classified as nonrecurring Level 3.

Other Real Estate Owned - Foreclosed real estate is adjusted to fair value upon transfer of the loans to foreclosed real estate. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The fair value of foreclosed assets is generally based on judgment and therefore is classified as nonrecurring Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of and for the periods ended June 30, 2014 and December 31, 2013, by level within the fair value hierarchy.

			Quoted prices in		Significant
			active markets		Other		Significant
			for identical		Observable		Unobservable
(Dollars in thousands)			assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2014
Assets:
Government sponsored enterprises	$	48,475	$	—	$	48,475	$	—
Mortgage-backed securities		70,746		—		70,746		—
Obligations of state and local governments		1,199		—		1,199		—
Total	$	120,420	$	—	$	120,420	$	—
December 31, 2013
Assets:
Government sponsored enterprises	$	55,075	$	—	$	55,075	$	—
Mortgage-backed securities		37,034		—		37,034		—
Obligations of state and local governments		2,493		—		2,493		—
Total	$	94,602	$	—	$	94,602	$	—

The Company has no liabilities measured at fair value on a recurring basis.

-46-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following tables present the assets and liabilities carried on the balance sheet by caption and by level within the valuation hierarchy described above for which a nonrecurring change in fair value has been recorded during the periods ended June 30, 2014 and December 31, 2013.

			Quoted prices in		Significant
			active markets		Other		Significant
(Dollars in thousands)			for identical		Observable		Unobservable
			assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2014
Assets:
Impaired loans, net of valuation allowance	$	42,355	$	—	$	—	$	42,355
Other real estate owned		21,880		—		—		21,880
Total	$	64,235	$	—	$	—	$	64,235
December 31, 2013
Assets:
Impaired loans, net of valuation allowance	$	41,883	$	—	$	—	$	41,883
Other real estate owned		24,972		—		—		24,972
Total	$	66,855	$	—	$	—	$	66,855

The Company has no liabilities measured at fair value on a nonrecurring basis.

Level 3 Valuation Methodologies

The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At June 30, 2014, a majority of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loans as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, the Company records the impaired loans as nonrecurring Level 2. When an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans can be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

-47-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

Foreclosed real estate is carried at fair value less estimated selling costs. Fair value is generally based upon current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where management adjustments are significant to the fair value measurements in its entirety, such measurements are classified as Level 3 within the valuation hierarchy.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2014.

(Dollars in thousands)

	June 30,		Valuation	Unobservable	Range
	2014		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	4,469	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-75.75%
			Flows	Independent quotes	(5.96%)
Commercial real estate		25,801	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-80.47%
			Flows	Independent quotes	(17.19%)
Residential		11,595	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-89.71%
			Flows	Independent quotes	(20.02%)
Consumer		490	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-64.65%
			Flows	Independent quotes	(7.47%)
Other real estate owned		21,880	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-50.00%
			Flows	Independent quotes	(6.27%)

-48-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 - FAIR VALUE - continued

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013.

(Dollars in thousands)

	December 31,		Valuation	Unobservable	Range
	2013		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	3,728	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-76.50%
			Flows	Independent quotes	(3.36%)
Commercial real estate		27,085	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-88.29%
			Flows	Independent quotes	(16.51%)
Residential		10,865	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-90.23%
			Flows	Independent quotes	(23.60%)
Consumer		205	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-38.68%
			Flows	Independent quotes	(14.67%)
Other real estate owned		24,972	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-50.00%
			Flows	Independent quotes	(6.27%)

NOTE 12 – SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure that are not otherwise disclosed herein.

-49-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion describes our results of operations for the three and six month periods ended June 30, 2014, as compared to the three and six month periods ended June 30, 2013, and also analyzes our financial condition as of June 30, 2014 as compared to December 31, 2013. The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in our filings with the SEC.

OVERVIEW

For the six months ended June 30, 2014, the Bank had a net income of $243 thousand compared to net income of $741 thousand for the six months ended June 30, 2013. The decrease in net income during the first six months of 2014 was primarily attributable to a provision expense in the amount of $1.5 million that was recaptured during the six months ended June 30, 2013 while no provision expense was recorded or recaptured for the first six months of 2014. In addition, noninterest expenses decreased $1.2 million for the first six months of 2014 as compared to the first six months of 2013.

Total assets at June 30, 2014 were $452.6 million, an increase of $18.0 million from $434.6 million at December 31, 2013. Deposit growth of $13.1 million was used for purchases of investment securities available-for-sale which increased $25.8 million. Management increased QuickRate deposits by design during the six months ended June 30, 2014 to accompany slight growth in non-interest-bearing demand deposits and money market deposits to support the increase in the securities portfolio that was achieved during the period. The deposit growth was a strategic move by management but was not the result of any increase in deposit rates offered during the period.

RESULTS OF OPERATIONS

Results of Operations for the Six Months ended June 30, 2014 and 2013

The Company experienced a decrease of $135 thousand in total interest income for the six months ended June 30, 2014. A decrease in interest, including fees, on our loan portfolio of $690 thousand, or 9.2%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was partially offset by an increase of $571 thousand in interest income on taxable available-for-sale securities due to the increase in volume of the securities. Declines in rates resulted in a decrease to total interest expense of $199 thousand, or 7.2%, for the six month period in 2014 compared to the six month period in 2013. Net interest income increased $64 thousand for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

The provision for loan losses is charged to earnings based upon management’s evaluation of specific loans in its portfolio and general economic conditions and trends in the marketplace. Please refer to the section “Loan Portfolio” for a discussion of management’s evaluation of the adequacy of the allowance for loan losses. No provision was considered necessary for the six month period ended June 30, 2014. Provisions were recaptured during the six months ended June 30, 2013 in the amount of $1.5 million.

Noninterest income decreased $232 thousand to $1.3 million for the six months ended June 30, 2014 as compared to $1.6 million for the six months ended June 30, 2013, primarily due to a reduction in gains on sales of available-for-sale securities of $197 thousand. During the six months ended June 30, 2014, gains on sales of available-for-sale securities totaled $100 thousand compared to $297 thousand during the same period in 2013.

Noninterest expense decreased from $7.9 million for the six months ended June 30, 2013 to $6.7 million for the six months ended June 30, 2014 primarily due to lower costs of operations of other real estate owned. Net cost of operations of other real estate owned decreased from $1.1 million for the six months ended June 30, 2013 to $161 thousand for the same period in 2014.

-50-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Results of Operations for the Three Months ended June 30, 2014 and 2013

Net loss for the three months ended June 30, 2014 was $74 thousand compared to a net income of $77 thousand for the three months ended June 30, 2013. The decline was primarily the result of provision expense recaptured in the second quarter of 2013 offset by lower noninterest expenses.

Interest income decreased $102 thousand for the quarter ended June 30, 2014 when compared the same period in 2013. Lower rates and lower loan volume contributed to the reduction. Interest expense also decreased by $111 thousand for the quarter ended June 30, 2014 when compared to the same period in 2013. Net interest income increased by $9 thousand.

Provisions previously recognized of $497 thousand were recaptured during the quarter ended June 30, 2013. No provision was considered necessary for the quarter ended June 30, 2014.

Noninterest income for the three months ended June 30, 2014 was $706 thousand compared to $858 thousand for the three months ended June 30, 2013. Gains realized on sales of available-for-sale securities were $213 thousand for the three months ended June 30, 2013 compared to gains realized on sales of available-for-sale securities of $49 for the three months ended June 30, 2014.

For the three months ended June 30, 2014, noninterest expense was $3.6 million compared to $4.1 million for the three months ended June 30, 2013. Expenses related to other real estate owned decreased $390 thousand.

-51-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

FINANCIAL CONDITION

Investment Portfolio

Management classifies investment securities as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold them until maturity. In determining such classifications, securities that management has the positive intent and the Company has the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. As of June 30, 2014 and December 31, 2013, all securities were classified as available-for-sale.

The portfolio of available-for-sale securities increased $25.8 million, or 27.29%, from $94.6 million at December 31, 2013 to $120.4 million at June 30, 2014. Our securities portfolio consisted primarily of high quality mortgage securities, government agency bonds, and high quality municipal bonds.

The following tables summarize the carrying value of investment securities as of the indicated dates and the weighted-average yields of those securities at June 30, 2014.

June 30, 2014 (in thousands)	Amortized Cost Due
	Due			After One			After Five
	Within			Through			Through			After Ten						Market
	One Year			Five Years			Ten Years			Years			Total			Value
Investment securities
Government sponsored enterprises	$	—		$	—		$	12,500		$	38,031		$	50,531		$	48,475
Mortgage backed securities		—			1,491			8,023			60,993			70,507			70,746
State and political subdivisions		—			—			633			615			1,248			1,199
Total	$	—		$	1,491		$	21,156		$	99,639		$	122,286		$	120,420
Weighted average yields
Government sponsored enterprises		—	%		—	%		2.08	%		2.90	%
Mortgage backed securities		—	%		2.00	%		1.43	%		2.20	%
State and political subdivisions		—	%		—	%		2.54	%		4.07	%
Total		—	%		2.00	%		1.85	%		2.48	%		2.37	%
													Book			Market
December 31, 2013 (in thousands)													Value			Value
Investment securities
Government sponsored enterprises													$	60,628		$	55,075
Mortgage backed securities														37,731			37,034
States and political subdivisions														2,516			2,493
Total													$	100,875		$	94,602

Loan Portfolio

The Company experienced a decline in its loan portfolio of $5.1 million during the six months ended June 30, 2014. The following table sets forth the composition of the loan portfolio by category as of June 30, 2014 and December 31, 2013.

	June 30,		December 31,
	2014		2013
(Dollars in thousands)
Real estate:
Commercial construction and land development	$	36,236	$	38,899
Other commercial real estate		87,508		91,551
Residential construction		2,256		3,038
Other residential		81,019		81,297
Commercial and industrial		36,796		33,711
Consumer		7,557		7,928
	$	251,372	$	256,424

-52-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Loan Portfolio - continued

The primary component of our loan portfolio is loans collateralized by real estate, which made up approximately 82.4% of our loan portfolio at June 30, 2014. These loans are secured generally by first or second mortgages on residential, agricultural or commercial property. Commercial loans and consumer loans account for 14.6% and 3.0% of the loan portfolio, respectively.

Risk Elements

The downturn in general economic conditions over the past few years has resulted in increased loan delinquencies, defaults and foreclosures within our loan portfolio. The declining real estate market has had a significant impact on the performance of our loans secured by real estate. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. Although the real estate collateral provides an alternate source of repayment in the event of default by the borrower, in our current market the value of the collateral has deteriorated in value during the time the credit is extended.  There is a risk that this trend will continue, which could result in additional losses of earnings and increases in our provision for loan losses and loans charged-off.

Past due payments are often one of the first indicators of a problem loan. We perform a continuous review of our past due report in order to identify trends that can be resolved quickly before a loan becomes significantly past due. We determine past due and delinquency status based on the contractual terms of the note. When a borrower fails to make a scheduled loan payment, we attempt to cure the default through several methods including, but not limited to, collection contact and assessment of late fees.

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed in nonaccrual status, interest accruals are discontinued and income earned but not collected is reversed. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce principal. If the borrower is able to bring the account current, the loan is then placed back on regular accrual status.

For loans to be in excess of 90 days delinquent and still accruing interest, the borrowers must be either remitting payments although not able to get current, liquidation on loans deemed to be well secured must be near completion, or the Company must have a reason to believe that correction of the delinquency status by the borrower is near. The amount of both nonaccrual loans and loans past due 90 days or more were considered in computing the allowance for loan losses as of June 30, 2014.

Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and any other troubled debt restructurings not included in the previous categories. Nonperforming assets include nonperforming loans plus other real estate that we own as a result of loan foreclosures.

Nonperforming loans were $35.6 million or 13.90% of total loans at the end of 2013 compared to nonperforming loans at June 30, 2014 of $34.5 million or 13.71% of total loans.

At June 30, 2014, nonperforming assets were $56.3 million compared to $60.6 million at December 31, 2013. Loans transferred to other real estate owned of $905 thousand were offset by sales of other real estate owned of $4.0 million and writedowns of $13 thousand for the six month period ended June 30, 2014. As a percentage of total assets, nonperforming assets were 12.45% and 13.95% as of June 30, 2014 and December 31, 2013, respectively.

-53-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Loan Portfolio - continued

The following table summarizes nonperforming assets:

	June 30,			December 31,
Nonperforming Assets	2014			2013
(Dollars in thousands)
Nonaccrual loans	$	9,675		$	10,631
Performing troubled debt restructurings		24,788			25,010
Loans past due 90 days or more and still accruing interest		—			—
Total nonperforming loans		34,463			35,641
Other real estate owned		21,880			24,972
Total nonperforming assets	$	56,343		$	60,613
Nonperforming assets to total assets		12.45	%		13.95	%
Nonperforming loans to total loans		13.71	%		13.90	%

We identify impaired loans through our normal internal loan review process. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis by calculating either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Any resultant shortfall is charged to provision for loan losses and is classified as a specific reserve. When an impaired loan is ultimately charged-off, the charge-off is taken against the specific reserve.

Impaired loans are valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. At June 30, 2014, the recorded investment in impaired loans was $44.3 million compared to $45.7 million at December 31, 2013.

Troubled debt restructurings are loans which have been restructured from their original contractual terms and include concessions that would not otherwise have been granted outside of the financial difficulty of the borrower. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. The purpose of a troubled debt restructuring is to facilitate ultimate repayment of the loan.

At June 30, 2014, the principal balance of troubled debt restructurings totaled $29.5 million. Of these restructured loans, $24.8 million were performing as expected under the new terms and $4.7 million were considered to be nonperforming and evaluated for reserves on the basis of the fair value of the collateral A troubled debt restructuring can be removed from nonperforming status once there is sufficient history of demonstrating the borrower can service the credit under market terms. We currently consider sufficient history to be approximately six months.

-54-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Provision and Allowance for Loan Losses

Management has established an allowance for loan losses through a provision for loan losses charged to expense on our statements of operations. The allowance represents an amount which management believes will be adequate to absorb probable losses on existing loans that may become uncollectible. Management does not allocate specific percentages of our allowance for loan losses to the various categories of loans but evaluates the adequacy on an overall portfolio basis utilizing several factors. The primary factor considered is the credit risk grading system, which is applied to each loan. The amount of both nonaccrual loans and loans past due 90 days or more is also considered. The historical loan loss experience, the size of our lending portfolio, changes in the lending policies and procedures, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons, and current and anticipated economic conditions are also considered in determining the provision for loan losses. The amount of the allowance is adjusted periodically based on changing circumstances. Recognized losses are charged to the allowance for loan losses, while subsequent recoveries are added to the allowance.

Management regularly monitors past due and classified loans. However, it should be noted that no assurances can be made that future charges to the allowance for loan losses or provisions for loan losses may not be significant to a particular accounting period. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable, but which may or may not prove to be accurate. Because of the inherent uncertainty of assumptions made during the evaluation process, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional allocations will not be required. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

At June 30, 2014, the allowance for loan losses was $7.0 million or 2.77% of total loans compared to $9.4 million or 3.68% of total loans as of December 31, 2013. Reserves specifically set aside for impaired loans of $1.9 million and $3.8 million were included in the allowance as of June 30, 2014 and December 31, 2013, respectively. Management believes the allowance is adequate. The following table summarizes the activity related to our allowance for loan losses.

Summary of Loan Loss Experience
	Six months ended			Year ended
(Dollars in thousands)	June 30,			December 31,
	2014			2013
Total loans outstanding at end of period	$	251,372		$	256,424
Allowance for loan losses, beginning of period	$	9,443		$	14,150
Charge offs:
Real estate		(2,853	)		(5,568	)
Commercial		(278	)		(1,691	)
Consumer		(283	)		(217	)
Total charge-offs		(3,414	)		(7,476	)
Recoveries of loans previously charged off		945			4,266
Net charge-offs		(2,469	)		(3,210	)
Provision charged to operations		—			(1,497	)
Allowance for loan losses at end of period	$	6,974		$	9,443
Ratios:
Allowance for loan losses to loans at end of period		2.77	%		3.68	%
Net charge-offs to allowance for loan losses		35.40	%		33.99	%
Net charge-offs to provisions for loan losses		n/a			n/a

-55-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Advances from the Federal Home Loan Bank

The following table summarizes the Company’s FHLB borrowings for the six months ended June 30, 2014 and for the year ended December 31, 2013.

	Maximum				Weighted
	Outstanding				Average			Period
	at any		Average		Interest			End
(Dollars in thousands)	Month End		Balance		Rate			Balance
June 30, 2014
Advances from Federal Home Loan Bank	$	22,000	$	22,000		3.39	%	$	22,000
December 31, 2013
Advances from Federal Home Loan Bank	$	22,000	$	22,000		3.39	%	$	22,000

Advances from the FHLB are collateralized by one-to-four family residential mortgage loans, certain commercial real estate loans, certain securities in the Bank’s investment portfolio and the Company’s investment in FHLB stock. Although we expect to continue using FHLB advances as a secondary funding source, core deposits will continue to be our primary funding source. As a result of negative financial performance indicators, there is a risk that the Bank’s ability to borrow from the FHLB could be curtailed or eliminated. Although to date the Bank has not been denied advances from the FHLB, the Bank has had its collateral maintenance requirements altered to reflect the increase in our credit risk. Thus, we can make no assurances that this funding source will continue to be available to us.

Capital Resources

Shareholders’ deficit decreased from a deficit of $16.4 million at December 31, 2013 to a deficit of $11.8 million at June 30, 2014. The decrease of $4.7 million is primarily attributable to a reduction in unrealized losses of $4.4 million on our available-for-sale securities which are included in accumulated other comprehensive loss in addition to net income of $243 thousand for the period.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

-56-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Capital Resources – continued

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common 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 Company and the Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

To be considered “well-capitalized,” the Bank must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under these capital guidelines, the Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital.

In addition, the Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. Further, pursuant to the terms of the Consent Order with the FDIC and the State Board, the Bank must achieve and maintain Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%. For a more detailed description of the capital amounts required to be obtained in order for the Bank to be considered “well-capitalized,” see Note 9 to our Financial Statements.

If a bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the Bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to growth limitations (an undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

Significantly undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

-57-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Capital Resources – continued

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution, that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

The following table summarizes the capital amounts and ratios of the Company and the Bank at June 30, 2014 and December 31, 2013.

	June 30,			December 31,
	2014			2013
(Dollars in thousands)
The Company
Tier 1 capital	$	(9,926	)	$	(10,169	)
Tier 2 capital					—
Total qualifying capital	$	(9,926	)	$	(10,169	)
Risk-adjusted total assets
(including off-balance sheet exposures)	$	311,701		$	318,900
Tier 1 risk-based capital ratio		(3.18	)%		(3.19	)%
Total risk-based capital ratio		(3.18	)%		(3.19	)%
Tier 1 leverage ratio		(2.14	)%		(2.23	)%
The Bank
Tier 1 capital	$	10,743		$	9,789
Tier 2 capital		3,931			4,053
Total qualifying capital	$	14,674		$	13,842
Risk-adjustment total assets
(including off-balance sheet exposures)	$	311,420		$	318,813
Tier 1 risk-based capital ratio		3.45	%		3.07	%
Total risk-based capital ratio		4.71	%		4.34	%
Tier 1 leverage ratio		2.35	%		2.17	%

At June 30, 2014, the Company was categorized as “critically undercapitalized” and the Bank was categorized as “significantly undercapitalized.” Our losses over the past five years have adversely impacted our capital. As a result, we have been pursuing a plan to increase our capital ratios in order to strengthen our balance sheet and satisfy the commitments required under the Consent Order. In addition, the Consent Order required us to achieve and maintain Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets.

-58-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Capital Resources – continued

Approximately $10.2 million in capital would return the Bank to “adequately capitalized” and $25.9 million in capital would return the Bank to “well capitalized” under regulatory guidelines on a pro forma basis as of June 30, 2014. If we continue to decrease the size of the Bank or return the Bank to profitability, then we could achieve these capital ratios with less additional capital. However, if we suffer additional loan losses or losses in our other real estate owned portfolio, then we would need additional capital to achieve these ratios. There are no assurances that we will be able to raise this capital on a timely basis or at all. If we cannot meet the minimum capital requirements set forth under the Consent Order and return the Bank to a “well capitalized” designation, or if we suffer a continued deterioration in our financial condition, we may be placed into a federal conservatorship or receivership by the FDIC. Our auditors have noted that the uncertainty of our ability to obtain sufficient capital raises substantial doubt about our ability to continue as a going concern. Please refer to Note 2 in the notes to our consolidated financial statements.

The Company does not anticipate paying dividends for the foreseeable future, and all future dividends will be dependent on the Company’s financial condition, results of operations, and cash flows, as well as capital regulations and dividend restrictions from the Federal Reserve Bank of Richmond, the FDIC, and the State Board.

ACCOUNTING AND FINANCIAL REPORTING ISSUES

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2013, as filed on our Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires significant judgment and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

The income tax provision is also an accounting policy that requires judgment as the Company seeks strategies to minimize the tax effect of implementing their business strategies. The Company’s tax returns are subject to examination by both federal and state authorities. Such examinations may result in assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.

Fair value determination and other-than-temporary impairment is subject to management’s evaluation to determine if it is probable that all amounts due according to contractual terms will be collected to determine if any other-than-temporary impairment exists. The process of evaluating other-than-temporary impairment is inherently judgmental, involving the weighing of positive and negative factors and evidence that may be objective or subjective.

-59-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

LIQUIDITY

Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. The Company manages both assets and liabilities to achieve appropriate levels of liquidity. Cash and federal funds sold are the Company’s primary sources of asset liquidity. These funds provide a cushion against short-term fluctuations in cash flow from both deposits and loans. The investment securities portfolio is the Company’s principal source of secondary asset liquidity. However, the availability of this source of funds is influenced by market conditions. Individual and commercial deposits are the Company’s primary source of funds for credit activities. Although not historically used as principal sources of liquidity, federal funds purchased from correspondent banks and advances from the FHLB are other options available to management. Management believes that the Company’s liquidity sources will enable it to successfully meet its long-term operating needs.

As of June 30, 2014, the Company had no unused lines of credit to purchase federal funds; however, the Bank’s greatest source of liquidity resides in its unpledged securities portfolio. Unpledged securities available-for-sale totaled $76.4 million at June 30, 2014. This source of liquidity may be adversely impacted by changing market conditions, reduced access to borrowing lines, or increased collateral pledge requirements imposed by lenders. The Bank has implemented a plan to address these risks and strengthen its liquidity position. To accomplish the goals of this liquidity plan, the Bank will maintain cash liquidity at a minimum of 4% of total outstanding deposits and borrowings. In addition to cash liquidity, the Bank will also maintain a minimum of 15% off balance sheet liquidity. These objectives have been established by extensive contingency funding stress testing and analytics that indicate these target minimum levels of liquidity to be appropriate and prudent.

Comprehensive weekly and quarterly liquidity analyses serve management as vital decision-making tools by providing summaries of anticipated changes in loans, investments, core deposits, and wholesale funds. These internal funding reports provide management with the details critical to anticipate immediate and long-term cash requirements, such as expected deposit runoff, loan and securities paydowns and maturities. These liquidity analyses act as a cash forecasting tool and are subject to certain assumptions based on past market and customer trends. Through consideration of the information provided in these reports, management is better able to maximize our earning opportunities by wisely and purposefully choosing our immediate, and more critically, our long-term funding sources.

To better manage our liquidity position, management also stress tests our liquidity position on a semi-annual basis under two scenarios: short-term crisis and a longer-term crisis. In the short term crisis, our institution would be cut off from our normal funding along with the market in general. In this scenario, the Bank would replenish our funding through the most likely sources of funding that would exist in the order of price efficiency. In the longer term crisis, the Bank would be cut off from several of our normal sources of funding as our Bank’s financial situation deteriorated. In this crisis, we would not be able to utilize our federal funds borrowing lines and brokered CDs and would be allowed to utilize our unpledged securities to raise funds in the reverse repurchase market or borrow from the FHLB. On a quarterly basis, management monitors the market value of our securities portfolio to ensure its ability to be pledged if liquidity needs should arise.

We believe our liquidity sources are adequate to meet our needs for at least the next 12 months. However, if we are unable to meet our liquidity needs, the Bank may be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed conservator or receiver. There are no liquidity sources at the Company level.

-60-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

IMPACT OF OFF-BALANCE SHEET INSTRUMENTS

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 consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to a customer at predetermined interest rates 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. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. Standby letters of credit often expire without being used. Management believes that through various sources of liquidity, the Company has the necessary resources to meet obligations arising from these financial instruments.

The Company uses the same credit underwriting procedures for commitments to extend credit and standby letters of credit as for on-balance-sheet instruments. The credit worthiness of each borrower is evaluated and the amount of collateral, if deemed necessary, is based on the credit evaluation. 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, as well as liquid assets such as time deposit accounts, brokerage accounts, and cash value of life insurance.

The Company is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, which it believes could result in liquidity needs or other commitments or that could significantly impact earnings.

As of June 30, 2014, commitments to extend credit totaled $29.5 million and standby letters of credit totaled $415 thousand.

-61-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, we may be a party to various legal proceedings from time to time. As of June 30, 2014 and the date of this Report, except as noted below we do 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 condition.

• On April 26, 2012, Samuel C. Thomas, Jr. and Pamela A. Thomas filed a lawsuit in the Court of Common Pleas for the Fifteenth Judicial District, State of South Carolina, County of Horry, Case No. 2012-CP-26-3295. The Complaint names the Company and the Bank and current and former members of the Bank’s and/or Company’s Board of Directors as defendants. The Complaint alleges that the Plaintiffs were misled into investing $2 million in the Company’s subordinated promissory notes offering in the second and third quarters of 2010. The Complaint alleges that the Bank promised to loan the Plaintiffs up to 90% of the amount that the Plaintiffs would invest in the subordinated notes offering in the event that Plaintiffs needed access to these funds prior to the maturity of the subordinated notes, and, once the Plaintiffs applied for the loan, the Bank denied the loan request. The Complaint seeks actual damages, consequential damages, punitive damages as allowed by law, pre-judgment and post-judgment interest as allowed by law, penalties as mandated by statute, set-off against other obligations of the Plaintiffs due to the Company and the Bank, attorney’s fees and costs. All Defendants moved to stay the litigation and compel arbitration and the Court granted the motion. The parties have agreed on the three-neutral panel and have exchanged written discovery and documents. The parties have also each identified expert witnesses and initial reports have been issued. The first depositions are expected to be scheduled for early September.

• On July 19, 2012, Robert Shelley, in his individual capacity and on behalf of a proposed class of other similarly situated persons, filed a lawsuit in the Court of Common Pleas for the Fifteenth Judicial Circuit, State of South Carolina, County of Horry, Case No. 2012-CP-26-5546. The Complaint named the Company and the Bank as Defendants. However, the Complaint was never served on the Company or Bank. On September 27, 2012, Plaintiff filed an Amended Complaint. The Amended Complaint alleges that Plaintiff and other similarly situated persons were contacted by employees of the Bank, who then solicited a sale of Bank stock. The Amended Complaint further alleges that Bank employees did not disclose material information about the Bank’s financial condition to the Plaintiff and others prior to their respective purchases of stock. The Amended Complaint seeks the certification of a class action to include all those purchasers of Bank stock who were solicited to purchase such stock between July 1, 2009 and December 31, 2011. Plaintiff has asserted causes of action for violation of the South Carolina Uniform Securities Act, negligence and civil conspiracy, and seeks actual, punitive and treble damages and attorneys’ fees and costs. The Company and the Bank made a motion for summary judgment in March 2014, and the court granted the motion for summary judgment on April 8, 2014. Mr. Shelley’s attorney subsequently filed a Motion to Reconsider. The parties are awaiting notice of a hearing on the pending Motion.

-62-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

• On or about October 4, 2012, the United States Attorney for the District of South Carolina served the Company and Bank with a subpoena requesting the production of documents related to the Company’s offering and sale of subordinated debt notes. The subpoena number is GJ #2/2012-0215 and the Company and Bank are working closely with the appropriate contacts to provide them with the requested documents.

• On or about November 7, 2012, the South Carolina Attorney General served the Company and Bank with a subpoena requesting the production of documents related to: (1) names of certain officers, directors, shareholders, employees, and agents, as well as meetings of the Board of Directors or shareholders of the Company and/or the Bank; (2) the Company’s offering and sale of subordinated debt notes; and (3) the offering and/or sale of Company stock and related filings. The South Carolina Attorney General’s file number is 12063 and the Company and Bank are working closely with the appropriate contacts to provide that office with the requested documents. The Attorney General’s office has confirmed that the Company has provided all the documents and information requested. The Company believes that the proceedings will not have any material adverse effect on the financial condition or operations of the Company.

• Plaintiff Jan W. Snyder purchased $25,000 in subordinated debt notes in or around March 2010. After making three semi-annual interest payments, the Company was precluded from making further payments by the Federal Reserve Bank of Richmond. On January 14, 2014 Mr. Snyder sued the Company, the Bank, and several current and former officers, directors and employees in the Court of Common Pleas for the Fifteenth Judicial District, State of South Carolina, County of Horry, Case No. 2014-CP-26-0204. He is alleging that he and a similarly situated class of subordinated debt purchasers have suffered an unspecified amount of damages resulting from the Defendants’ wrongful conduct leading up to their respective purchases of subordinated debt notes. There are several causes of action alleged, including fraud, violation of state securities statutes, negligence and others. Mr. Snyder has brought this case on his behalf and as a representative of a class of similarly situated purchasers of subordinated debt notes. The Company and the Bank have engaged legal counsel and intend to vigorously defend against this lawsuit. The Complaint has been filed and the Company has filed its Answer, in which it denies any and all liability. Counsel for the Plaintiff recently advised us that he has been retained by a second subordinated debt purchaser and would like to amend the Complaint to reflect this new Plaintiff.

• Plaintiff Mozingo + Wallace Architects, LLC, was a depositor with the Bank. An employee named Deborah Guear was charged with being responsible for the Mozingo + Wallace Architects, LLC’s finances, including the receipt and review of account statements, payment of invoices, and reconciling all financial accounts. In 2013, another bank advised Mozingo + Wallace Architects, LLC that it had been receiving an unusually high number of checks issued by Mozingo + Wallace Architects, LLC to Ms. Guear’s account. Mozingo + Wallace Architects, LLC obtained records of its account at the Bank and alleges that Ms. Guear had been making unauthorized transactions from its account to herself, her husband, and her husband’s business. On September 25, 2013, Mozingo + Wallace Architects, LLC sued the Bank in the Court of Common Pleas for the Fifteenth Judicial District, State of South Carolina, County of Horry, Case No. 2013-CP-26-6494, alleging that it improperly allowed Ms. Guear to control and access account statements so that Mozingo + Wallace Architects, LLC could not discover the unauthorized transactions and seeking damages in an unspecified amount. The Bank has engaged legal counsel and intends to vigorously defend against this lawsuit. The Plaintiff has filed its Complaint and the Company filed its Answer, in which it denies all allegations of liability. The Company also obtained leave from the Court to add Ms. Guear as a third-party defendant, and the appropriate pleadings and response have been filed. The Company has exchanged written discovery and documents with the Plaintiff and has served Ms. Guear with discovery requests (no responses received to date). Also, in July, Ms. Guear pleaded guilty in South Carolina state court to breach of trust and was sentenced to 5 years in prison, 5 years of probation, and restitution. The court has ordered the parties to mediate the case on or before August 15, 2014.

-63-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

• On or about January 10, 2013 and January 9, 2014, the SEC served the Company and Bank with subpoenas requesting the production of documents related to the Company’s offering and sale of subordinated debt notes. The case/investigation number is A-3459. The Company and Bank provided timely responses to both subpoenas and continues to work closely with the SEC to provide them with any further documents they may need.

The Company has engaged legal counsel for the litigation and intends to vigorously defend itself. The ultimate outcome of the litigation and subpoena production is unknown at this time. However, given the Company’s current troubled financial condition, any expenses incurred by the Company for defense costs, governmental sanctions, or settlement or other litigation awards could have a material adverse effect on the Company’s financial condition.

Item 1A. Risk Factors

Not applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Index to Exhibits attached hereto and are incorporated herein by reference.

-64-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	August 12, 2014	By:	/s/ JAMES R. CLARKSON
			James R. Clarkson
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:	August 12, 2014	By:	/s/ EDWARD L. LOEHR, JR.
			Edward L. Loehr, Jr.
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

-65-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

EXHIBIT INDEX

Exhibit Number	Description
31.1	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.
32	Section 1350 Certifications.
101	The following materials from the Quarterly Report on Form 10-Q of HCSB Financial Corporation for the quarter ended June 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

-66-

EX-31.1

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Exhibit 31.1

Rule 13a-14(a) Certification of the Principal Executive Officer

I, James R. Clarkson, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of HCSB Financial Corporation.

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 12, 2014	/s/ James R. Clarkson
	James R. Clarkson
	President and Chief Executive Officer
	(Principal Executive Officer)

-67-

EX-31.2

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Exhibit 31.2

Rule 13a-14(a) Certification of the Principal Financial Officer

I, Edward L. Loehr, Jr., certify that:

1.     I have reviewed this quarterly report on Form 10-Q of HCSB Financial Corporation.

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 12, 2014	/s/ Edward L. Loehr, Jr.
	Edward L. Loehr, Jr.
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

-68-

EX-32

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned certify that to his knowledge on the date of this certification:

1. The quarterly report of the Company for the period ended June 30, 2014 as filed with the Securities and Exchange Commission on this date (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 /s/ James R. Clarkson  

James R. Clarkson

President and Chief Executive Officer

(Principal Executive Officer)

August 12, 2014

  /s/ Edward L. Loehr, Jr.  

Edward L. Loehr, Jr.

Chief Financial Officer

(Principal Financial and Accounting Officer)

August 12, 2014

-69-

XML

LOAN PORTFOLIO (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Total loans	$ 251,372	$ 256,424	$ 286,650
Grade 1 - Minimal [Member]
Total loans	2,124	2,139
Grade 2 - Modest [Member]
Total loans	3,598	3,313
Grade 3 - Average [Member]
Total loans	13,374	15,545
Grade 4 - Satisfactory [Member]
Total loans	146,487	143,458
Grade 5 - Watch [Member]
Total loans	24,843	27,646
Grade 6 - Special Mention [Member]
Total loans	15,163	17,076
Grade 7 - Substandard [Member]
Total loans	45,783	47,247
Grade 8 - Doubtful [Member]
Total loans
Grade 9 - Loss [Member]
Total loans
Commercial Loan [Member]
Total loans	36,796	33,711	42,554
Commercial Loan [Member] | Grade 1 - Minimal [Member]
Total loans	1,400	1,364
Commercial Loan [Member] | Grade 2 - Modest [Member]
Total loans	1,123	314
Commercial Loan [Member] | Grade 3 - Average [Member]
Total loans	3,132	4,782
Commercial Loan [Member] | Grade 4 - Satisfactory [Member]
Total loans	20,465	17,092
Commercial Loan [Member] | Grade 5 - Watch [Member]
Total loans	2,742	3,204
Commercial Loan [Member] | Grade 6 - Special Mention [Member]
Total loans	1,643	1,788
Commercial Loan [Member] | Grade 7 - Substandard [Member]
Total loans	6,291	5,167
Commercial Loan [Member] | Grade 8 - Doubtful [Member]
Total loans
Commercial Loan [Member] | Grade 9 - Loss [Member]
Total loans
Commercial Real Estate Portfolio Segment [Member]
Total loans	123,744	130,450	149,454
Commercial Real Estate Portfolio Segment [Member] | Grade 1 - Minimal [Member]
Total loans
Commercial Real Estate Portfolio Segment [Member] | Grade 2 - Modest [Member]
Total loans	984	1,066
Commercial Real Estate Portfolio Segment [Member] | Grade 3 - Average [Member]
Total loans	6,000	6,412
Commercial Real Estate Portfolio Segment [Member] | Grade 4 - Satisfactory [Member]
Total loans	65,241	67,453
Commercial Real Estate Portfolio Segment [Member] | Grade 5 - Watch [Member]
Total loans	16,921	17,288
Commercial Real Estate Portfolio Segment [Member] | Grade 6 - Special Mention [Member]
Total loans	9,248	10,028
Commercial Real Estate Portfolio Segment [Member] | Grade 7 - Substandard [Member]
Total loans	25,350	28,203
Commercial Real Estate Portfolio Segment [Member] | Grade 8 - Doubtful [Member]
Total loans
Commercial Real Estate Portfolio Segment [Member] | Grade 9 - Loss [Member]
Total loans
Consumer Loan [Member]
Total loans	7,557	7,928	8,050
Consumer Loan [Member] | Grade 1 - Minimal [Member]
Total loans	724	775
Consumer Loan [Member] | Grade 2 - Modest [Member]
Total loans	99	98
Consumer Loan [Member] | Grade 3 - Average [Member]
Total loans	908	914
Consumer Loan [Member] | Grade 4 - Satisfactory [Member]
Total loans	4,889	5,045
Consumer Loan [Member] | Grade 5 - Watch [Member]
Total loans	234	221
Consumer Loan [Member] | Grade 6 - Special Mention [Member]
Total loans	152	133
Consumer Loan [Member] | Grade 7 - Substandard [Member]
Total loans	551	742
Consumer Loan [Member] | Grade 8 - Doubtful [Member]
Total loans
Consumer Loan [Member] | Grade 9 - Loss [Member]
Total loans
Residential Portfolio Segment [Member]
Total loans	83,275	84,335	86,592
Residential Portfolio Segment [Member] | Grade 1 - Minimal [Member]
Total loans
Residential Portfolio Segment [Member] | Grade 2 - Modest [Member]
Total loans	1,392	1,835
Residential Portfolio Segment [Member] | Grade 3 - Average [Member]
Total loans	3,334	3,437
Residential Portfolio Segment [Member] | Grade 4 - Satisfactory [Member]
Total loans	55,892	53,868
Residential Portfolio Segment [Member] | Grade 5 - Watch [Member]
Total loans	4,946	6,933
Residential Portfolio Segment [Member] | Grade 6 - Special Mention [Member]
Total loans	4,120	5,127
Residential Portfolio Segment [Member] | Grade 7 - Substandard [Member]
Total loans	13,591	13,135
Residential Portfolio Segment [Member] | Grade 8 - Doubtful [Member]
Total loans
Residential Portfolio Segment [Member] | Grade 9 - Loss [Member]
Total loans

XML

FAIR VALUE (Details 2) (Fair Value Measurements Recurring [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Assets and liabilities fair value disclosure	$ 120,420	$ 94,602
Fair Value Inputs Level1 [Member]
Assets and liabilities fair value disclosure
Fair Value Inputs Level2 [Member]
Assets and liabilities fair value disclosure	120,420	94,602
Fair Value Inputs Level3 [Member]
Assets and liabilities fair value disclosure
Government Sponsored Enterprises Debt Securities [Member]
Assets and liabilities fair value disclosure	48,475	55,075
Government Sponsored Enterprises Debt Securities [Member] | Fair Value Inputs Level1 [Member]
Assets and liabilities fair value disclosure
Government Sponsored Enterprises Debt Securities [Member] | Fair Value Inputs Level2 [Member]
Assets and liabilities fair value disclosure	48,475	55,075
Government Sponsored Enterprises Debt Securities [Member] | Fair Value Inputs Level3 [Member]
Assets and liabilities fair value disclosure
Mortgage Backed Securities [Member]
Assets and liabilities fair value disclosure	70,746	37,034
Mortgage Backed Securities [Member] | Fair Value Inputs Level1 [Member]
Assets and liabilities fair value disclosure
Mortgage Backed Securities [Member] | Fair Value Inputs Level2 [Member]
Assets and liabilities fair value disclosure	70,746	37,034
Mortgage Backed Securities [Member] | Fair Value Inputs Level3 [Member]
Assets and liabilities fair value disclosure
Obligations of state and local governments [Member]
Assets and liabilities fair value disclosure	1,199	2,493
Obligations of state and local governments [Member] | Fair Value Inputs Level1 [Member]
Assets and liabilities fair value disclosure
Obligations of state and local governments [Member] | Fair Value Inputs Level2 [Member]
Assets and liabilities fair value disclosure	1,199	2,493
Obligations of state and local governments [Member] | Fair Value Inputs Level3 [Member]
Assets and liabilities fair value disclosure

XML

JUNIOR SUBORDINATED DEBENTURES (Details) (USD $) In Thousands, unless otherwise specified	1 Months Ended	6 Months Ended		38 Months Ended	0 Months Ended
	Feb. 28, 2011	Jun. 30, 2014 Junior Subordinated Debt [Member]	Jun. 30, 2013 Junior Subordinated Debt [Member]	Jun. 30, 2014 Trust Preferred Securities [Member]	Dec. 21, 2004 Hcsb Financial Trust I [Member]
Subordinated Borrowing [Line Items]
Preferred securities issued and sold	$ 6,000				$ 6,000
Proceeds from subordinated debentures		186
Debt issuance costs net of accumulated amortization		75
Amortization of debt issuance costs		5	5
Deferred interest payments				$ 633

XML

FAIR VALUE (Details 3) (Fair Value Measurements Nonrecurring [Member], USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Fair value of assets	$ 64,235	$ 66,855
Fair Value Inputs Level3 [Member]
Fair value of assets	64,235	66,855
Impaired Loans [Member]
Fair value of impaired loans disclosure.	42,355	41,883
Impaired Loans [Member] | Fair Value Inputs Level3 [Member]
Fair value of impaired loans disclosure.	42,355	41,883
Other Real Estate Owned [Member]
Fair value of other real estate owned disclosure.	21,880	24,972
Other Real Estate Owned [Member] | Fair Value Inputs Level3 [Member]
Fair value of other real estate owned disclosure.	$ 21,880	$ 24,972

XML

ADVANCES FROM THE FEDERAL HOME LOAN BANK (Details) (USD $) In Thousands, unless otherwise specified			6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Convertible Advance [Member]	Jun. 30, 2014 Convertible Advance [Member]	Jun. 30, 2014 Convertible Advance [Member]	Jun. 30, 2014 Convertible Advance [Member]	Jun. 30, 2014 Fixed Rate [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate			3.24%	3.60%	3.45%	2.95%	3.86%
Maturity Date			2014-12-08	2018-09-04	2018-09-10	2018-09-18	2019-08-20
Loan Balance	$ 22,000	$ 22,000	$ 5,000	$ 2,000	$ 5,000	$ 5,000	$ 5,000

XML

INVESTMENT SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Securities Available-for-Sale, Less than twelve months, Fair Value	$ 18,667	$ 65,689
Securities Available-for-Sale, Less than twelve months, Unrealized losses	(352)	(4,971)
Securities Available-for-Sale, Twelve months or more, Fair value	48,140	15,705
Securities Available-for-Sale, Twelve months or more, Unrealized losses	(2,345)	(1,582)
Securities Available-for-Sale, Total, Fair Value	66,807	81,394
Securities Available-for-Sale, Total, Unrealized losses	(2,697)	(6,553)
Government Sponsored Enterprises Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities Available-for-Sale, Less than twelve months, Fair Value	4,893	47,311
Securities Available-for-Sale, Less than twelve months, Unrealized losses	(107)	(4,433)
Securities Available-for-Sale, Twelve months or more, Fair value	38,057	7,764
Securities Available-for-Sale, Twelve months or more, Unrealized losses	(1,973)	(1,120)
Securities Available-for-Sale, Total, Fair Value	42,950	55,075
Securities Available-for-Sale, Total, Unrealized losses	(2,080)	(5,553)
Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities Available-for-Sale, Less than twelve months, Fair Value	13,166	17,826
Securities Available-for-Sale, Less than twelve months, Unrealized losses	(237)	(471)
Securities Available-for-Sale, Twelve months or more, Fair value	9,492	7,373
Securities Available-for-Sale, Twelve months or more, Unrealized losses	(331)	(393)
Securities Available-for-Sale, Total, Fair Value	22,658	25,199
Securities Available-for-Sale, Total, Unrealized losses	(568)	(864)
Obligations Of State And Local Governments [Member]
Schedule of Available-for-sale Securities [Line Items]
Securities Available-for-Sale, Less than twelve months, Fair Value	608	552
Securities Available-for-Sale, Less than twelve months, Unrealized losses	(8)	(67)
Securities Available-for-Sale, Twelve months or more, Fair value	591	568
Securities Available-for-Sale, Twelve months or more, Unrealized losses	(41)	(69)
Securities Available-for-Sale, Total, Fair Value	1,199	1,120
Securities Available-for-Sale, Total, Unrealized losses	$ (49)	$ (136)

XML

ADVANCES FROM THE FEDERAL HOME LOAN BANK (Tables)

6 Months Ended

Jun. 30, 2014

Federal Home Loan Bank, Advances, General Debt Obligations, Disclosures [Abstract]

Schedule Of Advances From Federal Home Loan Bank

Advances from the FHLB consisted of the following at June 30, 2014:

(Dollars in thousands)	Advance	Advance		Advance			Maturing
	Type	Amount		Rate			On
	Convertible Advance	$	5,000		3.24	%		12 /8/14
	Convertible Advance		2,000		3.60	%		9 /4/18
	Convertible Advance		5,000		3.45	%		9 /10/18
	Convertible Advance		5,000		2.95	%		9 /18/18
	Fixed Rate		5,000		3.86	%		8 /20/19
		$	22,000

XML

SHAREHOLDERS' EQUITY AND CAPITAL REQUIREMENTS (Details Narrative) (USD $) In Thousands, except Share data, unless otherwise specified	1 Months Ended			0 Months Ended	6 Months Ended
	Feb. 28, 2011	Jun. 30, 2014	Dec. 31, 2013	Dec. 21, 2004 Hcsb Financial Trust I [Member]	Jun. 30, 2014 Series T Preferred Stock [Member]	Mar. 06, 2009 Series T Preferred Stock [Member]
Fixed Rate Cumulative Perpetual Preferred Stock, Series T, shares issued to U.S. Treasury		12,895	12,895			12,895
Dividend Rate for first five years					5.00%
Dividend Rate after first five years					9.00%
Maximum number of common stock shares purchased under ten-year warrant						91,714
Common stock, initial exercise price						$ 21.09
Aggregate purchase price of Fixed Rate Cumulative Perpetual Preferred Stock, Series T						$ 12,900
Accrued dividend payments due on Series T Preferred Stock	$ 6,000			$ 6,000

XML

LOAN PORTFOLIO (Details 6) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Financing Receivable, Modifications [Line Items]
Restructured debt balances	$ 29,489	$ 31,453
Financial Receivable Modifications Performing [Member]
Financing Receivable, Modifications [Line Items]
Restructured debt balances	24,788	25,010
Financial Receivable Modifications Performing [Member] | Commercial Loan [Member]
Financing Receivable, Modifications [Line Items]
Restructured debt balances	3,961	3,496
Financial Receivable Modifications Performing [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Restructured debt balances	14,317	14,673
Financial Receivable Modifications Performing [Member] | Residential Portfolio Segment [Member]
Financing Receivable, Modifications [Line Items]
Restructured debt balances	6,361	6,690
Financial Receivable Modifications Performing [Member] | Consumer Loan [Member]
Financing Receivable, Modifications [Line Items]
Restructured debt balances	149	151
Financial Receivable Modifications Nonperforming [Member]
Financing Receivable, Modifications [Line Items]
Restructured debt balances	$ 4,701	$ 6,443

XML

LOAN PORTFOLIO (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended		12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Allowances for loan losses, Beginning balance	$ 9,443	$ 14,150	$ 14,150
Allowances for loan losses, Charge-offs	(3,414)	(3,347)	(7,476)
Allowances for loan losses, Recoveries	945	1,895	4,266
Allowances for loan losses, Provisions		(1,497)	(1,497)
Allowances for loan losses, Ending balance	6,974	11,201	9,443
Allowances for loan losses, Individually evaluated for impairment, Ending Balances	1,917	4,287	3,796
Allowances for loan losses, Collectively evaluated for impairment, Ending Balances	5,057	6,914	5,647
Loans receivable	251,372	286,650	256,424
Loans receivable, Individually evaluated for impairment	44,272	56,343	45,679
Loans receivable, Collectively evaluated for impairment	207,100	230,307	210,745
Commercial Loan [Member]
Allowances for loan losses, Beginning balance	1,020	1,982	1,982
Allowances for loan losses, Charge-offs	(278)	(1,272)	(1,691)
Allowances for loan losses, Recoveries	417	182	724
Allowances for loan losses, Provisions	(34)	433	5
Allowances for loan losses, Ending balance	1,125	1,325	1,020
Allowances for loan losses, Individually evaluated for impairment, Ending Balances	283	170	218
Allowances for loan losses, Collectively evaluated for impairment, Ending Balances	842	1,155	802
Loans receivable	36,796	42,554	33,711
Loans receivable, Individually evaluated for impairment	4,752	4,426	3,946
Loans receivable, Collectively evaluated for impairment	32,044	38,128	29,765
Commercial Real Estate Portfolio Segment [Member]
Allowances for loan losses, Beginning balance	5,312	7,587	7,587
Allowances for loan losses, Charge-offs	(2,258)	(1,584)	(3,927)
Allowances for loan losses, Recoveries	353	1,186	2,230
Allowances for loan losses, Provisions	452	(1,618)	(578)
Allowances for loan losses, Ending balance	3,859	5,571	5,312
Allowances for loan losses, Individually evaluated for impairment, Ending Balances	910	2,772	2,455
Allowances for loan losses, Collectively evaluated for impairment, Ending Balances	2,949	2,799	2,857
Loans receivable	123,744	149,454	130,450
Loans receivable, Individually evaluated for impairment	26,711	39,282	29,540
Loans receivable, Collectively evaluated for impairment	97,033	110,172	100,910
Consumer Loan [Member]
Allowances for loan losses, Beginning balance	144	124	124
Allowances for loan losses, Charge-offs	(283)	(118)	(217)
Allowances for loan losses, Recoveries	18	26	48
Allowances for loan losses, Provisions	450	90	189
Allowances for loan losses, Ending balance	329	122	144
Allowances for loan losses, Individually evaluated for impairment, Ending Balances	13	17	18
Allowances for loan losses, Collectively evaluated for impairment, Ending Balances	316	105	126
Loans receivable	7,557	8,050	7,928
Loans receivable, Individually evaluated for impairment	503	216	223
Loans receivable, Collectively evaluated for impairment	7,054	7,834	7,705
Residential Portfolio Segment [Member]
Allowances for loan losses, Beginning balance	2,967	4,457	4,457
Allowances for loan losses, Charge-offs	(595)	(373)	(1,641)
Allowances for loan losses, Recoveries	157	501	1,264
Allowances for loan losses, Provisions	(868)	(402)	(1,113)
Allowances for loan losses, Ending balance	1,661	4,183	2,967
Allowances for loan losses, Individually evaluated for impairment, Ending Balances	711	1,328	1,105
Allowances for loan losses, Collectively evaluated for impairment, Ending Balances	950	2,855	1,862
Loans receivable	83,275	86,592	84,335
Loans receivable, Individually evaluated for impairment	12,306	12,419	11,970
Loans receivable, Collectively evaluated for impairment	$ 70,969	$ 74,173	$ 72,365

XML

INCOME (LOSS) PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Basic loss per common share:
Net income (loss) available to common shareholders	$ (370)	$ (140)	$ (275)	$ 308
Weighted average common shares outstanding - basic	3,738,337	3,738,337	3,738,337	3,738,337
Basic income (loss) per common share	$ (0.10)	$ (0.04)	$ (0.07)	$ 0.08
Diluted loss per common share:
Net income (loss) available to common shareholders	(370)	(140)	(275)	308
Weighted average common shares outstanding - basic	3,738,337	3,738,337	3,738,337	3,738,337
Incremental shares
Weighted average common shares outstanding - diluted	3,738,337	3,738,337	3,738,337	3,738,337
Diluted income (loss) per common share	$ (0.10)	$ (0.04)	$ (0.07)	$ 0.08
Antidilutive stock options excluded from computation of earnings per share (in shares)	91,714	91,714	91,714	91,714

XML

ADVANCES FROM THE FEDERAL HOME LOAN BANK (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2014	Jun. 30, 2014	Dec. 31, 2013
Advances From The Federal Home Loan Bank [Line Items]
Advances from the Federal Home Loan Bank				$ 22,000	$ 22,000
Excess borrowing capacity with FHLB				8,700
Scheduled principal reductions	5,000	12,000	5,000
Mortgage Backed Securities [Member]
Advances From The Federal Home Loan Bank [Line Items]
First mortgage loans pledged as collateral				19,900
One To Four Family Residential Properties [Member]
Advances From The Federal Home Loan Bank [Line Items]
First mortgage loans pledged as collateral				1,700
Commercial Real Estate [Member]
Advances From The Federal Home Loan Bank [Line Items]
First mortgage loans pledged as collateral				4,400
Multifamily [Member]
Advances From The Federal Home Loan Bank [Line Items]
First mortgage loans pledged as collateral				45
Home Equity Lines Of Credit [Member]
Advances From The Federal Home Loan Bank [Line Items]
First mortgage loans pledged as collateral				$ 4,800

XML

REGULATORY MATTERS AND FUTURE OPERATIONS

6 Months Ended

Jun. 30, 2014

Regulatory Matters And Going Concern Considerations [Abstract]

REGULATORY MATTERS AND FUTURE OPERATIONS

NOTE 2 – REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS

Consent Order with the Federal Deposit Insurance Corporation and South Carolina Board of Financial Institutions

On February 10, 2011, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the South Carolina Board of Financial Institutions (the “State Board”). 

The Consent Order conveys specific actions needed to address the Bank’s current financial condition, primarily related to capital planning, liquidity/funds management, policy and planning issues, management oversight, loan concentrations and classifications, and non-performing loans. A summary of the requirements of the Consent Order and the Bank’s status on complying with the Consent Order is as follows:

Requirements of the Consent Order	Bank’s Compliance Status
Achieve and maintain, by July 10, 2011, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets.	The Bank did not meet the capital ratios as specified in the Consent Order and, as a result, submitted a revised capital restoration plan to the FDIC on July 15, 2011. The revised capital restoration plan was determined by the FDIC to be insufficient and, as a result, we submitted a further revised capital restoration plan to the FDIC on September 30, 2011. We received the FDIC’s non-objection to the further revised capital restoration plan on December 6, 2011. The Bank is working diligently to increase its capital ratios in order to strengthen its balance sheet and satisfy the commitments required under the Consent Order. The Bank has engaged independent third parties to assist the Bank in its efforts to increase its capital ratios. In addition to continuing to search for additional capital, the Bank is also searching for a potential merger partner. There can be no assurances the Company will either raise additional capital or find a merger partner.
Submit, by April 11, 2011, a written capital plan to the supervisory authorities.	We believe we have complied with this provision of the Consent Order.
Establish, by March 12, 2011, a plan to monitor compliance with the Consent Order, which shall be monitored by the Bank’s Directors’ Committee.	We believe we have complied with this provision of the Consent Order. The Directors’ Committee meets monthly and each meeting includes reviews and discussions of all areas required in the Consent Order.

Develop, by May 11, 2011, a written analysis and assessment of the Bank’s management and staffing needs. We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to perform an assessment of the Bank’s staffing needs to ensure the Bank has an appropriate organizational structure with qualified management in place. The Board of Directors has reviewed all recommendations regarding the Bank’s organizational structure.

Notify the supervisory authorities in writing of the resignation or termination of any of the Bank’s directors or senior executive officers.	We believe we have complied with this provision of the Consent Order.
Eliminate, by March 12, 2011, by charge-off or collection, all assets or portions of assets classified “Loss” and 50% of those assets classified “Doubtful.”	We believe we have complied with this provision of the Consent Order.
Review and update, by April 11, 2011, its policy to ensure the adequacy of the Bank’s allowance for loan and lease losses, which must provide for a review of the Bank’s allowance for loan and lease losses at least once each calendar quarter.	We believe we have complied with this provision of the Consent Order.
Submit, by April 11, 2011, a written plan to the supervisory authorities to reduce classified assets, which shall include, among other things, a reduction of the Bank’s risk exposure in relationships with assets in excess of $750,000 which are criticized as “Substandard” or “Doubtful”.  In accordance with the approved plan, reduce assets classified in the June 30, 2010 Report of Examination by 65% by August 11, 2012 and by 75% by February 9, 2013.	We are not in compliance with this provision of the Consent Order. The written plan was submitted and approved; however, assets classified in the June 30, 2010 Report of Examination had only been reduced by 71.76% as of June 30, 2014 and 68.76% as of December 31, 2013.
Revise, by April 11, 2011, its policies and procedures for managing the Bank’s Adversely Classified Other Real Estate Owned.	We believe we have complied with this provision of the Consent Order.

Not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been criticized, in whole or in part, “Substandard” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.	We believe we have complied with this provision of the Consent Order.  In the second quarter of 2010, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.  An independent review of the Bank’s credit portfolio was most recently completed in the second quarter of 2014.
Perform, by April 11, 2011, a risk segmentation analysis with respect to the Bank’s Concentrations of Credit and develop a written plan to systematically reduce any segment of the portfolio that is an undue concentration of credit.	We believe we have complied with this provision of the Consent Order.
Review, by April 11, 2011 and annually thereafter, the Bank’s loan policies and procedures for adequacy and, based upon this review, make all appropriate revisions to the policies and procedures necessary to enhance the Bank’s lending functions and ensure their implementation.	We believe we have complied with this provision of the Consent Order. As noted above, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.
Adopt, by May 11, 2011, an effective internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality.	We believe we have complied with this provision of the Consent Order. As noted above, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.

Review and update, by May 11, 2011, its written profit plan to ensure the Bank has a realistic, comprehensive budget for all categories of income and expense, which must address, at minimum, goals and strategies for improving and sustaining the earnings of the Bank, the major areas in and means by which the Bank will seek to improve the Bank’s operating performance, realistic and comprehensive budgets, a budget review process to monitor income and expenses of the Bank to compare actual results with budgetary projections, assess that operating assumptions that form the basis for budget projections and adequately support major projected income and expense components of the plan, and coordination of the Bank’s loan, investment, and operating policies and budget and profit planning with the funds management policy.	We believe we have complied with this provision of the Consent Order.  The Bank engaged an independent third party to assist management with a strategic plan to help restructure its balance sheet, increase capital ratios, return to profitability and maintain adequate liquidity.
Review and update, by May 11, 2011, its written plan addressing liquidity, contingent funding, and asset liability management.	We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to assist management in its development of a strategic plan that achieves all requirements of the Consent Order. The strategic plan reflects the Bank’s plans to restructure its balance sheet, increase capital ratios, return to profitability, and maintain adequate liquidity. The Board of Directors has reviewed and adopted the Bank’s strategic plan.
Eliminate, by March 12, 2011, all violations of law and regulation or contraventions of policy set forth in the FDIC’s safety and soundness examination of the Bank in November 2009.	We believe we have complied with this provision of the Consent Order.
Not accept, renew, or rollover any brokered deposits unless it is in compliance with the requirements of 12 C.F.R. § 337.6(b).	Since entering into the Consent Order, the Bank has not accepted, renewed, or rolled-over any brokered deposits.
Limit asset growth to 5% per annum.	We believe we have complied with this provision of the Consent Order.

Not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.	We believe we have complied with this provision of the Consent Order.
The Bank shall comply with the restrictions on the effective yields on deposits as described in 12 C.F.R. § 337.6.	We believe we have complied with this provision of the Consent Order.
Furnish, by March 12, 2011 and within 30 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order.	We believe we have complied with this provision of the Consent Order, and we have submitted the required progress reports to the supervisory authorities.

Submit, by March 12, 2011, a written plan to the supervisory authorities for eliminating its reliance on brokered deposits.	We believe we have complied with this provision of the Consent Order.
Adopt, by April 11, 2011, an employee compensation plan after undertaking an independent review of compensation paid to all of the Bank’s senior executive officers.	We believe we have complied with this provision of the Consent Order.
Prepare and submit, by May 11, 2011, its written strategic plan to the supervisory authorities.	We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to assist management in its development of a strategic plan that achieves all requirements of the Consent Order. The Board of Directors has reviewed and adopted the Bank’s strategic plan.

There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of the Bank’s compliance will be made by the FDIC and the State Board. In addition, the supervisory authorities may amend the Consent Order based on the results of their ongoing examinations. However, we believe we are currently in substantial compliance with the Consent Order except for the requirements to achieve and maintain Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets. Should we fail to comply with the capital requirements in the Consent Order, or suffer a continued deterioration in our financial condition, the Bank may be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed as conservator or receiver.

As of June 30, 2014, the Company was categorized as “critically undercapitalized” and the Bank was categorized as “significantly undercapitalized.” Our losses over the past few years have materially adversely impacted our capital. As a result, we have been pursuing a plan through which to achieve the capital requirements set forth under the Consent Order which includes, among other things, the sale of assets, reduction in total assets, and reduction of overhead expenses, as well as raising additional capital at either the Bank or the holding company level and attempting to find a merger partner for the Company or the Bank.

We anticipate that we will need to raise a material amount of capital to return the Bank to an adequate level of capitalization and have been exploring a number of potential sources of capital. We have not had any success to date in raising this capital, and there are no assurances that we will be able to raise this capital on a timely basis or at all.

We are also working to improve asset quality and to reduce the Bank’s investment in commercial real estate loans as a percentage of Tier 1 capital. The Company is reducing its reliance on brokered deposits and is committed to improving the Bank’s capital position.

Written Agreement

On May 9, 2011, the Company entered into a Written Agreement with the Federal Reserve Bank of Richmond.  The Written Agreement is designed to enhance the Company’s ability to act as a source of strength to the Bank.

The Written Agreement contains provisions similar to those in the Bank’s Consent Order. Specifically, pursuant to the Written Agreement, the Company agreed, among other things, to seek the prior written approval of the Federal Reserve Bank of Richmond before undertaking any of the following activities:

· declaring or paying any dividends,

· directly or indirectly taking dividends or any other form of payment representing a reduction in capital from the Bank,

· making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities,

· directly or indirectly, incurring, increasing or guarantying any debt, and

· directly or indirectly, purchasing or redeeming any shares of its stock.

The Company also agreed to comply with certain notice provisions set forth in the Federal Deposit Insurance Act and regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position.  The Company is also required to comply with certain restrictions on indemnification and severance payments pursuant to the Federal Deposit Insurance Act and FDIC regulations.

We believe we are currently in substantial compliance with the Written Agreement.

Going Concern Considerations

The going concern assumption is a fundamental principle in the preparation of financial statements. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In assessing this assumption, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of June 30, 2014. Prior to 2009, the Company had a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank’s financial condition has suffered during the past five years from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression.

The effects of the current economic environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans to the Bank. As a result, the Bank’s level of nonperforming assets increased substantially during 2010 and 2011. However, since 2012, the Bank’s nonperforming assets have begun to stabilize. Specifically, nonperforming assets at June 30, 2014 were $56.3 million compared to $60.6 million at December 31, 2013 and $72.2 million at December 31, 2012. As a percentage of total assets, nonperforming assets were 12.45%, 13.95% and 15.39% as of June 30, 2014, and December 31, 2013 and 2012, respectively. While management recognizes the possibility of further deterioration in the loan portfolio, net loan charge-offs have decreased from $17.6 million for the year ended December 31, 2012 to $3.2 million for the year ended December 31, 2013. Year-to-date net charge-offs for the six months ended June 30, 2014 were $2.5 million.

The Company and the Bank operate in a highly regulated industry and must plan for the liquidity needs of each entity separately. A variety of sources of liquidity have historically been available to the Bank to meet its short-term and long-term funding needs. Although a number of these sources have been limited following execution of the Consent Order, management has prepared forecasts of these sources of funds and the Bank’s projected uses of funds during 2014 in an effort to ensure that the sources available are sufficient to meet the Bank’s projected liquidity needs for this period.

Prior to the economic downturn, the Company, if needed, would have relied on dividends from the Bank as its primary source of liquidity. Currently, however, the Company has no available sources of liquidity. The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, the terms of the Consent Order described below further limits the Bank’s ability to pay dividends to the Company to satisfy its funding needs. Unless the Company is able to raise capital, it will have no means of satisfying its funding needs.

Management believes the Bank’s liquidity sources are adequate to meet its needs for at least the next 12 months, but if the Bank is unable to meet its liquidity needs, then the Bank may be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed conservator or receiver.

The Company will also need to raise substantial additional capital to increase the Bank’s capital levels to meet the standards set forth by the FDIC. As a result of the recent downturn in the financial markets and the financial condition of the Company and the Bank, the availability of capital has become significantly restricted or has become increasingly costly as compared to the prevailing market rates prior to the volatility. Management cannot predict when or if the capital markets will return to more favorable conditions. Management is actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the Bank’s projected level of regulatory capital can support its balance sheet. Receivership by the FDIC is based on the Bank’s capital ratios rather than those of the Company. As of June 30, 2014, the Bank is categorized as significantly undercapitalized.

There can be no assurances that the Company or the Bank will be able to raise additional capital. An equity financing transaction by the Company would result in substantial dilution to the Company’s current shareholders and could adversely affect the market price of the Company’s common stock. Likewise, an equity financing transaction by the Bank would result in substantial dilution to the Company’s ownership interest in the Bank. It is difficult to predict if these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company would be unable to realize its assets and discharge its liabilities in the normal course of business.

As a result of management’s assessment of the Company’s ability to continue as a going concern, the accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets. There is substantial doubt about the Company’s ability to continue as a going concern.

XML

LOAN PORTFOLIO (Details 7) (Troubled Debt Restructuring [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014 Item		Jun. 30, 2013 Item		Jun. 30, 2014 Item		Jun. 30, 2013 Item
Tdrs That Are In Compliance With Terms Of Agreement [Member]
Number of contracts	8		6		12		19
Pre- Modification Outstanding Recorded Investment	$ 2,381		$ 365		$ 2,589		$ 1,627
Post-Modification Outstanding Recorded Investment	2,381		365		2,589		1,627
Tdrs That Are In Compliance With Terms Of Agreement [Member] | Commercial Real Estate [Member]
Number of contracts	4		1		7		3
Pre- Modification Outstanding Recorded Investment	1,127		43		1,304		540
Post-Modification Outstanding Recorded Investment	1,127		43		1,304		540
Tdrs That Are In Compliance With Terms Of Agreement [Member] | Residential Portfolio Segment [Member]
Number of contracts	1		1		2		3
Pre- Modification Outstanding Recorded Investment	235		241		266		355
Post-Modification Outstanding Recorded Investment	235		241		266		355
Tdrs That Are In Compliance With Terms Of Agreement [Member] | Commercial Loan [Member]
Number of contracts	3		3		3		11
Pre- Modification Outstanding Recorded Investment	1,019		77		1,019		681
Post-Modification Outstanding Recorded Investment	1,019		77		1,019		681
Tdrs That Are In Compliance With Terms Of Agreement [Member] | Consumer Loan [Member]
Number of contracts			1				2
Pre- Modification Outstanding Recorded Investment			4				51
Post-Modification Outstanding Recorded Investment			4				51
Tdrs That Are Subsequently Defaulted [Member]
Number of contracts		[1]		[1]		[1]		[1]
Pre- Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Post-Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Tdrs That Are Subsequently Defaulted [Member] | Commercial Real Estate [Member]
Number of contracts		[1]		[1]		[1]		[1]
Pre- Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Post-Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Tdrs That Are Subsequently Defaulted [Member] | Residential Portfolio Segment [Member]
Number of contracts		[1]		[1]		[1]		[1]
Pre- Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Post-Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Tdrs That Are Subsequently Defaulted [Member] | Commercial Loan [Member]
Number of contracts				[1]				[1]
Pre- Modification Outstanding Recorded Investment				[1]				[1]
Post-Modification Outstanding Recorded Investment				[1]				[1]
Tdrs That Are Subsequently Defaulted [Member] | Consumer Loan [Member]
Number of contracts		[1]		[1]		[1]		[1]
Pre- Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]
Post-Modification Outstanding Recorded Investment		[1]		[1]		[1]		[1]

[1] Loans past due 90 days or more are considered to be in default.

XML

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $) In Thousands, except Share data, unless otherwise specified	1 Months Ended	6 Months Ended		0 Months Ended
	Feb. 28, 2011	Jun. 30, 2014 Item	Dec. 31, 2013	Mar. 06, 2009 Capital Purchase Program Warrant [Member]	Mar. 06, 2009 Series T Preferred Stock [Member]
Class of Stock [Line Items]
Fixed Rate Cumulative Perpetual Preferred Stock, Series T, shares issued to U.S. Treasury		12,895	12,895		12,895
Fixed Rate Cumulative Perpetual Preferred Stock, Series T, Liquidation preference (per share)					$ 1,000
Warrant term				10 years
Maximum number of common stock shares purchased under ten-year warrant				91,714	91,714
Common stock, initial exercise price				$ 21.09	$ 21.09
Aggregate purchase price of Fixed Rate Cumulative Perpetual Preferred Stock, Series T					$ 12,900
Proceeds on trust preferred securities	$ 6,000
Number of accrued dividend payments due on Series T Preferred Stock		8
Number of accrued dividend payments due on Series T Preferred Stock when holders have right to elect directors		6
Number of directors shareholders have right to elect		2

XML

FAIR VALUE (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Schedule Of Carrying Values And Estimated Fair Values Of Financial Instruments

June 30, 2014					Fair Value Measurements
(Dollars in thousands)					Quoted		Significant
					market		other		Significant
					price in		observable		unobservable
	Carrying		Estimated		active markets		inputs		inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	29,368	$	29,368	$	29,368	$	—	$	—
Securities available-for-sale		120,420		120,420		—		120,420		—
Nonmarketable equity securities		1,567		1,567		—		—		1,567
Loans, net		244,398		244,793		—		—		244,793
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		175,593		175,593		175,593		—		—
Certificates of deposit		243,548		245,659		—		245,659		—
Repurchase agreements		1,194		1,194		—		1,194		—
Advances from the Federal Home Loan Bank		22,000		24,681		—		24,681		—
Subordinated debentures		11,062		*		—		—		—
Junior subordinated debentures		6,186		*		—		—		—
	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	29,452		n/a
Standby letters of credit		415		n/a

* The Company is unable to determine this value.

December 31, 2013					Fair Value Measurements
(Dollars in thousands)					Quoted		Significant
					market		other		Significant
					price in		observable		unobservable
	Carrying		Estimated		active markets		inputs		inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	28,081	$	28,081	$	28,081	$	—	$	—
Securities available-for-sale		94,602		94,602		—		94,602		—
Nonmarketable equity securities		1,743		1,743		—		—		1,743
Loans, net		246,981		248,633		—		—		248,633
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		163,505		163,505		163,505		—		—
Certificates of deposit		242,539		244,463		—		244,463		—
Repurchase agreements		1,337		1,337		—		1,337		—
Advances from the Federal Home Loan Bank		22,000		25,055		—		25,055		—
Subordinated debentures		11,062		*		—		—		—
Junior subordinated debentures		6,186		*		—		—		—
	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	29,836		n/a
Standby letters of credit		361		n/a

* The Company is unable to determine this value.

Schedule Of Assets And Liabilities Measured At Fair Value On A Recurring Basis

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of and for the periods ended June 30, 2014 and December 31, 2013, by level within the fair value hierarchy.

			Quoted prices in		Significant
			active markets		Other		Significant
			for identical		Observable		Unobservable
(Dollars in thousands)			assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2014
Assets:
Government sponsored enterprises	$	48,475	$	—	$	48,475	$	—
Mortgage-backed securities		70,746		—		70,746		—
Obligations of state and local governments		1,199		—		1,199		—
Total	$	120,420	$	—	$	120,420	$	—
December 31, 2013
Assets:
Government sponsored enterprises	$	55,075	$	—	$	55,075	$	—
Mortgage-backed securities		37,034		—		37,034		—
Obligations of state and local governments		2,493		—		2,493		—
Total	$	94,602	$	—	$	94,602	$	—

The Company has no liabilities measured at fair value on a recurring basis.

Schedule Of Assets And Liabilities Recorded At Fair Value On A Non-Recurring Basis

The following tables present the assets and liabilities carried on the balance sheet by caption and by level within the valuation hierarchy described above for which a nonrecurring change in fair value has been recorded during the periods ended June 30, 2014 and December 31, 2013.

			Quoted prices in		Significant
			active markets		Other		Significant
(Dollars in thousands)			for identical		Observable		Unobservable
			assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2014
Assets:
Impaired loans, net of valuation allowance	$	42,355	$	—	$	—	$	42,355
Other real estate owned		21,880		—		—		21,880
Total	$	64,235	$	—	$	—	$	64,235
December 31, 2013
Assets:
Impaired loans, net of valuation allowance	$	41,883	$	—	$	—	$	41,883
Other real estate owned		24,972		—		—		24,972
Total	$	66,855	$	—	$	—	$	66,855

The Company has no liabilities measured at fair value on a nonrecurring basis.

Schedule Of Quantitative Information About Level 3 Fair Value Measurements On A Non-Recurring Basis

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2014.

(Dollars in thousands)

	June 30,		Valuation	Unobservable	Range
	2014		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	4,469	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-75.75%
			Flows	Independent quotes	(5.96%)
Commercial real estate		25,801	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-80.47%
			Flows	Independent quotes	(17.19%)
Residential		11,595	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-89.71%
			Flows	Independent quotes	(20.02%)
Consumer		490	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-64.65%
			Flows	Independent quotes	(7.47%)
Other real estate owned		21,880	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-50.00%
			Flows	Independent quotes	(6.27%)

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013.

(Dollars in thousands)

	December 31,		Valuation	Unobservable	Range
	2013		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	3,728	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-76.50%
			Flows	Independent quotes	(3.36%)
Commercial real estate		27,085	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-88.29%
			Flows	Independent quotes	(16.51%)
Residential		10,865	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-90.23%
			Flows	Independent quotes	(23.60%)
Consumer		205	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-38.68%
			Flows	Independent quotes	(14.67%)
Other real estate owned		24,972	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-50.00%
			Flows	Independent quotes	(6.27%)

XML

FAIR VALUE (Details 4) (Fair Value Inputs Level3 [Member], USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Impaired Loans [Member] | Commercial Loan [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Fair value on a non-recurring basis	$ 4,469	$ 3,728
Valuation Techniques	Appraised Value/ Discounted Cash Flows	Appraised Value/ Discounted Cash Flows
Unobservable Inputs	Appraisals and/or sales of comparable properties/ Independent quotes	Appraisals and/or sales of comparable properties/ Independent quotes
Range (Weighted Avg)	(5.96%)	3.36%
Impaired Loans [Member] | Commercial Loan [Member] | Minimum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	0.00%	0.00%
Impaired Loans [Member] | Commercial Loan [Member] | Maximum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	75.75%	76.50%
Impaired Loans [Member] | Commercial Real Estate [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Fair value on a non-recurring basis	25,801	27,085
Valuation Techniques	Appraised Value/ Discounted Cash Flows	Appraised Value/ Discounted Cash Flows
Unobservable Inputs	Appraisals and/or sales of comparable properties/ Independent quotes	Appraisals and/or sales of comparable properties/ Independent quotes
Range (Weighted Avg)	(17.19%)	16.51%
Impaired Loans [Member] | Commercial Real Estate [Member] | Minimum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	0.00%	0.00%
Impaired Loans [Member] | Commercial Real Estate [Member] | Maximum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	80.47%	88.29%
Impaired Loans [Member] | Residential Portfolio Segment [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Fair value on a non-recurring basis	11,595	10,865
Valuation Techniques	Appraised Value/ Discounted Cash Flows	Appraised Value/ Discounted Cash Flows
Unobservable Inputs	Appraisals and/or sales of comparable properties/ Independent quotes	Appraisals and/or sales of comparable properties/ Independent quotes
Range (Weighted Avg)	(20.02%)	23.60%
Impaired Loans [Member] | Residential Portfolio Segment [Member] | Minimum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	0.00%	0.00%
Impaired Loans [Member] | Residential Portfolio Segment [Member] | Maximum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	89.71%	90.23%
Impaired Loans [Member] | Consumer Loan [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Fair value on a non-recurring basis	490	205
Valuation Techniques	Appraised Value/ Discounted Cash Flows	Appraised Value/ Discounted Cash Flows
Unobservable Inputs	Appraisals and/or sales of comparable properties/ Independent quotes	Appraisals and/or sales of comparable properties/ Independent quotes
Range (Weighted Avg)	(7.47%)	14.67%
Impaired Loans [Member] | Consumer Loan [Member] | Minimum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	0.00%	0.00%
Impaired Loans [Member] | Consumer Loan [Member] | Maximum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	64.65%	38.68%
Other Real Estate Owned [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Valuation Techniques	Appraised Value/ Discounted Cash Flows	Appraised Value/ Discounted Cash Flows
Unobservable Inputs	Appraisals and/or sales of comparable properties/ Independent quotes	Appraisals and/or sales of comparable properties/ Independent quotes
Range (Weighted Avg)	(6.27%)	6.27%
Fair value on a non-recurring basis	$ 21,880	$ 24,972
Other Real Estate Owned [Member] | Minimum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	0.00%	0.00%
Other Real Estate Owned [Member] | Maximum [Member]
Quantitative Information For Financial Instruments Measured At Fair Value On A Non-Recurring Basis [Line Items]
Range	50.00%	50.00%

XML

LOAN PORTFOLIO (Details 8) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Commitments To Extend Credit [Member]
Off-Balance Sheet Financial Instruments:
Notional Amount	$ 29,452	$ 29,836
Standby Letters Of Credit [Member]
Off-Balance Sheet Financial Instruments:
Notional Amount	$ 415	$ 361

XML

REGULATORY MATTERS AND FUTURE OPERATIONS (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Dec. 31, 2012	Feb. 09, 2013 Consent Order Requirements [Member]	Apr. 11, 2011 Consent Order Requirements [Member]	Mar. 12, 2011 Consent Order Requirements [Member]	Jul. 10, 2011 Minimum [Member] Consent Order Requirements [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Total risk based capital of risk-weighted assets (as a percentage)							10.00%
Tier 1 capital of total assets (as a percentage)							8.00%
Charge-off or collect assets classified as "Doubtful"						50.00%
Substandard or doubtful assets risk exposure threshold					$ 750,000
Asset growth limit per consent order				5.00%
Nonperforming assets	56,300	60,600	72,200
Percentage of nonperforming assets	12.45%	13.95%	15.39%
Net loan charge-offs	$ 2,500	$ 3,200	$ 17,600

XML

INVESTMENT SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 122,286	$ 100,875
Gross Unrealized Gains	831	280
Gross Unrealized Losses	(2,697)	(6,553)
Estimated Fair Value	120,420	94,602
Government Sponsored Enterprises Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	50,531	60,628
Gross Unrealized Gains	24
Gross Unrealized Losses	(2,080)	(5,553)
Estimated Fair Value	48,475	55,075
Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	70,507	37,731
Gross Unrealized Gains	807	167
Gross Unrealized Losses	(568)	(864)
Estimated Fair Value	70,746	37,034
Obligations Of State And Local Governments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	1,248	2,516
Gross Unrealized Gains		113
Gross Unrealized Losses	(49)	(136)
Estimated Fair Value	$ 1,199	$ 2,493

XML

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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”) which was incorporated on June 10, 1999 to serve as a bank holding company for its wholly owned subsidiary, Horry County State Bank (the “Bank”). The Bank was incorporated on December 18, 1987, and opened for operations on January 4, 1988. The principal business activity of the Company is to provide commercial banking services in Horry County, South Carolina, and in Columbus and Brunswick Counties, North Carolina. The Bank is a state-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). HCSB Financial Trust I (the “Trust”) is a special purpose subsidiary organized for the sole purpose of issuing trust preferred securities. The operations of the Trust have not been consolidated in these financial statements.

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of June 30, 2014 and for the interim periods ended June 30, 2014 and 2013 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The financial information as of December 31, 2013 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 2013 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2014.

On March 6, 2009, as part of the Troubled Asset Relief Program Capital Purchase Program (the “CPP”) established by the U.S. Department of the Treasury (the “U.S. Treasury”) under the Emergency Economic Stabilization Act of 2009, the Company issued and sold to the U.S. Treasury (i) 12,895 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series T, having a liquidation preference of $1,000 per share (the “Series T Preferred Stock”), and (ii) a ten-year warrant to purchase up to 91,714 shares of its common stock at an initial exercise price of $21.09 per share (the “CPP Warrant”), for an aggregate purchase price of $12.9 million in cash. Refer to the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

As of February 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulator, has required the Company to defer dividend payments on the 12,895 shares of the Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities issued in December 2004. Therefore, for each quarterly period beginning in February 2011, the Company notified the U.S. Treasury of its deferral of quarterly dividend payments on the Series T Preferred Stock and also informed the Trustee of the trust preferred securities of its deferral of the quarterly interest payments on the trust preferred securities. On May 15, 2014, the dividend rate on the Series T Preferred Stock increased from 5% per annum (approximately $645 thousand annually) to 9% per annum (approximately $1.2 million annually). As of June 30, 2014, the Company had $2.4 million of deferred dividend payments due on the Series T Preferred Stock. Because the Company has deferred these 14 payments, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full. In addition, whenever dividends payable on the shares of the Series T Preferred Stock have been deferred for an aggregate of six or more quarterly dividend periods, the holders of the preferred stock have the right to elect two directors to fill newly created directorships at the Company’s next annual meeting of the shareholders. As a result of the Company’s deferral of dividend payments on the Series T Preferred Stock, the U.S. Treasury, the current holder of all 12,895 shares of the Series T Preferred Stock, requested the Company’s non-objection to appoint a representative to observe monthly meetings of the Company’s Board of Directors. The Company granted the Treasury’s request and a representative of Treasury has attended the Company’s monthly board meetings since June 2012. As of the date of this report, the U.S. Treasury has not exercised its right to elect two directors to fill newly created directorships and has not notified the Company whether it intends to elect two directors to fill newly created directorships at the Company’s 2015 annual meeting of the shareholders.

The Company has never paid a cash dividend, but, as a result of the Company’s financial condition and these restrictions on the Company, including the restrictions on the Bank’s ability to pay dividends to the Company, the Company has not been permitted to pay a dividend on its common stock since 2009.

Management’s Estimates - In preparing the consolidated 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 income 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.

Investment Securities - Investment securities available-for-sale owned by the Company are carried at amortized cost and adjusted to their estimated fair value for reporting purposes. The unrealized gain or loss is recorded in shareholders’ equity net of any 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 (the “FHLB”). The FHLB stock is carried at cost because the stock has no quoted market value and no ready market exists. Investment in FHLB stock is a condition of borrowing from the FHLB, and the stock is pledged to collateralize the borrowings. Dividends received on FHLB stock are included as a separate component in interest income.

Loans Receivable - Loans receivable are stated at their unpaid principal balance, less any charge-offs. Interest income on 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 contractually 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 deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method.

Loans are 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 these 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 and home equity lines as such exceptions. Therefore, loans within the real estate and commercial loan portfolios are reviewed individually.

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 off with a corresponding entry to the allowance for loan losses. The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily throughout Horry County in South Carolina and Columbus and Brunswick counties of North Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. However, the loan portfolio does include a concentration in loans secured by residential and commercial real estate and commercial and industrial non-real estate loans. These loans are especially susceptible to being adversely effected by the current economic downturn. The current downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and these trends may continue, especially in the Myrtle Beach area. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The commercial real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values in our market areas continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management’s judgments about the adequacy of the allowance are based on numerous assumptions about current events, which management believes to be reasonable, but which may or may not prove to be accurate. Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company.

The allowance is subject to examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require the Company to adjust its allowance based on information available to them at the time of their examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

Premises, Furniture and Equipment - Premises, furniture 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; and furniture and equipment - three to 25 years. The cost of assets sold or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts, and the resulting gains or losses are reflected in the income statement.

Maintenance and repairs are charged to current expense as incurred, and the costs of major renewals and improvements are capitalized.

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at appraised value.

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 net cost of operations of other real estate owned.

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 – The Company files consolidated federal and state income tax returns. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis. The Company accounts for income taxes based on two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to uncertain tax positions, if any.

Deferred income taxes are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax impacts of the differences between the book and tax bases of assets and liabilities and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to the Company’s judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties, if any, are recognized as a component of income tax expense.

The Company reviews the deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income available under tax law, including future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, projections of future operating results, cumulative tax losses over the past three years, tax loss deductibility limitations, and available tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance against the deferred tax asset must be established with a corresponding charge to income tax expense. The deferred tax assets and valuation allowance are evaluated each quarter, and a portion of the valuation allowance may be reversed in future periods. The determination of how much of the valuation allowance that may be reversed and the timing is based on future results of operation and the amount and timing of actual loan charge-offs and asset write-downs. At June 30, 2014 and December 31, 2013, the Company’s deferred tax asset was offset in its entirety by a valuation allowance.

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore no reserves for uncertain income tax positions have been recorded.

Net Income (Loss) Per Common Share - Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares. The computation of diluted net loss per share does not include potential common shares as their effect would be anti-dilutive.

Comprehensive Income - Accounting principles generally require recognized income, expenses, gains, and losses to 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.

Statements of Cash Flows - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks, federal funds sold, and interest-bearing deposits with other banks.

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.

Recently Issued Accounting Pronouncements – The following is a summary of recent authoritative pronouncements.

In January 2014, the Financial Accounting Standards Board (the “FASB”) amended the Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan portfolio that results from a borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

Additionally, the Company is subject to certain regulations due to our participation in the CPP. Pursuant to the terms of the CPP Purchase Agreement between us and the U.S. Treasury, we adopted certain standards for executive compensation and corporate governance for the period during which the Treasury holds the equity issued pursuant to the CPP Purchase Agreement, including the common stock which may be issued pursuant to the CPP Warrant. These standards generally apply to our named executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) requiring clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibiting on making golden parachute payments to senior executives; (4) prohibiting tax gross-up provisions; and (5) agreeing not to deduct for tax purposes executive compensation in excess of $500 thousand for each senior executive. In particular, the change to the deductibility limit on executive compensation will likely increase the overall cost of our compensation programs in future periods and may make it more difficult to attract suitable candidates to serve as executive officers.

In February 2005 the Bank purchased a $500 thousand 15-year renewable and convertible term life insurance policy through Banner Life Insurance Company on the life of James R. Clarkson, President and CEO. The Bank is both the owner and the beneficiary of this key person policy. The purpose of securing this policy was to provide the Bank with financial protection in the event of the unexpected death of Mr. Clarkson and better enable the Bank to attract a qualified replacement for Mr. Clarkson in such a situation.

Legislation that has been adopted after we closed on our sale of Series T Preferred Stock and the CPP Warrant to the U.S. Treasury for $12.9 million pursuant to the CPP on March 6, 2009, or any legislation or regulations that may be implemented in the future, may have a material impact on the terms of our CPP transaction with the U.S. Treasury.

Reclassifications - Certain captions and amounts for prior periods have been reclassified to conform to the June 30, 2014 presentation.

XML

INVESTMENT SECURITIES (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Securities Available-For-Sale Amortized Cost [Abstract]
Due after one year but within five years	$ 1,491
Due after five years but within ten years	21,156
Due after ten years	99,639
Amortized Cost	122,286	100,875
Securities Available-For-Sale Fair Value [Abstract]
Due after one year but within five years	1,501
Due after five years but within ten years	20,974
Due after ten years	97,945
Estimated Fair Value	$ 120,420	$ 94,602

XML

LOAN PORTFOLIO (Details Narrative) (USD $) In Thousands, unless otherwise specified					6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013	Jun. 30, 2014 Pass [Member]	Jun. 30, 2014 Pass [Member] Concentration of Loan Portfolio [Member]	Jun. 30, 2014 Watch And Special Mention [Member]
Total loans	$ 251,372	$ 256,424	$ 286,650	$ 165,600		$ 40,000
Concentration of Loan (as a percentage)					65.90%
Classified loans	45,800
Classified loans collateralized by real estate	38,900
Recorded investment in impaired loans	44,272	45,679
TDR impaired loans	$ 29,489	$ 31,453

XML

FAIR VALUE (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
Financial Assets:
Securities available-for-sale	$ 120,420		$ 94,602
Commitments To Extend Credit [Member]
Off-Balance Sheet Financial Instruments:
Notional Amount	29,452		29,836
Standby Letters Of Credit [Member]
Off-Balance Sheet Financial Instruments:
Notional Amount	415		361
Carrying Reported Amount Fair Value Disclosure [Member]
Financial Assets:
Cash and cash equivalents	29,368		28,081
Securities available-for-sale	120,420		94,602
Nonmarketable equity securities	1,567		1,743
Loans, net	244,398		246,981
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	175,593		163,505
Certificates of deposit	243,548		242,539
Repurchase agreements	1,194		1,337
Advances from the Federal Home Loan Bank	22,000		22,000
Subordinated debentures	11,062		11,062
Junior subordinated debentures	6,186		6,186
Estimate Of Fair Value Fair Value Disclosure [Member]
Financial Assets:
Cash and cash equivalents	29,368		28,081
Securities available-for-sale	120,420		94,602
Nonmarketable equity securities	1,567		1,743
Loans, net	244,793		248,633
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	175,593		163,505
Certificates of deposit	245,659		244,463
Repurchase agreements	1,194		1,337
Advances from the Federal Home Loan Bank	24,681		25,055
Subordinated debentures		[1]		[1]
Junior subordinated debentures		[1]		[1]
Fair Value Inputs Level1 [Member]
Financial Assets:
Cash and cash equivalents	29,368		28,081
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	175,593		163,505
Fair Value Inputs Level2 [Member]
Financial Assets:
Securities available-for-sale	120,420		94,602
Financial Liabilities:
Certificates of deposit	245,659		244,463
Repurchase agreements	1,194		1,337
Advances from the Federal Home Loan Bank	24,681		25,055
Fair Value Inputs Level3 [Member]
Financial Assets:
Nonmarketable equity securities	1,567		1,743
Loans, net	$ 244,793		$ 248,633

[1] The Company is unable to determine this value.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Assets:
Cash and due from banks	$ 29,368	$ 28,081
Securities available-for-sale	120,420	94,602
Nonmarketable equity securities	1,567	1,743
Total investment securities	121,987	96,345
Loans receivable	251,372	256,424
Less allowance for loan losses	(6,974)	(9,443)
Loans, net	244,398	246,981
Premises and equipment, net	20,564	20,802
Accrued interest receivable	2,049	2,197
Cash value of life insurance	11,167	11,002
Other real estate owned	21,880	24,972
Other assets	1,213	4,206
Total assets	452,626	434,586
Deposits:
Noninterest-bearing transaction accounts	44,101	33,081
Interest-bearing transaction accounts	40,588	42,723
Money market savings accounts	80,810	78,829
Other savings accounts	10,094	8,872
Time deposits $100 and over	163,710	156,582
Other time deposits	79,838	85,957
Total deposits	419,141	406,044
Repurchase agreements	1,194	1,337
Advances from the Federal Home Loan Bank	22,000	22,000
Subordinated debentures	11,062	11,062
Junior subordinated debentures	6,186	6,186
Accrued interest payable	3,940	3,305
Other liabilities	893	1,094
Total liabilities	464,416	451,028
Shareholders' Equity
Preferred stock, $1,000 par value; 5,000,000 shares authorized; 12,895 shares issued and outstanding	12,828	12,771
Common stock, $0.01 par value, 500,000,000 shares authorized; 3,738,337 shares issued and outstanding	37	37
Capital surplus	30,224	30,224
Common stock warrant	1,012	1,012
Retained deficit	(54,027)	(54,213)
Accumulated other comprehensive loss	(1,864)	(6,273)
Total shareholders' deficit	(11,790)	(16,442)
Total liabilities and shareholders' deficit	$ 452,626	$ 434,586

XML

OTHER REAL ESTATE OWNED (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Other Real Estate [Abstract]
Balance, beginning of period	$ 24,972	$ 19,464
Additions	905	17,659
Sales	(3,984)	(11,383)
Write-downs	(13)	(768)
Balance, end of period	$ 21,880	$ 24,972

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (USD $) In Thousands, except Share data	Common Stock [Member]	Common Stock Warrant [Member]	Preferred Stock [Member]	Capital Surplus [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Beginning Balance at Dec. 31, 2012	$ 37	$ 1,012	$ 12,572	$ 30,224	$ (55,777)	$ 170	$ (11,762)
Beginning Balance, shares at Dec. 31, 2012	3,738,337		12,895
Net income					741		741
Other comprehensive loss						(3,478)	(3,478)
Accretion of preferred stock to redemption value			107		(107)		107
Ending Balance at Jun. 30, 2013	37	1,012	12,679	30,224	(55,143)	(3,308)	(14,499)
Ending Balance, shares at Jun. 30, 2013	3,738,337		12,895
Beginning Balance at Dec. 31, 2013	37	1,012	12,771	30,224	(54,213)	(6,273)	(16,442)
Beginning Balance, shares at Dec. 31, 2013	3,738,337		12,895
Net income					243		243
Other comprehensive loss						4,409	4,409
Accretion of preferred stock to redemption value			57		(57)		57
Ending Balance at Jun. 30, 2014	$ 37	$ 1,012	$ 12,828	$ 30,224	$ (54,027)	$ (1,864)	$ (11,790)
Ending Balance, shares at Jun. 30, 2014	3,738,337		12,895

XML

INVESTMENT SECURITIES (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Book value of investment securities pledged to secure deposits	$ 45,300		$ 45,300
Market value of investment securities pledged to secure deposits	44,000		44,000
Proceeds from sales of securities available-for-sale	$ 11,100	$ 6,400	$ 18,503	$ 25,885
Government Sponsored Enterprises Debt Securities [Member]
Number of individual securities in an unrealized loss position for more than twelve months	18		18
Mortgage Backed Securities [Member]
Number of individual securities in an unrealized loss position for more than twelve months	6		6
Obligations Of State And Local Governments [Member]
Number of individual securities in an unrealized loss position for more than twelve months	1		1

XML

INVESTMENT SECURITIES (Tables)

6 Months Ended

Jun. 30, 2014

Investments, Debt and Equity Securities [Abstract]

Schedule Of Securities Available-For-Sale

Securities available-for-sale consisted of the following:

	Amortized		Gross Unrealized					Estimated
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2014
Government-sponsored enterprises	$	50,531	$	24	$	(2,080	)	$	48,475
Mortgage-backed securities		70,507		807		(568	)		70,746
Obligations of state and local governments		1,248		—		(49	)		1,199
Total	$	122,286	$	831	$	(2,697	)	$	120,420
December 31, 2013
Government-sponsored enterprises	$	60,628	$	—	$	(5,553	)	$	55,075
Mortgage-backed securities		37,731		167		(864	)		37,034
Obligations of state and local governments		2,516		113		(136	)		2,493
Total	$	100,875	$	280	$	(6,553	)	$	94,602

Summary Of Maturities Of Securities Available-For-Sale

The following is a summary of maturities of securities available-for-sale as of June 30, 2014. 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.

	Securities
	Available-For-Sale
	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Due after one year but within five years	$	1,491	$	1,501
Due after five years but within ten years		21,156		20,974
Due after ten years		99,639		97,945
Total	$	122,286	$	120,420

Schedule Of Gross Unrealized Losses And Fair Value Of Securities Available-For-Sale

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at:

	June 30, 2014
	Less than twelve months					Twelve months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	4,893	$	(107	)	$	38,057	$	(1,973	)	$	42,950	$	(2,080	)
Mortgage-backed securities		13,166		(237	)		9,492		(331	)		22,658		(568	)
Obligations of state and local governments		608		(8	)		591		(41	)		1,199		(49	)
Total	$	18,667	$	(352	)	$	48,140	$	(2,345	)	$	66,807	$	(2,697	)

	December 31, 2013
	Less than twelve months					Twelve months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	47,311	$	(4,433	)	$	7,764	$	(1,120	)	$	55,075	$	(5,553	)
Mortgage-backed securities		17,826		(471	)		7,373		(393	)		25,199		(864	)
Obligations of state and local governments		552		(67	)		568		(69	)		1,120		(136	)
Total	$	65,689	$	(4,971	)	$	15,705	$	(1,582	)	$	81,394	$	(6,553	)

Schedule Of Gross Realized Gains And Losses On Sales Of Available-For-Sale Secutities

Gross realized gains and losses on sales of available-for-sale securities for the periods ended were as follows:

(Dollars in thousands)	Three months ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
Gross realized gains	$	71		$	213	$	135		$	297
Gross realized losses		(22	)		—		(35	)		—
Net gain	$	49		$	213	$	100		$	297

XML

LOAN PORTFOLIO (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Total Loans Receivable	$ 251,372	$ 256,424
Residential Portfolio Segment [Member]
Total Loans Receivable	83,275	84,335
Commercial Real Estate Portfolio Segment [Member]
Total Loans Receivable	123,744	130,450
Commercial Loan [Member]
Total Loans Receivable	36,796	33,711
Consumer Loan [Member]
Total Loans Receivable	$ 7,557	$ 7,928

XML

OTHER REAL ESTATE OWNED (Tables)

6 Months Ended

Jun. 30, 2014

Other Real Estate [Abstract]

Schedule Of Transactions In Other Real Estate Owned

The following table shows transactions in OREO for the periods ended June 30, 2014 and December 31, 2013:

	June 30,			December 31,
(Dollars in thousands)	2014			2013
Balance, beginning of period	$	24,972		$	19,464
Additions		905			17,659
Sales		(3,984	)		(11,383	)
Write-downs		(13	)		(768	)
Balance, end of period	$	21,880		$	24,972

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net income	$ 243	$ 741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	404	425
Provision for loan losses		(1,497)
Amortization less accretion on investments	94	228
Net gains on sales of securities available-for-sale	(100)	(297)
Net gains on sales of other real estate owned	(337)	(42)
Writedowns of other real estate owned	13	556
Increase in accrued interest payable	635	576
Decrease in accrued interest receivable	148	46
(Increase) decrease in other assets	2,993	(157)
Income (net of mortality cost) on cash value of life insurance	(165)	(174)
Increase (decrease) in other liabilities	(201)	329
Net cash provided by operating activities	3,727	734
Cash flows from investing activities:
Decrease in loans to customers	1,678	7,038
Purchases of securities available-for-sale	(47,826)	(40,187)
Maturities, calls and principal paydowns of securities available-for-sale	7,920	7,752
Proceeds from sales of other real estate owned	4,321	2,559
Proceeds from sales of securities available-for-sale	18,503	25,885
Redemptions of nonmarketable equity securities	176	240
Purchases of premises and equipment, net	(166)	(8)
Net cash provided by (used by) investing activities	(15,394)	3,279
Cash flows from financing activities:
Net increase in demand deposits and savings	12,088	10,052
Net increase (decrease) in time deposits	1,009	(12,110)
Net increase (decrease) in repurchase agreements	(143)	1,167
Net cash provided by (used by) financing activities	12,954	(891)
Net increase in cash and cash equivalents	1,287	3,122
Cash and cash equivalents, beginning of period	28,081	46,600
Cash and cash equivalents, end of period	29,368	49,722
Cash paid during the period for:
Income taxes	37
Interest	1,928	2,186
Noncash investing and financing activities:
Transfers of loans to other real estate owned	$ 905	$ 7,094

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Time deposits, threshold	$ 100	$ 100
Preferred stock, par value	$ 1,000	$ 1,000
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	12,895	12,895
Preferred stock, shares outstanding	12,895	12,895
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	500,000,000	500,000,000
Common stock, shares issued	3,738,337	3,738,337
Common stock, shares outstanding	3,738,337	3,738,337

XML

INCOME (LOSS) PER SHARE

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

LOSS PER SHARE

NOTE 10 – INCOME (LOSS) PER SHARE

(Dollars in thousands, except	Six Months ended June 30,
per share amounts)	2014			2013
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(275	)	$	308
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Basic income (loss) per common share	$	(0.07	)	$	0.08
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	(275	)	$	308
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Incremental shares		—			—
Weighted average common shares outstanding - diluted		3,738,337			3,738,337
Diluted income (loss) per common share	$	(0.07	)	$	0.08

(Dollars in thousands, except	Three Months ended June 30,
per share amounts)	2014			2013
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(370	)	$	(140	)
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Basic income (loss) per common share	$	(0.10	)	$	(0.04	)
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	(370	)	$	(140	)
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Incremental shares		—			—
Weighted average common shares outstanding - diluted		3,738,337			3,738,337
Diluted income (loss) per common share	$	(0.10	)	$	(0.04	)

For the six and three month periods ended June 30, 2014 and 2013, there were 91,714 common stock equivalents outstanding. These common stock equivalents were not included in the computation of diluted income (loss) per share because their effect would have been anti-dilutive.

XML

Document And Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 12, 2014
Document And Entity Information [Abstract]
Entity Registrant Name	HCSB FINANCIAL CORP
Entity Central Index Key	0001091491
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		3,738,337
Entity's Reporting Status Current	No
Entity a Well-known Seasoned Issuer	No
Entity a Voluntary Filer	No

XML

FAIR VALUE

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE

NOTE 11 - FAIR VALUE

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on current economic conditions, risk characteristics of various financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accounting principles establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Financial Instruments

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Cash Equivalents - The carrying amount is a reasonable estimate of fair value.

Securities Available-for-Sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Nonmarketable Equity Securities - The carrying amount is a reasonable estimate of fair value since no ready market exists for these securities.

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to the borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Repurchase Agreements – The carrying value of these instruments is a reasonable estimate of fair value.

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.

Subordinated Debentures - The Company is unable to determine the fair value of these debentures.

Junior Subordinated Debentures - The Company is unable to determine the fair value of these debentures.

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 and include no unusual credit risks.

The carrying values and estimated fair values of the Company’s financial instruments were as follows:

June 30, 2014					Fair Value Measurements
(Dollars in thousands)					Quoted		Significant
					market		other		Significant
					price in		observable		unobservable
	Carrying		Estimated		active markets		inputs		inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	29,368	$	29,368	$	29,368	$	—	$	—
Securities available-for-sale		120,420		120,420		—		120,420		—
Nonmarketable equity securities		1,567		1,567		—		—		1,567
Loans, net		244,398		244,793		—		—		244,793
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		175,593		175,593		175,593		—		—
Certificates of deposit		243,548		245,659		—		245,659		—
Repurchase agreements		1,194		1,194		—		1,194		—
Advances from the Federal Home Loan Bank		22,000		24,681		—		24,681		—
Subordinated debentures		11,062		*		—		—		—
Junior subordinated debentures		6,186		*		—		—		—
	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	29,452		n/a
Standby letters of credit		415		n/a

* The Company is unable to determine this value.

December 31, 2013					Fair Value Measurements
(Dollars in thousands)					Quoted		Significant
					market		other		Significant
					price in		observable		unobservable
	Carrying		Estimated		active markets		inputs		inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and cash equivalents	$	28,081	$	28,081	$	28,081	$	—	$	—
Securities available-for-sale		94,602		94,602		—		94,602		—
Nonmarketable equity securities		1,743		1,743		—		—		1,743
Loans, net		246,981		248,633		—		—		248,633
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		163,505		163,505		163,505		—		—
Certificates of deposit		242,539		244,463		—		244,463		—
Repurchase agreements		1,337		1,337		—		1,337		—
Advances from the Federal Home Loan Bank		22,000		25,055		—		25,055		—
Subordinated debentures		11,062		*		—		—		—
Junior subordinated debentures		6,186		*		—		—		—
	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	29,836		n/a
Standby letters of credit		361		n/a

* The Company is unable to determine this value.

Fair Value Measurements

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt and discounted cash flows. Those impaired loans not requiring a specific allowance represents loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At June 30, 2014 and December 31, 2013, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of Impaired Loans is generally based on judgment and therefore classified as nonrecurring Level 3.

Other Real Estate Owned - Foreclosed real estate is adjusted to fair value upon transfer of the loans to foreclosed real estate. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The fair value of foreclosed assets is generally based on judgment and therefore is classified as nonrecurring Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of and for the periods ended June 30, 2014 and December 31, 2013, by level within the fair value hierarchy.

			Quoted prices in		Significant
			active markets		Other		Significant
			for identical		Observable		Unobservable
(Dollars in thousands)			assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2014
Assets:
Government sponsored enterprises	$	48,475	$	—	$	48,475	$	—
Mortgage-backed securities		70,746		—		70,746		—
Obligations of state and local governments		1,199		—		1,199		—
Total	$	120,420	$	—	$	120,420	$	—
December 31, 2013
Assets:
Government sponsored enterprises	$	55,075	$	—	$	55,075	$	—
Mortgage-backed securities		37,034		—		37,034		—
Obligations of state and local governments		2,493		—		2,493		—
Total	$	94,602	$	—	$	94,602	$	—

The Company has no liabilities measured at fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following tables present the assets and liabilities carried on the balance sheet by caption and by level within the valuation hierarchy described above for which a nonrecurring change in fair value has been recorded during the periods ended June 30, 2014 and December 31, 2013.

			Quoted prices in		Significant
			active markets		Other		Significant
(Dollars in thousands)			for identical		Observable		Unobservable
			assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2014
Assets:
Impaired loans, net of valuation allowance	$	42,355	$	—	$	—	$	42,355
Other real estate owned		21,880		—		—		21,880
Total	$	64,235	$	—	$	—	$	64,235
December 31, 2013
Assets:
Impaired loans, net of valuation allowance	$	41,883	$	—	$	—	$	41,883
Other real estate owned		24,972		—		—		24,972
Total	$	66,855	$	—	$	—	$	66,855

The Company has no liabilities measured at fair value on a nonrecurring basis.

Level 3 Valuation Methodologies

The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At June 30, 2014, a majority of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loans as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, the Company records the impaired loans as nonrecurring Level 2. When an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans can be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. 

Foreclosed real estate is carried at fair value less estimated selling costs. Fair value is generally based upon current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where management adjustments are significant to the fair value measurements in its entirety, such measurements are classified as Level 3 within the valuation hierarchy.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2014.

(Dollars in thousands)

	June 30,		Valuation	Unobservable	Range
	2014		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	4,469	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-75.75%
			Flows	Independent quotes	(5.96%)
Commercial real estate		25,801	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-80.47%
			Flows	Independent quotes	(17.19%)
Residential		11,595	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-89.71%
			Flows	Independent quotes	(20.02%)
Consumer		490	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-64.65%
			Flows	Independent quotes	(7.47%)
Other real estate owned		21,880	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-50.00%
			Flows	Independent quotes	(6.27%)

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013.

(Dollars in thousands)

	December 31,		Valuation	Unobservable	Range
	2013		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	3,728	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-76.50%
			Flows	Independent quotes	(3.36%)
Commercial real estate		27,085	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-88.29%
			Flows	Independent quotes	(16.51%)
Residential		10,865	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-90.23%
			Flows	Independent quotes	(23.60%)
Consumer		205	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-38.68%
			Flows	Independent quotes	(14.67%)
Other real estate owned		24,972	Appraised Value/	Appraisals and/or sales
			Discounted Cash	of comparable properties/	0.00%-50.00%
			Flows	Independent quotes	(6.27%)

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Interest income:
Loans, including fees	$ 3,397	$ 3,758	$ 6,802	$ 7,492
Investment securities:
Taxable	689	418	1,384	813
Tax-exempt	4	11	14	23
Nonmarketable equity securities	15	8	26	16
Other interest income	16	28	34	51
Total	4,121	4,223	8,260	8,395
Interest expense:
Deposits	770	818	1,538	1,677
Borrowings	484	547	1,025	1,085
Total	1,254	1,365	2,563	2,762
Net interest income	2,867	2,858	5,697	5,633
Provision for loan losses		(497)		(1,497)
Net interest income after provision for loan losses	2,867	3,355	5,697	7,130
Noninterest income:
Service charges on deposit accounts	224	217	445	449
Credit life insurance commissions	2	3	6	8
Gain on sale of securities available-for-sale	49	213	100	297
Gain on sale of mortgage loans	72	52	114	129
Other fees and commissions	143	72	237	139
Brokerage commissions	21	83	35	117
Income from cash value life insurance	109	110	218	224
Other operating income	86	108	164	188
Total	706	858	1,319	1,551
Noninterest expenses:
Salaries and employee benefits	1,431	1,508	2,860	3,079
Net occupancy expense	322	297	624	599
Furniture and equipment expense	275	247	514	509
Marketing expense	2	1	11	3
FDIC insurance premiums	415	403	811	783
Net cost of operations of other real estate owned	324	714	161	1,136
Other operating expenses	865	966	1,741	1,831
Total	3,634	4,136	6,722	7,940
Income (loss) before income taxes	(61)	77	294	741
Income tax expense	13		51
Net income (loss)	(74)	77	243	741
Accretion of preferred stock to redemption value		(54)	(57)	(107)
Preferred dividends	(296)	(163)	(461)	(326)
Net income (loss) available to common shareholders	$ (370)	$ (140)	$ (275)	$ 308
Net income (loss) per common share
Basic (in dollars per share)	$ (0.10)	$ (0.04)	$ (0.07)	$ 0.08
Diluted (in dollars per share)	$ (0.10)	$ (0.04)	$ (0.07)	$ 0.08
Weighted average common shares outstanding
Basic and diluted (in shares)	3,738,337	3,738,337	3,738,337	3,738,337

XML

OTHER REAL ESTATE OWNED

6 Months Ended

Jun. 30, 2014

Other Real Estate [Abstract]

OTHER REAL ESTATE OWNED

NOTE 5 – OTHER REAL ESTATE OWNED

The following table shows transactions in OREO for the periods ended June 30, 2014 and December 31, 2013:

	June 30,			December 31,
(Dollars in thousands)	2014			2013
Balance, beginning of period	$	24,972		$	19,464
Additions		905			17,659
Sales		(3,984	)		(11,383	)
Write-downs		(13	)		(768	)
Balance, end of period	$	21,880		$	24,972

XML

LOAN PORTFOLIO

6 Months Ended

Jun. 30, 2014

Loans and Leases Receivable Disclosure [Abstract]

LOAN PORTFOLIO

NOTE 4 - LOANS RECEIVABLE

Loans consisted of the following:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Residential	$	83,275	$	84,335
Commercial Real Estate		123,744		130,450
Commercial		36,796		33,711
Consumer		7,557		7,928
Total gross loans	$	251,372	$	256,424

Provision and Allowance for Loan Losses

An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent losses in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

In evaluating the adequacy of the Company’s loan loss reserves, management identifies loans believed to be impaired. Impaired loans are those not likely to be repaid as to principal and interest in accordance with the terms of the loan agreement. Impaired loans are reviewed individually by management and the net present value of the collateral is estimated. Reserves are maintained for each loan in which the principal balance of the loan exceeds the net present value of the collateral. In addition to the specific allowance for individually reviewed loans, a general allowance for potential loan losses is established based on management’s review of the composition of the loan portfolio with the purpose of identifying any concentrations of risk, and an analysis of historical loan charge-offs and recoveries. The final component of the allowance for loan losses incorporates management’s evaluation of current economic conditions and other risk factors which may impact the inherent losses in the loan portfolio. These evaluations are highly subjective and require that a great degree of judgmental assumptions be made by management. This component of the allowance for loan losses includes additional estimated reserves for internal factors such as changes in lending staff, loan policy and underwriting guidelines, and loan seasoning and quality, and external factors such as national and local economic trends and conditions.

The following table details the activity within our allowance for loan losses as of and for the periods ended June 30, 2014 and 2013 and as of and for the year ended December 31, 2013, by portfolio segment:

June 30, 2014

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,020		$	5,312		$	144		$	2,967		$	9,443
Charge-offs		(278	)		(2,258	)		(283	)		(595	)		(3,414	)
Recoveries		417			353			18			157			945
Provision		(34	)		452			450			(868	)		—
Ending balance	$	1,125		$	3,859		$	329		$	1,661		$	6,974
Ending balances:
Individually evaluated for impairment	$	283		$	910		$	13		$	711		$	1,917
Collectively evaluated for impairment	$	842		$	2,949		$	316		$	950		$	5,057
Loans receivable:
Ending balance, total	$	36,796		$	123,744		$	7,557		$	83,275		$	251,372
Ending balances:
Individually evaluated for impairment	$	4,752		$	26,711		$	503		$	12,306		$	44,272
Collectively evaluated for impairment	$	32,044		$	97,033		$	7,054		$	70,969		$	207,100

June 30, 2013

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,982		$	7,587		$	124		$	4,457		$	14,150
Charge-offs		(1,272	)		(1,584	)		(118	)		(373	)		(3,347	)
Recoveries		182			1,186			26			501			1,895
Provision		433			(1,618	)		90			(402	)		(1,497	)
Ending balance	$	1,325		$	5,571		$	122		$	4,183		$	11,201
Ending balances:
Individually evaluated for impairment	$	170		$	2,772		$	17		$	1,328		$	4,287
Collectively evaluated for impairment	$	1,155		$	2,799		$	105		$	2,855		$	6,914
Loans receivable:
Ending balance, total	$	42,554		$	149,454		$	8,050		$	86,592		$	286,650
Ending balances:
Individually evaluated for impairment	$	4,426		$	39,282		$	216		$	12,419		$	56,343
Collectively evaluated for impairment	$	38,128		$	110,172		$	7,834		$	74,173		$	230,307

December 31, 2013

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,982		$	7,587		$	124		$	4,457		$	14,150
Charge-offs		(1,691	)		(3,927	)		(217	)		(1,641	)		(7,476	)
Recoveries		724			2,230			48			1,264			4,266
Provision		5			(578	)		189			(1,113	)		(1,497	)
Ending balance	$	1,020		$	5,312		$	144		$	2,967		$	9,443
Ending balances:
Individually evaluated for impairment	$	218		$	2,455		$	18		$	1,105		$	3,796
Collectively evaluated for impairment	$	802		$	2,857		$	126		$	1,862		$	5,647
Loans receivable:
Ending balance, total	$	33,711		$	130,450		$	7,928		$	84,335		$	256,424
Ending balances:
Individually evaluated for impairment	$	3,946		$	29,540		$	223		$	11,970		$	45,679
Collectively evaluated for impairment	$	29,765		$	100,910		$	7,705		$	72,365		$	210,745

Loan Performance and Asset Quality

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed in nonaccrual status, interest accruals are discontinued and income earned but not collected is reversed. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce principal.

The following chart summarizes delinquencies and nonaccruals, by portfolio class, as of June 30, 2014 and December 31, 2013.

June 30, 2014

(Dollars in thousands)

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual
Commercial	$	14	$	63	$	38	$	115	$	36,681	$	36,796	$	358
Commercial real estate:
Construction		135		—		505		640		35,596		36,236		2,958
Other		226		92		2,767		3,085		84,423		87,508		2,892
Real Estate:
Residential		756		853		2,736		4,345		78,930		83,275		3,121
Consumer:
Other		8		29		28		65		6,835		6,900		57
Revolving credit		2		1		3		6		651		657		289
Total	$	1,141	$	1,038	$	6,077	$	8,256	$	243,116	$	251,372	$	9,675

December 31, 2013

(Dollars in thousands)

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual
Commercial	$	771	$	146	$	407	$	1,324	$	32,387	$	33,711	$	430
Commercial real estate:
Construction		215		33		2,243		2,491		36,408		38,899		4,208
Other		1,156		—		3,414		4,570		86,981		91,551		4,017
Real Estate:
Residential		2,188		830		1,381		4,399		79,936		84,335		1,936
Consumer:
Other		191		219		35		445		6,710		7,155		40
Revolving credit		18		3		—		21		752		773		—
Total	$	4,539	$	1,231	$	7,480	$	13,250	$	243,174	$	256,424	$	10,631

There were no loans outstanding 90 days or more and still accruing interest at June 30, 2014 or December 31, 2013.

The following table summarizes management’s internal credit risk grades, by portfolio class, as of June 30, 2014 and December 31, 2013.

June 30, 2014

(Dollars in thousands)

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	1,400	$	—	$	724	$	—	$	2,124
Grade 2 – Modest		1,123		984		99		1,392		3,598
Grade 3 – Average		3,132		6,000		908		3,334		13,374
Grade 4 – Satisfactory		20,465		65,241		4,889		55,892		146,487
Grade 5 – Watch		2,742		16,921		234		4,946		24,843
Grade 6 – Special Mention		1,643		9,248		152		4,120		15,163
Grade 7 – Substandard		6,291		25,350		551		13,591		45,783
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	36,796	$	123,744	$	7,557	$	83,275	$	251,372

December 31, 2013

(Dollars in thousands)

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	1,364	$	—	$	775	$	—	$	2,139
Grade 2 – Modest		314		1,066		98		1,835		3,313
Grade 3 – Average		4,782		6,412		914		3,437		15,545
Grade 4 – Satisfactory		17,092		67,453		5,045		53,868		143,458
Grade 5 – Watch		3,204		17,288		221		6,933		27,646
Grade 6 – Special Mention		1,788		10,028		133		5,127		17,076
Grade 7 – Substandard		5,167		28,203		742		13,135		47,247
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	33,711	$	130,450	$	7,928	$	84,335	$	256,424

Loans graded one through four are considered “pass” credits. As of June 30, 2014, $165.6 million, or 65.9% of the loan portfolio, had a credit grade of “minimal,” “modest,” “average” or “satisfactory.” For loans to qualify for these grades, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment.

Loans with a credit grade of “watch” and “special mention” are not considered classified; however, they are categorized as a watch list credit and are considered potential problem loans. This classification is utilized by us when there is an initial concern about the financial health of a borrower.  These loans are designated as such in order to be monitored more closely than other credits in the portfolio.  Loans on the watch list are not considered problem loans until they are determined by management to be classified as substandard. As of June 30, 2014, loans with a credit grade of “watch” and “special mention” totaled $40.0 million. Watch list loans are considered potential problem loans and are monitored as they may develop into problem loans in the future. 

Loans graded “substandard” or greater are considered classified credits. At June 30, 2014, classified loans totaled $45.8 million, with $38.9 million being collateralized by real estate. Classified credits are evaluated for impairment on a quarterly basis.

The Bank identifies impaired loans through its normal internal loan review process. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis by calculating either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Any resultant shortfall is charged to provision for loan losses and is classified as a specific reserve. When an impaired loan is ultimately charged-off, the charge-off is taken against the specific reserve.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Impaired consumer and residential loans are identified for impairment disclosures, however, it is policy to individually evaluate for impairment all loans with a credit grade of “substandard” or greater that have an outstanding balance of $50 thousand or greater, and all loans with a credit grade of “special mention” that have outstanding principal balance of $100 thousand or greater.

Impaired loans are valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. At June 30, 2014, the recorded investment in impaired loans was $44.3 million, compared to $45.7 million at December 31, 2013.

The following chart details our impaired loans, which includes troubled debt restructurings (“TDRs”) totaling $29.5 million and $31.5 million, by category as of June 30, 2014 and December 31, 2013, respectively:

June 30, 2014

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,998	$	2,188	$	—	$	2,717	$	26
Commercial real estate		17,948		22,390		—		23,627		642
Residential		4,906		5,913		—		6,245		108
Consumer		347		369		—		558		4
Total:	$	25,199	$	30,860	$	—	$	33,147	$	780
With an allowance recorded:
Commercial		2,754		2,754		283		2,804		48
Commercial real estate		8,763		8,763		910		8,807		216
Residential		7,400		7,400		711		7,422		164
Consumer		156		162		13		161		4
Total:	$	19,073	$	19,079	$	1,917	$	19,194	$	432
Total:
Commercial		4,752		4,942		283		5,521		74
Commercial real estate		26,711		31,153		910		32,434		858
Residential		12,306		13,313		711		13,667		272
Consumer		503		531		13		719		8
Total:	$	44,272	$	49,939	$	1,917	$	52,341	$	1,212

December 31, 2013

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,464	$	1,657	$	—	$	1,621	$	50
Commercial real estate		14,120		17,052		—		14,275		606
Residential		3,729		4,366		—		3,901		206
Consumer		55		79		—		60		7
Total:	$	19,368	$	23,154	$	—	$	19,857	$	869
With an allowance recorded:
Commercial		2,482		2,482		218		2,556		106
Commercial real estate		15,420		15,747		2,455		15,674		469
Residential		8,241		8,454		1,105		8,381		384
Consumer		168		168		18		163		8
Total:	$	26,311	$	26,851	$	3,796	$	26,774	$	967
Total:
Commercial		3,946		4,139		218		4,177		156
Commercial real estate		29,540		32,799		2,455		29,949		1,075
Residential		11,970		12,820		1,105		12,282		590
Consumer		223		247		18		223		15
Total:	$	45,679	$	50,005	$	3,796	$	46,631	$	1,836

TDRs are loans which have been restructured from their original contractual terms and include concessions that would not otherwise have been granted outside of the financial difficulty of the borrower. We only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans.

With respect to restructured loans, we grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt, or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. We do not generally grant concessions through forgiveness of principal or accrued interest. Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases.

Success in restructuring loans has been mixed but it has proven to be a useful tool in certain situations to protect collateral values and allow certain borrowers additional time to execute upon defined business plans. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restructured agreement, the loan is placed on nonaccrual status and continues to be written down to the underlying collateral value.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. To date, we have not restored any nonaccrual loan classified as a TDR to accrual status. We believe that all of our modified loans meet the definition of a TDR.

The following is a summary of information pertaining to our TDRs:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Nonperforming TDRs	$	4,701	$	6,443
Performing TDRs:
Commercial		3,961		3,496
Commercial real estate		14,317		14,673
Residential		6,361		6,690
Consumer		149		151
Total performing TDRs		24,788		25,010
Total TDRs	$	29,489	$	31,453

The following table summarizes how loans that were considered TDRs were modified during the periods indicated:

For the Six Months ended June 30, 2014

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post-				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		7	$	1,304	$	1,304		—	$	—	$	—
Residential		2		266		266		—		—		—
Commercial		3		1,019		1,019		—		—		—
Total		12	$	2,589	$	2,589		—	$	—	$	—

During the six months ended June 30, 2014, 12 loans were modified that were considered to be TDRs. Term concessions were granted for eight loans, payment deferrals were granted for two loans and both term concessions and payment deferrals were granted for two loans.

For the Three Months ended June 30, 2014

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		4	$	1,127	$	1,127		—	$	—	$	—
Residential		1		235		235		—		—		—
Commercial		3		1,019		1,019		—		—		—
Total		8	$	2,381	$	2,381		—	$	—	$	—

During the quarter ended June 30, 2014, eight loans were modified that were considered to be TDRs. Term concessions were granted for four loans, payment deferrals were granted for two loans and both term concessions and payment deferrals were granted for two loans.

⁽¹⁾ Loans past due 90 days or more are considered to be in default.

For the Six Months ended June 30, 2013

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		3	$	540	$	540		—	$	—	$	—
Residential		3		355		355		—		—		—
Commercial		11		681		681		—		—		—
Consumer		2		51		51		—		—		—
Total		19	$	1,627	$	1,627		—	$	—	$	—

During the six months ended June 30, 2013, 19 loans were modified that were considered to be TDRs. Term concessions were granted for fourteen of these loans and other concessions were granted for five loans.

For the Three Months ended June 30, 2013

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		1	$	43	$	43		—	$	—	$	—
Residential		1		241		241		—		—		—
Commercial		3		77		77		—		—		—
Consumer		1		4		4		—		—		—
Total		6	$	365	$	365		—	$	—	$	—

During the quarter ended June 30, 2013, six loans were modified that were considered to be TDRs. Term concessions were granted for five of these loans and other concessions were granted for one loan.

⁽¹⁾ Loans past due 90 days or more are considered to be in default.

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. While management utilizes the best judgment and information available to it, the ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

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.

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. The fair value of standby letters of credit is insignificant.

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:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Commitments to extend credit	$	29,452	$	29,836
Standby letters of credit		415		361

XML

LOAN PORTFOLIO (Tables)

6 Months Ended

Jun. 30, 2014

Loans and Leases Receivable Disclosure [Abstract]

Components Of Loan Portfolio By Category

Loans consisted of the following:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Residential	$	83,275	$	84,335
Commercial Real Estate		123,744		130,450
Commercial		36,796		33,711
Consumer		7,557		7,928
Total gross loans	$	251,372	$	256,424

Schedule Of Allowance For Loan Losses

The following table details the activity within our allowance for loan losses as of and for the periods ended June 30, 2014 and 2013 and as of and for the year ended December 31, 2013, by portfolio segment:

June 30, 2014

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,020		$	5,312		$	144		$	2,967		$	9,443
Charge-offs		(278	)		(2,258	)		(283	)		(595	)		(3,414	)
Recoveries		417			353			18			157			945
Provision		(34	)		452			450			(868	)		—
Ending balance	$	1,125		$	3,859		$	329		$	1,661		$	6,974
Ending balances:
Individually evaluated for impairment	$	283		$	910		$	13		$	711		$	1,917
Collectively evaluated for impairment	$	842		$	2,949		$	316		$	950		$	5,057
Loans receivable:
Ending balance, total	$	36,796		$	123,744		$	7,557		$	83,275		$	251,372
Ending balances:
Individually evaluated for impairment	$	4,752		$	26,711		$	503		$	12,306		$	44,272
Collectively evaluated for impairment	$	32,044		$	97,033		$	7,054		$	70,969		$	207,100

June 30, 2013

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,982		$	7,587		$	124		$	4,457		$	14,150
Charge-offs		(1,272	)		(1,584	)		(118	)		(373	)		(3,347	)
Recoveries		182			1,186			26			501			1,895
Provision		433			(1,618	)		90			(402	)		(1,497	)
Ending balance	$	1,325		$	5,571		$	122		$	4,183		$	11,201
Ending balances:
Individually evaluated for impairment	$	170		$	2,772		$	17		$	1,328		$	4,287
Collectively evaluated for impairment	$	1,155		$	2,799		$	105		$	2,855		$	6,914
Loans receivable:
Ending balance, total	$	42,554		$	149,454		$	8,050		$	86,592		$	286,650
Ending balances:
Individually evaluated for impairment	$	4,426		$	39,282		$	216		$	12,419		$	56,343
Collectively evaluated for impairment	$	38,128		$	110,172		$	7,834		$	74,173		$	230,307

December 31, 2013

(Dollars in thousands)

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,982		$	7,587		$	124		$	4,457		$	14,150
Charge-offs		(1,691	)		(3,927	)		(217	)		(1,641	)		(7,476	)
Recoveries		724			2,230			48			1,264			4,266
Provision		5			(578	)		189			(1,113	)		(1,497	)
Ending balance	$	1,020		$	5,312		$	144		$	2,967		$	9,443
Ending balances:
Individually evaluated for impairment	$	218		$	2,455		$	18		$	1,105		$	3,796
Collectively evaluated for impairment	$	802		$	2,857		$	126		$	1,862		$	5,647
Loans receivable:
Ending balance, total	$	33,711		$	130,450		$	7,928		$	84,335		$	256,424
Ending balances:
Individually evaluated for impairment	$	3,946		$	29,540		$	223		$	11,970		$	45,679
Collectively evaluated for impairment	$	29,765		$	100,910		$	7,705		$	72,365		$	210,745

Summary Of Delinquencies And Nonaccruals, By Portfolio Class

The following chart summarizes delinquencies and nonaccruals, by portfolio class, as of June 30, 2014 and December 31, 2013.

June 30, 2014

(Dollars in thousands)

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual
Commercial	$	14	$	63	$	38	$	115	$	36,681	$	36,796	$	358
Commercial real estate:
Construction		135		—		505		640		35,596		36,236		2,958
Other		226		92		2,767		3,085		84,423		87,508		2,892
Real Estate:
Residential		756		853		2,736		4,345		78,930		83,275		3,121
Consumer:
Other		8		29		28		65		6,835		6,900		57
Revolving credit		2		1		3		6		651		657		289
Total	$	1,141	$	1,038	$	6,077	$	8,256	$	243,116	$	251,372	$	9,675

December 31, 2013

(Dollars in thousands)

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual
Commercial	$	771	$	146	$	407	$	1,324	$	32,387	$	33,711	$	430
Commercial real estate:
Construction		215		33		2,243		2,491		36,408		38,899		4,208
Other		1,156		—		3,414		4,570		86,981		91,551		4,017
Real Estate:
Residential		2,188		830		1,381		4,399		79,936		84,335		1,936
Consumer:
Other		191		219		35		445		6,710		7,155		40
Revolving credit		18		3		—		21		752		773		—
Total	$	4,539	$	1,231	$	7,480	$	13,250	$	243,174	$	256,424	$	10,631

There were no loans outstanding 90 days or more and still accruing interest at June 30, 2014 or December 31, 2013.

Summary Of Internal Credit Risk Grades, By Portfolio Class

The following table summarizes management’s internal credit risk grades, by portfolio class, as of June 30, 2014 and December 31, 2013.

June 30, 2014

(Dollars in thousands)

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	1,400	$	—	$	724	$	—	$	2,124
Grade 2 – Modest		1,123		984		99		1,392		3,598
Grade 3 – Average		3,132		6,000		908		3,334		13,374
Grade 4 – Satisfactory		20,465		65,241		4,889		55,892		146,487
Grade 5 – Watch		2,742		16,921		234		4,946		24,843
Grade 6 – Special Mention		1,643		9,248		152		4,120		15,163
Grade 7 – Substandard		6,291		25,350		551		13,591		45,783
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	36,796	$	123,744	$	7,557	$	83,275	$	251,372

December 31, 2013

(Dollars in thousands)

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	1,364	$	—	$	775	$	—	$	2,139
Grade 2 – Modest		314		1,066		98		1,835		3,313
Grade 3 – Average		4,782		6,412		914		3,437		15,545
Grade 4 – Satisfactory		17,092		67,453		5,045		53,868		143,458
Grade 5 – Watch		3,204		17,288		221		6,933		27,646
Grade 6 – Special Mention		1,788		10,028		133		5,127		17,076
Grade 7 – Substandard		5,167		28,203		742		13,135		47,247
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	33,711	$	130,450	$	7,928	$	84,335	$	256,424

Schedule Of Impaired Loans

June 30, 2014

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,998	$	2,188	$	—	$	2,717	$	26
Commercial real estate		17,948		22,390		—		23,627		642
Residential		4,906		5,913		—		6,245		108
Consumer		347		369		—		558		4
Total:	$	25,199	$	30,860	$	—	$	33,147	$	780
With an allowance recorded:
Commercial		2,754		2,754		283		2,804		48
Commercial real estate		8,763		8,763		910		8,807		216
Residential		7,400		7,400		711		7,422		164
Consumer		156		162		13		161		4
Total:	$	19,073	$	19,079	$	1,917	$	19,194	$	432
Total:
Commercial		4,752		4,942		283		5,521		74
Commercial real estate		26,711		31,153		910		32,434		858
Residential		12,306		13,313		711		13,667		272
Consumer		503		531		13		719		8
Total:	$	44,272	$	49,939	$	1,917	$	52,341	$	1,212

December 31, 2013

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,464	$	1,657	$	—	$	1,621	$	50
Commercial real estate		14,120		17,052		—		14,275		606
Residential		3,729		4,366		—		3,901		206
Consumer		55		79		—		60		7
Total:	$	19,368	$	23,154	$	—	$	19,857	$	869
With an allowance recorded:
Commercial		2,482		2,482		218		2,556		106
Commercial real estate		15,420		15,747		2,455		15,674		469
Residential		8,241		8,454		1,105		8,381		384
Consumer		168		168		18		163		8
Total:	$	26,311	$	26,851	$	3,796	$	26,774	$	967
Total:
Commercial		3,946		4,139		218		4,177		156
Commercial real estate		29,540		32,799		2,455		29,949		1,075
Residential		11,970		12,820		1,105		12,282		590
Consumer		223		247		18		223		15
Total:	$	45,679	$	50,005	$	3,796	$	46,631	$	1,836

Summary Of Troubled Debt Restructurings

The following is a summary of information pertaining to our TDRs:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Nonperforming TDRs	$	4,701	$	6,443
Performing TDRs:
Commercial		3,961		3,496
Commercial real estate		14,317		14,673
Residential		6,361		6,690
Consumer		149		151
Total performing TDRs		24,788		25,010
Total TDRs	$	29,489	$	31,453

Summary Of Loan Modifications

The following table summarizes how loans that were considered TDRs were modified during the periods indicated:

For the Six Months ended June 30, 2014

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post-				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		7	$	1,304	$	1,304		—	$	—	$	—
Residential		2		266		266		—		—		—
Commercial		3		1,019		1,019		—		—		—
Total		12	$	2,589	$	2,589		—	$	—	$	—

During the six months ended June 30, 2014, 12 loans were modified that were considered to be TDRs. Term concessions were granted for eight loans, payment deferrals were granted for two loans and both term concessions and payment deferrals were granted for two loans.

For the Three Months ended June 30, 2014

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		4	$	1,127	$	1,127		—	$	—	$	—
Residential		1		235		235		—		—		—
Commercial		3		1,019		1,019		—		—		—
Total		8	$	2,381	$	2,381		—	$	—	$	—

During the quarter ended June 30, 2014, eight loans were modified that were considered to be TDRs. Term concessions were granted for four loans, payment deferrals were granted for two loans and both term concessions and payment deferrals were granted for two loans.

⁽¹⁾ Loans past due 90 days or more are considered to be in default.

For the Six Months ended June 30, 2013

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		3	$	540	$	540		—	$	—	$	—
Residential		3		355		355		—		—		—
Commercial		11		681		681		—		—		—
Consumer		2		51		51		—		—		—
Total		19	$	1,627	$	1,627		—	$	—	$	—

During the six months ended June 30, 2013, 19 loans were modified that were considered to be TDRs. Term concessions were granted for fourteen of these loans and other concessions were granted for five loans.

For the Three Months ended June 30, 2013

(Dollars in thousands)

	TDRs that are in compliance
	with the terms of the agreement						TDRs that subsequently defaulted(1)
			Pre-		Post				Pre-		Post-
			modification		modification				modification		modification
	Number		outstanding		outstanding		Number		outstanding		outstanding
	of		recorded		recorded		of		recorded		recorded
	contracts		investment		investment		contracts		investment		investment
Commercial real estate		1	$	43	$	43		—	$	—	$	—
Residential		1		241		241		—		—		—
Commercial		3		77		77		—		—		—
Consumer		1		4		4		—		—		—
Total		6	$	365	$	365		—	$	—	$	—

During the quarter ended June 30, 2013, six loans were modified that were considered to be TDRs. Term concessions were granted for five of these loans and other concessions were granted for one loan.

⁽¹⁾ Loans past due 90 days or more are considered to be in default.

Schedule Of Off-balance Sheet Financial Instruments

The following table summarizes the Company’s off-balance sheet financial instruments whose contract amounts represent credit risk:

	June 30,		December 31,
(Dollars in thousands)	2014		2013
Commitments to extend credit	$	29,452	$	29,836
Standby letters of credit		415		361

XML

SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 12 – SUBSEQUENT EVENTS

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure that are not otherwise disclosed herein.

XML

SUBORDINATED DEBENTURES

6 Months Ended

Jun. 30, 2014

Subordinated Borrowings [Abstract]

SUBORDINATED DEBENTURES

NOTE 8 - SUBORDINATED DEBENTURES

On July 31, 2010, the Company completed a private placement of subordinated promissory notes that totaled $12.1 million. The notes initially bear interest at a rate of 9% per annum payable semiannually on April 5^th and October 5^th and are callable by the Company four years after the date of issuance and mature 10 years from the date of issuance. After October 5, 2014 and until maturity, the notes bear interest at a rate equal to the current Prime Rate in effect, as published by the Wall Street Journal, plus 3%; provided, that the rate of interest shall not be less than 8% per annum or more than 12% per annum. The subordinated notes have been structured to fully count as Tier 2 regulatory capital on a consolidated basis.

The Federal Reserve Bank of Richmond has prohibited the Company from paying interest due on the subordinated notes since October 2011 and, as a result, the Company has deferred interest payments in the amount of approximately $3.1 million as of June 30, 2014.

XML

ADVANCES FROM THE FEDERAL HOME LOAN BANK

6 Months Ended

Jun. 30, 2014

Federal Home Loan Bank, Advances, General Debt Obligations, Disclosures [Abstract]

ADVANCES FROM THE FEDERAL HOME LOAN BANK

NOTE 6 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the FHLB consisted of the following at June 30, 2014:

(Dollars in thousands)	Advance	Advance		Advance			Maturing
	Type	Amount		Rate			On
	Convertible Advance	$	5,000		3.24	%		12 /8/14
	Convertible Advance		2,000		3.60	%		9 /4/18
	Convertible Advance		5,000		3.45	%		9 /10/18
	Convertible Advance		5,000		2.95	%		9 /18/18
	Fixed Rate		5,000		3.86	%		8 /20/19
		$	22,000

As of June 30, 2014, we had advances totaling $22.0 million with various interest rates and maturity dates. Interest on fixed rate advances is generally payable monthly and interest on fixed rate advances is payable quarterly. Convertible advances are callable by the FHLB on their respective call dates. The Company has the option to either repay any advance that has been called or to refinance the advance as a convertible advance.

At June 30, 2014, the Company had pledged as collateral for FHLB advances approximately $1.7 million of one-to-four family first mortgage loans, $4.4 million of commercial real estate loans, $4.8 million in home equity lines of credit, $45 thousand in multifamily loans and $19.9 million of agency and private issue mortgage-backed securities. The Company has an investment in FHLB stock of $1.4 million. The Company has $8.7 million in excess borrowing capacity with the FHLB that is available if liquidity needs should arise. As a result of negative financial performance indicators, there is also a risk that the Bank’s ability to borrow from the FHLB could be curtailed or eliminated, although to date the Bank has not been denied advances from the FHLB or had to pledge additional collateral for its borrowings.

As of June 30, 2014, scheduled principal reductions include $5.0 million in the fourth quarter of 2014, $12.0 million in 2018, and $5.0 million in 2019.

XML

JUNIOR SUBORDINATED DEBENTURES

6 Months Ended

Jun. 30, 2014

Junior Subordinated Notes [Abstract]

JUNIOR SUBORDINATED DEBENTURES

NOTE 7 – JUNIOR SUBORDINATED DEBENTURES

On December 21, 2004, the Trust issued $6.0 million floating rate trust preferred securities with a maturity of December 31, 2034. In accordance with current accounting standards, the trust has not been consolidated in these financial statements. The Company received from the Trust the $6.0 million proceeds from the issuance of the securities and the $186 thousand initial proceeds from the capital investment in the Trust and, accordingly, has shown the funds due to the trust as a $6.2 million junior subordinated debenture. The current regulatory rules allow certain amounts of junior subordinated debentures to be included in the calculation of regulatory capital. The debenture issuance costs, net of accumulated amortization, totaled $75 thousand at June 30, 2014 and are included in other assets on the consolidated balance sheet. Amortization of debt issuance costs totaled $5 thousand for each of the periods ended June 30, 2014 and 2013. The Federal Reserve Bank of Richmond has prohibited the Company from paying interest due on the trust preferred securities since February 2012 and, as a result, the Company has deferred interest payments in the amount of approximately $633 thousand as of June 30, 2014.

XML

SHAREHOLDERS' EQUITY AND CAPITAL REQUIREMENTS

6 Months Ended

Jun. 30, 2014

Stockholders' Equity Note [Abstract]

SHAREHOLDERS' EQUITY AND CAPITAL REQUIREMENTS

NOTE 9 - SHAREHOLDERS’ EQUITY AND CAPITAL REQUIREMENTS

Preferred Stock – In March 2009, in connection with the CPP, the Company issued to the U.S. Treasury 12,895 shares of the Company’s Series T Preferred Stock. The Series T Preferred Stock has a dividend rate of 5% for the first five years and 9% thereafter, and has a call feature after three years.

In connection with the sale of the Series T Preferred Stock, the Company also issued to the U.S. Treasury the CPP Warrant to purchase up to 91,714 shares of the Company’s common stock at an initial exercise price of $21.09 per share.

As required under the CPP, dividend payments on and repurchases of the Company’s common stock are subject to certain restrictions. For as long as the Series T Preferred Stock is outstanding, no dividends may be declared or paid on the Company’s common stock until all accrued and unpaid dividends on the Series T Preferred Stock are fully paid. In addition, the U.S. Treasury’s consent is required for any increase in dividends on common stock before the third anniversary of issuance of the Series T Preferred Stock and for any repurchase of any common stock except for repurchases of common shares in connection with benefit plans.

The Series T Preferred Stock and the CPP Warrant were sold to the U.S. Treasury for an aggregate purchase price of $12.9 million in cash. The purchase price was allocated between the Series T Preferred Stock and the CPP Warrant based upon the relative fair values of each to arrive at the amounts recorded by the Company. This resulted in the Series T Preferred Stock being issued at a discount which is being amortized on a level yield basis as a charge to retained earnings over an assumed life of five years.

As of February 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulator, has required the Company to defer dividend payments on the 12,895 shares of the Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities issued in December 2004. Therefore, for each quarterly period beginning in February 2011, the Company notified the U.S. Treasury of its deferral of quarterly dividend payments on the Series T Preferred Stock and also informed the Trustee of the trust preferred securities of its deferral of the quarterly interest payments on the trust preferred securities. On May 15, 2014, the dividend rate on the Series T Preferred Stock increased from 5% per annum (approximately $645 thousand annually) to 9% per annum (approximately $1.2 million annually). As of June 30, 2014, the Company had $2.4 million of deferred dividend payments due on the Series T Preferred Stock. Because the Company has deferred these 14 payments, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full. In addition, whenever dividends payable on the shares of the Series T Preferred Stock have been deferred for an aggregate of six or more quarterly dividend periods, the holders of the preferred stock have the right to elect two directors to fill newly created directorships at the Company’s next annual meeting of the shareholders. As a result of the Company’s deferral of dividend payments on the Series T Preferred Stock, the U.S. Treasury, the current holder of all 12,895 shares of the Series T Preferred Stock, requested the Company’s non-objection to appoint a representative to observe monthly meetings of the Company’s Board of Directors. The Company granted the Treasury’s request and a representative of Treasury has attended the Company’s monthly board meetings since June 2012. As of the date of this report, the U.S. Treasury has not exercised its right to elect two directors to fill newly created directorships and has not notified the Company whether it intends to elect two directors to fill newly created directorships at the Company’s 2015 annual meeting of the shareholders.

The Company has never paid a cash dividend, but, as a result of the Company’s financial condition and these restrictions on the Company, including the restrictions on the Bank’s ability to pay dividends to the Company, the Company has not been permitted to pay a dividend on its common stock since 2009.

Restrictions on Dividends - Under the terms of the Written Agreement, the Company is currently prohibited from declaring or paying any dividends without the prior written approval of the Federal Reserve Bank of Richmond. In addition, because the Company is a legal entity separate and distinct from the Bank and has little direct income itself, the Company relies on dividends paid to it by the Bank in order to pay dividends on its common stock. As a South Carolina state bank, the Bank may only pay dividends out of its net profits, after deducting expenses, including losses and bad debts. Under Federal Deposit Insurance Corporation Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. As of June 30, 2014, the Bank was classified as “significantly undercapitalized;” therefore, it is prohibited under FDICIA from paying dividends until it increases its capital levels. In addition, even if it increases its capital levels, under the terms of the Consent Order, the Bank is prohibited from declaring a dividend on its shares of common stock unless it receives approval from the FDIC and State Board. Further, as a result of the Company’s deferral of dividend payments on the 12,895 shares of Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common 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 Company and the Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

To be considered “well-capitalized,” the Bank must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under these capital guidelines, the Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, the Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. Further, pursuant to the terms of the Consent Order with the FDIC and the State Board, the Bank must achieve and maintain Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%.

At June 30, 2014, the Company was categorized as “critically undercapitalized” and the Bank was categorized as “significantly undercapitalized.” Our losses over the past five years have adversely impacted our capital. As a result, we have been pursuing a plan to increase our capital ratios in order to strengthen our balance sheet and satisfy the commitments required under the Consent Order. However, if we continue to fail to meet the capital requirements in the Consent Order in a timely manner, then this would result in additional regulatory actions, which could ultimately lead to the Bank being taken into receivership by the FDIC. Our auditors have noted that the uncertainty of our ability to obtain sufficient capital raises substantial doubt about our ability to continue as a going concern.

The following table summarizes the capital ratios and the regulatory minimum requirements for the Company and the Bank.

												Minimum
												To Be Well
							Minimum					Capitalized Under
							Capital					Prompt Corrective
	Actual						Requirement					Action Provisions
(Dollars in thousands)	Amount			Ratio			Amount		Ratio			Amount			Ratio
June 30, 2014
The Company
Total Capital
(to Risk-Weighted Assets)	$	(9,926	)		(3.18	)%	$	24,936		8.00	%		N/A			N/A
Tier I Capital
(to Risk-Weighted Assets)	$	(9,926	)		(3.18	)%	$	12,468		4.00	%		N/A			N/A
Tier I Capital
(to Average Assets)	$	(9,926	)		(2.14	)%	$	18,570		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	14,674			4.71	%	$	24,914		8.00	%	$	31,142			10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	10,743			3.45	%	$	12,457		4.00	%		(1	)		(1	)
Tier I Capital
(to Average Assets)	$	10,743			2.35	%	$	18,312		4.00	%	$	36,624			8.00	%
December 31, 2013
The Company
Total Capital
(to Risk-Weighted Assets)	$	(10,169	)		(3.19	)%	$	25,512		8.00	%		N/A			N/A
Tier I Capital
(to Risk-Weighted Assets)	$	(10,169	)		(3.19	)%	$	12,756		4.00	%		N/A			N/A
Tier I Capital
(to Average Assets)	$	(10,169	)		(2.23	)%	$	18,242		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	13,842			4.34	%	$	25,505		8.00	%	$	31,881			10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	9,789			3.07	%	$	12,753		4.00	%		(1	)		(1	)
Tier I Capital
(to Average Assets)	$	9,789			2.17	%	$	18,067		4.00	%	$	36,135			8.00	%

⁽¹⁾ Minimum capital amounts and ratios presented as of June 30, 2014 and December 31, 2013 are amounts to be well-capitalized under the various regulatory capital requirements administered by the FDIC. On February 10, 2011, the Bank became subject to a regulatory Consent Order with the FDIC. Minimum capital amounts and ratios presented for the Bank as of June 30, 2014 and December 31, 2013 are the minimum levels set forth in the Consent Order. No minimum Tier 1 capital to risk-weighted assets ratio was specified in the Consent Order. Regardless of the Bank’s capital ratios, it is unable to be classified as “well-capitalized” while it is operating under the Consent Order with the FDIC.

XML

INVESTMENT SECURITIES (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Investments, Debt and Equity Securities [Abstract]
Gross realized gains	$ 71	$ 213	$ 135	$ 297
Gross realized losses	(22)		(35)
Net gain	$ 49	$ 213	$ 100	$ 297

XML

SHAREHOLDERS' EQUITY AND CAPITAL REQUIREMENTS (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
The Company [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Total Capital to risk-weighted assets, Actual Amount	$ (9,926)		$ (10,169)
Total Capital to risk-weighted assets, Actual Percent	(3.18%)		(3.19%)
Total Capital to risk-weighted assets, Minimum capital adequacy Amount	24,936		25,512
Total Capital to risk-weighted assets, Minimum capital adequacy Percent	8.00%		8.00%
Tier I capital to risk-weighted assets, Actual Amount	(9,926)		(10,169)
Tier I capital to risk-weighted assets, Actual Percent	(3.18%)		(3.19%)
Tier I capital to risk-weighted assets, Minimum capital adequacy Amount	12,468		12,756
Tier I capital to risk-weighted assets, Minimum capital adequacy Percent	4.00%		4.00%
Tier I capital to total average assets, Actual Amount	(9,926)		(10,169)
Tier I capital to total average assets, Actual Percent	(2.14%)		(2.23%)
Tier I capital to total average assets, Minimum capital adequacy Amount	18,570		18,242
Tier I capital to total average assets, Minimum capital adequacy Percent	4.00%		4.00%
The Bank [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Total Capital to risk-weighted assets, Actual Amount	14,674		13,842
Total Capital to risk-weighted assets, Actual Percent	4.71%		4.34%
Total Capital to risk-weighted assets, Minimum capital adequacy Amount	24,914		25,505
Total Capital to risk-weighted assets, Minimum capital adequacy Percent	8.00%		8.00%
Total Capital to risk-weighted assets, Minimum for well capitalized Amount	31,142		31,881
Total Capital to risk-weighted assets, Minimum for well capitalized, Percent	10.00%		10.00%
Tier I capital to risk-weighted assets, Actual Amount	10,743		9,789
Tier I capital to risk-weighted assets, Actual Percent	3.45%		3.07%
Tier I capital to risk-weighted assets, Minimum capital adequacy Amount	12,457		12,753
Tier I capital to risk-weighted assets, Minimum capital adequacy Percent	4.00%		4.00%
Tier I capital to risk-weighted assets, Minimum for well capitalized Amount		[1]		[1]
Tier I capital to risk-weighted assets, Minimum for well capitalized, Percent		[1]		[1]
Tier I capital to total average assets, Actual Amount	10,743		9,789
Tier I capital to total average assets, Actual Percent	2.35%		2.17%
Tier I capital to total average assets, Minimum capital adequacy Amount	18,312		18,067
Tier I capital to total average assets, Minimum capital adequacy Percent	4.00%		4.00%
Tier I capital to total average assets, Minimum for well capitalized Amount	$ 36,624		$ 36,135
Tier I capital to total average assets, Minimum for well capitalized, Percent	8.00%		8.00%

[1] Minimum capital amounts and ratios presented as of June 30, 2014 and December 31, 2013 are amounts to be well-capitalized under the various regulatory capital requirements administered by the FDIC. On February 10, 2011, the Bank became subject to a regulatory Consent Order with the FDIC. Minimum capital amounts and ratios presented for the Bank as of June 30, 2014 and December 31, 2013 are the minimum levels set forth in the Consent Order. No minimum Tier 1 capital to risk-weighted assets ratio was specified in the Consent Order. Regardless of the Bank's capital ratios, it is unable to be classified as "well-capitalized" while it is operating under the Consent Order with the FDIC.

XML

REGULATORY MATTERS AND FUTURE OPERATIONS (Tables)

6 Months Ended

Jun. 30, 2014

Regulatory Matters And Going Concern Considerations [Abstract]

Schedule Of Compliance With Consent Order

A summary of the requirements of the Consent Order and the Bank’s status on complying with the Consent Order is as follows:

Requirements of the Consent Order	Bank’s Compliance Status
Achieve and maintain, by July 10, 2011, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets.	The Bank did not meet the capital ratios as specified in the Consent Order and, as a result, submitted a revised capital restoration plan to the FDIC on July 15, 2011. The revised capital restoration plan was determined by the FDIC to be insufficient and, as a result, we submitted a further revised capital restoration plan to the FDIC on September 30, 2011. We received the FDIC’s non-objection to the further revised capital restoration plan on December 6, 2011. The Bank is working diligently to increase its capital ratios in order to strengthen its balance sheet and satisfy the commitments required under the Consent Order. The Bank has engaged independent third parties to assist the Bank in its efforts to increase its capital ratios. In addition to continuing to search for additional capital, the Bank is also searching for a potential merger partner. There can be no assurances the Company will either raise additional capital or find a merger partner.
Submit, by April 11, 2011, a written capital plan to the supervisory authorities.	We believe we have complied with this provision of the Consent Order.
Establish, by March 12, 2011, a plan to monitor compliance with the Consent Order, which shall be monitored by the Bank’s Directors’ Committee.	We believe we have complied with this provision of the Consent Order. The Directors’ Committee meets monthly and each meeting includes reviews and discussions of all areas required in the Consent Order.

Develop, by May 11, 2011, a written analysis and assessment of the Bank’s management and staffing needs. We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to perform an assessment of the Bank’s staffing needs to ensure the Bank has an appropriate organizational structure with qualified management in place. The Board of Directors has reviewed all recommendations regarding the Bank’s organizational structure.

Notify the supervisory authorities in writing of the resignation or termination of any of the Bank’s directors or senior executive officers.	We believe we have complied with this provision of the Consent Order.
Eliminate, by March 12, 2011, by charge-off or collection, all assets or portions of assets classified “Loss” and 50% of those assets classified “Doubtful.”	We believe we have complied with this provision of the Consent Order.
Review and update, by April 11, 2011, its policy to ensure the adequacy of the Bank’s allowance for loan and lease losses, which must provide for a review of the Bank’s allowance for loan and lease losses at least once each calendar quarter.	We believe we have complied with this provision of the Consent Order.
Submit, by April 11, 2011, a written plan to the supervisory authorities to reduce classified assets, which shall include, among other things, a reduction of the Bank’s risk exposure in relationships with assets in excess of $750,000 which are criticized as “Substandard” or “Doubtful”.  In accordance with the approved plan, reduce assets classified in the June 30, 2010 Report of Examination by 65% by August 11, 2012 and by 75% by February 9, 2013.	We are not in compliance with this provision of the Consent Order. The written plan was submitted and approved; however, assets classified in the June 30, 2010 Report of Examination had only been reduced by 71.76% as of June 30, 2014 and 68.76% as of December 31, 2013.
Revise, by April 11, 2011, its policies and procedures for managing the Bank’s Adversely Classified Other Real Estate Owned.	We believe we have complied with this provision of the Consent Order.

Not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged-off or classified, in whole or in part, “Loss” or “Doubtful” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been criticized, in whole or in part, “Substandard” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.	We believe we have complied with this provision of the Consent Order.  In the second quarter of 2010, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.  An independent review of the Bank’s credit portfolio was most recently completed in the second quarter of 2014.
Perform, by April 11, 2011, a risk segmentation analysis with respect to the Bank’s Concentrations of Credit and develop a written plan to systematically reduce any segment of the portfolio that is an undue concentration of credit.	We believe we have complied with this provision of the Consent Order.
Review, by April 11, 2011 and annually thereafter, the Bank’s loan policies and procedures for adequacy and, based upon this review, make all appropriate revisions to the policies and procedures necessary to enhance the Bank’s lending functions and ensure their implementation.	We believe we have complied with this provision of the Consent Order. As noted above, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.
Adopt, by May 11, 2011, an effective internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality.	We believe we have complied with this provision of the Consent Order. As noted above, the Bank engaged the services of an independent firm to perform an extensive review of the Bank’s credit portfolio and help management implement a more comprehensive lending and collection policy and more enhanced loan review.

Review and update, by May 11, 2011, its written profit plan to ensure the Bank has a realistic, comprehensive budget for all categories of income and expense, which must address, at minimum, goals and strategies for improving and sustaining the earnings of the Bank, the major areas in and means by which the Bank will seek to improve the Bank’s operating performance, realistic and comprehensive budgets, a budget review process to monitor income and expenses of the Bank to compare actual results with budgetary projections, assess that operating assumptions that form the basis for budget projections and adequately support major projected income and expense components of the plan, and coordination of the Bank’s loan, investment, and operating policies and budget and profit planning with the funds management policy.	We believe we have complied with this provision of the Consent Order.  The Bank engaged an independent third party to assist management with a strategic plan to help restructure its balance sheet, increase capital ratios, return to profitability and maintain adequate liquidity.
Review and update, by May 11, 2011, its written plan addressing liquidity, contingent funding, and asset liability management.	We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to assist management in its development of a strategic plan that achieves all requirements of the Consent Order. The strategic plan reflects the Bank’s plans to restructure its balance sheet, increase capital ratios, return to profitability, and maintain adequate liquidity. The Board of Directors has reviewed and adopted the Bank’s strategic plan.
Eliminate, by March 12, 2011, all violations of law and regulation or contraventions of policy set forth in the FDIC’s safety and soundness examination of the Bank in November 2009.	We believe we have complied with this provision of the Consent Order.
Not accept, renew, or rollover any brokered deposits unless it is in compliance with the requirements of 12 C.F.R. § 337.6(b).	Since entering into the Consent Order, the Bank has not accepted, renewed, or rolled-over any brokered deposits.
Limit asset growth to 5% per annum.	We believe we have complied with this provision of the Consent Order.

Not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.	We believe we have complied with this provision of the Consent Order.
The Bank shall comply with the restrictions on the effective yields on deposits as described in 12 C.F.R. § 337.6.	We believe we have complied with this provision of the Consent Order.
Furnish, by March 12, 2011 and within 30 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order.	We believe we have complied with this provision of the Consent Order, and we have submitted the required progress reports to the supervisory authorities.

Submit, by March 12, 2011, a written plan to the supervisory authorities for eliminating its reliance on brokered deposits.	We believe we have complied with this provision of the Consent Order.
Adopt, by April 11, 2011, an employee compensation plan after undertaking an independent review of compensation paid to all of the Bank’s senior executive officers.	We believe we have complied with this provision of the Consent Order.
Prepare and submit, by May 11, 2011, its written strategic plan to the supervisory authorities.	We believe we have complied with this provision of the Consent Order. In 2011, the Bank engaged an independent third party to assist management in its development of a strategic plan that achieves all requirements of the Consent Order. The Board of Directors has reviewed and adopted the Bank’s strategic plan.

XML

SHAREHOLDERS' EQUITY AND CAPITAL REQUIREMENTS(Tables)

6 Months Ended

Jun. 30, 2014

Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]

Schedule of capital ratios and regulatory minimum requirements

The following table summarizes the capital ratios and the regulatory minimum requirements for the Company and the Bank.

												Minimum
												To Be Well
							Minimum					Capitalized Under
							Capital					Prompt Corrective
	Actual						Requirement					Action Provisions
(Dollars in thousands)	Amount			Ratio			Amount		Ratio			Amount			Ratio
June 30, 2014
The Company
Total Capital
(to Risk-Weighted Assets)	$	(9,926	)		(3.18	)%	$	24,936		8.00	%		N/A			N/A
Tier I Capital
(to Risk-Weighted Assets)	$	(9,926	)		(3.18	)%	$	12,468		4.00	%		N/A			N/A
Tier I Capital
(to Average Assets)	$	(9,926	)		(2.14	)%	$	18,570		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	14,674			4.71	%	$	24,914		8.00	%	$	31,142			10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	10,743			3.45	%	$	12,457		4.00	%		(1	)		(1	)
Tier I Capital
(to Average Assets)	$	10,743			2.35	%	$	18,312		4.00	%	$	36,624			8.00	%
December 31, 2013
The Company
Total Capital
(to Risk-Weighted Assets)	$	(10,169	)		(3.19	)%	$	25,512		8.00	%		N/A			N/A
Tier I Capital
(to Risk-Weighted Assets)	$	(10,169	)		(3.19	)%	$	12,756		4.00	%		N/A			N/A
Tier I Capital
(to Average Assets)	$	(10,169	)		(2.23	)%	$	18,242		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	13,842			4.34	%	$	25,505		8.00	%	$	31,881			10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	9,789			3.07	%	$	12,753		4.00	%		(1	)		(1	)
Tier I Capital
(to Average Assets)	$	9,789			2.17	%	$	18,067		4.00	%	$	36,135			8.00	%

⁽¹⁾ Minimum capital amounts and ratios presented as of June 30, 2014 and December 31, 2013 are amounts to be well-capitalized under the various regulatory capital requirements administered by the FDIC. On February 10, 2011, the Bank became subject to a regulatory Consent Order with the FDIC. Minimum capital amounts and ratios presented for the Bank as of June 30, 2014 and December 31, 2013 are the minimum levels set forth in the Consent Order. No minimum Tier 1 capital to risk-weighted assets ratio was specified in the Consent Order. Regardless of the Bank’s capital ratios, it is unable to be classified as “well-capitalized” while it is operating under the Consent Order with the FDIC.

XML

SUBORDINATED DEBENTURES (Details Narrative) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Subordinated Borrowings [Abstract]
Subordinated debentures	$ 11,062	$ 11,062
Subordinated promissory note interest rate	9.00%
Subordinated promissory note callable	4 years
Subordinated promissory note term	10 years
Subordinated borrowing terms and conditions	Interest at a rate equal to the current Prime Rate in effect, as published by the Wall Street Journal, plus 3%;
Subordinated promissory note current Prime Rate margin	3.00%
Subordinated promissory note interest rate floor	8.00%
Subordinated promissory note interest rate ceiling	12.00%
Deferred interest on subordinated debt	$ 3,100

XML

LOAN PORTFOLIO (Details 5) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Recorded-Investment	$ 44,272	$ 45,679
Unpaid Principal Balance	49,939	50,005
Average Recorded Investment	52,341	46,631
Interest Income Recognized	1,212	1,836
With No Related Allowance Recorded [Member]
Recorded-Investment	25,199	19,368
Unpaid Principal Balance	30,860	23,154
Average Recorded Investment	33,147	19,857
Interest Income Recognized	780	869
With Allowance Recorded [Member]
Related Allowance	1,917	3,796
Recorded-Investment	19,073	26,311
Unpaid Principal Balance	19,079	26,851
Average Recorded Investment	19,194	26,774
Interest Income Recognized	432	967
Commercial Loan [Member]
Recorded-Investment	4,752	3,946
Unpaid Principal Balance	4,942	4,139
Average Recorded Investment	5,521	4,177
Interest Income Recognized	74	156
Commercial Loan [Member] | With No Related Allowance Recorded [Member]
Recorded-Investment	1,998	1,464
Unpaid Principal Balance	2,188	1,657
Average Recorded Investment	2,717	1,621
Interest Income Recognized	26	50
Commercial Loan [Member] | With Allowance Recorded [Member]
Related Allowance	283	218
Recorded-Investment	2,754	2,482
Unpaid Principal Balance	2,754	2,482
Average Recorded Investment	2,804	2,556
Interest Income Recognized	48	106
Commercial Real Estate [Member]
Recorded-Investment	26,711	29,540
Unpaid Principal Balance	31,153	32,799
Average Recorded Investment	32,434	29,949
Interest Income Recognized	858	1,075
Commercial Real Estate [Member] | With No Related Allowance Recorded [Member]
Recorded-Investment	17,948	14,120
Unpaid Principal Balance	22,390	17,052
Average Recorded Investment	23,627	14,275
Interest Income Recognized	642	606
Commercial Real Estate [Member] | With Allowance Recorded [Member]
Related Allowance	910	2,455
Recorded-Investment	8,763	15,420
Unpaid Principal Balance	8,763	15,747
Average Recorded Investment	8,807	15,674
Interest Income Recognized	216	469
Residential Portfolio Segment [Member]
Recorded-Investment	12,306	11,970
Unpaid Principal Balance	13,313	12,820
Average Recorded Investment	13,667	12,282
Interest Income Recognized	272	590
Residential Portfolio Segment [Member] | With No Related Allowance Recorded [Member]
Recorded-Investment	4,906	3,729
Unpaid Principal Balance	5,913	4,366
Average Recorded Investment	6,245	3,901
Interest Income Recognized	108	206
Residential Portfolio Segment [Member] | With Allowance Recorded [Member]
Related Allowance	711	1,105
Recorded-Investment	7,400	8,241
Unpaid Principal Balance	7,400	8,454
Average Recorded Investment	7,422	8,381
Interest Income Recognized	164	384
Consumer Loan [Member]
Recorded-Investment	503	223
Unpaid Principal Balance	531	247
Average Recorded Investment	719	223
Interest Income Recognized	8	15
Consumer Loan [Member] | With No Related Allowance Recorded [Member]
Recorded-Investment	347	55
Unpaid Principal Balance	369	79
Average Recorded Investment	558	60
Interest Income Recognized	4	7
Consumer Loan [Member] | With Allowance Recorded [Member]
Related Allowance	13	18
Recorded-Investment	156	168
Unpaid Principal Balance	162	168
Average Recorded Investment	161	163
Interest Income Recognized	$ 4	$ 8

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statement of Comprehensive Income [Abstract]
Net income	$ (74)	$ 77	$ 243	$ 741
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period	1,891	(3,300)	4,509	(3,181)
Tax expense
Reclassification to realized gains	(49)	(213)	(100)	(297)
Tax expense
Other comprehensive income (loss)	1,842	(3,513)	4,409	(3,478)
Comprehensive income (loss)	$ 1,768	$ (3,436)	$ 4,652	$ (2,737)

XML

INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2014

Investments, Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES

NOTE 3 - INVESTMENT SECURITIES

Securities available-for-sale consisted of the following:

	Amortized		Gross Unrealized					Estimated
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
June 30, 2014
Government-sponsored enterprises	$	50,531	$	24	$	(2,080	)	$	48,475
Mortgage-backed securities		70,507		807		(568	)		70,746
Obligations of state and local governments		1,248		—		(49	)		1,199
Total	$	122,286	$	831	$	(2,697	)	$	120,420
December 31, 2013
Government-sponsored enterprises	$	60,628	$	—	$	(5,553	)	$	55,075
Mortgage-backed securities		37,731		167		(864	)		37,034
Obligations of state and local governments		2,516		113		(136	)		2,493
Total	$	100,875	$	280	$	(6,553	)	$	94,602

The following is a summary of maturities of securities available-for-sale as of June 30, 2014. 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.

	Securities
	Available-For-Sale
	Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value
Due after one year but within five years	$	1,491	$	1,501
Due after five years but within ten years		21,156		20,974
Due after ten years		99,639		97,945
Total	$	122,286	$	120,420

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at:

	June 30, 2014
	Less than twelve months					Twelve months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	4,893	$	(107	)	$	38,057	$	(1,973	)	$	42,950	$	(2,080	)
Mortgage-backed securities		13,166		(237	)		9,492		(331	)		22,658		(568	)
Obligations of state and local governments		608		(8	)		591		(41	)		1,199		(49	)
Total	$	18,667	$	(352	)	$	48,140	$	(2,345	)	$	66,807	$	(2,697	)

	December 31, 2013
	Less than twelve months					Twelve months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
Government-sponsored enterprises	$	47,311	$	(4,433	)	$	7,764	$	(1,120	)	$	55,075	$	(5,553	)
Mortgage-backed securities		17,826		(471	)		7,373		(393	)		25,199		(864	)
Obligations of state and local governments		552		(67	)		568		(69	)		1,120		(136	)
Total	$	65,689	$	(4,971	)	$	15,705	$	(1,582	)	$	81,394	$	(6,553	)

Management evaluates its investment portfolio periodically to identify any impairment that is other than temporary. At June 30, 2014, the Company had 18 government-sponsored enterprise securities, six mortgage-backed securities and one state and local government obligation security that have been in an unrealized loss position for more than twelve months. Management believes these losses are temporary and are a result of the current interest rate environment. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.

At June 30, 2014, investment securities with a book value of $45.3 million and a market value of $44.0 million were pledged to secure deposits.

Proceeds from sales of available-for-sale securities were $18.5 million and $25.9 million for the six-month periods ended June 30, 2014 and 2013, respectively and $11.1 million and $6.4 million for the three-month periods ended June 30, 2014 and 2013, respectively. Gross realized gains and losses on sales of available-for-sale securities for the periods ended were as follows:

(Dollars in thousands)	Three months ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
Gross realized gains	$	71		$	213	$	135		$	297
Gross realized losses		(22	)		—		(35	)		—
Net gain	$	49		$	213	$	100		$	297

XML

INCOME (LOSS) PER SHARE (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Reconciliation Of Numerators And Denominators Used To Calculate Basic And Diluted Earnings (Losses) Per Share

(Dollars in thousands, except	Six Months ended June 30,
per share amounts)	2014			2013
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(275	)	$	308
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Basic income (loss) per common share	$	(0.07	)	$	0.08
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	(275	)	$	308
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Incremental shares		—			—
Weighted average common shares outstanding - diluted		3,738,337			3,738,337
Diluted income (loss) per common share	$	(0.07	)	$	0.08

(Dollars in thousands, except	Three Months ended June 30,
per share amounts)	2014			2013
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(370	)	$	(140	)
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Basic income (loss) per common share	$	(0.10	)	$	(0.04	)
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	(370	)	$	(140	)
Weighted average common shares outstanding - basic		3,738,337			3,738,337
Incremental shares		—			—
Weighted average common shares outstanding - diluted		3,738,337			3,738,337
Diluted income (loss) per common share	$	(0.10	)	$	(0.04	)

XML

LOAN PORTFOLIO (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	$ 1,141	$ 4,539
60-89 Days Past Due	1,038	1,231
90 + Days Past Due	6,077	7,480
Total Past Due	8,256	13,250
Current	243,116	243,174
Total Loans Receivable	251,372	256,424	286,650
Nonaccrual Loans	9,675	10,631
Loans outstanding 90 days or more and still accruing interest
Commercial Loan [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	14	771
60-89 Days Past Due	63	146
90 + Days Past Due	38	407
Total Past Due	115	1,324
Current	36,681	32,387
Total Loans Receivable	36,796	33,711	42,554
Nonaccrual Loans	358	430
Commercial Real Estate Construction Financing Receivable [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	135	215
60-89 Days Past Due		33
90 + Days Past Due	505	2,243
Total Past Due	640	2,491
Current	35,596	36,408
Total Loans Receivable	36,236	38,899
Nonaccrual Loans	2,958	4,208
Commercial Real Estate Other Receivable [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	226	1,156
60-89 Days Past Due	92
90 + Days Past Due	2,767	3,414
Total Past Due	3,085	4,570
Current	84,423	86,981
Total Loans Receivable	87,508	91,551
Nonaccrual Loans	2,892	4,017
Residential Portfolio Segment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	756	2,188
60-89 Days Past Due	853	830
90 + Days Past Due	2,736	1,381
Total Past Due	4,345	4,399
Current	78,930	79,936
Total Loans Receivable	83,275	84,335	86,592
Nonaccrual Loans	3,121	1,936
Consumer Other Financing Receivable [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	8	191
60-89 Days Past Due	29	219
90 + Days Past Due	28	35
Total Past Due	65	445
Current	6,835	6,710
Total Loans Receivable	6,900	7,155
Nonaccrual Loans	57	40
Revolving Credit Facilities [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	2	18
60-89 Days Past Due	1	3
90 + Days Past Due	3
Total Past Due	6	21
Current	651	752
Total Loans Receivable	657	773
Nonaccrual Loans	$ 289

XML

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Basis of Presentation and Consolidation

Basis of Presentation and Consolidation - The accompanying consolidated financial statements include the accounts of HCSB Financial Corporation (the “Company”) which was incorporated on June 10, 1999 to serve as a bank holding company for its wholly owned subsidiary, Horry County State Bank (the “Bank”). The Bank was incorporated on December 18, 1987, and opened for operations on January 4, 1988. The principal business activity of the Company is to provide commercial banking services in Horry County, South Carolina, and in Columbus and Brunswick Counties, North Carolina. The Bank is a state-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). HCSB Financial Trust I (the “Trust”) is a special purpose subsidiary organized for the sole purpose of issuing trust preferred securities. The operations of the Trust have not been consolidated in these financial statements.

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of June 30, 2014 and for the interim periods ended June 30, 2014 and 2013 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The financial information as of December 31, 2013 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 2013 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2014.

On March 6, 2009, as part of the Troubled Asset Relief Program Capital Purchase Program (the “CPP”) established by the U.S. Department of the Treasury (the “U.S. Treasury”) under the Emergency Economic Stabilization Act of 2009, the Company issued and sold to the U.S. Treasury (i) 12,895 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series T, having a liquidation preference of $1,000 per share (the “Series T Preferred Stock”), and (ii) a ten-year warrant to purchase up to 91,714 shares of its common stock at an initial exercise price of $21.09 per share (the “CPP Warrant”), for an aggregate purchase price of $12.9 million in cash. Refer to the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

As of February 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulator, has required the Company to defer dividend payments on the 12,895 shares of the Series T Preferred Stock and interest payments on the $6.0 million of trust preferred securities issued in December 2004. Therefore, for each quarterly period beginning in February 2011, the Company notified the U.S. Treasury of its deferral of quarterly dividend payments on the Series T Preferred Stock and also informed the Trustee of the trust preferred securities of its deferral of the quarterly interest payments on the trust preferred securities. On May 15, 2014, the dividend rate on the Series T Preferred Stock increased from 5% per annum (approximately $645 thousand annually) to 9% per annum (approximately $1.2 million annually). As of June 30, 2014, the Company had $2.4 million of deferred dividend payments due on the Series T Preferred Stock. Because the Company has deferred these 14 payments, the Company is prohibited from paying any dividends on its common stock until all deferred payments have been made in full. In addition, whenever dividends payable on the shares of the Series T Preferred Stock have been deferred for an aggregate of six or more quarterly dividend periods, the holders of the preferred stock have the right to elect two directors to fill newly created directorships at the Company’s next annual meeting of the shareholders. As a result of the Company’s deferral of dividend payments on the Series T Preferred Stock, the U.S. Treasury, the current holder of all 12,895 shares of the Series T Preferred Stock, requested the Company’s non-objection to appoint a representative to observe monthly meetings of the Company’s Board of Directors. The Company granted the Treasury’s request and a representative of Treasury has attended the Company’s monthly board meetings since June 2012. As of the date of this report, the U.S. Treasury has not exercised its right to elect two directors to fill newly created directorships and has not notified the Company whether it intends to elect two directors to fill newly created directorships at the Company’s 2015 annual meeting of the shareholders.

The Company has never paid a cash dividend, but, as a result of the Company’s financial condition and these restrictions on the Company, including the restrictions on the Bank’s ability to pay dividends to the Company, the Company has not been permitted to pay a dividend on its common stock since 2009.

Management's Estimates

Management’s Estimates - In preparing the consolidated 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 income 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.

Investment Securities

Investment Securities - Investment securities available-for-sale owned by the Company are carried at amortized cost and adjusted to their estimated fair value for reporting purposes. The unrealized gain or loss is recorded in shareholders’ equity net of any 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 - Nonmarketable equity securities include the Company’s investments in the stock of the Federal Home Loan Bank (the “FHLB”). The FHLB stock is carried at cost because the stock has no quoted market value and no ready market exists. Investment in FHLB stock is a condition of borrowing from the FHLB, and the stock is pledged to collateralize the borrowings. Dividends received on FHLB stock are included as a separate component in interest income.

Loans Receivable

Loans Receivable - Loans receivable are stated at their unpaid principal balance, less any charge-offs. Interest income on 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 contractually 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 deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method.

Loans are 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 these 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 and home equity lines as such exceptions. Therefore, loans within the real estate and commercial loan portfolios are reviewed individually.

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 off with a corresponding entry to the allowance for loan losses. The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.

Concentrations of Credit Risk

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily throughout Horry County in South Carolina and Columbus and Brunswick counties of North Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. However, the loan portfolio does include a concentration in loans secured by residential and commercial real estate and commercial and industrial non-real estate loans. These loans are especially susceptible to being adversely effected by the current economic downturn. The current downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and these trends may continue, especially in the Myrtle Beach area. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The commercial real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values in our market areas continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Allowance For Loan Losses

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Management’s judgments about the adequacy of the allowance are based on numerous assumptions about current events, which management believes to be reasonable, but which may or may not prove to be accurate. Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company.

The allowance is subject to examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require the Company to adjust its allowance based on information available to them at the time of their examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

Premises, Furniture And Equipment

Premises, Furniture and Equipment - Premises, furniture 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; and furniture and equipment - three to 25 years. The cost of assets sold or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts, and the resulting gains or losses are reflected in the income statement.

Maintenance and repairs are charged to current expense as incurred, and the costs of major renewals and improvements are capitalized.

Other Real Estate Owned

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at appraised value.

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 net cost of operations of other real estate owned.

Income And Expense Recognition

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

Income Taxes – The Company files consolidated federal and state income tax returns. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis. The Company accounts for income taxes based on two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to uncertain tax positions, if any.

Deferred income taxes are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax impacts of the differences between the book and tax bases of assets and liabilities and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to the Company’s judgment that realization is more likely than not. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties, if any, are recognized as a component of income tax expense.

The Company reviews the deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income available under tax law, including future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, projections of future operating results, cumulative tax losses over the past three years, tax loss deductibility limitations, and available tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, a valuation allowance against the deferred tax asset must be established with a corresponding charge to income tax expense. The deferred tax assets and valuation allowance are evaluated each quarter, and a portion of the valuation allowance may be reversed in future periods. The determination of how much of the valuation allowance that may be reversed and the timing is based on future results of operation and the amount and timing of actual loan charge-offs and asset write-downs. At June 30, 2014 and December 31, 2013, the Company’s deferred tax asset was offset in its entirety by a valuation allowance.

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore no reserves for uncertain income tax positions have been recorded.

Net Income (Loss) Per Common Share

Net Income (Loss) Per Common Share - Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares. The computation of diluted net loss per share does not include potential common shares as their effect would be anti-dilutive.

Comprehensive Income

Comprehensive Income - Accounting principles generally require recognized income, expenses, gains, and losses to 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.

Statements of Cash Flows

Statements of Cash Flows - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks, federal funds sold, and interest-bearing deposits with other banks.

Off-Balance-Sheet Financial Instruments

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.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements – The following is a summary of recent authoritative pronouncements.

In January 2014, the Financial Accounting Standards Board (the “FASB”) amended the Receivables topic of the Accounting Standards Codification. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2014 with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Risks And Uncertainties

Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company’s loan portfolio that results from a borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

Additionally, the Company is subject to certain regulations due to our participation in the CPP. Pursuant to the terms of the CPP Purchase Agreement between us and the U.S. Treasury, we adopted certain standards for executive compensation and corporate governance for the period during which the Treasury holds the equity issued pursuant to the CPP Purchase Agreement, including the common stock which may be issued pursuant to the CPP Warrant. These standards generally apply to our named executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) requiring clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibiting on making golden parachute payments to senior executives; (4) prohibiting tax gross-up provisions; and (5) agreeing not to deduct for tax purposes executive compensation in excess of $500 thousand for each senior executive. In particular, the change to the deductibility limit on executive compensation will likely increase the overall cost of our compensation programs in future periods and may make it more difficult to attract suitable candidates to serve as executive officers.

In February 2005 the Bank purchased a $500 thousand 15-year renewable and convertible term life insurance policy through Banner Life Insurance Company on the life of James R. Clarkson, President and CEO. The Bank is both the owner and the beneficiary of this key person policy. The purpose of securing this policy was to provide the Bank with financial protection in the event of the unexpected death of Mr. Clarkson and better enable the Bank to attract a qualified replacement for Mr. Clarkson in such a situation.

Legislation that has been adopted after we closed on our sale of Series T Preferred Stock and the CPP Warrant to the U.S. Treasury for $12.9 million pursuant to the CPP on March 6, 2009, or any legislation or regulations that may be implemented in the future, may have a material impact on the terms of our CPP transaction with the U.S. Treasury.

Reclassifications

Reclassifications - Certain captions and amounts for prior periods have been reclassified to conform to the June 30, 2014 presentation.