2016 Annual Report
Building Value
Building Value
Over the last several years I have shared with you our
progress as we focused on protecting our brand while at
the same time realigning the financial elements of our core business. Our brand which
promises “To Make the Lives of Customers Better” is a commitment we never wavered
from even during the most difficult days of realigning our bank. The strength of our brand
has allowed us to build a strong foundation, a foundation that will support our continued
focus on growth and building value for our associates, our customers and our Shareholders.
As I stated in my message to you last year, we have spent the last eight years reshaping the
way we do business and the way we grow our bank. In 2016 we can say with confidence
that we were able to successfully shift our focus from repairing the bank to growing the
bank. We are now well on our way to leveraging our brand, restoring the yield on our
assets, gathering more income from our business diversification initiatives and continuing
to provide our customers with an exceptional banking experience. As a result we had a
great year filled with many note worthy successes. I would like to share with you some of
the successes we are especially proud of, as well as share with you our plan to continually
grow our business in ways that generate value for our customers, our associates and our
shareholders.
Strong Business Model
The strength of our business model and strategy is clearly evident in our financial results.
Our commitment to maintaining our asset quality adds to the health of our franchise and
allows us to allocate our capital growth initiatives.
1
Our low cost of funds is a result of the effort our retail team places on growing
relationships with our current deposit customers. By delivering exceptional customer
service we are able to attract new customers primarily through word of mouth from our
satisfied and loyal customers. We have
a tremendous track record over the
last 8 years of continually delivering on
deposit growth goals. This gives us a
unique strategic advantage in how we
structure and price our lending,
helping us attract more earning assets
and producing high performing
margins.
Results speak for themselves; our loan
growth at the end of 2016 was up $28
million or 10.9% from the previous
year.
Our continued emphasis on loan mix
and funding composition has allowed
us to break through the 4% net
interest margin barrier; an
accomplishment our industry struggles
to meet.
Strong Diversification
We made a strategic decision to
diversify our revenue sources and in
early 2015 we expanded our mortgage
business line to better serve our
customers and to bolster our fee
income sources. Our strategy has been focused on shifting our fee income contribution to
revenue to 35-40%; and we accomplished this. This strategy has added significantly to our
profit margins. Our strong residential mortgage team is able to provide a comprehensive
selection of products to customers that meet almost any mortgage need while providing
outstanding service and turnaround times for a better customer experience.
2
Our approach to the auto finance business line has been deliberate, slow and with an
emphasis on local lending. It is now into its fourth profitable year and is an important
channel that provides us access to new customers and gives us another diverse source of
income.
Strategically, we will continue to focus on growing our market presence through the
Carolina’s where the community banking model remains strong. We will aggressively
recruit local talent who understand the markets they live in and can quickly leverage their
relationships into business opportunities. We will provide our market teams with strong
centralized support to ensure we effectively manage our risk, maintain excellent loan
quality, provide fast loan decisions, and well managed products and services.
Look for us to build out our presence with the same unique branch layout and strong
branding we have always had, only in a smaller footprint, reflective of our customers desire
to do banking at the branch as well as through their mobile devices.
Strong Culture
The strength of our culture is at the core of our success. It
carried us through our tough times and now it is our strong
culture that will fuel our growth and value building
initiatives.
Our exceptional customer satisfaction results and our
consistently high levels of associate engagement are major
contributors to our success, now and in the future. We will
place considerable effort in the next few years on building a
culture of operational excellence which will improve our
efficiency ratio and customer experience.
95%
Customer
Satisfaction
Some areas of particular focus will be to utilize technology
more effectively, reduce our dependency on manual/paper
based processes by moving toward a fully digital environment. These initiatives will result
in reduced costs, improved customers service turnaround times and a more capable and
scalable workforce. Our goal is to keep pace with our customers desire to have access to
their information anytime and anywhere to allow for optimal convenience.
3
Strong Value Proposition for the Shareholder
One of our main strengths is building relationships with small businesses that operate in
our communities to help them grow and succeed. We have a strong relationship banking
team that is knowledgeable in small business lending and in providing deposit services,
and banking their employees. In every community we serve we provide a level of
customer service to all our customers that is unmatched by our competition. It is critical
that we stay laser focused on capturing our fair share of
small business and consumer customers in the
communities we serve. Consumer customers and small
businesses are not only the life blood of our
communities they are the life blood of our company and
the only path to creating sustainable, true value for our
shareholders.
All of our efforts have resulted in an improvement in
our Tangible Book Value over the past 4 years and since
2013 we have been realized an increase of 61.5%; an
outstanding performance. We do however recognize
that we are not an actively traded stock and because of
this our company is undervalued in the public markets. So as we move into the next phase
of growth we plan on making the necessary strategic moves to improve this.
Along with an aggressive loan and deposit growth plan we have a comprehensive plan to
enhance our capital structure. A strong capital structure will allows us to be proactive with
our growth initiatives, whether it is organic growth, strategic acquisition, and /or lending
team acquisition.
For our shareholders it will also provide the company with an increased stock liquidity.
Our capital raise plan is outlined in detail as part of the proxy vote and I encourage you to
vote yes for this initiative which we will deploy to grow the business with a goal to
increasing value to the customer, associates and shareholders.
Thank you and best regards,
Rick Saunders
President and CEO
4
First Reliance Bancshares, Inc. and Subsidiary
Report on Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
First Reliance Bancshares, Inc. and Subsidiary
Contents
Page
Independent Auditor’s Report ........................................................................................................................ 1-2
Consolidated Financial Statements
Consolidated Balance Sheets ........................................................................................................................ 3
Consolidated Statements of Operations ....................................................................................................... 4
Consolidated Statements of Comprehensive Income................................................................................... 5
Consolidated Statements of Changes in Shareholders' Equity ..................................................................... 6
Consolidated Statements of Cash Flows ....................................................................................................... 7
Notes to Consolidated Financial Statements ........................................................................................... 8-45
Independent Auditor's Report
The Board of Directors
First Reliance Bancshares, Inc. and Subsidiary
Florence, South Carolina
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of First Reliance Bancshares, Inc. and
Subsidiary which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related
consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for
the years then ended and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Elliott Davis Decosimo | www.elliottdavis.com
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of First Reliance Bancshares, Inc. and Subsidiary as of December 31, 2016 and 2015, and the
results of their operations and their cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Columbia, South Carolina
February 28, 2017
2
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2016 and 2015
Assets
Cash and cash equivalents:
Cash and due from banks
Interest-bearing deposits with other banks
Total cash and cash equivalents
Time deposits in other banks
Securities available-for-sale
Securities held-to-maturity (Estimated fair value of $20,842,142
and $26,270,623 at December 31, 2016 and 2015, respectively)
Nonmarketable equity securities
Total investment securities
Mortgage loans held for sale
Loans receivable
Less allowance for loan losses
Loans, net
Premises, furniture and equipment, net
Accrued interest receivable
Other real estate owned
Cash surrender value life insurance
Net deferred tax assets
Mortgage servicing rights
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing transaction accounts
Interest-bearing transaction accounts
Savings
Time deposits $250,000 and over
Other time deposits
Total deposits
Securities sold under agreement to repurchase
Advances from Federal Home Loan Bank
Notes payable
Junior subordinated debentures
Subordinated debentures
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies - Notes 4 and 18
Shareholders’ Equity
Preferred stock
Series A cumulative perpetual preferred stock - 15,349 shares issued and outstanding
at December 31, 2015
Series B cumulative perpetual preferred stock - 767 shares issued and outstanding
at December 31, 2015
Series D non-cumulative preferred stock – 600 and 612 shares issued and outstanding
at December 31, 2016 and 2015, respectively
Common stock, $0.01 par value; 20,000,000 shares authorized,
4,679,881 and 4,680,481 shares issued and outstanding
at December 31, 2016 and 2015, respectively
Capital surplus
Treasury stock, at cost, 39,069 and 38,663 shares at December 31, 2016 and 2015, respectively
Nonvested restricted stock
Retained earnings (deficit)
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
3
2016
2015
$
$
$
$
$
$
4,810,304
22,287,560
27,097,864
101,816
17,862,635
20,438,084
734,300
39,035,019
5,355,532
288,126,331
(2,648,535)
285,477,796
18,873,718
961,449
2,870,484
13,964,986
8,463,657
4,211,582
1,707,519
408,121,422
76,175,393
76,736,892
115,741,395
17,757,192
50,124,647
336,535,519
11,088,526
8,000,000
6,893,211
10,310,000
4,896,398
298,950
3,431,091
381,453,695
-
-
600
46,798
25,071,543
(219,106)
(262,153)
2,262,742
(232,697)
26,667,727
3,703,357
16,357,619
20,060,976
101,612
11,255,855
25,470,171
813,400
37,539,426
8,070,283
259,806,101
(2,693,985)
257,112,116
22,856,744
979,347
2,506,733
13,615,610
9,950,018
1,015,403
1,502,230
375,310,498
68,147,262
76,304,111
99,870,631
14,990,007
44,612,452
303,924,463
8,201,396
10,000,000
-
10,310,000
-
54,002
2,586,907
335,076,768
15,179,709
767,000
612
46,804
26,007,698
(217,230)
(326,481)
(1,259,166)
34,784
40,233,730
$
408,121,422
$
375,310,498
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 2016 and 2015
Interest income:
Loans, including fees
Investment securities:
Taxable
Tax exempt
Other interest income
Total
Interest expense:
Time deposits
Other deposits
Other interest expense
Total
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Income from mortgage operations
Income from bank owned life insurance
Other service charges, commissions, and fees
Gain on sale of available-for-sale securities
Gain on sale of premises
Other
Total
Noninterest expenses:
Salaries and benefits
Occupancy
Furniture and equipment related expenses
Other
Total
Income before income taxes
Income tax expense (benefit)
Net income
Preferred stock dividends accrued
2016
2015
$
14,363,973
$
13,866,514
801,878
113,099
109,578
15,388,528
366,955
300,580
630,250
1,297,785
925,411
113,599
129,247
15,034,771
327,768
209,324
303,036
840,128
14,090,743
14,194,643
9,075
777,678
14,081,668
13,416,965
1,385,517
6,153,308
349,374
1,236,026
13,261
652,367
240,780
10,030,633
11,270,540
1,572,271
1,517,840
4,428,482
18,789,133
1,430,808
2,949,877
333,046
1,161,788
9,562
-
328,365
6,213,446
9,747,542
1,628,527
1,583,048
4,185,607
17,144,724
5,323,168
2,485,687
1,801,260
(6,326,661)
3,521,908
8,812,348
937,848
1,450,440
Net income available to common shareholders
$
2,584,060
$
7,361,908
Average common shares outstanding, basic
Average common shares outstanding, diluted
Income per common share:
Basic income per common share
Diluted income per common share
4,438,570
4,554,138
4,491,053
4,595,204
$
$
0.58
0.57
1.64
1.60
See Notes to Consolidated Financial Statements
4
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2016 and 2015
Net income
Other comprehensive loss, net of tax:
Securities available-for-sale
Unrealized holding losses arising during the period
Income tax benefit
Net of income taxes
Reclassification adjustment for gains realized in
net income
Income tax expense
Net of income taxes
2016
2015
$
3,521,908
$ 8,812,348
(354,501)
120,530
(233,971)
(13,261)
4,509
(8,752)
(54,140)
18,408
(35,732)
(9,562)
3,251
(6,311)
Other comprehensive loss attributable to securities available-for-sale
(242,723)
(42,043)
Securities held-to-maturity
Amortization of net unrealized gains
capitalized on securities transferred from available-for-sale
Income tax benefit
Net of income taxes
Other comprehensive loss
Comprehensive income
(37,513)
12,755
(24,758)
(67,950)
23,103
(44,847)
(267,481)
(86,890)
$
3,254,427
$ 8,725,458
See Notes to Consolidated Financial Statements
5
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2016 and 2015
Preferred
Stock
Common
Stock
Capital
Surplus
Treasury
Stock
Nonvested
Restricted
Stock
Retained
Earnings
(Deficit)
Other
Compre-
hensive
Income
(Loss)
Total
Accumulated
Balance, December 31, 2014
$ 15,946,709 $
47,398 $ 30,914,242 $
(205,512) $
(385,330) $(10,071,514) $
121,674 $ 36,367,667
Net income
Other comprehensive loss,
net of tax
Dividend payment on
preferred stock
(4,914,514)
Conversion of Common Stock
to Preferred Stock - Series D
612
(612)
Issuance of Common Stock
18
7,970
Net Change in Restricted Stock
Purchase of Treasury Stock
58,849
(11,718)
8,812,348
8,812,348
(86,890)
(86,890)
(4,914,514)
-
7,988
58,849
(11,718)
Balance, December 31, 2015
15,947,321
46,804
26,007,698
(217,230)
(326,481)
(1,259,166)
34,784
40,233,730
Net income
Other comprehensive loss,
net of tax
Redemption of preferred
stock - Series A and B
(15,946,709)
Dividend payment on
preferred stock
(937,848)
Conversion of Preferred Stock -
Series D to Common Stock
(12)
12
Net issuance (forfeiture) of
Common Stock
Net Change in Restricted Stock
Purchase of Treasury Stock
(18)
1,693
64,328
(1,876)
3,521,908
3,521,908
(267,481)
(267,481)
(15,946,709)
(937,848)
-
1,675
64,328
(1,876)
Balance, December 31, 2016
$
600 $
46,798 $ 25,071,543 $
(219,106) $
(262,153) $ 2,262,742 $
(232,697) $ 26,667,727
See Notes to Consolidated Financial Statements
6
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and 2015
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided (used) by operating activities:
2016
2015
$
3,521,908
$
8,812,348
Provision for loan losses
Depreciation and amortization expense
Gain on sales of securities available-for-sale
Discount accretion and premium amortization
Net gain on sale of other real estate owned
Gain on sale of premises
Write down of other real estate owned
Disbursements for mortgages held for sale
Proceeds from sales of mortgages held for sale
Deferred income taxes
Decrease in interest receivable
Increase (decrease) in interest payable
Increase in cash surrender value of life insurance
Increase in deferred compensation on restricted stock
Increase in other assets
Increase in mortgage servicing rights
Increase in other liabilities
Net cash provided (used) by operating activities
Cash flows from investing activities:
Purchases of securities available-for-sale
Maturities of securities available-for-sale
Maturities of securities held-to-maturity
Proceeds from sale of securities available-for-sale
Net decrease in nonmarketable equity securities
Net increase in time deposits in other banks
Net increase in loans receivable
Purchases of premises, furniture and equipment
Proceeds from sale of premises, furniture and equipment
Proceeds from sale of other real estate owned
Net cash (used) provided by investing activities
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
transaction accounts and savings accounts
Net increase (decrease) in certificates of deposit and other time deposits
Net decrease in advances from Federal Home Loan Bank
Net increase in securities sold under agreements to repurchase
Net proceeds from issuance of common stock
Increase in notes payable
Redemption of preferred stock
Proceeds from issuance of subordinated debentures
Purchase of treasury stock
Payment of dividends on preferred stock
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash paid during the year for:
Income taxes
Interest
Supplemental noncash investing and financing activities:
Foreclosures on loans
Net change in unrealized losses on investment securities
See Notes to Consolidated Financial Statements
7
9,075
908,827
(13,261)
81,041
(11,031)
(652,367)
17,370
(327,583,115)
330,297,866
1,617,635
17,898
244,948
(349,374)
64,328
(292,606)
(3,196,179)
844,183
5,527,146
(14,200,128)
6,348,470
4,922,467
881,445
79,100
(204)
(29,246,249)
(487,575)
4,307,979
501,400
(26,893,295)
24,331,676
8,279,380
(2,000,000)
2,887,130
1,675
6,893,211
(15,946,709)
4,896,398
(1,876)
(937,848)
28,403,037
7,036,888
20,060,976
27,097,864
93,000
1,052,837
871,490
(267,481)
$
$
$
777,678
930,789
(9,562)
188,173
(366,898)
-
33,580
(141,957,066)
135,856,851
(6,751,247)
54,969
(752,077)
(333,045)
58,849
(486,919)
(1,015,403)
206,354
(4,752,626)
(5,000,000)
1,546,426
5,749,484
5,179,670
689,000
(203)
(9,649,939)
(279,351)
-
4,416,734
2,651,821
32,824,382
(14,218,537)
(15,000,000)
627,993
7,988
-
-
-
(11,718)
(4,914,514)
(684,406)
(2,785,211)
22,846,187
20,060,976
597,270
1,592,205
4,145,896
(86,890)
$
$
$
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies
Organization:
First Reliance Bancshares, Inc. (the “Company”) was incorporated to serve as a bank holding company for its
subsidiary, First Reliance Bank (the “Bank”). First Reliance Bank was incorporated on August 9, 1999 and commenced
business on August 16, 1999. The principal business activity of the Bank is to provide banking services to domestic
markets throughout South Carolina. The Bank is a South Carolina chartered commercial bank, and its deposits are
insured by the Federal Deposit Insurance Corporation (“FDIC”). The consolidated financial statements include the
accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany
balances and transactions. In 2005, the Company formed First Reliance Capital Trust I (the "Trust") for the purpose of
issuing trust preferred securities. In accordance with current accounting guidance, the Trust is not consolidated in
these financial statements.
Management’s Estimates:
The preparation of consolidated financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance
for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for
losses on loans and valuation of foreclosed real estate, management obtains independent appraisals in accordance
with regulatory policy. Management must also make estimates in determining the estimated useful lives and methods
for depreciating premises and equipment.
While management uses available information to recognize losses on loans and foreclosed real estate, future
additions to the allowances 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 examinations. 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.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of
loans receivable, investment securities, federal funds sold and amounts due from banks.
The Company makes loans to individuals and small businesses for various personal and commercial purposes
primarily throughout South Carolina. At December 31, 2016 and 2015, the majority of the total loan portfolio was to
borrowers from within these areas.
8
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Concentrations of Credit Risk, continued:
The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of
borrowers. Additionally, management is not aware of any concentrations of loans to groups of borrowers or
industries that would also be affected by sector-specific economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries
and geographic regions, management monitors exposure to credit risk from concentrations of lending products and
practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans
with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Management has determined that
there is minimal concentration of credit risk associated with its lending policies or practices.
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 and management believes that these particular practices
do not subject the Company to unusual credit risk. The Company’s investment portfolio consists principally of
obligations of the United States and its agencies or its corporations and obligations of state and local governments. 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.
Securities Available-for-Sale:
Investment securities available-for-sale are carried at amortized cost and adjusted to estimated market value by
recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments
are recorded as part of accumulated other comprehensive income in shareholders’ equity, net of deferred income
taxes. Reductions in market value considered by management to be other than temporary are reported as a realized
loss and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is
determined by specific identification and is used in computing the gain or loss upon sale.
Securities Held-to-Maturity:
Investment securities held-to-maturity are stated at cost, adjusted for amortization of premium and accretion of
discount computed by the straight-line method. The Company has the ability and management has the intent to hold
designated investment securities to maturity. Reductions in market value considered by management to be other
than temporary are reported as a realized loss and a reduction in the cost basis of the security.
Nonmarketable Equity Securities:
At December 31, 2016 and 2015, non-marketable equity securities consist of the following:
Federal Home Loan Bank stock
Community Bankers Bank stock
Total
9
2016
2015
$
$
676,200
58,100
734,300
$
$
755,300
58,100
813,400
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Nonmarketable Equity Securities, continued:
Nonmarketable equity securities are carried at cost since no quoted market value and no ready market exists.
Investment in the Federal Home Loan Bank (“FHLB”) is a condition to borrowing from that bank, and the stock is
pledged to collateralize such borrowings. Dividends received on nonmarketable equity securities are included as a
separate component of interest income.
Loans Receivable:
Loans receivable are stated at their unpaid principal balance, net of charge offs. Interest income is computed using
the simple interest method and is recorded in the period earned.
When serious doubt exists as to the collectability of a loan or when a loan becomes contractually 90 days past due as
to principal or interest, interest income is discontinued unless the estimated net realizable value of collateral exceeds
the principal balance and accrued interest. When interest accruals are discontinued, income earned but not collected
is reversed. Loans are removed from nonaccrual status when they become current as to both principal and interest,
when concern no longer exists as to the collectability of the principal and interest, and after a sufficient history of
satisfactory payment performance has been established.
Loan origination and commitment fees and certain direct loan origination costs (principally salaries and employee
benefits) are deferred and amortized as an adjustment of the related loan yields. Generally, these amounts are
amortized over the contractual life of the related loans or commitments.
The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s
problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether
all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal
payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period
of delay, are expected to be collected.
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
uncollectibility 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 collectibility of the loans in light of historical experience, 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.
10
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Allowance for Loan Losses, continued:
The allowance consists of specific, general and unallocated components. The specific component relates to loans that
are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows or collateral value or observable market price of the
impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current
information and events, it is probable that the Company 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. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for 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.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the
borrower is granted that the Company would not otherwise consider, the related loan is classified as a troubled debt
restructuring. The restructuring of a loan may include the transfer from the borrower to the Company of real estate,
receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the
loan, modification of the loan terms, or a combination of the above.
Premises, Furniture and Equipment:
Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation
is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and for
furniture and equipment of 5 to 10 years. Leasehold improvements are amortized over the term of the lease. The
cost of assets sold or otherwise disposed of and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and
repairs are charged to current expense. The costs of major renewals and improvements are capitalized based upon
the Company's policy.
11
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Other Real Estate Owned:
Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at the
lower of cost or the fair market value minus estimated costs to sell. Any write-downs at the date of foreclosure are
charged to the allowance for loan losses. Expenses to maintain such assets and subsequent changes in the valuation
allowance are included in other noninterest expense along with gains and losses on disposal.
Cash Surrender Value of Life Insurance:
Cash surrender value of life insurance represents the cash value of policies on certain current and former officers of
the Company.
Residential Mortgage Loans Held for Sale:
Loans held for sale represent loans originated or acquired by the Company with the intent to sell. The Company has
elected the fair value option of accounting for certain residential mortgage loans. Electing to use the fair value option
of accounting allows a better offset of the changes in the fair values of the loans and the derivative instruments used
to economically hedge them without the burden of complying with the requirements for hedge accounting. These
loans are initially recorded and carried at fair value, with changes in fair value recognized in income from mortgage
operations. Loan origination fees are recorded when earned.
The Company issues rate lock commitments to borrowers on prices quoted by secondary market investors.
Derivatives related to these commitments are recorded as either assets or liabilities in the balance sheet and are
measured at fair value. Changes in the fair value of the derivatives are reported in current income or other
comprehensive income depending on the purpose for which the derivative is held. The Company does not currently
engage in any activities that qualify for hedge accounting. Accordingly, changes in fair value of these derivative
instruments are included in noninterest income in the consolidated statements of operations.
Mortgage Servicing Rights:
Mortgage servicing rights (“MSRs”) represent the present value of the future net servicing fees from servicing
mortgage loans. Servicing assets and servicing liabilities must be initially measured at fair value, if practicable. For
subsequent measurements, an entity can choose to measure servicing assets and liabilities either based on fair value
or lower of cost or market. The Company uses the fair value measurement option for MSRs.
The methodology used to determine the fair value of MSRs is subjective and requires the development of a number
of assumptions, including anticipated prepayments of loan principal. Fair value is determined by estimating the
present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other
assumptions validated through comparison to trade information, industry surveys and with the use of independent
third party appraisals. Risks inherent in the MSRs valuation include higher than expected prepayment rates and/or
delayed receipt of cash flows. The value of MSRs is significantly affected by mortgage interest rates available in the
marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest
rates, the value of mortgage servicing rights declines due to increasing prepayments attributable to increased
mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing rights generally
increases due to reduced refinance activity. MSRs are carried at fair value with changes in fair value and servicing
fees (cost) recorded as a component of income from mortgage operations.
12
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Liabilities for Representations and Warranties:
The Company is exposed to certain liabilities under representations and warranties made to purchasers of mortgage
loans and servicing rights that require indemnification or repurchase of loans. At the time it issues a guarantee, the
Company is required to recognize an initial liability for the fair value of obligations assumed under the guarantee.
The Company establishes a contingency reserve for its liabilities under representations and warranties provided to
purchasers of its mortgage loans and servicing rights. This reserve is maintained at a level considered appropriate by
management to provide adequately for known and inherent losses. The reserve is based upon a continuing review of
past loss experience, estimates and assumptions of risk elements and future economic conditions. Additions to the
reserve are recorded in other expenses.
Management's judgment about the adequacy of the reserve is based upon a number of assumptions about future
events which it believes to be reasonable but which may or may not be accurate. There is no assurance that
additional increases in the reserve will not be required. The Company may from time-to-time be required to
repurchase loans previously sold to investors due to loan nonperformance. At December 31, 2016 and 2015, the
Company had $71,515 and $11,353, respectively, recorded for potential indemnifications to other third-party
purchasers based on management’s analysis.
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on
temporary differences between the amount of taxable income and pretax financial income and between the tax bases
of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition, deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Interest and penalties related to income tax matters are
recognized in income tax expense.
Advertising Expense:
Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are
expensed in the period in which the direct mailings are sent. Advertising and public relations costs of $201,459 and
$268,836 were included in the Company's results of operations for 2016 and 2015, respectively.
Retirement Benefits:
A trusteed retirement savings plan is sponsored by the Company and provides retirement benefits to substantially all
officers and employees who meet certain age and service requirements. The plan includes a “salary reduction”
feature pursuant to Section 401(k) of the Internal Revenue Code. In 2004, the Company converted the 401(k) plan to
a 404(c) plan. The 404(c) plan changes investment alternatives to include the Company's stock. Under the plan and
present policies, participants are permitted to make contributions up to 15% of their annual compensation. At its
discretion, the Company can make matching contributions up to 6% of the participants’ compensation. The Company
charged $173,178 and $147,119 to earnings for the retirement savings plan in 2016 and 2015, respectively. In
addition, the Company made an elective contribution to the retirement savings plan during 2016 totaling $231,726
recorded within salaries and employee benefits expense. No elective contribution was made during 2015.
13
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Retirement Benefits, continued:
During 2006, the Board of Directors approved a supplemental retirement plan for the directors and certain officers.
These benefits are not qualified under the Internal Revenue Code and they are not funded. For 2016 and 2015 the
supplemental retirement expense was $237,161 and $192,057, respectively. The current accrued but unfunded
amount is $1,818,588 and $1,642,646 at December 31, 2016 and 2015, respectively. However, certain funding is
provided informally and indirectly by bank owned life insurance policies. The cash surrender value of the life
insurance policies is recorded as a separate line item in the accompanying consolidated balance sheets at $13,964,986
and $13,615,610 at December 31, 2016 and 2015, respectively.
The Company has split-dollar life insurance arrangements with certain of its officers. At December 31, 2016 and 2015,
the split-dollar liability relating to these arrangements totaled $304,468 and $286,558, respectively. For 2016 and
2015, the Company recognized net expenses of $17,910 and $16,857, respectively, related to these arrangements.
Equity Incentive Plan:
On January 19, 2006, the Company approved the 2006 Equity Incentive Plan. This plan provides for the granting of
dividend equivalent rights, options, performance unit awards, phantom shares, stock appreciation rights and stock
awards, each of which shall be subject to such conditions based upon continued employment, passage of time or
satisfaction of performance criteria or other criteria as permitted by the plan. The plan allows granting up to 950,000
shares of stock to officers, employees, and directors, consultants and service providers of the Company or its
affiliates. Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, the
Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of
incentive stock options may not be less than the market value of a share of common stock on the date the option is
granted. The related compensation cost for all stock-based awards is recognized over the service period for awards
expected to vest. Any options that expire unexercised or are canceled become available for re-issuance. The
Company's equity incentive plan is further described in Note 19.
Common Stock Owned by the Employee Stock Ownership Plan (“ESOP”):
All shares held by the ESOP are treated as outstanding for purposes of computing earnings per share. Purchases and
redemptions of the Company’s common stock by the ESOP are at estimated fair value as determined by independent
valuations. Dividends on shares held by the ESOP are charged to retained earnings. At December 31, 2016 and 2015,
the ESOP owned 435,492 and 419,106 shares of the Company’s common stock with an estimated value of $1,542,673
and $1,542,673, respectively. All of these shares were allocated to participants.
Income Per Common Share:
Basic earnings per common share represents income available to common shareholders divided by the weighted-
average number of common shares outstanding during the period. Diluted earnings per share reflect additional
common shares that would have been outstanding if dilutive potential common shares had been issued. Potential
common shares that may be issued by the Company relate to outstanding stock options and similar share-based
compensation instruments and are determined using the treasury stock method (see Note 20).
14
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Statements of Cash Flows:
For purposes of reporting cash flows in the consolidated financial statements, the Company considers certain highly
liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash
equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day
periods. Changes in the valuation account of securities available-for-sale, including the deferred tax effects, are
considered noncash transactions for purposes of the statement of cash flows and are presented in detail in the notes
to the consolidated financial statements.
Off-Balance Sheet Financial Instruments:
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. These financial instruments are recorded in the consolidated
financial statements when they become payable by the customer.
Recently Issued Accounting Pronouncements:
The following is a summary of recent authoritative pronouncements:
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance to change the recognition of
revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize
revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity
receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after
December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company
does not expect these amendments to have a material effect on its financial statements.
In April 2015, the FASB issued guidance which changes the presentation of debt issuance costs. The amendments will
be effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15,
2016, with early adoption permitted for financial statements that have not been previously issued. The Company
does not expect these amendments to have a material effect on its financial statements.
In August 2015, the FASB deferred the effective date of Accounting Standards Update ("ASU") 2014-09, Revenue from
Contracts with Customers. 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 will apply the guidance using a modified
retrospective approach. The Company does not expect these amendments to have a material effect on its financial
statements.
In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of
recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as
of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily
determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of
the amendments. The Company does not expect these amendments to have a material effect on its financial
statements.
15
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Recently Issued Accounting Pronouncements, continued:
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition,
measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early
adoption is permitted. The Company is currently evaluating the effect that implementation of the new standard will
have on its financial position, results of operations, and cash flows.
In March 2016, the FASB amended several topics of the ASC to make the guidance in all private company accounting
alternatives effective immediately by removing their effective dates. The amendments also include transition
provisions that provide that private companies are able to forgo a preferability assessment the first time they elect
the private company accounting alternatives. The amendments were effective immediately. These amendments did
not have a material effect on its financial statements.
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the
implementation guidance on principal versus agent considerations and address how an entity should assess whether
it is the principal or the agent in contracts that include three or more parties. 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 April 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance
related to identifying performance obligations and accounting for licenses of intellectual property. 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 May 2016, the FASB 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.
In 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, 2020. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.
The Company is currently evaluating the effect that implementation of the new standard will have on its financial
position, results of operations, and cash flows.
In August 2016, the FASB amended the Statement of Cash Flows topic of the ASC to clarify how certain cash receipts
and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for
the Company for 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.
16
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1. Summary of Significant Accounting Policies, Continued
Recently Issued Accounting Pronouncements, continued:
In October 2016, the FASB amended the Income Taxes topic of the ASC to modify the accounting for intra-entity
transfers of assets other than inventory. The amendments will be effective for the Company for 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 December 2016, the FASB issued amendments to clarify the ASC, correct unintended application of guidance, and
make minor improvements to the ASC that are not expected to have a significant effect on current accounting
practice or create a significant administrative cost to most entities. The amendments were effective upon issuance
(December 14, 2016) for amendments that do not have transition guidance. Amendments that are subject to
transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted. The Company does not expect these amendments to have a
material effect on its financial statements.
In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with
Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition
standard issued in 2014. The effective date and transition requirements for the technical corrections will be effective
for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance
using a modified retrospective approach. The Company does not expect these amendments to have a material effect
on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not
expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Risks and Uncertainties:
In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory.
There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or
on different basis, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio
that results from borrower's inability or unwillingness to make contractually required payments. Market risk reflects
changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies (regulatory risk). 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.
Reclassifications:
Certain captions and amounts in the 2015 consolidated financial statements were reclassified to conform with the
2016 presentation. The reclassifications did not have an impact on net income or shareholders’ equity.
17
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 2. Cash and Due From Banks
The Company is required to maintain balances with the Federal Reserve computed as a percentage of deposits. At
December 31, 2016 and 2015, this requirement was $2,435,000 and $2,892,000, respectively, net of vault cash and
balances on deposit with the Federal Reserve.
Note 3.
Investment Securities
The amortized cost and estimated fair values of securities available-for-sale were:
December 31, 2016
U.S. Government sponsored agencies
Mortgage-backed securities
Corporate bonds
Equity security
Total
December 31, 2015
U.S. Government sponsored agencies
Mortgage-backed securities
Corporate bonds
Equity security
Total
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated
Fair Value
$ 9,028,395
6,382,063
2,833,723
30,000
$ 18,274,181
$ 5,000,000
3,458,548
2,811,091
30,000
$ 11,299,639
$
$
$
$
-
10,149
-
-
10,149
-
31,825
-
-
31,825
$
$
$
$
226,553
180,915
14,227
-
421,695
$ 8,801,842
6,211,297
2,819,496
30,000
$ 17,862,635
29,850
-
45,759
-
75,609
$ 4,970,150
3,490,373
2,765,332
30,000
$ 11,255,855
The amortized cost and estimated fair values of securities held-to-maturity were:
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated
Fair Value
December 31, 2016
U.S. Government sponsored agencies
Mortgage-backed securities
Municipals
Capitalization of net unrealized gains
on securities transferred from
available-for-sale in 2013
Total
December 31, 2015
U.S. Government sponsored agencies
Mortgage-backed securities
Municipals
Capitalization of net unrealized gains
on securities transferred from
available-for-sale in 2013
Total
$ 4,768,428
12,489,025
3,121,658
20,379,111
58,973
$ 20,438,084
$ 5,729,310
16,508,390
3,135,985
25,373,685
96,486
$ 25,470,171
18
$
$
$
$
85,579
313,488
155,087
554,154
205,658
493,975
255,120
954,753
$
$
$
$
-
91,123
-
91,123
$ 4,854,007
12,711,390
3,276,745
$ 20,842,142
-
57,815
-
57,815
$ 5,934,968
16,944,550
3,391,105
$ 26,270,623
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 3.
Investment Securities, Continued
The following is a summary of maturities of securities available-for-sale and held-to-maturity as of December 31,
2016. 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. Mortgage-backed securities are presented as a separate line, maturities of which are based on
expected maturities since paydowns are expected to occur before contractual maturity dates.
Due after one year but within five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Equity security
Total
Securities
Available-for-Sale
Securities
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
5,000,000
6,862,118
-
11,862,118
6,382,063
30,000
$ 18,274,181
$
4,958,566
6,662,772
-
11,621,338
6,211,297
30,000
$ 17,862,635
$
503,038
7,387,048
-
7,890,086
12,489,025
-
$ 20,379,111
$
515,555
7,615,197
-
8,130,752
12,711,390
-
$ 20,842,142
The following tables show gross unrealized losses and fair value of securities available-for-sale and securities held-to-
maturity, aggregated by investment category, and length of time that individual securities have been in a continuous
realized loss position at December 31, 2016 and 2015.
Securities Available-for-Sale
Less Than 12 Months
U.S. Government sponsored agencies
Mortgage-backed securities
Corporate bonds
Total
12 Months or More
Corporate bonds
Total securities available-for-sale
Securities Held-to-Maturity
Less Than 12 Months
Mortgage-backed securities
Total
12 Months or More
Mortgage-backed securities
Total securities held-to-maturity
December 31, 2016
Fair
Value
Unrealized
Losses
December 31, 2015
Fair
Value
Unrealized
Losses
$
8,801,842
4,802,134
-
13,603,976
2,819,496
$ 16,423,472
$
$
4,100,521
4,100,521
-
4,100,521
$
$
$
$
226,553
180,915
-
407,468
14,227
421,695
91,213
91,213
-
91,213
$
$
$
$
4,970,150
-
2,765,331
7,735,481
-
7,735,481
2,927,507
2,927,507
815,344
3,742,951
$
$
$
$
29,850
-
45,759
75,609
-
75,609
33,201
33,201
24,614
57,815
19
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 3.
Investment Securities, Continued
At December 31, 2016, seven securities classified as available-for-sale and three securities classified as held-to-
maturity were in a loss position as detailed in the preceding tables. The Company does not intend to sell these
securities in the near future and it is more likely than not that the Company will not be required to sell these securities
before recovery of their amortized cost. The Company believes that, based on industry analyst reports and credit
ratings, the deterioration in value is attributable to changes in market interest rates and, therefore, these losses are
not considered other-than-temporary.
During 2016 and 2015, gross proceeds from the sale of available-for-sale securities were $881,445 and $5,179,670,
respectively. During these periods, gross gains totaled $13,261 and $13,546, while gross losses totaled $0 and $3,984,
respectively.
At December 31, 2016 and 2015, investment securities with a par value of $15,299,708 and $13,233,612 and a fair
market value of $15,220,970 and $13,295,031, respectively, were pledged as collateral to secure public deposits and
borrowings.
Note 4. Loans and Allowance for Loan Losses
Major classifications of loans receivable are summarized as follows at December 31:
Real estate loans:
Construction
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total loans
2016
2015
$
21,712,531
84,722,824
93,071,267
199,506,622
32,087,777
56,531,932
$ 288,126,331
$
21,818,648
74,442,236
92,029,160
188,290,044
29,182,335
42,333,722
$ 259,806,101
The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank. The
total of loans pledged was $48,524,832 and $44,338,113 at December 31, 2016 and 2015, respectively.
Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various
other financial institutions. These loans are sold with the agreement that a loan may be returned to the Company
within 90 days of purchase, at any time in the event the Company fails to provide necessary documents related to the
mortgages to the buyers, or if the Company makes false representations or warranties to the buyers. Loans sold under
these agreements in 2016 and 2015 totaled $330,297,866 and $135,856,851, respectively. The Company uses the
same credit policies in making loans held for sale as it does for on-balance-sheet instruments. Sales commitments are
to sell loans at an agreed upon price and are generally funded within 60 days.
20
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an analysis of the allowance for loan losses by class of loans for the years ended December 31, 2016
and 2015.
December 31, 2016
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$ 2,693,985 $
Beginning
balance
Provisions
Recoveries
Charge-offs
Ending balance $ 2,648,535 $
9,075
418,368
(472,893)
274,660 $
108,632
209,433
-
716,885 $
504,942
49,528
(161,955)
592,725 $ 1,109,400 $
974,122 $ 1,965,667 $
(507,202)
4,771
(23,508)
448,183 $ 2,150,308 $
106,372
263,732
(185,463)
38,498 $
(19,999)
25,538
(12,501)
31,536 $
689,820
(77,298)
129,098
(274,929)
466,691
December 31, 2015
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
Beginning
balance
Provisions
Recoveries
Charge-offs
Ending balance $ 2,693,985 $
$ 3,002,922 $
777,678
474,520
(1,561,135)
225,890 $ 1,244,879 $ 1,247,137 $ 2,717,906 $
429,677
171,861
(552,768)
274,660 $
(122,620)
234,605
(385,000)
974,122 $ 1,965,667 $
(198,621)
14,371
(343,744)
716,885 $
108,436
420,837
(1,281,512)
38,045 $
4,239
26,444
(30,230)
38,498 $
246,971
665,003
27,239
(249,393)
689,820
The following is a summary of loans evaluated for impairment individually and collectively, by class, for the years
ended December 31, 2016 and 2015.
December 31, 2016
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
Allowance
Evaluated for
impairment
Individually
Collectively
Allowance
for loan losses
Total Loans
Evaluated for
impairment
Individually
Collectively
Loans
receivable
$
38,348 $
- $
4,028 $
16,683 $
20,711 $
- $
2,610,187
592,725
1,105,372
431,500
2,129,597
31,536
17,637
449,054
$ 2,648,535 $
592,725 $ 1,109,400 $
448,183 $ 2,150,308 $
31,536 $
466,691
$ 5,186,870 $ 1,574,732 $ 1,749,022 $ 1,699,489 $ 5,023,243 $
282,939,461
20,137,799
91,371,778
82,973,802
194,483,379
32,087,777
- $
163,627
56,368,305
$ 288,126,331 $ 21,712,531 $ 84,722,824 $ 93,071,267 $ 199,506,622 $ 32,087,777 $ 56,531,932
21
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
December 31, 2015
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$
45,817 $
- $
21,541 $
23,572 $
45,113 $
- $
2,648,168
274,660
695,344
950,550
1,920,554
38,498
704
689,116
$ 2,693,985 $
274,660 $
716,885 $
974,122 $ 1,965,667 $
38,498 $
689,820
$ 8,237,102 $ 1,745,745 $ 2,066,045 $ 4,319,989 $ 8,131,779 $
251,568,999
20,072,903
87,709,171
72,376,191
180,158,265
29,179,408
2,927 $
102,396
42,231,326
$ 259,806,101 $ 21,818,648 $ 74,442,236 $ 92,029,160 $ 188,290,044 $ 29,182,335 $ 42,333,722
Allowance
Evaluated for
impairment
Individually
Collectively
Allowance
for loan losses
Total Loans
Evaluated for
impairment
Individually
Collectively
Loans
receivable
The following summarizes the Company’s impaired loans as of December 31, 2016.
With no related allowance recorded:
Real estate
Construction
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
With an allowance recorded:
Real estate
Construction
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Real estate
Construction
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Recorded
Investments
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
$ 1,574,732 $ 1,574,732 $
1,178,355
1,601,918
4,355,005
-
145,990
1,178,355
1,601,918
4,355,005
-
145,990
$ 4,500,995 $ 4,500,995 $
- $ 1,660,238 $
-
-
-
-
-
- $ 4,828,683 $
1,046,333
1,936,093
4,642,664
-
186,019
$
$
- $
570,667
97,571
668,238
-
17,637
685,875 $
- $
570,667
97,571
668,238
-
17,637
685,875 $
- $
4,028
16,683
20,711
-
17,637
38,348 $
- $
591,642
95,357
686,999
-
20,182
707,181 $
$ 1,574,732 $ 1,574,732 $
- $ 1,660,238 $
1,749,022
1,699,489
5,023,243
-
163,627
1,749,022
1,699,489
5,023,243
-
163,627
$ 5,186,870 $ 5,186,870 $
4,028
16,683
20,711
-
17,637
38,348 $ 5,535,864 $
1,637,975
2,031,450
5,329,663
-
206,201
22
-
17,300
20,442
37,742
-
5,155
42,897
-
11,361
15
11,376
-
344
11,720
-
28,661
20,457
49,118
-
5,499
54,617
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2015.
With no related allowance recorded:
Real estate
Construction
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
With an allowance recorded:
Real estate
Construction
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Real estate
Construction
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Recorded
Investment
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
$ 1,745,745 $ 1,745,745 $
1,120,703
3,141,327
6,007,775
2,927
68,019
1,120,703
3,141,327
6,007,775
2,927
68,019
$ 6,078,721 $ 6,078,721 $
- $ 1,749,692 $
-
-
-
-
1,144,016
3,382,888
6,276,596
5,383
73,604
- $ 6,355,583 $
$
- $
- $
- $
- $
945,342
1,178,662
2,124,004
-
34,377
945,342
1,178,662
2,124,004
-
34,377
21,541
23,572
45,113
-
704
972,290
1,220,726
2,193,016
-
39,925
$ 2,158,381 $ 2,158,381 $
45,817 $ 2,232,941 $
$ 1,745,745 $ 1,745,745 $
- $ 1,749,692 $
2,066,045
4,319,989
8,131,779
2,927
102,396
2,066,045
4,319,989
8,131,779
2,927
102,396
21,541
23,572
45,113
-
704
2,116,306
4,603,614
8,469,612
5,383
113,529
$ 8,237,102 $ 8,237,102 $
45,817 $ 8,588,524 $
85,110
49,062
214,610
348,782
404
4,333
353,519
-
65,811
65,872
131,683
-
1,017
132,700
85,110
114,873
280,482
480,465
404
5,350
486,219
The following is an aging analysis of the Company’s loan portfolio at December 31, 2016:
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Current
Total Loans
Receivable
Recorded
Investment>
90 Days and
Accruing
Real estate
Construction
Residential
Nonresidential
Total real estate loans
Consumer and industrial
Consumer and other
Total
$
- $
- $
84,505
24,029
108,534
-
277,575
130,442
97,571
228,013
12,838
73,102
$ 386,109 $ 313,953 $
1,574,732 $
101,226
-
1,675,958
-
51,499
1,727,457 $
1,574,732 $ 20,137,799 $ 21,712,531 $
316,173
121,600
2,012,505
12,838
402,176
84,406,651
92,949,667
197,494,117
32,074,939
56,129,756
84,722,824
93,071,267
199,506,622
32,087,777
56,531,932
2,427,519 $ 285,698,812 $ 288,126,331 $
-
-
-
-
-
-
-
23
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an aging analysis of the Company’s loan portfolio at December 31, 2015:
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Current
Total Loans
Receivable
Recorded
Investment>
90 Days and
Accruing
Real estate
Construction
Residential
Nonresidential
Total real estate loans
Consumer and industrial
Consumer and other
Total
- $
84,969 $
$
- $
-
16,012
16,012
-
120,400
115,520
-
115,520
14,144
49,279
$ 136,412 $ 178,943 $
498,169
461,668
1,044,806
-
18,998
1,063,804 $
84,969 $ 21,733,679 $ 21,818,648 $ 84,969
-
-
84,969
-
508
1,379,159 $ 258,426,942 $ 259,806,101 $ 85,477
74,442,236
92,029,160
188,290,044
29,182,335
42,333,722
73,828,547
91,551,480
187,113,706
29,168,191
42,145,045
613,689
477,680
1,176,338
14,144
188,677
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2016 and 2015:
Real Estate
Construction
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Troubled Debt Restructurings
2016
2015
$ 1,574,732
631,360
97,571
2,303,663
-
286,925
$ 2,590,588
$ 1,746,744
881,221
461,668
3,089,633
-
135,738
$ 3,225,371
The following table summarizes the carrying balance of troubled debt restructurings (“TDRs”) as of December 31,
2016 and 2015:
Performing TDRs
Nonperforming TDRs
Total TDRs
2016
2015
$ 2,274,303
1,574,732
$ 3,849,035
$ 4,257,699
-
$ 4,257,699
Loans classified as TDRs may be removed from this status for disclosure purposes after a specified period of time if
the restructured agreement specifies an interest rate equal to or greater than the rate that the lender was willing to
accept at the time of the restructuring for a new loan with comparable risk, the loan is performing in accordance with
the terms specified by the restructured agreement, and certain other criteria are met.
24
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an analysis of TDRs identified during 2016:
Troubled Debt Restructurings
Real Estate
Construction
Residential
Nonresidential
Total real estate
Commercial and industrial
Consumer and other
For the year ended December 31, 2016
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of Contracts
1
2
2
5
-
6
$
1,574,732
362,993
74,372
2,012,097
-
88,209
$
1,574,732
362,993
74,372
2,012,097
-
88,209
During the year ended December 31, 2016, we modified eleven loans that were considered to be troubled debt
restructuring. We provided rate concessions for four of these loans, and extensions for seven of the loans. During
the year ended December 31, 2016, no loans that had previously been restructured during the year subsequently
defaulted during the year.
The following is an analysis of TDRs identified during 2015:
Troubled Debt Restructurings
Real Estate
Construction
Residential
Nonresidential
Total real estate
Commercial and industrial
Consumer and other
For the year ended December 31, 2015
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of Contracts
-
3
2
5
-
1
$
-
208,648
972,995
1,181,643
-
15,886
$
-
208,648
972,995
1,181,643
-
15,886
During the year ended December 31, 2015, we modified six loans that were considered to be troubled debt
restructuring. We provided rate concessions for three of these loans, and extensions for three of the loans. During
the year ended December 31, 2015, no loans that had previously been restructured during the year subsequently
defaulted during the year.
All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment
of TDRs, including those which have experienced a subsequent default, are considered in determining an appropriate
level of allowance for credit losses.
25
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their
debt, including, among other factors: current financial information, historical payment experience, credit
documentation, public information, and current economic trends. The following definitions are utilized for risk ratings,
which are consistent with the definitions used in supervisory guidance:
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for
the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are
considered to be pass rated loans.
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each category
at December 31, 2016:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Other
Pass
Special mention
Substandard
Doubtful
Totals
$ 269,367,262 $ 18,901,733 $ 79,957,949 $ 83,879,694 $ 182,739,376 $ 30,780,707 $ 55,847,179
322,346
362,407
-
$ 288,126,331 $ 21,712,531 $ 84,722,824 $ 93,071,267 $ 199,506,622 $ 32,087,777 $ 56,531,932
11,973,945
4,793,301
-
13,538,416
5,220,653
-
1,242,125
64,945
-
7,582,776
1,608,797
-
3,155,103
1,609,772
-
1,236,066
1,574,732
-
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each category
at December 31, 2015:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Other
Pass
Special mention
Substandard
Doubtful
Totals
$ 230,530,869 $ 16,376,423 $ 68,046,394 $ 76,703,998 $ 161,126,815 $ 27,371,549 $ 42,032,505
161,989
139,228
-
$ 259,806,101 $ 21,818,648 $ 74,442,236 $ 92,029,160 $ 188,290,044 $ 29,182,335 $ 42,333,722
10,681,266
4,643,896
-
18,226,116
8,937,113
-
20,169,191
9,106,041
-
1,781,086
29,700
-
3,696,480
1,745,745
-
3,848,370
2,547,472
-
26
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4. Loans and Allowance for Loan Losses, Continued
The Company enters into 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 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. A commitment involves, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss
in the event of nonperformance by the other parties 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. The Company uses the same credit
policies in making commitments to extend credit as it does for on-balance-sheet instruments. 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.
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 for the years ended December 31:
Commitments to extend credit
Standby letters of credit
Note 5. Premises, Furniture and Equipment
2016
2015
$ 38,247,248
239,089
$ 35,891,328
229,089
Premises, furniture and equipment consisted of the following for the years ended December 31:
2016
2015
Land
Buildings
Leasehold improvements
Furniture and equipment
Construction in progress
Total
Less, accumulated depreciation
Premises and equipment, net
$
6,808,794 $ 10,464,406
13,685,643
521,657
6,609,932
1,177,988
32,459,626
9,602,882
$ 18,873,718 $ 22,856,744
13,655,456
543,087
6,810,566
1,374,551
29,192,454
10,318,736
Depreciation expense for the years ended December 31, 2016 and 2015 amounted to $806,145 and $817,913,
respectively.
At December 31, 2016 and 2015, construction in progress consists mainly of architect fees and site work for potential
new branches. As of December 31, 2016, there were no material commitments outstanding for the construction/or
purchase of premises, furniture and equipment. During 2016, the Company sold a parcel of land originally acquired
for future facilities expansion, recording a gain on sale of premises totaling $652,367. There were no material sales of
premises, furniture or equipment during 2015.
27
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 6. Other Real Estate Owned
Transactions in other real estate owned for the years ended December 31, 2016 and 2015 are summarized below:
Beginning balance
Additions
Sales
Write downs
Ending balance
2016
2015
$ 2,506,733
871,490
(490,369)
(17,370)
$ 2,870,484
$ 2,444,253
4,145,896
(4,049,836)
(33,580)
$ 2,506,733
The Company recognized net gains of $11,031 and $366,898 on the sale of other real estate owned for the years
ended December 31, 2016 and 2015, respectively.
Other real estate owned expense for the years ended December 31, 2016 and 2015 was $92,604 and $349,561,
respectively, which includes gains and losses on sales.
Note 7. Mortgage Servicing Rights
The Company retains right to service the residential mortgage loans that it sells to the Federal National Mortgage
Association (“FNMA”). The Company accounts for residential mortgage servicing rights (“MSRs”) at fair value. The
changes in fair value are recorded in income from mortgage operations.
The following table presents the activity for residential MSRs for the years ended December 31, 2016 and 2015:
Balances, beginning of year
Additions
Change in MSR market value
Balances, end of year
2016
2015
$ 1,015,403
2,980,477
215,702
$ 4,211,582
$
-
1,174,973
(159,570)
$ 1,015,403
The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the
present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other
assumptions validated through comparison to trade information, industry surveys and with the use of independent
third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value
of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance
activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the
conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be
appropriate if they are applied at a different time.
At December 31, 2016, the aggregate amount of loans serviced by the Company for the benefit of others totaled
$358,616,362.
28
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 7. Mortgage Servicing Rights, Continued
The characteristics and sensitivity analysis of the MSRs are included in the following table as of December 31, 2016
and 2015.
Composition of residential loans serviced for others
Fixed-rate mortgage loans
Weighted average life
Constant prepayment rate (“CPR”)
Weighted average discount rate
Note 8. Derivatives
2016
2015
100.00%
100.00%
8.95 years
8.53 years
10.55%
9.67%
11.05%
9.88%
The derivative positions of the Company for the years ended December 31, 2016 and 2015 are reported as other assets
and are as follows:
Derivative assets:
Fair value
Notional value
Fair value
Notional value
2016
2015
Mortgage loan interest rate
lock commitments
Mortgage loan forward
sales commitments
$
282,949
$ 18,015,138
$
304,460
$ 16,663,588
39,141
16,500,000
3,203
15,500,000
The Company uses derivatives to reduce interest rate risk incurred as a result of market movements. These derivatives
primarily consist of mortgage loan interest rate lock commitments. A derivative is a financial instrument that derives its
cash flows, and therefore its value, by reference to an underlying instrument, index or reference interest rate. The
Company uses derivatives primarily to minimize interest rate risk related to its pipeline of loan interest rate lock
commitments issued on residential mortgage loans in the process of origination for sale or loans held for sale. The
Company’s derivative positions are classified as trading assets and liabilities, and as such, the changes in the fair market
value of the derivative positions are recognized in the consolidated statements of operations within income from
mortgage operations.
Note 9. Deposits
At December 31, 2016, the scheduled maturities of time deposits were as follows:
Maturing In
2017
2018
2019
2020
2021
Total
Amount
$ 61,425,371
4,012,098
1,164,006
1,048,154
232,210
$ 67,881,839
Included in total time deposits at December 31, 2016 and 2015 were brokered time deposits of $9,510,000 and
$9,331,836, respectively.
Time deposits that meet or exceed the FDIC insurance limits of $250,000 at year-end 2016 and 2015 were
$17,757,192 and $14,990,007, respectively.
29
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10. Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase generally mature on a one to thirty day basis. Under the terms of
the repurchase agreement, the Company sells an interest in securities issued by United States Government agencies
and agrees to repurchase the same securities the following business day. Information concerning securities sold
under agreements to repurchase is summarized as follows at December 31:
Balance at end of the year
Maximum month-end balance during the year
Average balance during the year
Average interest rate at the end of the year
Average interest rate during the year
2016
2015
$ 11,088,526
11,088,526
9,694,287
0.17%
0.15%
$ 8,201,396
9,332,381
8,403,014
0.08%
0.07%
At December 31, 2016 and 2015, investment securities with a par value of $11,310,819 and $8,461,452 and a fair
market value of $11,259,662 and $8,561,157, respectively, were pledged as collateral for the underlying agreements.
Note 11. Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consisted of the following at December 31:
Advances maturing
Fixed rate
January 19, 2016
February 29, 2016
March 14, 2017
Interest
Rate
0.36%
0.37%
0.70%
2016
2015
$
-
-
8,000,000
$ 8,000,000
$ 6,000,000
4,000,000
-
$ 10,000,000
At December 31, 2016 and 2015, the Company has pledged certain loans totaling $48,524,832 and $44,338,113,
respectively, as collateral to secure its borrowings from the FHLB. Additionally, the Company’s FHLB stock is pledged
to secure the borrowings.
Note 12. Junior Subordinated Debentures
On June 30, 2005, the Trust (a non-consolidated subsidiary) issued $10,000,000 in trust preferred securities (callable
without penalty) with a maturity of November 23, 2035. Interest on these securities is payable quarterly at the three-
month LIBOR rate plus 2.75%. In accordance with generally accepted accounting principles, the Trust has not been
consolidated in these financial statements. The Company received from the trust the $10,000,000 proceeds from the
issuance of the securities and the $310,000 initial proceeds from the capital investment in the Trust, and accordingly
has shown the funds due to the trust as $10,310,000 junior subordinated debentures. Current regulations allow the
entire amount of junior subordinated debentures to be included in the calculation of regulatory capital. As of
December 31, 2016 and 2015, the Company had accrued and unpaid interest totaling $30,655 and $24,025,
respectively.
30
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 13. Borrowings
On August 5, 2016, the Company entered into subordinated debt agreements with eight lenders which totaled
$5,000,000. The debt initially bears interest at a fixed rate of 7.00% per annum until August 1, 2021 and then variable
at three-month LIBOR plus 5.86%, payable quarterly with principal and unpaid interest due at maturity, August 5,
2026. The Company recorded $111,450 in issuance costs associated with the subordinated debt, which is recorded
net within subordinated debentures and to be amortized over five years. As of December 31, 2016, remaining
issuance costs to be amortized totaled $103,602.
On July 8, 2016, the Company obtained a note with CresCom Bank in the amount of $7,000,000. The debt initially bears
interest at a fixed rate of 4.95% per annum with principal and interest due quarterly based on a nine year
amortization of the principal amount outstanding and any outstanding principal and unpaid interest due at maturity,
July 8, 2021. The Company recorded $115,284 in issuance costs associated with the note payable, which is recorded
net within the note payable and to be amortized over five years. As of December 31, 2016, remaining issuance costs
to be amortized totaled $105,789. The debt is securitized by the assignment of Bank common stock. Principal
reductions over the next five years are as follows:
2017
2018
2019
2020
2021
Total
$
310,858
649,172
682,045
716,583
4,641,342
$ 7,000,000
Proceeds from the subordinated debt and note payable were used to repay the Series A and Series B Preferred Stock
as described in Note 14.
Note 14. Shareholders’ Equity
Common Stock - The following is a summary of the changes in common shares outstanding for the years ended
December 31, 2016 and 2015.
Common shares outstanding at beginning of the period
Conversion of common stock to Series D preferred stock
Conversion of restricted stock to common stock
Issuance of non-vested restricted shares
Forfeiture of restricted shares
Common shares outstanding at end of the period
2016
2015
4,680,481
1,200
2,200
-
(4,000)
4,679,881
4,739,823
(61,182)
1,840
-
-
4,680,481
Preferred Stock - The Company’s Articles of Incorporation authorizes the issuance of a class of 10,000,000 shares of
preferred stock, having no par value. Subject to certain conditions, the Company’s Board of Directors is authorized to
issue preferred stock without shareholder approval. Under the Articles of Incorporation, the Board is authorized to
determine the terms of one or more series of preferred stock, including the preferences, rights, and limitations of
each series.
31
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 14. Shareholders’ Equity, Continued
On March 6, 2009, the Company completed a transaction with the United States Treasury (the “Treasury”) under the
Troubled Asset Relief Program Capital Purchase Program, whereby the Company sold 15,349 shares of its Series A
Cumulative Perpetual Preferred Stock (the “Series A Shares”) to the Treasury. In addition, the Treasury received a
warrant to purchase 767 shares of the Company’s Series B Cumulative Perpetual Preferred Stock (the “Series B
Shares”), which was immediately exercised for a nominal exercise price. The preferred shares issued to the Treasury
qualify as Tier 1 capital for regulatory purposes. On March 1, 2013, the Treasury auctioned the subject securities in a
private transaction with unaffiliated third-party investors.
The Series A Preferred Stock is a senior cumulative perpetual preferred stock that had a liquidation preference of
$1,000 per share, paid cumulative dividends at a rate of 5% per year (approximately $767,000 annually) for the first
five years and beginning May 15, 2014, at a rate of 9% per year (approximately $1,381,000 annually). Dividends were
payable quarterly. At any time, the Company could, at its option and with regulatory approval, redeem the Series A
Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock is generally non-voting.
The Series B Preferred Stock is a cumulative perpetual preferred stock that had the same rights, preferences,
privileges, voting rights and other terms as the Series A Preferred Stock, except that dividends were to be paid at the
rate of 9% per year so long as the Series A Preferred Stock was outstanding and could not be redeemed until all the
Series A Preferred Stock had been redeemed. The Series A and Series B Preferred Shares will receive preferential
treatment in the event of liquidation, dissolution or winding up of the Company.
The net amount of the accretion and amortization was treated as a deemed dividend to preferred shareholders in the
computation of income per share.
During 2016, the Company redeemed both Series A and Series B Preferred Stock outstanding totaling $15,179,709 and
$767,000, respectively. The preferred stock was repaid through borrowings obtained as described in Note 13.
The Series D Preferred Stock ("Series D Shares") is a fixed rate non-cumulative perpetual preferred stock, created July
16, 2015, with the authorized issuance of 70,000 shares. The Series D shares were created for the purpose of
converting Common Stock holders with 200 shares or less to Series D Shares. The Series D Shares have no voting
rights, and in the event dividends are declared on Common Stock, will be entitled to 4% more than those paid on the
Common Stock. Series D Shares will, with respect to ranking to include but not limited to dividends and rights upon
liquidation, be junior to the Series A Preferred Stock and the Series B Preferred Stock, and will rank senior to all
Common Stock.
Restrictions on Shareholders’ Equity - South Carolina banking regulations restrict the amount of dividends that can be
paid to shareholders. All of the Bank’s dividends to the Company are payable only from the undivided profits of the
Bank. At December 31, 2016, the Bank had undivided profits of $9,269,741. The Bank is authorized to upstream 100%
of net income in any calendar year without obtaining the prior approval of the South Carolina Commissioner of Banks
provided that the Bank received a composite CAMELS rating of one or two at the last Federal or State regulatory
examination. Under Federal Reserve regulations, the amounts of loans or advances from the Bank to the parent
company are also restricted.
32
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 15. Other Operating Expense
Other operating expenses are summarized below for the years ended December 31:
Advertising
Office supplies, postage and printing
Telephone
Professional fees and services
Supervisory fees and assessments
Debit and credit card expenses
Other real estate owned expenses
Insurance expenses
Loss on purchased loan
Income from legal settlement
Other
Total
Note 16. Income Taxes
2016
2015
$
201,683
274,990
189,128
724,002
326,617
970,586
92,604
316,543
-
-
1,332,329
$ 4,428,482
$
268,836
318,075
157,785
787,077
523,176
810,624
280,432
329,627
336,926
(849,227)
1,222,276
$ 4,185,607
Income tax provision for the years ended December 31, 2016 and 2015 is summarized as follows:
Provision
Current income tax expense
Federal
State
Total current
Deferred income tax expense (benefit)
Federal
State
Total deferred
Change in valuation allowance
Total income tax expense (benefit)
2016
2015
$
$
35,862
147,763
183,625
-
379,824
379,824
1,617,635
(11,030)
1,606,605
586,316
(12,401)
573,916
11,030
(7,280,400)
$ 1,801,260
$ (6,326,661)
33
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 16. Income Taxes, Continued
The components of deferred tax assets and deferred tax liabilities as of December 31, are as follows:
Deferred tax assets:
Allowance for loan losses
Net operating losses
Non-accrual interest
Unrealized loss on securities available for sale
Deferred compensation
Federal and state credits
Other real estate owned
Other
Gross deferred tax assets
Less, valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accumulated depreciation
Prepaid expenses
Unrealized gains on securities available for sale
Market to market adjustments
Other
Total gross deferred tax liabilities
Net deferred tax assets recognized
2016
2015
$
900,502
8,190,326
67,151
119,874
673,542
458,427
-
124,829
10,534,651
(219,370)
10,315,281
$
915,955
8,641,888
85,063
-
593,738
429,954
79,926
258,326
11,004,850
(208,340)
10,795,510
183,804
84,145
-
1,541,449
42,226
1,851,624
$ 8,463,657
272,830
81,946
17,918
449,842
23,956
846,492
$ 9,950,018
Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a
tax asset will not be realized, a valuation allowance is required to reduce the net deferred tax assets to net realizable
value. As of December 31, 2016, management has determined that it is more likely than not that the majority of the
deferred tax asset from continuing operations will be realized. In 2016, the balance in the valuation allowance
changed by $11,030. The remaining valuation allowance relates to the parent company’s state operating loss
carryforwards for which realizability is uncertain.
The Company has federal net operating losses of $23,450,783 and $24,850,153 for the years ended December 31,
2016 and 2015, respectively. The Company has state net operating losses of $6,577,572 and $5,843,509 for the years
ended December 31, 2016 and 2015, respectively.
34
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 16. Income Taxes, Continued
A reconciliation between the income tax expense (benefit) and the amount computed by applying the federal
statutory rate of 34% to income before income taxes for the years ended December 31, 2016 and 2015 follows:
Tax expense (benefit) at statutory rate
State income tax, net of federal income tax benefit
Tax-exempt interest income
Disallowed interest expense
Life insurance surrender value
Change in valuation allowance
Other, net
Total
2016
2015
$ 1,809,877
90,244
(38,454)
395
(118,787)
11,030
46,955
$ 1,801,260
$
845,134
242,499
(38,624)
340
(113,236)
(7,280,400)
17,626
$ (6,326,661)
The Company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no
liability related to uncertain tax positions. Tax returns for 2013 and subsequent years are subject to review by taxing
authorities.
Note 17. Related Party Transactions
Certain parties (principally certain directors and executive officers of the Company, their immediate families and
business interests) were loan customers of the Company. In compliance with relevant law and regulations, the
Company’s related party loans are made on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with persons not related to the lender and do not involve
more than the normal risk of collectability. As of December 31, 2016 and 2015, the Company had related party loans
totaling $1,624,090 and $1,418,178, respectively.
Deposits from directors and executive officers and their related interests totaled $2,947,072 and $3,344,237 at
December 31, 2016 and 2015, respectively.
Note 18. Commitments and Contingencies
In the ordinary course of business, the Company may, from time to time, become a party to legal claims and disputes.
At December 31, 2016, management and legal counsel are not aware of any pending or threatened litigation or
unasserted claims or assessments that could result in losses, if any, that would be material to the consolidated
financial statements.
The Company has entered into a number of operating leases for properties relating to its branch banking and
mortgage operations. The leases have various initial terms and expire on various dates. The lease agreements
generally provide that the Company is responsible for ongoing repairs and maintenance, insurance and real estate
taxes. The leases also provide for renewal options and certain scheduled increases in monthly lease payments. Rental
expenses recorded under leases for the years ended December 31, 2016 and 2015 were $504,424 and $467,503,
respectively.
35
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 18. Commitments and Contingencies
The minimal future rental payments under non-cancelable operating leases having remaining terms in excess of one
year, for each of the next five years and thereafter in the aggregate are:
2017
2018
2019
2020
2021
Thereafter
Total
Note 19. Equity Incentive Plan
Amount
$
488,889
462,487
417,195
417,195
385,115
3,193,477
$ 5,364,358
On January 19, 2006, the Company adopted the 2006 Equity Incentive Plan (the “Plan”), which provides for the
granting of dividend equivalent rights options, performance unit awards, phantom shares, stock appreciation rights
and stock awards, each of which are subject to such conditions based upon continued employment, passage of time
or satisfaction of performance criteria or other criteria as permitted by the Plan. The Plan, which was amended on
September 17, 2010, allows the Company to award, subject to approval by the Board of Directors, up to 950,000
shares of stock to officers, employees, and directors, consultants and service providers of the Company or its
affiliates. Awards may be granted for a term of up to ten years from the effective date of grant. Under the Plan, our
Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of
incentive stock awards may not be less than the market value of a share of common stock on the date the award is
granted. Any awards that expire unexercised or are canceled become available for re-issuance.
The Company can issue the restricted shares as of the grant date either by the issuance of share certificate(s)
evidencing restricted shares or by documenting the issuance in uncertificated or book entry form on the Company's
stock records. Except as provided by the Plan, the employee does not have the right to make or permit to exist any
transfer or hypothecation of any restricted shares. When restricted shares vest, the employee must either pay the
Company within two business days the amount of all tax withholding obligations imposed on the Company or make
an election pursuant to Section 83(b) of the Internal Revenue Code to pay taxes at grant date.
Restricted shares may be subject to one or more objective employment, performance or other forfeiture conditions
established by the Plan Committee at the time of grant. Under the terms of the Plan, the restricted shares will not
vest unless the Company’s retained earnings at the end of the fiscal quarter preceding the third anniversary of the
restricted share award date are greater than the award value of the restricted shares. Any shares of restricted stock
that are forfeited will again become available for issuance under the Plan. An employee or director has the right to
vote the shares of restricted stock after grant until they are forfeited. Compensation cost for restricted stock is equal
to the market value of the shares at the date of the award and is amortized to compensation expense over the vesting
period. Dividends, if any, will be paid on awarded but unvested stock.
36
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 19. Equity Incentive Plan, Continued
During 2016 and 2015, the Company issued 2,200 and 1,840 shares, respectively, of restricted stock pursuant to the
2006 Equity Incentive Plan, as amended. As of December 31, 2016 and 2015, 197,100 and 213,100 shares,
respectively, issued vest on the seventh anniversary of the date of grant and thus will be fully vested in 2021, subject
to meeting the performance criteria of the Plan. During 2016 and 2015, 2,200 and 1,840 shares, respectively, were
issued which vested during each of the respective years. The weighted-average fair value of restricted stock issued
during 2016 and 2015 was $4.54 and $4.34 per share, respectively. During 2016 and 2015, 4,000 and 0 shares,
respectively, were either forfeited or cancelled having a weighted average price of $2.05 and $0, respectively. Also,
during 2016 and 2015, 14,200 and 1,840 shares were exercised, respectively. The weighted-average fair value of
restricted stock exercised during 2016 and 2015 was $3.32 and $4.34, respectively. Deferred compensation expense
of $58,777 and $58,849 during 2016 and 2015, respectively, and income of $81,993 was recognized during 2015
relating to restricted stock.
The Plan also allows for the issuance of Stock Appreciation Rights ("SARs"). The SARs entitle the participant to receive
the excess of (1) the market value of a specified or determinable number of shares of the stock at the exercise date
over the fair value at grant date or (2) a specified or determinable price which may not in any event be less than the
fair market value of the stock at the time of the award. Upon exercise, the Company can elect to settle the awards
using either Company stock or cash. The shares start vesting after five years and vest at 20% per year until fully
vested. Compensation cost for SARs is amortized to compensation expense over the vesting period. No SARs were
issued during 2016 and 2015.
At December 31, 2016, there were 752,900 stock awards available for grant under the 2006 Equity Incentive Plan, as
amended.
Note 20. Income Per Common Share
Net income available to common shareholders represents net income adjusted for preferred dividends including
dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and
cumulative dividends related to the current dividend period that have not been declared as of period end.
The following is a summary of the income per common share calculations for the years ended December 31, 2016 and
2015.
Income available to common shareholders
Net income
Preferred stock dividends
Net income available to common shareholders
Basic income per common share:
Net income available to common shareholders
Average common shares outstanding - basic
Basic income per common share
2016
2015
$ 3,521,908
937,848
$ 2,584,060
$ 8,812,348
1,450,440
$ 7,361,908
$ 2,584,060
$ 7,361,908
4,438,570
4,491,053
$
0.58
$
1.64
37
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 20. Income Per Common Share, Continued
Diluted income per common share:
Net income available to common shareholders
Average common shares outstanding - basic
Dilutive potential common shares
Average common shares outstanding - diluted
Diluted income per common share
Note 21. Regulatory Matters
2016
2015
$ 2,584,060
$ 7,361,908
4,438,570
4,491,053
115,568
104,151
4,554,138
4,595,204
$
0.57
$
1.60
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct adverse material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Company's and the Bank’s assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
ratios (set forth in the table below) of Tier 1, Common Equity Tier 1 (“CET1”), and total capital as a percentage of
assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 150%. Tier 1 capital of the Bank
consists of common stockholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus
certain intangible assets, while CET1 is comprised of Tier 1 capital, adjusted for certain regulatory deductions and
limitations. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for
purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All
others are subject to maintaining ratios 1% to 2% above the minimum.
Effective March 31, 2015, quantitative measures established by applicable regulatory standards, including the newly
implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd Frank Act”), require the Bank to maintain (i) a minimum ratio of Tier 1
capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital to risk-
weighted assets of 6.00%, (iii) a minimum ratio of total-capital to risk-weighted assets of 8.00% and (iv) a minimum
ratio of CET1 to risk-weighted assets of 4.50%. A “well-capitalized” institution must generally maintain capital ratios
2% higher than the minimum guidelines.
38
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 21. Regulatory Matters, Continued
In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, the Bank will
also be required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital
requirements. This buffer will be required to consist solely of CET1, but the buffer will apply to all three risk-based
measurements (CET1, Tier 1 and total capital). The capital conservation buffer will be phased in incrementally over
time, beginning January 1, 2016 at 0.625% and becoming fully effective on January 1, 2019, and will ultimately consist
of an additional amount of Tier 1 capital equal to 2.5% of risk-weighted assets. The capital conservation buffer in
effect for the year ended December 31, 2016 was 0.625%.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements
at December 31, 2016 and 2015.
(Dollars in Thousands)
December 31, 2016
The Bank
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Common Equity Tier 1 Capital
(to risk-weighted assets)
December 31, 2015
The Bank
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Common Equity Tier 1 Capital
(to risk-weighted assets)
Note 22. Unused Lines of Credit
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 42,138
39,486
39,486
39,486
13.03% $ 25,872
19,404
12.21
15,845
9.97
14,553
12.21
8.00% $ 32,341
25,872
6.00
16,170
4.00
21,021
4.50
10.00%
8.00
5.00
6.50
$ 42,943
40,245
40,245
40,245
13.79% $ 24,905
18,679
12.93
14,814
10.87
14,009
12.93
8.00% $ 31,132
24,905
6.00
18,817
4.00
20,336
4.50
10.00%
8.00
5.00
6.50
The Bank had available at December 31, 2016 several unsecured lines of credit, which were unused, to purchase up to
$34,000,000 of federal funds from four unrelated correspondent institutions. Also, as of December 31, 2016, the Bank
had the ability to borrow funds from the FHLB of up to $122,063,700. At that date, $8,000,000 had been advanced.
Additionally, an unused line of credit of approximately $3,848,481 was available from the Federal Reserve. The FHLB
and the Federal Reserve lines can be revoked at the lender’s discretion.
Note 23. Fair Value Measurements
Generally accepted accounting principles (“GAAP”) provide a framework for measuring and disclosing fair value that
requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the
measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a
nonrecurring basis (for example, impaired loans).
39
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 23. Fair Value Measurements, Continued
Fair value is defined as the exchange in 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. GAAP also establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair
value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time
to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically
involve application of the lower of cost or market accounting or the writing down of individual assets.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates of assumptions that
market participants would use in pricing the asset or liability. Valuation techniques include the use of
option pricing models, discounted cash flow models and similar techniques.
Assets Recorded at Fair Value on a Recurring Basis
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Securities Available-for-Sale - Securities available for sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured
using independent pricing models or other model-based valuation techniques such as the present value of future
cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange,
Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds.
Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and
corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
40
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 23. Fair Value Measurements, Continued
Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is
considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired.
Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired
loans is estimated using one of several methods, including the collateral value, market value of similar debt,
enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring a specific
allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded
investment in such loans. At December 31, 2016 and 2015, a significant portion of impaired loans were evaluated
based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value
of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When
an appraised value is not available or management 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 loan as nonrecurring
Level 3.
Mortgage Loans Held for Sale - Mortgage loans held for sale are comprised of loans originated for sale in the
ordinary course of business. The fair value of mortgage loans originated for sale in the secondary market is based on
purchase commitments or quoted prices for the same or similar loans and are classified as recurring Level 2.
Other Real Estate Owned - Foreclosed assets are 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. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level
2. When an appraised value is not available or management 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 foreclosed
asset as nonrecurring Level 3.
Mortgage Servicing Rights - Mortgage servicing rights do not trade in an active market with readily observable
market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted
cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its
mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are
those that market participants would use in estimating future net servicing income. Assumptions in the valuation of
mortgage servicing rights may include estimated loan repayment rates, the discount rate, servicing costs, and the
timing of cash flows, among other factors. The Company measures mortgage servicing rights as recurring Level 3.
41
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 23. Fair Value Measurements, Continued
Derivatives - The Company’s valuation techniques and inputs to internally-developed models depend on the type of
derivative and nature of the underlying rate, price or index upon which the derivative's value is based. Key inputs can
include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and
correlation of such inputs. Where model inputs can be observed in a liquid market and the model does not require
significant judgment, such derivatives are typically classified as Level 2 of the fair value hierarchy. Examples of
derivatives classified as Level 2 include interest rate lock commitments written for our residential mortgage loans
that we intend to sell. When instruments are traded in less liquid markets and significant inputs are unobservable,
such derivatives are classified as Level 3. Additionally, significant judgments are required when classifying financial
instruments within the fair value hierarchy, particularly between Level 2 and 3, as is the case for certain derivatives.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis by level
within the hierarchy at December 31, 2016 and 2015.
December 31, 2016
Available-for-sale securities:
U.S. Government sponsored agencies
Mortgage-backed securities
Corporate bonds
Equity security
Total available-for-sale securities
Mortgage loans held for sale
Mortgage servicing rights
Derivative asset:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
December 31, 2015
Available-for-sale securities
U.S. Government sponsored agencies
Mortgage-backed securities
Corporate bonds
Equity security
Total available-for-sale securities
Mortgage loans held for sale
Mortgage servicing rights
Derivative asset:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Total
Level 1
Level 2
Level 3
December 31, 2016
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
8,801,842
6,211,297
2,819,496
30,000
17,862,635
5,355,532
-
282,949
39,141
$ 23,540,257
$
4,970,150
3,490,373
2,765,332
30,000
11,255,855
8,070,283
-
-
-
-
-
-
-
4,211,582
-
-
4,211,582
-
-
-
-
-
-
1,015,403
304,460
3,203
$ 19,633,801
$
-
-
1,015,403
$
$
$
$
8,801,842
6,211,297
2,819,496
30,000
17,862,635
5,355,532
4,211,582
282,949
39,141
$ 27,751,839
$
4,970,150
3,490,373
2,765,332
30,000
11,255,855
8,070,283
1,015,403
304,460
3,203
$ 20,649,204
$
42
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 23. Fair Value Measurements, Continued
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Balance, December 31, 2014
Transfers into/out of Level 3
Purchases, sales, issuances and settlements, net
Total net gains (losses) included in:
Net income
Balance, December 31, 2015
Transfers into/out of Level 3
Purchases, sales, issuances and settlements, net
Total net gains (losses) included in:
Net income
Balance, December 31, 2016
Mortgage
Servicing
Rights
$
-
-
1,174,973
(159,570)
1,015,403
-
2,980,477
215,702
$ 4,211,582
The Company has no liabilities measured at fair value on a recurring basis.
Assets Recorded at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for
example, when there is evidence of impairment). The following table presents the assets and liabilities measured at
fair value on a nonrecurring basis at December 31, 2016 and December 31, 2015, aggregated by level in the fair value
hierarchy within which those measurements fall.
December 31, 2016
Impaired loans, net specific reserve
Other real estate owned
Total assets at fair value
December 31, 2015
Impaired loans, net specific reserve
Other real estate owned
Total assets at fair value
Note 24. Subsequent Events
Total
Level 1
Level 2
Level 3
$
$
5,148,522
2,870,484
8,019,006
Total
$
8,191,285
2,506,733
$ 10,698,018
$
$
$
$
Level 1
-
-
-
-
-
-
$
$
5,148,522
2,870,484
8,019,006
Level 2
$
8,191,285
2,506,733
$ 10,698,018
$
$
$
$
Level 3
-
-
-
-
-
-
Subsequent events are events or transactions that occur after the balance sheet date but before consolidated
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 consolidated 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 February 28, 2017, the date the consolidated financial statements were
available to be issued and no subsequent events occurred requiring accrual or disclosure.
43
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 25. First Reliance Bancshares, Inc. (Parent Company Only)
Condensed Balance Sheets
Assets
Cash
Investment in banking subsidiary
Marketable investments
Nonmarketable investments
Premises
Investment in trust
Deferred tax asset
Total assets
Liabilities
Notes payable
Junior subordinated debentures
Subordinated debentures
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Operations
Income
Rental income from banking subsidiary
Interest income
Gain on sale of premises
Dividend from banking subsidiary
Total income
Expenses
Interest expense
Other expenses
Total expenses
Income before income taxes and equity in
undistributed income of banking subsidiary
Equity in undistributed earnings (losses) of banking subsidiary
Net income before income taxes
Income tax benefit
Net income
44
December 31,
2016
2015
$ 2,398,475
45,105,360
30,000
58,100
-
310,000
1,122,730
$ 49,024,665
$
605,170
47,630,328
30,000
58,100
3,655,612
310,000
1,009,085
$ 53,298,295
$ 6,893,211
10,310,000
4,896,398
257,329
-
22,356,938
$ 2,720,432
10,310,000
-
24,658
9,475
13,064,565
26,667,727
$ 49,024,665
40,233,730
$ 53,298,295
For the years ended
December 31,
2016
2015
$
5,400
7,711
652,367
6,000,000
6,665,478
$
9,659
29,598
-
3,890,588
3,929,845
672,023
327,705
999,728
321,603
93,450
415,953
5,665,750
3,514,752
(2,257,487)
3,408,263
4,549,922
8,064,714
(113,645)
$ 3,521,908
(747,634)
$ 8,812,348
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 25. First Reliance Bancshares, Inc. (Parent Company Only), Continued
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of premises
Deferred income tax benefit
Increase (decrease) in deferred compensation on restricted stock
Increase (decrease) in accrued interest payable
Decrease in other assets
Decrease in other liabilities
Net equity in undistributed losses (earnings) of banking subsidiary
Net cash provided by operating activities
Cash flows from by investing activities
Purchase of premises
Proceeds from sale of premises
Net cash used (provided) by investing activities
Cash flows from financing activities
Net increase (decrease) in notes payable
Payment of dividend on preferred stock
Net proceeds from issuance of common stock
Redemption of preferred stock
Increase in subordinated debentures
Purchase of treasury stock
Net cash used by financing activities
Increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, ending of year
For the years ended
December 31,
2016
2015
$ 3,521,908
$ 8,812,348
(652,367)
(113,645)
64,328
232,671
-
(9,475)
2,257,487
5,300,907
-
4,307,979
4,307,979
4,172,779
(937,848)
1,675
(15,946,709)
4,896,398
(1,876)
(7,815,581)
1,793,305
605,170
$ 2,398,475
$
-
(747,634)
58,849
(749,953)
4,706
-
(4,549,922)
2,828,394
(96,157)
-
(96,157)
(224,332)
(4,914,514)
7,988
-
-
(11,718)
(5,142,576)
(2,410,339)
3,015,509
605,170
45
There’s More to Banking Than Money.R
www.firstreliance.com
888.543.5510