Exhibit 13

HCSB FINANCIAL CORPORATION

HORRY COUNTY STATE BANK

Loris, South Carolina

Annual Report

2009

www.hcsbaccess.com

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Contents

Headquarters

Certain statements in this annual report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the future plans and expectations, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.  Please see our annual report filed on Form 10-K for further discussion of these risks.

HCSB Financial Corporation will furnish, free of charge, copies of the Annual Report and the Company’s Report to the Securities and Exchange Commission (Form 10-K) upon written request to James R. Clarkson, President and C.E.O., HCSB Financial Corporation, Post Office Box 218, Loris, South Carolina 29569.

HCSB FINANCIAL CORPORATION AND SUBSIDIARY

MESSAGE TO SHAREHOLDERS

The year 2009 proved to be the most tumultuous year for our nation’s financial system since the 1930’s.  It was marked by a stagnant economy, a real estate market that continued to sag, the near collapse of two of America’s largest automobile manufacturers, rising unemployment that reached double digits, over 100 bank failures nationwide and a general demise in public confidence that resulted from these factors.

The local economy in which Horry County State Bank operates suffered through many of these same turmoils as our real estate market dipped substantially in activity and values, especially in the areas of condominiums and single family residential developments.  The influx of new residents into our communities slowed dramatically as many of those who would have normally moved here were unable to sell their homes elsewhere and thus not able to reinvest in new residences here.

Rising unemployment across our country caused many tourists to either cancel vacations to our beaches or to shorten their stays from full weeks to oftentimes three or four days.  It also had a negative impact on our golf industry as many Americans simply began looking in earnest last year for ways to reduce spending.  As a result of all of this, our local unemployment rates also climbed into the double digits.

Going into 2009 the single most negative impact to Horry County State Bank was the adverse effect of low interest rates on our bank’s net interest margin, which serves as our primary source of revenue.  With drastic setbacks experienced in the real estate market and the resulting impacts on many businesses and individuals in our marketplace, however, credit quality issues rapidly became our bank’s primary concern.

As with virtually every bank in America, the rates of delinquencies and defaults rose to an all-time high, as did our inventory of foreclosed property.  These situations were not restricted to a single community within our market, but rather to our entire trade area.  Likewise, those who encountered financial difficulties included people of a variety of income brackets, and some were customers with long standing successful track records.  And as a result, we found it necessary to substantially increase our Reserve for Loan Losses, which resulted in a net loss of $1.35 million, the first loss we had incurred since our bank’s opening year in 1988.

In the midst of an abnormal year, however, there were some very bright spots for HCSB.  We did utilize the TARP Capital Purchase Program afforded to us by the U.S. Treasury to bolster our capital position during the first quarter of 2009.  This enabled us to take advantage of a number of excellent opportunities to attract some well-seasoned, prime customer relationships from some of our competitors who were forced to reduce their loan portfolios and turn away customers.  In so doing, we were able to increase our outstanding loans by 14.0% to $484.1 million from 2008, with most of this growth occurring during the first half of 2009.  Total assets also increased during the year to close at $759.6 million, which represents a 17.9% increase from the prior year.

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Our deposits increased by 19.3% during 2009 to a level of $578.3 million.  According to a report prepared annually by the Federal Deposit Insurance Corporation, as of June 30, 2009, HCSB had risen to No. 3 in market share of deposits held in banks in Horry County, and we had the largest growth in deposits of any bank in the county during the twelve months ended June 30, 2009.  In fact, of the banks with the five largest deposit share ratios in Horry County, only HCSB realized an increase in deposit market share during this period.

Perhaps the most significant claim that we are able to continue to make at HCSB is that our bank still meets the regulatory requirements to be considered a “well-capitalized” bank.  During these depressed economic times in which we are currently experiencing, capital is indeed “King” in the banking industry as it serves as a source of strength for endurance and future growth.

Although we fully expect the year 2010 to largely be a continuation of the economic conditions that prevailed in 2009, we believe we have definite reasons for optimism for HCSB.  We continue to operate in a market that is the most desirable for people who desire to relocate specifically to South Carolina or generally along the Atlantic coast.  Many folks in the Carolinas, Tennessee and Virginia will still make every effort to afford some family vacation time at our beaches because the cost is significantly less than most other vacation attractions.  And, too, we have performed a very in depth review of our expenses and determined that while some reductions may be difficult and unpleasant to initiate, we can and already have made the decisions to get our bank to a much leaner operational position in 2010.

I have no doubt that our significant growth in market share of deposits of late was no accident.  We have a group of outstanding employees, and we are working diligently to provide financial services of the highest quality in our trade area.  With the solid factors of capital and employees on our side, we intend to bounce back and accomplish great things as we go forward.  Our local area has endured previous downturns in the economy in agriculture, tourism and development before, and we always seem to come back stronger than ever.  While this downturn may be more significant than most others, we still have the underlying components to bring us back, and at HCSB we believe we have learned some valuable lessons to better position us in the future.

On behalf of our Board of Directors and employees, I thank you for your continued trust and support, and I encourage you to come “Bank with Me” at HCSB!

Most Respectfully,

James R. Clarkson

President & CEO

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HCSB FINANCIAL CORPORATION AND SUBSIDIARY

Ten Year History

(Dollars in thousands)

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Selected Financial Data

The following table sets forth certain selected financial data concerning the Company.  The selected financial data has been derived from the financial statements.  This information should be read in conjunction with the financial statements of the Company, including the accompanying notes, included elsewhere herein.

(1)     Adjusted for 5% stock dividends declared in February 2001, February 2002 and February 2003, and the 7.5% stock dividend declared in January 2004.  Adjustments have also been made for the 3% stock dividends declared in January 2005, January 2006, February 2008 and January 2009, as well as the two-for-one stock split in the form of a 100% stock dividend declared in January 2007.  There was no stock dividend declared in January 2010.

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Description of Company’s Business

HCSB Financial Corporation (the Company) was incorporated on June 10, 1999 to become a holding company for Horry County State Bank.  The Company’s only significant asset is its wholly owned subsidiary, Horry County State Bank (the Bank).  The Bank is a state-chartered bank incorporated on December 18, 1987 and located at 5201 Broad Street, Loris, South Carolina.  The Company’s primary market includes Horry County in South Carolina and Columbus and Brunswick Counties in North Carolina.  From its 14 branch locations, the Company offers a full range of deposit services, including checking accounts, savings accounts, certificates of deposit, money market accounts, and IRAs, as well as a broad range of non-deposit investment services.

The Company is primarily engaged in the business of attracting deposits from the general public and using these deposits together with other funds to make agricultural, commercial, consumer, and real estate loans.  The Company’s operating results depend to a substantial extent on the difference between interest and fees earned on loans and investments and the Company’s interest expense, consisting principally of interest paid on deposits and borrowings.  Unlike most industrial companies, virtually all of the assets and liabilities of financial institutions are monetary.  As a result, interest rates have a greater effect on the financial institution’s performance.  In addition to competing with other traditional financial institutions, the Company also competes for checking and savings dollars with nontraditional financial intermediaries, such as mutual funds, as well as with investment opportunities available via the internet.  This has resulted in a highly competitive market area.  The Company attempts to compete in this highly competitive market by focusing on providing the highest quality of personal service and attention to its customers.

In 1995, the Company opened its first branch office in the Mt. Olive community of Horry County and has since expanded its branch network to 14 banking offices located throughout Horry County, as well as an Operations Center in Loris, South Carolina which houses the Company’s support services.  This expansion of its branch system has enabled the Company to more effectively compete for deposits and loans.  By expanding into different communities, the Company has been able to substantially diversify its market place from one of a predominantly agricultural flavor to one which blends residential developments of retirees and others, tourism, major employment areas, central county government and the market’s most active overall growth areas.  In so doing, the Company has reduced considerably the seasonality in its loan portfolio.  At the same time the coastal markets have proven to offer primarily commercial real estate lending opportunities, and commercial real estate has been significantly adversely impacted by the current economic recession.

During the year 2009, the Company completed the construction of its permanent branch location in the Ocean Drive section of North Myrtle Beach.  As a result the Company closed its temporary location in The Plaza at Gator Hole and moved into the new facility, which enables the Company to offer drive-up banking services.

Also during the year 2009, the Company completed construction of its new Operations Center in the Loris Commerce Center and moved its executive offices and support services into this building.  The Company plans to market its former Operations Center for sale or lease.

In order to support this growth in its branch network, the Company has undertaken several secondary common stock offerings.  Prior to its reorganization from a bank into the holding company, Horry County State Bank undertook three such secondary offerings of its common stock in efforts to strengthen the Bank’s regulatory capital position to support projected future growth in assets.  Since the reorganization was consummated in 1999, the Company committed to another secondary offering in 2002 whereby the Company issued an additional 365,712 shares of common stock at a price per share of $22.00, resulting in over $8,000,000 in added capital.

In December 2004, the Company participated in the issuance of $6,000,000 of trust preferred securities through its non-consolidated subsidiary HCSB Financial Trust I (the Trust) to enable the company to pursue its growth goals and yet maintain a “well-capitalized” status as defined by banking regulatory agencies.

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On March 6, 2009, the Company issued 12,985 shares of preferred stock, having $0.01 par value per share and a liquidation preference of $1,000 per share, in connection with the United States Treasury’s Capital Purchase Program.  The dividend rate of 5% per annum will be payable for the first five years, increasing to 9% per annum in 2014.  The Company also issued 91,714 warrants to purchase common stock at a strike price of $21.09 per share.  The warrants expire 10 years from the issue date.  The Company plans to redeem all shares of this series of preferred stock within five years.

Market for Common Share and Dividends

As of December 31, 2009, there were 3,787,170 shares of our common stock outstanding held by approximately 2,400 shareholders of record.  There is currently no established public trading market in our common stock and trading and quotations of our common stock have been limited and sporadic.  Most of the trades of which the Company is aware have been privately negotiated by local buyers and sellers.  In addition to these trades, the Company is aware of a number of trades reported on Yahoo! that occurred on the OTC Bulletin Board between December 31, 2008 and December 31, 2009.  These trades ranged from $11.00 to $15.30.  We have included these trades in the following table.  Because there has not been an established market for our common stock, we may not be aware of all prices at which our common stock has been traded.  We have not determined whether the trades of which we are aware were the result of arm’s-length negotiations between the parties.  Based on information available to us, we believe transactions in our common stock can be fairly summarized as follows for the periods indicated:

All share and per share data in this report has been adjusted to reflect all stock dividends and splits declared by the Company.

No cash dividends have ever been declared or paid by the Company.  However, the Board of Directors approved a 10% stock dividend for each of the five years ended December 31, 1996.  The Company also paid a two-for-one stock split in the form of a 100% stock dividend in 2000, a 5% stock dividend in each of the years 2001, 2002, and 2003, a 7.5% stock dividend in 2004, a 3% stock dividend in 2005, 2006 and 2008, and a two-for-one stock split in the form of a 100% stock dividend in January 2007.  The Company also paid a 3% stock dividend on February 20, 2009 to shareholders of record as of close of business February 6, 2009.  There was no stock dividend declared in January 2010 because the Company is prohibited from declaring any dividends on its common stock until March 6, 2012 without Treasury’s approval unless the 12,985 shares of preferred stock have been repurchased from Treasury.

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Management does not expect the Company to pay cash dividends in the foreseeable future.  The Company’s ability to pay dividends depends on the ability of its subsidiary, Horry County State Bank, to pay dividends to the Company.  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.  In addition, the Bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital and until it receives approval from the Federal Deposit Insurance Corporation (the “FDIC”) and the South Carolina Board of Financial Institutions.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

INTRODUCTION

The following discussion describes our results of operations for 2009 as compared to 2008 and also analyzes our financial condition as of December 31, 2009 as compared to December 31, 2008.  Like most community banks, we derive most of our income from interest we receive on our loans and investments.  Our primary source of funds for making these loans and investments is our deposits, both interest-bearing and noninterest-bearing.  Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowed funds.  In order to maximize our net interest income, we must not only manage the volume of these balance sheet items, but also the yields that we earn on our interest-earning assets and the rates that we pay on interest-bearing liabilities.

We have included a number of tables to assist in our description of these measures.  For example, the “Average Balances” table shows the average balance during 2009, 2008, and 2007 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category.  A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio.  Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown.  We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included an “Interest Rate Sensitivity Analysis” table to help explain this.  Finally, we have included a number of tables that provide details about our investment securities, our loans, and our deposits and other borrowings.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.  In the Loan Portfolio section we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

In addition to earning interest on our loans and investments, we earn income through fees that we charge to our customers. Likewise, we incur other operating expenses as well.  We describe the various components of this noninterest income, as well as our noninterest expense, in the Other Income and Other Expense section.

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GENERAL

Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than two years.  These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.  Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry with falling home prices and increasing foreclosures and unemployment have created strains on financial institutions.  Across the country many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.  The following discussion and analysis describes our performance in this challenging economic environment.

The Company continued to grow throughout 2009.  Total assets increased by $115,302,000, or 17.89%, and net loans increased by $59,505,000, or 14.01%.  Much of this growth is attributable to the success of our branch network.

Profitability decreased in 2009 by 160.07%, from net earnings of $2,244,000 in 2008 to a net loss of $1,348,000 in 2009, primarily as a result of an increase in provision for loan losses of $8,607,000, or 490.71%.  The growth of the loan portfolio resulted in a loan to deposit ratio of 85.02%.  The Company will need to attract additional deposits, borrow more money, or a combination of the two to continue expansion of the loan portfolio.

The Company is working diligently to improve asset quality and to reduce its investment in commercial real estate loans as a percentage of Tier 1 capital.  The Company is reducing its reliance on brokered CDs and is committed to maintaining its “well capitalized” status.

A more detailed discussion of the factors contributing to growth and challenges is presented below.

RESULTS OF OPERATIONS

The Company experienced an increase of $397,000, or 1.55%, in interest income on loans and related fees for the year ended December 31, 2009.  The Company also experienced an increase in the interest income on taxable securities, which increased $2,855,000 or 57.62%.  This contributed to an increase in total interest income of $2,962,000 or 9.51%, over the course of 2009.  Because of the increase in growth in interest-bearing deposits and other borrowings, total interest expense increased $1,056,000, or 7.26%, to $15,593,000.  This resulted in a $1,906,000, or 11.48%, increase in net interest income in 2009.  The Company also experienced increases in non-interest income and expenses.  Non-interest income increased $3,977,000, or 110.90%, due to gains on sale of available-for-sale securities of $3,663,000.  Non-interest expenses increased $2,812,000, or 18.64%, during 2009 due to the acquisition of additional personnel in our mortgage lending and investment services areas.  Overall, the Company had a net loss for the year ended December 31, 2009 of $1,348,000, compared to net earnings of $2,244,000 for the year ended December 31, 2008.  This represents a decrease in net income of $3,592,000, or 160.07%.  The net loss was driven by the increase in provision for loan losses of $8,607,000, or 490.71%, from $1,754,000 at December 31, 2008 to $10,361,000 at December 31, 2009.

ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY

During the twelve months ended December 31, 2009, total assets increased $115,302,000, or 17.89%, when compared to December 31, 2008.  The primary reason for the increase in total assets was an increase in our loan portfolio of $62,614,000, or 14.59%, during 2009 from $429,038,000 at December 31, 2008.  Total deposits increased $93,541,000, or 19.30%, from the December 31, 2008 amount of $484,751,000.  Interest-bearing deposits increased $93,165,000, or 20.55%, and noninterest-bearing deposits increased $376,000, or 1.20%, during 2009.  The increase in deposits was primarily due to the increase in our money market savings accounts, which increased $58,545,000, or 62.28%, from $94,008,000 at December 31, 2008 to $152,553,000 at December 31, 2009.

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DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY

The Company has sought to maintain a conservative approach in determining the distribution of its assets and liabilities. The following table presents the percentage relationships of significant components of the Company’s average balance sheets for the last three fiscal years.

Balance Sheet Categories as a Percent of Average Total Assets

NET INTEREST INCOME

Earnings are dependent to a large degree on net interest income.  Net interest income represents the difference between gross interest earned on earning assets, primarily loans and investment securities, and interest paid on deposits and borrowed funds. Net interest income is affected by the interest rates earned or paid and by volume changes in loans, investment securities, deposits, and borrowed funds.  The interest rate spread and the net yield on earning assets are two significant elements in analyzing the Company’s net interest income.  The interest rate spread is the difference between the yield on average earning assets and the rate on average interest-bearing liabilities.  The net yield on earning assets is computed by dividing net interest income by the average earning assets.

For the year ended December 31, 2009, net interest income was $18,508,000, an increase of $1,906,000, or 11.48%, over net interest income of $16,602,000 in 2008.  Interest income from loans, including fees, was $25,997,000, an increase of $397,000, or 1.55%, from 2008 to 2009 as employment of additional lenders resulted in an increase in loans.  Interest expense for the year ended December 31, 2009 was $15,593,000, compared to $14,537,000 for 2008.

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This represents an increase of $1,056,000, or 7.26%, compared to the prior year.  The interest rate spread and net yield on earning assets reflected the pressure created by the lower interest rate environment when compared to the previous year as our customers began to invest more of their monies into higher yielding deposit products, such as money market deposit accounts and certificate of deposits, which increased $96,077,000, or 23.87%, throughout 2009.  The net yield realized on earning assets was 2.77% for 2009, compared to 3.35% in 2008.  The interest rate spread was 2.64% and 3.14% in 2009 and 2008, respectively.

The following table sets forth, for the periods indicated, the weighted-average yields earned, the weighted-average yields paid, the interest rate spread, and the net yield on earning assets.  The table also indicates the average daily balance and the interest income or expense by specific categories.

Average Balances, Income and Expenses, and Rates

(1)   The effects of loans in nonaccrual status and fees collected are not significant to the computations.

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RATE/VOLUME ANALYSIS

Net interest income can also be analyzed in terms of the impact of changing rates and changing volume.  The following table describes the extent to which changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate), (ii) changes due to rates (changes in rates multiplied by prior period volume), and (iii) changes in rate and volume (change in rate multiplied by the change in volume) is provided as follows:

(1)  Volume-rate changes have been allocated to each category based on a consistent basis between rate and volume.

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RATE SENSITIVITY

Interest rates paid on deposits and borrowed funds and interest rates earned on loans and investments have generally followed the fluctuations in market rates in 2009 and 2008.  However, fluctuations in market interest rates do not necessarily have a significant impact on net interest income, depending on the Company’s interest rate sensitivity position. A rate-sensitive asset or liability is one that can be repriced either up or down in interest rate within a certain time interval. When a proper balance exists between rate-sensitive assets and rate-sensitive liabilities, market interest rate fluctuations should not have a significant impact on liquidity and earnings.  The larger the imbalance, the greater the interest rate risk assumed and the greater the positive or negative impact of interest fluctuations on liquidity and earnings.

Interest rate sensitivity management is concerned with the management of both the timing and the magnitude of repricing characteristics of interest-earning assets and interest-bearing liabilities and is an important part of asset/liability management.  The objectives of interest rate sensitivity management are to ensure the adequacy of net interest income and to control the risks to net interest income associated with movements in interest rates.  The following table, “Interest Rate Sensitivity Analysis,” indicates that, on a cumulative basis, after three through twelve months, rate-sensitive liabilities exceeded rate-sensitive assets, resulting in a twelve-month liability sensitive position.  For a bank with a liability-sensitive position, or negative gap, falling interest rates would generally be expected to have a positive effect on net interest income, and rising interest rates would generally be expected to have the opposite effect.  The following table presents the Company’s rate sensitivity at each of the time intervals indicated as of December 31, 2009 and may not be indicative of the Company’s rate-sensitivity position at other points in time:

Interest Rate Sensitivity Analysis

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PROVISION FOR LOAN LOSSES

The provision for loan losses is charged to earnings based upon management’s evaluation of specific loans in its portfolio and general economic conditions and trends in the marketplace.  The 2009 and 2008 provisions for loan losses and their related effect of increasing the allowance for loan losses are related to growth in the loan portfolio.  Please refer to the section “Loan Portfolio” for a discussion of management’s evaluation of the adequacy of the allowances for loan losses. In 2009 and 2008, the provisions for loan losses were $10,361,000 and $1,754,000, respectively.

NONINTEREST INCOME

Noninterest income was $7,563,000 for the year ended December 31, 2009, an increase of $3,977,000, or 110.90%, when compared with the year ended December 31, 2008.  The increase is primarily a result of net gains on sale of securities of $4,102,000 for the year ended December 31, 2009 as compared to $439,000 for the same period in 2008, an increase of $3,663,000, or 834.40%.  Due to the increase in pre-payments of principal on our mortgage-backed securities, management began to realize gains within the portfolio to help improve the profitability of the bank.  This increase in noninterest income is also a result of an increase of $167,000, or 53.35%, in income from cash value of life insurance from $313,000 for the year ended December 31, 2008 to $480,000 for the year ended December 31, 2009.  This increase is due to the Bank’s investment in bank-owned life insurance policies of $600,000 during 2009.  In addition, gains on sale of residential mortgages in the secondary market increased $100,000, 18.73%, from $534,000 for the year ended December 31, 2008 to $634,000 for the year ended December 31, 2009.  This increase is due to additional personnel hired in this area, as well as, the various tax advantages available to the homebuyer during 2009.  Also, brokerage commission fees increased $89,000, or 61.38%, from $145,000 for the year ended December 31, 2008 to $234,000 for the year ended December 31, 2009.  This increase is due to two additional personnel hired in this area.  We also experienced decreases in noninterest income.  We incurred a decrease in service charges on deposit accounts of $90,000, or 5.29%, from $1,700,000 for the year ended 2008 compared to $1,610,000 for the year ended 2009, due to the increase in growth in our money market and certificate of deposits, which generates minimal service charge fee income.

NONINTEREST EXPENSES

Most categories of noninterest expenses increased during 2009 due to continued growth of the Company.  Salaries and employee benefits increased $902,000, or 10.15%, due to the employment of additional personnel in our mortgage lending and investment brokerage services.  Also, FDIC insurance premiums increased $801,000, or 183.72%, from $436,000 for the year ended December 31, 2008 to $1,237,000 for the comparable period in 2009.  Also, other operating expenses increased $578,000, or 21.44%, from $2,696,000 for the year ended December 31, 2008 to $3,274,000 for the year ended December 31, 2009, which was a result of increased legal and repossession expenses relating to our impaired loans.  In addition, losses incurred in the sale of assets increased $186,000 to $171,000 for the period ended December 31, 2009 due to the sale of our repossessions and foreclosed property.  There were also losses experienced on stock in Silverton Bank due to its insolvency of $122,000 during 2009.  There were also increases in net occupancy expense during 2009 of $78,000, or 7.01%, to $1,190,000 for the year ended December 31, 2009 due to the construction of an Operations Center, which became operational in November 2009 and the movement of our Ocean Drive branch from a store front location to a permanent location.

INCOME TAXES

The Company’s income tax benefit for 2009 was $840,000, a decrease of $1,944,000 from the 2008 expense of $1,104,000. The decrease in the expense results from the decrease in income before taxes in 2009 compared to 2008.  The Company’s effective tax rates for the years ended December 31, 2009 and 2008 were 38.39% and 32.97%, respectively.

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LIQUIDITY

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

As of December 31, 2009, the Company had unused lines of credit to purchase federal funds from unrelated banks totaling $21,000,000.  These lines of credit are available on a one to fourteen day basis for general corporate purposes.  The lenders have reserved the right not to renew their respective lines.  Unpledged securities available-for-sale, which totaled $25,720,000 at December 31, 2009, also serve as a ready source of liquidity. Management believes that the Company’s liquidity sources are adequate to meet its operating needs.  The level of liquidity is measured by the loans-to-total borrowed funds ratio, which was at 69.12% and 71.00% at December 31, 2009 and 2008, respectively.

IMPACT OF OFF-BALANCE-SHEET INSTRUMENTS

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments consist of commitments to extend credit and standby letters of credit.  Commitments to extend credit are legally binding agreements to lend to a customer at predetermined interest rates as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument.  Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities.  Standby letters of credit often expire without being used.  Management believes that through various sources of liquidity, the Company has the necessary resources to meet obligations arising from these financial instruments.

The Company uses the same credit underwriting procedures for commitments to extend credit and standby letters of credit as for on-balance-sheet instruments.  The credit worthiness of each borrower is evaluated and the amount of collateral, if deemed necessary, is based on the credit evaluation.  Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties, as well as liquid assets such as time deposit accounts, brokerage accounts, and cash value of life insurance.

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

As of December 31, 2009, commitments to extend credit totaled $53,840,000 and standby letters of credit totaled $1,137,000.

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The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at December 31, 2009.