UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended March 31, 2017
	For the Quarterly Period Ended September 30, 2016
	OR
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 x No o

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 ~~preceding12~~preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o ~~(do~~Smaller ~~not check if smaller~~ reporting company) ~~Smaller~~x ~~reporting~~Emerging growth company xo

~~Indicate~~If an emerging growth company, indicate by check mark ~~whether~~if the registrant has elected not to use the extended transition period isfor acomplying ~~shell~~with ~~company~~any ~~(as~~new ~~defined~~or inrevised ~~Rule~~financial ~~12b-2~~accounting standards provided pursuant to Section 13(a) of the Exchange Act). o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

	Voting Common Stock, par value $0.01 per share	405,232,383 shares outstanding as of ~~November~~May 13, ~~2016~~2017
	Non-Voting Common Stock, par value $0.01 per share	90,531,557 shares outstanding as of November 1, 2016
	Non-voting Common Stock, par value $0.01 per share	90,531,557 shares outstanding as of May 3, 2017

Index

PART I. FINANCIAL INFORMATION	Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets – September 30, 2016 and December 31, 2015	3
Condensed Consolidated Balance Sheets – March 31, 2017 and December 31, 2016	3
Condensed Consolidated Statements of Operations – Nine and three months
Condensed Consolidated Statements of Operations – Three months ended March 31, 2017 and 2016	4
ended September 30, 2016 and 2015	4
Condensed Consolidated Statements of Comprehensive Income (Loss) – Three months ended March 31, 2017 and 2016	5
Condensed Consolidated Statements of Comprehensive Income (Loss) – Nine and three months
Condensed Consolidated Statements of Changes in Shareholders’ Equity – Three months ended March 31, 2017 and 2016	6
ended September 30, 2016 and 2015	5
Condensed Consolidated Statements of Cash Flows – Three months ended March 31, 2017 and 2016	7
Condensed Consolidated Statements of Changes in Shareholders’ Equity -
Nine months ended September 30, 2016 and 2015	6
Condensed Consolidated Statements of Cash Flows –
Nine months ended September 30, 2016 and 2015	7
Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	5144
Item 3. Quantitative and Qualitative Disclosures about Market Risk	6456
Item 4. Controls and Procedures	6456
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	6557
Item 1A. Risk Factors	6657
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	6657
Item 3. Defaults Upon Senior Securities	6657
Item 4. Mine Safety Disclosures	6657
Item 5. Other Information	6657
Item 6. Exhibits	6657
SIGNATURES

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	March 31,			December 31,
(Dollars in thousands except share amounts)	~~2016~~2017			~~2015~~2016
Assets:	~~(unaudited)~~	(unaudited)		~~(audited)~~	(audited)
Cash and cash equivalents	$	31,174		$	22,137
Cash and due from banks	$	22,190		$	25,429
Securities available-for-sale		~~111~~104,~~581~~341			89106,~~701~~529
Nonmarketable equity securities		1,~~090~~359			1,~~330~~345
Total investment securities		~~112~~105,~~671~~700			91107,~~031~~874
Loans receivable		~~209~~229,~~176~~033			~~209~~215,~~367~~112
Less allowance for loan losses		(43,~~676~~717	)		(43,~~601~~750	)
Loans, net		~~204~~225,~~500~~316			~~204~~211,~~766~~362
Premises and equipment, net		14,~~456~~182			1514,~~917~~314
Accrued interest receivable		1,~~350~~289			1,~~745~~303
Cash value of life insurance		11,~~562~~721			11,~~319~~643
Other real estate owned		42,~~032~~617			132,~~624~~887
Other assets		~~1,362~~999			~~884~~1,122
Total assets	$	~~381~~384,~~107~~014		$	~~361~~375,~~423~~934
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	4743,~~060~~666		$	4041,~~182~~324
Interest-bearing transaction accounts		4342,~~718~~405			4042,~~478~~408
Money market savings accounts		6997,~~948~~130			6571,~~806~~486
Other savings accounts		12,~~119~~575			1011,~~394~~820
Time deposits $250 and over		414,~~002~~405			318,~~735~~510
Other time deposits		~~146~~112,~~503~~158			~~170~~127,~~236~~721
Total deposits		~~323~~322,~~350~~339			~~330~~313,~~831~~269
Repurchase agreements		~~1,662~~848			1,~~716~~983
Advances from the Federal Home Loan Bank		1724,000			1724,000
Subordinated debentures		—			11,021
Accrued interest payable		134			155
Junior subordinated debentures		—			6,117
Other liabilities		581			1,200
Accrued interest payable		104			5,958
Total liabilities		347,902			340,607
Other liabilities		2,398			1,030
Total liabilities		344,514			373,673
Commitments and contingencies
Shareholders’ Equity
Shareholders’ Equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
Series A, no shares issued and outstanding at September 30, 2016 and December 31, 2015		—			—
Series A, no shares issued and outstanding		—			—
Series T, no shares issued and outstanding at September 30, 2016 and 12,895 shares issued and outstanding at December 31, 2015		—			12,895
Common stock, Voting, $0.01 par value; 500,000,000 shares authorized; 405,232,383 shares issued and outstanding		4,053			4,053
Common stock, Voting, $0.01 par value, 500,000,000 shares authorized; 405,232,383 and 3,846,340 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		4,053			38
Common stock, Non-voting, $0.01 par value; 150,000,000 shares authorized; 90,531,557 shares issued and outstanding		905			905
Common stock, Non-voting, $0.01 par value, 150,000,000 shares authorized; 90,531,557 and no shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		905			—
Capital surplus		68,550			68,411
Capital surplus		82,051			30,220
Retained deficit		(34,490	)		(34,783	)
Common stock warrant		—			1,012
Accumulated other comprehensive loss		(2,906	)		(3,259	)
Retained deficit		(49,961	)		(54,807	)
Total shareholders’ equity		36,112			35,327
Accumulated other comprehensive loss		(455	)		(1,608	)
Total liabilities and shareholders’ equity	$	384,014		$	375,934
Total shareholders’ equity (deficit)		36,593			(12,250	)
The accompanying notes are an integral part of the consolidated financial statements.
Total liabilities and shareholders’ equity (deficit)	$	381,107		$	361,423

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~-3-

-3-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
	Three months ended March 31,
(Dollars in thousands except share amounts)	2017			2016
Interest income:
Loans, including fees	$	2,724		$	2,483
Investment securities:
Taxable		480			461
Nonmarketable equity securities		15			14
Other interest income		40			31
Total		3,259			2,989
Interest expense:
Deposits		486			523
Borrowings		151			523
Total		637			1,046
Net interest income		2,622			1,943
Provision for loan losses		—			1,424
Net interest income after provision for loan losses		2,622			519

Noninterest income:
Service charges on deposit accounts		162			161
Gains on sales of securities available-for-sale		—			17
Mortgage loan income		31			—
Other fees and commissions		91			72
Brokerage commissions		—			9
Income from cash value of life insurance		108			110
Other operating income		21			47
Total		413			416

Noninterest expenses:
Salaries and employee benefits		1,560			1,286
Net occupancy expense		244			275
Furniture and equipment expense		232			224
FDIC insurance premiums		44			309
Net cost (profit) of operations of other real estate owned		(65	)		1,564
Other operating expenses		727			560
Total		2,742			4,218

Income (loss) before income taxes		293			(3,283	)
Income tax expense		—			—
Net income (loss)		293			(3,283	)

Preferred dividends		—			(398	)

Net income (loss) available to common shareholders	$	293		$	(3,681	)

Net income (loss) per common share
Basic	$	0.00		$	(0.96	)
Diluted	$	0.00		$	(0.96	)
Weighted average common shares outstanding
Basic		468,013,940			3,846,340
Diluted		469,054,565			3,846,340

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

~~HCSB FINANCIAL CORPORATION AND SUBSIDIARY~~-4-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~COMPREHENSIVE INCOME (LOSS) (unaudited)

(unaudited)

	Three months ended March 31,
(Dollars in thousands)	2017		2016

Net income (loss)	$	293	$	(3,283	)
Other comprehensive income:
Unrealized gains on securities available-for-sale:
Net unrealized holding gains arising during the period		353		902
Reclassification to realized gains		—		(17	)
Other comprehensive income		353		885
Comprehensive income (loss)	$	646	$	(2,398	)

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

	Nine months ended September 30,						Three months ended September 30,
(Dollars in thousands except share amounts)	2016			2015			2016			2015
Interest income:
Loans, including fees	$	7,731		$	8,875		$	2,667		$	3,088
Investment securities:
Taxable		1,273			1,501			426			506
Nonmarketable equity securities		39			37			11			8
Other interest income		172			53			68			16
Total		9,215			10,466			3,172			3,618
Interest expense:
Deposits		1,553			1,884			518			595
Borrowings		770			1,504			150			510
Total		2,323			3,388			668			1,105
Net interest income		6,892			7,078			2,504			2,513
Provision for loan losses		4,984			—			—			—
Net interest income after provision for loan losses		1,908			7,078			2,504			2,513
Noninterest income:
Service charges on deposit accounts		538			581			188			197
Gains on sales of securities available-for-sale		68			232			153			20
Gains on sales of mortgage loans		—			175			—			50
Other fees and commissions		239			325			70			93
Brokerage commissions		13			73			—			42
Income from cash value of life insurance		330			322			110			109
Net (loss) gain on sales of assets		(222	)		721			(222	)		736
Gain from early extinguishment of debt		19,115			—			—			—
Other operating income		122			283			35			96
Total		20,203			2,712			334			1,343
Noninterest expenses:
Salaries and employee benefits		4,602			4,155			1,648			1,330
Net occupancy expense		815			876			275			292
Furniture and equipment expense		663			764			218			266
FDIC insurance premiums		719			1,071			204			346
Net cost of operations of other real estate owned		6,229			465			1,392			382
Other operating expenses		3,317			2,229			885			837
Total		16,345			9,560			4,622			3,453
Income (loss) before income taxes		5,766			230			(1,784	)		403
Income tax expense		920			67			—			35
Net income (loss)	$	4,846		$	163		$	(1,784	)	$	368
Preferred dividends		—			(1,107	)		—			(514	)
Net income (loss) available to common shareholders	$	4,846		$	(944	)	$	(1,784	)	$	(146	)
Net income (loss) per common share
Basic	$	0.02		$	(0.25	)	$	(0.00	)	$	(0.04	)
Diluted	$	0.02		$	(0.25	)	$	(0.00	)	$	(0.04	)
Weighted average common shares outstanding
Basic and diluted		245,538,014			3,816,340			411,085,981			3,816,340

-5-

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

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three months ended March 31, 2017 and 2016
(unaudited)
	Common Stock				Common Stock		Preferred Stock				Capital		Retained			Accumulated Other Comprehensive
	Shares		Amount		Warrant		Shares		Amount		Surplus		Deficit			Loss			Total
(Dollars in thousands except share data)
Balance, December 31, 2015		3,846,340	$	38	$	1,012		12,895	$	12,895	$	30,220	$	(54,807	)	$	(1,608	)	$	(12,250	)
Net loss		—		—		—		—		—		—		(3,283	)		—			(3,283	)
Other comprehensive income		—		—		—		—		—		—		—			885			885

Balance, March 31, 2016		3,846,340	$	38	$	1,012		12,895	$	12,895	$	30,220	$	(58,090	)	$	(723	)	$	(14,648	)

Balance, December 31, 2016		495,763,940	$	4,958	$	—		—	$	—	$	68,411	$	(34,783	)	$	(3,259	)	$	35,327
Net income		—		—		—		—		—		—		293			—			293
Other comprehensive income		—		—		—		—		—		—		—			353			353
Stock-based compensation expense		—		—		—		—		—		139		—			—			139

Balance, March 31, 2017		495,763,940	$	4,958	$	—		—	$	—	$	68,550	$	(34,490	)	$	(2,906	)	$	36,112

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

-46-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)	Three months ended March 31,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	293		$	(3,283	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		162			170
Amortization of debt issuance costs		—			3
Provision for loan losses		—			1,424
Amortization less accretion on investments		251			13
Stock-based compensation expense		139			—
Net gains on sales of securities available-for-sale		—			(17	)
Gains on sales of other real estate owned		(11	)		(15	)
Write-downs of other real estate owned		2			1,369
Decrease in accrued interest receivable		14			229
Increase (decrease) in accrued interest payable		(21	)		375
(Increase) decrease in other assets		123			(486	)
Income (net of mortality cost) on cash value of life insurance		(78	)		(81	)
Decrease in other liabilities		(619	)		(202	)
Net cash provided (used) by operating activities		255			(501	)

Cash flows from investing activities:
Purchases of securities available-for-sale		—			(7,558	)
Maturities, calls and principal paydowns of securities available-for-sale		2,290			10,790
Proceeds from sales of securities available-for-sale		—			4,153
(Purchases) redemptions of nonmarketable equity securities		(14	)		54
(Increase) decrease in loans to customers		(13,954	)		6,947
Purchases of premises and equipment, net		(30	)		(11	)
Proceeds from sale of other real estate owned		279			1,479
Net cash provided (used) by investing activities		(11,429	)		15,854

Cash flows from financing activities:
Net increase in demand deposits and savings		28,738			5,980
Net decrease in time deposits		(19,668	)		(1,350	)
Net decrease in repurchase agreements		(1,135	)		(468	)
Net cash provided by financing activities		7,935			4,162

Net increase (decrease) in cash and cash equivalents		(3,239	)		19,515
Cash and cash equivalents, beginning of period		25,429			22,137
Cash and cash equivalents, end of period	$	22,190		$	41,652

Cash paid during the period for:
Income taxes	$	—		$	—
Interest	$	658		$	671

Noncash investing and financing activities:
Transfers of loans to other real estate owned	$	—		$	479
Unrealized gains on investments	$	353		$	885

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

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~-7-

~~(unaudited)~~HCSB FINANCIAL CORPORATION AND SUBSIDIARY

	Nine months ended September 30,
(Dollars in thousands)	2016			2015
Net income	$	4,846		$	163
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Net unrealized holding gains (losses) arising during the period, net of tax		1,221			141
Reclassification to realized gains		(68	)		(232	)
Other comprehensive income (loss), net of tax		1,153			(91	)
Comprehensive income	$	5,999		$	72

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Three months ended September 30,
(Dollars in thousands)	2016			2015
Net income (loss)	$	(1,784	)	$	368
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Net unrealized holding gains (losses) arising during the period, net of tax		(201	)		595
Reclassification to realized gains		(153	)		(20	)
Other comprehensive income (loss), net of tax		(354	)		575
Comprehensive income (loss)	$	(2,138	)	$	943

NOTE 1 - ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS

~~The accompanying notes are an integral~~Organization ~~part~~and ofSignificant ~~the~~Accounting ~~condensed consolidated financial statements.~~Policies

Basis of Presentation and Consolidation -5 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 trust preferred securities were redeemed in the second quarter of 2016. The operations of the Trust were not consolidated in the financial statements prior to the dissolution.

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 March 31, 2017 and for the interim periods ended March 31, 2017 and 2016 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The financial information as of December 31, 2016 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~~Financial ~~CORPORATION~~Corporation’s ~~AND~~2016 ~~SUBSIDIARY~~Annual Report on Form 10-K which was filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2017, as amended on April 27, 2017.

~~CONDENSED~~Management’s Estimates ~~CONSOLIDATED~~- ~~STATEMENTS~~In OFpreparing ~~CHANGES~~the consolidated financial statements, management is required to make estimates and assumptions INthat ~~SHAREHOLDERS’~~affect ~~EQUITY~~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.

~~Nine~~Material ~~months~~estimates that ~~ended~~are ~~September~~particularly 30susceptible to significant change relate to the determination of the allowance for loan losses, ~~2016~~including valuation allowances for impaired loans, and the carrying amount of real estate acquired in connection with foreclosures or in ~~2015~~satisfaction of loans. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

~~(unaudited)~~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.

																				Accumulated
					Common															Other
	Common Stock				Stock			Preferred Stock						Capital			Retained			Comprehensive
	Shares		Amount		Warrant			Shares			Amount			Surplus			Deficit			Loss			Total
(Dollars in thousands except share data)
Balance, December 31, 2014		3,816,340	$	38	$	1,012			12,895		$	12,895		$	30,214		$	(54,561	)	$	(845	)	$	(11,247	)
Net income		—		—		—			—			—			—			163			—			163
Other comprehensive loss		—		—		—			—			—			—			—			(91	)		(91	)
Balance, September 30, 2015		3,816,340	$	38	$	1,012			12,895		$	12,895		$	30,214		$	(54,398	)	$	(936	)	$	(11,175	)
Balance, December 31, 2015		3,846,340	$	38	$	1,012			12,895		$	12,895		$	30,220		$	(54,807	)	$	(1,608	)	$	(12,250	)
Net income		—		—		—			—			—			—			4,846			—			4,846
Redemption of Series T preferred stock and CPP Warrant		—		—		(1,012	)		(12,895	)		(12,895	)		13,778			—			—			(129	)
Issuance of Series A preferred stock		—		—		—			905,316			9			9,044			—			—			9,053
Issuance of common stock		373,636,043		3,737		—			—			—			33,628			—			—			37,365
Stock issuance costs		—		—		—			—			—			(3,491	)		—			—			(3,491	)
Issuance of restricted stock		27,750,000		278		—			—			—			(278	)		—			—			—
Stock conversion		90,531,557		905		—			(905,316	)		(9	)		(896	)		—			—			—
Stock-based compensation expense		—		—		—			—			—			46			—			—			46
Other comprehensive income		—		—		—			—			—			—			—			1,153			1,153
Balance, September 30, 2016		495,763,940	$	4,958	$	—			—		$	—		$	82,051		$	(49,961	)	$	(455	)	$	36,593

-8-

~~The~~HCSB ~~accompanying~~FINANCIAL ~~notes~~CORPORATION ~~are~~AND ~~an integral part of the condensed consolidated financial statements.~~SUBSIDIARY

~~-6-~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~HCSB~~NOTE ~~FINANCIAL~~1 - ~~CORPORATION~~ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES AND ~~SUBSIDIARY~~RECENT DEVELOPMENTS - continued

~~CONDENSED~~Investment Securities ~~CONSOLIDATED~~- ~~STATEMENTS~~Investment OFsecurities ~~CASH~~available-for-sale owned by the Company are carried at amortized cost and adjusted ~~FLOWS~~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 (~~unaudited~~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.

(Dollars in thousands)	Nine months ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	4,846		$	163
Adjustments to reconcile net income to net cash (used by) provided by operating activities:
Depreciation and amortization		497			570
Amortization of debt issuance costs		2			—
Provision for loan losses		4,984			—
Amortization less accretion on investments		178			130
Net gains on sales of securities available-for-sale		(68	)		(232	)
Net gains on sales of other real estate owned		(52	)		(530	)
Write-downs of other real estate owned		5,582			184
Gain from early extinguishment of debt		(19,115	)		—
Net gain on sale of branches		—			(736	)
Net loss on sale of assets		222			—
Stock based compensation expense		46			—
Decrease in accrued interest receivable		395			41
Increase in accrued interest payable		378			1,059
Income (net of mortality cost) on cash value of life insurance		(243	)		(237	)
(Increase) decrease in other assets		(618	)		1,474
Increase in other liabilities		1,368			99
Net cash (used by) provided by operating activities		(1,598	)		1,985
Cash flows from investing activities:
(Increase) decrease in loans to customers, net		(5,514	)		5,009
Purchases of securities available-for-sale		(80,655	)		(14,054	)
Maturities, calls and principal paydowns of securities available-for-sale		34,450			13,122
Proceeds from sales of securities available-for-sale		25,100			23,326
Redemptions of nonmarketable equity securities		240			12
Proceeds from sales of other real estate owned		4,858			5,395
Purchases of premises and equipment, net		964			(224	)
Net cash paid in branch sale		—			(23,933	)
Net cash (used by) provided by investing activities		(20,557	)		8,653
Cash flows from financing activities:
Net increase in demand deposits and savings		15,985			17,428
Net decrease in time deposits		(23,466	)		(26,915	)
Net decrease in repurchase agreements		(54	)		(493	)
Redemption of subordinated debentures		(3,454	)		—
Redemption of junior subordinated debentures		(617	)		—
Redemption of Series T preferred stock and CPP Warrant		(129	)		—
Issuance of Series A preferred stock		9,053			—
Issuance of common stock		37,364			—
Stock issuance costs		(3,490	)		—
Net cash provided by (used by) financing activities		31,192			(9,980	)
Net increase in cash and cash equivalents		9,037			658
Cash and cash equivalents, beginning of period		22,137			28,527
Cash and cash equivalents, end of period	$	31,174		$	29,185
Cash paid during the period for:
Income taxes	$	—		$	—
Interest	$	1,945		$	2,337
Noncash investing and financing activities:
Transfers of loans to other real estate owned	$	796		$	4,058
Change in unrealized gains (losses) on securities available-for-sale	$	885		$	(91	)

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 ~~accompanying~~accrual of ~~notes~~interest ~~are~~income anis ~~integral~~generally discontinued when a loan becomes contractually 90 days past due as to principal or interest. Management ~~part~~may elect to continue the accrual of interest when the ~~condensed~~estimated ~~consolidated~~net ~~financial~~realizable ~~statements~~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-7-line method.

~~HCSB~~For ~~FINANCIAL~~all ~~CORPORATION~~classes of ~~AND~~loans, ~~SUBSIDIARY~~loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans may include all classes of nonaccrual loans and loans modified in a troubled debt restructuring (“TDR”). If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the interest rate implicit in the original agreement or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is probable, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

~~NOTES~~Impairment TOof a ~~UNAUDITED~~loan ~~CONDENSED~~is ~~CONSOLIDATED~~measured based on the present value of expected future cash flows discounted at the loan’s effective interest ~~FINANCIAL~~rate ~~STATEMENTS~~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 or a specific reserve is set aside within 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.

~~NOTE 1 – ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS~~-9-

~~Organization~~HCSB ~~and~~FINANCIAL ~~Significant~~CORPORATION ~~Accounting Policies~~AND SUBSIDIARY

~~Basis~~NOTES ofTO ~~Presentation and Consolidation~~UNAUDITED -CONDENSED ~~The~~CONSOLIDATED ~~accompanying~~FINANCIAL 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 trust preferred securities were redeemed in the second quarter of 2016. The operations of the Trust were not consolidated in the financial statements prior to the dissolution.STATEMENTS

~~The~~NOTE ~~accompanying consolidated financial statements~~1 ~~have~~- ~~been prepared in accordance with the requirements for interim financial statements and~~ORGANIZATION, ~~accordingly,~~SIGNIFICANT ~~they~~ACCOUNTING ~~are~~POLICIES ~~condensed~~AND ~~and omit~~RECENT ~~disclosures,~~DEVELOPMENTS which would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of September 30, 2016 and for the interim periods ended September 30, 2016 and 2015 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the nine and three month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The financial information as of December 31, 2015 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 2015 Annual Report on Form 10-K ~~which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2016, as amended on Form 10-K/A which was filed with the SEC on April 1, 2016.~~continued

~~Management’s Estimates~~Concentrations -of InCredit ~~preparing~~Risk ~~the~~- ~~consolidated~~Financial ~~financial statements~~instruments, ~~management~~which ispotentially ~~required~~subject tothe ~~make~~Company ~~estimates~~to ~~and~~concentrations ~~assumptions~~of ~~that~~credit ~~affect~~risk, ~~the~~consist ~~reported~~principally ~~amounts~~ of ~~assets~~loans ~~and~~receivable, ~~liabilities~~investment assecurities, offederal ~~the~~funds ~~balance~~sold ~~sheet date~~ and ~~income~~amounts ~~and~~due ~~expenses for the period. Actual results could differ significantly~~ from ~~those estimates~~banks.

~~Material~~The ~~estimates~~Company ~~that~~makes ~~are~~loans ~~particularly~~to ~~susceptible~~individuals and small businesses for various personal and commercial purposes primarily throughout toHorry ~~significant~~County ~~change~~in ~~relate~~South Carolina and Columbus and Brunswick counties of North Carolina. The Company’s loan portfolio is not concentrated in loans to ~~the~~any ~~determination~~single borrower or a relatively small number of borrowers. However, the ~~allowance~~loan ~~for~~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 unfavorable economic conditions. The recent economic recession resulted in increased loan ~~losses~~delinquencies, ~~including~~defaults ~~valuation~~and ~~allowances~~foreclosures ~~for~~within ~~impaired~~our loan portfolio. The declined real estate market during this time had a significant impact on the performance of our loans secured by real estate. In some cases, this downturn resulted in a significant impairment to the value of our collateral and our ability to sell the ~~carrying~~collateral ~~amount~~upon foreclosure. ofThe real estate ~~acquired~~collateral in ~~connection~~each ~~with~~case ~~foreclosures~~provides oran alternate source of repayment in ~~satisfaction~~the event of ~~loans.~~default ~~Management~~by ~~must~~the ~~also~~borrower ~~make~~and ~~estimates~~may deteriorate in ~~determining~~value during the ~~estimated~~time ~~useful~~the ~~lives~~credit ~~and~~is ~~methods~~extended. ~~for~~While ~~depreciating~~economic ~~premises~~conditions and ~~equipment~~real estate in our primary markets have improved since the end of the economic recession, there can be no assurance that this improvement will continue or that our local markets will not experience another economic decline. If real estate values in our market areas were to decline, it is also more likely that we would be required to increase our allowance for loan losses.

~~While~~In ~~management~~addition to ~~uses~~monitoring ~~available~~potential ~~information~~ concentrations of loans to ~~recognize~~particular ~~losses~~borrowers onor ~~loans~~groups ~~and~~of ~~foreclosed~~borrowers, ~~real~~industries ~~estate~~and geographic regions, management ~~future~~monitors ~~additions~~exposure to ~~the~~credit ~~allowance~~risk ~~may~~from beconcentrations ~~necessary~~of ~~based~~lending onproducts ~~changes~~and inpractices such as loans that subject borrowers ~~local~~to ~~economic~~substantial ~~conditions~~payment increases (e.g. Inprincipal ~~addition~~deferral periods, ~~regulatory~~loans ~~agencies~~with initial interest-only periods, asetc.), anand ~~integral~~loans with ~~part~~high ofloan-to-value ~~their~~ratios. ~~examination~~Management ~~process,~~has ~~periodically~~determined ~~review the~~that ~~Company’s~~there ~~allowances~~is ~~for~~no ~~losses~~concentration onof ~~loans~~credit ~~and~~risk ~~foreclosed~~associated ~~real~~with ~~estate~~its lending policies or practices. ~~Such~~Additionally, ~~agencies~~there ~~may~~are ~~require~~industry practices that could subject the Company to ~~recognize additions~~increased tocredit ~~the~~risk ~~allowances~~should economic ~~based~~conditions onchange ~~their~~over ~~judgments~~the ~~about~~course ~~information~~of ~~available~~a toloan’s ~~them~~life. atFor example, the ~~time~~Company ofmakes ~~their~~variable ~~examination.~~rate ~~Because of~~loans ~~these~~and ~~factors,~~fixed rate itprincipal-amortizing isloans ~~reasonably~~with ~~possible~~maturities ~~that~~prior to the ~~allowances~~loan ~~for~~being ~~losses~~fully onpaid (i.e. balloon payment loans). These loans are underwritten and ~~foreclosed~~monitored ~~real~~to ~~estate~~manage ~~may~~the ~~change~~associated ~~materially~~risks. Therefore, management believes that these particular practices do not insubject the ~~near~~Company ~~term~~to unusual credit risk.

~~Investment~~The ~~Securities - Investment~~Company’s ~~securities~~investment ~~available-for-sale~~portfolio ~~owned~~consists byprincipally ~~the~~of ~~Company~~obligations ~~are~~of ~~carried~~the atUnited ~~amortized~~States, ~~cost~~its ~~and~~agencies ~~adjusted~~or toits ~~their~~corporations ~~estimated~~and ~~fair~~general ~~value for~~obligation ~~reporting~~municipal ~~purposes~~securities. ~~The~~In ~~unrealized~~the ~~gain~~opinion ~~or loss is recorded in shareholders’ equity net~~ of ~~any deferred tax effects. Management does not actively trade securities classified as available-for-sale~~management, ~~but~~there ~~intends~~is tono ~~hold~~concentration ~~these securities for an indefinite period~~ of ~~time~~credit ~~and~~risk ~~may~~in ~~sell~~its ~~them~~investment ~~prior to maturity to achieve certain objectives~~portfolio. ~~Reductions in fair value considered by management to~~The beCompany ~~other~~places ~~than~~its ~~temporary~~deposits ~~are~~and ~~reported~~correspondent asaccounts awith ~~realized loss~~ and asells ~~reduction~~its infederal ~~the~~funds ~~cost~~to ~~basis~~high inquality ~~the security~~institutions. ~~The adjusted cost basis~~Management ofbelieves ~~securities~~credit ~~available-for-sale~~risk isassociated ~~determined~~with bycorrespondent ~~specific~~accounts ~~identification and~~ is ~~used~~not ~~in computing the realized gain or loss from a sales transaction~~significant.

~~-8-~~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.

~~HCSB FINANCIAL CORPORATION AND SUBSIDIARY~~-10-

~~Notes to~~HCSB ~~Unaudited~~FINANCIAL ~~CONDENSED~~CORPORATION ~~Consolidated~~AND ~~Financial Statements~~SUBSIDIARY

~~NOTE~~NOTES 1TO UNAUDITED –CONDENSED ~~ORGANIZATION,~~CONSOLIDATED ~~SIGNIFICANT~~FINANCIAL ~~ACCOUNTING POLICIES AND RECENT DEVELOPMENTS - continued~~STATEMENTS

~~Nonmarketable~~NOTE ~~Equity Securities~~1 - Nonmarketable equity securities include the Company’s investment 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 FHLBORGANIZATION, ~~and~~SIGNIFICANT ~~the~~ACCOUNTING ~~stock~~POLICIES isAND ~~pledged~~RECENT toDEVELOPMENTS ~~collateralize~~- ~~the borrowings. Dividends received on FHLB stock are included as a separate component in interest income.~~continued

~~Loans~~The ~~Receivable~~allowance is -subject ~~Loans~~to ~~receivable~~examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy ~~are~~and ~~stated~~the atsize ~~their~~of ~~unpaid~~the ~~principal~~allowance ~~balance~~relative to that of peer institutions, ~~less~~and ~~any~~other ~~charge-offs~~adequacy tests. ~~Interest~~In ~~income~~addition, onsuch ~~loans~~regulatory isagencies could ~~computed~~require ~~based~~the ~~upon~~Company ~~the~~to ~~unpaid principal~~adjust ~~balance.~~its ~~Interest~~allowance ~~income~~based ison ~~recorded~~information inavailable to them at the ~~period~~time ~~earned~~of their examination.

The ~~accrual~~methodology used ofto ~~interest~~determine ~~income~~the isreserve ~~generally discontinued~~for ~~when~~unfunded alending ~~loan~~commitments, ~~becomes~~which ~~contractually~~is 90included ~~days~~in ~~past~~other ~~due~~liabilities, asis inherently similar to ~~principal~~that orused ~~interest. Management may elect~~ to ~~continue~~determine the ~~accrual~~ ofallowance ~~interest~~for ~~when~~loan ~~the~~losses ~~estimated~~adjusted ~~net~~for ~~realizable~~factors ~~value~~specific ofto ~~collateral~~binding ~~exceeds~~commitments, including the ~~principal~~probability of ~~balance~~funding and ~~accrued~~historical ~~interest~~loss ratio.

~~Loan~~Premises, Furniture ~~origination~~ and ~~commitment~~Equipment ~~fees~~- Premises, furniture and ~~certain~~equipment are stated at cost less accumulated depreciation. The provision ~~direct~~for ~~loan~~depreciation ~~origination~~is ~~costs~~computed ~~(principally~~by ~~salaries~~the ~~and~~straight-line ~~employee~~method. ~~benefits)~~Rates of depreciation are ~~deferred~~generally based on the following estimated useful lives: buildings - 40 years; furniture and ~~amortized~~equipment - three to ~~income~~ten ~~over~~years. ~~the~~The ~~contractual life~~cost of assets sold or otherwise disposed of and the related ~~loans~~accumulated ordepreciation ~~commitments,~~is ~~adjusted~~eliminated ~~for~~from ~~prepayments~~the accounts, ~~using~~and the ~~straight-line~~resulting ~~method~~gains or losses are reflected in the Statement of Operations.

~~Loans are impaired when it is probable that~~Maintenance aand ~~creditor~~repairs ~~will~~are becharged ~~unable~~ to ~~collect~~current ~~all~~expense ~~amounts~~as ~~due~~incurred, ~~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~~costs of ~~cost~~major orrenewals ~~fair value. The Company considers its consumer installment portfolio~~ and ~~home~~improvements ~~equity lines as such exceptions. Therefore, loans within the real estate and commercial loan portfolios~~ are ~~reviewed individually~~capitalized.

~~Impairment of a loan is measured based on the~~Other ~~present~~Real ~~value~~Estate ofOwned ~~expected~~- ~~future~~Other ~~cash~~real ~~flows~~estate ~~discounted~~owned at(“OREO”) ~~the~~includes ~~loan’s~~real ~~effective~~estate ~~interest~~acquired ~~rate~~through orforeclosure. ~~the fair value of the collateral,~~OREO ~~if the loan~~ is ~~collateral~~initially ~~dependent.~~recorded ~~When~~at ~~management~~appraised ~~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~~, orless ~~the~~estimated ~~fair~~costs ~~value of the collateral, is charged off with a corresponding entry~~ to ~~the allowance for loan losses or a specific reserve is set aside within the allowance for loan losses~~sell. ~~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~~Any write-downs at the dates of ~~Credit~~acquisition ~~Risk~~ are charged to the allowance for loan losses. Subsequent write-downs ~~Financial~~are ~~instruments,~~charged ~~which~~to ~~potentially~~a ~~subject~~reserve ~~the~~for OREO ~~Company~~losses. Expenses to ~~concentrations~~maintain ofsuch ~~credit~~assets, ~~risk~~subsequent write-downs, ~~consist~~and ~~principally~~gains ofand ~~loans~~losses ~~receivable,~~on disposal are included in net cost ~~investment~~(profit) ~~securities,~~of ~~federal~~operations ~~funds~~of ~~sold~~other ~~and~~real ~~amounts~~estate ~~due~~owned ~~from~~on ~~banks~~the statement of operations.

Income and Expense Recognition -9- 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.

~~HCSB~~Income Taxes ~~FINANCIAL~~– ~~CORPORATION~~The ~~AND~~Company ~~SUBSIDIARY~~files a consolidated federal income tax return and separate company 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.

~~Notes~~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 ~~Unaudited~~the ~~CONDENSED~~Company’s ~~Consolidated~~judgment ~~Financial~~that ~~Statements~~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.

~~NOTE 1 – ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENT DEVELOPMENTS~~ - ~~continued~~11-

~~The~~HCSB ~~Company~~FINANCIAL ~~makes~~CORPORATION ~~loans~~AND 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 unfavorable economic conditions. 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 decline, it is also more likely that we would be required to increase our allowance for loan losses.SUBSIDIARY

InNOTES ~~addition~~TO ~~to monitoring potential concentrations~~UNAUDITED ofCONDENSED ~~loans~~CONSOLIDATED toFINANCIAL 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.STATEMENTS

~~The~~NOTE ~~Company’s investment portfolio consists~~1 ~~principally~~- ~~of obligations of the United States~~ORGANIZATION, ~~its~~SIGNIFICANT ~~agencies~~ACCOUNTING orPOLICIES ~~its~~AND ~~corporations~~RECENT ~~and~~DEVELOPMENTS ~~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.continued

~~Allowance~~The ~~for~~Company reviews ~~Loan~~the ~~Losses~~deferred ~~– The~~tax ~~allowance~~assets for ~~loan~~recoverability ~~losses~~based ison ~~established~~history asof ~~losses~~earnings, ~~are~~expectations ~~estimated to have occurred through a provision~~ for ~~loan~~future ~~losses charged to~~ earnings. ~~Loan~~and ~~losses~~expected timing ~~are~~of ~~charged~~reversals ~~against~~of ~~the~~temporary ~~allowance~~differences. ~~when~~Realization ~~management believes the uncollectability~~ of a ~~loan~~deferred ~~balance~~tax isasset ~~confirmed. Subsequent~~ultimately ~~recoveries,~~depends ifon ~~any, are credited to~~ the ~~allowance.~~existence ~~The~~of ~~allowance~~sufficient taxable ~~for~~income ~~loan~~available ~~losses~~under istax ~~evaluated~~law, onincluding afuture ~~regular~~reversals ~~basis~~of ~~by management~~existing ~~and~~temporary isdifferences, ~~based~~future ~~upon~~taxable ~~management’s~~income ~~periodic review~~ exclusive of ~~the~~reversing ~~collectability~~differences, oftaxable ~~the~~income ~~loans~~ in ~~light~~prior ofcarryback ~~historical experiences~~years, ~~the~~ ~~nature~~projections ~~and volume~~ of ~~the~~future ~~loan~~operating ~~portfolio~~results, ~~adverse~~cumulative ~~situations~~tax ~~that~~losses over ~~may affect~~ the ~~borrower’s~~past ~~ability~~three ~~to repay~~years, ~~estimated value~~tax ofloss ~~any~~deductibility ~~underlying~~limitations, ~~collateral~~ and ~~prevailing~~available ~~economic~~tax ~~conditions~~planning strategies. ~~This~~If, ~~evaluation~~based ison ~~inherently~~available ~~subjective as~~ information, it ~~requires estimates~~is ~~that~~more ~~are~~likely ~~susceptible~~than tonot ~~significant~~that ~~revision~~the asdeferred ~~more~~income ~~information~~tax ~~becomes~~asset ~~available.~~will ~~Management’s~~not ~~judgments~~be ~~about the~~realized, ~~adequacy~~a ofvaluation ~~the~~ allowance ~~are~~against ~~based~~the ondeferred tax ~~numerous~~asset ~~assumptions~~must ~~about~~be ~~current~~established ~~events,~~with ~~which~~a ~~management~~corresponding ~~believes~~charge to beincome ~~reasonable, but~~tax ~~which~~expense. ~~may~~The ordeferred ~~may~~tax ~~not~~assets ~~prove~~and tovaluation beallowance are ~~accurate.~~evaluated ~~Thus~~each quarter, ~~there~~and ~~can~~a beportion noof ~~assurance~~the ~~that~~valuation ~~loan~~allowance ~~losses~~may be reversed in future periods. ~~will~~The ~~not~~determination ~~exceed~~of how much of the ~~current~~valuation allowance ~~amount or~~ that ~~future~~may ~~increases~~be inreversed and the ~~allowance~~timing ~~will~~is ~~not~~based beon ~~required.~~future Noresults ~~assurance~~of ~~can~~operation beand ~~given~~the ~~that~~amount ~~management’s~~and ~~ongoing~~timing ~~evaluation~~ of ~~the~~actual loan ~~portfolio~~charge-offs inand ~~light~~asset ofwrite-downs. ~~changing~~At ~~economic~~March ~~conditions~~31, 2017 and ~~other~~December ~~relevant~~31, ~~circumstances~~2016, ~~will~~the ~~not~~Company’s ~~require~~deferred ~~significant~~tax ~~future~~asset ~~additions~~was tooffset ~~the~~in ~~allowance,~~its ~~thus~~entirety ~~adversely~~by ~~affecting~~a ~~the~~valuation ~~operating results of the Company~~allowance.

The ~~allowance~~Company believes isthat ~~subject~~its toincome ~~examination~~tax ~~by regulatory~~filing ~~agencies,~~positions ~~which~~taken ~~may~~or ~~consider~~expected ~~such~~to ~~factors~~be astaken ~~the~~in ~~methodology~~its ~~used~~tax toreturns ~~determine~~will ~~adequacy~~more ~~and~~likely ~~the~~than ~~size~~not ofbe ~~the allowance~~sustained ~~relative~~upon toaudit ~~that~~by ofthe ~~peer~~taxing ~~institutions,~~authorities and ~~other~~does ~~adequacy~~not ~~tests.~~anticipate Inany ~~addition,~~adjustments ~~such~~that ~~regulatory~~will ~~agencies~~result ~~could~~in ~~require~~a material adverse impact on the Company to’s ~~adjust~~financial ~~its~~condition, ~~allowance~~results ~~based~~of onoperations, ~~information~~or ~~available~~cash toflow. ~~them~~Therefore, atno ~~the~~reserves ~~time~~for ofuncertain ~~their~~income ~~examination~~tax positions have been recorded.

Net Income (Loss) Per Common Share -10 Basic net 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. At March 31, 2017, the only potential common share equivalents are restricted stock.

~~HCSB~~Comprehensive Income ~~FINANCIAL~~- ~~CORPORATION~~Accounting ~~AND~~principles ~~SUBSIDIARY~~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 and are also presented in a separate statement of comprehensive income. Accumulated other comprehensive income for the Company consists entirely of unrealized holding gains and losses on available for sale securities.

~~Notes~~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 ~~Unaudited~~be ~~CONDENSED~~cash ~~Consolidated~~equivalents. ~~Financial~~Cash ~~Statements~~equivalents include amounts due from banks, federal funds sold, and interest-bearing deposits with other banks.

~~NOTE 1~~Off-Balance –Sheet ~~ORGANIZATION,~~Financial ~~SIGNIFICANT~~Instruments ~~ACCOUNTING~~- ~~POLICIES~~In ~~AND~~the ~~RECENT~~ordinary ~~DEVELOPMENTS~~course of business, the Company enters into off-balance ~~continued~~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.

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.-12-

~~Premises,~~HCSB ~~Furniture~~FINANCIAL ~~and~~CORPORATION ~~Equipment -~~AND 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; furniture and equipment - three to ten 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.SUBSIDIARY

~~Maintenance~~NOTES ~~and~~TO ~~repairs are charged to current~~UNAUDITED ~~expense~~CONDENSED asCONSOLIDATED ~~incurred,~~FINANCIAL ~~and the costs of major renewals and improvements are capitalized.~~STATEMENTS

~~Other~~NOTE ~~Real Estate Owned~~ 1 - ~~Other real~~ORGANIZATION, ~~estate~~SIGNIFICANT ~~owned~~ACCOUNTING ~~(“OREO”)~~POLICIES ~~includes~~AND ~~real~~RECENT ~~estate~~DEVELOPMENTS ~~acquired~~- ~~through foreclosure. OREO is initially recorded at appraised value, less estimated costs to sell.~~continued

~~Any write-downs at the dates of acquisition~~Recently ~~are~~Issued ~~charged~~Accounting toPronouncements ~~the~~– ~~allowance~~The ~~for~~following ~~loan~~is ~~losses.~~a ~~Expenses~~summary ~~to maintain such assets, subsequent write-downs, and gains and losses on disposal are included in net cost (profit)~~ of ~~operations~~recent ofauthoritative ~~other real estate owned on the statement of operations~~pronouncements.

~~Income~~In ~~and~~May ~~Expense~~2014, ~~Recognition~~the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition -of revenue from contracts with customers. The ~~accrual~~core ~~method~~principle of ~~accounting~~the new guidance is ~~used~~that ~~for~~an ~~all~~entity ~~significant~~should ~~categories~~recognize revenue to reflect the transfer of ~~income~~goods and ~~expense~~services to customers in an amount equal to the consideration the entity receives or expects to receive. ~~Immaterial~~This ~~amounts~~guidance also includes expanded disclosure requirements that result in an entity providing users of ~~insurance~~financial ~~commissions~~statements with comprehensive information about the nature, amount, timing, and ~~other~~uncertainty ~~miscellaneous~~of ~~fees~~revenue ~~are~~and ~~reported~~cash ~~when~~flows ~~received~~arising from the entity’s contracts with customers. In August 2015, the FASB deferred the effective date of Accounting Standards Update (“ASU”) 2014-09. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

~~Income~~In ~~Taxes~~January –2016, ~~The~~the ~~Company~~FASB issued ASU 2016-01 updating the Financial Instruments topic of the Accounting Standards ~~files~~Codification ato ~~consolidated~~address ~~federal~~certain ~~income~~aspects ~~tax~~of ~~return~~recognition, ~~and~~measurement, ~~separate~~presentation, ~~company~~and ~~state~~disclosure ~~income~~of ~~tax~~financial ~~returns~~instruments. ~~Federal~~The amendments ~~income~~will ~~tax~~be ~~expense~~effective orfor ~~benefit has~~fiscal ~~been~~years ~~allocated~~beginning toafter ~~subsidiaries~~December on15, a2017, ~~separate~~including ~~return~~interim ~~basis~~periods within those fiscal years. The Company ~~accounts~~will ~~for~~apply ~~income~~the ~~taxes~~guidance ~~based~~by onmeans ~~two~~of ~~components~~a cumulative-effect adjustment to the balance sheet as of the beginning ~~income~~of ~~tax~~the ~~expense:~~fiscal ~~current~~year ~~and~~of ~~deferred~~adoption. ~~Current~~The ~~income~~amendments ~~tax~~related ~~expense~~to ~~approximates~~equity ~~taxes~~securities towithout readily determinable fair values will be ~~paid~~applied prospectively orto ~~refunded~~equity ~~for~~investments that exist as of the ~~current period~~date ~~and~~of ~~includes~~adoption ~~income~~of ~~tax~~the ~~expense~~amendments. ~~related~~The Company does not expect these amendments to ~~uncertain~~have ~~tax~~a ~~positions,~~material ifeffect ~~any~~on its financial statements.

~~Deferred~~In ~~income~~February 2016, ~~taxes~~the ~~are~~FASB ~~determined~~amended ~~using~~ the ~~balance~~Leases ~~sheet~~topic ~~method.~~of ~~Under this method,~~ the ~~net~~ASC ~~deferred~~to ~~tax~~require ~~asset~~all orleases ~~liability~~with islease ~~based~~terms onover ~~the~~12 ~~tax~~months ~~impacts~~to ofbe ~~the~~capitalized ~~differences~~as ~~between~~a ~~the book and tax bases~~ right-of-use ~~assets~~asset and ~~liabilities~~lease ~~and~~liability ~~recognizes~~on ~~enacted~~the ~~changes~~balance insheet ~~tax~~at ~~rates and laws in~~ the ~~period~~date ~~in which~~of ~~they~~lease ~~occur~~commencement. ~~Deferred~~Leases ~~income~~will ~~tax~~be ~~expense~~classified ~~results~~as either ~~from~~finance ~~changes~~leases inor ~~deferred~~operating ~~tax assets and liabilities between periods~~leases. ~~Deferred tax~~This ~~assets~~distinction ~~are~~will ~~recognized~~be ~~subject~~relevant tofor the ~~Company’s~~pattern ~~judgment~~of ~~that~~expense ~~realization~~recognition isin ~~more~~the ~~likely than not~~income statement. AThe ~~tax~~amendments ~~position~~will ~~that meets~~be ~~the~~effective ~~more~~for ~~likely~~fiscal ~~than~~years ~~not~~beginning ~~recognition~~after ~~threshold~~December is15, ~~measured~~2018, toincluding ~~determine~~interim ~~the~~periods ~~amount~~within those offiscal ~~benefit to recognize~~years. The ~~tax~~Company ~~position~~ is ~~measured~~currently atin the ~~largest~~process ~~amount~~ of ~~benefit~~evaluating ~~that~~the isimpact ~~greater~~of ~~than~~adoption ~~50% likely~~ of ~~being~~this ~~realized~~guidance ~~upon~~on ~~settlement.~~the ~~Interest and penalties,~~financial ~~if any, are recognized as a component of income tax expense~~statements.

~~The Company reviews the deferred tax assets~~In ~~for~~March ~~recoverability based on history of earnings~~2016, ~~expectations~~the ~~for~~FASB ~~future~~amended ~~earnings~~the ~~and~~Revenue ~~expected~~from ~~timing~~Contracts ofwith ~~reversals~~Customers oftopic ~~temporary differences. Realization~~ of ~~a deferred tax asset ultimately depends on~~ the ~~existence~~ASC ofto ~~sufficient~~clarify 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~~implementation ~~three years,~~guidance ~~tax~~on ~~loss~~principal ~~deductibility~~versus ~~limitations,~~agent considerations and ~~available~~address ~~tax~~how ~~planning~~an ~~strategies.~~entity ~~If,~~should ~~based~~assess onwhether ~~available information,~~ it is ~~more likely than not that~~ the ~~deferred~~principal ~~income~~or ~~tax asset will not be realized, a valuation allowance against~~ the ~~deferred~~agent ~~tax~~in ~~asset must be~~contracts ~~established~~that ~~with~~include athree ~~corresponding~~or ~~charge~~more ~~to income tax expense~~parties. The ~~deferred~~amendments ~~tax~~will ~~assets~~be ~~and~~effective ~~valuation~~for ~~allowance are evaluated each quarter, and a portion of~~ the ~~valuation~~Company ~~allowance~~for ~~may~~reporting ~~be reversed in future~~ periods. ~~The~~beginning ~~determination~~after ~~of how much of the valuation~~December ~~allowance~~15, ~~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~~2017. ~~Due~~The ~~to the private placement in April 2016 that removed the going concern considerations, the~~ Company ~~recorded~~does anot ~~deferred~~expect ~~tax~~these ~~asset~~amendments ~~of $267 thousand related~~ to ~~unrealized~~have ~~losses in the securities available-for-sale portfolio. The remaining deferred tax asset was offset by~~ a ~~valuation~~material ~~allowance.~~effect Aton ~~December 31, 2015, the Company’s deferred tax asset was offset in~~ its ~~entirety~~financial ~~by a valuation allowance~~statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-11based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company on January 1, 2017 and did not have a material effect on its financial statements.

~~HCSB~~In ~~FINANCIAL~~May ~~CORPORATION~~2016, the ~~AND~~FASB ~~SUBSIDIARY~~amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

~~Notes to Unaudited CONDENSED Consolidated Financial Statements~~-13-

~~NOTE~~HCSB 1FINANCIAL –CORPORATION ~~ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES~~ AND ~~RECENT DEVELOPMENTS - continued~~SUBSIDIARY

~~The~~NOTES ~~Company~~TO ~~believes that its income tax filing~~UNAUDITED ~~positions~~CONDENSED ~~taken~~CONSOLIDATED orFINANCIAL 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.STATEMENTS

~~Net~~NOTE ~~Income (Loss) Per Common Share~~1 - ~~Basic~~ORGANIZATION, ~~income~~SIGNIFICANT ~~(loss)~~ACCOUNTING ~~per~~POLICIES ~~common~~AND ~~share~~RECENT isDEVELOPMENTS ~~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. There were no common share equivalents at September 30, 2016.continued

~~Comprehensive~~In ~~Income~~June ~~- Accounting~~2016, ~~principles~~the ~~generally~~FASB ~~require~~issued ~~recognized~~guidance ~~income,~~to ~~expenses,~~change ~~gains,~~the ~~and~~accounting ~~losses~~for tocredit belosses ~~included~~and inmodify ~~net~~the ~~income.~~impairment ~~Although~~model for certain ~~changes~~debt securities. inThe ~~assets~~guidance ~~and~~requires ~~liabilities,~~a ~~such~~financial asasset ~~unrealized~~(including ~~gains~~trade ~~and~~receivables) ~~losses~~measured onat ~~available-for-sale~~amortized ~~securities,~~cost ~~are~~basis ~~reported~~to asbe apresented ~~separate~~at ~~component~~the ofnet ~~the~~amount ~~equity~~expected ~~section~~to ofbe collected. Thus, the ~~balance~~income ~~sheet,~~statement ~~such~~will ~~items,~~reflect ~~along~~the ~~with~~measurement ~~net~~of ~~income,~~credit ~~are~~losses ~~components~~for ofnewly-recognized financial ~~comprehensive~~assets ~~income~~as ~~and~~well ~~are~~as ~~also presented~~the inexpected aincreases ~~separate~~or ~~statement~~decreases of ~~comprehensive~~expected ~~income~~credit losses that have taken place during the period. The ~~Accumulated~~amendments ~~other~~will ~~comprehensive~~be ~~income~~effective for the Company ~~consists~~for ~~entirely~~reporting periods beginning after December 15, 2019. The Company is currently in the process of ~~unrealized~~evaluating ~~holding~~the ~~gains~~impact ~~and~~of ~~losses~~adoption of this guidance on ~~available-for-sale~~the ~~securities~~financial statements.

~~Statements~~In ofAugust ~~Cash~~2016, the ~~Flows~~FASB -amended ~~For purposes~~the Statement of ~~reporting~~Cash ~~cash~~Flows ~~flows,~~topic of the ~~Company~~ASC ~~considers~~to clarify how certain ~~highly~~cash ~~liquid~~receipts ~~debt~~and ~~instruments~~cash ~~purchased~~payments ~~with~~are apresented and ~~maturity~~classified in the statement of ~~three months~~cash orflows. ~~less~~The toamendments will be ~~cash~~effective ~~equivalents.~~for ~~Cash~~the ~~equivalents~~Company ~~include~~for ~~amounts~~fiscal ~~due~~years ~~from~~beginning ~~banks~~after December 15, ~~federal~~2017 ~~funds~~including ~~sold,~~interim ~~and~~periods ~~interest-bearing~~within those fiscal years. The Company does not expect these amendments to have a ~~deposits~~material ~~with~~effect ~~other~~on ~~banks~~its financial statements.

~~Off-Balance~~In ~~Sheet~~October ~~Financial Instruments~~2016, -the InFASB amended the ~~ordinary~~Income ~~course~~Taxes topic of ~~business,~~ the ~~Company~~ASC ~~enters~~to ~~into~~modify ~~off-balance~~the ~~sheet~~accounting ~~financial~~for ~~instruments~~intra-entity ~~consisting~~transfers of ~~commitments~~assets other than inventory. toThe ~~extend~~amendments ~~credit~~will ~~and~~be ~~letters~~effective offor ~~credit~~the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. ~~These~~Early ~~financial~~adoption ~~instruments~~is ~~are~~permitted. ~~recorded~~The inCompany ~~the~~does ~~financial~~not ~~statements~~expect ~~when~~these ~~they~~amendments ~~become~~to ~~payable~~have a material effect byon ~~the~~its ~~customer~~financial statements.

~~Recently~~In ~~Issued~~October ~~Accounting Pronouncements~~2016, –the ~~The~~FASB ~~following~~amended the Consolidation topic of the ASC to revise the consolidation guidance on how a reporting entity that is the single decision maker of a ~~summary~~variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of ~~recent~~that ~~authoritative~~VIE. ~~pronouncements~~The amendments became effective for the Company on January 1, 2017 and did not have a material effect on the financial statements.

In ~~May 2014~~November 2016, the ~~Financial Accounting Standards Board (“~~FASB”) ~~issued~~amended ~~guidance to change~~ the ~~recognition~~Statement of ~~revenue~~Cash ~~from~~Flows ~~contracts~~topic ~~with customers. The core principle~~ of the ~~new~~ASC ~~guidance is that an entity should recognize revenue~~ to ~~reflect~~clarify ~~the~~how ~~transfer~~restricted ofcash ~~goods~~is presented and ~~services to customers~~ classified in ~~an amount equal to~~ the ~~consideration~~statement ~~the~~of ~~entity~~cash ~~receives or expects to receive~~flows. The ~~guidance~~amendments will be effective for the Company for ~~reporting~~ ~~periods~~fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In ~~January 2015~~December 2016, the FASB issued ~~guidance~~technical tocorrections ~~eliminate~~and ~~from~~improvements ~~U.S.~~to ~~GAAP~~ the ~~concept~~Revenue offrom anContracts ~~extraordinary~~with ~~item, which~~Customers ~~is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring~~Topic. ~~Under~~These ~~the new guidance, an~~corrections ~~entity~~make ~~will~~a nolimited ~~longer~~number ~~(1) segregate an extraordinary item from the results~~ of ~~ordinary~~revisions ~~operations;~~to ~~(2)~~several ~~separately~~pieces ~~present an extraordinary item on its income statement, net~~ of ~~tax,~~the ~~after~~revenue ~~income~~recognition ~~from~~standard ~~continuing~~issued ~~operations;~~in or2014. ~~(3)~~The ~~disclose~~effective ~~income~~date ~~taxes~~ and ~~earnings-per-share~~ ~~data~~transition ~~applicable~~requirements tofor anthe ~~extraordinary~~technical ~~item.~~corrections ~~The~~will ~~amendments~~be ~~were~~ effective for the Company onfor ~~January~~reporting 1periods beginning after December 15, ~~2016~~2017. The Company isdoes ~~applying the~~not ~~guidance~~expect ~~prospectively.~~these ~~The~~ amendments ~~had~~to nohave a material effect on ~~the~~its financial statements.

~~-12-~~In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

~~HCSB~~In ~~FINANCIAL~~January ~~CORPORATION~~2017, the ~~AND~~FASB ~~SUBSIDIARY~~updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the ASC. The update incorporates into the ASC recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

~~Notes to Unaudited CONDENSED Consolidated Financial Statements~~-14-

~~NOTE~~HCSB 1FINANCIAL –CORPORATION ~~ORGANIZATION, SIGNIFICANT ACCOUNTING POLICIES~~ AND ~~RECENT DEVELOPMENTS - continued~~SUBSIDIARY

InNOTES ~~February~~TO ~~2015, the FASB issued guidance~~UNAUDITED ~~which~~CONDENSED ~~amends~~CONSOLIDATED ~~the~~FINANCIAL consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. The amendments were effective for the Company on January 1, 2016 and did not have a material effect on the financial statements.STATEMENTS

InNOTE ~~April 2015, the FASB issued guidance which~~1 ~~changes~~- ~~the presentation of debt issuance costs. The amendments were effective for the Company on January 1~~ORGANIZATION, ~~2016.~~SIGNIFICANT AsACCOUNTING aPOLICIES ~~result, all~~AND ~~debt~~RECENT ~~issuance~~DEVELOPMENTS ~~costs~~- ~~were reclassified to offset related debt.~~continued

In ~~August 2015~~February 2017, the FASB ~~deferred~~amended the ~~effective date~~Other Income Topic of the Accounting Standards ~~Update~~Codification ~~(“ASU”)~~to ~~2014-09,~~clarify ~~Revenue~~the ~~from~~scope ~~Contracts~~of ~~with~~the ~~Customers.~~guidance Ason nonfinancial aasset ~~result~~derecognition ofas well as the ~~deferral,~~ accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in ~~ASU~~the ~~2014-09~~new ~~will~~revenue standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In ~~August~~March ~~2015~~2017, the FASB ~~issued~~amended ~~amendments to~~the requirements in the ~~Interest~~Receivables—Nonrefundable ~~topic~~Fees and Other Costs Topic of the ASC related to ~~clarify~~ the amortization ~~SEC~~period ~~staff’s~~for ~~position~~certain onpurchased ~~presenting~~callable ~~and~~debt ~~measuring~~securities ~~debt~~held ~~issuance~~at ~~costs~~a ~~incurred~~premium. The amendments shorten the amortization inperiod ~~connection~~for ~~with~~the ~~line-of-credit~~premium ~~arrangements~~to the earliest call date. The amendments ~~were~~will be effective ~~upon~~for ~~issuance~~the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The ~~amendments~~Company ~~did~~does not expect these amendments to have a material effect on ~~the~~its ~~Company’s~~ financial statements.

InOther ~~January 2016, the FASB amended the Financial~~accounting ~~Instruments~~standards ~~topic~~that ofhave ~~the~~been ~~ASC~~issued toor ~~address~~proposed ~~certain~~by aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the ~~guidance~~FASB byor ~~means~~other ~~of a cumulative~~standards-~~effect~~setting ~~adjustment~~bodies toare ~~the~~not ~~balance~~expected ~~sheet as of the beginning of the fiscal year of adoption. The amendments related~~ to ~~equity~~have ~~securities~~a ~~without readily determinable fair values~~material ~~will~~impact beon ~~applied prospectively to equity investments that exist as of~~ the ~~date of adoption of the amendments. The~~ Company’s ~~does~~financial ~~not expect~~position, ~~these~~results ~~amendments~~of tooperations ~~have~~or acash ~~material effect on its financial statements~~flows.

Risks and Uncertainties - In ~~February~~the ~~2016~~normal course of its business, the ~~FASB~~Company ~~amended~~encounters ~~the~~two ~~Leases topic~~significant types of ~~the~~risks: ~~ASC~~economic and toregulatory. ~~revise~~There ~~certain~~are ~~aspects~~three main components of ~~recognition,~~economic ~~measurement,~~risk: ~~presentation~~interest rate risk, ~~and~~credit ~~disclosure~~risk ofand ~~leasing~~market ~~transactions~~risk. The Company ~~amendments~~is ~~will~~subject beto ~~effective~~interest ~~for~~rate ~~fiscal~~risk ~~years~~to ~~beginning~~the ~~after~~degree ~~December~~that ~~15,~~its ~~2018,~~interest-bearing ~~including~~liabilities ~~interim~~mature ~~periods~~or ~~within~~reprice ~~those~~at ~~fiscal~~different speeds, or ~~years~~on a different basis, than its interest-earning assets. ~~The~~Credit ~~Company~~risk is ~~currently~~the ~~evaluating~~risk of default on the ~~effect~~Company’s loan portfolio that results ~~implementation~~from ofa ~~the~~borrower’s ~~new~~inability ~~standard~~or ~~will~~unwillingness ~~have~~to onmake ~~its~~contractually ~~financial~~required ~~position,~~payments. Market risk reflects changes in ~~results~~the value of ~~operations,~~collateral underlying loans receivable and ~~cash~~the ~~flows~~valuation of real estate held by the Company.

InThe ~~March~~Company is ~~2016,~~subject ~~the~~to ~~FASB amended~~ the ~~Revenue from~~regulations ~~Contracts with Customers topic~~ of ~~the~~various ~~ASC~~governmental toagencies. ~~clarify~~These ~~the~~regulations ~~implementation~~can ~~guidance~~and ondo ~~principal~~change ~~versus~~significantly ~~agent~~from ~~considerations~~period ~~and~~to ~~address~~period. ~~how~~The anCompany ~~entity~~also ~~should~~undergoes ~~assess~~periodic ~~whether~~examinations itby is the ~~principal~~regulatory oragencies, ~~the~~which ~~agent~~may insubject ~~contracts~~it ~~that~~to ~~include~~further ~~three or more parties.~~changes ~~The~~with ~~amendments~~respect ~~will~~to beasset ~~effective~~valuations, ~~for~~amounts ~~the~~of ~~Company~~required ~~for~~loss ~~reporting~~allowances ~~periods~~and ~~beginning~~operating ~~after~~restrictions ~~December~~from ~~15,~~the ~~2017.~~regulators’ ~~The Company does not~~judgments ~~expect~~based ~~these~~on ~~amendments~~information available to ~~have~~them aat ~~material~~the ~~effect~~time onof ~~its~~their ~~financial statements~~examination.

~~In March 2016, the FASB issued guidance to~~Reclassifications ~~simplify several aspects of the accounting for share~~-~~based~~ ~~payment~~Certain ~~award~~captions ~~transactions including the income tax consequences, the classification of awards as either equity or liabilities,~~ and ~~the~~amounts classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for ~~all~~prior ~~awards~~periods ~~with performance or service conditions that~~ have ~~certain~~been ~~characteristics~~reclassified ~~and also allowing them~~ to ~~make~~ aconform ~~one-time election~~ to ~~switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for~~ the ~~Company~~March ~~for annual periods beginning after December 15~~31, ~~2016~~2017 ~~and interim periods~~presentation. ~~within~~These ~~those~~reclassifications ~~annual~~had ~~periods.~~no ~~The~~effect ~~Company~~on ~~does~~net ~~not~~income ~~expect~~(loss) ~~these~~or ~~amendments~~shareholders’ toequity ~~have~~as apreviously ~~material effect on its financial statements~~reported.

-1315-

~~HCSB~~NOTE 2 ~~FINANCIAL~~- ~~CORPORATION~~REGULATORY MATTERS AND ~~SUBSIDIARY~~OTHER CONSIDERATIONS

~~Notes~~Termination of the Written Agreement towith ~~Unaudited~~the ~~CONDENSED~~Federal ~~Consolidated~~Reserve ~~Financial~~Bank ~~Statements~~of Richmond

~~NOTE~~On 1March –23, ~~ORGANIZATION~~2017, ~~SIGNIFICANT~~the Company received notification from the Federal Reserve Bank of Richmond ~~ACCOUNTING~~that ~~POLICIES~~the ~~AND~~Written ~~RECENT~~Agreement ~~DEVELOPMENTS~~it -has ~~continued~~been operating under since May 9, 2011 was terminated effective March 21, 2017. 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 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. Although the Written Agreement has been terminated, certain regulatory requirements and restrictions remain, including prohibitions on (i) increasing or guarantying any debt, (ii) directly or indirectly or purchasing or redeeming any shares of its stock, and (iii) making dividend payments, each without prior approval from the Federal Reserve.

InTermination June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the ~~new~~Consent ~~standard will have on its financial position, results of operations, and cash flows.~~Order

InAs ~~August~~a ~~2016~~result of the recent economic recession, the ~~FASB~~Bank ~~amended~~entered into a Consent Order (the ~~Statement~~“Consent Order”) ofwith ~~Cash~~the ~~Flows~~Federal ~~topic~~Deposit Insurance Corporation (the “FDIC”) and the South Carolina Board of Financial Institutions (the ~~ASC~~“State toBoard”) ~~clarify~~on ~~how~~February ~~certain~~10, ~~cash~~2011, ~~receipts~~which, among other things, required the Bank to achieve and ~~cash~~maintain ~~payments~~total risk ~~are~~based ~~presented~~capital at least equal to 10% of risk-weighted assets and ~~classified~~Tier in1 ~~the~~capital ~~statement~~ at least equal to 8% of ~~cash~~total ~~flows.~~assets ~~The~~and ~~amendments~~to seek ~~will~~to besell ~~effective~~or ~~for~~merge the ~~Company~~Bank ~~for~~if ~~fiscal~~it ~~years~~cannot ~~beginning~~satisfy ~~after~~or ~~December~~maintain 15the requisite capital. October 26, ~~2017~~2016, ~~including~~the ~~interim~~Bank received notification ~~periods~~from ~~within~~the ~~those~~FDIC ~~fiscal~~and ~~years~~the State Board that the Consent Order had been terminated. The ~~Company~~Consent ~~does~~Order ~~not~~was ~~expect~~replaced ~~these~~with ~~amendments~~certain regulatory requirements and restrictions, including a requirement to ~~have~~continue to improve credit quality and earnings, a ~~material~~restriction ~~effect~~prohibiting dividend onpayments ~~its~~without ~~financial~~prior ~~statements~~approval from the supervisory authorities, and a requirement to maintain Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%. We believe that we are currently in substantial compliance with the new regulatory requirements and restrictions.

~~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.~~16-

~~Risks~~HCSB ~~and~~FINANCIAL ~~Uncertainties~~CORPORATION -AND 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.SUBSIDIARY

~~The~~NOTES ~~Company~~TO ~~is subject to the regulations of~~UNAUDITED ~~various~~CONDENSED ~~governmental~~CONSOLIDATED ~~agencies.~~FINANCIAL 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.STATEMENTS

~~Reclassifications~~NOTE 2 - ~~Certain~~REGULATORY ~~captions~~MATTERS ~~and~~AND ~~amounts~~OTHER ~~for~~CONSIDERATIONS ~~prior~~- ~~periods have been reclassified to conform to the current presentation. These reclassifications had no effect on net income (loss) or shareholders’ equity (deficit) as previously reported.~~continued

~~-14-~~Other Considerations

~~HCSB~~During ~~FINANCIAL~~the economic ~~CORPORATION~~recession, ~~AND~~the ~~SUBSIDIARY~~Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, experienced a decline in the value of the collateral securing its loan portfolio as well as a 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. In addition to increasing write-downs on OREO to expedite sales during 2016, the Bank sold $4.3 million of nonperforming loans and $270 thousand of OREO in a bulk sale. The loans and OREO had been reduced to fair value prior to the sale. Additional OREO properties totaling $5.6 million were also sold during 2016.

~~Notes~~The Bank’s nonperforming assets at March 31, 2017 were $4.5 million compared to ~~Unaudited~~$4.9 ~~CONDENSED~~million ~~Consolidated~~at ~~Financial~~December ~~Statements~~31, 2016. As a percentage of total assets, nonperforming assets were 1.18% and 1.31% as of March 31, 2017 and December 31, 2016, respectively. As a percentage of total loans, nonperforming loans were 0.84% and 0.94% as of March 31, 2017 and December 31, 2016, respectively.

~~NOTE~~The 1Company and –the ~~ORGANIZATION,~~Bank ~~SIGNIFICANT~~operate in a highly-regulated industry and must plan for the liquidity needs of each entity separately. A variety ~~ACCOUNTING~~of ~~POLICIES~~sources ~~AND~~of ~~RECENT~~liquidity ~~DEVELOPMENTS~~have historically been available to the Bank to meet its short-term ~~continued~~and long-term funding needs. Although several of these sources have been limited following execution of the Consent Order (which was terminated on October 26, 2016), management has prepared forecasts of these sources of funds and the Bank’s projected uses of funds during 2017 in an effort to ensure that the sources available are sufficient to meet the Bank’s projected liquidity needs for this period.

~~Recent~~Prior ~~Developments~~to the most recent economic downturn, the Company, if needed, would have relied on dividends from the Bank as its primary source of liquidity. The Company is a legal entity separate and distinct from the Bank. However, various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, regulatory restrictions remaining following the termination of the Consent Order further limit the Bank’s ability to pay dividends to the Company to satisfy its funding needs.

OnManagement ~~February~~believes ~~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 conveyed specific actions needed to address the Bank’s ~~current financial condition, primarily related to capital planning,~~ liquidity~~/funds~~ ~~management, policy~~sources ~~and~~are ~~planning~~adequate issues, management oversight, loan concentrations and classifications, and non-performing loans. On October 26, 2016, the Bank received notification that the Consent Order was terminated by the FDIC and the State Board and was replaced with certain regulatory requirements and restrictions, including a requirement to ~~continue~~meet toits ~~improve~~needs ~~credit~~for ~~quality and earnings, a restriction prohibiting dividend payments without prior approval from the supervisory authorities, and a requirement to maintain Tier 1 capital~~ at least ~~equal to 8% and total risk-based capital at least equal to 10%. As of September 30, 2016, we believe~~ the ~~Bank~~ isnext in12 ~~substantial compliance with the new requirements and restrictions set forth by the supervisory authorities~~months.

On April 11, 2016, the Company completed a private placement of 359,468,443 shares of common stock at $0.10 per share and 905,316 shares of a new series of convertible perpetual preferred stock, Series A (the “Series A preferred stock”), at $10.00 per share for aggregate cash proceeds of approximately $45.0 million (the “2016 private placement”). Net proceeds from the 2016 private placement, after deducting commissions and expenses, were approximately $41.5 million, of which $38.0 million was contributed to the Bank as a capital contribution to support its operations and increase its capital ratios to meet the then higher minimum capital ratios required under the terms of the recently terminated Consent Order. Net proceeds from the 2016 private placement were also used to repurchase the Company’s outstanding Series T preferred stock (as defined below), trust preferred securities, and subordinated promissory notes, as described below.-17-

OnHCSB ~~June~~FINANCIAL ~~30,~~CORPORATION ~~2016,~~AND the Company completed a public offering of 14,167,600 shares of common stock at $0.10 per share for aggregate cash proceeds of approximately $1.4 million (the “2016 follow-on offering”). The 2016 follow-on offering was conducted primarily to provide the Company’s legacy shareholders, employees and others in its community with an opportunity to invest in the Company at the same offering price of $0.10 per share that the Company offered to the investors in the 2016 private placement. The offering period ended at 5:00 p.m., Eastern Standard time, on June 30, 2016. The proceeds were used for general corporate and operational purposes.SUBSIDIARY

OnNOTES ~~July~~TO ~~7, 2016, the Company sold $4.3 million~~UNAUDITED ofCONDENSED ~~nonaccrual~~CONSOLIDATED ~~loans~~FINANCIAL ~~and $270 thousand of other real estate owned (“OREO”). The loans and OREO were recorded at fair value as of June 30, 2016.~~STATEMENTS

~~On August 23, 2016, the Company filed Articles~~NOTE of3 ~~Amendment to its Articles of Incorporation to authorize a class of 150,000,000 shares of non~~-~~voting~~ ~~common~~INVESTMENT stock. Also on August 23, 2016, the Company converted 905,316 shares of issued and outstanding Series A preferred stock into 90,531,557 shares of non-voting common stock. The 905,316 shares of Series A preferred stock converted into 90,531,557 shares of non-voting common stock represented all of the issued and outstanding shares of Series A preferred stock on such date and, as a result, all shares of the Series A preferred stock are no longer outstanding and resumed the status of authorized and unissued shares of the Company’s preferred stock.SECURITIES

OnSecurities July 31, 2010, the Company completed a private placement of subordinated promissory notes that totaled $12.1 million. The notes bore interest at a rate equal to the current Prime Rate in effect, as published by the Wall Street Journal, plus 3%; provided, that the interest rate would not be less than 8% per annum or more than 12% per annum. Beginning in October 2011, the Federal Reserve Bank of Richmond prohibited the Company from paying interest due on the subordinated promissory notes. Effective as of September 16, 2015, the Company, the Bank, and certain other defendants entered into a class action settlement agreement in potential settlement of the putative class action lawsuit initiated by three holders of the Company’s subordinated promissory notes, on behalf of themselves and as representatives of a class of similarly situated purchasers of the Company’s subordinated promissory notes, with respect to alleged wrongful conduct associated with purchases of the subordinated promissory notes, including fraud, violation of state securities statutes, and negligence. On March 2, 2016, the Court of Common Pleas available-for ~~the Fifteenth Judicial District, State of South Carolina, County of Horry entered~~-sale aconsisted ~~final order~~ of ~~approval approving~~ the ~~class action settlement agreement. Immediately~~ following the closing of the 2016 private placement on April 11, 2016, pursuant to the terms of the class action settlement agreement, the Company established a settlement fund of approximately $2.4 million, which represented 20% of the principal of subordinated promissory notes issued by the Company. The settlement fund was used to redeem the subordinated promissory notes held by class members. Also on April 11, 2016, the Company settled, pursuant to previously executed binding settlement agreements, with all subordinated promissory note holders who opted out of the class action settlement. These settlements, including the class action settlement, constituted the full satisfaction of the principal and interest owed on, and required the immediate dismissal of all pending litigation related to, the respective subordinated promissory notes. In each case, the Company and the Bank also obtained a full and complete release of all claims asserted or that could have been asserted with respect to the subordinated promissory notes. Refer to Note 8 to our Financial Statements for additional information on the subordinated promissory notes.:

-15-


(Dollars in thousands)			Gross Unrealized					Estimated
March 31, 2017	Amortized Cost		Gains		Losses			Fair Value
Government-sponsored enterprises	$	8,315	$	—	$	(72	)	$	8,243
Mortgage-backed securities		84,039		239		(2,228	)		82,050
State and political subdivisions		14,893		18		(863	)		14,048
Total	$	107,247	$	257	$	(3,163	)	$	104,341

December 31, 2016
Government-sponsored enterprises	$	8,489	$	—	$	(80	)	$	8,409
Mortgage-backed securities		86,394		202		(2,598	)		83,998
State and political subdivisions		14,905		14		(797	)		14,122
Total	$	109,788	$	216	$	(3,475	)	$	106,529

~~HCSB~~The ~~FINANCIAL~~following is ~~CORPORATION~~a ~~AND~~summary ~~SUBSIDIARY~~of maturities of securities available-for-sale as of March 31, 2017. 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.

Notes to Unaudited CONDENSED Consolidated Financial Statements

	Amortized Cost
March 31, 2017 (in thousands)	Due Within One Year		After One Through Five Years		After Five Through Ten Years		After Ten Years		Total		Market Value
Investment securities
Government-sponsored enterprises	$	—	$	210	$	2,000	$	6,105	$	8,315	$	8,243
Mortgage-backed securities		—		—		19,761		64,278		84,039		82,050
State and political subdivisions		—		—		13,279		1,614		14,893		14,048
Total	$	—	$	210	$	35,040	$	71,997	$	107,247	$	104,341

~~NOTE~~The 1following table –shows ~~ORGANIZATION~~gross unrealized losses and fair value, ~~SIGNIFICANT~~aggregated by investment category, and length of time that individual securities ~~ACCOUNTING~~have ~~POLICIES~~been ~~AND~~in ~~RECENT~~a ~~DEVELOPMENTS~~continuous -unrealized ~~continued~~loss position, at:

On March 6, 2009, as part of the Troubled Asset Relief Program (the “TARP”) 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 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. Beginning in February 2011, the Federal Reserve Bank of Richmond required the Company to defer dividend payments on the Series T preferred stock. On February 29, 2016, the Company entered into a securities purchase agreement with the U.S. Treasury, pursuant to which the Company agreed to repurchase all 12,895 shares of the Series T preferred stock for $129 thousand, plus reimbursement of attorneys’ fees and other expenses incurred by the U.S Treasury not to exceed $25 thousand. Under the terms of the securities purchase agreement, the U.S. Treasury also agreed to waive any and all unpaid dividends on the Series T preferred stock and to cancel the CPP Warrant.

	March 31, 2017
	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	$	6,137	$	(52	)	$	2,106	$	(20	)	$	8,243	$	(72	)
Mortgage-backed securities		53,208		(1,769	)		14,087		(489	)		67,295		(2,228	)
State and political subdivisions		12,831		(863	)		—		—			12,831		(863	)
Total	$	72,176	$	(2,654	)	$	16,193	$	(509	)	$	88,369	$	(3,163	)

Immediately following the closing of the 2016 private placement on April 11, 2016, pursuant to the terms of the securities purchase agreement, the Company repurchased all 12,895 shares of the Series T preferred stock from the U.S. Treasury for $129 thousand and the U.S. Treasury canceled the CPP Warrant. Refer to Note 9 to our Financial Statements for additional information on the Series T preferred stock.

	December 31, 2016
	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	$	8,161	$	(79	)	$	249	$	(1	)	$	8,410	$	(80	)
Mortgage-backed securities		56,319		(1,986	)		19,069		(612	)		75,388		(2,598	)
State and political subdivisions		12,904		(797	)		—		—			12,904		(797	)
Total	$	77,384	$	(2,862	)	$	19,318	$	(613	)	$	96,702	$	(3,475	)

On December 21, 2004, the Trust issued and sold a total of 6,000 trust preferred securities, with $1,000 liquidation amount per capital security and a maturity of December 31, 2034, to institutional buyers in a pooled trust preferred issue. 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. Beginning in February 2011, the Federal Reserve Bank of Richmond prohibited the Company from paying interest due on the trust preferred securities. The Company was permitted to defer these interest payments for up to 20 consecutive quarterly periods, or until March 15, 2016, at which point all of the deferred interest, including interest accrued on such deferred interest, would become due and payable. On February 29, 2016, the Company entered into a securities purchase agreement with Alesco Preferred Funding VI LTD (“Alesco”), pursuant to which the Company agreed to repurchase the trust preferred securities for $600 thousand, plus reimbursement of attorneys’ fees and other expenses incurred by Alesco not to exceed $25 thousand. Alesco also agreed to forgive any and all unpaid interest on the trust preferred securities. On March 16, 2016, the Company received a notice of default from The Bank of New York Mellon Trust Company, N.A., in its capacity as trustee, relating to the trust preferred securities. Immediately following the closing of the 2016 private placement on April 11, 2016, pursuant to the terms of the securities purchase agreement, the Company repurchased all of the trust preferred securities from Alesco for $600 thousand plus $17 thousand in direct legal expenses. Refer to Note 7 to our Financial Statements for additional information on the trust preferred securities.-18-

~~After~~HCSB ~~taking~~FINANCIAL ~~into~~CORPORATION ~~account~~AND the discounted repurchase or redemption prices for the Series T preferred stock, the trust preferred securities and the subordinated promissory notes, each as described above, as well as the forgiveness of accrued and deferred interest, legal fees, amounts paid in settlement of litigation, income taxes, and other expenses incurred in connection with these transactions, the Company recognized a gain, net of income taxes, of approximately $13.8 million on the repurchase of the Series T preferred stock, which is included in capital surplus and an aggregate gain of $19.1 million from the extinguishment of debt which is included in noninterest income. See the respective notes referred to above for additional information.SUBSIDIARY

~~-16-~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~HCSB~~NOTE ~~FINANCIAL~~3 ~~CORPORATION~~- ~~AND~~INVESTMENT ~~SUBSIDIARY~~SECURITIES - continued

~~Notes~~Management evaluates its investment portfolio periodically to identify any impairment that is other than temporary. At March 31, 2017, the Company had two government-sponsored enterprise securities and 16 mortgage-backed securities that have been in an unrealized loss position for more than twelve months. At December 31, 2016, the Company had one government-sponsored enterprise security and twenty mortgage-backed securities that had 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 ~~Unaudited~~sell ~~CONDENSED~~these ~~Consolidated~~securities ~~Financial~~and ~~Statements~~it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.

~~NOTE~~At 2March –31, 2017 ~~REGULATORY~~and ~~MATTERS~~December ~~AND~~31, 2016, investment securities with a book value of $42.5 million and $43.8 million, respectively, and a market ~~OTHER~~value ~~CONSIDERATIONS~~of $41.5 million and $42.6 million, respectively, were pledged to secure deposits.

~~Removal~~Proceeds from sales of ~~Consent~~available-for-sale ~~Order~~securities ~~with~~were $4.2 million for the ~~Federal~~three-month period ended March 31, 2016. There were no sales ~~Deposit~~during ~~Insurance~~the ~~Corporation~~three-month period ended March 31, 2017. Gross realized gains and ~~South~~losses ~~Carolina~~on ~~Board~~sales of ~~Financial~~available-for-sale ~~Institutions~~securities for the periods ended were as follows:

As noted above, on February 10, 2011, the Bank entered into the Consent Order with the FDIC and the State Board. The Consent Order conveyed 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. On October 26, 2016 the Consent Order was terminated by the FDIC and the State Board and was replaced with certain regulatory requirements and restrictions, including a requirement to continue to improve credit quality and earnings, a restriction prohibiting dividend payments without prior approval from the supervisory authorities, and a requirement to maintain Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%. We believe that we are currently in substantial compliance with the new regulatory requirements and restrictions.


(Dollars in thousands)	Three months ended March 31,
	2017		2016
Gross realized gains	$	—	$	17
Gross realized losses		—		—
Net gain	$	—	$	17

~~Written~~NOTE 4 ~~Agreement~~– LOAN PORTFOLIO

OnLoans ~~May 9, 2011, the Company entered into a~~consisted ~~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.~~following:

The Written Agreement contains provisions similar to those in the recently terminated 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:

(Dollars in thousands)	March 31,		December 31,
	2017		2016
Residential	$	73,908	$	71,444
Commercial Real Estate		112,393		104,875
Commercial		37,041		33,800
Consumer		5,691		4,993
Total gross loans	$	229,033	$	215,112

·Provision ~~declaring~~and orAllowance ~~paying~~for Loan ~~any~~Losses ~~dividends,~~

·An ~~directly~~allowance for orloan ~~indirectly~~losses ~~taking~~is ~~dividends~~maintained orat ~~any~~a ~~other~~level ~~form~~deemed ofappropriate ~~payment~~by ~~representing~~management ato ~~reduction~~adequately provide for known and inherent losses in ~~capital~~the ~~from~~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 ~~Bank~~allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

·In ~~making~~evaluating the ~~any~~adequacy ~~distributions~~ of ~~interest~~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. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or ~~other~~liquidation ~~sums~~value and discounted cash flows. Reserves are maintained for each loan in which the principal balance of the loan exceeds the net present value of cash flows. In addition to the specific allowance for individually reviewed loans, a general allowance for potential loan losses is established based on ~~subordinated~~management’s ~~debentures~~review orof ~~trust~~the ~~preferred~~composition ~~securities~~of the loan portfolio with the purpose of identifying any concentrations of risk, and an analysis of historical loan charge-offs and recoveries.

~~· directly or indirectly, incurring, increasing or guarantying any debt, and~~-19-

·HCSB ~~directly~~FINANCIAL orCORPORATION ~~indirectly,~~AND ~~purchasing or redeeming any shares of its stock.~~SUBSIDIARY

~~-17-~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~HCSB~~NOTE ~~FINANCIAL~~4 - ~~CORPORATION~~LOAN ~~AND~~PORTFOLIO ~~SUBSIDIARY~~- continued

~~Notes~~The final tocomponent ~~Unaudited~~of ~~CONDENSED~~the ~~Consolidated~~allowance ~~Financial~~for ~~Statements~~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.

~~NOTE~~During 22016, –we ~~REGULATORY~~introduced ~~MATTERS~~certain ~~AND~~enhancements ~~OTHER~~to ~~CONSIDERATIONS~~our allowance for loan loss model and methodology that, -in ~~continued~~management’s opinion, provide a better estimate and an allowance for loan loss which better reflects the inherent loss in the loan portfolio. The most significant enhancement was the implementation of a new third party software for the calculation of the allowance for loan losses. While this change did not result in an overall change in methodology, it did allow management to further analyze the portfolio. Additionally, as we regularly review the look back period being used for the calculation of historical losses. As economic conditions have improved and the overall risk profile of the loan portfolio has changed, it was determined that the historic look back period should be increased to 12 quarters from six quarters to present an estimated risk and loss consistent with expectations. This change in the look back period resulted in an increase in reserves of approximately $570,000 at December 31, 2016.

The ~~Company also agreed to comply with certain~~ ~~notice~~following ~~provisions~~table ~~set~~details ~~forth in~~ the ~~Federal~~activity ~~Deposit~~within ~~Insurance~~our ~~Act~~allowance ~~and~~for ~~regulations~~loan oflosses ~~the~~as ~~Board~~ of ~~Governors~~and offor the ~~Federal~~three-month ~~Reserve System~~periods ~~(the~~ended ~~“Federal~~March 31, ~~Reserve”)~~2017 inand ~~appointing~~2016 ~~any~~and ~~new~~as ~~director or senior executive officer, or changing the responsibilities~~ of ~~any~~and ~~senior~~for ~~executive officer so that~~ the ~~officer~~year ~~would~~ended ~~assume~~December a31, ~~different~~2016, ~~senior~~by ~~executive~~portfolio ~~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.~~segment:

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

March 31, 2017
(Dollars in thousands)
				Commercial
	Commercial			Real Estate		Consumer			Residential			Total

Allowance for loan losses:
Beginning balance	$	400		$	2,291	$	103		$	956		$	3,750
Charge-offs		(36	)		—		(51	)		(12	)		(99	)
Recoveries		6			12		19			29			66
Provision		66			33		22			(121	)		—
Ending balance	$	436		$	2,336	$	93		$	852		$	3,717

Ending balances:
Individually evaluated for impairment	$	21		$	236	$	6		$	329		$	592
Collectively evaluated for impairment	$	415		$	2,100	$	87		$	523		$	3,125

Loans receivable:

Ending balance, total	$	37,041		$	112,393	$	5,691		$	73,908		$	229,033

Ending balances:
Individually evaluated for impairment	$	1,656		$	10,978	$	88		$	7,171		$	19,893
Collectively evaluated for impairment	$	35,385		$	101,415	$	5,603		$	66,737		$	209,140

On August 18, 2014, the Federal Reserve Bank of Richmond informed the Company that it was required to repay two notes in the amount of $1.8 million to the Bank as soon as the Company has the funds available to do so for repayment of loans deemed made from the Bank to the Company. The Bank was a general unsecured creditor of the Company with respect to these loans. The Company made these payments to the Bank shortly following the closing of the private placement on April 11, 2016.-20-

~~Other~~HCSB ~~Considerations~~FINANCIAL CORPORATION AND SUBSIDIARY

~~The~~NOTES ~~effects~~TO ~~of the Great Recession continue~~UNAUDITED toCONDENSED beCONSOLIDATED ~~felt~~FINANCIAL 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, experienced a decline in the value of the collateral securing its loan portfolio as well as a 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. In addition to increasing write-downs on OREO to expedite sales during the first nine months of 2016, the Bank sold $4.3 million of nonperforming loans and $270 thousand of OREO which had been reduced to fair value prior to the sale. The Bank’s nonperforming assets at September 30, 2016 were $5.0 million compared to $22.4 million at December 31, 2015. As a percentage of total assets, nonperforming assets were 1.30% and 6.19% as of September 30, 2016 and December 31, 2015, respectively. As a percentage of total loans, nonperforming loans were 0.45% and 4.18% as of September 30, 2016 and December 31, 2015, respectively.STATEMENTS

~~The~~NOTE ~~Company and the Bank operate in a highly regulated industry and must plan for the liquidity needs of each~~4 ~~entity~~- ~~separately.~~LOAN APORTFOLIO ~~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 (which was terminated on October 26, 2016), management has prepared forecasts of these sources of funds and the Bank’s projected uses of funds during 2016 in an effort to ensure that the sources available are sufficient to meet the Bank’s projected liquidity needs for this period.continued

Prior to the most recent economic downturn, the Company, if needed, would have relied on dividends from the Bank as its primary source of liquidity. The Company is a legal entity separate and distinct from the Bank. However, various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, regulatory restrictions remaining following the termination of the Consent Order further limit the Bank’s ability to pay dividends to the Company to satisfy its funding needs.

March 31, 2016
(Dollars in thousands)
				Commercial
	Commercial			Real Estate			Consumer			Residential			Total

Allowance for loan losses:
Beginning balance	$	952		$	2,543		$	80		$	1,026		$	4,601
Charge-offs		(18	)		(2,322	)		(6	)		(33	)		(2,379	)
Recoveries		34			14			7			18			73
Provision		(439	)		1,750			29			84			1,424
Ending balance	$	529		$	1,985		$	110		$	1,095		$	3,719

Ending balances:
Individually evaluated for impairment	$	95		$	518		$	10		$	617		$	1,240
Collectively evaluated for impairment	$	434		$	1,467		$	100		$	478		$	2,479

Loans receivable:

Ending balance, total	$	29,842		$	92,461		$	4,729		$	72,603		$	199,635

Ending balances:
Individually evaluated for impairment	$	2,466		$	19,121		$	118		$	9,248		$	30,953
Collectively evaluated for impairment	$	27,376		$	73,340		$	4,611		$	63,355		$	168,682

~~Management believes the Bank’s liquidity sources are adequate to meet its needs for at least the next 12 months.~~-21-

~~-18-~~HCSB FINANCIAL CORPORATION AND SUBSIDIARY

~~HCSB~~NOTES ~~FINANCIAL~~TO ~~CORPORATION~~UNAUDITED CONDENSED ~~AND~~CONSOLIDATED ~~SUBSIDIARY~~FINANCIAL STATEMENTS

~~Notes~~NOTE 4 to- ~~Unaudited~~LOAN ~~Condensed~~PORTFOLIO ~~Consolidated~~- ~~Financial Statements~~continued

~~NOTE~~December 31, ~~3 - INVESTMENT SECURITIES~~2016

~~Securities available-for-sale consisted~~(Dollars ofin ~~the following:~~thousands)

	Amortized			Gross Unrealized						Estimated
				Commercial
(Dollars in thousands)	Cost			Gains			Losses			Fair Value
	Commercial			Real Estate			Consumer			Residential			Total
September 30, 2016
Allowance for loan losses:
Government-sponsored enterprises	$	8,870		$	71		$	(59	)	$	8,882
Beginning balance	$	952		$	2,543		$	80		$	1,026		$	4,601
Mortgage-backed securities		88,518			236			(987	)		87,767
Charge-offs		(1,132	)		(4,595	)		(72	)		(809	)		(6,608	)
State and political subdivisions		14,916			85			(69	)		14,932
Recoveries		1,382			202			79			171			1,834
Total	$	112,304		$	392		$	(1,115	)	$	111,581
Provision		(802	)		4,141			16			568			3,923
December 31, 2015
Ending balance	$	400		$	2,291		$	103		$	956		$	3,750
Government-sponsored enterprises	$	36,720		$	—		$	(688	)	$	36,032
Ending balances:
Mortgage-backed securities		53,368			54			(977	)		52,445
Individually evaluated for impairment	$	25		$	291		$	7		$	320		$	643
State and political subdivisions		1,221			5			(2	)		1,224
Collectively evaluated for impairment	$	375		$	2,000		$	96		$	636		$	3,107
Total	$	91,309		$	59		$	(1,667	)	$	89,701
Loans receivable:
Ending balance, total	$	33,800		$	104,875		$	4,993		$	71,444		$	215,112
Ending balances:
Individually evaluated for impairment	$	1,667		$	12,616		$	84		$	7,254		$	21,621
Collectively evaluated for impairment	$	32,133		$	92,259		$	4,909		$	64,190		$	193,491

~~The~~Loan ~~following is a summary of maturities of~~Performance ~~securities available-for-sale as of September 30, 2016. The amortized cost~~ and ~~estimated~~Asset 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.Quality

September 30, 2016 (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
Government-sponsored enterprises	$	—	$	285	$	2,000	$	6,585	$	8,870	$	8,882
Mortgage backed securities		—		—		19,846		68,672		88,518		87,767
State and political subdivisions		—		—		9,634		5,282		14,916		14,932
Total	$	—	$	285	$	31,480	$	80,539	$	112,304	$	111,581

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 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:-22-

	September 30, 2016
	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	$	6,527	$	(58	)	$	284	$	(1	)	$	6,811	$	(59	)
Mortgage-backed securities		38,331		(348	)		19,500		(639	)		57,831		(987	)
State and political subdivisions		11,042		(69	)		—		—			11,042		(69	)
Total	$	55,900	$	(475	)	$	19,784	$	(640	)	$	75,684	$	(1,115	)

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

	December 31, 2015
	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	$	31,489	$	(558	)	$	4,543	$	(130	)	$	36,032	$	(688	)
Mortgage-backed securities		28,024		(354	)		17,008		(623	)		45,032		(977	)
State and political subdivisions		617		(2	)		—		—			617		(2	)
Total	$	60,130	$	(914	)	$	21,551	$	(753	)	$	81,681	$	(1,667	)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 -19 LOAN PORTFOLIO - continued

~~HCSB~~The ~~FINANCIAL~~following chart ~~CORPORATION~~summarizes ~~AND~~delinquencies ~~SUBSIDIARY~~and nonaccruals, by portfolio class, as of March 31, 2017 and December 31, 2016.

~~Notes to~~March ~~Unaudited Condensed Consolidated Financial Statements~~31, 2017

~~NOTE~~(Dollars in ~~3 - INVESTMENT SECURITIES - continued~~thousands)

Management evaluates its investment portfolio periodically to identify any impairment that is other than temporary. At September 30, 2016, the Company had one government-sponsored enterprise security and 20 mortgage-backed securities 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.

	30-59 Days		60-89 Days		90+ Days		Total				Total Loans		Non-
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		accrual

Commercial	$	83	$	46	$	16	$	145	$	36,896	$	37,041	$	16
Commercial real estate:
Construction		23		—		—		23		26,174		26,197		20
Other		50		—		1,219		1,269		84,927		86,196		1,407
Real Estate:
Residential		150		—		251		401		73,507		73,908		464
Consumer:
Other		24		3		—		27		5,124		5,151		8
Revolving credit		—		3		—		3		537		540		—
Total	$	330	$	52	$	1,486	$	1,868	$	227,165	$	229,033	$	1,915

At September 30, 2016 and December 31, 2015, investment securities with a book value of $45.0 million and $36.7 million, respectively, and a market value of $44.7 million and $36.1 million, respectively, were pledged to secure deposits.

December 31, 2016
(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	$	82	$	—	$	16	$	98	$	33,702	$	33,800	$	32
Commercial real estate:
Construction		96		—		—		96		22,885		22,981		21
Other		782		—		1,219		2,001		79,893		81,894		1,413
Real Estate:
Residential		86		133		411		630		70,814		71,444		559
Consumer:
Other		34		17		—		51		4,403		4,454		—
Revolving credit		2		—		—		2		537		539		—
Total	$	1,082	$	150	$	1,646	$	2,878	$	212,234	$	215,112	$	2,025

~~Proceeds~~There ~~from~~were ~~sales~~no loans ofoutstanding ~~available-for-sale~~90 ~~securities were~~days ~~$25.1~~or ~~million~~more and ~~$23.3~~still ~~million~~accruing ~~for~~interest ~~the~~at ~~nine-month~~March ~~periods ended September 30~~31, ~~2016~~2017 ~~and~~or ~~2015,~~December ~~respectively and $16.9 million and $5.4 million for the three-month periods ended September 30~~31, 2016 ~~and 2015, 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 September 30,					Nine months ended September 30,
	2016			2015		2016			2015
Gross realized gains	$	180		$	20	$	217		$	232
Gross realized losses		(27	)		—		(149	)		—
Net gain	$	153		$	20	$	68		$	232

-23-

~~NOTE~~HCSB 4FINANCIAL –CORPORATION ~~LOAN~~AND ~~PORTFOLIO~~SUBSIDIARY

~~Loans~~NOTES ~~consisted~~TO ofUNAUDITED CONDENSED ~~the~~CONSOLIDATED ~~following:~~FINANCIAL STATEMENTS

	September 30,		December 31,
(Dollars in thousands)	2016		2015
Residential	$	72,417	$	75,081
Commercial Real Estate		97,573		101,291
Commercial		34,304		27,881
Consumer		4,882		5,114
Total gross loans	$	209,176	$	209,367

NOTE 4 - LOAN PORTFOLIO - continued

AtThe ~~June~~following ~~30,~~table ~~2016,~~summarizes ~~$4.3 million of loans receivable were transferred to loans held for sale at fair value which~~management’s ~~also~~internal ~~represented~~credit ~~the~~risk ~~contract value at that time~~grades, ~~and~~by ~~the~~portfolio ~~loans were subsequently sold on July 7~~class, ~~2016.~~as ~~The charge-offs related to these loans accounted for a significant portion~~ of ~~total~~March ~~loan~~31, ~~charge-offs~~2017 ofand ~~$6.5~~December ~~million~~31, ~~in the first nine months of~~ 2016.

~~-20-~~March 31, 2017

~~HCSB~~(Dollars in ~~FINANCIAL CORPORATION AND SUBSIDIARY~~thousands)

Notes to Unaudited Condensed Consolidated Financial Statements

	Commercial		Commercial Real Estate		Consumer		Residential		Total

Grade 1 - Minimal	$	1,755	$	—	$	400	$	—	$	2,155
Grade 2 - Modest		813		116		150		661		1,740
Grade 3 -Average		2,131		18,861		134		7,015		28,141
Grade 4 - Satisfactory		23,146		62,213		4,503		46,851		136,713
Grade 5 - Watch		7,081		22,560		310		12,916		42,867
Grade 6 - Special Mention		1,543		1,413		107		1,651		4,714
Grade 7- Substandard		572		7,230		87		4,814		12,703
Grade 8 - Doubtful		—		—		—		—		—
Grade 9- Loss		—		—		—		—		—
Total loans receivable	$	37,041	$	112,393	$	5,691	$	73,908	$	229,033

NOTE 4 - LOAN PORTFOLIO – continued

December 31, 2016
(Dollars in thousands)
			Commercial
	Commercial		Real Estate		Consumer		Residential		Total

Grade 1 - Minimal	$	1,781	$	—	$	383	$	—	$	2,164
Grade 2 - Modest		934		122		112		573		1,741
Grade 3 - Average		2,226		13,877		84		6,588		22,775
Grade 4 - Satisfactory		19,973		58,149		3,971		45,208		127,301
Grade 5 - Watch		7,125		21,807		234		11,531		40,697
Grade 6 - Special Mention		1,484		900		140		1,517		4,041
Grade 7 - Substandard		277		10,020		69		6,027		16,393
Grade 8 - Doubtful		—		—		—		—		—
Grade 9 - Loss		—		—		—		—		—
Total loans receivable	$	33,800	$	104,875	$	4,993	$	71,444	$	215,112

~~Provision and Allowance for Loan Losses~~-24-

AnHCSB ~~allowance~~FINANCIAL ~~for~~CORPORATION ~~loan~~AND 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.SUBSIDIARY

InNOTES ~~evaluating~~TO ~~the adequacy of the Company’s~~UNAUDITED ~~loan~~CONDENSED ~~loss~~CONSOLIDATED ~~reserves,~~FINANCIAL 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. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Reserves are maintained for each loan in which the principal balance of the loan exceeds the net present value of cash flows. 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.STATEMENTS

~~Based~~NOTE ~~on management observation, judgment,~~4 ~~and~~- ~~experience,~~LOAN ~~environmental~~PORTFOLIO ~~factors~~- used in the allowance for loan loss model were reassessed during the second quarter of 2016 for all loan classes. Management also determined that a look back period of twelve quarters would be more appropriate in light of recent changes to the economy. The allowance was previously based on a six quarter look back period. The impact of the change to the model resulted in a $2.1 million increase to the loan loss reserves as of the time of the change.continued

~~-21-~~Loans graded one through four are considered “pass” credits. As of March 31, 2017, $168.7 million, or 73.7% 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.

~~HCSB~~Loans ~~FINANCIAL~~with ~~CORPORATION~~a credit ~~AND~~grade ~~SUBSIDIARY~~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 March 31, 2017, loans with a credit grade of “watch” and “special mention” totaled $47.6 million. Watch list loans are considered potential problem loans and are monitored as they may develop into problem loans in the future.

~~Notes~~Loans graded to“substandard” ~~Unaudited~~or ~~Condensed~~greater ~~Consolidated~~are ~~Financial~~considered ~~Statements~~classified credits. At March 31, 2017 classified loans totaled $12.7 million, with $12.0 million being collateralized by real estate. Classified credits are evaluated for impairment on a quarterly basis. Loans showing improvement may be upgraded to “watch”.

~~NOTE~~TDRs 4at -March 31, ~~LOAN~~2017 ~~PORTFOLIO~~were -$17.9 ~~continued~~million. TDRs totaling $6.8 million were graded as classified loans, of which $5.7 million were considered to be performing at March 31, 2017.

The ~~following~~Company identifies ~~table~~impaired ~~details~~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 ~~activity~~scheduled ~~within~~payments of principal or interest when ~~our~~due, ~~allowance~~according ~~for~~to the contractual terms of the loan ~~losses~~agreement. asFactors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and ~~for~~interest payments when due. Impairment is measured on a loan-by-loan basis by calculating either the ~~nine~~present ~~months~~value ~~ended~~of ~~September~~expected 30future cash flows discounted at the loan’s effective interest rate, ~~2016~~the ~~and~~loan’s ~~2015~~obtainable ~~and~~market asprice, or the fair value of ~~and~~the ~~for~~collateral, less selling costs, if the ~~year~~loan ~~ended~~is collateral dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including ~~December~~accrued 31interest, ~~2015~~net of deferred loan fees or costs), an impairment is recognized by ~~portfolio~~establishing ~~segment:~~or adjusting an existing allocation of the allowance, or by recording a partial charge-off of the loan to its fair value. When an impaired loan is ultimately charged-off, the charge-off is taken against the specific reserve, if any.

September 30, 2016
(Dollars in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	952		$	2,543		$	80		$	1,026		$	4,601
Charge-offs		(1,132	)		(4,591	)		(45	)		(778	)		(6,546	)
Recoveries		1,372			188			13			64			1,637
Provision		(492	)		4,445			84			947			4,984
Ending balance	$	700		$	2,585		$	132		$	1,259		$	4,676
Ending balances:
Individually evaluated for impairment	$	41		$	367		$	7		$	372		$	787
Collectively evaluated for impairment	$	659		$	2,218		$	125		$	887		$	3,889
Loans receivable:
Ending balance, total	$	34,304		$	97,573		$	4,882		$	72,417		$	209,176
Ending balances:
Individually evaluated for impairment	$	1,513		$	13,905		$	91		$	7,815		$	23,324
Collectively evaluated for impairment	$	32,791		$	83,668		$	4,791		$	64,602		$	185,852

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 “special mention”, “substandard”, “doubtful”, and “loss.” Impaired loans are valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral, less any selling costs, or based on the net present value of cash flows. For loans valued based on collateral, market values were obtained using independent appraisals, updated every 18 to 24 months, in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. At March 31, 2017, the recorded investment in impaired loans was $19.9 million, compared to $21.6 million at December 31, 2016.

September 30, 2015
(Dollars in thousands)
				Commercial
	Commercial			Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	597		$	3,591		$	185		$	1,414		$	5,787
Charge-offs		(458	)		(948	)		(57	)		(410	)		(1,873	)
Recoveries		189			713			27			178			1,107
Provision		547			(247	)		(47	)		(253	)		—
Ending balance	$	875		$	3,109		$	108		$	929		$	5,021
Ending balances:
Individually evaluated for impairment	$	145		$	742		$	11		$	560		$	1,458
Collectively evaluated for impairment	$	730		$	2,367		$	97		$	369		$	3,563
Loans receivable:
Ending balance, total	$	34,070		$	102,834		$	5,264		$	77,814		$	219,982
Ending balances:
Individually evaluated for impairment	$	2,710		$	21,453		$	138		$	10,103		$	34,404
Collectively evaluated for impairment	$	31,360		$	81,381		$	5,126		$	67,711		$	185,578

The following chart details our impaired loans by category as of March 31, 2017 and December 31, 2016, respectively:

-2225-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

~~Notes to~~NOTES ~~Unaudited~~TO ~~Condensed~~UNAUDITED CONDENSED ~~Consolidated~~CONSOLIDATED ~~Financial~~FINANCIAL ~~Statements~~STATEMENTS

NOTE 4 - LOAN PORTFOLIO – - continued

December 31, 2015
March 31, 2017
(Dollars in thousands)				Unpaid						Average			Interest
				Commercial
	Recorded			Principal			Related			Recorded			Income
	Commercial			Real Estate			Consumer			Residential			Total
	Investment			Balance			Allowance			Investment			Recognized
Allowance for loan losses:
With no related allowance recorded:
Beginning balance	$	597		$	3,591		$	185		$	1,414		$	5,787
Commercial	$	854		$	910		$	—		$	867		$	15
Charge-offs		(539	)		(1,212	)		(81	)		(501	)		(2,333	)
Commercial real estate		8,107			11,473			—			9,342			106
Recoveries		200			727			37			183			1,147
Residential		4,235			4,428			—			4,987			59
Provision		694			(563	)		(61	)		(70	)		—
Consumer		45			45			—			46			1
Ending balance	$	952		$	2,543		$	80		$	1,026		$	4,601
Total:	$	13,241		$	16,856		$	—		$	15,242		$	181
Ending balances:
With an allowance recorded:
Individually evaluated for impairment	$	137		$	396		$	10		$	560		$	1,103
Commercial		802			802			21			810			8
Collectively evaluated for impairment	$	815		$	2,147		$	70		$	466		$	3,498
Commercial real estate		2,871			2,871			236			2,883			40
Loans receivable:
Residential		2,936			2,936			329			2,942			30
Ending balance, total	$	27,881		$	101,291		$	5,114		$	75,081		$	209,367
Consumer		43			43			6			43			1
Ending balances:
Total:	$	6,652		$	6,652		$	592		$	6,678		$	79
Individually evaluated for impairment	$	2,727		$	21,582		$	134		$	9,418		$	33,861
Total:
Collectively evaluated for impairment	$	25,154		$	79,709		$	4,980		$	65,663		$	175,506
Commercial		1,656			1,712			21			1,677			23
Commercial real estate		10,978			14,344			236			12,225			146
Residential		7,171			7,364			329			7,929			89
Consumer		88			88			6			89			2
Total:	$	19,893		$	23,508		$	592		$	21,920		$	260

Loan Performance and Asset Quality

December 31, 2016
(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	720	$	720	$	—	$	732	$	43
Commercial real estate		9,194		12,597		—		9,332		574
Residential		4,365		4,553		—		4,390		248
Consumer		33		33		—		34		3

Total:	$	14,312	$	17,903	$	—	$	14,488	$	868

With an allowance recorded:
Commercial		947		947		25		956		37
Commercial real estate		3,422		3,422		291		3,433		178
Residential		2,889		2,889		320		2,895		120
Consumer		51		51		7		52		2

Total:	$	7,309	$	7,309	$	643	$	7,336	$	337

Total:
Commercial		1,667		1,667		25		1,688		80
Commercial real estate		12,616		16,019		291		12,765		752
Residential		7,254		7,442		320		7,285		368
Consumer		84		84		7		86		5
Total:	$	21,621	$	25,212	$	643	$	21,824	$	1,205

~~The~~HCSB ~~following~~FINANCIAL ~~chart~~CORPORATION ~~summarizes~~AND ~~delinquencies and nonaccruals, by portfolio class, as of September 30, 2016 and December 31, 2015.~~SUBSIDIARY

September 30, 2016
(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	$	133	$	1	$	—	$	134	$	34,170	$	34,304	$	18
Commercial real estate:
Construction		34		—		12		46		21,089		21,135		12
Other		—		—		326		326		76,112		76,438		524
Real Estate:
Residential		366		100		310		776		71,641		72,417		376
Consumer:
Other		2		10		—		12		4,319		4,331		1
Revolving credit		—		1		—		1		550		551		—
Total	$	535	$	112	$	648	$	1,295	$	207,881	$	209,176	$	931

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 -23 LOAN PORTFOLIO - continued

~~HCSB~~TDRs ~~FINANCIAL~~are ~~CORPORATION~~loans which ~~AND~~have ~~SUBSIDIARY~~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.

~~Notes~~With respect to ~~Unaudited~~restructured ~~Condensed~~loans, ~~Consolidated~~we ~~Financial~~grant ~~Statements~~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.

~~NOTE~~Success 4in -restructuring loans ~~LOAN~~has ~~PORTFOLIO~~been -mixed ~~continued~~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.

December 31, 2015
(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	$	321	$	110	$	1	$	432	$	27,449	$	27,881	$	139
Commercial real estate:
Construction		25		—		3,186		3,211		27,321		30,532		3,384
Other		973		—		3,046		4,019		66,740		70,759		3,895
Real Estate:
Residential		2,887		142		948		3,977		71,104		75,081		1,314
Consumer:
Other		108		18		10		136		4,395		4,531		10
Revolving credit		4		—		—		4		579		583		—
Total	$	4,318	$	270	$	7,191	$	11,779	$	197,588	$	209,367	$	8,742

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.

~~There~~We ~~were~~will nocontinue to ~~loans~~closely ~~outstanding~~monitor 90these ~~days~~loans ~~or more~~ and ~~still~~will cease accruing interest aton ~~September~~them 30if management believes that the borrowers may not continue performing based on the restructured note terms. If, ~~2016~~after orpreviously ~~December~~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. In addition, there are times when a loan previously considered a TDR was restructured under a new agreement that does not qualify as a TDR. This includes restructurings whereby the customer is no longer in financial difficulty and the restructured terms offer no concessions from the original loan terms. During the quarter ended March 31, ~~2015~~2017, there were $1.5 million in TDRs that were restructured into new agreements that no longer qualified as TDRs. We believe that all of our modified loans meet the definition of a TDR.

-2427-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to ~~Unaudited~~unaudited Condensed Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO –- continued

The following ~~table~~is ~~summarizes~~a ~~management’s internal~~summary ~~credit risk grades, by portfolio class, as~~ of ~~September~~information pertaining ~~30,~~to ~~2016~~our ~~and December 31, 2015.~~TDRs:

September 30, 2016
	March 31,		December 31,
(Dollars in thousands)	2017		2016
			Commercial
Nonperforming TDRs	$	1,179	$	1,269
	Commercial		Real Estate		Consumer		Residential		Total
Performing TDRs:
Grade 1 - Minimal	$	2,158	$	—	$	421	$	85	$	2,664
Commercial		1,562		1,635
Grade 2 – Modest		691		129		52		671		1,543
Commercial real estate		8,860		10,554
Grade 3 – Average		2,779		10,673		90		6,496		20,038
Residential		6,257		6,133
Grade 4 – Satisfactory		16,534		56,087		3,843		46,275		122,739
Consumer		79		84
Grade 5 – Watch		11,308		18,633		280		10,675		40,896
Total performing TDRs		16,758		18,406
Grade 6 – Special Mention		466		702		119		1,309		2,596
Total TDRs	$	17,937	$	19,675
Grade 7 – Substandard		368		11,349		77		6,906		18,700
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	34,304	$	97,573	$	4,882	$	72,417	$	209,176

December 31, 2015
(Dollars in thousands)
			Commercial
	Commercial		Real Estate		Consumer		Residential		Total
Grade 1 - Minimal	$	975	$	—	$	434	$	—	$	1,409
Grade 2 – Modest		561		1,024		37		277		1,899
Grade 3 – Average		4,934		5,620		218		4,716		15,488
Grade 4 – Satisfactory		14,693		58,549		4,031		53,187		130,460
Grade 5 – Watch		2,445		9,654		152		2,988		15,239
Grade 6 – Special Mention		992		6,321		98		3,544		10,955
Grade 7 – Substandard		3,281		20,123		144		10,369		33,917
Grade 8 – Doubtful		—		—		—		—		—
Grade 9 – Loss		—		—		—		—		—
Total loans receivable	$	27,881	$	101,291	$	5,114	$	75,081	$	209,367

The following tables summarize how loans that were considered TDRs were modified during the periods indicated:

~~-25-~~For the Three Months ended March 31, 2017

~~HCSB~~(Dollars ~~FINANCIAL~~in ~~CORPORATION AND SUBSIDIARY~~thousands)

Notes to Unaudited Condensed Consolidated Financial Statements

	TDRs identified during the period						TDRs identified in the last twelve months that subsequently defaulted⁽¹⁾
	Number of contracts		Pre- modification outstanding recorded investment		Post modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post modification outstanding recorded investment

Commercial		—	$	—	$	—		1	$	30	$	30
Residential		4		994		970		—		—		—
Total		4	$	994	$	970		1	$	30	$	30

~~NOTE~~(1) 4Loans -past due ~~LOAN~~90 ~~PORTFOLIO~~days -or ~~continued~~more are considered to be in default.

~~Loans graded one through four are considered~~During ~~“pass”~~the ~~credits.~~quarter Asended ofMarch ~~September 30~~31, ~~2016~~2017, ~~$147.0~~four ~~million,~~loans orwere ~~70.3%~~modified ofthat ~~the~~were ~~loan~~considered ~~portfolio,~~to ~~had~~be ~~a credit grade of “minimal,” “modest,” “average” or “satisfactory~~TDRs.” ~~For~~Term ~~loans~~concessions towere ~~qualify~~granted for ~~these grades, they must be~~ ~~performing~~all ~~relatively~~four ~~close~~loans toand ~~expectations,~~payment ~~with~~deferrals nowere ~~significant~~also ~~departures~~granted ~~from~~for ~~the~~one ~~intended source and timing~~ of ~~repayment~~the loans.

~~Loans~~For 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 when there is an initial concern about the ~~financial~~Three ~~health~~Months ofended ~~a borrower.~~ March 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 September 3031, 2016, loans with a credit grade of “watch” and “special mention” totaled $43.5 million. Watch list loans are considered potential problem loans and are monitored as they may develop into problem loans in the future.

~~Loans~~(Dollars graded “substandard” or greater are considered classified credits. At September 30, 2016, classified loans totaled $18.7 million, with $18.3 million being collateralized by real estate. This includes $11.7 million in ~~troubled debt restructurings (“TDRs”~~thousands), of which $11.6 million were performing as expected under the new terms and $109 thousand were considered to be nonperforming. Classified credits are evaluated for impairment on a quarterly basis. Loans showing improvement may be upgraded to “watch”.

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.

	TDRs identified during the period						TDRs identified in the last twelve months that subsequently defaulted⁽¹⁾
	Number of contracts		Pre- modification outstanding recorded investment		Post modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post modification outstanding recorded investment

Commercial		2	$	137	$	137		1	$	106	$	25
Residential		2		135		135		3		413		373
Total		4	$	272	$	272		4	$	519	$	398

~~Large~~(1) ~~groups~~Loans ~~of smaller balance homogeneous~~past ~~loans~~due ~~are~~90 ~~collectively~~days ~~evaluated~~or ~~for~~more ~~impairment. Impaired consumer and residential loans~~ are ~~identified~~considered ~~for impairment disclosures, however, it is policy~~ to ~~individually~~be ~~evaluate~~in 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 greaterdefault.

~~Impaired~~During ~~loans are valued on a nonrecurring basis at~~ the ~~lower of cost or market value of the underlying collateral or based on the net present value of cash flows. For loans~~quarter ~~valued~~ended ~~based~~March on31, ~~collateral~~2016, ~~market~~four ~~values~~loans were ~~obtained~~modified ~~using~~that ~~independent~~were ~~appraisals,~~considered ~~updated every 18~~ to 24be ~~months,~~TDRs. inTerm ~~accordance with~~concessions ~~our~~were ~~reappraisal~~granted ~~policy,~~for orall ~~other~~four ~~market~~loans and ~~data~~payment ~~such~~deferrals aswere ~~recent~~also ~~offers~~granted tofor ~~the~~one ~~borrower.~~of ~~At September 30, 2016,~~ the ~~recorded investment in impaired~~ loans ~~was $23~~.~~3 million, compared to $33.9 million at December 31, 2015.~~

-2628-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to ~~UNAUDITED~~unaudited ~~Condensed~~CONDENSED Consolidated Financial Statements

NOTE 4 - LOAN PORTFOLIO - continued

~~The~~Portions ~~following~~of the ~~chart~~allowance ~~details~~for ~~our~~loan ~~impaired~~losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan ~~which~~losses ~~includes~~is ~~TDRs~~available ~~totaling~~for ~~$20~~any loan that, in management’s judgment, should be charged-off.9 ~~million~~While management utilizes the best judgment and ~~$29.1~~information ~~million~~available to it, bythe ~~category~~ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, asincluding the performance of ~~September~~our 30loan portfolio, ~~2016~~the economy, changes in interest rates, and ~~December~~the 31view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, ~~2015~~we may be required to increase our provision for loan losses, ~~respectively:~~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.

September 30, 2016
(Dollars in thousands)							Nine months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial	$	560	$	560	$	—	$	811	$	29	$	711	$	7
Commercial real estate		9,794		12,912		—		11,305		356		11,093		261
Residential		4,591		4,751		—		4,848		192		4,824		65
Consumer		40		40		—		45		3		43		1
Total:	$	14,985	$	18,263	$	—	$	17,009	$	580	$	16,671	$	334
With an allowance recorded:
Commercial		953		953		41		1,003		32		975		11
Commercial real estate		4,111		4,111		367		4,169		159		4,140		61
Residential		3,224		3,224		372		3,249		100		3,236		34
Consumer		51		51		7		173		2		171		1
Total:	$	8,339	$	8,339	$	787	$	8,594	$	293	$	8,522	$	107
Total:
Commercial		1,513		1,513		41		1,814		61		1,686		18
Commercial real estate		13,905		17,023		367		15,474		515		15,233		322
Residential		7,815		7,975		372		8,097		292		8,060		99
Consumer		91		91		7		218		5		214		2
Total:	$	23,324	$	26,602	$	787	$	25,603	$	873	$	25,193	$	441

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.

December 31, 2015
(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	1,070	$	1,339	$	—	$	1,319	$	72
Commercial real estate		17,180		22,037		—		18,989		722
Residential		4,016		4,338		—		4,936		137
Consumer		68		68		—		84		7
Total:	$	22,334	$	27,782	$	—	$	25,328	$	938
With an allowance recorded:
Commercial		1,657		1,657		137		1,729		79
Commercial real estate		4,402		4,402		396		4,461		207
Residential		5,402		5,443		560		5,445		215
Consumer		66		66		10		66		3
Total:	$	11,527	$	11,568	$	1,103	$	11,701	$	504
Total:
Commercial		2,727		2,996		137		3,048		151
Commercial real estate		21,582		26,439		396		23,450		929
Residential		9,418		9,781		560		10,381		352
Consumer		134		134		10		150		10
Total:	$	33,861	$	39,350	$	1,103	$	37,029	$	1,442

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.

~~-27-~~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.

~~HCSB~~Commitments to ~~FINANCIAL~~extend ~~CORPORATION~~credit ~~AND~~are ~~SUBSIDIARY~~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.

~~Notes~~Collateral held for commitments to ~~unaudited~~extend ~~Condensed~~credit ~~Consolidated~~and ~~Financial~~standby ~~Statements~~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:

NOTE 4 - LOAN PORTFOLIO - continued

	March 31,		December 31,
(Dollars in thousands)	2017		2016

Commitments to extend credit	$	32,334	$	33,155
Standby letters of credit		1,177		444

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.-29-

~~With~~HCSB ~~respect~~FINANCIAL toCORPORATION ~~restructured~~AND 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.SUBSIDIARY

~~Success in restructuring loans has been mixed~~Notes ~~but it has proven~~ to beunaudited aCONDENSED ~~useful~~Consolidated ~~tool~~Financial 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.Statements

~~Our policy with respect to accrual of interest~~NOTE on5 ~~loans~~- ~~restructured~~OTHER inREAL aESTATE 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.OWNED

WeTransactions ~~will~~in ~~continue~~OREO tofor ~~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~~periods ~~note~~ended ~~terms.~~March If31, ~~after~~2017 ~~previously~~and ~~being~~December ~~classified as a TDR~~31, 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. We believe that all of our modified loans meet the definition of a TDR.2016:

-28-

	March 31,			December 31,
(Dollars in thousands)	2017			2016
Balance, beginning of period	$	2,887		$	13,624
Additions		—			796
Sales		(268	)		(5,868	)
Write-downs		(2	)		(5,665	)

Balance, end of period	$	2,617		$	2,887

~~HCSB~~Increased ~~FINANCIAL~~write-downs ~~CORPORATION~~were ~~AND~~taken during ~~SUBSIDIARY~~2016 in an effort to expedite sales to reduce nonperforming assets.

~~Notes~~NOTE to6 ~~unaudited~~- ~~Condensed~~ADVANCES ~~Consolidated~~FROM ~~Financial~~THE ~~Statements~~FEDERAL HOME LOAN BANK

~~NOTE~~Advances 4from the -FHLB ~~LOAN~~consisted ~~PORTFOLIO~~of –the ~~continued~~following at March 31, 2017:

The following is a summary of information pertaining to our TDRs at September 30, 2016 and December 31, 2015:

(Dollars in thousands)	Advance		Advance		Advance			Maturing
	Type		Amount		Rate			On

		Convertible Advance	$	2,000		3.60	%		9/4/18
		Fixed Rate		7,000		1.05	%		10/29/18
		Fixed Rate		5,000		3.86	%		8/20/19
		Fixed Rate		5,000		2.51	%		11/18/20
		Fixed Rate		5,000		2.74	%		11/18/20
			$	24,000

	September 30,		December 31,
(Dollars in thousands)	2016		2015
Nonperforming TDRs	$	109	$	5,449
Performing TDRs:
Commercial		1,497		2,565
Commercial real estate		12,734		13,883
Residential		6,491		7,059
Consumer		89		106
Total performing TDRs		20,811		23,613
Total TDRs	$	20,920	$	29,062

As of March 31, 2017, the Company had advances totaling $24.0 million with various interest rates and maturity dates. Interest on all advances is at a fixed rate and 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.

~~The~~At ~~following~~March ~~tables~~31, 2017, ~~summarize~~the ~~how~~Company had pledged as collateral for FHLB advances approximately $4.9 million of one-to-four family first mortgage loans, $3.4 million of commercial real estate loans, $4.6 million in home equity lines of credit, $218 thousand of multi-family loans, and $17.7 million of agency and private issue mortgage-backed securities. The Company has an investment in FHLB stock of $1.4 million. The Company has $70.0 million in excess borrowing capacity with the FHLB that ~~were~~is ~~considered~~available ~~TDRs~~if liquidity needs should ~~were~~arise. ~~modified~~As ~~during~~a result of negative financial performance indicators, there is also a risk that the ~~periods~~Bank’s ability ~~indicated:~~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.

~~For~~As ~~the~~of March ~~Nine~~31, ~~Months~~2017, ~~ended~~scheduled ~~September~~principal 30reductions include $9.0 million in 2018, ~~2016~~$5.0 million in 2019 and $10.0 million in 2020.

(Dollars in thousands)							TDRs identified in the last twelve
	TDRs identified during the period						months 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	$	475	$	311		—	$	—	$	—
Residential		6		634		534		3		169		169
Commercial		4		179		155		3		242		161
Consumer		—		—		—		1		2		2
Total		14	$	1,288	$	1,000		7	$	413	$	332

-30-

~~During~~HCSB ~~the~~FINANCIAL ~~nine~~CORPORATION ~~months ended~~AND September 30, 2016, fourteen loans were modified that were considered to be TDRs. Term concessions only were granted for seven loans; term and interest concessions were granted for two loans; term and payment deferrals were granted for one loan; term, payment deferrals and interest concessions were granted for one loan; principal was forgiven on two loans; and other concessions were extended for one loan.SUBSIDIARY

~~Nine~~NOTES ~~modified~~TO ~~loans~~UNAUDITED ~~that~~CONDENSED ~~were~~CONSOLIDATED ~~considered~~FINANCIAL ~~to be TDRs during the first nine months of 2016 were sold during the third quarter of 2016, two of which subsequently defaulted and are included in the above table.~~STATEMENTS

~~(1) Loans past due 90~~NOTE ~~days~~7 or- ~~more~~SHAREHOLDERS’ ~~are~~EQUITY ~~considered~~AND toCAPITAL ~~be in default.~~REQUIREMENTS

~~For the Three Months ended September 30, 2016~~Preferred Stock

(Dollars in thousands)							TDRs identified in the last twelve
	TDRs identified during the period						months 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	$	167	$	167		—	$	—	$	—
Residential		—		—		—		1		59		59
Commercial		—		—		—		1		30		30
Consumer		—		—		—		—		—		—
Total		1	$	167	$	167		2	$	89	$	89

Series T - In March 2009, in connection with the U.S. Treasury’s Capital Purchase Program (the “CPP”), the Company issued to the U.S. Treasury 12,895 shares of the Company’s fixed rate cumulative perpetual preferred stock, Series T (the “Series T preferred stock”). The Series T preferred stock had a dividend rate of 5% for the first five years and 9% thereafter, and had 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 a warrant to purchase up to 91,714 shares of the Company’s common stock at an initial exercise price of $21.09 per share (the “CPP Warrant”).

~~During~~The ~~the~~Series ~~quarter~~T ~~ended~~preferred ~~September~~stock ~~30,~~and ~~2016,~~the ~~one~~CPP ~~loan~~Warrant ~~was~~were ~~modified~~sold ~~that~~to ~~was~~the ~~considered~~U.S. toTreasury befor aan ~~TDR~~aggregate purchase price of $12.9 ~~Term~~million in cash. The purchase price was allocated between the Series T preferred stock and ~~interest~~the ~~concessions~~CPP ~~were~~Warrant ~~granted~~based ~~for~~upon the relative fair values of each to arrive at the ~~loan~~amounts recorded by the Company. This resulted in the Series T preferred stock being issued at a discount which was amortized on a level yield basis as a charge to retained earnings over an assumed life of five years.

~~(1)~~As ~~Loans~~required under ~~past~~the ~~due~~CPP, 90dividend ~~days~~payments oron ~~more~~and ~~are~~repurchases ~~considered~~ of the Company’s common stock were subject to certain restrictions. For as long as the Series T preferred stock was outstanding, no dividends could be declared or paid on the Company’s common stock until all accrued and unpaid dividends on the Series T preferred stock were fully paid. In addition, the U.S. Treasury’s consent was required for any increase in ~~default~~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.

~~-29-~~Beginning in February 2011, the Federal Reserve Bank of Richmond required the Company to defer dividend payments on the 12,895 shares of the Series T preferred stock. 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. The amount of each of the Company’s quarterly interest payments was approximately $161 thousand through March 2014 and then increased to $290 thousand. At the time the shares were repurchased on April 12, 2016, as described below, the Company had $5.1 million of deferred dividend payments due on the Series T preferred stock, $398 thousand of which had previously been shown as accrued preferred dividends on the Company’s statement of operations for 2016.

~~HCSB~~On ~~FINANCIAL~~April ~~CORPORATION~~11, 2016, ~~AND~~the ~~SUBSIDIARY~~Company repurchased all 12,895 shares of the outstanding Series T preferred stock from the U.S. Treasury for $129 thousand. The U.S. Treasury also canceled the CPP Warrant. The redemption gain realized on this settlement was approximately $13.8 million and was recorded in retained earnings and net income available to common shareholders.

~~Notes~~Series A – As previously disclosed, on April 1, 2016, the Company designated 905,316 shares of the Company’s authorized but unissued preferred stock as shares of Series A preferred stock. On April 11, 2016, the Company issued 359,468,443 shares of common stock at $0.10 per share and 905,316 shares of its Series A stock at $10.00 per share in a private placement. A portion of the net proceeds from the private placement were used to repurchase ~~unaudited~~the ~~Condensed~~Company’s ~~Consolidated~~outstanding ~~Financial~~Series ~~Statements~~T preferred stock.

~~NOTE~~Non-Voting Common 4Stock - ~~LOAN~~On ~~PORTFOLIO~~August –23, ~~continued~~2016, the Company filed Articles of Amendment to the Company’s Articles of Incorporation to authorize a class of 150,000,000 shares of non-voting common stock. Also on August 23, 2016, the Company converted 905,316 shares of issued and outstanding Series A preferred stock into 90,531,557 shares of non-voting common stock. The 905,316 shares of Series A preferred stock converted into 90,531,557 shares of non-voting common stock represented all of the issued and outstanding shares of Series A preferred stock on such date and, as a result, all shares of the Series A preferred stock are no longer outstanding and resumed the status of authorized and unissued shares of the Company’s preferred stock.

~~For~~Restrictions on Dividends - The Company is a legal entity separate and distinct from the ~~Nine~~Bank ~~Months~~and ~~ended~~has ~~September~~little 30direct income itself, and ~~2015~~therefore 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 the Federal Deposit Insurance Corporation Act (“FDICIA”), the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. In addition, the Bank is still subject to regulatory restrictions that prohibit it from paying dividends without the prior approval of the Federal Reserve Bank of Richmond, FDIC and State Board.

(Dollars in thousands)							TDRs identified in the last twelve
	TDRs identified during the period						months 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	$	448	$	448		1	$	243	$	128
Residential		7		851		811		2		268		268
Commercial		1		60		60		—		—		—
Consumer		3		14		14		—		—		—
Total		15	$	1,373	$	1,333		3	$	511	$	396

-31-

~~During~~HCSB ~~the~~FINANCIAL ~~nine~~CORPORATION ~~months~~AND ended September 30, 2015, 15 loans were modified that were considered to be TDRs. Term concessions only were granted for four loans; payment deferrals only were granted for four loans; interest concessions only were granted for one loan; term and payment deferrals were granted for four loans; and term, payment deferrals and interest concessions were granted for two loans.SUBSIDIARY

~~(1) Loans past due 90~~Notes ~~days~~to orunaudited ~~more~~CONDENSED ~~are~~Consolidated ~~considered~~Financial ~~to be in default.~~Statements

~~For~~NOTE ~~the~~7 ~~Three~~- ~~Months~~SHAREHOLDERS’ EQUITY ~~ended~~AND ~~September~~CAPITAL ~~30,~~REQUIREMENTS ~~2015~~- continued

(Dollars in thousands)							TDRs identified in the last twelve
	TDRs identified during the period						months 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		2	$	202	$	202		—	$	—	$	—
Residential		2		223		223		1		116		116
Commercial		—		—		—		—		—		—
Consumer		2		4		4		—		—		—
Total		6	$	429	$	429		1	$	116	$	116

Regulatory Capital - 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.

~~During~~Quantitative measures established by regulation to ensure capital adequacy require the ~~quarter~~Company and the Bank to maintain minimum ratios of Tier ~~ended~~1 ~~September~~and ~~30,~~total ~~2015~~capital as a percentage of assets and off-balance sheet exposures, ~~six~~adjusted ~~loans~~for ~~were~~risk ~~modified~~weights ~~that~~ranging ~~were~~from ~~considered~~0% to be1250%. Tier ~~TDRs~~1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. ~~Term~~Tier ~~concessions~~2 ~~only~~capital ~~were~~consists ~~granted~~of the allowance for ~~two~~loan ~~loans; payment~~losses ~~deferrals~~subject ~~only~~to ~~were~~certain ~~granted~~limitations. Total capital for ~~three~~purposes ~~loans;~~of computing the capital ratios consists of the sum of Tier 1 and ~~interest~~Tier ~~concessions~~2 ~~only~~capital. ~~were~~The ~~granted~~Company ~~for~~and ~~one~~the ~~loan~~Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

(Regulatory capital rules released in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with more than $1) ~~Loans~~billion ~~past~~in ~~due~~total 90consolidated ~~days~~assets. More stringent requirements are imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more ~~are~~in ~~considered~~total consolidated assets, $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The requirements in the rule began to phase in on January 1, 2015 for the Bank, and the requirements in the rule will be fully phased in ~~default~~by January 1, 2019.

The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-30weighted assets (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to the risk weights for certain assets and off-balance sheet exposures. Finally, CET1 includes accumulated other comprehensive income (which includes all unrealized gains and losses on available-for-sale debt and equity securities), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in the Bank’s Tier 1 capital.

~~HCSB~~The ~~FINANCIAL~~new ~~CORPORATION~~capital conservation ~~AND~~buffer ~~SUBSIDIARY~~began its phase-in period on January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019, as discussed above. The Bank had sufficient capital to meet the new conservation buffer requirements (1.25% of risk-weighted assets) at March 31, 2017.

~~Notes~~To be considered “well-capitalized,” a 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, a bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. The Bank is subject to ~~unaudited~~additional requirements ~~CONDENSED~~to ~~Consolidated~~maintain ~~Financial~~Tier ~~Statements~~1 capital at least equal to 8% and total risk-based capital at least equal to 10%.

~~NOTE~~At March 431, -2017, ~~LOAN~~the ~~PORTFOLIO~~Company -and ~~continued~~Bank exceeded minimum regulatory capital requirements.

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 charge32-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~~HCSB ~~Company~~FINANCIAL isCORPORATION aAND 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.SUBSIDIARY

~~The Company’s exposure to credit loss~~Notes ~~in the event of nonperformance by the other party~~ to ~~the~~unaudited ~~financial~~CONDENSED ~~instrument~~Consolidated ~~for~~Financial 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.Statements

~~Standby~~NOTE ~~letters~~7 of- ~~credit are conditional commitments~~SHAREHOLDERS’ ~~issued~~EQUITY byAND ~~the~~CAPITAL ~~Company~~REQUIREMENTS 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.continued

~~Commitments~~The ~~to extend credit are agreements~~following totable ~~lend~~summarizes ~~to a customer as long as there is no violation of any condition established in~~ the ~~contract.~~capital ~~Commitments~~ratios ~~generally have fixed expiration dates or other termination clauses~~ and ~~may require payment of a fee. Since some of~~ the ~~commitments~~regulatory ~~are~~minimum ~~expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash~~ requirements. ~~The~~for ~~Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by~~ the Company ~~upon~~and ~~extension of credit, is based on management’s credit evaluation of~~ the ~~counter-party~~Bank.

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:

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio

*March 31, 2017*
The Company
Total Capital (to Risk-Weighted Assets)	$	42,266		16.27	%	$	20,788		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	39,018		15.02	%	$	11,693		4.50	%		N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	39,018		15.02	%	$	10,394		4.00	%		N/A		N/A
Tier 1 Capital (to Average Assets)	$	39,018		10.29	%	$	15,178		4.00	%		N/A		N/A
The Bank
Total Capital (to Risk-Weighted Assets) ⁽¹⁾	$	41,429		15.94	%	$	20,787		8.00	%	$	25,984		10.00	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	38,175		14.69	%	$	11,693		4.50	%		16,889		6.50	%
Tier 1 Capital (to Risk-Weighted Assets)	$	38,175		14.69	%	$	15,590		6.00	%		20,787		8.00	%
Tier 1 Capital (to Average Assets) ⁽¹⁾	$	38,175		10.08	%	$	15,146		4.00	%	$	30,292		8.00	%

*December 31, 2016*
The Company
Total Capital (to Risk-Weighted Assets)	$	41,697		16.80	%	$	19,861		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	38,586		15.54	%	$	9,930		4.50	%		N/A		N/A
Tier 1 Capital (to Risk-Weighted Assets)	$	38,586		15.54	%	$	9,930		4.00	%		N/A		N/A
Tier 1 Capital (to Average Assets)	$	38,586		10.15	%	$	15,200		4.00	%		N/A		N/A
The Bank
Total Capital (to Risk-Weighted Assets) ⁽¹⁾	$	40,833		16.44	%	$	19,865		8.00	%	$	24,832		10.00	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	37,721		15.19	%	$	11,174		4.50	%		16,141		6.50	%
Tier 1 Capital (to Risk-Weighted Assets)	$	37,721		15.19	%	$	14,899		6.00	%		19,865		8.00	%
Tier 1 Capital (to Average Assets) ⁽¹⁾	$	37,721		9.95	%	$	15,162		4.00	%	$	30,324		8.00	%

	September 30,		December 31,
(Dollars in thousands)	2016		2015
Commitments to extend credit	$	31,485	$	21,318
Standby letters of credit		459		257

⁽¹⁾ Minimum capital amounts and ratios presented as of March 31, 2017 and December 31, 2016, are amounts to be well-capitalized under the various regulatory capital requirements administered by the FDIC which includes maintaining Tier 1 leverage capital at least equal to 8% and total risk-based capital at least equal to 10%.

-3133-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 8 5- –INCOME ~~OTHER~~(LOSS) ~~REAL~~PER ~~ESTATE~~SHARE ~~OWNED~~

The following table shows transactions in OREO for the nine-month period ended September 30, 2016 and the year ended December 31, 2015:

(Dollars in thousands, except per share amounts)	Three Months ended March 31,
	2017		2016

Basic income (loss) per common share:

Net income (loss) available to common shareholders	$	293	$	(3,681	)

Weighted average common shares outstanding - basic		468,013,940		3,846,340

Basic income (loss) per common share	$	0.00	$	(0.96	)

Diluted income (loss) per common share:

Net income (loss) available to common shareholders	$	293	$	(3,681	)

Weighted average common shares outstanding - basic		468,013,940		3,846,340

Incremental shares		1,040,625		—

Weighted average common shares outstanding - diluted		469,054,565		3,846,340

Diluted income (loss) per common share	$	0.00	$	(0.96	)

	September 30,			December 31,
(Dollars in thousands)	2016			2015
Balance, beginning of period	$	13,624		$	19,501
Additions		796			4,058
Sales		(4,806	)		(9,709	)
Write-downs		(5,582	)		(226	)
Balance, end of period	$	4,032		$	13,624

For the three-month period ended March 31, 2016, there were 91,714 common stock equivalents outstanding which were not included in the diluted calculation because the effect would have been anti-dilutive. No common stock equivalents were excluded from the calculation for the three-month period ended March 31, 2017.

~~Increased write~~-~~downs were taken during the first nine months of 2016 in an effort to expedite sales to reduce nonperforming assets.~~34-

~~NOTE 6 - ADVANCES FROM THE FEDERAL~~HCSB ~~HOME~~FINANCIAL ~~LOAN~~CORPORATION ~~BANK~~AND SUBSIDIARY

~~Advances from the FHLB consisted of the~~Notes ~~following~~to atunaudited ~~September~~CONDENSED ~~30,~~Consolidated ~~2016:~~Financial Statements

(Dollars in thousands)	Advance	Advance		Advance			Maturing
	Type	Amount		Rate			On
	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
		$	17,000

NOTE 9 - FAIR VALUE

AsFair ofValue September 30, 2016, we had advances totaling $17.0 million with various interest rates and maturity dates. Interest on all advances is at a fixed rate and 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.Hierarchy

AtFair ~~September~~value ~~30,~~is the ~~2016,~~exchange ~~the~~price ~~Company had~~that ~~pledged~~would asbe ~~collateral~~received for ~~FHLB~~an ~~advances~~asset ~~approximately~~or ~~$2.9~~paid ~~million of one-~~to~~-four~~ ~~family~~transfer ~~first~~a ~~mortgage~~liability ~~loans, $1.3 million of commercial real estate loans, $4.0 million in home equity lines of credit, and $19.2 million of agency and private issue mortgage-backed securities. The Company has~~ (an ~~investment~~exit inprice) ~~FHLB stock of $1.1 million. The Company has $8.9 million~~ in ~~excess borrowing capacity with~~ the ~~FHLB~~principal ~~that~~or ~~is available if liquidity needs should arise. As a result of negative financial performance indicators, there~~most isadvantageous ~~also~~market afor ~~risk that~~ the ~~Bank’s ability~~asset ~~to borrow from the FHLB could be curtailed~~ or ~~eliminated,~~liability ~~although~~in toan ~~date~~orderly ~~the Bank~~transaction ~~has~~between ~~not~~market ~~been~~participants ~~denied~~on ~~advances from~~ the ~~FHLB~~measurement ~~or had to pledge additional collateral for its borrowings~~date.

AsFair 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 ~~September~~the ~~30,~~Company’s ~~2016~~financial instruments, ~~scheduled~~fair ~~principal~~value estimates are based on current ~~reductions~~economic ~~include~~conditions, ~~$12~~risk characteristics of various financial instruments, and such other factors.0 ~~million~~These estimates are subjective in ~~2018~~nature and ~~$5.0~~involve ~~million~~uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in ~~2019~~assumptions could significantly affect the estimates.

~~-32-~~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:

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

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. This category generally includes certain derivative contracts and impaired loans.

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.

~~Notes to unaudited CONDENSED Consolidated Financial Statements~~-35-

~~NOTE~~HCSB FINANCIAL 7CORPORATION –AND ~~JUNIOR SUBORDINATED DEBENTURES~~SUBSIDIARY

~~On December 21, 2004, the Trust issued $6.0~~Notes 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~~unaudited ~~Trust~~CONDENSED asConsolidated aFinancial $6.2 million junior subordinated debenture offset by debt issuance costs. The current regulatory rules allow certain amounts of junior subordinated debentures to be included in the calculation of regulatory capital.Statements

~~The~~NOTE ~~Federal~~9 ~~Reserve~~- ~~Bank~~FAIR ~~of Richmond~~VALUE ~~prohibited~~- the Company from paying interest due on the trust preferred securities beginning February 2011 and as a result, the Company had deferred interest payments in the amount of approximately $958 thousand due and payable at the time of redemption on April 11, 2016, as described below.continued

~~As described in Note~~Financial 1 to our financial statements, on February 29, 2016, the Company entered into a securities purchase agreement with Alesco for the repurchase of all the trust preferred securities for an aggregate cash payment of $600 thousand plus reimbursement of attorneys’ fees and other expenses incurred by Alesco not to exceed $25 thousand. Alesco also agreed to forgive any and all unpaid interest on the trust preferred securities.Instruments

~~On March 16, 2016, the Company received a notice of default from~~ The ~~Bank of New York Mellon Trust Company, N.A., in its capacity as trustee, relating~~following tomethods ~~the trust preferred securities. The notice of default related specifically to the Indenture dated December 21, 2004, by~~ and ~~among~~ ~~the~~assumptions ~~Company~~were ~~and~~used ~~The Bank of New York Mellon Trust Company, N.A., successor-in-interest~~ to JPestimate ~~Morgan Chase Bank, National Association, under which~~ the ~~Company~~fair ~~issued~~value the trust preferred securities. As permitted by the Indenture, the Company previously exercised its right to defer interest payments on the trust preferred securities for 20 consecutive quarterly payment periods. The Company’s right to defer such interest payments expired on March 15, 2016, at which time all deferred payments of ~~interest became~~significant ~~due~~financial and payable. The Company did not pay such deferred interest at the end of the permitted deferral period, constituting an event of default under the Indenture, and therefore pursuant to the Indenture, the trustee provided this notice of default. However, under the Indenture, the principal amount of the trust preferred securities, together with any premium and unpaid accrued interest, would only become due upon such an event of default if the trustee or Alesco declared such amounts due and payable by written notice to the Company.instruments:

OnCash ~~April 11, 2016, immediately following the~~and ~~closing~~Cash ofEquivalents ~~the~~- ~~2016~~The ~~private~~carrying ~~placement,~~amount ~~the~~is ~~Company~~a ~~repurchased~~reasonable ~~all~~estimate of ~~the~~fair ~~outstanding trust preferred securities for $600 thousand, plus reimbursement of approximately $17 thousand in third party legal expenses~~value. ~~The redemption gain realized on this settlement was approximately $6.3 million.~~

~~The~~Securities Available-for-Sale ~~redemption~~- ~~consisted~~Investment ofsecurities 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 ~~following~~present ~~(in~~value of future cash flows, adjusted ~~thousands):~~for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Assets
Other assets	$	186
Reduction to assets		186
Liabilities
Junior subordinated debentures		6,117
Accrued interest payable		958
Reduction to liabilities		7,075
Cash paid		(617	)
Gain on extinguishment of debt	$	6,272

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

Loans Receivable -~~33-~~ 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.

~~HCSB~~Deposits - ~~FINANCIAL~~The ~~CORPORATION~~fair ~~AND~~value ~~SUBSIDIARY~~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.

~~Notes~~Repurchase toAgreements ~~unaudited~~– ~~CONDENSED~~The ~~Consolidated~~carrying ~~Financial~~value ~~Statements~~of these instruments is a reasonable estimate of fair value.

~~NOTE~~Advances from 8the Federal Home Loan Bank - ~~SUBORDINATED~~For ~~DEBENTURES~~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.

~~On July 31, 2010, the Company completed~~Off-Balance aSheet ~~private~~Financial ~~placement~~Instruments of- ~~subordinated promissory notes that totaled $12.1 million.~~ The ~~notes~~contractual ~~bore~~amount ~~interest~~is at a ~~rate~~reasonable ~~equal~~estimate toof ~~the current~~fair ~~Prime~~value ~~Rate~~for ~~in effect, as published by~~ the ~~Wall~~instruments ~~Street~~because commitments ~~Journal,~~to ~~plus~~extend ~~3%;~~credit ~~provided,~~and ~~that~~standby ~~the~~letters ~~rate~~ of ~~interest~~credit ~~shall~~are ~~not~~issued ~~be less~~on ~~than~~a 8%short-term ~~per annum~~ or ~~more~~floating ~~than~~rate ~~12%~~basis ~~per~~and ~~annum.~~include ~~The~~no ~~subordinated notes were structured to fully count as Tier 2 regulatory capital~~unusual oncredit ~~a consolidated basis~~risks.

The Federal Reserve Bank of Richmond prohibited the Company from paying interest due on the subordinated notes beginning October 2011 and, as a result, the Company had deferred interest payments in the amount of approximately $5.3 million at the time of redemption on April 11, 2016, as described below.-36-

~~During 2013, $1.0 million of the subordinated~~HCSB ~~notes~~FINANCIAL ~~were~~CORPORATION ~~canceled~~AND by the holder as part of a settlement of litigation between the holder, the Bank, and the Company. The Company was obligated to contribute capital in this amount to the Bank when it was able and did so immediately following the closing of the 2016 private placement. The forgiveness of this debt was recognized in 2013 as noninterest income in the consolidated statements of operations.SUBSIDIARY

~~Effective as of September 16, 2015,~~Notes the Company, the Bank, and certain other defendants entered into a class action settlement agreement in potential settlement of the putative class action lawsuit initiated by three holders of the Company’s subordinated promissory notes, on behalf of themselves and as representatives of a class of similarly situated purchasers of the Company’s subordinated promissory notes, with respect to ~~alleged~~unaudited ~~wrongful~~CONDENSED ~~conduct~~Consolidated ~~associated~~Financial with purchases of the subordinated promissory notes, including fraud, violation of state securities statutes, and negligence. On March 2, 2016, the Court of Common Pleas for the Fifteenth Judicial District, State of South Carolina, County of Horry entered a final order of approval approving the class action settlement agreement.Statements

OnNOTE ~~April~~9 ~~11,~~- ~~2016,~~FAIR ~~immediately following the~~VALUE ~~closing~~- of the 2016 private placement, the Company established a settlement fund of approximately $2.4 million, which represented 20% of the principal of subordinated promissory notes issued by the Company. The proceeds of the fund were used to redeem the subordinated promissory notes held by class members. Also on April 11, 2016, the Company settled, pursuant to previously executed binding settlement agreements, with the subordinated promissory note holders who opted out of the class action settlement. These settlements, including the class action settlement, constituted the full satisfaction of the principal and interest owed on, and required the immediate dismissal of all pending litigation related to, the respective subordinated promissory notes. In each case, the Company and the Bank also obtained a full and complete release of all claims asserted or that could have been asserted with respect to the subordinated promissory notes. The redemption gain realized on this settlement was approximately $12.8 million.continued

The ~~redemption~~carrying values ~~consisted~~and estimated fair values of the ~~following~~Company’s ~~(in thousands)~~financial instruments were as follows:

Assets
March 31, 2017						Fair Value Measurements
Reduction to assets	$	—
(Dollars in thousands)	Carrying Amount			Estimated Fair Value		Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Liabilities
Financial Assets:
Subordinated debentures		11,023
Cash and cash equivalents	$	22,190		$	22,190	$	22,190	$	—	$	—
Accrued interest payable		5,274
Securities available-for-sale		104,341			104,341		—		104,341		—
Reduction to liabilities		16,297
Nonmarketable equity securities		1,359			1,359		—		—		1,359
Cash paid		(3,454	)
Loans, net		225,316			225,227		—		—		225,227
Gain on extinguishment of debt	$	12,843
Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		195,776			195,776		195,776		—		—
Certificates of deposit		126,563			126,172		—		126,172		—
Repurchase agreements		848			848		—		848		—
Advances from the Federal Home Loan Bank		24,000			24,307		—		24,307		—

-34-

		Notional	Estimated
		Amount	Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	32,334	n/a
Standby letters of credit		1,177	n/a

~~HCSB FINANCIAL CORPORATION AND SUBSIDIARY~~-37-

~~Notes~~HCSB toFINANCIAL ~~unaudited~~CORPORATION ~~CONDENSED~~AND ~~Consolidated Financial Statements~~SUBSIDIARY

~~NOTE~~Notes to 9unaudited -CONDENSED ~~SHAREHOLDERS’~~Consolidated ~~EQUITY AND~~Financial ~~CAPITAL REQUIREMENTS~~Statements

~~Preferred~~NOTE ~~Stock~~9 - FAIR VALUE - continued

Series T - 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 had a dividend rate of 5% for the first five years and 9% thereafter, and had a call feature after three years.

December 31, 2016					Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial Assets:
Cash and cash equivalents	$	25,429	$	25,429	$	25,429	$	—	$	—
Securities available-for-sale		106,529		106,529		—		106,529		—
Nonmarketable equity securities		1,345		1,345		—		—		1,345
Loans, net		211,362		211,278		—		—		211,278

Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts		167,038		167,038		167,038		—		—
Certificates of deposit		146,231		145,779		—		145,779		—
Repurchase agreements		1,983		1,983		—		1,983		—
Advances from the Federal Home Loan Bank		24,000		24,307		—		24,307		—

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.

	Notional		Estimated
	Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	33,155		n/a
Standby letters of credit		444		n/a

~~The~~Fair ~~Series T preferred stock and the CPP Warrant~~Value 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 was amortized on a level yield basis as a charge to retained earnings over an assumed life of five years.Measurements

AsFollowing ~~required~~is ~~under~~a ~~the~~description ~~CPP, dividend payments on and repurchases~~ of ~~the Company’s common stock were subject to certain restrictions. For as long as the Series T preferred~~valuation ~~stock~~methodologies ~~was~~used outstanding, no dividends could be declared or paid on the Company’s common stock until all accrued and unpaid dividends on the Series T preferred stock were fully paid. In addition, the U.S. Treasury’s consent was required for ~~any increase~~assets ~~in dividends on common stock before the third anniversary of issuance of the Series T preferred stock~~ and ~~for~~liabilities ~~any~~recorded ~~repurchase of~~at ~~any~~fair ~~common stock except for repurchases of common shares in connection with benefit plans~~value.

~~Beginning~~Securities Available-for-Sale in- ~~February~~Investment ~~2011,~~securities ~~the~~available-for-sale ~~Federal~~are ~~Reserve Bank~~recorded ofat ~~Richmond~~fair ~~required~~value ~~the~~on ~~Company~~a torecurring ~~defer~~basis. ~~dividend~~Fair ~~payments~~value measurement onis ~~the~~based 12upon quoted prices,~~895~~ ~~shares~~if ofavailable. ~~the~~If ~~Series~~quoted Tprices ~~preferred~~are ~~stock.~~not ~~Therefore~~available, ~~for~~ ~~each~~fair ~~quarterly~~values ~~period~~are ~~beginning~~measured inusing ~~February~~independent pricing ~~2011,~~models ~~the~~or ~~Company~~other ~~notified~~model-based ~~the~~valuation ~~U.S.~~techniques ~~Treasury~~such ofas ~~its~~the ~~deferral~~present value of ~~quarterly~~future ~~dividend payments~~cash onflows, adjusted for the ~~Series~~security’s credit Trating, ~~preferred~~prepayment ~~stock.~~assumptions ~~The~~and ~~amount~~other offactors ~~each~~such ofas ~~the~~credit ~~Company’s~~loss ~~quarterly~~assumptions. ~~interest~~Level ~~payments~~1 ~~was~~securities ~~approximately~~include those traded ~~$161~~on ~~thousand~~an ~~through~~active ~~March~~exchange, ~~2014~~such ~~and~~as ~~then~~the ~~increased~~New toYork ~~$290~~Stock ~~thousand~~Exchange, U.S. AtTreasury ~~the~~securities ~~time~~that ~~the~~are ~~shares~~traded ~~were~~by ~~repurchased~~dealers onor ~~April~~brokers ~~12, 2016,~~in asactive ~~described~~over-the-counter ~~below,~~markets ~~the~~and ~~Company~~money ~~had~~market $5funds.1 ~~million~~Level of2 ~~deferred~~securities ~~dividend~~include ~~payments~~mortgage-backed ~~due~~securities onissued ~~the~~by ~~Series~~government sponsored Tentities, ~~preferred~~municipal ~~stock,~~bonds ~~$398~~and ~~thousand~~corporate debt securities. Securities classified as Level 3 include asset-backed securities ofin ~~which~~less ~~had~~liquid ~~previously~~markets. ~~been~~All ~~shown~~available-for-sale asinvestment ~~accrued~~security ~~preferred~~fair ~~dividends~~values were based on ~~the~~quoted ~~Company’s~~market ~~statement~~prices ofand ~~operations~~therefore classified as Level 2 for ~~2016~~the periods presented.

On April 12, 2016, the Company repurchased all 12,895 shares of the outstanding Series T preferred stock from the U.S. Treasury for $129 thousand. The U.S. Treasury also canceled the CPP Warrant. The redemption gain realized on this settlement was approximately $13.8 million and was recorded as capital surplus.-38-

~~Series A – As previously~~HCSB ~~disclosed,~~FINANCIAL onCORPORATION ~~April~~AND 1, 2016, the Company designated 905,316 shares of the Company’s authorized but unissued preferred stock as shares of the Company’s Series A preferred stock. As discussed in Note 1, the Company issued 905,316 shares of its Series A stock at $10.00 per share in the 2016 private placement.SUBSIDIARY

~~Non-Voting~~Notes to ~~Common~~unaudited ~~Stock~~CONDENSED Consolidated Financial Statements

OnNOTE ~~August~~9 ~~23, 2016, the Company filed Articles of Amendment to the Company’s Articles of Incorporation to authorize a class of 150,000,000 shares of non~~-~~voting~~ ~~common~~FAIR ~~stock. Also on August 23, 2016, the Company converted 905,316 shares~~VALUE ~~of issued and outstanding Series A preferred stock into 90,531,557 shares of non~~-~~voting~~ common stock. The 905,316 shares of Series A preferred stock converted into 90,531,557 shares of non-voting common stock represented all of the issued and outstanding shares of Series A preferred stock on such date and, as a result, all shares of the Series A preferred stock are no longer outstanding and resumed the status of authorized and unissued shares of the Company’s preferred stock.continued

Loans -~~35-~~ 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. The fair value of Impaired Loans is generally based on judgment and therefore classified as nonrecurring Level 3.

~~HCSB~~Other ~~FINANCIAL~~Real Estate ~~CORPORATION~~Owned ~~AND~~- ~~SUBSIDIARY~~OREO is adjusted to fair value upon transfer of the loans to OREO. 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 OREO is generally based on judgment and therefore is classified as nonrecurring Level 3.

~~Notes~~Assets toand ~~unaudited~~Liabilities ~~CONDENSED~~Measured ~~Consolidated~~at ~~Financial~~Fair ~~Statements~~Value on a Recurring Basis

~~NOTE~~The 9tables below -present ~~SHAREHOLDERS’~~the ~~EQUITY~~balances ~~AND~~of ~~CAPITAL~~assets ~~REQUIREMENTS~~and liabilities measured at fair value on a recurring basis as of and for the periods ended -March ~~continued~~31, 2017 and December 31, 2016, by level within the fair value hierarchy.

Restrictions on Dividends

			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)
March 31, 2017
Assets:
Government-sponsored enterprises	$	8,243	$	—	$	8,243	$	—
Mortgage-backed securities		82,050		—		82,050		—
State and political subdivisions		14,048		—		14,048		—
Total	$	104,341	$	—	$	104,341	$	—

December 31, 2016
Assets:
Government-sponsored enterprises	$	8,409	$	—	$	8,409	$	—
Mortgage-backed securities		83,998		—		83,998		—
State and political subdivisions		14,122		—		14,122		—
Total	$	106,529	$	—	$	106,529	$	—

~~Under~~The ~~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~~no ~~direct~~liabilities ~~income~~measured ~~itself,~~at ~~the~~fair ~~Company~~value ~~relies~~ on ~~dividends paid to it by the Bank in order to pay dividends on its common stock. As~~ a ~~South~~recurring ~~Carolina state bank, the Bank may only pay dividends out of its net profits, after deducting expenses, including losses and bad debts~~basis. Under the Federal Deposit Insurance Corporation Act (“FDICIA”), the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. In addition, regulatory restrictions remain following the termination of the Consent Order that prohibit the Bank from paying dividends without the prior approval of the FDIC and State Board.

~~Regulatory Capital~~-39-

~~The Company and the Bank are subject to various~~HCSB ~~regulatory~~FINANCIAL ~~capital~~CORPORATION ~~requirements~~AND 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.SUBSIDIARY

~~Quantitative measures established by regulation~~Notes to ~~ensure~~unaudited ~~capital~~CONDENSED ~~adequacy~~Consolidated ~~require~~Financial 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 1250%. 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.Statements

InNOTE ~~July~~9 ~~2013, the federal bank regulatory agencies issued a final rule that has revised their risk~~-~~based~~ ~~capital requirements~~FAIR ~~and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed~~VALUE ~~by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd~~-~~Frank~~ Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The final rule applies to all depository institutions, such as the Bank, top-tier bank holding companies with total consolidated assets of $1 billion or more, and top-tier savings and loan holding companies, which we refer to below as “covered” banking organizations. Bank holding companies with less than $1 billion in total consolidated assets, such as the Company, are not subject to the final rule. Effective March 31, 2015, the Bank was required to implement the new Basel III capital standards (subject to the phase in for certain parts of the new rules).continued

~~-36-~~Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

~~HCSB~~Certain assets ~~FINANCIAL~~and ~~CORPORATION~~liabilities ~~AND~~are ~~SUBSIDIARY~~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.

Notes to unaudited CONDENSED Consolidated Financial Statements

			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)
March 31, 2017
Assets:
Impaired loans, net of valuation allowance	$	19,301	$	—	$	—	$	19,301
Other real estate owned		2,617		—		—		2,617
Total	$	21,918	$	—	$	—	$	21,918

December 31, 2016
Assets:
Impaired loans, net of valuation allowance	$	20,978	$	—	$	—	$	20,978
Other real estate owned		2,887		—		—		2,887
Total	$	23,865	$	—	$	—	$	23,865

~~NOTE~~The 9Company has -no ~~SHAREHOLDERS’~~liabilities ~~EQUITY~~measured ~~AND~~at ~~CAPITAL~~fair ~~REQUIREMENTS -~~value ~~continued~~on a nonrecurring basis.

~~The approved rule includes a new minimum ratio~~Level of3 ~~common~~Valuation equity Tier 1 capital to risk-weighted assets (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to the risk weights for certain assets and off-balance sheet exposures. Finally, CET1 includes accumulated other comprehensive income (which includes all unrealized gains and losses on available-for-sale debt and equity securities), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in the Bank’s Tier 1 capital.Methodologies

The ~~new~~fair value ~~capital~~of ~~conservation~~impaired ~~buffer~~loans ~~began~~is ~~its phase-in~~estimated ~~period~~using onone ~~January~~of 1several methods, ~~2016~~including atcollateral ~~0.625%~~value ofand ~~risk-weighted~~discounted ~~assets~~cash flows and, ~~will~~in rare ~~increase~~cases, ~~each~~the ~~subsequent~~market ~~year~~value byof the note. Those impaired loans not requiring an ~~additional~~allowance ~~0.625%~~represent loans for which the net present ~~until~~value ~~reaching~~of ~~its~~the ~~final~~expected ~~level~~cash flows or fair value of 2the collateral less costs to sell exceed the recorded investments in such loans.5% When the fair value of the collateral is based on ~~January~~an executed sales contract with an independent third party, the Company records the impaired loan as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, ~~2019~~the Company records the impaired loan 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 ~~discussed~~nonrecurring ~~above~~Level 3. ~~The~~Impaired ~~Bank~~loans ~~had~~can ~~sufficient~~be ~~capital~~evaluated tofor ~~meet~~impairment using the ~~new~~present ~~conservation~~value ~~buffer~~of ~~requirements~~expected future cash flows discounted at ~~September~~the ~~30,~~loan’s ~~2016~~effective interest rate. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

~~To be considered “well~~-~~capitalized,” a bank must maintain total risk~~40-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, a bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. Although the Bank is no longer subject to the Consent Order as of its termination on October 26, 2016, the Bank must continue to maintain a Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%.

~~At September 30, 2016, the Company exceeded its minimum regulatory capital requirements. While~~HCSB ~~the~~FINANCIAL ~~Bank~~CORPORATION ~~could~~AND not be considered “well capitalized” at September 30, 2016 due to the Consent Order (which was subsequently terminated on October 26, 2016), as a result of the 2016 private placement, the Bank met all of the capital requirements set forth under the Consent Order as of September 30, 2016.SUBSIDIARY

~~-37-~~Notes to unaudited CONDENSED Consolidated Financial Statements

~~HCSB~~NOTE ~~FINANCIAL~~9 ~~CORPORATION~~- ~~AND~~FAIR ~~SUBSIDIARY~~VALUE - continued

~~Notes~~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 ~~unaudited~~the ~~CONDENSED~~collateral value ~~Consolidated~~estimates ~~Financial~~indicated ~~Statements~~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.

~~NOTE~~The 9following table -presents ~~SHAREHOLDERS’~~quantitative ~~EQUITY~~information ~~AND~~about ~~CAPITAL~~Level ~~REQUIREMENTS~~3 fair value measurements for financial instruments measured at fair value -on ~~continued~~a nonrecurring basis at March 31, 2017. Management believes the weighted average range of adjustments to be appropriate. As discussed previously, depressed real estate values in the areas we serve may cause larger adjustments from time to time.

The following table summarizes the capital ratios and the regulatory minimum requirements for the Company and the Bank as of the dates indicated.


(Dollars in thousands)
	March 31,		Valuation	Unobservable	Range
	2017		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	1,635	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(3.71	%)

Commercial real estate		10,742	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(7.39	%)

Residential		6,842	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(8.36	%)

Consumer		82	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-25.14	%
			Flows	Independent quotes		(4.39	%)

Other real estate owned		2,617	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(10.00	%)

												Minimum
												To Be Well
							Minimum					Capitalized Under
							Capital					Prompt Corrective
	Actual						Requirement					Action Provisions
(Dollars in thousands)	Amount			Ratio			Amount		Ratio			Amount			Ratio
September 30, 2016
The Company
Total Capital
(to Risk-Weighted Assets)	$	40,085			16.61	%	$	19,305		8.00	%		N/A			N/A
Tier 1 Capital
(to Risk-Weighted Assets)	$	37,048			15.35	%	$	9,652		4.00	%		N/A			N/A
Tier 1 Capital
(to Average Assets)	$	37,048			9.51	%	$	15,587		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	39,441			16.34	%	$	19,305		8.00	%	$	24,131			10.00	%
Tier 1 Capital
(to Risk-Weighted Assets)	$	36,404			15.09	%	$	14,478		6.00	%		(1	)		(1	)
Tier 1 Capital
(to Average Assets)	$	36,404			9.38	%	$	15,525		4.00	%	$	31,051			8.00	%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)	$	36,404			15.09	%	$	10,859		4.50	%		N/A			N/A
December 31, 2015
The Company
Total Capital
(to Risk-Weighted Assets)	$	(10,642	)		(4.15	)%	$	20,537		8.00	%		N/A			N/A
Tier 1 Capital
(to Risk-Weighted Assets)	$	(10,642	)		(4.15	)%	$	10,269		4.00	%		N/A			N/A
Tier 1 Capital
(to Average Assets)	$	(10,642	)		(2.87	)%	$	14,831		4.00	%		N/A			N/A
The Bank
Total Capital
(to Risk-Weighted Assets)	$	15,402			5.92	%	$	20,802		8.00	%	$	26,002			10.00	%
Tier 1 Capital
(to Risk-Weighted Assets)	$	12,135			4.67	%	$	15,601		6.00	%		(1	)		(1	)
Tier 1 Capital
(to Average Assets)	$	12,135			3.28	%	$	14,819		4.00	%	$	29,639			8.00	%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)	$	12,135			4.67	%	$	11,701		4.50	%		N/A			N/A

-41-

~~(1) Minimum capital amounts and ratios presented as of September~~HCSB ~~30,~~FINANCIAL ~~2016~~CORPORATION ~~and~~AND December 31, 2015, 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 and the State Board. Minimum capital amounts and ratios presented for the Bank as of September 30, 2016 and December 31, 2015, 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. Although the Bank is no longer subject to the Consent Order as of its termination on October 26, 2016, the Bank must continue to maintain Tier 1 capital at least equal to 8% and total risk-based capital at least equal to 10%.SUBSIDIARY

~~-38-~~Notes to unaudited CONDENSED Consolidated Financial Statements

~~HCSB~~NOTE ~~FINANCIAL~~9 ~~CORPORATION~~- ~~AND~~FAIR ~~SUBSIDIARY~~VALUE - continued

~~Notes~~The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2016. Management believes the weighted average range of adjustments to ~~unaudited~~be ~~CONDENSED~~appropriate. As ~~Consolidated~~discussed ~~Financial~~previously, ~~Statements~~depressed real estate values in the areas we serve may cause larger adjustments from time to time.

NOTE 10 – INCOME (LOSS) PER SHARE


(Dollars in thousands)
	December 31,		Valuation	Unobservable	Range
	2016		Techniques	Inputs	(Weighted Avg)
Impaired loans:
Commercial	$	1,642	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-23.50	%
			Flows	Independent quotes		(4.00	%)

Commercial real estate		12,325	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(6.72	%)

Residential		6,934	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(8.05	%)

Consumer		77	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(1.25	%)

Other real estate owned		2,887	Appraised Value/ Discounted Cash	Appraisals and/or sales of comparable properties/		0.00%-10.00	%
			Flows	Independent quotes		(10.00	%)

(Dollars in thousands, except	Nine Months ended September 30,
per share amounts)	2016		2015
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	4,846	$	(944	)
Weighted average common shares outstanding - basic		245,538,014		3,816,340
Basic income (loss) per common share	$	0.02	$	(0.25	)
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	4,846	$	(944	)
Weighted average common shares outstanding - basic		245,538,014		3,816,340
Incremental shares		—		—
Weighted average common shares outstanding - diluted		245,538,014		3,816,340
Diluted income (loss) per common share	$	0.02	$	(0.25	)

NOTE 10 - COMMITMENTS AND CONTINGENCIES

(Dollars in thousands, except	Three Months ended September 30,
per share amounts)	2016			2015
Basic loss per common share:
Net loss available to common shareholders	$	(1,784	)	$	(146	)
Weighted average common shares outstanding - basic		411,085,981			3,816,340
Basic loss per common share	$	(0.00	)	$	(0.04	)
Diluted loss per common share:
Net loss available to common shareholders	$	(1,784	)	$	(146	)
Weighted average common shares outstanding - basic		411,085,981			3,816,340
Incremental shares		—			—
Weighted average common shares outstanding - diluted		411,085,981			3,816,340
Diluted loss per common share	$	(0.00	)	$	(0.04	)

In the ordinary course of business, the Company may, from time to time, become a party to legal claims and disputes. In 2012, the Company and the Bank received subpoenas from the office of SIGTARP and has fully responded to all of the subpoenas and provided testimony. At March 31, 2017, The Company and the Bank believe that the investigation will not have a material adverse effect on the financial condition or operation of the Company. Management was not aware of any other pending or threatened litigation or unassisted claims that could result in losses, if any, that would be material to the financial statements. The details of the matter above is included in “Legal Proceedings” under Part II, Item 1 of this Form 10-Q.

Weighted average shares outstanding for the nine and three month periods ended September 30, 2016 excludes 27,750,000 shares of unvested restricted stock. There were no unvested shares of restricted stock outstanding for the nine and three month periods ended September 30, 2015. For the nine and three month periods ended September 30, 2015, there were 91,714 common stock equivalents outstanding. These common stock equivalents were not included in the computation of diluted loss per share because their effect would have been anti-~~dilutive.~~ 42-

~~-39-~~HCSB FINANCIAL CORPORATION AND SUBSIDIARY

~~HCSB~~NOTES ~~FINANCIAL~~TO ~~CORPORATION~~UNAUDITED CONDENSED ~~AND~~CONSOLIDATED ~~SUBSIDIARY~~FINANCIAL STATEMENTS

~~Notes~~NOTE 11 to- ~~unaudited~~SUBSEQUENT ~~CONDENSED Consolidated Financial Statements~~EVENTS

~~NOTE~~Subsequent 11events are –events ~~STOCK~~or ~~COMPENSATION~~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 the following subsequent events occurred requiring accrual or disclosure that are not otherwise disclosed herein.

~~Summary~~On April 19, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with United Community Banks, Inc. (“United”), the holding company for United Community Bank, Blairsville, Georgia. Under the Merger Agreement, the Company will merge with and into United and Horry County State Bank will merge with and into United Community Bank.

OnUnder ~~July~~the ~~28,~~terms ~~2016,~~and subject to the ~~shareholders~~conditions of the ~~Company~~Merger ~~approved~~Agreement, at the ~~HCSB~~effective ~~Financial~~time ~~Corporation~~of ~~2016~~the ~~Equity Incentive~~Merger ~~Plan~~ (the “~~Plan~~Effective Time”), ~~that~~outstanding ~~provides~~shares ~~for~~of the ~~grant~~Company’s ofvoting ~~stock~~common ~~options, restricted~~ stock ~~awards,~~and ~~restricted~~non-voting common stock ~~unit awards~~will ~~and~~be ~~other~~converted ~~equity~~into ~~awards to~~ the ~~Company’s~~right ~~officers,~~to ~~employees,~~receive ~~directors, advisors and consultants~~0.0050 ~~A total of 30,000,000~~ shares of ~~voting~~United’s common stock, ~~have~~$1.00 ~~been~~per ~~reserved~~value ~~for~~per ~~the issuance of awards under the Plan~~share, ~~all~~together ofwith ~~which may be issued as stock~~cash ~~options~~in ~~(including~~lieu ~~incentive~~of ~~stock~~any ~~options),~~fractional ~~restricted~~shares. ~~stock~~The orMerger ~~restricted~~Agreement ~~stock~~also ~~units,~~includes ~~subject~~provisions tothat address the ~~anti-dilution~~treatment ~~provisions~~ of the ~~Plan.~~outstanding equity ~~The~~awards ~~Board~~ of ~~Directors has appointed~~ the ~~Compensation~~Company ~~Committee~~in as the ~~administrator of the Plan~~merger.

~~Stock~~The ~~Options~~Merger Agreement has been unanimously approved by the boards of directors of each of the Company and United. The closing of the merger is subject to the required approval of the Company’s shareholders, requisite regulatory approvals, the effectiveness of the registration statement to be filed by United with respect to United’s common stock to be issued in the merger, and other customary closing conditions. The parties anticipate closing the merger during the third quarter of 2017.

The Plan requires that stock options can only be issued at or above the fair market value per share on the date of grant. Stock options granted to participants under the Plan may be either incentive stock options or Nonqualified Options. Stock options entitle the recipient to purchase shares of common stock at the exercise price specified in the award agreement. The administrator at its discretion determines the number of option shares, the term of the option, the exercise price (subject to the minimum price described above), the vesting schedule and performance conditions (if any), and any other terms and conditions. In the case of 10% shareholders who receive incentive stock options, the exercise price may not be less than 110% of the fair market value of the common stock on the date of grant. An exception to each of these requirements may be made for options that the Company may grant in substitution for options held by employees of companies that the Company acquires. In such a case, the exercise price is adjusted to preserve the economic value of the employee’s stock option from his or her former employer.-43-

~~The Compensation Committee will determine the periods during which~~HCSB ~~the~~FINANCIAL ~~options~~CORPORATION ~~will~~AND be exercisable. However, no option will be exercisable more than 10 years after the date of grant. Payment of the exercise price of any option may be made in cash or cash equivalent, as determined by the Compensation Committee, to the extent permitted by law (i) by means of any cashless exercise procedure approved by the Compensation Committee, (ii) by delivering shares of common stock already owned by the option holder, (iii) by such other method as the Compensation Committee may determine, or (iv) any combination of the foregoing.SUBSIDIARY

Restricted Stock

Restricted stock consists of shares of common stock which are granted to the participant, subject to certain restrictions against disposition and certain obligations to forfeit such shares to the Company under certain circumstances. The restrictions, which may be different for each award, will be determined by the Compensation Committee in its sole discretion. Restricted stock awarded under the Plan will be represented by a book entry registered in the name of the participant. Unless otherwise provided in an agreement, the participant will have the right to receive dividends, if any, with respect to such shares of restricted stock, to vote such shares and to enjoy all other shareholder rights, except that the participant may not sell, transfer, pledge or otherwise dispose of the restricted stock until the restrictions have expired. A breach of the terms and conditions established by the Compensation Committee pursuant to an award will cause a forfeiture of the award. The Compensation Committee expects that participants generally will not be required to make any payment for common stock received pursuant to an award, except to the extent otherwise determined by the Compensation Committee or required by law.

Restricted Stock Units

Restricted stock units are similar to restricted stock awards in that the value of a restricted stock unit is denominated in shares of stock. However, unlike a restricted stock award, restricted stock units are a mere promise by the Company to grant stock at a specified point in the future, and no shares of stock are transferred to the participant until certain requirements or conditions associated with the award are satisfied.

-40-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 11 – STOCK COMPENSATION - continued

Stock Compensation Activity

On August 18, 2016, the Compensation Committee awarded 27,750,000 shares of restricted stock. Subject to earlier forfeiture or accelerated vesting under circumstances described in the applicable Restricted Stock Award Agreements, the restricted shares vest ratably over a five year period, subject to the Company’s achievement of certain performance-based and time-based vesting conditions prior to the applicable vesting date. The performance-based conditions are (i) the removal of the Consent Order, and (ii) the reporting of two consecutive quarters of consolidated net income.

The following summarizes non-vested restricted stock activity for the period (dollars in thousands except per share amounts):

	Nine months Ended September 30,
	2016
Balance, beginning of period		—
Granted		27,750,000
Vested		—
Balance, end of period		27,750,000
Weighted average grant date value per share	$	0.10
Stock compensation expense for the period	$	46
Unrecognized compensation expense	$	2,729
Period over which unrecognized compensation expense will be recognized (years)		4.9

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Total shares of restricted stock granted under the Plan is 27,750,000.

-41-

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Notes to unaudited CONDENSED Consolidated Financial Statements

NOTE 12 - 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:

Filing Compare · HCSB FINANCIAL CORP