SecProbe.io

CORRESP
1
filename1.htm

HCSB Financial Services
Corporation
James R. Clarkson, President
Horry County State Bank
5009 Broad Street

Loris, South Carolina 29596-0218
T: (843) 716-6101

October 31, 2005

Ms. Joyce Sweeney
United States Securities
and Exchange Commission
Division of Corporation Finance

Washington, DC 20549

Re:        HCSB Financial Services Corporation

              Form 10-KSB for the period ended December 31, 2004

     File No. 0-26995

Dear Ms. Sweeney:

Thank you for your review of our
response to your September 21, 2005 letter and these additional comments in review of our
Form 10-KSB for the year ended December 31, 2004. Set forth are our responses to your
letter.

Form 10-KSB for the
period ended December 31, 2004

Financial Statements

Note 7 – Derivative
Instruments and Hedging Activities page 40

Comment 1

We note your supplemental response to
comment 1 from our letter dated September 21, 2005. Please tell us whether your
convertible advances automatically convert to a variable-rate when the FHLB exercises its
option or if you must prepay the fixed-rate advance in cash unless you negotiate a new
advance. Provide us with the contractual excerpts that describe the conversion terms.

Response:

Our convertible advances do not automatically convert. They convert at the option of the FHLB
after specified dates in each of the advances and with 2 business days notice from the
FHLB. The interest rate swap option also does not automatically convert from a fixed to
variable rate when the FHLB converts its advance. The Bank

must provide two day notification of exercise to Morgan Keegan. The dates that the FHLB
advances may convert and the dates that the swaption may be exercised coincide exactly.

Attached in Exhibit 1 is excerpted information related to the $4.6 million FHLB advance and
early conversion option.

Attached in Exhibit 2 is excerpted information related to the Interest rate swap and
swaption on the $4.6 million advance.

Comment 2

Please tell us how you considered the
applicability of paragraph 68(d) of SFAS 133 since this paragraph specifically provides an
exception for call and put rights that are mirrored and these instruments contain
conversion features.

Response:

The following is Paragraph 68(d) of SFAS 133:

The interest-bearing asset or liability is not prepayable. (that is, able to be settled by
either party prior to its scheduled maturity), except as indicated in the following
sentences. This criterion does not apply to an interest-bearing asset or liability that is
prepayable solely due to an embedded call option provided that the hedging interest rate
swap contains an embedded mirror-image call option.

The call option embedded in the swap is considered a mirror image of the call option embedded
in the hedged item if (1) the terms of the two call options match (including matching
maturities, strike price, related notional amounts, timing and frequency of payments, and
dates on which the instruments may be called) and (2) the entity is the writer of one call
option and the holder (or purchaser) of the other call option. Similarly, this criterion
does not apply to an interest-bearing asset or liability that is prepayable solely due to
an embedded put option provided that the hedging interest rate swap contains an embedded
mirror-image put option.

After review of SFAS 133, we believe that the hedged FHLB advances are not considered to be
prepayable by either party. (There are no callable features in the advances). The swaption
is a mirror image of the interest rate swap, but this is designed to ensure that the terms
of the interest rate swap continue to match the terms of the FHLB advance if the FHLB
exercises their option to convert the advances from a fixed rate to a variable rate.

In connection with your comments, we
acknowledge that:

•

The Company is responsible for the adequacy and accuracy of the disclosure in
filing;

•

Staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from
taking any action with respect to the filing; and

•

The Company may not assert staff comments as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United States.

We appreciate the staff’s
assistance and suggestions to help improve the Company’s disclosures, and hope the
above responses clarify the issues you have raised with respect to our Form 10-KSB dated
December 31, 2004. Please do not hesitate to contact me at 843-716-6101 if additional
clarification or information is necessary.

Sincerely,

/s/ James R. Clarkson
James R. Clarkson

President and Chief Executive Officer

Exhibit 1

     FEDERAL HOME LOAN BANK

     OF ATLANTA
     We Give Communities Credit

     1475 Peachtree Street, NE

     Atlanta, Georgia 30309

     PO Box 105565

     Atlanta, Georgia 30348-5565

     (404) 888-8000

To:
Horry County State
Bank

Attention:     Harold Hinson

From:
W. Wesley McMullan
                        Federal
Home Loan Bank of Atlanta

Re:
Supplemental Confirmation
                        Ten Year Convertible Advance

                        Ref # 75556008

Date:
May 22, 2000

The purpose of this communication is
to set forth the terms and conditions of the transaction entered into between the Federal
Home Loan Bank of Atlanta and Horry County State Bank on the Trade Date referred to below:

     Advance Amount

     $                                                 4,600,000

     Trade Date
     May 18, 2000

     Effective Date
     May 24, 2000

     Subject to Early Termination Option

     Rate Payer
     Horry County State Bank

     Rate
     6.49

     Floating/Fixed Rate Day Count Fraction
     Actual/360

     Payment Dates
     February 24, May 24, August 24, and November

     24 of each year commencing August 24, 2000 and

     continuing to and including May 24, 2010

     subject to adjustment in accordance with the

     MODIFIED FOLLOWING BUSINESS DAY CONVENTION with

     adjustment of period end dates.

     Early Conversion Option
     FHLB Atlanta shall have the option to convert

     in whole only this transaction effective as of

     May 24, 2001 and any Payment Date thereafter, subject to

     adjustment with the MODIFIED FOLLOWING BUSINESS DAY

     CONVENTION with at least two (2) business days prior

     notice to the Payment Date to Horry County State Bank,

     (which may be oral notice by telephone followed by written

     notice). The advance will be converted into a three (3)

     Month LIBOR-based floating rate advance (ARC

     at 3M LIBOR flat.

Early Termination Option

If the Federal Home Loan Bank of
Atlanta elects NOT to convert this advance then, Horry County State Bank may elect
with at least two (2) business days prior written notice to the Federal Home Loan Bank of
Atlanta to terminate in whole this transaction on any Payment Date, subject to adjustment
with the MODIFIED FOLLOWING BUSINESS DAY CONVENTION and the payment of a prepayment fee to
the Federal Home Loan Bank of Atlanta. The prepayment amount will equal the present value
of the daily lost cash flow to the new convertible advance with the same remaining
maturity and remaining options discounted at the current offering rate. Such amounts will
normally substantially exceed the prepayment fees associated with standard fixed rate
credit products.

If the Federal Home Loan Bank of
Atlanta elects to convert this advance; then Horry County State Bank may elect with at
least two (2) business days prior written notice to the Federal Home Loan Bank of Atlanta
to terminate in whole or in part this transaction without payment of a termination amount
(prepayment fee) on any subsequent Payment Date, subject to adjustment with the MODIFIED
FOLLOWING BUSINESS DAY CONVENTION.

All terms capitalized and not
identified in this agreement shall default to 1991 ISDA definition.

Representation

Each party represents that (i) it is
entering into the transaction evidenced hereby as principal; (ii) it is not relying upon
any representations except those expressly set forth in the “Addendum to Agreement
for Advances and Security Agreement with Blanket Floating Lien” executed between
Federal Home Loan Bank of Atlanta and Horry County State Bank; or this confirmation; (iii)
it has consulted with its own legal, regulatory, tax, business, investment, financial and
accounting advisors to the extent it has deemed necessary, and it has made its own
investment, hedging and trading decisions based upon its own judgment and upon any advice
from such advisors as it has deemed necessary and not upon any view expressed by the other
party; and (iv) it is entering into this transaction with a full understanding of the
terms, conditions, and risks thereof and it is capable of and willing to assume those
risks.

Confirmed as of the date first
written above.

Convertible advances may subject a
borrower to unsuitable interest rate risks, because they are likely to be converted to a
floating rate in a rising interest rate environment and remain unconverted in a falling
interest rate environment. It is understood that such advances are convertible prior to
the maturity date at the sole discretion of the Federal Home Loan Bank of Atlanta. The
Bank makes no representations as to the expectation of the average life of a Convertible
advance. A borrower should carefully consider how a Convertible advance could affect its
financial and/or business strategy under alternative interest rate scenarios. The Bank
reserves the right to limit the amount of Convertible advances granted to an individual
borrower.

Horry County State Bank

By: /s/ James R. Clarkson

Name: JAMES R. CLARKSON

Title: PRESIDENT

Federal Home Loan Bank
of Atlanta

By:  /s/ W. Wesley
McMullan

Name: W. Wesley McMullan

Title: Group Vice
President, Director of Asset Management

Exhibit 2

Morgan Keegan

______________________________________________________________________________________________________

Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
901/524-4100
Telex 69-74324
WATS 800/386-7426
Members   New York Stock
Exchange, Inc.

September 5, 2003

Horry County State Bank
5009
Broad Street
Loris, SC 29569

Dear Mike Hambrick:

The purpose of this letter agreement
is to confirm the terms and conditions of the Swap and Swaption Transactions entered into
between Morgan Keegan as Duly Authorized Agent fur Regions Bank (“Morgan
Keegan”) and Horry County State Bank (“Counterparty”) on the Trade Date
specified below (the “Swap and Swaption Transactions”). This letter agreement
constitutes a ‘Confirmation’ as referred to in the Master Agreement specified
below.

The definitions and provisions
contained in the 2000 ISDA Definitions published by the International Swaps and
Derivatives Association, Inc. (the “Definitions”) are incorporated into this
confirmation. In the event of any inconsistency between those definitions and provisions
and this Confirmation, this Confirmation will govern. In the event that Morgan Keenan and
Counterparty have entered into a master agreement effective prior to or on the date
hereof, this Confirmation supplements, forms part of, and is subject to such Master
Agreement. In the event Morgan Keegan and Counterparty have not entered into such a Master
Agreement, all of the terms and provisions of the 1992 International Swap Dealers
Association, Inc. Master Agreement (Local Currency – Single Jurisdiction Version)(the
“1992 Master Agreement”) are hereby incorporated by this reference as if fully
set forth herein, and this Transaction and all other Transactions entered into between
Morgan Keegan and Counterparty shall be governed by and subject to the terms and
provisions of the 1992 Master Agreement with (i) New York law being hereby elected as the
governing law, (ii) the “Cross Default” provisions of Section 5(a)(vi) of the
1992 Master Agreement being applicable to the Counterparty (and a Threshold Amount
applicable to the Counterparty of 3% of the consolidated tangible net worth of the
Counterparty), and (iii) the “Credit Event Upon Merger” provisions of Section
5(b)(ii) of the 1992 Master Agreement being applicable to the Counterparty. Upon execution
after the date hereof by Morgan Keegan and Counterparty of a Master Agreement (the
“Subsequent Master Agreement”), the terms and provisions of the 1992 Master
Agreement shall be superseded in their entirety by the terms and provisions of the
Subsequent Master Agreement, and this Transaction and all other Transactions entered into
between Morgan Keegan and Counterparty prior to execution of the Subsequent Master
Agreement shall thereafter be subject to and governed by the terms and provisions of the
Subsequent Master Agreement. This Confirmation shall be subject to and constitute a
“Confirmation” for the purposes of any Master Agreement, 1992 Master Agreement
(as incorporated herein) or Subsequent Master Agreement now or from time to time hereafter
in effect.

The terms of this particular Swap and
Swaption Transactions to which this Confirmation relates are as follows:

SWAP TRANSACTION:

     Notional Amount:

     USD $4,600,000.00

     Trade Date:
     September 5, 2003

     Effective Date:
     September 9, 2003

     Termination Date:
     May 24, 2010

     Subject to adjustment in accordance with the

     Modified Following Business Day Convention.

Page 1

Fixed Amounts:

     Fixed Rate Payer:

     Morgan Keegan

     Fixed Rate Payer Payment Dates:
     The 24th day of each February, May, August,

     and November, commencing on November 24, 2003

     up to and including the Termination Date,

     subject to adjustment in accordance with the

     Modified Following Business Day Convention.

     Fixed Rate:
     3.53%

     Fixed Rate Day Count Fraction:
     Act/360

Floating Amounts:

     Floating Rate Payer:

     Counterparty

     Floating Rate Payer Payment Dates:
     The 24th day of each February, May, August,

     and November, commencing on November 24, 2003

     up to and including the Termination Date,

     subject to adjustment in accordance with the

     Modified Following Business Day Convention.

     Floating Rate for Initial Calculation Period:
     1.14219%

     Floating Rate Option:
     USD-LIBOR-BBA

     Designated Maturity:
     Quarterly

     Floating Rate Day Count Fraction:
     Act/360

     Reset Dates:
     The first day of each Calculation Period.

     Method of Averaging:
     Not Applicable

     Compounding:
     Not Applicable

     Compounding Dates:
     Not Applicable

     Business Days:
     London business days for resets and New York

     and London business days for payments

     Business Day Convention:
     Modified Following

     Calculation Agent:
     Morgan Keegan

SWAPTION TRANSACTION:

     Trade Date:

     September 5, 2003

     Option  Terms, Procedure for Exercise,

     Settlement Provisions:

     Option Buyer:
     Counterparty

     Option Style:
     Bermudan Swaption

Page 2

     Exercise Date(s)

     The 24th day of each February, May, August,

     and November, commencing on November 24, 2003

     up to and including February 24, 2010,

     subject to adjustment in accordance with the

     Modified Following Business Day Convention

     Exercise Period:
     Counterparty will provide Morgan Keegan

     notice of its intent to enter into this

     transaction no later than 10:00 AM (EST) 2

     Business Days prior to each Exercise Date.

     Notice of Exercise:
     By Telephone

     Physical Settlement:
     Applies

     Exercise Business Days
     London and New York

THE PARTICULAR TERMS OF THE
UNDERLYING SWAPTION TRANSACTION TO WHICH THE OPTION RELATES ARE AS FOLLOWS:

     Notional Amount:

     USD $4,600,000.00

     Effective Date:
     Two Business Days after the Exercise Date

     Termination Date: